Before the
Federal Communications Commission
Washington, D.C. 20554

FCC 96-93

In the Matter of		)
				)	CC Docket No. 96-45
Federal-State Joint Board on	)
Universal Service		)

COMMENTS OF

WASHINGTON UTILITIES AND TRANSPORTATION COMMISSION
TABLE OF CONTENTS

I. INTRODUCTION AND SUMMARY 1

II. COMMENTS 3

A. Overview of Washington Universal Service Data 3

B. Support for Rural, Insular, and High-Cost Areas and Low-Income

Customers 4

1. Affordability and Comparability (NPRM [[paragraph]] 14) 4

2. The "Core" Definition of Services (NPRM [[paragraph]][[paragraph]] 15-23) 7

3. Existing Universal Service Fund Mechanisms

(NPRM [[paragraph]][[paragraph]] 28-30, 40) 10

4. Support for Low-Income Customers (NPRM [[paragraph]][[paragraph]] 50-65) 12

C. Support for Schools and Libraries (NPRM [[paragraph]] 71 et seq.) 15

D. Other Universal Service Support Mechanisms: SLC and CCL (NPRM [[paragraph]] 114) 18

E. State Utility Commission Administration of Support Collection and Distribution (NPRM [[paragraph]] 130) 20

III. CONCLUSION 21

I. INTRODUCTION AND SUMMARY

The Washington Utilities and Transportation Commission (Washington UTC or Commission) submits the following comments in response to the Federal Communications Commission's (FCC) Notice of Proposed Rulemaking and Order Establishing Joint Board (NPRM) of March 8, 1996. While the NPRM requests comments on nearly 200 universal service issues, the Washington UTC has chosen to focus these opening comments on selected issues of special importance. The Commission intends to file additional comments on universal service issues in the reply round, in response to the Joint Board's notice and call for comments mandated by 47 U.S.C. [[section]] 254(a)(1), and in any further rounds of comments in the FCC rulemaking.

Washington state has promoted universal service goals as it has facilitated the advent of competition. The existing universal service funding system, which subsidizes incumbent companies as the carriers of last resort, is based on the monopoly paradigm and must be revamped to be consistent with a competitive market. As that overhaul has proceeded in Washington, the Commission has recognized the new market realities while working to ensure that the affordability and availability of basic telephone service is maintained. For example, in 1987 the Commission directed our local exchange carriers to provide all Washington residents, regardless of geography, access to touch-tone single party lines, free of suburban mileage charges, so that all households could have access to information services. Most of our companies met that goal by 1990 and, today, virtually all the state's subscribers receive that level of service. Over 90 percent of our state's telephone exchanges are served by digital switching offices. Of those not served by digital switches, most of those customers are in urban areas which will be the first to benefit directly from competition. Perhaps the most important lesson for purposes of this proceeding is that we were able to accomplish this by working cooperatively with Washington carriers. Also, throughout the decade, we have gradually but persistently provided extended area service in suburban and rural areas so that flat rated local calling capability is roughly equivalent to that in metropolitan areas.

Washington state has been a leader among states finding solutions to the new issues of the competitive era in telecommunications. The Telecommunications Act of 1996 clearly preserves the states' continuing authority over universal service policy and contemplates that states will play an important role. The Joint Board and the FCC should adopt federal policies which leave maximum flexibility to the states to make universal service decisions which are appropriate for their own customers and markets.

In general, we urge the Joint Board and the FCC to look to a market-driven approach to meeting universal service goals, with an emphasis on market transformation and consumer education, rather than subsidies, as the best means to achieve those goals. A competitive marketplace provides consumers with a wide range of services provided by a diverse set of suppliers. Consumers should be able to choose the services they want and to pay only for what they receive.

Competitive markets and administratively determined outcomes are inconsistent. Administrative invervention should be reserved for situations where it is needed to remedy market failure. The Joint Board and the FCC must, therefore, proceed with care in fashioning universal service policy. The goal of these efforts must be to reduce rather than to increase dependence on subsidies, both explicit and implicit, on the part of customers and providers alike. We strongly urge the Joint Board and the FCC to avoid the approach of defining universal service as a list of service features and technologies with accompanying support mechanisms. This is a "slippery slope" which is most likely to lead to a cumbersome and costly subsidy burden that only perpetuates the monopoly-era system and prevents the benefits of competition from being fully realized.

II. COMMENTS

A. Overview of Washington Universal Service Data

Washington has a population of 5.25 million, nearly one quarter of whom live in rural areas. Eleven percent of the population has income below the poverty level, and approximately seven percent are receiving public assistance. Washington has nearly 3 million access lines, provided by 22 incumbent local exchange carriers (LECs) and several competitive entrants.[1] The RBOC providing service in the state is U S WEST Communications (USWC), with a market share of 65.6 percent. The overall penetration rate is 95.7 percent.

Washington participates in federal universal service programs, including Lifeline, Link Up, and the high cost fund. At the state level, Washington has a Universal Service Fund (USF) targeted to rural and high cost companies, administered by the Washington Exchange Carrier Association (WECA). GTE, USWC, new competitive entrants, and the interexchange carriers (IXCs) contribute to the fund based on a mill levy on access minutes. The state USF, like its federal counterpart, provides a rate subsidy to eligible carriers, those whose unsupported loop cost is greater than 115 percent of the statewide average.

B. Support for Rural, Insular, and High-Cost Areas and Low-Income Customers

1. Affordability and Comparability (NPRM [[paragraph]] 14)

The NPRM calls for comment on appropriate standards for evaluating affordability, whether all services should be accessible in all regions, and comparability of access to services throughout the nation, as well as comparability of rates.

There are two major points the Washinton UTC wishes to make in commenting on this section of the NPRM. First, competitive market forces can be the most effective tool for allocating society's scarce resources and for finding the answers to the issues raised here. Second, the issues are often best developed on a state-specific basis.

Washington's experience can serve as a useful model for analysis. On one hand, the state contains a densely-populated urban area in the Puget Sound region. This area is characterized by heavily aggregated supply and demand. The majority of the state's land area, however, consists of more sparsely populated areas in the coastal, mountain, and eastern regions of the state with dispersed demand and higher service costs. The Washington UTC has long been faced with the challenge of ensuring that services are affordable and accessible at comparable rates and quality throughout the state.

Washington state law, as implemented by the Commission, authorizes easy market entry by all types of service providers, including new competitors seeking entry in the local exchange market. New alternative local exchange companies are granted authority to compete anywhere in the state. This broad authority is already being exercised, with new entrants beginning to offer competitive services not only where competition happens first, in the Seattle area,[2] but also in cities such as Spokane.[3] Another new entrant[4] has recently announced plans to offer competitive services in smaller Western Washington communities outside the Seattle metropolitan area. Because telecommunications costs are expected to continue to fall as advances in technology occur, issues of comparability of rates between rural and urban areas may become less significant. These recent initiatives by competitors outside of the major urban areas are in part an early reflection of this trend.

A starting point for measuring affordability in Washington state is the Washington Telephone Assistance Program (WTAP), which currently sets the rate for eligible customers at $9.25 per month.[5] In an era when declines in costs of production and advances in technology are nearly a daily occurrence there are significant risks for regulators in setting a standard of affordability. If the standard of affordability is set too high, certain customers may not be able to afford service, even with a subsidy. At the same time, this may create some opportunities for competitive unsubsidized entry. If the standard is set too low, on the other hand, unnecessary subsidies will be created and competitive solutions may not develop.

Given the differences in competitive market structure in every state, it will be very difficult to develop a standard for defining affordability and comparability which works well everywhere. We caution against a "one size fits all" approach as the Joint Board and the FCC address these issues. The thrust of our comments is that policies which encourage competition will inure to the benefit of all consumers. Those benefits can and should accrue with comparable value in rural, insular, and high-cost areas, as well as to low-income consumers. It is vitally important in developing standards for evaluating affordability, availability, and comparability that the competitive paradigm remain the norm.

2. The "Core" Definition of Services (NPRM [[paragraph]][[paragraph]] 15-23)

The Washington UTC has initiated a rulemaking to address universal service. As part of the rulemaking, we are attempting to learn from a broad spectrum of telecommunications customers how their needs should be met in a competitive environment. Because the rulemaking is still pending, it would be premature for us to make specific recommendations as to a universal service definition. The fundamental flaw in the NPRM proposal, however, is in defining universal service by means of a list of services in the first instance. The effect of this approach, inevitably, is to freeze universal service policy in the technology and services of 1996. Instead, the Joint Board and the FCC should design a description of universal service which is more functional in nature, focusing on availability of and access to network capabilities rather than services. Not only will this avoid miring universal service policy in the old paradigm, it will leave far more flexibility to states to adapt policy to fit local customer needs and market conditions.

While the Washington UTC has not adopted a formal definition of universal service, current state policy already requires the provision of single party service, voice grade transmission according to specified technical quality standards, touch tone, and access to emergency services. Single party service, touch-tone dialing, and elimination or reduction of suburban mileage were components of the Commission's incentive regulation policy in the late 1980's.[6] The policy has resulted in a 99.97 percent penetration rate for single party service in the state.

Extension of the service to every customer, however, can entail very significant costs. United Telephone Company of the Northwest, a local exchange provider in Washington, has the largest remaining group of multi-party customers. United estimated that conversion of its last 450 multi-party customers to single party service would cost $1.105 million. While United has now converted nearly half of these, it reports that there are some customers for whom conversion costs would so high as to be cost-prohibitive. The Commission recommends against creating a universal service definition that would pay for such uneconomic service conversions through support mechanisms that place the burden on other providers and users.

The issue raised by the FCC in paragraph 17 of the NPRM is the extent to which additional services should be included in the definition and what effects such inclusion could have on competition. Again, this focuses inappropriately on the "laundry list" approach. The guiding principle should be that the market rather than regulatory mandates should determine the definition of universal service. A fundamental difficulty with selecting services for inclusion as "basic" or "core" is that regulators run great risk of choosing technological winners and losers. The more prescriptive the approach, the greater the risk to competitive and technological neutrality. In addition, to the extent that more new services are added to the definition, the costs and burdens of universal service become proportionately greater. It is interesting to note that the existing support mechanisms, although not perfect, are in large measure neutral as to service definition, since they are disbursed on the basis of historical costs and geography, with no requirement that a specific list of services be provided. The Joint Board and FCC should seek to minimize the level of universal support needed as the definitional issues are considered. Creating subsidy mechanisms to support such services inevitably will become a barrier to entry by technologically advanced, more efficient competitors.

Voice Grade. We recommend that established telephone industry standards for performance levels should continue to define voice grade access. This is essential to maintain comparability of services between market segments that are subsidized and those that are not. A customer should not receive an inferior grade of service just because it is subsidized. The Washington UTC has quality of service rules[7] governing provision of voice grade service which are equivalent to these industry standards.

Single Party. With regard to single party service, the NPRM at paragraph 20 addresses the need for single party access due to proliferating use of modems. If that is used as an argument for supporting single party service, then should a second line for modem use be subsidized? This Commission would oppose any proposal to include a second single-party service line in the definition of universal service. This would place an additional and unwarranted burden on the system.

Emergency Service. In Washington, enhanced 9-1-1 service is funded through state and county excise taxes collected by local exchange carriers from end users. Access to 911 is available whenever voice grade access is available.

3. Existing Universal Service Fund Mechanisms (NPRM [[paragraph]][[paragraph]] 28-30, 40)

The existing mechanisms for the Universal Service Fund and for the DEM Weighting assistance program apply only to LECs, and therefore may not be available to other potential telecommunications providers under the Act who may offer new services or products.

The Universal Service Fund provided levels of support in 1995 in Washington averaging $6.72 per month per affected access line. The effect on individual companies ranges from $2.68 to $48.30 per access line per month, based on 1993 financial data. The total support received in 1995 in Washington was $22,241,194.[8]

The DEM weighting factors affect 17 companies and approximately 61,000 access lines in Washington. Based on 1993 financial data, the amount of the dollars shifted from the intrastate to interstate jurisdiction equates to an average of $6.84 per month per affected access line, with the effect on individual companies ranging from $3.04 per line to $15.77 per line.[9]

In Washington, as a general proposition, the support generated by these programs has been used for the purposes intended, providing needed support to companies with long loops and high costs in an explicit manner. While these mechanisms need to be modernized to achieve the goal of competitive neutrality set by the Act, any replacement mechanism must be fashioned with great care. The Washington Commission supports a transition period for carriers, including recipients of support from the Universal Service Fund and DEM weighting, if it is determined that these existing support mechanisms should be adjusted or eliminated. Such a transition period is necessary to protect consumers. Sudden changes in existing support mechanisms could potentially have a dramatic negative effect on both service quality and affordability, particularly from the perspective of incumbent LEC customers. Service quality and affordability are among the guiding principles to be applied by the Joint Board and the FCC in implementing Section 254. Sec. 254(b)(1). Consumer protection is further underlined by the Section 254(i) requirement that the FCC and the States "ensure that universal service is available at rates that are just, reasonable and affordable." These principles should be followed to make certain that the transition to a new universal service policy does not itself become harmful to consumers.

4. Support for Low-Income Customers (NPRM [[paragraph]][[paragraph]] 50-65)

In general, the Washington UTC believes that the low-income support mechanisms currently in place are working well and should not be made the target of major revisions. Existing mechanisms, such as Life Line and Link Up (see below) are sufficiently explicit and targeted to be consistent with the intent of the Act. These support mechanisms do not place unreasonable burdens on other services.

Additional Services (NPRM [[paragraph]][[paragraph]] 50-58). The NPRM asks for comment on whether there are particular services, technical capabilities, or features of special benefit to low-income customers that should receive support. In our comments above on "core services" (par. 16), the Commission has expressed its concern with the overall approach taken in the NPRM, of identifying individual services, and then constructing support mechanisms for those services on a service-by-service basis. The NPRM's discussion of additional low-income services raises similar questions. While the social goals of these proposals are understandable, an approach which focuses on a special definition for universal service for low-income customers may be confusing and unmanageable as a practical matter. Efforts to provide a "low-income" definition of universal service, and to provide support for special low-income services are steps in the wrong direction; away from a competively-neutral market-based approach.

Link Up Program (NPRM [[paragraph]] 64). The Washington Commission has very serious concerns about the proposal to remove the Link Up program from the jurisdictional separations rules. The Link Up program is effective, if not perfect, in its current form. In Washington State, we provide assistance to over 40,000 customers per year under the program, only about one-quarter of those eligible. Reimbursements to Washington LECs was $668,199 in calendar year 1994. We are concerned that even this minimal level of support would be threatened by the NPRM proposal. Transition from the current mechanism to a new mechanism to be created in the future could take months or years. There is no indication of the amount of funds that might be available under the new approach, or of the reliability of the support over time. The high cost of connection to the network has been shown to be a major factor affecting subscribership levels. The existing program need not be changed.

Lifeline and Washington Telephone Assistance Plan. The WTAP is administered through the state Department of Social and Health Services. After $9.25 is paid by the eligible participant, WTAP pays the remainder of the bill, excluding ancillary services and including the matched NECA contribution capped at $3.50. The average monthly subsidy was $3.35 per client for fiscal year 1994. The program is funded through an excise tax of 13 cents per month on access lines. WTAP assistance also includes up to 50 percent of non-recurring charges once a year. Program expenditures for fiscal year 1994 were $4.725 million. Approximately 90,000 subscribers receive assistance annually.

Washington participates in the federal Lifeline program which waives subscriber line charges for eligible customers if matched by a state contribution. NECA pays up to $3.50 of charges set above the low-income rate of $9.25 by the Washington UTC directly to the serving LEC. In calendar year 1994, reimbursement to Washington LECs was $2.96 million.

The Commission is concerned with the reference in paragraph 65 to "changes to the level of support or other changes to our Lifeline and Link Up programs." (Emphasis added.) As the NPRM notes, the Act specifies that nothing in Section 254 "shall affect the collection, distribution, or administration of the Lifeline Assistance Program . . . ." The Commission questions whether, given this language, it is appropriate to undertake any review of the Lifeline program in this proceeding.

C. Support for Schools and Libraries (NPRM [[paragraph]] 71 et seq.)

We believe that many effective and creative initiatives are based upon cooperation between public institutions and private entities in rural communities. The language of the Act, however, seems to require that discounted service provided to schools and libraries must be for educational purposes and may not be transferred by the user for value. This may limit or even impose an outright prohibition on many demand aggregation arrangements. Will a school or library have to choose between receiving discounted universal service and participating in a successful local network partnership? If the school chooses the former, the partnership may not survive without the school's participation. We urge the FCC and the Joint Board to interpret the Act and to design rules to permit the continuation of existing aggregation arrangements and encourage the initiation of new efforts.

The Washington UTC questions the soundness of a policy mandating discounted services for schools and libraries over the long term. The potential costs of such support for schools and libraries throughout the United States could be very high, placing massive burdens on telecommunications providers and users of the network. (See discussion of San Juan County costs below.) This kind of support would be more appropriately provided through the Congressional appropriation of general tax revenues. The Joint Board should consider recommitting this issue to Congress for amendment of the Act.

Washington State has seen a number of recent initiatives in the area of access to telecommunications by schools and libraries. The Governor's Telecommunications Policy Coordination Task Force, on which Chairman Sharon Nelson serves, has been considering proposals which would use schools in rural areas as a focal point to build local community and business demand for advanced services.

The 1996 Legislature passed Senate Bill 6705 supporting the creation of a K-20 education network for the coordinated expansion of current technology and the development of new technologies that support distance learning through an integrated and interoperable educational technology network. Significantly, the bill requires a design and implementation plan to "foster partnerships among public, private and non-profit entities, including independent non-profit baccalaureate institutions of higher education, libraries, and public hospitals." The legislative intent, as stated in the bill, is for "collaborative endeavor" that makes "maximum use of a common telecommunications backbone network."

San Juan County, a county consisting entirely of islands located between the Washington mainland and Canada's Vancouver Island, set up a distance learning plan in 1994. The San Juan County Distance Learning Project, Northern Telecom, Inc., and PTI Communications (the incumbent LEC) formed a strategic partnership to perform a network trial to provide interactive full motion video and audio capability between classroom sites. The video conferencing capability allowed geographically dispersed locations to share educational resources and diversify the curricula for the Skagit Valley Community College extension located in Friday Harbor, the county seat, the San Juan Island High School at Friday Harbor, and the Orcas Island High School. During the trial period, the incumbent LEC provided service to the Distance Learning Project free of charge, while the San Juan County school district investigated grant funding from public and private sources to defray service costs after the trial. The trial was terminated in 1995 after the school district's search for funding proved unsuccessful. The costs were substantial, particularly for a small rural school district. Capital costs were $300,000 for equipment at conference sites. Monthly tariff expenses for the service, using DS3 links, were estimated by the LEC at $1500 per month per site.

A common feature of these examples is the use of demand aggregation and user partnerships to make provision of more advanced service and facilities to remote areas more economically feasible. Schools and libraries, which may be among the largest users in small communities, often act as the focal institution in such arrangements. Advanced services delivered to such communities may be used for a broad range of public and private purposes, not limited to education. Again, we ask the Joint Board and the FCC to avoid any action which would prevent such cooperative ventures.

D. Other Universal Service Support Mechanisms: SLC and CCL (NPRM [[paragraph]] 114)

The FCC has asked for comments on recovery of interstate-allocated subscriber loop costs. The recovery of subscriber loop costs was litigated in USWC's current general rate case, Washington UTC v. U S West Communications, Inc., Docket UT-950200. A decision and order in that case were issued this week. One of the main points of contention in the case was whether to include the cost of the loop in the rate charged the customer (end-user) for local exchange service. In presenting its case, USWC included all the cost of the local loop in its calculation of the incremental cost (TSLRIC) of local exchange service. The Company argued that allocation of any loop costs to access and toll service violates the principle of incremental costing, because the entire loop cost would exist even if no carrier or toll services were provided. This argument addresses why loop costs should not be included in the incremental cost of toll and access but did not explain why they belong in the incremental cost of local service. On the contrary, the arguments apply equally well in application of the costs to local exchange service.

In its decision, the Commission found that the local loop facilities are required for nearly every service provided by the telephone company to its customers. Neither local service nor long distance (including interstate) nor vertical features can reach a customer without the local loop. Should the phone company cease to provide any one of these services, its need for a local loop to provide the remaining services would remain. The cost of the local loop, therefore, is not incremental to any one service. It is a shared cost that should be recovered in the rates. No one service is responsible for that recovery.

The Commission, in its order, found that arbitrary allocations of shared costs, such as the loop, are no longer sustainable and no longer require a separate rate element. To so require would be to fix in perpetuity those aspects of a company's costs that should be most subject to reductions as a result of competitive pressures. The result is that, after a review of USWC's expenses and revenues, the Commission was able to eliminate the Company's intrastate Carrier Common Line Charge and adopt a local transport restructure that included only rate elements that related specifically to a service: switching and transport. The Commission was able to establish this restructure, including a substantial reduction in total access charges, without increasing the average rate for a residential line and while decreasing the average business rate per access line.

An underlying assumption behind a number of the NPRM questions in this area is the existence of a subsidy of local loop costs. After review of USWC costs, for the first time in a dozen years, the Commission found that residential rates are currently set above costs, even assuming full allocation of the local loop.

In conclusion, for two key reasons the Washington UTC can see no merit in shifting the the interstate CCLC to an end user charge. First, to the extent this charge is related to the loop, the loop is a shared cost and should be recovered along with other shared and common costs through all rates on services utilizing the loop. Second, a contemporary review of a company's cost structure may very well indicate that such charges are no longer necessary.

The NPRM asks whether increasing the SLC could potentially reduce telephone subscribership. The answer is obviously yes--at some point. The effect would necessarily differ across income levels and consumption patterns.[10] Prospective monitoring of penetration levels may be an appropriate general measure of the impact of mechanisms adopted in this proceeding.

E. State Utility Commission Administration of Support Collection and Distribution (NPRM [[paragraph]] 130)

The Washington UTC has little interest in any proposal which would delegate to State commissions the role of administrator for universal service funds. The collection and distribution of funds for public policy purposes has not historically been a role performed by the agency. Low-income programs such as WTAP are administered by the Department of Social and Health Services. The Washington Exchange Carriers Association (WECA) has the responsibility of administering the universal service fund for intrastate purposes. An administrator like WECA would be more appropriate for the purposes contemplated in the NPRM.

III. CONCLUSION

The Washington Utilities and Transportation Commission urges the Joint Board and the FCC to adopt universal service polices which are administratively simple and low cost and which provide the minimum support necessary to maintain affordable basic network access. Universal service should be supported, to the extent necessary by the broadest possible user base and should be competitively neutral. The definition of services should be determined to the extent possible by market forces rather than administrative mandate.

The Washington UTC looks forward to further participation and further opportunity to comment on these matters before the Joint Board and the FCC.

DATED this 10th day of April, 1996, at Olympia, Washington.

RICHARD HEMSTAD, Commissioner
Washington Utilities and Transportation Commission

[2]New entrants offering service in Seattle include Electric Lightwave, Inc. (ELI), TCG Seattle, MCI Metro, and MFS Intelnet.

[3]NEXTLINK offers service in Spokane.

[4]GST Lightwave.

[5]The WTAP plan is described in more detail below in Section II.B.4 "Support for Low-Income Customers."

[6]Commission Open Letter on Incentive Regulation, Oct. 7, 1988, at 0-5.

[7] WAC 480-120-500 to 535. The rules are attached as Appendix A.

[8] NECA Monitoring Report, CC Docket No. 87-339, May 1995, Table 3.9.

[9] Comments of the Washington Independent Telephone Association Small Company Committee, FCC/Joint Board Notice of Proposed Rulemaking and Notice of Inquiry of July 13, 1995, CC Docket No. 80-286, dated October 5, 1995.