Introduction

 By notice dated January 21, 1998, the Washington Utilities and Transportation 
Commission (WUTC or Commission) issued a Notice of Opportunity to File Comments 
in this docket.  The Washington Independent Telephone Association (WITA) 
welcomes the opportunity to address these very important issues of universal 
service reform and access reform.
 In these Comments, WITA will address the importance of establishing a 
universal service program.  Then, WITA will discuss access reform issues and 
the alternative approaches to access reform set out in the Commission’s January 
21, 1998 notice.  The third portion of these Comments will discuss a rural 
competition plan.  The fourth and concluding section will tie together the 
interrelationship between universal service, access reform, and rural 
competition.
Recommendations
 WITA recommends that the Commission establish a two-track process for this 
docket — the first track for non-rural carriers and the second track for rural 
carriers.
 It is also WITA’s recommendation that the Commission call for a formal round 
of reply comments.  WITA recognizes that the January 21 notice asked for 
comments on other parties’ previously filed written comments, as well as 
presentations at the workshop. It may be worthwhile to have a round of formal 
replies to the written comments that are filed in response to the January 21 
notice.  Such a round of reply comments would not unduly delay the docket.  A 
rule proposal could be brought before the Commission in early April.
Discussion
1. A state universal service program is critically needed.
 Access reform and universal service reform go hand in hand.  All parties 
recognize that incumbent local exchange companies (ILECs) have received 
significant contribution to universal service from access charges.  This is 
especially true for the rural ILECs.
 At the workshop, information was provided by TDS Telecom that demonstrated 
what could happen to the rates paid by customers in Asotin Telephone Company’s 
service areas if access reform on the intrastate level mirrored what has 
happened on the interstate level (at least for non-rural companies). To date, 
the FCC’s action on access reform has addressed only the price cap companies.  
See In the Matter of Implementation of the Local Competition Provisions in the 
Telecommunications Act of 1996, First Report and Order, CC Docket No. 96-98 
(FCC 96-325)(Released August 8, 1996).  The FCC has stated that it will engage 
in a separate proceeding to address the rate of return companies.  Although 
there is some mix-and-match, by and large, the small companies that qualify as 
rural companies under the Telecommunications Act of 1996 are also rate of 
return companies in the FCC’s lexicon.  See Attachment 1.  The figures provided 
demonstrate that customers in Asotin Telephone Company would see increases of 
$9.50 per month.
 Asotin also showed what would happen if other events took place, such as if 
certain of the proposed separation reforms occur.  It is important to keep in 
mind what is happening at the federal level.  The FCC seems to be absolutely 
determined to shift as many costs as possible to the state.  This means that 
there is increasing need to establish a universal service program on the state 
level.
 At the workshop, Pacific Telecom, Inc. (PTI) presented information on where 
support is derived for the service provided to its rural customers, focusing on 
Telephone Utilities of Washington, Inc. service areas.  PTI divided their 
customers into five density zones.  The information they provided compared the 
existing local rate and other revenue sources, notably access charges and 
federal universal service support, to the average cost of the loop in each of 
the density zones.  The results are enclosed as Attachment 2.
 In the lowest density zone (i.e., least dense), it costs over $260 per month 
to provide service to those customers.  A great deal of the support ($140 per 
month) to be sure those customers receive up-to-date, modern telecommunications 
service at an affordable rate is through revenues derived from access charges.
 Another example of this interrelationship can be found in examining the 
revenue received from the Washington Exchange Carrier Association (WECA).  As 
pointed out at page 1 of WECA’s opening comments in this docket, in many cases 
total access revenue provides over fifty percent of a rural telecommunications 
company’s total revenue.  The WECA member companies derive a significant amount 
of revenue from the non-traffic sensitive rates that are established through 
the WECA pool.  The amount ranges from $6.06 to $60.12 per line per month. 
 Attachment 3 provides a company-by-company delineation of how much support is 
received per line from intrastate, non-traffic sensitive access charges.  Since 
the information is confidential, company names are not used, but the 
information which is provided does represent the actual results of the 1996 
intrastate non-traffic sensitive access charges.
 Yet another example is the recent experience that the Commission saw with Pend 
Oreille Telephone Company.  When Pend Oreille began operations in 1997, there 
was a delay between its going into operation and becoming part of the WECA 
pool.  Because of that timing difference, Pend Oreille initially filed its own 
NTS access tariff.  That tariff rate was calculated by Pend Oreille using a 25% 
subscriber plant factor (SPF).  Even at a 25% SPF, Pend Oreille had a 
terminating minute rate of nearly 27 cents.  This figure points out two 
things.  First is the importance of the contribution from non-traffic sensitive 
access to local service rates.  Second is the beneficial effect of pooling 
rates among rural carriers.
 The purpose of these examples is not to say that access reform should not 
occur. The emphasis that WITA wants to place on the direction this docket is 
going is that universal service funding and access reform must go hand in hand.
2. Access Reform
a. Preliminary Comments
 For non-rural carriers, access reform has started at the federal level.  See 
In the Matter of Implementation of the Local Competition Provisions in the 
Telecommunications Act of 1996, First Report and Order, CC Docket No. 96-98 
(FCC 96-325)(Released August 8, 1996).  One of the elements of the access 
reform at the federal level was to allow LECs to charge interexchange carriers 
(IXCs) a flat rate monthly charge known as the Primary Interexchange Carrier 
Charge (PICC).  The express purpose of the PICC is to allow LECs to continue to 
receive some of the support for local service that was previously provided by 
the non-traffic sensitive carrier common line (CCL) access charge.  It is 
interesting to note the behavior of the two largest IXCs on this issue.  At 
least AT&T and MCI have determined that they will pass this charge on as a flat 
rate charge on the individual customer’s bill, even though according to the 
FCC, the carriers are receiving a substantial overall reduction in their access 
charges from the local carrier. AT&T and MCI are even attempting to assess this 
charge against customers of rural telephone companies.  Rural telephone 
companies do not charge AT&T and MCI a PICC.  This means that the customers of 
the small rural carriers are providing AT&T and MCI a revenue source or subsidy 
unrelated to any charge assessed on AT&T and MCI from the rural companies.
 The FCC has yet to act on access reform for rural carriers.  Access reform for 
rural carriers should be coordinated between the federal and state levels.  If 
Washington State acted before the FCC completes its work, the State decision 
may be affected in ways that are unanticipated.  At least if the State waits 
for the FCC to act for rural companies, the State can then review what the FCC 
does, make a decision whether it believes the FCC acted appropriately, and take 
action either to mirror the FCC or, to the extent possible, ameliorate what 
might be an unacceptable mechanism on the state level.
b. Comments on Alternatives Contained in the Commission’s Notice
 In the January 21, 1998 notice, the Commission set out four alternatives and 
called for comments.  Those alternatives are as follows:
A. Reduce terminating access charges by the amount of funding provided through 
the universal service mechanism.

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.

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.
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.

WITA believes that the preferable alternative is Alternative A. GTE Northwest 
Incorporated and SPRINT disagree with this position.  This alternative 
expressly recognizes the interrelationship between universal service funding 
and access charge reform.  It is the most appropriate way to address this 
issue.  
 Alternative B would shift some of the terminating access charges to 
originating elements.  WITA believes that approach is problematic.  The reason 
that existing terminating access charges are higher than originating access 
charges is because terminating access is more difficult to bypass.  If access 
charges continue to be a support mechanism for local service, that support 
should not be placed in a rate design so that it can be more easily bypassed, 
thereby causing a reduction in the level of support and a need for more 
universal service funding.
 WITA also observes that the concept that the charge in excess of cost, however 
cost is defined, should be on the originating access minute does not appear to 
give support to the principle that there is an economic welfare benefit to a 
ubiquitous network. That is, there is an economic benefit to a customer who 
desires to terminate a call to another customer by that second customer being 
on the network.  For example, it is obvious that telephone solicitation 
companies believe that there is a high welfare benefit to being able to 
terminate calls to customers in order to sell their products.  This is true for 
all customers.  The question is why these customers who receive an economic 
benefit from terminating calls should not continue to pay terminating access 
charges at rates higher than originating access charges.
 Alternative B also suggests that the originating elements could be a 
combination of per-minute and per-line charges.  Given the recent behavior by 
AT&T and MCI with the PICC, it is questionable whether a per-line charge makes 
sense.  Given their desire to pass the charge through to the end-use customer 
and blame the local exchange carrier as though the LEC was increasing the 
customer’s rate, they should not be given a second opportunity to engage in 
that behavior.  All it does is cause customer confusion.  If a flat rate access 
charge is to be used, the Commission should make it very clear that the IXCs 
are not to pass the charge on as a line item on the customer’s bill.
 Alternative C suggests shifting part or all of remaining access charges 
(beyond those offset by universal service funding) to local rates.  WITA does 
not favor this approach as a mandated generic model.  Local rates are going to 
see more and more upward pressure as the telecommunications industry is 
restructured.  However, there may be instances in which a company can offset 
access reductions with local rate increases and can accommodate the shift while 
maintaining affordable rates.  For many small companies, such a shift may not 
be possible.  The local rate for these companies will quickly exceed an 
affordable level.  This alternative should be an individual company choice.  
 The Commission must also keep in mind what it is doing in other dockets.  For 
example, the Commission has a docket in which it is considering expanding 
minimum local calling areas.  Using the situation presented by McDaniel 
Telephone Company provides an interesting demonstration of how these two 
dockets might interrelate.  Currently, the residential customers of McDaniel 
Telephone Company pay $7.70 per month for residential service, not including 
the $3.50 subscriber line charge (SLC).  The company reviewed possible EAS 
routes from its exchanges to Centralia and Chehalis.  If those routes are 
established, the company’s initial estimate is that the customer’s monthly rate 
would increase to $15.55, without the SLC.  Should there be additional rate 
increases to reduce access charges?  The answer is no.  The rate the customer 
pays for basic service will quickly reach a level where it is not affordable.
 WITA does not consider Alternative D an option.  The Commission does not have 
authority to order revenue reductions in a rulemaking.
c. Access reform should produce toll reductions.
 In considering access reform, it is important to find out who wins and who 
loses. If access charges go down, the interexchange carriers see a reduction in 
their cost.  WITA believes that there should be a direct relationship between 
access charge reductions and decreases in toll rates to the average customer.  
 Federal access reform has reduced access costs to interexchange carriers in 
the billions of dollars. When the FCC released its Access Reform Order, In the 
Matter of Access Change Reform, First Report and Order, CC Docket No. 96-262 
(FCC 97-158)(Released May 16, 1997), it published a press release and 
supporting information in which it calculated a decrease in net access charges 
of $4.3 billion by July, 1998 and $18.5 billion by July, 2001.  However, since 
these access reductions have occurred, it is not apparent that there have been 
general overall toll rate decreases to residential customers and small business 
customers.  In fact, it was pointed out in the past summer’s generic pricing 
docket that not long after the access reductions from the federal level took 
place, AT&T increased its small business plan by 5.6%.  There should have been 
a reduction, not an increase.
 If access reform goes forward in the State of Washington, as it should, there 
should be a requirement that IXCs reduce toll rates by the amount of the 
reduction in access charges.  These reductions should come, at the very least, 
across the board, and perhaps should be targeted as general decreases to the 
MTS rate — that is, a rate used by most residential customers and small 
businesses.  Although the Commission generally does not have enforcement 
authority over the IXCs, since all of the major IXCs are classified as 
competitive carriers, it can offer a carrot.  WITA suggests that access reform 
be a phased-in approach.  In other words, identify the goal that the Commission 
wishes to reach and require access reductions to be phased in over three or 
four years.  Then ask the IXCs to come in and demonstrate on a yearly basis 
where the access charge reductions are reflected in reductions in toll rates.  
If there has not been a reduction in toll rates, then the next phase of access 
reductions would not occur.  WITA recognizes that after the third year of a 
four-year phase-in, the IXCs would not have to do the last year of toll 
reductions because there is no more carrot, but at least a significant portion 
of the objective could be accomplished.
3. Rural Competition Plan
 Competition has begun in Washington.  Obviously, it is beginning in the urban 
areas first.  It is also obvious that when an ILEC either attempts to or is 
forced to charge rates significantly above cost to a class of customers, it 
will lose many of those customers to a competitor.  Pricing anomalies created 
in a monopoly environment, even those pricing objectives undertaken to 
accomplish social goals, provide incorrect economic signals for competition.  
While pricing anomalies exist, competitive local exchange carriers (CLECs) have 
an incentive to take advantage of those pricing anomalies.  This means that 
implicit subsidies must be removed from existing rates and made explicit.  Part 
of this docket does address the concept of reducing the contribution made by 
access charges.  In addition, other implicit support, such as higher local 
exchange prices for business customers, must also be addressed.  Absent 
explicit and targeted USF support, averaged rates are not sustainable in a 
competitive environment.  This would result in rates for some customers rising 
to unaffordable levels.
 To the extent that implicit supports remain, competitive entry focusing on the 
most lucrative areas for a customer — a rural company’s more densely populated 
portions of its exchange or its business customers Depending upon a company’s 
cost structure, density factors and other items, business rates may or may not 
be providing support for residential rates.  Access usage for business 
customers is generally higher than for residential customers on a per line 
basis. — will disrupt the support mechanisms.  
 Congress understood that this was a concern.  Congress provided under Section 
251(f)(1) and (2) of the Telecommunications Act of 1996 exemptions or the 
opportunity for waiver of certain interconnection requirements under the Act 
for any telephone company defined by the Act as a rural telephone company.  
That does not mean that competition should be prevented from taking place in 
rural areas.  Instead, what the tenor of the Act seems to be is that there 
should be a balance between competitive entry and its benefits on the one hand 
and the dark side of competition, the effect on universal service in rural 
areas, on the other hand.  This Commission has the ability by its consideration 
of the scope of exemptions and waivers to strike that balance.  For example, 
the Commission could authorize resale of a rural incumbent LEC’s local exchange 
services, while deferring interconnection through unbundling and collocation 
until the actions described in Phase II of the Rural Competition Plan (see 
below) are taken.  This would promote competition while preserving universal 
service.
 If competitive entry by a CLEC is allowed using unbundled network elements in 
a rural company’s high cost exchanges before implicit subsidies in access are 
eliminated or substantially reduced, the effect on universal service could be 
devastating.  A CLEC using unbundled network elements receives the access 
revenue, not the incumbent.  Thus, the incumbent not only loses a customer, but 
the support in access which came through that customer to provide service for 
higher cost areas.
 One of the steps that needs to be taken before full removal of exemptions 
takes place is the elimination of implicit subsidies which provide false 
economic signals.  This requires an explicit intrastate universal service 
fund.  Without those steps, a CLEC could use unbundled facilities in 
combination with collocation to pocket the most lucrative customers with the 
highest margins.  This would result in the CLEC and its shareholders profiting 
from the implicit subsidies that the ILEC currently uses to support other 
customers in higher cost areas.
 To address these issues, WITA suggests a two-phase rural competition plan.  

Phase I
 Rural competition begins with the resale of local exchange services.  These 
would be available to CLECs upon conclusion of a Section 252 proceeding.  
Section 252 sets out the duty to negotiate upon receipt of a request for 
interconnection.  As the Commission is well aware, it also includes the 
arbitration and approval process.  The exemptions granted to rural companies 
under Section 251(f)(1) would be maintained.  These items would not be 
maintained indefinitely, but would be maintained until access charge reform, 
universal service funding, and regulatory flexibility/parity as discussed under 
Phase II are available and in place.
Phase II
 Phase II would include the following:
 • An intrastate universal service fund which meets the standards contained in 
the Act must be in place and the funding provided broadly by market 
participants.

 • Pricing of intrastate access charges moves to cost.  In this case, “cost” 
means either total service long-run incremental cost or total element long-run 
incremental cost.  In either case, cost includes contribution to common 
overheads and a return element.

 • The intrastate universal service funding is portable among competitors. 
However, the mechanism must be in place to target that support below the wire 
center level.  This may be on a census block group, census block or grid 
basis.  Or it may be reinstituting the concept of base rate areas where 
customers are within or outside of a certain area which is based on density. 
Separate support levels are calculated for those customers within the base rate 
area and for those customers outside the base rate area.

 • Pricing and regulatory flexibility that an ILEC can employ once a CLEC is 
granted entry must be in place.

 This is not a simple issue.  However, the good news is that the Commission is 
well on its way towards addressing several of these points.  This docket is 
addressing universal service reform and access reform.  The Commission is 
investigating the concept of targeting support.  It is expected that work on 
the targeting of support should be completed later this year.
 This means that a docket must be found to address the considerations of 
regulatory reform for incumbent LECs facing competitive entry.  The regulatory 
and pricing reform, including defining carrier of last resort obligations, 
should  be added to this docket in an expanded version.  This will allow these 
interrelated issues to be reviewed in context.
4. Washington’s “Quartet” of Issues

 The FCC had its trilogy — interconnection, universal service, and access 
reform.
In Washington State, there are a quartet of issues to resolve.  These are 
universal service reform, access reform, appropriate disaggregation or 
targeting of universal service support, and the development of the regulatory 
and pricing flexibility available to ILECs in a competitive environment.
 As indicated at the beginning of these comments, WITA does recommend that this 
docket be bifurcated into two tracks — one track for the non-rural carriers as 
defined by the Telecommunications Act of 1996, and a second track for rural 
carriers.
 A January 9, 1998 letter from Ms. Lida Tong, State Director - External Affairs 
for GTE Northwest Incorporated, to Mr. Bob Shirley summarizes the reasons why 
work should move forward on establishing a universal service mechanism in 
conjunction with access reform for non-rural carriers.  Copy included as 
Attachment 4.  She identifies the types of significant implicit support that 
flow from urban to rural local exchange companies, and from business customers 
to residential customers in GTE Northwest’s exchanges.  She points to the loss 
of this contribution where competitors purchase unbundled network elements to 
compete with GTE.  She also points out that for non-rural carriers, whatever 
mechanism is established by the FCC for universal service funding, 75% of that 
will fall to the states.  WITA supports the position taken by GTE Northwest as 
it applies to non-rural carriers.
 Many of the same concerns, although with different twists, apply to rural 
carriers. WITA’s comments emphasize the important relationship between 
contribution received from access services and the maintenance of universal 
service.  WITA is very appreciative of the position the Commission has taken in 
its call for comments by expressing the assumption that there must be a 
workable universal service mechanism in place as a precondition to access 
reform.  Thus, the primary objective of this docket is to have a firm universal 
service program in place coincident with implementing access reform. 
 It is also very important to appropriately disaggregate the universal service 
support received by rural carriers from a study area average to a density-based 
concept. Deaveraging universal service support will eliminate some of the false 
economic signals that averaging of portable support creates.  It avoids the 
cream-skimming of customers in the more dense areas served by rural companies.  
It also provides some incentive where there are high-cost customers for 
competition to exist based upon the availability of the appropriate level of 
support.  That should not be the primary emphasis for deaveraging support.  But 
it will have that effect.
 Moving together with these other concepts is the need to establish the rules 
under which incumbent LECs gain pricing and regulatory flexibility in meeting 
competitive issues. This is important for all ILECs.  It is especially 
important for rural companies whose ability to support customers in remote 
locations is highly dependent upon their ability to react to competition for 
more profitable customers.
 WITA appreciates the opportunity to comment. 

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