Before the Washington Utilities and Transportation Commission Olympia, Washington 98504-7250 In the Matter of: ) ) ) Universal Service Rulemaking ) Docket No. UT-980311(r) ) ) ) Comments of AirTouch Communications on Revised Draft Universal Service Rules Michael D. Gallagher WSBA No. 18910 AirTouch Communications, Inc. 3350 161st Ave., S.E. Bellevue, Washington 98008 (425) 603-7968 (425) 603-7659 FAX E-mail: mike.gallagher@airtouch.com Charles D. Cosson, Esq. AirTouch Communications One California Street, 29th Fl. San Francisco, CA 94111 658-2434 (415) 658-2154 FAX E-mail: charles.cosson@airtouch.com October 29, 1998 Before the Washington Utilities and Transportation Commission Olympia, Washington 98504-7250 In the Matter of: ) ) ) Universal Service Rulemaking ) Docket No. UT-980311(r) ) ) ) Comments of AirTouch Communications INTRODUCTION AirTouch Communications, Inc., (“AirTouch”) hereby submits its comments in response to the revised draft universal service rules distributed to interested parties via e-mail on October 21, 1998. These universal service rules derive from issues raised in a Notice of Proceeding released August 21, 1998, in the above-captioned proceeding.“Notice of Request for Comment on 2nd Draft Universal Service Rules,” Docket No. UT-980311(r)(October 21, 1998). AirTouch provides a variety of wireless telecommunications services, including cellular and paging, in the State of Washington, throughout the U.S., and internationally, and has participated in this proceeding from its inception.“Notice of Proceeding - Opportunity to file Rulemaking Comments,” Universal Service Issues Proceeding, Docket No. UT-980311(r) (May 4, 1998); see Letter from Paul Curl, Acting Secretary, WUTC, dated May 14, 1998 (inviting comment on two additional questions from WUTC staff); Comments of AirTouch Communications, June 8, 1998. The Washington Utilities and Transportation Commission (“WUTC” or “Commission”) seeks additional comment on a revised set of draft rules implementing a universal service mechanism for the state of Washington. AirTouch is interested in assisting the Commission in fulfilling its statutory responsibilities and responds to the draft rules and provides some general observations below. It bears noting, however, that the Commission has apparently not issued any written response to the comments filed on the initial set of rules, nor has it explained its thinking behind the revised set of rules. It is therefore difficult for commenters to know whether these revised rules reflect the Commission’s current thinking, whether they are an alternative that the Commission considers equally valid to the first set of rules or whether they are perhaps a “second-best” approach, less favored than the first revision but upon which the Commission wants additional comment. The lack of any reasoned explanation behind the rules also makes it difficult to avoid repetition in presenting our positions or to offer any “compromise proposals” that would be more responsive to the Commission’s current thinking. Since many aspects of the rules have not changed and it is unclear whether the Commission has been able to conduct a meaningful review of the initial comments, AirTouch proceeds under the assumption that we should succinctly re-submit arguments raised earlier in response to the proposed universal service rules. However, as the deadline for the Commission to submit its recommendation to the legislature draws near, AirTouch once again submits that the legislature expects facts and analysis supporting a well reasoned recommendation - not naked, unwavering conclusions. The revised rules do evidence some improvements. Specifically, the use of end-user retail revenues as reported on the FCC worksheet, rather than a separate state-specific report of gross telecommunications revenues, is a much more equitable and efficient method of collecting revenue information.See Revised WAC 480-123-230. Reducing the level of contributions exempted as de minimis from $1000 to $100 is a positive step as it will reduce the burden on consumers by spreading the costs of the fund over a broader base. And further clarification about the selection and authority of the fund administrator is helpful, although the revised rules should contain some provision to ensure that the administrator selected is not only neutral and impartial, but low-cost as well.See Revised WAC 480-123-440 through Revised WAC 480-123-560. Although AirTouch agrees all prospective administrators should meet these criteria, the revised rules should, but do not, provide that of the candidates meeting these criteria, the Commission will evaluate proposals based on cost or that the low-cost bidder will be favored. But the revised rules are most notable for what they continue to fail to accomplish: to identify in a meaningful way the true costs of universal service and assess the burden of those costs in a competitively neutral way. Rather, the proposed rules simply perpetuate existing revenue flows to incumbent LECs, protect incumbent LECs from competition, and impose new taxes on other telecommunications carriers and their customers. In this respect, the proposed regulations are discriminatory and unlawful. As a matter of public policy, the proposed rules frustrate competition, distort consumer choices and raise the cost of telecommunications services. I. The Revised Draft Rules Are Still Inconsistent With Their Stated Purpose The revised rules adopt a new, more expansive goal: rather than merely ensuring access to basic services, the Washington universal service fund (WUSF) must now preserve and advance access to basic services, equalize prices between high-cost and low-cost areas, and promote access to advanced telecommunications and information services.Revised WAC 480-123-020. Having expanded the purposes for which telecommunications carriers and their customers are to be taxed, the Commission must be even more careful to ensure that the universal tax system operates efficiently and with as little obstruction to competition as possible.Of course, any system of universal service subsidies will have some harmful effects on competition. AirTouch believes that the more limited goal of ensuring affordable access to basic telecommunications is more appropriate given a policy direction toward a “pro- competitive, re-regulatory national telecommunications policy.” See Telecommunications Act of 1996, “Conference Report,” preamble, H.R. Report 104-458, 104th Congress, 2d Session (1996); Comments of AirTouch Communications, June 8, 1998, at 3. AirTouch continues to question whether these draft rules are even the proper starting point for the Commission’s universal service inquiry. As AirTouch stated in its June 8th Comments, one goal of any Washington universal service support system must be to tax the people of Washington no more than necessary to achieve its purposes.AirTouch June 8th Comments at 3-4 (responding to the question: what is the goal of a WUSF?). The new arrangement must identify with specificity how much money might be needed to supplement federal support for high-cost areas or low-income subscribers, in order to prevent large numbers of disconnections from the network in a competitive environment. This amount of money, obviously, is not necessarily equal to the existing level of support, since the existing level of support was not determined in a competitive environment. Yet the Commission is no closer today than it was in May to determining how much support might be needed, much less to understanding the real basis for service disconnections. Instead, the Commission has simply issued draft rules that will collect revenue based on the existing level of revenue (including support) received by the incumbent LECs and, in the revised rules, left the determination of costs for the year 2001.Revised WAC 480-123-570. Although the Commission envisions that these ILECs will adopt tariff changes to adjust for the new sources of revenue, the amount of contributions paid in will still be based on the old level of revenue. The effect is that non-eligible carriers are taxed more than the Commission can demonstrate is necessary to ensure affordable service, even under a non-competitive environment.Similarly, the revised rules are not premised upon any meaningful analysis of how much money is needed to meet the expanded goals, e.g., promote access to advanced services. Although the draft rules state that they are intended to promote competition and competitive neutrality, it is difficult to imagine a more anti-competitive and discriminatory arrangement. Moreover, the draft rules state that their purpose is “to benefit telecommunications ratepayers in the state by promoting competition...through minimizing implicit sources of support and maximizing explicit sources of support.”See WAC 480-123-020 Purpose and Authority. AirTouch agrees that this should be a purpose of any universal service rules adopted. But the rules incorporate a specific provision requiring carriers to support universal service implicitly, rather than an explicit charge that would bill the costs of subsidies directly to consumers.See WAC 480-123-290 Contributions From Company Revenue. Although the revised rules appear to now make some provision for disclosure, the rules continue to prohibit the use of this explicit method of supporting universal service. In addition being contrary to the avowed purpose of the rules, these provisions violate the Communications Act’s prohibition on rate regulation of CMRS carriers, and U.S. Constitution’s prohibition on government restrictions of free speech, as explained below in Section II. The Washington Commission should set aside these rules for the time being and instead turn its attention to identifying a meaningful affordability threshold, the actual costs of service, and thereby calculate the level of subsidy actually needed. This approach will neither harm the status quo (since the effect of the proposed rules is to preserve existing ILEC revenue levels anyway), nor be unusually complicated or burdensome. The Federal Communications Commission (FCC) has very recently adopted a hybrid cost model that, given the proper inputs, will effectively develop a forward-looking measure of the costs of universal service. The FCC is expected to determine these inputs and transition carriers to this cost-model approach in the very near future. At a minimum, the Commission should set aside these draft rules and begin instead to examine the FCC’s newly adopted cost model. It is imperative that the Commission not simply adopt a jerry-rigged regulatory system that imposes new taxes on ILEC competitors to pay for the costs of subsidies which may not even be necessary. II. Specific Provisions of the Revised Draft Rules Related to Revenue Collection Continue to Be Unlawful As Well As Harmful to Competition In the text below, AirTouch reviews those draft rules which most directly conflict with not only their stated purpose, but also with provisions of established law including the Communications Act of 1934. In particular, we review the statutory principles of the Communications Act found in Sections 332 (preemption of state rate regulation for CMRS) and Sections 214 and 254 (universal service and eligibility designation).47 U.S.C. §§ 214(e), 254, 332(c)(3). The original Draft Rules provided that “contributions to the USF must be paid from carrier revenue and must not be billed directly to customers and must not be a separate, identified part of customer bills.” It does not explain what its accomplished by placing this restriction on the recovery of USF taxes.Section WAC 480-123-290 Contributions From Company Revenue. The term “contribution” is inaccurate, since it connotes a voluntary quality to the fund transfer at issue. The term “tax” more accurately conveys the transaction at issue: government assessments on businesses and individuals to meet a public purpose. The revised rules contains a slightly revised limitation: “contributions must be paid from carrier revenue and must not be billed directly to customers.” The revised rules also appear to provide that there may be a separate, identified part of customer bills which makes certain other disclosures.Revised WAC 480-123-290 Contributions From Carrier Revenue. It is not clear, however, that USF taxes may be passed on to consumers as a line-item charge, even provided these certain other disclosures are made, since the rule continues to prohibit billing customers directly. As discussed above, the effect of this regulation will likely be that the costs of the program are recovered implicitly, i.e., through rate increases, rather than explicitly, notwithstanding the statement in WAC 480-123-020 establishing a policy of minimizing implicit means of support. Additionally, proposed WAC 480-123-290 is unlawful. First, the Commission may not lawfully adopt such a regulation as applied to CMRS carriers. The Commission may not tax a CMRS carrier or subject them to universal service “requirements” unless that carrier is a “substitute for landline telephone exchange service for a substantial portion of the communications within a State.”47 U.S.C. § 332(c)(3). Only by disregarding this express Congressional direction may the Commission subject CMRS carriers to universal service taxation. Additionally, the effect of this regulation is for a state commission to directly regulate the rates charged to customers and the rate of return a CMRS carrier earns on its investment, something which is prohibited by federal law. In recognition of the rapid growth of the wireless telecommunications services industry, Congress in 1993 amended the Communications Act to provide a uniform federal regulatory framework for all commercial mobile radio services.See Omnibus Budget Reconciliation Act of 1993, Pub. L. No. 103-66, 107 Stat. 312, 387-97 (1993). Pursuant to its stated goals of regulatory uniformity and deregulation of the industry, Congress amended Section 332 of the Act to provide, among other things: “no State or local government shall have any authority to regulate the entry of or the rates charged by any commercial mobile service or any private mobile service, except that this paragraph shall not prohibit a state regulating the other terms and conditions of commercial mobile services.” 47 U.S.C. § 332(c)(3)(A). Proposed rule WAC 480-123-290 violates this provision in at least three ways. First, the regulation prohibits certain rate practices, e.g., a separate line-item charge billed directly to customers, and thereby constitutes a direct regulation of the “rates charged by” CMRS carriers. The draft rule impermissibly dictates to CMRS carriers how they must recover their costs of doing business, contrary to the policy codified by Congress. Second, by prohibiting CMRS carriers from billing the costs of new taxes directly to customers, the Commission effectively dictates that CMRS carriers must raise service rates in order to recover the costs of the new taxes. This undoubtedly constitutes regulation of the “rates charged by” CMRS carriers. Finally, requiring that USF taxes must be paid from carrier revenue dictates a particular profit margin, or imposes conditions on the profit margin, of CMRS carriers. Traditional regulation of the “rates charged” is, in fact, understood as “rate-of-return” regulation, rather than merely regulation of the specific prices charged.See generally Kellogg, Thorne and Huber, Federal Telecommunications Law 429-431 (1992). Neither a CMRS carriers’ prices nor its rate of return are permissible subjects for state regulation under the framework enacted by Congress. The revised draft rule is still poor public policy and should not be adopted in any event, for any carrier. It is fundamentally inconsistent with a regulatory system designed to develop explicit and identifiable mechanisms to attempt to hide the specific costs of the mechanism from telecommunications customers. The requirement that universal service mechanisms be specific and predictable is not simply a policy goal of this Commission, it is a requirement of the Communications Act.See 47 U.S.C. § 254(f). Finally, the Commission must recognize that it is not merely the law of the Congress, it is a law of economics, which cannot be disregarded. The Commission must understand that it cannot insulate consumers from the impact of these taxation programs simply by prohibiting carriers from billing the costs directly to consumers. Even if the costs are paid out of carrier revenue, i.e. , by the owners and shareholders of telecommunications companies, consumers will feel the impact. Essentially, the tax will discourage investment in telecommunications companies, raising the cost of capital, and necessitating adjustments in rates to compensate. It is fundamentally impossible as a matter of economics for the Commission to tax competitive telecommunications carriers or other services and avoid any rate impacts on the services they provide.Of course, in the monopoly environment to which regulators are accustomed and in which many incumbent LECs still operate, Congress and the Commission could restrict or direct how consumers would eventually bear these costs. One of the purposes of Section 332(c)(3) was to prohibit such regulation for the competitive CMRS market. As Commissioner Chong explained in her separate statement regarding the Joint Board decision, the Commission should make no mistake about the fact that the ultimate contributor to new universal service programs will be consumers.Universal Service Recommended Decision, 12 FCC Rcd 87 (1996), Separate Statement of Commissioner Rachelle B. Chong. Effectively, therefore, the draft rule seeks to require all telecommunications carriers, not just local exchange carriers, to embed implicit subsidies in their rates structure. A better approach was that suggested by AirTouch in its comments: taxation of the general tax base, rather than simply telecommunications carriers. If the premise is that everyone benefits from an ubiquitous telephone network, then there is nothing inconsistent with that premise about funding the costs of such ubiquity through the general treasury of the State of Washington. Nothing in the 1996 Act prevents states from choosing not to act under the limitations and provisions of the Communications Act and electing to fund universal service from its general tax base, which of course includes telecommunications carriers and other businesses.The only requirement is that a state universal service program be funded in a manner which does not rely on or burden the federal universal service mechanisms . See 47 U.S.C. § 254(f). This approach has the additional benefit of being fundamentally more open to the democratic process. If the citizens of Washington truly believe a supplement to the federal universal service programs is needed, they will vote for it. If the citizens of Washington believe their state fund should do more than ensure basic access, and wish to fund access to advanced services and information services, they will vote for it. Trying to hide the fact of new taxes on telecommunications service in order to stifle debate about such programs is bad policy and bad government. Indeed, the revised draft rules do not address one of the most egregious legal infirmities: the proposed limitation on a carriers’s ability to communicate with its customers regarding Washington universal service programs, through the regulations mandating the content of bill insert information. See Revised WAC 480-123-300 - providing that “One month in each calendar year, all carriers will include in their bills to customers information on the state universal service program. To ensure that all customers receive the same information, the carriers must use text and graphics prepared by the administrator and reviewed by the commission.” As AirTouch explained in its September comments, this is an unconstitutional limitation on speech. Relevant Supreme Court cases establish that utilities do have a speech interest in the information they communicate to their customers, and cannot be compelled to speak, much less speak a particular message. As the Supreme Court stated in Pacific Gas, “[f]or corporations as for individuals, the choice to speak includes within it the choice of what not to say.”Pacific Gas and Electric v. Calif. Public Utilities Comm’n et. al., 475 U.S. 1, 25 (1986)(plurality). Because the draft regulation provides that the Commission, not the utility, will determine the text and graphics to be provided in the bill insert, the regulation is not a “content-neutral” regulation of commercial speech, nor a “time, place or manner” restriction on speech.Even if this regulation is considered to be a restriction on “commercial speech” such as those restrictions governing advertising, the Commission must demonstrate that there is a “substantial interest,” and that its required bill insert communication is narrowly tailored to serving that interest. See, e.g., Central Hudson Gas & Electric Corp. v. Public Service Corp., 447 U.S. 557 (1980). It does not merely restrict the utility from communicating misleading or false information about the universal service program, but compels each telecommunications carrier - at the carrier’s expense - to communicate a message of the government’s choosing. In the Supreme Court’s words, the draft rules unconstitutional flaw is that it “identifies a favored speaker ‘based on the identity of the interests that [the speaker] may represent.’” This type of regulation triggers a much higher level of First Amendment scrutiny, and is extremely unlikely to be found constitutional.Pacific Gas, 475 U.S. at 22, quoting First National Bank of Boston v. Bellotti, 435 U.S. 765, at 784 (1978). In this case, the regulation is even more pernicious since the government is both the party compelling the speech and determining its content. The Commission should not adopt it.Moreover, the regulation will not meet its goal of ensuring that all customers receive the same information. Some carriers may choose to supplement the Commission’s text with information of their own; the revised regulation does not prohibit carriers from including additional information. Nor does the First Amendment permit the Commission to prohibit any additional truthful information. Accordingly, the proposed WAC 480-123-300 should simply be eliminated. III. Specific Provisions of the Draft Rules Related to Revenue Distribution Are Still Unlawful As Well As Harmful to Competition In addition to the problems with revenue collection, the process in which subsidies are distributed is seriously flawed. The draft rules proposals for distributing subsidies still fail to remove implicit subsidies from the universal service system, and obstruct competition by discriminating against potential competitors. In particular, the distribution of subsidies based on the difference between a revenue benchmark (set at the level of the weighted average revenue of a particular class of carrier - distinguishing between wireline and wireless) and the cost of service violates the principle of competitive neutrality, in at least three ways, as explained below. A. The Draft Rules Perpetuate Implicit Subsidies in Local Rates Simply assuming that because households generally have a telephone at existing rates means that the telephone is “affordable” - at best - merely plays lip service to the principle that universal service mechanisms raise no more subsidy than necessary. The proposed revenue benchmark also frustrates competition by perpetuating a level of subsidy that a competitor might find unnecessary in order to compete. At the same time, it further inhibits competition because it enables possibly less-efficient existing eligible carriers to continue providing service at current prices without fear of having to raise rates to cover the costs of their inefficiency. Apart from the obvious anti-competitive effects discussed below, setting a revenue benchmark based on the weighted average revenue of wireline carriers, as proposed in the draft rules, perpetuates the effect of implicit subsidies in today’s LEC tariff structure. The draft rules continue to provide that the Commission will determine the affordability of the basic services eligible for support with respect to a weighted average of wireline carriers’ “international, interstate, and intrastate revenue per access line.”Revised WAC 480-123-190. The weighted average revenue will not reflect to any degree the extent to which the supported services are affordable. In fact, the revenue benchmark will fail to reflect whether or to what extent the revenue offsetting the costs of the basic, supported services comes from those services or from some other service, i.e., from a subsidy. The effect of the proposed benchmark is to perpetuate the role of the implicit subsidies the Commission seeks to remove. Even if the Commission were to use the revenue from basic intrastate services alone, This analysis leaves aside, for the moment, the fact that wireless carriers cannot easily distinguish between interstate and intrastate revenue since, as Congress recognized, they operate “without regard to state lines.” H.R. Rep. No. 103-111, at 260 (1993), reprinted in 1993 U.S.C.C.A.N. 378, 587. a weighted average of wireline carriers’ revenue alone would reflect the fact that rates for that service benefit from subsidies that keep wireline residential rates artificially low. Such subsidies include, among other things, artificial allocation of additional portions of the cost of local switching to the interstate jurisdiction, specific “interconnection charges” levied on interexchange carrier access customers, as well as numerous other artificial cost allocation rules shifting the costs of local service to the interstate jurisdiction.See generally FCC Universal Service Order, para. 6. The effect is that the revenue benchmark will be set too low. The draft rules’ proposal to require eligible carriers to adopt tariff changes to reduce their rates to reflect additional revenue from the new universal service mechanism does not solve this problem.WAC 480-123-390, “Revenue Reduction Required.”; Revised WAC 480-123-390 “Implicit Support Offset Required.” For one, this is closing the barn door after the horse has already bolted. The revenue benchmark determining, in part, the level of revenue received, and thus the magnitude of any offsetting tariff changes, will have already been set, based on implicit subsidy levels. At most, all that is accomplished is moving the same amount of money from one subsidy mechanism to another. At a minimum, the revenue benchmark will utterly fail to provide a meaningful answer to what should be a question the Commission asks in the first place: how much can Washington residents afford for basic telecommunications service? To answer the question under the assumption that Washington residents are already paying the maximum they can afford is simply to duck it. Would rate increases of 1%, 5% or even more lead to service disconnections? Would such an increase even result in “serious detriment” to subscribers?Webster’s Third New International Dictionary defines “affordable” as “to manage to bear without serious detriment.” See Comments of Public Counsel and American Assoc. of Retired Persons, Docket No. UT-980311(r) (June 8, 1998). The Commission has chosen to issue rules before gathering and analyzing the facts necessary to answer these questions, despite the important consequences to Washington ratepayers that flow from them. The Commission must undertake further investigations to answer this question in a meaningful way before adopting any of the proposed rules. This investigation could also benefit from a brief delay in order to benefit from the information gathered at the FCC at both an upcoming en banc meeting concerning affordability, and an upcoming comment cycle.See “Public Notice,” DA 98-2112, Commission to Hold En Banc Hearing October 29, 1998, to Discuss the Affordability of Telecommunications Services and Consumer Education Issues,” (October 20, 1998); “Public Notice,” No. CC 98-36, “Commission Adopts Model Platform For Use in Determining Universal Service Support for High Cost Areas,” (October 22, 1998). The fact that futher investigation is warranted is demonstrated by the fact that even eliminating all subsidies is not certain to lead to widespread network disconnections. A 1994 Study prepared by OPASTCO, who is a trade association of rural ILECs finds that eliminating all support mechanisms and deaveraging toll rates (thus lowering access revenue) results in an increase of $25.45 to a Washington state subscriber bill for local telephone service.See “Keeping Rural American Connected: Cost and Rates in the Competitive Era” at ES-2 (showing increase per access line per month) (1994). The study was conducted by John Staurulakis, Inc. under contract from the Organization for the Protection and Advancement of Small Telephone Companies (OPASTCO). AirTouch does not intend to vouch for the methodological merit of the study; it is simply one figure that could be part of a larger debate about the meaning of “affordability.” It is difficult to see any economic evidence that a local rate of $35-40 a month is per se “unaffordable,” particularly if the consumer experiences a manifest decrease in toll rates, as would be expected when taxes on toll service are eliminated.Assuming wireline local service is presently priced at between $10-15 a month. It bears noting, additionally, that a local service rate of $40 a month is likely to attract competitive entry, perhaps even from wireless carriers, thus benefiting consumers with a wider choice of “affordable” rates. This is particularly true when the FCC has tentatively concluded that a local service “affordability” benchmark should be $31.00 per month for residential services and $51.00 per month for business.FCC Universal Service Order at para. 267. At a minimum, these figures demonstrate that the Commission must undertake a more meaningful analysis of affordability. B. The Revised Draft Rules Discriminate Against Potential Non-LEC Eligible Carriers And Are Not Competitively Neutral By continuing to calculate separate revenue benchmarks for wireline and non-wireline carriers, the amount of subsidy awarded to wireless carriers will likely be less (assuming costs are equal). This b