BEFORE THE WASHINGTON UTILITIES AND TRANSPORTATION COMMISSION WASHINGTON UTILITIES AND ) U S WEST TRANSPORTATION COMMISSION, ) COMMUNICATIONS, INC. REQUEST FOR COMMENTS Re: ) FEBRUARY 13, 1998 ) COMMENTS Docket No. UT-970325 ) ) PETITION FOR INVESTIGATION INTO ) THE COST OF UNIVERSAL SERVICE ) AND TO REFORM INTRASTATE ) CARRIER ACCESS CHARGES ) ____________________________________) On January 21, 1998, the Commission issued a Notice of Opportunity to File Comments in Docket Ut-970325 - Petition for Investigation into the Cost of Universal Service and to Reform Intrastate Carrier Access Charges. The Notice requested comment on the initial comments filed November 21, 1997, the Commission Staff Report on Access Charge Reform Options, the presentations made at the January 13, 1998 workshop and all the materials distributed at the workshop by presenters. The Notice also requested comments on four potential approaches to access charge reform and the likely effects on the various interest groups discussed in the Commission Staff (“Staff”) Report. Following are the comments of U S WEST Communications Inc. (“U S WEST”). INTRODUCTION When the Commission initiated the rule making in the above captioned and docketed matter, a Preproposal Statement of Inquiry was filed with the Code Reviser that identified five critical issues that must be addressed as part of this proposed rule making. The five issues were as follows: 1 Identify the existence of any implicit subsidies for universal service and remove them to the extent possible. 1 Establish a new universal service funding system and replace the existing system with an explicit, specific, predictable and sufficient funding mechanism for universal service that is competitively neutral. 1 Review pricing principles to ensure recovery of economically efficient costs, and to ensure that appropriate rate levels and rate design are established in proper relationship to the costs and market power of each provider. 1 Allow the marketplace to function, while protecting captive ratepayers. 1 Ensure that service to rural and high cost customers is adequate and affordable, as specified in 47 U.S.C. 254(b)(3). The initial U S WEST comments filed November 21, 1997 addressed each of these issues and urged the Commission to look at all sources of implicit subsidies for universal service, not just the subsidy derived from switched access service rates. The November 20 ,1997 Commission Staff Report on Access Charge Reform Options recognized the relationship of switched access charges to incumbent Local Exchange Company (“LEC”) long distance service rates but failed to include a specific recommendation to replace the existing subsidy derived from long distance service rates. In fact, one could conclude that the Staff Report assumes incumbent LECs will reduce long distance service rates once switched access charges are reduced without a provision for offsetting increases to other services. The Staff Report acknowledges incumbent LECs will have to reduce such rates to remain competitive. The Staff Report failed to acknowledge that in many cases the greatest source of available revenues to subsidize local service is not switched access charges but rather long distance and business basic exchange service revenues. The focus of the presentations and the materials distributed at the January 13, 1998 workshop also focused on switched access charge reform The Commission Staff set forth an agenda specific to access charge reform. Staff may plan to have additional workshops on other implicit subsidy sources of revenue as well. It is highly probable that GTE-NW, Sprint/United and U S WEST have greater sources of subsidy revenue in long distance and business basic exchange service rates.. Additionally, Docket U-85-23 and U S WEST’s role as designated carrier for intraLATA toll must be terminated. U-85-23 was established as a replacement for the separations procedures and cost studies used prior to divestiture. The old method was used to compensate the independent telephone companies for the use of their facilities for long distance service. Since 1986, the intraLATA toll arena has changed dramatically. Both GTE NW and Sprint/United have become their own toll carrier, a number of CLECs have become intraLATA toll carriers and there is a great deal of dial around activity by end user customers to interLATA carrier networks to place intraLATA toll calls. The market has changed to allow customers to chose from a variety of carriers to complete their toll calls. It is no longer appropriate to hold U S WEST to obligations established in U-85-23. U S WEST should have the option to serve these customers, as do other carriers. It is no longer appropriate that a regulatory mandate dictate that U S WEST must be their carrier. U S WEST is concerned that this proceeding continues to focus only on the implicit subsidies derived from switched access charges. The January 21, 1998 Notice focused on four potential approaches to access charge reform and failed to include the need for comment on other implicit subsidies that must also be addressed. Any rule designed to reduce switched access charges must also address reductions to incumbent LEC long distance service rates. This is necessary for consumers to receive the benefit of switched access charge reductions and also so that the LECs can remain competitive in the long distance market. LECs should not be forced to reduce long distance service rates without an offsetting increase to local service rates. At the January 13, 1998 Workshop, MCI advocated the flow-through of access charge reductions to consumers in the form of long distance price reductions. Sprint/ United stressed the consumer benefit of lower long distance prices stemming from reduced access charges. U_S_WEST agrees with MCI and Sprint/United that consumers should benefit from lower long distance prices when access charges are reduced. Incumbent LEC long distance customers should also receive the benefit of lower prices. Therefore, U_S_WEST and other incumbent LECs need to plan for reductions to their long distance prices at the same time they plan for reductions to their switched access charges. If incumbent LECs did not reduce their long distance rates, but other carriers did reduce their prices, incumbent LEC long distance service would suffer a further competitive disadvantage. U_S_WEST could expect to see more rapid erosion of its long distance business than it is already seeing. U S WEST has experienced a decline in its long distance revenue of over $135 million since 1991. Either way, incumbent LECs will experience loss of long distance revenues. The financial impacts of both rate reductions must be included as part of this rule making. U_S_WEST switched access service currently generates $57 million IXC Switched Access Service revenue is approximately $39 million. in intrastate revenue. U S WEST long distance service currently generates approximately $173 million in revenue and business basic exchange service generates approximately $193 million in revenue. The Commission needs to review the relationship of the rates for all of these services to their costs since they are all priced well above total service long run incremental cost (TSLRIC). An analysis of the contribution available from each of these services in conjunction with the determination of the subsidy required to fund universal service will enable the Commission to eliminate implicit subsidies as appropriate. Elimination of the implicit subsidy derived from switched access service must also include elimination of the implicit subsidy derived from long distance service to the extent possible. Any other approach would be anti-competitive. An analysis such as that suggested above will result in the identification of the greatest sources of implicit subsidies for each LEC. The degree of implicit support derived from long distance, switched access or business basic exchange service will vary by company. Incumbent LECs that do not retain long distance revenues most likely are dependent upon switched access revenue to subsidize high cost areas. However, when U S WEST is no longer the primary toll provider for such Independent LECs, contribution received by such companies from switched access service revenue could decline. Therefore the Commission must also consider the changes that will occur in incumbent LEC revenues due to the new competitive environment in Washington. Finally, the four proposed potential access charge reform approaches all seem to assume that the future Universal Service Fund will provide additional revenues to LECs and that these additional revenues should be offset by price reductions. This assumption is premature and may turn out to be faulty, depending on how WashingtonÕs new Universal Service Fund is finally structured. The fact that this is a combined access charge reform and universal service docket demonstrates a recognition of the fact that there is an implicit subsidy derived from switched access charges to support universal service. However, it is by no means certain that Washington’s new Universal Service Fund will provide incremental revenues to LECs. ACCESS CHARGE REFORM OPTIONS A. Reduce terminating access charges by the amount of funding provided through the universal service mechanism. If this rule is adopted, it should be limited to situations in which a LECs terminating access price is higher than its originating access price. The effect of this proposal would be vastly different for U_S_WEST than for most, if not all, of the other LECs in Washington. The Washington switched access rules established in Docket No. U-85-23, set the originating common carrier line (“CCL”) rate at one-cent, and specified that the terminating CCL rate be set residually, to collect the remaining non-traffic-sensitive revenue requirement. This resulted in LECs having considerably higher terminating access charges than originating access charges. Prior to February 1, 1998, the U S WEST terminating CCL rate was 2.28 cents; resulting in a terminating access rate 1.28 cents per minute higher than originating access. However, the Commission ordered U_S_WEST to eliminate its CCL charge in Docket No. UT-950200 and as of February 1, 1998, the switched access originating and terminating rates are equal at 2.11 cents per minute. Considering the switched access rates charged by other LECs in Washington, including the new competitive LECs (CLECs), U_S_WEST's originating and terminating access rates are now at a very competitive level. Other Washington LECs are not in the same situation as U_S_WEST and their terminating charges tend to be considerably higher than their originating charges. Given this situation, it would make more sense to apply reductions specifically to terminating rates only until terminating and originating rates are equal to each other. At this point, LECs should have the latitude to apply reductions equally to both originating and terminating access. It is not reasonable to force LECs into a situation in which their originating access rate is considerably higher than their terminating access rate. As was noted by the Staff in its January 13, 1998 report, (pp. 5-6), originating access is more susceptible to bypass and competition than is terminating access. To force a company into charging its highest price in the most competitive situation is to perpetuate regulation in a most negative manner. B. Reduce access charges to offset universal service funding, and shift any terminating 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. The first part of Proposal B would set terminating access rates at cost; the Commission should not mandate the setting of any rate at cost. All classes of customers, including interexchange carriers, should contribute to the common costs of the firm. No class of customer should be excluded from contributing to shared (joint) and common costs. This proposal would cause a shift of access rates toward the originating side, even for U_S_WEST with its already low access rates. To subject the only portion of access charges which contribute to common costs to the highest competitive pressures is simply a punitive action which serves no purpose in a competitive marketplace other than to penalize incumbent LECs. This part of proposal B should not be adopted. The second part of Proposal B addresses the structure of access charges. U_S_WEST favors a combination of usage-sensitive and flat-rated charges, reflecting that switched access service is made up of a combination of usage-sensitive and fixed elements. The local transport restructure which U_S_WEST implemented on February 1, 1998 consists of a combination of usage-sensitive and flat-rated charges. This type of price structure promotes economic efficiency and should be encouraged. C. 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, please comment on how the Commission should determine the proportion of access charges to be shifted to local rates and the timing of such shifts. It would be unreasonable to shift all of access charge revenues to local rates. Access charges recover costs that are associated specifically with the provision of long distance service and it would defy economic efficiency to shift this cost recovery to local rates. That is, cost should be recovered from the cost causer. Specifically, access charges should continue to recover the switching and transport costs associated with each long distance call and the LEC should be allowed an opportunity to also recover common costs and a portion of its authorized rate of return from access charges. At the same time, it is reasonable to shift some of the revenue from access charges to local rates. This is an action that U_S_WEST has long advocated. Furthermore, this is precisely what the Federal Telecom Act envisioned by advocating elimination of implicit universal service funding. Local service rates should be increased to recover the entire cost of local service, including the cost of the local loop. Further, local service rates should also contribute to recovery of common costs. These rate increases can be accomplished in a rate rebalancing proceeding in which rates of products with high contribution margins are decreased, and rates of products which are below or barely above cost are increased. Rate reductions in this type of rate rebalancing proceeding should not be limited to just switched access charges. Long distance rates and the rates of any other products with high contribution margins should also be considered for inclusion in a rate rebalancing proceeding. The Commission asked for direction on how the proportion of access charges to be shifted to local rates should be determined. The proportion will vary considerably from one LEC to another, and no attempt should be made to set a universal proportion for all LECs. Instead, rate rebalancing should be guided by the price/cost relationships of the individual products offered by each particular LEC. Similarly, the timing of such rate rebalancing should be determined according to each LECs circumstances. None-the-less, the Commission should, through its rules, encourage action by all LECs. D. Reduce access charges to offset universal service funding, and order an additional decrease in access charges with no offsetting local rate increase. If this approach is favored, please comment on how the Commission should determine the appropriate decrease in access charges and the timing of such decrease. This approach assumes that universal service funding will increase LEC revenues and therefore rate reductions that offset such an increase are necessary. Furthermore, it assumes that switched access service is the appropriate service to receive such rate reductions. This proposal fails to recognize that switched access service is not the only service offered by local exchange carriers (LECs) with pricing that may need to be adjusted to remove implicit subsidies and facilitate local competition. In fact, U S WEST long distance service revenues contribute more to total cost than switched access service revenues. This proposal also fails to address a LEC’s revenue requirement. Universal service funding may enable rate reductions however until the fund is defined it is not clear that rate reductions will result. But the proposal goes beyond offsetting universal service funding by mandating additional decreases with no offsetting increases. A net decrease should not be ordered without consideration of a LEC’s overall financial situation. It is also important to note that U_S_WEST's access charges were reduced by over 50% on February 1, 1998. Rates were reduced to two cents per minute; resulting in the lowest switched access rate in any U S WEST state. In the case of U_S_WEST, the rates of other products should be reduced before further reductions to access charges are warranted. U_S_WEST should not be expected to reduce rates without offsetting increases in other prices or revenues. The Commission should not adopt access charge rules which do not address the coordination of access charge reductions with overall rate rebalancing. The rules must also consider the impact on a LEC’s financial requirements and its ability to continue to serve as a defacto carrier of last resort. EFFECTS ON VARIOUS INTEREST GROUPS The Commission’s Notice also requested comment on the likely effects on the various interest groups discussed in the Commission Staff Report at pp.2-3 and at page 2 of the Notice. The effect on Incumbent LECs will vary dependent upon their existing sources of subsidy revenues. As discussed above, each incumbent LEC has a different revenue mix. GTE-NW, Sprint/United and U S WEST probably have more subsidy revenue in long distance service rates than in switched access service rates while smaller incumbent LECs may be more dependent upon switched access service revenues. The Commission must consider all implicit subsidy revenue sources and based upon an analysis of such subsidies, direct incumbent LECs to rebalance their rates accordingly. The analysis also must address future changes that will occur to incumbent LEC sources of revenue as a result of the new telecommunications environment in Washington. The effect on CLECs, IXCs and Wireless (Cellular and PCS) telecommunications companies will vary. Rates charged to carriers for interconnection to a LECs network should be the same absent cost differences. However, incumbent LECs must rebalance rates before this can be accomplished. A carefully thought out transition plan is essential to minimize the effect on consumers as well as incumbent LECs. The effect on Internet service providers (ISPs) and small business customers should be positive. Rates for long distance and business basic exchange services should decline as implicit subsidies are reduced or eliminated to the extent possible. The effect on consumer rates will vary based on the individual customer’s service profile. Some customers will see an increase in their total bill while other customers will see a decrease. However, it is important to note that today most customers receive service at a rate below cost and not all of these customers require subsidy support. Many customers could pay a rate that covers their cost. The purpose of this proceeding is to determine the appropriate affordability benchmark for local service and to develop a universal service fund that compensates LECs for the costs that are not recovered in local service rates. ADDITIONAL COMMENTS U_S_WEST also wishes to comment on the position taken by some of the parties that access charges should be set equal to the prices of unbundled network elements. While U_S_WEST agrees with those parties that it is appropriate for access rates to bear a relationship to the unbundled element rates for the underlying functions of access service, it is inappropriate to assume that the prices of the bundled switched access service should be set equal to the unbundled network element prices. If this were done, very significant revenue reductions would result, both from the access rate reduction and from the need to perform similar reductions to long distance service rates. U_S_WEST would expect the switched access rates to continue to decline and eventually to reach a level closer to the unbundled element rates. However, the magnitude of the revenue shift makes it imperative that such a pricing change not be done on a flash cut basis and that it be done only with consideration for the overall financial results of the Company. For example, if the interim prices contained in AT&T's interconnection contract with U_S_WEST were applied to UÊSÊWEST's switched access services, this would result in a 83% reduction from today’s already low access prices and would reduce the price to approximately 0.35 cents per minute. While it is unknown what such a drastic change in access prices would precipitate in price reductions for long distance services, it is certain that U_S_WEST's long distance revenues would be put at even greater risk than they are today. In other words, to reduce switched access rates to the level of the rates of unbundled network elements would turn upside-down the present structure of U_S_WEST's cost recovery. Such drastic action should not be taken without due consideration for the consequences. U S WEST MODEL FOR NEW WASHINGTON SWITCHED ACCESS SERVICE GUIDELINES The current Washington access charge rules were developed at a time when the telecommunications industry was very different from what it is today. Those rules need to be replaced with new guidelines which reflect the new competitive nature of the telecommunications marketplace. U_S_WEST continues to recommend adoption of new switched access guidelines based on the model U_S_WEST distributed at the January 13, 1998 Workshop. The following is a presentation of U_S_WEST's model guidelines with explanations as to the rationale for each proposed guideline. The new access charge guidelines should set minimum requirements for access charges in terms of both the structure and the level of the charges. Within those minimum requirements there should be flexibility for individual telecommunications carriers to set prices dynamically according to their individual circumstances and the marketplace. The proposed guidelines recognize the support that historically has come from long distance service and switched access charges for universal service and the need to transition to explicit universal service support. The guidelines allow this transition to take place in a reasoned, responsible manner to minimize the impact on end user customers. The guidelines recognize the need to continue to provide support for end user customers whose retail prices do not cover the costs of serving them as well as the need for incumbent facilities-based LECs to recover their costs. 1Structure of Switched Access Charges The proposed guidelines encourage an access charge structure which reflects the manner in which costs are incurred while leaving room for variations in structure which may evolve in the competitive market-place. 1At a minimum, carriers should adopt the local transport structure defined by the FCC in its First Memorandum Opinion and Order on Reconsideration, CC Docket No. 91-213, Released July 21, 1993. The basic local transport restructure adopted by the FCC effective January 1, 1994, establishes a structure in which fixed facilities are paid for with flat monthly rates and switching and shared facilities whose costs vary with use are paid for with usage-sensitive charges. This structure has a sound economic basis and should form the minimum requirements for the structure of switched access charges in Washington. B. Carriers should be free to adopt further modifications of switching and transport charge structures, such as those adopted by the FCC since 1993, which enable carriers to service customers in a competitive marketplace. Further refinements of the access charge structure have been adopted by the FCC in its Access Charge Reform Order of May 7, 1997, in which it established new rate elements corresponding to specific elements of the service. Washington LECs should be encouraged, but not required, to adopt these and any future refinements which the FCC may adopt which serve the goals of economic efficiency and competitive responsiveness. The FCC has set a precedent of allowing choice in adopting structure changes by making the adoption of a call set-up charge optional. This is a useful approach. If the market place demands further refinements to the access charge structure then LECs will respond accordingly. On the other hand, if the marketplace demands simplification then the LECs should be able to respond by simplifying their access charges. C. Subsidies contained in access charges should be explicitly identified and structured so that their phasing down or out can be properly managed. A non-usage-sensitive price structure should be permitted for this charging element. The Commission has correctly identified the link between access charges and universal service and it is reasonable to expect that at least some of the universal service support now coming from switched access charges would be replaced by explicit support from the new Universal Service Fund. At the same time, it is by no means certain that all of the support now coming from switched access charges will be replaced, nor is the timing of the replacement certain. The new Universal Service Funds are expected to be targeted to those specific situations, due to high cost or economic need, where the end user customer cannot be expected to pay enough recover the entire cost of his/her service. However, the support coming from long distance service and switched access charges today is not targeted and serves to keep prices low for all residential customers regardless of their need or the cost of serving them. Therefore, U_S_WEST recommends a guideline that encourages the establishment of a separate switched access rate element specifically identified as a support element. In that way, the phasing down of implicit support from access charges and other services can be specifically managed. U_S_WEST recognizes that this would be a move in the opposite direction from the action taken by the Commission when it ordered the elimination of U_S_WEST's CCL charge and assigned residual revenues to the switched access local switching rate. U_S_WEST respectfully suggests that a more fruitful approach would be to reduce the local switching charge to a level consistent with the marketplace and reflective of its costs. The Commission should establish a properly structured support charge for residual revenue requirements. A flat-rated support charge would be more economically efficient and more stable than the old usage-sensitive CCL charge. Thus protecting carriers from undue growth in their contribution and allowing the LEC to continue recovering loop and other costs from switched access charges as long as its needed. While U_S_WEST does not concur in the Commission’s position that loop costs are shared costs, this proposal for a flat-rated support charge to carrier customers is consistent with the CommissionÕs position. It would allow the LEC to recover cost from the carrier customers in a more economically efficient manner than the old usage-sensitive CCL charge. D. Carriers should be free to adopt various pricing structures such as deaverged prices and discount plans and to respond to Requests For Proposals (RFP) with unique pricing proposals based on market conditions. Competitive bidding for access services is a normal way of doing business in today’s environment and can only be expected to increase in the future. The dedicated transport elements of switched access service are the same elements that are used in private line (special access) services. In fact, carriers often take advantage of this fact and ask U_S_WEST to route their services so that switched and private line circuits share the same DS1 or DS3 facilities. Volume and term discounts are expected for private line services and are coming to be expected for switched transport as well. U_S_WEST offers term discounts and zone pricing for switched access in Nebraska today. Zone pricing is now available for U_S_WEST's interstate switched transport service in some locations. Carriers and competitive access providers routinely package long distance services with private line services. With the proliferation of offerings hitting the marketplace, LECs need to be able to make similar offers for their switched access services. II. Level of Switched Access Charges The proposed guidelines set limits on the level of access prices while at the same time allowing the flexibility needed by a LEC to meet its own specific circumstances as it moves universal service support to explicit funding and rebalances the prices of its various services for the competitive marketplace. A. The price floor should be the sum of the total service long run incremental costs (TSLRIC) of the component parts of switched access service. TSLRIC is the appropriate cost to use for a price floor. A TSLRIC price floor gives appropriate protection against predatory pricing. B. The price ceiling should be the total switched access revenue requirement for local switching, local transport and common line as determined by an intrastate application of FCC Part 36 and Part 69 rules. Because of the history in Washington of using revenue requirements generated by Part 36/69 processes, it would be convenient and appropriate to use this mechanism already in place to define price ceilings. U_S_WEST would recommend that the guideline for price ceiling also include instructions regarding the appropriate level for the basic allocation factor (BAF), also known as the subscriber plant factor (SPF). U_S_WEST suggests that the BAF be capped at a level determined by subscriber line usage (SLU). This will assure that the portion of loop costs recovered from long distance carriers is no more than the carriers’ portion of usage of the loop. C. Carriers should set access prices between the floor and ceiling based on considerations such as market conditions, prices of similar services offered both by the carrier and by other suppliers, the need for rate rebalancing, availability of support from universal service funds and the recovery of direct, shared