BEFORE THE WASHINGTON UTILITIES AND TRANSPORTATION COMMISSION In the Matter of ) Determining Costs for ) Docket UT-980311(a) Universal Service ) Brief of Sprint Corporation UT-980311(a) -1- Brief of Sprint Corporation UT-980311(a) S2-595766.1 BEFORE THE WASHINGTON UTILITIES AND TRANSPORTATION COMMISSION In the Matter of ) Determining Costs for ) Docket UT-980311(a) ) Universal Service ) BRIEF OF SPRINT CORPORATION ON BEHALF OF UNITED TELEPHONE COMPANY OF THE NORTHWEST I. INTRODUCTION The purpose of Docket No. UT-980311(a) is to ascertain the cost of providing universal services in high cost areas in the State of Washington. The Commission needs this information in order to report back to the legislature by November 1, 1998 as required by Ch. 337, L., 1998. While this Commission can choose a cost model platform as a result of this proceeding, it should advise the legislature that a determination of the size of the requisite state universal service fund cannot be made until the Federal Communications Commission (FCC) has completed its universal service docket. Washington and federal law, as well as the public interest, requires the Commission to act consistently with the FCC on the issue of universal service. Based upon the FCC's criteria for cost model selection, the BCPM model sponsored by Sprint is far superior to the HAI cost model sponsored by parties only interested in minimizing costs and the ultimate universal service fund size. The BCPM more accurately predicts the forward looking costs of providing universal service. Census Block customer location methodology is more accurate than the HAI model methodology which uses a "geocoding" technique that has a purported "success rate" of only 33.5% in Sprint's territory. Furthermore, this geocoding technique is based upon unavailable, expensive (in excess of $2.6 million) proprietary preprocessing software that has not been carefully scrutinized in this proceeding. In contrast, the BCPM is much more open and uses fully disclosed, company-specific data, including well-documented support on the development of inputs, in place of proprietary "company survey" data. The BCPM more accurately predicts the amount of outside plant required to serve all customers. The HAI model seriously underestimates the amount of feeder plant, and related costs, to serve customers. The HAI model consistently designs less distribution plant then called for by a minimum spanning tree (MST) analysis, which is a valid and valuable measurement of the sufficiency of the outside plant produced by the models. Irrespective of the actual model chosen the Commission should use company specific inputs to the greatest extent practical in the model chosen. The goal of this proceeding is to determine the costs in this State of serving high cost areas. Choosing nationally-averaged default input values would defeat this goal. The record in this proceeding fails to substantiate the accuracy of these default values at any level -- particularly not at the Washington state level! The Commission should use the company and state specific inputs and should breakdown costs at the geographic level to capture most accurately the cost differences in serving Washington customers. Cost differences can be, and should be, broken down below the wire center level, preferably at the census block group (CBG) level. This breakdown will allow universal service funds to be narrowly targeted to those areas that most need support. Without it, competition will be discouraged in rural Washington. On the record developed in this proceeding, this Commission must select a cost model and associated set of inputs that will affect subsequent cost and pricing decisions. Sprint, and the other proponents of the BCPM, have provided the best evidence upon which to base the critical choice of models and inputs. Sprint urges the Commission to choose the BCPM model and company-specific inputs. II. LEGAL PRINCIPLES A. State Law: Ch. 337, L., 1998 (ESSB 6622). 1. Ch. 337, L., 1998. Ch. 337, L., 1998 directs the commission to plan and prepare to implement a program for the preservation and advancement of universal service. The Legislature provided clear direction to the Commission on the program's purpose: The purpose of the universal service program is to benefit telecommunications ratepayers in the state by minimizing implicit sources of support and maximizing explicit sources of support that are specific, sufficient, competitively neutral, and technologically neutral to support basic telecommunications services for customers of telecommunications companies in high-cost locations. Ch. 337, L. § 1. Any program which this Commission recommends ultimately should adhere to this purpose. It must minimize "implicit sources of support" and maximize "explicit sources of support." The purpose of this adjudicatory proceeding is to provide the Commission with critical cost information to enable the Commission to prepare its universal service program. Ch. 337, L. 1998 calls for estimates of the cost of supportIt is critical to distinguish the cost of support for two distinct line levels from the cost of constructing two distinct networks to provide single line or multi-line service. The legislature wants to know support costs at each level to decide how to size the universal service fund. The second guideline issued by the Commission in its May 15, 1998 Notice of Prehearing Conference, has confused the legislature's direction by calling for cost studies for different network configurations (single, multi-line or both). Sprint contends that this is not what the legislature wants to know and that the proper way to determine support costs is to use the costs of a network designed to serve all customers regardless of which customer segments are funded. (Ex. 121T, pp. 3-4, Judy Direct, Ex. 84T, p. 3, Dunbar Response). The FCC expressly agreed with this approach. See Federal State Joint Board on Universal Service, CC Docket No. 96-45, Report & Order, 12 FCC Rcd 8776, 8899 para. 250(6) (1997) (Universal Service Order), as corrected by Federal State Joint Board on Universal Service, CC Docket 96-45, Errata, FCC 97-157 (rel. June 4, 1997), appeal pending, Texas Office of Public Utility Counsel v. FCC, No. 97-60421 (5th Cir. filed June 25, 1997). ("Universal Service Order"). So did the FCC-State Joint Board FCC 96J-3, par. 277, criteria (5). at two levels--all-line support and primary line support. See § (1.)2(a). The costs to be determined, according to Ch. 337, L. 1998, § (1.)(7)(b)(i) through (ix), are limited to the provision of defined basic telecommunications services. This proceeding, by the Commission's May 4, 1998 Notice of Proceeding is to make only that cost determination. The adjudicatory phase should not be broadened to include issues which Ch. 337, L., 1998 did not intend to have included. For instance, the critical benchmark determination is to be "established by the Commission by rule," not adjudication. See § 7(c). In addition, the actual size of the fund cannot be resolved in this adjudication. Thus, in Sprint's view, any Commission order to result from this phase should be limited to state-specific cost determinations. Other issues, such as the benchmark determination, should be dealt with in the companion rulemaking or deferred until the Federal Communications Commission (FCC) has finished its universal service program. Ch. 337, L., 1998, § (2.)(2)(c) requires that any state universal service program "to be established in accordance with Section 1 of this Act shall not be inconsistent with the requirements of 47 U.S.C. § 254." (Emphasis supplied.) Thus, in this proceeding Sprint urges the Commission against getting ahead of the FCC. While the Commission can make critical cost determinations in this adjudicatory proceeding, it should proceed cautiously to avoid the inconsistencies prohibited by Ch. 337, L. 1998, § (2.)(2)(c). 2. Relationship Between This Docket And Other Dockets, Including UT-980369. a. Can or should the Commission take any action on universal service fund absent an explicit directive from the legislature. The Commission's authority to act comes directly from the legislature, without which the Commission is powerless to take action on universal service. See Telephone Ass'n. v. Ratepayers Ass'n., 75 Wn. App. 356, 363, 80 P.2d 50 (1994). Ch. 337, L., 1998 § (1.)(1) plainly withholds this authority from the Commission and limits its powers to planning: The commission shall plan and prepare to implement a program for the preservation and advancement of universal telecommunications service which shall not take effect until the legislature approves the program. (Emphasis supplied.) Section (2.)(1) underscores the limits on the Commission's ability to act and does not allow the Commission to establish a new state program, or to adopt rules to preserve and advance universal service under § 254(f) of the federal act, until the legislature has approved a state universal service program. b. Need for consistency between the universal service fund proceeding and the price of unbundled network elements. (1) If the rates and the USF must be consistent, does this imply that UNE rates must be de-averaged? (2) If there is a need to de-average UNE prices, must this be done prior to the legislature taking action on the USF issue? (3) If the legislation takes no action on the Commission's report, is there a need to de-average UNEs? The principle of de-averaging is central to universal service reform. Historically, averaged prices provided one of the implicit methods of universal service support (Trans. Vol. XIII, 1549, 1667, Baker). Because Ch. 337, L., 1998 directs the Commission to remove implicit support for universal service in favor of explicit support, price de-averaging seems inevitable to some extent. Costs associated with high cost areas will now be dealt with by universal service mechanisms rather than buried in average rates. Therefore, Ch. 337, L., 1998 appears to support the policy of de-averaging. The Commission deferred the issue of the de-averaging of unbundled network elements (UNE's) in the Eighth Supplemental Order in Docket Nos. UT-960369, UT-960370 and UT-960371 ("Eighth Supplemental Order") "to consider this issue in the context of universal service reform, de-averaged retail prices, and the extent of competitive activity in Washington State" (¶ 274). The Commission recognized, and Sprint agrees, that UNE de-averaging and universal service reform should be coordinated. However, nothing in the new state law requires UNE de-averaging at any particular time. Thus, while Sprint supports the concept of de-averaging for both USF subsidies and UNEs, the costs for both should be calculated at the same USF basis to avoid inconsistencies. The Commission will have to revisit its UNE cost determinations to ensure consistency with its USF determinations.See Sprint's Comments in UT-980311(r) (p. 9) on this issue. B. Federal Law. For the first time, the Telecommunications Act of 1996 (the "Act") placed a federal universal service requirement in federal law.Pub. Law 104-104, 110 STAT. 56 (Feb. 8, 1996) codified at 47 U.S.C. § 1, et seq. In § 254 of the Act, Congress established both the procedure for implementing universal service in a federal program, and the principles to be served by it. Congress directed a Federal-State Joint Board to make recommendations to the FCC, which in turn was to issue an order implementing the recommendations. § 254(a). The FCC issued its Universal Service Order on May 8, 1997.Federal State Joint Board on Universal Service, CC Docket No. 96-45, Report & Order, 12 FCC Rcd 8776, 8899 paras. 224-25 (1997) (Universal Service Order), as corrected by Federal State Joint Board on Universal Service, CC Docket 96-45, Errata, FCC 97-157 (rel. June 4, 1997), appeal pending, Texas Office of Public Utility Counsel v. FCC, No. 97-60421 (5th Cir. filed June 25, 1997). See footnote 1. As will be discussed in Section III(F), the federal universal service program has not been finalized. What is important for purposes of this proceeding is the federal law requirement, like that contained in Ch. 337, L., 1998, of consistency between the state and federal programs. Section 254(f) requires: State Authority - A State may adopt regulations not inconsistent with the Commission's rules to preserve and advance universal service. 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. 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 mechanisms to support such definitions or standards that do not rely on or burden Federal universal service mechanisms. The principles upon which federal universal service policy are to be based, stated in § 254(b) line up with Washington's principles in Ch. 337, L., 1998. Under § 254(b), quality services are to be provided at affordable rates, and consumers in rural, high-cost areas are to receive services comparable to those in urban areas at comparable rates. In its Universal Service Order, the FCC reviewed the Act's directives for universal service, and in accordance with § 254(b)(7) of the Act declared "competitive neutrality" to be "an additional principle upon which universal service policies would be based." The core federal and state universal service principles can be summarized as requiring a universal support system that is explicit, sufficient, competitively neutral and in the public interest. Sprint urges the Commission in this proceeding to maintain consistency with federal law in practice--as well as in principle--in developing a universal service program. This may require the Commission to recommend to the legislature that Washington's universal service program await final federal action. III. POLICY ISSUES A. Purpose of the Proceeding. As noted in § IIA(1) above, Sprint views the purpose of this adjudicatory proceeding to be limited to cost determination. In its May 4 Notice of Proceeding the Commission said: The purpose of this proceeding is to determine the cost of and process for supporting universal service. Determination of cost will involve the designation of the methodology or methodologies. Two methodologies may be required to accommodate both rural and non-rural companies. Rural and non-rural companies are defined in 47 U.S.C. § 153(37). Related issues may include the cost of service for a primary line for each residence and business in high-cost locations and the cost of service for additional lines for residential and business customers in high-cost locations. See ESSB 6622, Section 1(2)(a) and (b). In its Notice of Prehearing Conference attached to the May 4 Notice, the Commission said: . . . the Commission finds it necessary to make determinations estimating the cost of providing telecommunications services in each area that may qualify as a high-cost location. The ultimate issue to be determined by the Commission in this investigation is the reasonable and accurate cost of providing service in each such area. (Emphasis supplied.) As a result of this proceeding the Commission will: • designate a methodology or methodologies, to determine the company-specific cost of universal service support. • on a discrete, area-specific, basis (i.e. high cost locations) • for one line or • for multi-lines.See footnote 1. The purpose of this proceeding should be confined to resolving contested issues regarding the determination of the cost of serving customers in high cost locations. B. Timing/Implementation/Competitors. As discussed in Secs. IIA.1. and IIIF. Sprint views the timing for implementation of a state universal service fund ("USF") as heavily dependent upon FCC action. The goal of ensuring federal/state consistency should guide USF timing and implementation issues--not the presence of competition, as suggested by AT&T. Sprint agrees with GTE witness Calnon that competition should not precede the establishment of an explicit universal service fund (Ex. 413T, pp. 8-9). First, such an explicit fund is required by state and federal law, which both say nothing about the presence of competition as a prerequisite to USF funding. Second, as Dr. Calnon notes, the establishment of an explicit USF is necessary to promote competition and to mitigate arbitrage opportunities. C. Selection of a Cost Model. The commission would best serve the public interest if it approved a cost model that is consistent with whatever is adopted by the FCC in its Universal Service proceeding in CC Docket No. 96-45. The FCC has established 10 criteria--all of which have now been satisfied by the BCPM model--(Ex. 71T, p. 26, Dunbar Direct) for universal service cost studies.Universal Service Order, supra, ¶ 250. The Commission's May 15, 1998 cost study guidelines parallel the FCC's criteria in most, but not all respects. Sprint views the FCC's criteria as the most appropriate for evaluating cost models used for universal service purposes. In a nutshell, these 10 criteria, and a comparison with the Commission's guidelines are: (1) The technology must be the least-cost, most-efficient and reasonable technology for providing the supported services that is currently being deployed (no similar Commission guideline, but see UT-960369, 960370, 960371 ¶ 10). (2) Any network function or element necessary to produce supported services must have an associated cost (no similar Commission guideline). (3) Costs must include long-run forward-looking economic costs (Commission guideline 3). (4) Rate of return must be the state's prescribed rate of return for intrastate services (Commission guideline 4). (5) Economic lives and future net salvage percentages used in calculating depreciation expense must be within the FCC-authorized range (similar to Commission guideline 4). (6) The cost model must estimate the cost of providing service for all businesses and households within a geographic region (Commission guideline 2).See footnote 1. (7) A reasonable allocation of joint and common costs must be assigned to the cost of supported services (Commission guideline 7). (8) The cost study or model and all underlying data, formulae, computations, and software associated with the model must be available to all interested parties for review and comment (no similar Commission guideline, but see UT-960369, 960370, 960371 ¶ 24). (9) The cost study or model must include the capability to examine and modify the critical assumptions and engineering principles (no similar Commission guideline, but see UT-960369, 960370, 960371 ¶ 25). (10) The cost study or model must de-average support calculations to the wire center serving area level at least, and if feasible, to even smaller areas such as a Census Block Group, Census Block or grid cell (Commission guideline 1). Most parties to this proceeding agree generally as to the criteria against which to measure cost studies (i.e., Ex. 371T, p. 21, Baker Responsive). As will be ex