BEFORE THE WASHINGTON UTILITIES AND TRANSPORTATION COMMISSION



In the Matter of the Petition for  ) Docket No. UT-970325       )
Investigation into the Cost of    )  
Universal Service and to Reform   ) Comments of TRACER       )
Intrastate Carrier Access Charges  )
________________________________________ )

 On January 21, 1998, the Commission solicited comments on four potential 
approaches to intrastate access charge reform.  In response to that 
solicitation, TRACER respectfully submits the following comments. 
 As noted in the request for comments, all of the potential approaches assume 
that the Commission, with appropriate legislative authority, has established a 
competitively neutral mechanism to support universal service for customers in 
high-cost locations.  TRACER strongly supports the broad-based funding of 
universal service through an appropriately designed, competitively neutral 
mechanism.  TRACER's comments are written with the assumption in mind that such 
a mechanism will be put in place.
General Comments
 As correctly noted in the Commission Staff's Access Charge Report, dated 
November 20, 1997, all segments of the telecommunications industry, whether 
customer or carrier, agree that intrastate access charges should be reformed.  
This is true for two primary reasons.  First, intrastate access charges, and 
consequently intrastate toll rates, are too high, particularly as compared with 
interstate rates.  Second, because intrastate access charges are set so high 
above economic cost, they present an attractive bypass target.  This becomes 
problematical to the extent that above-cost access charges provide a 
significant source of support for universal service in high-cost areas of the 
state.  The specific concern is that competition could erode this source of 
support, thereby jeopardizing the state's ability to achieve its universal 
service goals.
 TRACER supports the Commission's goal of reforming access charges for both of 
the reasons cited above, and respectfully recommends that the Commission pursue 
that goal with the key policy objectives of the federal Telecommunications Act 
of 1996 Telecommunications Act of 1996, Pub. L. No. 104-104, 110 Stat. 56 
(codified at 47 U.S.C. § § 151 et seq.). ("Act") in mind.
 The stated purpose of the Act is "to promote competition and reduce regulation 
in order to secure lower prices and higher quality services for American 
telecommunications consumers and encourage the rapid deployment of new 
telecommunications technologies." (Emphasis added.) Act, supra, purpose 
statement, at 56.  In section 254 of the Act, Congress also stated that 
"[t]here should be specific, predictable and sufficient Federal and State 
mechanisms to preserve and advance universal service."  As explained in the 
Joint Explanatory Statement of the Committee of the Conference, Congress 
intended that, "[t]o the extent possible, . . . any support mechanisms 
continued or created under new section 254 should be explicit, rather than 
implicit as many support mechanisms are today." Joint Explanatory Statement of 
the Committee of the Conference, S. Conf. Rep. No. 230, 104th Cong., 2d Sess. 
131 (1996).
 Thus, in reforming access charges, the Commission needs to act to identify and 
remove the implicit subsidies in access charges and do so in the context of, 
and in strict coordination with, policies that will enable competition capable 
of putting downward pressure on retail prices to develop.
 It is widely recognized that affordable basic service rates have been 
maintained historically through, among other things, a combination of 
geographic rate averaging, high rates for business customers, high intrastate 
access rates, high rates for intrastate toll service, and high rates for 
vertical features and services such as call waiting and call forwarding.  In 
the case of small, rural LECs, explicit subsidies and above-cost access charges 
probably provide the largest source of high-cost support, although some is 
provided by high business rates and geographic averaging.  In the case of the 
large incumbent LECs, more of the high-cost support likely comes from high 
business rates and geographic averaging.  Thus, the approaches for dealing with 
high-cost support may necessarily differ between the small, rural LECs and the 
larger LECs.
 Obviously, the overall level of intrastate universal service support is 
substantial.  TRACER believes that it will not be possible to immediately 
remove all implicit support, even just that contained in access charges, 
without significant inequitable impacts on customers or on incumbent local 
exchange carriers. Instead, TRACER believes that a process that over time 
eliminates the implicit support from access charges, and from other services, 
is the preferred course.
 At a minimum, it is important that existing subsidies from all services be 
identified precisely.  Once they are identified, either the Commission must act 
prescriptively to remove those subsidies or the competitive market must be 
strong enough to do so accurately.  Where pro-competitive policies can force 
telecommunications prices to competitive levels, implicit supports will be 
substantially eliminated.  This is because the prices charged by new entrants 
presumably do not contain any implicit universal service support.
 As an integral part of any effort to reform access charges, the Commission 
must aggressively act to eliminate opportunities and incentives for inefficient 
entry that are created by distortions and inefficiencies in current rate 
structures and rate levels.  In other words, access charges must be reduced and 
restructured to more accurately reflect the manner in which the costs are 
incurred.  Thus, usage-sensitive access charges should be reduced by removing 
non-traffic-sensitive ("NTS") costs and NTS costs should be recovered from more 
economically efficient, flat-rated charges.  Because NTS costs, by definition, 
do not vary with usage, the recovery of NTS costs on a usage-sensitive basis 
creates an implicit subsidy from high-volume users of intrastate toll services 
to low-volume users of intrastate toll services.
 One area of particular concern to TRACER is the apparent disjoint between (1) 
the Commission's announced intentions regarding the reform of access charges 
and (2) the status of decisions regarding the implementation of local 
competition.  At this point, permanent prices for UNEs have not be determined, 
and the Staff is recommending pricing policies that, in TRACER's opinion, will 
disable resale and UNE-based competition from being able to put any meaningful 
downward pressure on the prices charged by incumbent LECs.  Given that 
facilities-based competition can be expected to develop much more slowly, and 
perhaps be confined to niche markets, the competitive pressure on traditional 
sources of universal service support will simply not be present, at least not 
any time soon.  Thus, the Commission's proposed alternatives, to the extent 
they rely on a proposal to create new explicit subsidies, will simply turn into 
guarantees of revenues for incumbent LECs, insulating them from any competitive 
pressures.  In that case, competition will be disabled from producing any 
public benefits in the form of lower prices, and the promise of the Act will 
have been lost.
 In order for the public to be benefited from competition and universal service 
maintained, the costs of universal service and the cost of UNEs must be 
determined in a consistent manner.  If UNE prices are not available on a 
geographically deaveraged basis, universal service support needs should not be 
determined on a geographically deaveraged basis either.  If universal service 
subsidies are provided for an area larger than the UNE pricing area, local 
service providers may not find it profitable to serve high cost areas.  
Conversely, universal service areas smaller than the UNE pricing area may 
discourage service to low cost customers.  In either case, the universal 
service scheme could not be said to be competitively neutral.
 In sum, if UNEs and retail rates are only available on an averaged basis, 
universal service payments should be calculated on the same averaged basis.
 Available evidence suggests that USWC, one of the two major rate averaged LECs 
operating in this state, would not need any universal service support if 
universal service costs are estimated on a statewide average basis.  The same 
can be assumed to be true for GTE.
 USWC witness Robert Bowman produced evidence in the AT&T arbitration 
proceeding that USWC's statewide average monthly revenue per residential line 
in 1996 was $32.50 and $58.87 per business line. The USWC analysis assumes a 
residential local rate of $10.27.  The current residential local service rate 
is $12.50.  The analysis assumes a business local service
rate of $26.79.  The current business local service rate is $26.60.  A copy of 
Mr. Bowman's analysis is attached.   $2.60 of that residential revenue comes 
from intrastate access charges, and $5.54 from interstate access charges; 
totalling $8.14.  For business, $4.64 comes from intrastate access charges, and 
$9.90 from interstate access charges; totalling $14.54.
 In Docket No. UT-969639, Staff witness Spinks estimated that the average USWC 
monthly loop cost, including a 20% additive for attributable costs, was 
$12.20.  GTE's average monthly loop cost was $14.40.  Available evidence in 
Oregon suggests that the additional costs of local service (usage and 
administrative costs) are $4.23.  Thus, statewide average universal service 
costs for USWC should be approximately $16.43 and $18.63 for GTE. Available 
confidential and nonconfidential studies indicate that the cost per line to 
serve a typical business customer is less than the cost per line to serve a 
typical residential customer.

Nonconfidential cost results of the HAI model presented by the WUTC Staff in 
Docket UT-960369 provide support for this observation.  The HAI model results 
show that the cost of serving a typical customer in the higher density zones is 
much lower than the cost of serving customers in the medium and low density 
zones. Typically, residential customers reside in lower density zones than 
typical business customers, and, thus, the cost of serving an average business 
customer is less than the cost of serving an average residential customer.  
This result is expected because usage costs per minute are relatively small 
when compared to costs for loops.  Even though typical business customers make 
more calls than residential customers, this small cost difference is more than 
offset by large differences in loop costs.

Statewide average data for the total cost of serving residential lines and 
business lines can also be produced with the HAI model.  For example, in 
Oregon, the average total costs (i.e., costs of lines, usage costs, and 
administrative costs) for a business line is $4.37 (23%) less than the average 
total costs of serving a residential line.  Comparable results are expected in 
Washington.

Cost estimates based on data and models USWC claims to be confidential confirm 
these results.  USWC's most recent estimates of loop costs for services were 
made with its Regional Loop Cost Analysis Program ("RLCAP"). Based on those 
analyses, the statewide average loop costs of PBX trunks are lower than the 
statewide average costs of a typical business line loop and both business loop 
costs are much lower than the statewide average cost of a typical residential 
loop.  USWC usage cost estimates are also very small relative to loop costs.  
These USWC studies confirm the conclusion that it costs less to serve a typical 
business customer than it costs to serve a typical residential customer.
 Subtracting the revenue from intrastate access and interstate access from the 
total revenue per line yields a product of $24.36 for residence lines and 
$44.33 for business lines.  Those figures provide a margin above universal 
service costs of $7.93 for residence lines and $27.90 for business lines.
Assuming GTE gets approximately the same revenue per line that USWC does, the 
GTE margin on residence lines is $5.73 for residence lines and $42.13 for 
business lines.
 Thus, both companies generate ample revenue from their residential and 
business customers to cover the costs of providing universal service throughout 
the state.  Therefore, until UNEs and universal service costs are calculated 
and available on a geographically deaveraged basis, neither company needs 
support from a state universal service fund.  It follows that intrastate access 
charges for both companies can be reduced without concern about impacts on 
universal service.
Comments on the Commission's Potential Approaches
1. Reduce terminating access charges by the amount of funding provided through 
a universal service mechanism.
 As suggested by the discussion above, while this approach may be appropriate 
for small, rural LECs, it is not necessarily appropriate for the larger LECs, 
at least until such time as UNE pricing and universal service subsidies are 
made available on the same geographically deaveraged basis.
 It is also important to recognize that access charges are not the sole source 
of high-cost support today.  As noted above, high business rates and 
geographically averaged local service prices, among other things, are also 
important implicit subsidy sources.  Therefore, it would be inappropriate to 
calculate the total amount of implicit support to high-cost areas and then 
reduce access charges by that amount without also reducing the prices for the 
other services providing part of the implicit support.
2. Reduce access charges to offset universal service funding, and shift part or 
all of remaining access charges in excess of the actual cost of terminating 
access, to originating elements.  The originating elements could be a 
combination of per-minute and per-line charges.
 As discussed above, TRACER supports the idea of restructuring access charges 
to more accurately reflect the manner in which the costs are incurred.  Thus, 
usage-sensitive costs should be recovered on the basis of per-minute charges 
and NTS costs should be recovered through per-line charges.  Further, unless 
the Commission is prepared to take the politically difficult step of 
restructuring end-user rates so as to charge separately for network access, 
access charges should make some contribution to covering the cost of the local 
loop.  That should be done in the form of a per-line charge.  While the cost of 
the loop would not technically be a service-specific cost of access, it is a 
shared cost of local and long distance services; therefore, both local and 
access should contribute.
 TRACER also has a number of concerns about this approach. First, TRACER is 
troubled by the use of the term "actual cost". The term "actual cost" has been 
used by various incumbent LECs to imply that they should be allowed to use 
their embedded base for the determination of the cost of universal service.  
This is part of their proposal that any universal service mechanism should 
essentially be a "make-whole" mechanism, which protects their shareholders from 
any risks of serving high cost areas while low cost areas are subject to 
competition.  The concept of guaranteeing revenue neutrality is inconsistent 
with the policy directives of the Act.  The proper measure is forward-looking, 
economic cost.
 Second, this approach reflects a decision to rely on the anticipated 
development of local service competition to reduce intrastate access charges to 
appropriate levels.  TRACER is concerned that this sort of purely market-based 
approach to reducing access charges simply will not be effective, because 
meaningful local competition is not developing sufficiently.
 Fair, cost-based pricing for UNEs is essential if local competition that might 
actually produce downward pressure on access charges is to develop on a 
widespread basis in the short term.  At this point, the Commission has not 
established permanent UNE prices, and, if recommendations to price UNEs based 
on existing retail rates and not on economic costs ultimately are adopted, 
meaningful local competition will not likely develop in the foreseeable future.
 Thus, TRACER believes that the Commission should not rely solely on a 
market-based approach to reforming access charges, but, to the extent possible, 
must act affirmatively to prescribe rates for access services that reflect 
forward-looking economic cost.
 It should also be noted that, to the extent that competition is successful in 
putting pressure on originating access charges under this approach, incumbent 
LECs will be able to seek offsetting increases in other retail rates, at least 
as long as they remain under rate base, rate of return ("ROR") regulation. In 
fact, TRACER is becoming increasingly convinced that traditional ROR regulation 
is ill-suited for a marketplace in which competition is expected to develop.  
Thus, TRACER recommends that the Commission consider the merits of proposing a 
form of price cap regulation which (1) protects captive customers from the 
risks of competitive failures, (2) gives carriers the downward pricing 
flexibility they need to respond to emerging competition, and (3) requires that 
the carriers shoulder the risks of their competitive failures and allows them 
to keep the fruits of their successes.
3. Reduce access charges to offset universal service funding, and shift part or 
all of remaining access charges to local rates.  If this approach is favored, 
the Commission wants comments on how it should determine the proportion of 
access charges to be shifted to local rates and the timing of such shifts.
 The most economically rational step the Commission could take would be to 
restructure both access charges and retail rates by allowing LECs to charge 
end-users separately for network access.  This would also be the most 
politically difficult thing the Commission could do.  If each end-user customer 
were required to pay for the cost of the loop used to provide network access, 
and then paid an additional amount to cover the cost of local usage, and an 
additional amount for long distance usage, reducing access charges to 
economically efficient levels would be an easy task.  However, it would be 
incorrect to characterize such a restructuring as shifting charges to local 
rates, although that is how it is likely to be perceived.
 In the absence of charging separately for network access, any shift of access 
charges to local rates should be viewed as an adjustment of the relative 
contributions by local and access services to recovering the cost of the local 
loop.  In order to determine the appropriate amount of those contributions, the 
Commission first determine the relevant forward looking economic cost of the 
loop and compare that to the revenues derived from local rates, from access 
charges, direct and imputed, and from other services using the loop.  Once the 
loop cost is covered, determination of the relative percentages of contribution 
would be a matter for Commission discretion, considering the policy directives 
of state and federal law.
 Because of the political sensitivity, any change such as suggested in this 
approach should be done in stages and under strict conditions ensuring that any 
increase in end-user charges is offset by a corresponding reduction in toll 
rates.  While such an exchange should be revenue neutral in an overall sense, 
some individual customers would see increases in their overall bills and other 
would see decreases.  This results from the simple fact that some customers 
make few, if any, toll calls, whereas others make many such calls.  In other 
words, today many customers do not pay the costs of providing them service and 
do not contribute to the support for universal service in high-cost areas.  
That would change under this approach.
4. Reduce access charges to offset universal service funding, and order an 
additional decrease in access charges with no offsetting local rate increase.  
With this approach, the Commission wants comments on how it should determine 
the appropriate decrease in access charges and the timing of such decrease.
 As long as the incumbent LECs operating in this state are under traditional 
ROR regulation, any reduction in access charges with no offsetting increase in 
local or other rates would have to be done in the context of an overall 
earnings review.  Once the economic cost of access, including a reasonable 
contribution to shared and common costs and an appropriate contribution to the 
cost of the loop (if not charged separately to the end-user), is determined, 
the Commission could order access charges reduced, subject to a showing by the 
LEC that its resulting overall revenues would be insufficient to allow it to 
earn a reasonable return.  TRACER does not suggest that the Commission require 
all LECs to file a general rate case--certainly, no overall earnings review 
need be conducted for any company that has recently undergone such a review.  
However, filing a rate case is always an option available to a company that 
believes it is underearning. 
 Further, as noted above, the Commission should not view universal service 
funding as a mechanism to give incumbent LECs a revenue make-whole guarantee 
and insulate them from the effects of competition.  That would run counter to 
the policy directives in state law and in the Act.  However, TRACER strongly 
cautions the Commission not to undertake any revenue reducing action that would 
impair incentives for the deployment of advanced technologies and network 
configurations that can deliver new innovative and dynamic services. 
Impacts on Wireless Companies, ISPs, and Small Businesses
The Commission also solicited comments addressing how access charge reform 
would affect wireless companies, services and customers; Internet service 
providers, services, and customers; and small businesses throughout the state.
 TRACER has no comments regarding the effects of access charge reform on 
wireless companies, services or customers.
 With respect to the effects on Internet service providers, services, and 
customers, TRACER strongly recommends that the Commission follow the decision 
of the FCC that the existing pricing structure for ISPs should remain in place, 
and incumbent LECs not be permitted to assess per-minute access charges on 
ISPs. First Report and Order, In the Matter of Access Charge Reform, Price Cap 
Performance Review for Local Exchange Carriers, Transport Rate Structure and 
Pricing, End User Common Line Charges, CC Docket Nos. 92-262, 94-1, 91-213 & 
95-72, FCC 97-158 (rel. May 16, 1997), review pending sub nom. Southwestern 
Bell Tel. Co. v. FCC, Nos. 97-2866/2873/2875/3012 (8th Cir.)("FCC Access Charge 
Order").  As stated in the FCC's Access Charge Order at paragraph 345:
We decide here that ISPs should not be subject to interstate access charges.  
The access charge system contains non-cost-based rates and inefficient rate 
structures, and this Order goes only part of the way to remove rate 
inefficiencies. Moreover, given the evolution in ISP technologies and markets 
since we first established access charges in the early 1980's, it is not clear 
that ISPs use the public switched network in a manner analogous to IXCs. . . .
 The FCC also stated that is was not convinced that the nonassessment of access 
charges results in ISPs imposing uncompensated costs on incumbent LECs, 
pointing out that ISPs pay for their connections to incumbent LEC networks by 
purchasing services under state tariffs.  Incumbent LECs also receive 
incremental revenue from Internet usage through higher demand for second lines 
by consumers, usage of dedicated data lines by ISPs, and subscriptions to 
incumbent LEC Internet access services. FCC Access Charge Order at ¶ 346. 
Moreover, the costs of placing the calls to ISPs are fully covered in the rates 
paid by the consumers placing those calls.
 Further, as the FCC noted, incumbent LEC allegations about network congestion 
do not warrant imposition of interstate access charges on ISPs. FCC Access 
Charge Order at ¶ 347.  The Network Reliability and Interoperability Council 
has not identified any service outages above its reporting threshold 
attributable to Internet usage, and even incumbent LEC commenters acknowledge 
that they can respond to instances of congestion to maintain service quality 
standards. Internet access does generate different usage patterns and longer 
call holding times than average voice usage.  However, the extent to which this 
usage creates congestion depends on the ways in which incumbent LECs provision 
their networks, and ISPs use those networks.  Incumbent LECs and ISPs agree 
that technologies exist to reduce or eliminate whatever congestion exists.Id.
 TRACER does not believe that the public interest would be served by applying 
the access charge system, even when stripped of its current inefficiencies, to 
Internet access and other information services.  TRACER believes the public 
interest is better served by policies that provide appropriate incentives for 
the deployment of new technologies and network configurations that will result 
in more innovative and dynamic services than have been available in the past.
 With regard to small businesses, the impacts of access charge reform are 
discussed above.  To the extent a small business makes few toll calls, its 
total bill will go up if access charge reductions are offset by higher local 
service rates.  If the small business is a heavy user of toll services, its 
total bill will go down.
 The effects of shifting access charges to a new universal service mechanism 
will depend on how that mechanism is structured.  To the extent universal 
service contribution obligations are based on revenue and are passed to 
end-users on the same basis, any business customer will pay more towards 
supporting universal service because the prices it pays are higher than for 
residential customers.  This will be particularly true if the implicit 
subsidies in current business rates are not removed.  A business will also pay 
more to the extent it makes more toll calls.
 Respectfully submitted this 13th day of February, 1998.
     ATER WYNNE HEWITT DODSON & SKERRITT, LLP

     By:                                     
      Arthur A. Butler
      WSBA #04678

     Attorneys for TRACER