Item: 2D Date: November 16, 1998 Dockets: UT-970545 - Local calling area rulemaking Company: Telecommunications General Staff: Jeffrey Showman, Policy Advisor Glenn Blackmon, Assistant Director-Telecommunications Bob Wallis, Rules Coordinator Jeff Payne, Regulatory Consultant Tim Zawislak, Policy Specialist Penny Hansen, Public Affairs Specialist Lori Kanz, Consumer Affairs Specialist Pam Smith, Consumer Affairs Specialist Recommendation: Amend the proposed rules per Public Counsel’s suggestions, adopt the amended rules, and direct the Secretary to file an Order of Adoption with the Office of the Code Reviser in Docket UT-970545. Discussion: Customers in many local telephone exchanges cannot call basic community services, such as schools, medical facilities, government offices and businesses, without paying toll charges. Insufficient local calling capability is a problem due to changes in patterns of community development, coupled with the historic, ad hoc, and somewhat arbitrary nature of local exchange boundaries. Consumer interest in adequate local calling is very high. This rulemaking has over 3,000 names on the interested person list. About 500 people attended six workshops on this rule, more than almost any other public hearings in Commission history. We received over 900 comment letters during this rulemaking, from over 90 communities, plus petitions with nearly 1,000 names. The Commission has crafted different solutions to the problem of interexchange calling over the last three decades, in response to Washington State’s evolving urban areas, telephone industry structure, and consumer demand. The most recent solution, the extended area service (EAS) rule (WAC 480-120-400 through -435; See Attachment B to this memo ) was adopted in 1991. It requires companies to file a study of local calling routes every five years and, for routes that do not meet criteria in the rule (the so-called 80% and 50% tests), to identify EAS routes and a schedule for implementing them. The rule specifies how revenue requirement from these routes will be recovered: first from a $3.50 a month surcharge to customers in the benefitting exchange, then from company earnings, finally from all local rates. Over the first five years of the rule, many EAS routes were proposed and adopted. However, in recent years problems began to appear: many areas in the state did not receive adequate local calling; some areas sought EAS routes when local calling was already sufficient to reach community services; and the requirement for companies to study and file plans every five years could create an regulatory burden. In February, 1996, the Washington Docket UT-970545 November 16, 1998 Page 1 Independent Telephone Association (WITA) petitioned the Commission for a partial waiver of the EAS studies that were due that year, and suggested that the Commission reassess the entire EAS rule (Docket No. UT-960177). The Commission granted the waiver , and, on April 9, 1997, began an Inquiry (CR-101) process under this docket: “. . . to find ways to 1) improve the means available for redefining local calling areas to remedy problems of the split community and lack of local access to most basic services; and 2) ensure that telephone companies offer options for telephone subscribers to make interexchange calls at flat rates.” At the same time, the Commission issued a Policy Statement suspending action on new requests for EAS routes, but leaving the door open to consider, “requests to remedy exchange-wide problems that cause hardships by requiring the majority of subscribers to make daily toll calls to communicate with classmates, teachers, neighbors, and other parts of the local community.” (“Policy Statement Regarding Suspension of Action on New Requests for Extended Area Service . . .”, April 9, 1997, Docket No. UT-970546). Comments to the Inquiry showed there was general agreement that policy makers can play an important role in defining basic service, including a minimum scope of local calling. Beyond the minimum, market forces should meet consumer demand for frequent calling to a diversity of destinations. Commission Staff crafted an approach consistent with the core criteria in Inquiry: the local calling area included in basic monthly rates should allow customers to call and receive calls from basic, essential community services. On May 27, 1998 the Commission proposed a rule that included a list of community services that should be accessible as a local call; listed towns and cities, at least one of which should be accessible as a local call; and provided for companies to recover cost and lost revenues resulting from larger local calling areas by raising local rates. The proposed rule was both praised and criticized by the public and telecommunications industry. Proponents argued it would eliminate inequitable situations where customers, primarily in rural areas, are required to pay long distance charges to reach basic community services that customers in more urban areas can reach as a local call. Critics said that the rule was overly rigid and did not address some calling area problems; that it would result in excessive increases in local rates for expansions that customers do not actually want; that it had unrealistic timelines for implementation; and that mandating local calling areas is not consistent with competition. Discussions between staff and industry over alternatives to a prescriptive rule produced a settlement agreement and plan which the Commission adopted on September 9. As part of the plan, a new rule was proposed to limit future calling area expansions to exceptional circumstances. Rather than mandate calling areas, the Commission will be looking to competition and optional calling plans to meet individual customer calling needs. However, the new rule would allow for calling areas to be broadened to ensure that customers are able to make local calls to community medical facilities, city government services, K-12 schools, and a commercial center. On October 9, the Commission filed the proposed rule with the Code Reviser, and invited comments by October 30. We received the following comments: Telephone Resellers Association (Andrew Isar) - Supports the rule and urges its adoption. The rule is a simple way to create local calling areas when absolutely necessary, which accomplishes two critical objectives: leaves the door open for expanding calling areas on an ad hoc basis, and continues to promote competition by not foreclosing competitive choice. Public Counsel (Simon ffitch) offered two suggestions for improving the rule. First, to make it clear that customers and others may petition for expansion of local calling areas, Public Counsel suggested adding the following sentence to the end of Section 1: The commission may consider expansion of a local calling area on its own motion, or upon a petition filed by customers, a local government entity, or a telecommunications company serving the existing calling area. Second, Public Counsel suggested adding a clause to make lack of available competition one of the criteria for exceptional circumstances by amending the last sentence of the rule to read: In evaluating such requests, the Commission will consider the overall community of interest of the entire exchange, and may consider other pertinent factors such as customer calling patterns, and the availability and feasibility of optional calling plans, and the level of local and long distance competition. Staff : Both of these suggestions are in the nature of clarifying statements that would make the rule more easy for citizens to understand, so Staff supports accepting Public Counsel’s amendments to the rule. Staff also believes that, as clarifying statements, these do not constitute a major change that would require re-notification and comment. Washington Independent Telephone Association (WITA, by Terry Vann) and GTE support adopting the rule in spirit of the settlement agreement, and offer a definition of exceptional circumstances (“a major shift in local calling needs, due to unusual and unforeseen circumstances, where usage and/or environment have changed”), and notes the dictionary definitions of “exceptional” as rare, unique, and extraordinary. Staff agrees that major shifts in political, social, or economic factors that affect calling patterns would certainly constitute exceptional circumstances. However, despite our best efforts to solve local calling problems once and for all, there may currently be exchanges whose calling would not be considered adequate. These could be considered unique, and so support consideration of expanded local calling as an exceptional circumstance, without having anything change. City of Uniontown (Peter Holland, Mayor, and Dale Miller, Planning Commission, via email) - The May rule would have solved problem for most small rural communities, but the substitute plan will only work in larger urban areas. Uniontown and Colton are within 15 miles of both Pullman and Lewiston ID, but can’t call medical or retail centers and will have no expanded local calling because of apparent resistance by Inland Telephone. These towns cannot rely on competition or optional calling plans: Inland Telephone doesn’t even offer “1+” dialing for long distance choice (having no competition means that the default long distance provider (AT&T) doesn’t offer special rate programs) nor services such as distinctive fax ringing. Other communities are in the same situation (Endicott, Oakesdale, St. John). Volunteer efforts to improve the community are held hostage by obsolete and inadequate level of calling. The Commission should return to the concept of the May rule. If cost reasons suggest limiting calling area size, they suggest restricting expansion to 30 miles of commercial or medical centers. At a minimum, the Commission should revise section one by removing the phrase “only under the most exceptional circumstances”. This would preserve the intent of relying on competition to solve the problem, but would allow the Commission to expand local calling areas where a reasonable person could determine that competitive services were not available. Staff - Public Counsel’s proposed amendment will explicitly add availability of competition to the criteria for considering whether to expand local calling. In earlier drafts of the rule, Staff considered a calling size based on milage from a commercial center, but this has technical difficulties that would make it too difficult to enforce. Because of attempts in recent years to use the EAS rule to expand local calling for convenience rather than necessity, Staff believes that all parties (phone companies as well as the public) should be on notice that expanding local calling will require exceptional circumstances. Philip and Adrienne McClure (Silverdale, via email) - There wouldn’t be need to expand local calling areas if telephone exchanges corresponded to addresses, political boundaries, in first place. Individuals ought to have opportunity to change to exchanges that correspond to address. Instead of trying to fix the problem of outdated exchange areas, which were carved out before communities developed, the phone service should fit the population patterns rather than the other way around. Staff agrees in principle that phone service should serve the community. Given the fact that each telephone exchange is engineered to serve its current area, redrawing exchange boundaries would be a significant and costly undertaking. US West submitted substantial comments which have been numbered below for ease of reference: 1. U S WEST is not opposed to adoption of a new or revised rule, but is concerned that the proposed rule language is impermissibly vague and does not address several issues of concern to the Company and its customers. U S WEST shared this view at the time it signed the settlement agreement. Staff believes the new rule language is as specific and clear as it can be, given the unique characteristics of every community and telephone exchange in Washington. US West 2. Staff’s proposed new rule intends to limit future local calling area expansions to exceptional circumstances. It is not clear why this is necessary. Staff: Mandatory expansion of local calling areas, and mandating rate increases to pay for such expansion, are not consistent with competition and customer choice. Customers who want expanded local calling, and who will use this rule to seek it, should be on notice about the Commission’s policy priorities and expectations. US West 3. The proposed rule is in conflict with the Governor’s Executive Order 97-02. In his Order, the Governor requested that the Commission review each significant rule to assure that it is needed, that it is effective and efficient, clear and concise, and is consistent with the intent of the statutes that authorized it. This proposed rule is not clear and concise. It merely alludes to the standards considered, without giving clear direction and procedures to establish these standards, so is not consistent with the standards required by the Governor’s Order. Staff: The proposed rule replaces seven pages of rules with one page (see Attachments A and B). The current EAS rule is hardly a model of clarity (e.g. 480-120-405(4)). Although the current EAS rule provides standards which appear to be clear (i.e. the 80% and 50% tests in WAC 480-120-410), these criteria were often not relevant to a given community’s situation, and often did not result in a solution to calling problems. EAS standards require data which are increasingly difficult to obtain, given changes in long distance competition. US West 4. Section 1 of the proposed rule does not set forth the clear standards and procedures under which the Commission will consider the creation of new EAS routes as the existing rule currently does. It states that “the Commission may expand local calling areas only under the most exceptional circumstances.” “Exceptional circumstance” is not defined and is therefore impermissibly vague. Staff: Section 2 contains criteria and factors for considering petitions. We have discussed our understanding of “exceptional circumstances” above, in conjunction with WITA’s comments, as meaning unique, unusual, extraordinary. US West 5. Section 2 makes the proposed rule even more vague, because no process is described as to how the determination will be made that customers have or do not have this local calling capability. It is not clear how the determination of a route deemed necessary due to “exceptional circumstance” occurs. If a customer petitions for additional EAS, stating that they can not call their city government offices, what process will be utilized to determine if this situation meets the rule criteria? Staff: Petitions will be treated as a filing. They will be docketed and assigned to Staff to review against the criteria in the rule. Staff will notify each affected company of the petition, and conduct whatever review seems appropriate to the facts of each situation, since each exchange is unique, and every customer has unique calling patterns. Staff will make a recommendation, based on its findings, whether the petition meets the criteria in the rule. US West 6. “Commercial center” must be defined. The proposed rule language should also include more specific definitions of each community service as articulated in previous comments filed by U S WEST. Decisions as to a given area’s qualification for expanded area calling will be less arbitrary if all parties agree at the start on the definition of each community service. Another example of vagueness is the use of the term “local medical facilities”; does that infer a hospital facility or is a small medical clinic sufficient? Staff: Our experience drafting this rule over the last eight months has led us to believe that it is not possible to define these terms precisely since they depend on the precise nature of each exchange and community. US West 7. The proposed new rule does not contain a method for recovery of new costs imposed by this rule. The proposed rule states that “the Commission will generally rely on long distance competition, local competition, and optional calling plans that assess additional charges only to participating customers to meet customer demand for alternate or expanded calling.” The Commission ordered U S WEST to implement statewide average basic calling rates for its business and residence customers in Docket UT-950200. If this proposed rule becomes effective as written, and future EAS charges are assessed only to participating customers, U S WEST would be required to return to various rate group pricing structures. Staff: Each of the 20 or so local exchange companies may wish to take a different approach to recovering any costs of expanded local calling areas. Mandating one single recovery mechanism is not consistent with competition, or providing decision-making flexibility to companies. US West 8. Portions of rules currently in effect could be updated and revised to limit future calling area expansions, and still provide language in the new rule that is clear, concise and easy to implement. U S WEST recommends that the Commission incorporate the following existing EAS rule language in its proposed rule: •WAC 480-120-400 defines the purpose of EAS in Washington and WAC 480-120-405 provides the definition of EAS. Both of these definitions would work with the Commission’s proposed rule. •WAC 480-120-420 provides a mechanism for companies to use to calculate revenue requirement and rate design. The proposed rule offers no indication of how companies are to recover the costs and lost revenues associated with any new EAS (or minimum calling area) expansions. The existing language should be incorporated into the new rule. •WAC 480-120-410 provides the standards used to decide if customers have an adequate local calling capability. This language could be amended to more closely align with the criteria outlined in the proposed rule, i.e. “exceptional circumstance”. However, the test of community interest should be retained in the new rule. This test will always be required to establish a public policy basis for expanding a local calling area. Staff: Staff recommends declining US West’s proposal. The current EAS rule is cumbersome, out of step with competitive realities, and ineffective as a tool for solving community calling problems. The current plan for expanded local calling will solve many of the outstanding situations. The proposed rule provides a clear policy direction about preferred solutions (i.e. competition and optional calling plans), yet provides a mechanism in case those solutions are not forthcoming. We received many other citizen comments that pertained to specific telephone routes to be implemented rather than the rule before you. Those will be forwarded to the Staff analyst involved in each proposed route. Conclusion - Staff recommends that the Commission amend the proposed rules per Public Counsel’s suggestions, adopt the amended rules, and direct the Secretary to file an Order of Adoption with the Office of the Code Reviser. Attachment A: Proposed rule WAC 480-120-045. Local calling areas. (1) The Commission may expand local calling areas only under the most exceptional circumstances. The Commission will generally rely on long distance competition, local competition, and optional calling plans that assess additional charges only to participating customers to meet customer demand for alternate or expanded calling. The commission may consider expansion of a local calling area on its own motion, or upon a petition filed by customers, a local government entity, or a telecommunications company serving the existing calling area. (2) In evaluating requests for expanded local calling, the Commission will consider whether the local calling area is adequate to allow customers to call and receive calls from the following community services: community medical facilities, police and fire departments, city or town government, elementary and secondary schools, libraries, and a commercial center. In evaluating such requests, the Commission will consider the overall community of interest of the entire exchange, and may consider other pertinent factors such as customer calling patterns, and the availability and feasibility of optional calling plans, and the level of local and long distance competition. WAC 480-120-400 through 480-120-435 are repealed. Attachment B: Current EAS rule WAC 480-120-400 Purpose. The purpose of WAC 480-120-400 through 480-120-435 is to set forth the standards and procedures under which the commission will consider the creation of new extended area service routes. The commission finds that the creation of extended area service routes is in the public interest, where the establishment of those routes meets the standards set forth in WAC 480-120-400 through 480-120-435. The commission further finds that where extended area service is offered by operation of WAC 480-120-400 through 480-120-435, it is a local exchange calling service. WAC 480-120-405 Definition of extended area service. (1) As used in this chapter, "exchange" shall be as defined in WAC 480-120-021. (2) As used in this chapter, "extended area service" means mandatory, two-way local calling service between exchanges that provides the ability to call from one exchange to another exchange without incurring a toll charge. (3) As used in this chapter, "embedded extended area service routes" means those extended area service routes which exist prior to the effective date of WAC 480-120-400 through 480-120-435. (4) As used in this chapter, "local calling capability" means the percent of the total intrastate intraLATA minutes originating in an exchange that terminates within the local calling area, except where an interLATA extended area service route is proposed, in which case "local calling capability" means the percent of total intrastate minutes originating in an exchange that terminates within the local calling area. In calculating the local calling area, the local exchange company shall treat calling by foreign exchange subscribers as toll calling. WAC 480-120-410 Local calling capability. (1) For each exchange whose local calling capability is below eighty percent the local exchange company shall identify extended area service routes to improve the local calling capability. The company shall consider those routes where, based on a three-month average, at least 50% of the customers of the qualifying exchange make two or more intraLATA toll calls per month to the other exchange. In determining whether an exchange meets these criteria, the company shall include relevant foreign exchange calling. The commission may waive these criteria if it determines that it is in the public interest. (2) In determining which exchanges to incorporate into an expanded local calling area, the local exchange company shall consider at least the following: (a) The most frequently called exchange; (b) The exchange to which there is the widest distribution of residential calling; (c) Exchanges that are contiguous to the local calling area of the exchange. (3) Companies may propose extended area service for exchanges that do not qualify under the 80% threshold established in this rule. Except for routes that form part of a two-way EAS with qualifying exchanges, such routes will be considered outside of the revenue recovery provisions of this rule and will not be eligible for support from the community calling fund. WAC 480-120-415 Determination of extended area service routes. (1) On or before March 31, 1991, and each five years thereafter, each local exchange telecommunications company shall file a study of each of its exchange(s)' local calling capability. (2) The local exchange company shall notify the commission and the other affected local exchange companies (if the other exchange(s) is (are) served by another local exchange company) and the designated intraLATA toll carrier, of the existence of potential extended area service routes to expand local calling capability. The commission and the involved company(ies) shall review and set priorities for the potential extended area service routes. (3) On or before June 30, 1991, and each five years thereafter, a company shall file a schedule with priorities for engineering studies to establish extended area service routes, if any, which meet the criteria of WAC 480-120-410. (4) The affected companies shall thereafter develop a proposed schedule to establish individual extended area service routes. The schedule shall include a timetable for engineering studies and a proposed date to file an extended area service tariff, or a petition for waiver from the requirement to establish the extended area service route for the study exchanges. The companies shall make a good faith effort to arrive at an agreed upon schedule for implementation of the route(s) and shall share with each other all necessary data to arrive at a mutually agreeable schedule. The schedule to establish an extended area service route or routes shall be deemed to be a petition under WAC 480-09-420. Each petition for an extended area service route or routes shall be docketed separately. (5) If a proposed schedule cannot be agreed to by all affected companies, the commission will establish a schedule after giving an opportunity for all affected companies to be heard. If the companies present an agreed upon schedule, the commission will approve it, unless the commission finds it requires change for good reason, based upon a record. (6) Within thirty business days after completion of the engineering study, the local exchange company or companies shall file with the commission a schedule indicating the dates at which the following will be completed: A cost estimate; a revenue requirement; a proposed tariff; and an implementation date for the tariff. (7) Where an extended area service route affects more than one local exchange company, each company shall prepare and file its own tariff and supporting documentation. Such tariffs are subject to suspension pursuant to the rules of the commission. (8) At the time it files its proposed tariff, the local exchange company or companies shall notify their affected customers of the proposed changes in a form substantially similar to the notice prescribed by WAC 480-80-125. WAC 480-120-420 Revenue requirements and rate design. (1) The change in revenue requirement associated with (a) new extended area service route shall be calculated as the net of all cost and revenue changes for access, toll, if applicable, and engineering and plant costs. Nontraffic sensitive (carrier common line charges) access revenue reductions shall not be included in the calculation to the extent that the inclusion would reduce the nontraffic sensitive cost allocation below the percentage prescribed by the commission in Cause No. U-85-23 et al. or any subsequent access cost proceeding. (2) The revenue requirement calculated according to subsection (1) of this section shall be recovered as follows: (a) Rates for customers in exchanges that receive additional local calling area may include an increment of up to $3.50 per residential single party access line per month. The increment should bear a reasonable relationship to the increase in the local calling area. (b) Any remaining revenue requirement for the new local calling areas shall be recovered from current earnings, if appropriate, and then from all of a company's local exchange rates. If a local exchange company rejects this procedure, the commission reserves the right to file a complaint against the company's rates and services. (c) For companies eligible for assistance from the community calling fund established by WAC 480-120-425, any revenue requirement remaining after local rates in each exchange have been increased up to a limit of $12.50 exclusive of any increment charged pursuant to paragraph (2)(a) of this section per single party residential access line per month shall be recovered from the fund. (d) All residential and business local rates are subject to the changes described in this section. The references to residential rates are for bench mark purposes. The increases for other local rates may be more or less than those amounts, depending on the rate design approved by the commission in each case. WAC 480-120-425 Community calling fund. (1) A community calling fund is hereby created in order to transition and cushion the local rate effect of new extended area service on the customers of small local exchange companies. The community calling fund shall be administered by the Washington Exchange Carriers Association (WECA). WECA shall annually report and supply to the commission and all local exchange companies the status of the fund including the amount drawn by each recipient from the community calling fund. (2) The community calling fund is to be funded by a charge based on all exchange access lines in the state of Washington. (3) WECA shall annually calculate the amount required from the fund and local exchange companies may file a tariff to cover the charge calculated by WECA. If in an annual period the fund is excess to requirements, the surplus shall be adjusted for the next annual period to reflect the revenue requirement to be funded by the charge. If at any time the revenue from the community calling fund charge is insufficient to cover eligible draws from the fund, WECA may seek an upward revision to the charge. Until such a new rate is approved by the commission and in effect, recipients from the fund shall be supported on a pro rata basis. (4) If a local exchange company that serves fewer than one hundred fifty thousand access lines has proposed the local rate increases required by WAC 480-120-420; has a separated, intrastate rate of return of less than or equal to 11.13 percent or its authorized rate of return, whichever is less; and has increased local rates to the maximum reasonable level pursuant to WAC 480-120-420(2), the local exchange company is eligible for support from the community calling fund. A local exchange company applying for support shall supply data to the commission to audit rate of return eligibility on an annual basis. (5) The community calling fund shall be reviewed in 1996 to determine if the fund should be terminated on January 1, 1997, and if terminated, any remaining funds shall be returned on a pro rata basis to all local exchange customers in the state via bill credits. WAC 480-120-430 Impact on current compensation arrangements. WAC 480-120-400 through 480-120-435 do not impact current compensation arrangeme