Company: U S WEST Communications, Inc. Staff: Glenn Blackmon, Assistant Director-Telecommunications Jing Roth, Regulatory Consultant Recommendation 1. Approve the petition in part, by granting U S WEST's request that it be relieved of its "carrier of last resort" and "designated toll carrier" obligation to provide intraLATA toll service in areas where it is not the incumbent local exchange company, subject to the conditions recommended in this staff memo; 2. Dismiss the part of the petition in which U S WEST seeks to be relieved of its obligation to provide private line service in areas where it is not the incumbent local exchange company; and 3. Direct staff to file with the Code Reviser a notice of proposed rulemaking (CR-101) on possible rules to establish a competitively-neutral obligation to provide toll service. Discussion The Commission’s orders in Docket U-85-23 require U S WEST to provide toll service in the areas where independent companies are the incumbent local exchange providers. (The only exceptions are areas where the incumbent local company is GTE-Northwest or Sprint/United, who in recent years each assumed the toll obligations of U S WEST for their respective local exchange areas.) Similarly, U S WEST is required to provide private line service in independent company areas. On August 4, 1999, U S WEST filed a petition asking that it be relieved of these obligations and stating its intent, should the petition be granted, to stop providing toll and private line service in the independent company areas. The company proposes an implementation period of no more than six months. Staff believes that the issues involved in the two services -- intraLATA toll and private line -- are quite different and recommends that the Commission address each service independently, as discussed below: 1. IntraLATA toll service U S WEST contends that it is not currently recovering the costs it incurs, including access charges paid to the Docket UT-990976 independent companies, to provide toll service in independent company areas. It also contends that each independent company "functionally" provides originating intraLATA service in its own areas and that the exit of U S WEST is not disrupt existing physical connections used to provide intraLATA toll service. Another argument advanced by U S WEST is that there is no need to impose an obligation to serve on it because customers have a choice of toll providers. If an obligation to serve is required, U S WEST argues, it should be applied to all providers of toll service equally. Staff has not verified U S WEST’s initial claim, which was not factually supported in the petition itself. However, Staff believes the competitive argument is persuasive. Earlier this year the Commission required that U S WEST and each of the independent local exchange companies open the intraLATA toll market to competition. All local companies were ordered to implement "dialing parity" for 1-plus calls, so that customers can designate the toll provider of choice. Once U S WEST complied with that order, the Commission on January 27, 1999 classified U S WEST's toll service as competitive, as provided for in the state Regulatory Flexibility Act. (The Commission did not change the company's primary toll carrier obligations at that time.) Staff believes that, with the implementation of 1-plus dialing parity in the independent company areas, it is no longer appropriate to designate a single toll provider such as U S WEST as the designated carrier. The Commission has found U S WEST's intraLATA toll service to be a competitive service, and one of the hallmarks of a competitive market is ease of entry and exit. Any competing carrier, including U S West, should be allowed to exit the market if it so desires and subject to reasonable transition requirements. Staff does not believe that the exiting firm should be required to demonstrate that it is losing money in a market; therefore staff has not attempted to verify U S WEST's claims in this regard. An important concern with U S WEST's exit is whether conditions in those markets will sustain a reasonable level of customer choice in the future. While there are other providers of intraLATA toll service in the independent company areas, those providers might leave too, or they might increase their rates upon U S WEST's exit. Staff believes this is a legitimate concern but does not believe that compelling U S WEST to provide toll service is an appropriate response to the concern. The most appropriate response would be to address the factors that would cause firms to leave and/or raise prices. Possible factors might include the level of access charges levied by independent local companies, problems with ordering access services or billing toll services, or insufficient universal service support. However, this list is little more than speculation, given the hypothetical nature of the problem. Moreover, should the Commission determine that whatever obstacles to toll competition cannot be addressed directly, Staff still believes that the best approach would not be to impose a service obligation on any single firm but instead to devise a service obligation that applies broadly across the toll industry. Customers in independent company areas should receive a choice of providers, just as customers in areas served by larger companies. Staff believes that, while U S WEST should be allowed to exit the intraLATA toll market in independent company areas, two general issues remain: (1) What transition provisions, if any, should apply? (2) What service obligations, if any, should be imposed generally on toll providers to ensure that customers in independent company areas are not abandoned or subjected to unreasonable rates? a. Transition provisions The company acknowledges that transition issues exist but does not in its petition provide a specific implementation plan, other than to state that it will exit the independent company areas "no later than six months after the Commission order is entered." Staff has discussed implementation issues with U S WEST and the independent companies. Staff believes that the independent companies, who benefitted from U S WEST's designation as toll carrier, should be required to participate in the transition. While it is U S WEST's responsibility to notify customers of its exit, the local companies also have a role in migrating customers to a replacement carrier. Staff recommends that U S WEST and each of the independent local exchange companies be required to give notice and information to each affected customer. This requirement should, in Staff's view, extend beyond simple notice that U S WEST will no longer be offering toll service in their area and that they should select an another provider. Rather, it should include competitively-neutral consumer education material to assist customers in making an informed choice about a replacement carrier. Staff asks that the Commission require the companies to submit these educational materials for Staff review. The consumer information also should explain the process that will be used to assign the customer to an intraLATA toll provider should the customer not choose a new provider. Regarding the transition process itself, Staff recommends these provisions: (1) No charge will be levied on the customer for the change in intraLATA carrier, and (2) Customers who do not make a selection will be assigned to the carrier they have chosen for interLATA toll service. Other transition issues should be addressed with each local company as those issues emerge during the six-month implementation process. Finally, the Commission should make clear that it is not relieving U S WEST of its obligation to provide access services. Currently U S WEST provides switched access service that is used by various toll providers to connect independent company customers to the providers' networks. U S WEST has not asked for relief from its obligation to provide access service, and no such relief should be granted at this point. b. Competitively-neutral replacement obligation While Staff believes that U S WEST should no longer have sole obligation to provide intraLATA toll service, there remains a question of whether the monopoly designation of U S WEST should be replaced with a competitively-neutral obligation to offer toll services in the state. The Commission might, for example, require that any company that offers interLATA service in an exchange also offer intraLATA service in that exchange. Another form of obligation would be to require that all toll providers over some threshold size offer both interLATA and intraLATA service in every exchange in the state. In either case, the Commission might have to specify the dimensions of service, including both price and quality, that the carrier is obligated to provide. The objective of such requirements should be to ensure that price and service are reasonably comparable in all areas of the state. There are many issues raised by a toll obligation to serve, and Staff believes that the better course might be to impose no obligation as long as no specific problems emerge with either insufficient service or unreasonable prices. However, Staff believes that the Commission should gather more information before making a decision either way. The best way to explore a possible competitively-neutral toll service obligation would be through the rule-making process. 2. Private line service U S WEST also seeks to have the Commission relieve the company of its obligation to provide private line services in areas where it does not provide local exchange service. While Staff has discussed the toll issues with U S WEST and the independent companies for at least the past year, U S WEST has provided little explanation of the private line services. As noted above, Staff's recommendation to approve the toll portion of the petition is based on the existence of competition in the state's toll markets. That is a fundamental difference between the toll and private line services, in that private line services are not competitive. (The Commission has before it a petition to classify some private lines services as competitive, Docket UT-990022, but that petition would not affect private line services in the areas at issue here.) U S WEST and the independent companies are, in essence, monopoly co-providers of private line services that terminate in the independent company areas. Staff understands U S WEST's proposal to switch to "meet-point" billing as an effort to shift the financial responsibility of those services from it to the individual customers and/or the independent companies. Staff has no view as to whether that shift is appropriate. While it may seem unfair that U S WEST would absorb the higher private line charges of independent companies, it should be noted that U S WEST's current rates reflect those expenses and effectively reimburse the company. Were the Commission to take up the private line issue, it should consider whether it should order U S WEST to pass through any resulting expense savings to its own customers. Staff believes that the private line portion of the petition should not be granted at this time, because U S WEST has not provided sufficient information about how individual customers and companies would be affected. Staff therefore recommends that this portion of the petition be dismissed. U S WEST would be free to renew this request in the future, and Staff understands U S WEST not to object to this dismissal. Conclusion The Commission has the opportunity with this petition to remove another vestige of monopoly telephone service by either eliminating or replacing the designation of U S WEST as the state's primary provider of intraLATA toll service. Staff believes that this is a reasonable step and is one that will benefit consumers and competition. However, there are important concerns that should be addressed by placing conditions on the Commission's approval and by inquiring into the need for a competitively-neutral service obligation rule. In addition, Staff believes the private line proposal by U S WEST should not be approved at this time.