BEFORE THE WASHINGTON UTILITIES AND TRANSPORTATION COMMISSION In the Matter of Establishing ) Universal Service Mechanisms ) UT-980311(r) ) COMMENTS OF GTE ON THE 2ND DRAFT UNIVERSAL SERVICE RULES OCTOBER 29, 1998 TABLE OF CONTENTS I. INTRODUCTION 4 CRITICAL ANTI-COMPETITIVE AND ANTI-UNIVERSAL SERVICE DRAFT RULES 5 A Cost Benchmark Approach Eliminates Implicit Support and Provides Sufficient, Predictable, Competitively Neutral Explicit Universal Service Support for All Eligible Telecommunications Carriers ("ETCs") 5 The Revenue Benchmark Approach Would Exacerbate Rather Than Eliminate Implicit Subsidies 6 The Draft Rules Do Not Consider the Cost to Generate the New Implicit Support, Resulting in Insufficient Support and an Unlawful Taking 7 The Draft Rules Would Create a Vicious Circle That Would Continuously Deny ETC's Full Cost Recovery 7 All Carriers Must Be Allowed to Recover Their USF Contributions Through a Customer Charge 8 The Draft Rules' Prohibition of a Customer Charge Would Unduly and Unlawfully Expand the Commission's Regulatory Reach 9 A Revenue Benchmark Approach Would Inevitably Fail to Provide Sufficient Universal Service Support and Incent New Investment and Competition in High Cost Areas; A Cost Benchmark Would Succeed 10 III. ADDITIONAL ISSUES 10 Outcome Measures Should Be Established In Advance and Provision Made for Recovery of ETC Compliance Costs 10 The "Access Line" Definition Should Be Clarified and Its Usage Standardized 11 "Access Line Equivalent" Should Be Deleted 11 Flexibility Should Be Added to Draft Rules 480-123-160 and -240 12 The Draft Rules' Technology Mandates Should Be Deleted; Rural/Urban Technology Parity Issues Should Be Addressed Separately 12 The Toll Limitation Service Requirement Should be Clarified, and White Pages Listing Should Be Added 14 The Access Line Report Requirements Should be Clarified 14 The Draft Rules' Excessive Penalty Provisions Should Be Deleted 14 Annual Notice Requirements Should Be Streamlined 14 Service Area Designations Should Be No Higher than Wire Center Levels 15 Service Area Modifications Must Comply with FCC Rules and be Accomplished By Due Process 15 Wireless and Wireline Benchmarks Must Be the Same, and Should be Updated Frequently 16 Line Extension Charges Cannot Be Eliminated Under the Commission's Current Cost Approach 17 The Rules Must Address Late Payments from the Fund to ETCs 17 The Administrator Should Be A Third Party 18 Arbitrary Audit Parameters Should Be Eliminated 18 "Misused Funds" Charges Must Be Made and Decided By Due Process 18 IV. COMMENTS OF AFFORDABILITY 18 COMMENTS OF GTE DOCKET NO. UT-980311(r) October 29, 1998 GTE Northwest Incorporated, GTE Wireless Incorporated, and GTE Communications Corporation (collectively “GTE”) submit the following comments to address the Commission=s Notice of Request for Comment on 2nd Draft Universal Service Rules and Comments on Affordability (ADraft Rules@) issued on October 21, 1998. I. INTRODUCTION GTE addressed the prior draft of these rules in its September 8, 1998 comments. The Second Draft Rules an improvement in certain details, but as a whole they still fail to fulfill the legislature’s central assignment in Engrossed Substitute Senate Bill 6622 (AESSB 6622") and the requirements of the Telecommunications Act of 1996 (A1996 Act@): replace the implicit universal service support presently found in incumbent local exchange carrier (“ILEC”) rate structures with explicit support provided by all telecommunications carriers on an equitable basis. This deficiency is readily remedied, however. The critical, insoluble defect of the draft rules is their use of a “revenue benchmark” approach rather than a straightforward “cost benchmark.” The revenue benchmark approach is inherently incapable of eliminating implicit support and establishing a sufficient, predictable, competitively neutral, explicit universal service support mechanism. Rather, it would both undermine affordable universal service and discourage true open market competition throughout Washington. The draft rules also would prohibit any and all carriers from recovering their new state universal service fund (“SUSF”) contribution expenses from explicit end user charges, and they would require ILECs to reduce rates in the amount of new SUSF support payments without accounting for the ILECs’ new contribution expenses. In addition, the draft rules continue to unnecessarily complicate the support reform task by injecting rural/urban technological parity issues. GTE agrees that such issues must be addressed. That effort will, however, involve new expenditures for network upgrades, which is beyond the required or appropriate scope of this implicit support reform effort. Other problems remain in the draft rules, as well. Some are readdressed in these comments. GTE also refers the Commission to the company’s prior comments. Thus, GTE could not endorse the draft rules as a SUSF proposal to the legislature. As GTE describes in these comments, however, the draft rules can be readily modified to create a proposal that GTE could fully support and which the legislature could adopt in order to maintain affordable universal service and at the same time encourage true economic competition throughout the state. II. CRITICAL ANTI-COMPETITIVE AND ANTI-UNIVERSAL SERVICE DRAFT RULES Four draft rules in particular would operate to maintain implicit support and prevent the development of true, economic competition throughout the state: 480-123-190, 480-123-290, 480-123-360 and 480-123-390. The revenue benchmark approach of draft rules –190 and –360 would embed implicit support in ILEC rates that would be insufficient in the first place and would then be eroded by competitive pressures. The contribution recovery ban of draft rule –290 and the lopsided revenue reduction mandate of draft rule –390 would both expand the Commission’s rate regulation authority to new types of carriers and would deny carriers recovery of new, government mandated costs. In contrast, a straightforward “cost benchmark” approach would provide predictable, sufficient explicit support for ILECs and new entrants as well as eliminate implicit support, thereby encouraging economic competition throughout the state. Allowing carriers to recover their SUSF contribution costs through specific customer charges would maintain economic efficiency and competitive neutrality. A Cost Benchmark Approach Eliminates Implicit Support and Provides Sufficient, Predictable, Competitively Neutral Explicit Universal Service Support for All Eligible Telecommunications Carriers (“ETCs”) The need for universal service support derives from the simple fact that in some areas the cost to actually provide basic service is higher than the rate that the state (acting through the Commission) allows carriers to charge for basic service, i.e., the ”affordable rate.” Thus, calculation of the necessary universal service support in a given high cost area is straightforward: support = basic service cost – affordable rate. When explicit universal service support is provided in this manner – on a basis fine enough to eliminate geographic cost averaging – implicit support may be totally removed from the ILEC’s rate structure. In addition, new entrants that are truly more efficient than the ILEC will be financially able to compete in high cost areas. A simple example illustrates how this works. If in a given locale the cost to actually provide basic service is $50 and the affordable rate is $20, the necessary support is $30. For simplicity’s sake, the $30 of required support is assumed to all come from the state USF, rather than from a combination of state and federal USFs, subscriber line charges, and other explicit mechanisms. Receipt of this $30 in explicit support would allow the ILEC to make a $30 reduction in the rates for other services that have to date been providing implicit support. The availability of this $30 support payment would also allow a new entrant whose service costs were $50 or less to compete in the high cost area on a financially viable basis. This is the type of universal service support reform that the 1996 Act and the Washington legislature have directed the Commission to design. The Revenue Benchmark Approach Would Exacerbate Rather Than Eliminate Implicit Subsides Draft rule 480-123-360, on the other hand, would calculate the SUSF support that state ETC’s (“SETC”) would receive for a given locale using a revenue benchmark. That benchmark would be set at the statewide average revenue per line from local rates, “vertical or discretionary services” (e.g., Caller ID), toll, carrier access charges, and “such other revenues as the commission determines will be included.” For example, the statewide average per line revenues might consist of $21 from local rates, Since currently tariffed local service rates tend to be higher in urban areas than rural areas, it is possible that the statewide average local rate would be higher than the Commission allowed rate in the high cost locale. Furthermore, because rates are not the same in every exchange across the state, the use of a statewide average revenue benchmark would create artificial disincentives for both new ILEC investment and for competition from new entrants in exchanges where the rates are below the benchmark. $3 for discretionary services, $10 for toll, $5 for access charges, and $4 for “other revenue,” leaving only a $7 payment from the SUSF. In other words, the ETC would supposedly recover its $50 of basic service costs from a $7 SUSF payment, a fictitious $21 local service rate, and $22 in implicit support imputed from the statewide average revenue figure. It is easy to see how this approach would create a new implicit support scheme. In addition to violating the mandate to eliminate existing implicit support and support universal service only through explicit mechanisms, the draft rules’ approach would make the ILECs financially worse off than they are today. In particular, the draft rules would not allow the companies to recover the costs of their non-basic services. The Draft Rules Do Not Consider the Cost to Generate the New Implicit Support, Resulting in Insufficient Support and an Unlawful Taking Under draft rule 480-123-190 (in conjunction with draft rule –180), the SUSF support amount is the difference between the “average cost to provide basic service” and the revenue benchmark (emphasis added). The revenue benchmark does not, however, make any deduction for the costs of providing the non-basic services. In other words, the draft rules would consider revenues from non-basic services to be 100% profit and would transform that entire amount into implicit universal service support. This would be a stark unlawful taking of the ETC’s revenues by the state. This defect in the draft rules cannot be corrected. The cost models being considered by the Commission in UT-980311(a) do not produce estimates of the costs of non-basic services, and there is no other evidence of such costs in the record . For this reason alone, the Commission must reject the draft rules’ revenue benchmark approach. The Draft Rules Would Create a Vicious Circle That Would Continuously Deny ETCs Full Cost Recovery The revenue benchmark approach would combine with the rate reduction mandate of draft rule 480-123-390 to create a circular process that would make both the SUSF support and the carriers’ allowed rates insufficient. Returning to our illustrative ETC and high cost area, the company would have basic service costs of $50 (plus the costs of its non-basic services) and be provided $7 in explicit support from the SUSF. The company would also be allowed to charge its tariffed $20 basic service rate (which is less than the $21 rate assumed by the statewide average revenue benchmark). The company may or may not be able to actually obtain the $22 in implicit support that the statewide average revenue benchmark imputes, but, for simplicity’s sake, we will assume it does. Draft rule 480-123-390 would then require the company to reduce its rates by the $7 of SUSF support. Let us assume the company makes that reduction in the rates that are supposedly providing the implicit support. Thus, the company’s financial situation would be as follows: costs of $50+ vs. revenues of $42 This ignores the new contribution the company must make to the SUSF.. Under draft rule 480-123-360, in a year and a half the Commission would start to look at the state average revenue figures again, so that, with luck, in two years the ETC’s SUSF payment might be adjusted in light of the mandated and market-driven reductions in the implicit support. In addition to the draft rule’s immediate reduction of the implicit support, that support would be further eroded by market forces. The ETC would lose customers in lower cost areas to other carriers not burdened with the implicit support requirement, and the ETC would also lose revenues by making rate reductions to match those other carriers’ lower, “cream skimming” rates. In short, the draft rules would create a spiral on which the ETCs would chase a goal they could never attain: sufficient revenues. All Carriers Must Be Allowed to Recover Their USF Contributions Through a Customer Charge As noted above, draft rule 480-123-390 would require ETCs to reduce their rates by an amount equal to support anticipated from the SUSF GTE supports the reduction of rates currently providing implicit support , in the amount of new SUSF payments. If the SUSF is properly sized, all current implicit support will be eliminated. But this is a viable and lawful approach only if ETCs can also recover their SUSF contributions in a competitively neutral manner. Otherwise, draft rule 480-123-390 would be an obvious government mandated rate reduction for the ETCs., but without any offset for the carrier’s new expense of making contributions to the fund. In addition, draft rule 480-123-290 would prohibit the ETC – and all other carriers – from recovering their SUSF contribution through a customer charge. Clearly, the ETCs must be allowed either to net their contributions against their support payments before making the required rate reductions, or to make the full rate reductions and then recover their contributions through a customer charge. The customer charge approach should be used. It is the competitively neutral approach. While the netting approach would address the ETCs’ revenue deficiency, it would not address the non-ETCs’ situation. The customer charge approach, on the other hand, works for both ETCs and non-ETCs. In addition, a customer charge implements the requirement of the 1996 Act and of ESSB 6622 that all universal service support be made explicit. The draft rules’ prohibition would, on the other, continue to bury support in the carriers’ rate structures. The Draft Rules’ Prohibition of a Customer Charge Would Unduly and Unlawfully Expand the Commission’s Regulatory Reach Draft rule 480-123-290’s prohibition of recovering SUSF contribution costs through a customer charge cannot be implemented on a competitively neutral basis, because the Commission is preempted by federal law from applying such a restriction to wireless carriers. Moreover, the prohibition would unnecessarily reinsert the Commission into the regulation of competitive local exchange carrier (“CLEC”) and interexchange carrier (“IXC”) rates. In prior comments, GTE and other parties detailed why this approach should be rejected. GTE appreciates the changes that have been made in draft rule 480-123-290, which would allow “disclosure of receipts and contributions.” GTE assumes this approach is in response to customer education concerns raised by Public Counsel. GTE supports customer education on the important universal service issues being addressed by the legislature, the Commission and the industry. It is willing to work with these interested parties on customer education regardless of the eventual content of 480-123-290. But the amendments to the draft rule do not resolve the fundamental cost recovery and rate regulation issues raised by a customer charge prohibition. A Revenue Benchmark Approach Would Inevitably Fail to Provide Sufficient Universal Service Support and Incent New Investment and Competition in High Cost Areas; a Cost Benchmark Would Succeed For the several reasons discussed above, the draft rules’ revenue benchmark approach cannot work. It cannot provide sufficient, explicit, predictable, competitively neutral universal service support. Rather, it would create disincentives for ETCs to make new investment in high cost areas, and it would fail to encourage new entrants to invest and compete in those areas. A cost benchmark approach, on the other hand, has none of those deficiencies, since no artificial gap would be maintained between the supported cost and the maximum affordable rate. A cost benchmark approach would eliminate implicit support and provide sufficient explicit support for ILEC ETCs. It would also open the entire state to true competition by offering sufficient support to efficient new entrants. The Commission should, therefore, modify the draft rules by deleting the revenue benchmark approach and substituting a cost benchmark approach. This would present the legislature with a plan that can succeed in maintaining universal service and encouraging true competition throughout the state. III. ADDITIONAL ISSUES Outcome Measures Should Be Established In Advance and Provision Made for Recovery of ETC Compliance Costs GTE agrees with the premise of draft rule 480-123-070 that the success of the new SUSF should be measured. Outcome measurements should be established before implementation of the program, to ensure that carriers can comply with any reporting requirements. GTE would like to work with the Commission and interested parties to develop these measures. The draft rule should be amended to provide that if ETCs are required to incur new costs in order to comply with the measurements’ information demands, a mechanism will be established to recover those costs. The “Access Line” Definition Should Be Clarified and Its Usage Standardized Draft rule 480-123-090 should be clarified to indicate that the access lines that will receive support are switched access lines only and do not include dedicated or special access lines. It would be helpful to insert the word A Switched@ in the rule title, and to change the term “access line” in the substantive portion of the rules to “switched access line.” In addition, some of the draft rules use the term “line” rather than “access line,” such as 480-123-180, -240, -290, -350, -360, -370, and -380. If some meaning other than switched access line is intended, a definition to that effect should be added. Otherwise, those references should be changed to “switched access line.” For the reasons discussed below, the reference to access line equivalents should be deleted from draft rule 480-123-090. “Access Line Equivalent” Should Be Deleted The draft rule 480-123-100 definition of “access line equivalent” should be deleted and the access line equivalents should not be included in the 480-123-090 definition of access lines. Since only switched access lines will be supported by the SUSF, inclusion of so-called “access line equivalents” is unnecessary and, moreover, would distort contributions and support payments. In addition, the draft rule in technically inaccurate. It confuses pair equivalency with bandwidth/voice grade equivalency. Counting a DS-1 as two access lines is based on the fact that a DS-1 is usually provisioned over a four wire, two pair circuit, even though it provides 24 times the capacity of a two wire basic loop. DS-3's carry 28 times the capacity of a DS-1, but they are not provisioned over 28 DS-1's. DS-3's are typically provisioned over 4 fiber strands. # lines Bandwidth Bandwidth/64k Wires R1/B1 1 64k 1 2 DS-1 1 1.5M 24 4 DS-3 1 43M 672 4 From a cost study perspective, overstatement of access line counts will result in an overstatement of the economies of scale present in the network and in an under-estimation of the cost per line of providing basic service. Furthermore, technological advances call into question the relevancy of any measure of access line equivalency. Digital subscriber line technologies can increase the capacity of loops several-fold. A company recently announced a product that can deliver DS-1 over a single 2-wire pair. Therefore, access line equivalencies are an inconsistent basis of comparison in periods of rapidly changing technology. Flexibility Should Be Added to Draft Rules 480-123-160 and -240 FCC Universal Service Worksheet Form 457 is filed on a legal entity basis, which may or may not be state-specific. The GTE companies, for example, compile end-user retail revenue information by study area and then roll it up by legal entity and finally to a national basis. It is not difficult for GTE Northwest to obtain its end-user revenue for the state of Washington simply by adding up the end-user retail revenues in each study area located in the state of Washington. It is likely that many of the companies have the accounting system in place to provide state specific data such that the proposed rule methodology of using a factor to derive the state specific amount of end-user retail revenue would not be necessary. This would eliminate the opportunity to incorrectly calculate the amount of Washington revenues used in determining the percentage contribution to the universal service fund. In fact, it generally would be necessary to know the end-user retail revenues for the state of Washington before you could determine the percentage of the end-user revenues reported on the FCC Universal Service Worksheet Form 457 that are attributable to the state of Washington. Where carriers could attest to the inability of their accounting systems in providing state-specific revenue data, a special study should be permitted by the Commission. The Draft Rules’ Technology Mandates Should Be Deleted; Rural/Urban Technology Parity Issues Should Be Addressed Separately The objective of this proceeding is to design a new state universal service fund that will replace the implicit support currently embedded in ILEC rate structures with explicit, sufficient, portable universal service support. This task is to be accomplished in the context of the state’s telecommunications network as it currently exists and in the context of basic, voice grade services as they are currently provided. In addition, this task should be revenue neutral, i.e., it should not increase the current overall costs of telecommunications services in Washington. GTE agrees that any rural/urban technological disparities must be addressed. Correcting such disparities will, however, require new investment and, if mandated as part of the SUSF, would require the fund size to be increased accordingly. In addition, resolution of this issue should be technologically neutral. Even if wireline carriers could comply with such a mandate, wireless carriers may not be able to meet a 28.8kbps standard. These issues should be addressed separately from the initial establishment of the SUSF. Draft rule 480-123-200’s 28.8 kbps mandate would have a significant cost impact. The approach of alternative draft rule 480-123-330 would also have a significant cost impact. Clearly this rulemaking has not allowed the parties to submit and the Commission to consider evidence on these impacts. For this due process reason alone, the mandates should be deleted from the draft rules. Furthermore, the premise of the draft rule’s approach needs to be examined. For example, a specific level of performance such as 28.8 kbps implicitly assumes this is what the market demands and is willing to pay for. What this ignores is that the public switched network is designed and engineered for voice grade service. Additionally, establishing a specific standard would be economically inefficient given that by the time the upgrades to GTE=s network are finished, state of the art modems will be performing at 100+ kbps. Thus, minimum performance levels will always be a moving target. It should also be noted that the FCC, in developing the costing framework for a forward-looking voice network, concluded that bandwidth parameters should be 300 to 3,000 hertz for universal service purposes (Universal Service Fourth Order on Reconsideration in CC Docket Nos. 96-45, 96-262, 94-1, 91-213, & 95-72). Instead of mandating a minimum analog modem speed performance level, the Commission should encourage the deployment of advanced broadband services which will meet the high speed data transmission demands of consumers. Only after it has been determined that the market is not providing advanced service capability on an ubiquitous and affordable basis should the Commission intervene with some type of support for these services. The Toll Limitation Service Requirement Should be Clarified, and White Page Listings Should Be Added To be consistent with the FCC guidelines, Draft WAC 480-123-200 should be clarified to state that support for toll limitation services is restricted to qualifying low income customers. As discussed in previous comments, Draft WAC 480-123-200 does not include white page listings in the list of supported services. If the Commission is to continue to require that basic service include a white page listing, that feature must be included in the definition of supported services. The Access Line Report Requirements Should Be Clarified Draft rule 480-123-250(2) should be clarified by replacing the word Acarrier=s @ with the phrase AState Eligible Telecommunications Carrier=s@. It would then read @...estimate of the State Eligible Telecommunications Carrier=s access lines.@ The Draft Rules’ Excessive Penalty Provisions Should Be Deleted While the Commission should encourage carriers to file revenue reports and make contributions in a timely manner, the penalties in draft rules 480-123-240 and 480-123–270 are excessive. The draft rules would also require increases in administration costs to keep track of the different time frames and penalties. Washington law already provides penalties for violation of Commission rules and orders (e.g., RCW 80.4.380 through -.405). In addition to them, GTE endorses assessing a 18% annual late fee on tardy contributions. Annual Notice Requirements Should Be Streamlined Draft rule 480-123-300 would require all carriers to send the same notice to all their customers every year. This would result in many – if not most – customers receiving duplicate notices. This would an unnecessary expense, and its application to all carriers would unnecessarily expand the Commission’s current regulatory authority. The rule should be streamlined to allow the administrator to craft an efficient, targeted notice effort, funded by the SUSF. Service Area Designations Should Be No Higher than Wire Center Levels Draft rule 480-123-330’s designation of service area should be at a level no greater than the wire center, and not at exchange level as is currently proposed. An exchange may not be synonymous with the wire center. The calculation of universal service support at a wire center level results in a more accurate representation of the costs associated with providing service to high cost areas on a geographically deaveraged basis. If an exchange were comprised of several wire centers, and support were calculated at the exchange level, then the costs of geographically different areas would be averaged together, resulting in insufficient support for customers in the higher cost portions of the exchange, and perpetuating implicit support. Additionally, the draft rule states that for non-wireline designation,A...the commission will determine a service area or areas that best promotes competition.@ The uncertainty associated with this language does not convey competitive neutrality, in that a non-wireline carrier may be determined to have a smaller service area than a wireline carrier, yet receive the same amount of support. The rule should be modified to clearly spell out that the service areas for wireline and non-wireline carriers must be the same. It should also be borne in mind that use of the smaller service area level will increase the likelihood that wireless carriers can serve the entire area using its wireless facilities. Even if it cannot, however, it could satisfy its ETC service obligations by supplementing its wireless services with resold wireline services. Service Area Modifications Must Comply with FCC Rules and be Accomplished By Due Process Draft rule 480-123-340 would provide the Commission the ability to modify the service area of an ETC at any open meeting. The modification of a service area can significantly affect the ETC’s obligations and the size of the universal service fund. Because of the potential impact, the change should only occur after notice and the opportunity for hearing. The proposed rule should be changed to incorporate this procedural requirement. Otherwise, the uncertainty of defining an appropriate service area may cause new entrants to forego attempting to serve high cost areas as the carrier=s business risk associated with obtaining the necessary support on a consistent basis increases. It must also be noted that the state commission cannot change the definition of service area for a rural telephone company without first petitioning the FCC and presenting its reasons for adopting such a change. Wireless and Wireline Benchmarks Must Be the Same, and Should Be Updated Frequently GTE has demonstrated above why a revenue benchmark approach cannot work, while a cost benchmark approach will provide sufficient, explicit support and encourage competition. Regardless of which approach is used, benchmarks must be the same for all types of carriers. Draft rules 480-123-360 and –370 would, however, use different benchmarks for wireline and wireless carriers. Benchmarks for wireline and wireless provision of universal service are not competitively and technologically neutral unless they are equal to one another. As discussed previously, the rules’ focus should be to replace the ILECs’ implicit support with portable explicit support, which would then provide incentives for efficient entry by carriers that are more efficient than the ILECs. Thus the support calculation should be based on the ILEC's costs, and any carrier that satisfies the ETC requirements should be eligible to receive the same amount of portable support regardless of the technology used to serve the customer. In addition, the draft rules’ attempt to conform a revenue benchmark approach