1 October 29, 1998 Carole J. Washburn Executive Secretary Washington Utilities and Transportation Commission PO Box 47250 Olympia, WA 98504-7250 Comments On Draft Rules For State Universal Service Fund Dear Ms. Washburn: Thank you for the opportunity to submit comments on the 2nd Draft of USF rules now being developed by the Commission staff. The following comments are from the staff at Independent Business Association on behalf of the over 8600 small business owners participating in Independent Business Association. Due to the very limited 7-day comment period, time did not allow IBA to poll its members for input on this 2nd Draft. The following comments are from the viewpoint of small business telephone consumers. IBA is not an expert in the telecommunications systems nor are we experts in the telecommunications rate and service setting regulatory process. However, IBA is an expert on the needs and concerns for telecommunications services of small business customers. According to IBA’s research, there are more than 228,000 business telephone customers in Washington State purchasing over 1 million business telephone lines per month. Eighty nine percent of those business customers have 20 or fewer employees, meaning 89% of them are small businesses. The following comments will address both policy issues and technical issues. Proposed changes will be shown in a "bill drafting" format with proposed additions underlined and proposed deletions crossed-out. Technical issues will be followed by a superscript of "t" while proposed policy issue revisions will be followed by a subscript "p". Comment supporting proposed policy revisions will follow the WAC section for which the policy change is being proposed. WAC 480-123-160 End-User Retail Revenue (1) End-User retail telecommunications t revenue or retail revenuet is the carrier's end-user retail revenue reported on FCC Universal Service Worksheet Form 457 multiplied by the percentage of revenue attributable to Washington telecommunications services. (2) References in this section and subsequent sections to FCC Universal Service Worksheet Form 457 means the worksheet and the instructions for contributor revenue information found on pages 13 through 20 of the instructions to the Universal Service Worksheet Form 457 published July 1997. WAC 480-123-180 High-Cost Location. High-cost-location means a geographic area where the commission has determined the average cost per line to provide basic telecommunications service exceeds the applicable revenuet benchmark, WAC 480-123-190 Revenue Benchmark. Revenue benchmark means the averaget an amount of retailt revenue per access line determined by the commission and based on revenue from local exchange service, subscriber line charge; vertical or discretionary services, also known as advanced features, or premium services, such as, but not limited to, call waiting, call forwarding, and caller ID; services billed on a per-use basis such as last call return dialing; local exchange carrier toll revenue; access payments received for origination and termination of toll calls; and such other revenue as the commission determines will be included. In calculating the revenue benchmark, the Commission shall also provide the average retail revenues per access line for vertical or discretionary services, services billed on a per-use basis, access payments for origination and termination of toll calls, and other revenues in addition to providing the services defined by WAC 480-123-200(1).p1 In the case of bundled service offerings at one price, the commission will determine, for the purpose of calculating a revenue benchmark, what portion of the bundled price will be considered in arriving at a revenue benchmark. Comment on P1 IBA believes that it is important for the Commission to specifically identify what portion of the total revenue benchmark is for services other than “Plain Old Telephone Service - WAC 480-123-200(1) - because not all exchanges have these same services available nor are they used or purchased the same in each exchange. IBA believes that if an exchange can show that their non-POTS-service-revenues per line are significantly above or below the average non-POTS-service-revenues should have the benchmark appropriately adjusted. WAC 480-123-200 Services Supported By The Universal Service Fund. (1) The USF supports basic services, consisting of: (a) Single-party service; (b) Voice-grade access to the public switched network,- (c) Support for local usage; (d) Dual tone multifrequency signaling (touch tone); (e) 4 access to emergency services (911); 69 4ccess to operator services; (g) Access to interexchange services; (h) Access to directory assistance; and (i) Toll limitation services. (2) When carriers that receive support under this chapter construct or upgrade access lines in high-cost locations, the new and upgraded lines must be capable of sending and receiving information at rates no lower than 28.8 kilobits per second. Carriers that receive support under this chapter shall demonstrate to the satisfaction of the Commission that at the end of each year that: in year one at least 20% of the lines supported under this chapter are capable of sending and receiving information at rates not lower than 28.8 kilobits per second, in year two at least forty percent, in year three at least 60 percent, in year for at least eighty percent and at the end of the fifth year one hundred percent. Any carrier failing to meet these requirements shall have their support reduced by __ percent from what it would have been if the carrier had been in compliance.p2 Five years after the adoption of this rule, all lines for which support is received must be capable of end-to-end transfer rates sending and receiving information at a rate no lower than 28.8 kilobits per second. P2 Comments We think it is wrong for a telco to accept the full amount of the USF support for 5 years and make little to no effort to meet the 28.8 kbps service level. We also think it will harm the customers of a telco that serves high cost areas where it is too costly to provide 28.8kbps service to lose ALL of its USF support at the end of 5 years. This alternative language does two things. First, it assures that if a telco is receiving USF support that it is making the incremental upgrades to its lines during the 5-year period. Second, it allows reduced USF support for areas that are not upgraded which will be important to protecting the affordability of service to the telco’s customers. IBA is not in a position to recommend the percentage reduction for a telco that does not meet the 28.8 kbps standard and leaves that to the Commission. As an alternative to the percentage, the language could read, “an appropriate amount as determined by the Commission.” WAC 480-123-330 Designation of Eligible Telecommunications Carriers. (1) The commission will approve a petition, deny a petition, or, on its own motion or by request of the petitioner, set the petition for an adjudication or a brief adjudication. Any approval or denial will include findings of fact and conclusions of law and will specify the service area or areas for which designation is made. Designation for wireline carriers will be for an exchange and conform to existing exchange boundaries of their company or those of an historical incumbent. For non-wireline carriers, the commission will determine a service area or areas that best promotes competition in telecommunications services.p3 (2) The commission will designate a telecommunications carrier as a state eligible telecommunications carrier (SETC)t if the carrier demonstrates that: (a) It offers or will offer upon designation the basic services required by WAC 480-123-200 to all customers requesting the service on a timely basis in the area for which the designation is made;p4 (b) It offers or will offer such services at an adequate level of quality; and (c) It will advertise in media of general distribution that it offers such services required by WAC 480-123-200. (3) A petition for designation as a federal eligible telecommunications carrier t an (FETC) for purposes of the federal universal service program must meet the requirements of 47 U. S. C. § 214(e). (4) The commission may grant a petition for approval of FETC status for the federal program in conjunction with a petition for SETC status. (5) The commission will require an annual verification from each SETC that it continues to meet the requirements of subsection (2) of this rule and annual verification from each FETC that it continues to meet the requirement of subsection (3) of this rule. Comments P3 IBA does not feel that wireless services should be included in the state USF funding or support. See our further comment at Comment 12. Comments P4 This addition is proposed to assure customer access to competition. While it may be implied elsewhere, IBA feels it is imperative that it be stated explicitly here for all to know. WAC 480-123-350 Limitations on Resellers' Eligibility for Designation. A carrier that provides service solely through resale in a service area is not eligible for ETC designation for that service area. A carrier that provides service through resale and facilities combined, unbundled network elements, or both, is eligible for ETC designation but may shallt not receive support for access lines it purchases for resale. WAC 480-123-360 Revenue Benchmark--Wireline. For each exchange the The commission shall determines to be high-cost, the commissionp5 determine a statewidep6 revenue benchmark for residential service and a statewidep6 revenue benchmark for business service in accordance with WAC 480-123-190 for wireline services.p5 & P6 The initial benchmark will be based on the statewide average revenue per line of wireline service.p6 Not less than every eighteen months the commission will consider appropriate adjustments to the revenue benchmark based on the average statewide revenue per access line as provided by WAC 480-123-190p7 the effects of competition on carrier revenues and such other factors as the commission considers appropriate. Comment P5 It is our understanding that the Commission will not determine which exchanges are “high cost” but that after the revenue benchmark is set, it will automatically be determined which exchanges are high cost based on the benchmark. Thus, it is the commission’s job to set the benchmark, not determine which exchanges are “high cost”. Comment P6 By making these additions, the next sentence is not needed Comment P7 It is inappropriate in our opinion to base any revisions in the benchmark based on “...the effects of competition on carrier revenues...” The benchmark is best set by reviewing the statewide average retail revenues per line. If competition drives down the price for local telephone service, this will be reflected in an updated statewide average. If the price goes up, this also will be reflected. The effect of competition on a carrier’s revenues has no bearing in our opinion on what level of SUSF support should be provided a carrier on a per line basis. WAC 480-123-370 Revenue Benchmark-Non-Wireline. For each service area the commission determines to be high cost, the commission will also determine a revenue benchmark that applies to non-wireline service. 7he initial benchmark will be based on the statewide average revenue per line of non-wireline service. Not less than every eighteen months the commission will consider appropriate adjustments to the revenue benchmark based on the effects of competition on carrier revenues and such other factors as the commission considers appropriate.p8 Comment P8 IBA does not feel that wireless services should be included in the state USF funding or support. See our further comment at Comment 12. If this section is retained, IBA’s proposed policy revisions P5 and P7 should be incorporated into this section. WAC 480-123-380 Universal Service Fund Support Calculation. The per-line support available to an SETC in a high-cost location will be the commission determined per-line cost appropriate pricep9 minus the applicable revenuet benchmark and federal support. A telecommunications carrier may request a benchmark deviation if the carrier can show that the average retail revenues for high cost lines it serves have lower average retail revenues for vertical or discretionary services, services billed on a per-use basis, access payments for origination and termination of toll calls, and other revenues in addition to providing the services defined by WAC 480-123-200(1),p10 For the purposes of this section, “appropriate price” means the price the commission approves after receiving a request for state universal fund support from a telecommunications carrier for an exchange based on the cost to provide the service plus a reasonable rate of return for providing the services defined in WAC 480-123-200.p9 For each month in which an SETC serves subscribers in the high-cost location, the SETC is eligible to apply for and be paid an amount equal to the per-line support in the high- cost location multiplied by the number of subscribers served on the last day of the month. Comment P9 The term “cost” is not an appropriate term. In accounting terms, cost does not include profit. If the calculation for USF support were made based on the proposed definition, the USF support would be inadequate to even cover the costs of providing the local telephone service and thus jeopardize the well-being of consumers in high cost areas. Comment P10 This addition allows a telco to ask for a deviation to the benchmark because their average non-POTS revenues are lower than the statewide average for non-POTS revenues. This is only fair to assure equity among customers in different telephone exchanges. It would also work for telco’s with higher than statewide non-POTS revenues but it is unlikely they will make such a request to the Commission. ALTERNATIVE OPTION FOR WAC 480-123-330p11 Comment P11 IBA does not support the proposed alternative to WAC 480-123-330. IBA believes that requiring all telecommunication carriers serving high-cost areas to provide access to DSL or better facilities to all high-cost customers is an excessive burden that may well result in harms to local telephone consumers. To impose such an excessive burden on some local telecommunication companies may well make serving certain exchanges unprofitable resulting in fewer choices for consumers and questionable stability in having reliable, quality affordable local telephone service. The primary purpose of establishing the State Universal Service Fund is to make current implicit subsidies explicit so that competition may begin for providing local telecommunications services. It is NOT the intent of establishing a State Universal Service Fund to direct the future of telecommunications technology. Directing telecommunications technology in the future is a policy issue that deserves much greater review and analysis and should be done in another proceeding or elsewhere. Comment 12 IBA recommends that the Commission NOT include wireless telecommunications services in the funding of or receiving support from the State Universal Service Fund (SUSF). IBA’s staff believes that wireless services are not considered by most consumers as essential telecommunications services. The wireless telecommunications services is already operating in a competitive marketplace and adding potential subsidies to some service providers for some areas is beyond the scope of why the State Universal Service Fund is being established. IBA’s staff does realize that excluding wireless services will almost certainly result in higher costs paid by consumers to fund the SUSF. But the incremental cost increase we believe will be relatively small. Comment 13 IBA understands that Washington State already has a “high cost fund” to help support smaller telecommunications companies that serve high cost areas. It is unclear to IBA whether this high cost fund will remain in effect after the adoption of the draft SUSF rules now being discussed. We do not see a repealer as part of these draft rules. IBA strongly recommends the existing state high cost fund remain in operation as it is today and not be repealed or modified as a result of adopting new SUSF rules. Comment 14 IBA is concerned that the proposed mechanism to establish a SUSF will result in some telecommunication carriers being net contributors to the SUSF (meaning they pay more into the SUSF than they draw from it) on the fund’s first day of operation. If this is the case, IBA believes that the basic design of such a SUSF would be flawed. IBA’s concern is for the customers of a telco that becomes a net contributor to the SUSF would likely see higher price for their local telephone service. The reason IBA feels this way about the current SUSF proposal is that all companies contribute to the SUSF based on the number of access lines they have. But, if the revenue benchmark is set at a level that results in a telco’ s draws from the fund being less than their contributions, they become a net contributor and their customers likely face higher bills for their local telephone services. We urge the Commission to consider an alternative approach to establishing a SUSF. Instead of establishing the SUSF based on a contribution from each telco for each access line they have, consider having each telco individually define its own SUSF draws and contributions based on its existing service, subject to Commission approval. This benchmark would be set so that any access lines with an appropriate price (see our Comment P9) above the benchmark, minus federal USF support, would receive support from the SUSF. The carrier would also establish a per-access line SUSF contribution amount for each access line it has, sufficient to meet its draws from the SUSF. At telco that sets its benchmark too low or its contribution rate too high - resulting in pricing that would discourage competition - would have a very difficult time justifying the benchmark to the Commission. A telco that sets its benchmark too high or a contribution rate too low would find its price for providing access lines in low cost areas would likely be higher than the competition and thus put them at a competitive disadvantage. The result from this different approach to establishing a SUSF would be to allow for much greater flexibility to take into account the many differences between existing incumbent local exchange carriers that the current approach does not allow for, but would eliminate to the greatest extent the potential that some existing ILEC’s would become net contributors to the new SUSF which will result in upward pressures on the cost of local telephone services for their customers. Then, all CLECS could enter the market and pay the same SUSF contribution rate per access line as established by the ILECs for the areas the CLEC serves. Once the SUSF contribution rates per access line and benchmarks are set, they would remain in effect until some telco requested a revision. Any request to reduce a contribution rate would result in a reduction of all SUSF contribution rates statewide, but only where it can be shown that the draws from the SUSF can be reduced in an equal amount to the reduction in the contributions. Or, the Commission, on its own, could modify contribution rates and benchmarks based on appropriate empirical data. This different approach assumes the existing high cost fund remains in place and continues to operate as it has in the past. We thank the Commission for its consideration of these comments. IBA stands ready to answer and questions or provide additional information upon request. Sincerely, Gary L. Smith Executive Director