October 29, 1998 Carole J. Washburn, Executive Secretary Washington Utilities and Transportation Commission P.O. Box 47250 Olympia, WA 98504-7250 Re: Docket No. UT-980311(r) - Comments on Second Draft of USF Rules Dear Ms. Washburn: The following comments are filed on behalf of the Washington Independent Telephone Association addressing the Second Draft of the USF Rules. As a preliminary matter, WITA wishes to express its disappointment on behalf of its members that the rules continue to perpetuate a proposed universal service fund program that is overly complex, does not provide specific, predictable and sufficient support, and is not competitively and technologically neutral. As requested in the Notice of Request for Comments, WITA will address each of the rules on a section-by-section basis. WITA will not be able to comment on every aspect of every rule in the very short time frame allowed for written comments. However, WITA will highlight areas of concern to its members. Specific Comments 1. WAC 480-123-100 Access-Line Equivalent. This proposed definition treats a DS1 trunk as the equivalent of two access lines and a DS3 trunk as the equivalent of 56 access lines when they are used to connect customers to the public switched network. A qualification should be added that the equivalents are counted as access lines only to the extent they are actually connecting customers to the public switched network. If only a portion of the capacity on a DS3 trunk is used to provide basic telecommunications services, for example, the equivalent of a DS1, then the DS3 should only be counted as two access lines, not 56 access lines. 2. WAC 480-123-110 Administrator. WITA believes that subsection (2) of this rule should be deleted. For reasons described in the comments on the first round of the draft USF rules, WITA does not believe that the Commission can serve as a neutral administrator. The Commission has clearly expressed preferences for competitive local exchange companies over incumbent local exchange companies. 3. WAC 480-123-160 End-User Retail Revenue. This definition ties to the Universal Service Worksheet Form 457, published July 1997. The July 1997 Form 457 has already been superseded. The FCC is working on a new form which will cover multiple programs. If the Universal Service Worksheet is to be used, the version that is current at the time the report is being submitted should be used. We do not support use of a revenue benchmark. The additional complexity and problem of playing catch-up to changing federal report forms are removed if a revenue benchmark is not used. 4. WAC 480-123-190 Revenue Benchmark. Use of a revenue benchmark in the draft rules prejudges the decision to be made in the adjudicative proceeding. WITA strongly disagrees that a revenue benchmark is appropriate. The proper benchmark to use is one of affordability. An affordability benchmark best ties to the concepts of comparable rates for comparable services in rural and urban areas and that the services must be available on an affordable basis. If a revenue benchmark is to be used, here are the problems we see. First, the definition includes services within the revenue benchmark that go beyond what is included in the definition of basic telecommunications services. To the extent that a revenue benchmark includes services that are beyond the services which comprise basic telecommunications services, it perpetuates a system of implicit subsidies in violation of both the Telecommunications Act of 1996 (Federal Act) and Chapter 337, Laws of 1998 (State Act). Second, as WITA has previously argued, including access payments received for originating and termination of toll calls unfairly skews the benchmark as it relates to rural companies. This has the effect of reducing support that would otherwise be required, and in fact is required, to adequately provide service in high-cost rural areas. Third, including terminating access in the benchmark is inconsistent with the Commission’s recent access reform order which removes the contribution provided by terminating access. Access revenue is included in the federal revenue benchmark only because of the implicit support it provides to basic service. Once the implicit support is removed, then it is not appropriate to include access revenues in the benchmark. Fourth, “local exchange carrier toll revenue” should not be included in this definition. If access revenues are included in the benchmark, then what should be included in this regard is the imputed access revenue portion of such local exchange carrier toll revenue. Fifth, the revenues included in this definition must correspond to the costs that are measured against the benchmark to determine high-cost locations. The benchmark and the comparison must measure apples to apples. For example, the definition does not specify that it is limited to revenues derived from telecommunications services. Even if it were so confined, some revenues should be excluded — for example, billing and collection revenues, which could be viewed as “services billed on a per-use basis.” Further, to the extent that this proposed definition includes “such other revenue as the Commission determines will be included,” it constitutes an improper exercise of rulemaking if the Commission does, in fact, determine other revenues are to be included without amending the rule. 5. WAC 480-123-200 Services Supported By The Universal Service Fund. WITA takes strong exception to subsection (2). In the prior version of this rule, the Commission proposed to require companies to upgrade to 3,500 hertz. At that time, WITA filed comments pointing out that there would be very substantial cost to the network to meet such a standard because current equipment is not manufactured to provide capacity at 3,500 hertz. Those comments fell on deaf ears until Dr. Mercer for AT&T, in the course of the adjudicative proceeding, pointed out the very same thing — that current manufacturing specifications call for equipment to be manufactured between 300 and 3,300 hertz, not to 3,500 hertz. He pointed out that a 3,500 hertz standard would require substantial cost to upgrade the network and was the wrong focus if the issue is the deployment of advanced services. To dwell on this point for just a moment, the foregoing is a commentary on how the Commission views the comments of the incumbent LEC industry. Anything that is provided by the incumbent LEC industry is immediately discounted. It is only when a comment comes out of the competitive LEC industry that it is given credence. That situation underscores the fact that the Commission is not taking a balanced approach. What CLECs do is good in the Commission’s eyes, and what ILECs do is automatically bad. That imbalance must stop if the Commission is going to develop a coherent, comprehensible universal service plan that accomplishes the objectives the Commission has set forth in proposed WAC 480-123-020. To return to the language in this rule, there is nothing in the record in the adjudication or before this rulemaking that will provide the Commission with any indication of the cost of providing service at 28.8 kilobits per second. The issue under today’s construction standards and technology will be loop lengths. Many of the existing digital loop carriers will not allow this level of data speed beyond 9 - 12 kilofeet. In many rural areas in Washington, the average loop length is far in excess of 12 kilofeet. Is the Commission prepared to fund the investment required to reduce average loop length so that the maximum loop length is 12 kilofeet so that all customers can receive 28.8 kilobit per second capacity? Or, conversely, is the Commission willing to have the universal fund replace today’s standard gauge cables with 19 gauge copper cable or fiber? Or replace DLCs as a new line is added to service? Does the Commission know the size of the check that it is signing? WITA is not opposed to the development of infrastructure to allow the deployment of advanced services — WITA’s members are strong supporters of rural economic development. The point WITA is making is that the Commission should not set standards in a vacuum. 6. WAC 480-123-240 Revenue Reports. The penalty structure contained in this proposed regulation is far too aggressive. In addition, it does not appear that the Commission currently has statutory authority to impose such penalties. 7. WAC 480-123-250 Access Line Reports. There does not appear to be any need for subsection (3). If contributions are to be based upon revenue, not revenue per line, there is no need for anyone to report the number of access lines for all locations. Only the supported lines are needed. 8. WAC 480-123-270 Determination of Contribution. The same penalty issue is raised in this section as is raised earlier. 9. WAC 480-123-280 Net Contributions Required. The administrative scheme proposed in these rules does not lend itself to netting in the way the Commission is using that concept. Under the Commission’ s concept of netting, companies that are receiving support are placed in a position of having a permanent shortfall in that support equal to the level of their contributions to the fund. That is not a sufficient and predictable mechanism as required by the Federal Act and State Act. WITA does support the concept of netting, and an administrative scheme that will work needs to be developed. 10. WAC 480-123-290 Contributions From Carrier Revenue. These provisions are discriminatory, inasmuch as they permit interexchange carriers (IXCs) to bill customers directly without any further disclosure. If disclosure is to be required as a condition of customer billing, IXCs should be required to disclose the amount by which access charges to the IXC have been reduced, both in total and on a per-line basis, as a result of transference of revenue requirements from access rates to the state universal service fund. 11. WAC 480-123-300 Commission Notice on Universal Service Fund. WITA discussed this rule in the comments earlier this year. WITA continues to have a concern that the Commission is impermissibly mandating speech in violation of the First Amendment. The problem arises when the Commission mandates the precise speech to be used. The issue is not informing the customers. But, either the companies are free to communicate the message to their customers as they see best, or the Commission communicates its message at its expense. Forcing companies to carry the government’s speech is improper. 12. WAC 480-123-320 Petition for Eligible Telecommunications Carrier Designation. The last sentence should be deleted. In areas where there is only the incumbent, obviously its designation will neither promote nor discourage competition. Insofar as this section relates to designation of federal ETC status, it is an impermissible requirement. The Telecommunications Act of 1996 establishes the requirements for designation for federal ETC status, and should be referenced in this section. 13. WAC 480-123-330 Designation of Eligible Telecommunications Carriers. WITA has several concerns about this proposed rule. First, it sets as the minimum designation for a wireline carrier as an exchange. WITA suggests that subwire center designation should be allowed to conform to the areas created for targeting of support. These rules should not prejudge or limit the use of sub-exchange systems for designation and targeting support. The proposed rule is not competitively neutral if it allows non-wireline carriers to have a small service area which is less than an exchange and restricts wireline carriers to the exchange level. (In both cases, it is probably best described as wire center rather than exchange.) The distinction is also not technologically neutral. The proposed rule sets standards for designation of an eligible telecommunications carrier as less than those set forth for federal designation. Specifically, it allows a company to receive ETC designation if it “will offer” the services required by WAC 480-123-200 at some unspecified “adequate” level of quality. There are no parameters about what is meant by “will offer” or what is the “adequate” level of quality. 14. WAC 480-123-340 Modification, Revocation, or Suspension of Eligible Telecommunications Carrier Designation. This proposed rule purports to allow the Commission to modify the service area of an ETC for either state or federal purposes at any open meeting of the Commission. As it relates to federal designation, that is a violation of the Federal Act. A service area may be modified for federal purposes only after concurrence by the FCC. 47 U.S.C. Section 214(e)(5). As it relates to state ETC designation, to remove or modify the designation to a smaller service area without notice and an opportunity for an adjudicative hearing violates the due process rights of the ETC. Having conferred ETC status upon a company, the Commission may not remove that status without due process afforded by the Administrative Procedures Act in an adjudicative proceeding. If an ETC’s service area is enlarged, again doing so at an open meeting violates due process. Enlarging an ETC’s service area would require it to undertake certain obligations that it has not agreed to take on. State compulsion to provide service in areas where a company does not wish to serve is improper. 15. WAC 480-123-360 Revenue Benchmark — Wireline. Again, WITA is concerned that the Commission is prejudging the use of exchange level, as opposed to subwire center methodologies. The same is true in WAC 480-123-400 as proposed. Both of these proposed rules should be modified to make it clear that subwire center methodologies may be used. WITA is also concerned about the construction of a separate benchmark for residential service and business service. This would require disaggregation of information on a level that does not exist today between revenues received from business services and revenues received from residential services, including, but not limited to, access service. This is yet another reason why access service should be eliminated from the benchmark. Instead of separate benchmarks, a single benchmark can be used based upon statewide averages, with support targeted on a disaggregated basis on a subwire center basis. That may be the best methodology for both ease of administration and proper targeting of support. 16. WAC 480-123-370 Revenue Benchmark — Non-Wireline. The Commission has absolutely no information either from the rulemaking or the adjudicative proceeding on which to set a non-wireline benchmark. What is the purpose of this rule? How can the Commission enforce this rule? Where does the Commission get the jurisdiction to require the reporting of this information? In addition, this rule does not separate residential service from business service — this concept should be consistent if separate technology benchmarks are used. If it is not, the rules violate the principle of technological neutrality. 17. WAC 480-123-380 Universal Service Fund Support Calculation. This proposed rule predicates support on “commission determined per-line cost. . . .” If the Commission adopts this proposed rule, it is setting up an extremely expensive system of administration. In essence, the Commission is requiring a rate case to be performed every year for every rural company to determine the per-line cost as that cost changes from year to year. This is one of the problems that underlies the Commission’s approach to the universal service program. It is predicated on very expensive, acrimonious, and time-consuming processes to set the base line from which the program works. WITA continues to advocate an affordability benchmark predicated on prices paid by consumers. That is far easier to administer with far less overhead costs being driven by a universal service program. In the alternative, a cost benchmark, which is essentially the same as that used in the existing federal system for rural companies, predicated on known rules and under the control of the neutral administrator, not a Commission rate case process, can also be relatively inexpensive to administer. The Commission is setting up a mechanism which requires yearly state rate cases — that is not a sufficient, predictable and specific support methodology as required by the Federal Act and the State Act. 18. WAC 480-123-390 Implicit Support Offset Required. To the extent that this section addresses federal USF, it is not appropriate and is also nonsensical. The state Commission does not possess the authority to determine how federal support is to be used. The determination of the use of the funds is inherent in the federal support mechanism. More importantly, the existing federal support mechanisms are already taken into account in the existing local rates. The existing local rates are lower than they would otherwise be absent that federal support. To mandate a further reduction equivalent to the support that is already received would place the companies in a position equivalent to a revenue reduction below rates that are fair, just, reasonable and sufficient, and would be double-counting the effect of the federal support. On the state level, to the extent that access reform has already resulted in a reduction of support levels, then the same concept applies — to require additional reduction double-counts the effect of the removal of implicit support. This is why WITA has consistently advocated that implementation of the access reform be coextensive with the implementation of universal service, not one preceding the other. This requirement is also not competitively neutral. Why is an incumbent LEC required to reduce other revenue and a CLEC is not? This discriminatory treatment allows a CLEC with existing facilities in an area (such as a wireless carrier) to reap a windfall and does nothing to encourage further development of infrastructure in rural areas. In addition, there is no reason to limit subsection (1)(a) to a small business. Any time there is an offsetting reduction to take into account additional explicit support, the Commission should not engage in a rate case-type of review, but should instead approve the filing if the reduction is in proportion to the amount of incremental support attributable to the service. The provision in subsection (1)(b) as it relates to line extensions does not make any sense. Line extension charges should not be reduced. Rather, the line extension revenue should be recognized in the benchmark, thereby causing an offset to support. Line extension charges are appropriately assessed to end-user customers to recognize the fact that there is a cost inherent in providing service to customers in remote locations that is appropriately assessed to the customers. As a practical matter, it will be extremely difficult, if not impossible, to determine the amount of plant, if any, that has been paid for in part by line extension charges, that is included in determinations of cost. The necessary revenue data by ETC service area is not likely to be available, nor is either the original book cost or the depreciation associated with past line extension projects likely to be available. With respect to prospective line extension charges, such charges are often spread over several years. Because of portability, it is not guaranteed that just because a line is included in the first year’s USF, it will be included in subsequent USF support. By what figure is it intended that line extension charges be reduced? Only the associated draw from the USF in the first year, or the expected draw from the USF in subsequent years as well, even though portability leaves that recovery highly speculative. 19. WAC 480-123-400 Disbursement of Support for All Subscribed Lines. WITA has previously commented on the use of the concept of an “exchange.” The rule should allow for subwire center applications. Further, the draw of a State Eligible Telecommunications Carrier (SETC) using unbundled network elements should be limited to the price paid for the unbundled network element. Since the cost of providing service to rural areas includes switching costs, simply using an unbundled loop should not allow the SETC to draw all support. To provide the entire amount of support to an SETC gives the SETC a windfall. A limit of the draw up to the level of the price paid for the unbundled network element does not give the SETC a windfall, but does allow recovery for use of the UNE to provide service in the high-cost area. Without this limitation, the rules would not be competitively neutral (they would favor the CLEC using UNEs by providing USF support above what is needed to provide the service). Without a limitation, the rules would violate the principle of providing sufficient and predictable support by removing support from the ILEC that is not consistent with the determination of support required to serve high-cost areas. In addition, the rule seems to assure, but does not state, that the line is the unbundled loop. There are other UNEs. As written, the proposed rule is unclear because it allows use of any UNE to base receipt of the entire amount of support for service to the customer. 20. WAC 480-123-410 Approval for Payment by Administrator. This proposed rule contemplates that there may shortfalls resulting in payments made on a pro rata basis. This underscores some of the defects in the Commission’s proposal. A proposal that contemplates that there will be shortfalls, with no mechanism to make up that shortfall, violates the principle in both the State Act and the Federal Act that the support mechanism provide support that is sufficient and predictable. A shortfall in support means the support is neither sufficient, nor predictable. 21. WAC 480-123-440 Administrator. WITA has earlier expressed its opinion that the Commission should not serve as administrator. 22. WAC 480-123-450 Expenditure Authorization and Information. WITA has previously commented that the budget should be approved on an annual basis rather than a biennial basis. 23. WAC 480-123-460 Independent Administrator. WITA agrees that there should be an independent, neutral and impartial administrator. The fact that the administrator has industry experience or has a board of directors that includes members that contribute or receive support should not preclude that entity from being the administrator. Experience has benefits and can be balanced with other needs to find the right mix for an independent, neutral administrator. 24. WAC 480-123-500 Access to Books, Records and Property. WITA’s members do not believe that the administrator should have authority to require carriers to produce records, without limitation, at the administrator’s place of business. In addition, there must be in place sufficient protections for confidentiality, which are lacking from the rules. It would also be beneficial if the records provided to the administrator are expressly exempt from the Public Records Act, much like returns filed with the Department of Revenue. 25. Other Rules. In addition to the foregoing, there are also some other issues that come to attention in reviewing the rules. For example, proposed WAC 480-123-040 requires that reports be filed under penalty of perjury. With the startup program where there is a great deal of uncertainty in the program, a declaration that the reports are filed based upon the records of the company and using the company’s best efforts to be true and accurate is a better standard to use than under penalty of perjury. It is highly unlikely that the Commission itself could meet the perjury standard with a startup USF program. Another complicating issue is with the de minimis exemption in proposed WAC 480-123-200(2). This exemption should be an amount per contribution period. For example, it will be very difficult for a carrier to know, at the time when the first-period contribution for each year is to be made, whether revenues for the second half of the year would result in the carrier having to make a contribution for the entire year. Closing Comments WITA has previously testified that there should be three basic principles that drive universal service fund administrative issues. The first is that the fund should ensure that customers in high-cost areas receive the services defined by the State as basic telecommunications services at rates that are affordable and comparable to those paid by customers in urban areas. The second principle is that the fund should be competitively neutral. The third principle is that it should be easy to administer. These principles can be established by using an affordability benchmark. This is the benchmark that best fits the concept of having rates for services in rural areas reasonably comparable to the same services in urban areas. As to the physical administration of the fund, the fund should be administered by an outside administrator. The administrator should be chosen based on experience, integrity, and efficiency of operation. The actions of the administrator should be overseen by an advisory group made up of a balance of industry and consumer interests. In the actual administration, the first step would be to calculate for the non-rural companies, and those rural companies such as Sprint that choose to use a forward-looking economic cost model, the support needed using the forward-looking economic cost model. Once the Commission defines a set of inputs to be used for universal service funding purposes, the model could be run using those inputs in October of each year. The support could then be reported to the Commission with the supporting model runs, and the Commission would then approve the support by December 1. The administrator would then notify the carriers of the amount that would need to be collected for that purpose and the distributions to be estimated for the coming year. This would then let CLECs know what support was available for porting purposes. For rural companies, one of two approaches could be taken. If the economic forward-looking price models can be made to work for rural companies, then the same approach can be followed as is used for non-rural companies. If not, then the companies should submit for 1999 the projected loss in revenue expressed on a per-line basis for changes in the current revenue streams, such as due to access reform. The administrator would then calculate a per-line support amount, the amount needed to be collected and distributed and report that to the Commission and the companies in the same time frame as for non-rural companies. Rate cases are not needed. They are not used today on the federal level. They are inefficient mechanisms which do not need to be used on the state level. Using such complex, adversarial processes only drives up the cost of administering a state universal service fund. For small companies, including companies such as CenturyTel, such a system is an inappropriate burden to place on providing service to customers in rural portions of the state of Washington. The concern should be the delivery of an efficient, affordable telecommunications system to serve the customers in the state of Washington. The system that is established should not serve as a substitute for Commission rate base, rate of return regulation. There are other statutory provisions that can address the issue of over- and underearnings. As WITA has expressed in its comments, there are many problems with the existing proposal. WITA does not support this proposal, and our comments are resistive and negative in tone by necessity. We do, however, support a state universal service fund. We are committed to continue to work with the Commission on a program to administer a state universal service fund. Sincerely, TERRY A. VANN Executive Vice President TAV/aw 12152.ltr