BEFORE THE WASHINGTON UTILITIES AND TRANSPORTATION COMMISSION UT-980311(r) In the Matter of Establishing ) COMMENTS OF SPRINT CORPORATION Universal Service Mechanisms ) ON BEHALF OF UNITED TELEPHONE ) COMPANY OF THE NORTHWEST AND ) SPRINT COMMUNICATION COMPANY, L.P. Pursuant to the Notice of Request for Comments on the 1st Draft Universal Service Rules and Comments on Affordability issued in this docket on August 21, 1998, Sprint Corporation (“Sprint”), on behalf of United Telephone Company of the Northwest and Sprint Communications Company, L.P., respectfully submits comments on the draft universal service rules in the Commission’s Notice. Sprint appreciates the work that has gone into the draft rules. Sprint has operating companies that provide, or plan to provide, local, long distance and competitive local services in the state of Washington, and thus has a significant interest in the outcome of this proceeding. Sprint is encouraged by and supports the stated goals of the USF plan (WAC 480-123-020). Sprint also agrees that the Washington USF Plan should be coordinated with the federal USF Plan (WAC 480-123-050) and that rates should be set at an affordable level (WAC 480-123-060). However, the draft rules included in this Commission Notice do not provide the framework needed to meet the Commission’s stated goals. Specifically, Sprint believes that the proposed revenue benchmark, the proposed subsidy recovery and assessment, and the lack of affordability principles do not comport with the Telecommunications Act of 1996 (“the Act”), FCC mandates or the Commission’s stated goals in this proceeding. Following are Sprint’s specific comments on each subsection of the draft rules: WAC 480-123-020: Sprint agrees that the Commission should replace implicit subsidies with explicit subsidies targeted to meet USF needs. Sprint agrees that competition will be promoted in Washington by minimizing implicit subsidies that have been used in the past to maintain affordable basic services. The replacement of these implicit subsidies with explicit subsidies that are specific, sufficient, competitively neutral, and technologically neutral will help achieve the goals specified by Congress in the Act. Unfortunately, several sections of the proposed rules conflict with the stated goals of this section and those of the Act. WAC 480-123-050: Sprint agrees that the Commission should coordinate the Washington USF plan with the federal plan. Sprint wholeheartedly agrees that the Commission should coordinate the USF Plan with the federal program of universal service. Establishing a state fund that matches the federal mechanism will make the most of the federal contribution, without creating additional burdens on the state. States have the opportunity to supplement the national fund, but only as long as the State develops a mechanism that funds any differences in an explicit, competitively neutral manner. WAC 480-123-190: The Commission should replace the proposed revenue benchmark, because it would perpetuate implicit subsidies, with an affordability benchmark applied only to the local services which need USF support. The proposed revenue benchmark, will not eliminate the subsidies which exist in today’s rates. Instead, use of the proposed revenue benchmark actually would perpetuate the implicit subsidies that exist in today’s rates, because it encompasses so many sources of revenue beyond those associated with universal services. Comparing the cost of providing basic service to an average total revenue stream that includes many other services does not achieve the stated USF goals, and is contrary to the stated intent of the Act. Such an exercise would merely indicate whether existing rate structures, on average, cover basic service costs. Yet universal service is not an issue of revenue sufficiency. Rather, the issue is determining how revenue should be collected to maintain affordable rates for essential services while promoting competition. - Competition precludes reliance upon implicit subsidies such as those which would result from application of the proposed revenue benchmark applied to the entire company revenue stream. In the past, prior to the development of local competition, virtually all state commissions maintained affordable rates for essential services by approving local telephone company rate structures that relied upon implicit subsidies from higher margin services, to support certain other services including basic local service. The current rate structure which evolved in that environment was not designed to, and does not, align rates with the underlying costs of providing individual services. This rate structure is the product of years of Commission and industry decision-making that attempted to meet social policy goals such as increasing access to telephone service. Today, the entire landscape of local telephone services has changed. Competitors are providing local telephone services in many parts of this state, and, naturally, the competitors are focusing their resources on entering areas where they can compete for higher margin services. In this new environment, the current rate structures, with their implicit, inefficient, untargeted subsidies are no longer sustainable. It is crucially important that the Commission establish a universal support framework that identifies universal support needs clearly, and targets any subsidies specifically to meet the universal service support needs. This type of subsidy targeting will not occur if the proposed revenue benchmark is utilized. The revenue benchmark approach relies upon implicit subsidies. In doing so, using the revenue benchmark will retard competition for services priced below cost, such as basic residential service, particularly in rural areas, by requiring competitors to replicate ILEC service offerings in order to match existing implicit subsidy structures. There can be no meaningful, facilities-based competition until the revenue stream from end users and subsidy sources is predictable, sufficient, and sustainable. but will not attract competition to the local market. - Failing to properly apply an affordability benchmark will hurt competition and impair the exchange telephone companies’ ability to support universal service. Failing to develop a clearly identifiable, and targeted subsidy program, will hurt the development of competition and will impair the ability of the incumbent telephone companies to meet the universal service needs that only they can address today. Implicit subsidies encourage competitive behavior that is inconsistent with the public policy of preserving universal service. Competitors are encouraged to enter markets where profit margins are high which results in less implicit universal service for high cost areas. Where competition develops for services priced above cost, the ILEC’s implicit revenues will be eroded which will in turn continually increase the amount of universal service funding required, and make for an unpredictable fund. Given the likely variability in revenues over time, it is no wonder that even the Joint Board has expressed concern over the future use of a revenue benchmark. See Joint Board Report Nov. 8, 1996 ¶317. The Commission should adopt an affordability benchmark, applied only to basic services. To meet the goals of the draft rules and the Act, USF subsidies instead should be based on the difference between the long-run economic cost of basic services, and an affordable revenue benchmark associated only with basic services. The resulting USF revenue requirement will not result in a windfall for ILECs or harm Washington telecommunications users, as some parties fear, for several reasons. First, the State USF revenue requirement would be reduced by any federal support. Second, Section 254 of the Act specifies that universal service funds are to be used to replace implicit subsidies. As long as Universal Service revenues are used to reduce implicit subsidies dollar-for-dollar, LECs will not receive more revenue than under existing rate structures. Under this rate restructuring, consumers should realize offsetting savings in services that were formerly implicitly subsidizing basic local service. Third, although the plan would be revenue-neutral at its inception, Universal Service revenue amounts would be portable to other ETCs—ETCs which under the restructure should have more incentive to enter high-cost markets. Therefore, it cannot be said that Universal Service Revenues will preserve ILEC’ s existing revenues and insulate them from competition. Administration of the proposed over-broad revenue benchmark would impose substantial and costly changes in the ETCs systems and reporting. Sprint has an additional concern about the administrative costs that will arise with the proposed revenue benchmark. Under the rule, ETCs would be required to prepare special revenue reports by exchange and by customer type. For instance, Sprint currently does not have the ability to summarize toll and access by customer type. If the revenue benchmark proposed in the draft is adopted, some clarification may be necessary concerning how companies might attribute such revenues to individual customers and exchanges. In order to be competitively neutral, all carriers should use a similar process. This issue is avoided if the Commission uses an affordable price benchmark WAC 480-123-230: All providers of telecommunications services should be required to remit USF support on an equitable and nondiscriminatory basis. As stated in previous comments in this docket, Sprint believes that USF contributions should be based on all intrastate retail telecommunications revenues. Allowing some carriers to reduce their USF contribution simply because they provide services using the facilities of other companies such as the ETCs. Limiting the requirement for USF contribution to facilities based providers is discriminatory and could have the effect of discouraging facilities-based competition. Section 254(f) of the Act states that “Every telecommunications carrier that provides intrastate telecommunications services shall contribute, on an equitable and nondiscriminatory basis, in a manner determined by the State to the preservation and advancement of universal service in that State.” The proposed rule appears to violate this mandate of the Act. Conversely, calculating USF contributions on the basis of retail intrastate revenues would allow all telecommunications providers to contribute to the USF on a nondiscriminatory basis. WAC 480-123-250: USF funds should be used to support services provided to residential and single-line business customers, not to support services used by big business. It appears from this section and WAC 480-123-020 that support is to be provided for all basic lines in high-cost locations. Sprint believes that the goals of universal service can best be accomplished if all high-cost residential and high-cost single business lines are supported. By including all high-cost business lines as recipients, the rule will require end users to subsidize rates for large business customers with multiple lines. Although large business customers typically are not located in rural, high-cost areas, in the event that they are this proposal appears unjust. To Sprint’s way of thinking, a large business, which has the means to pay higher rates, should not receive the same level of subsidy as a small family business with one line. Large corporations can recover their telecommunications expense from their customer base, instead of receiving subsidies from only Washington end users of telecommunications services. WAC 480-123-290: Customers should be given the information they need to understand USF support, and telephone companies should be directed to bill customers for USF support in a way which enables the customers to be fully informed. The requirement that USF must not be billed directly to customers and must not be a separate, identified part of customer bills is in direct conflict with the goals stated in proposed WAC 480-123-120 and the Act. In this instance, the rule not only perpetuates existing implicit subsidies, but it appears to create a new implicit subsidy. Sprint appreciates that explicit surcharges may result in customer confusion, and is willing to work with the Commission on addressing this issue. Also, Sprint suggests that some clarification would be helpful in this section concerning direct versus indirect billing, and how the requirement affects carriers or services that are not price-regulated, as well as carriers under rate-of-return regulation, and fully regulated services. WAC 480-123-360: The Commission should not rely on a weighted average revenue benchmark for all ETCs because this would result in over-compensating some companies, and under-compensating others, and not enhance companies’ ability to provide service to high cost customers. As stated earlier, Sprint believes that the proposed revenue benchmark perpetuates implicit subsidies and works against the goals of the Commission as drafted in the rule, and the goals of the Act. Implicit subsidy streams, which should begin to be dissolved, are maintained because the carrier is forced to recover its costs from something other than a combination of the tariff price for basic local service and the explicit amount of universal service. Assuming, for the sake of argument, that it is appropriate to use an average total revenue benchmark, it is not clear why a revenue benchmark would include another carrier’s revenue stream. Presumably, competitors will attempt to sell services to customers that have higher revenue yields. For example, assume an ILEC ETC had an exchange with an average revenue stream of $40 dollars and a cost to provide basic service of $60. That ILEC ETC would receive $20 in USF subsidies for each line served. Let us also assume a CLEC ETC wins several high yield customers thereby reducing the ILEC’s average revenue stream to $30. Additionally, the ILEC’s average costs would rise, because it loses economies of scale. Under the proposed plan, the ILEC would continue to utilize a revenue benchmark of $40, and a revenue/subsidy shortfall would occur at least until the program, costs, and revenues are reviewed and updated. As Sprint understands the proposal, the review could occur every three years; however, there is no guarantee that the fund or payments will be increased. Alternatively, the ILEC would be required to file a rate case to increase rates. The ILEC, which cannot refuse service to the high cost customer, would be forced to provide universal service without the ability to recover its costs, absent a rate case. In addition to having a higher average revenue stream, the CLEC would receive a subsidy based on an exchange-wide revenue benchmark, which is lower than the CLEC’s average revenue. Clearly, this proposal is not competitively neutral in that it would under-compensate some carriers and over-compensate others in direct violation of the Act and the stated goals of the proposed rules. If an average revenue benchmark must be used, the revenue benchmark should be calculated from revenues specific to each carrier. WAC 480-123-400: The Commission should coordinate its approach to USF funding with its approach to UNE costing. Sprint supports the principles in this section assuming it interprets the rule correctly. As Sprint understands it, ETCs providing basic service through the purchase of UNE are entitled to receive USF support if UNE prices and USF subsidies are both calculated at the exchange level. If UNE prices are based on study area averages, Sprint believes that appropriate action would be to recalculate UNE costs at that the same level as the USF subsidy calculation. In the event that the Commission decides that UNEs are to be developed on a statewide basis, and USF subsidies should be calculated on an exchange level basis, Sprint believes additional language is needed to clarify this section. An ILEC ETC providing UNEs priced on a statewide basis should be allowed to receive USF subsidies based on the difference between the revenue received from the UNE services and the cost calculated to serve that exchange. In most cases, calculating the USF subsidy based on the difference between the revenue benchmark and cost would result in the UNE provider not being able to recover its costs. The ILEC ETC will not have the ability to generate any revenue other than the revenue received for the UNE services. Requiring an ILEC ETC to provide UNEs and not allowing it to recover its costs would mean that the ILEC would be forced to increase prices to other customer segments to preserve revenue streams. WAC 480-123-490: The Commission should minimize USF administrative costs, and not order by rule special-purpose audits that may duplicate other review processes. Sprint agrees that the administrator must ensure that support from USF is received and distributed in a fair and equitable manner. Requiring the 36 largest carriers to be audited at least every three years appears to be a requirement that would generate significant costs that may not be justified in terms of benefit to end user customers. ILECs are already required to file revenue information that is periodically reviewed by the Commission. Other carriers could provide copies of audited financials if they are available. At a minimum, it would appear that a significantly lower number of carriers will make up the large majority of USF funding and distribution. Administrative costs will increase the fund size and will ultimately be borne by ratepayers. Therefore, Sprint believes that administrative costs should be kept at a minimum. WAC 480-123-570 (and 480-123-060): The Commission should allow ETCs to petition for interim USF changes, and should address affordability in the draft rule. This section of the rule provides for a review of exchange telephone companies’ costs once every three years. Sprint is concerned that many changes may occur over a three-year period, and suggests that a mechanism should be established to allow an ETC to petition the Commission during the three-year period to reflect significant changes in the revenue benchmark or affordability level. In Sprint’s assessment, one of the most critical issues to be addressed in this rulemaking is the affordability of basic local service. In the draft rule, affordability is not specifically defined, but 480-123-060 indicates that the Commission will consider affordability as it reviews and sets rates for basic telecommunications service. Sprint does not contest this assumption as it has applied to past practice; however, a major theme of the Act was the idea that prices should be moved closer to cost and that USF assistance would be provided in areas where costs significantly exceed what customers are able to pay. The creation of a competitively neutral explicit subsidy to replace existing implicit subsidies will allow all carriers to operate in a competitively neutral market while preserving affordable universal service. The use of a revenue benchmark ignores the underlying need for a USF program. The proposed rules do not remove implicit subsidies—rather they create a new one, and seem to encourage the continuation of pricing services at affordable rates without regard for underlying economic costs. Alternatively, Sprint proposes that the Commission: 1) determine an affordability benchmark, 2) raise the price of basic service to cost, not to exceed the affordable level determined by the Commission, and 3) calculate the USF subsidy by computing the difference between basic service prices and costs and multiplying the amount against the number of lines served that are eligible for support. Summary The stated goals clearly encapsulate the intent of the Act The draft rule recognizes the need to coordinate the state fund with the federal fund, and recognize other policy considerations such as wholesale and retail pricing decisions. Contributions should be assessed on retail revenues. Net revenues are not competitively-neutral. The proposed Revenue Benchmark leaves current implicit subsidies intact. The explicit universal service subsidy should be the difference between cost and an affordable revenue benchmark. Using an average benchmark comprised of all ETC revenue by geography is not competitively neutral and will have unintended consequences. In order for a subsidy to be explicit, it should not be hidden in the prices. Respectfully submitted this 8th day of September, 1998. SPRINT CORPORATION on behalf of UNITED TELEPHONE COMPANY OF THE NORTHWEST AND SPRINT COMMUNICATIONS COMPANY, LP ___________________________ Nancy L. Judy AVP External Affairs