WSR 98-11-082
PROPOSED RULES
UTILITIES AND TRANSPORTATION
COMMISSION
[Docket No. UT-970325--Filed May 19, 1998, 1:15 p.m.]
Original Notice.
Preproposal statement of inquiry was filed as WSR 97-21-153.
Title of Rule: Intrastate carrier access charge reform.
Purpose: To conform Washington's access charge system with state and federal laws encouraging competition.
Statutory Authority for Adoption: RCW 80.01.040, 80.04.160, and 80.36.140.
Statute Being Implemented: RCW 80.36.160.
Summary: The proposal would require that each local exchange telecommunications company must charge no more for terminating access than it does for comparable local interconnection service (LIS); or if no LIS, then no more than the actual cost (as defined in the rule) of the terminating access being provided.
Reasons Supporting Proposal: This proposal begins the process of identifying and removing implicit subsidies. It also corrects the current discrimination between "local" and "toll" termination charges. By prescribing a terminating access charge rate, the rule concentrates on the access rate element which is least susceptible to customer choice. Market forces are relied on for other access charge rate elements (i.e. originating and transport). This allows the marketplace to function while protecting captive customers. It is competitively neutral, in that it will apply to all local exchange telecommunications carriers (incumbent and new entrant alike). This proposal will also create opportunities for fair and efficient competition, allow for innovative new products and services, and greatly simplify the access charge system within the state of Washington.
Name of Agency Personnel Responsible for Drafting: Tim Zawislak, 1300 South Evergreen Park Drive S.W., Olympia, WA 98504, (360) 664-1294; Implementation and Enforcement: Carole Washburn, Secretary, 1300 South Evergreen Park Drive S.W., Olympia, WA 98504, (360) 664-1174.
Name of Proponent: Washington Utilities and Transportation Commission, governmental.
Rule is not necessitated by federal law, federal or state court decision. While no federal or state law mandates the adoption of this rule, state and federal laws and policies encouraging competition in the local telecommunications market direct the Utilities and Transportation Commission to take actions to foster such competition. This proposed rule is intended to comply with those legislative and policy directives.
Explanation of Rule, its Purpose, and Anticipated Effects: The rule would require each local exchange telecommunications company to file and/or revise its intrastate carrier access charge tariffs in order to price terminating access at cost. The proposal would require that each company must charge no more for terminating access than it does for comparable local interconnection service (LIS); or if no LIS is offered, then no more than the actual cost (as defined in the rule) of the terminating access being provided.
This proposal begins the process of identifying and removing implicit subsidies. It also corrects the current discrimination between "local" and "toll" termination charges. By prescribing a terminating access charge rate, the rule concentrates on the access rate element which is least susceptible to customer choice. Market forces are relied on for other access charge rate elements (i.e. originating and transport). This allows the marketplace to function while protecting captive customers. It is competitively neutral, in that it will apply to all local exchange telecommunications carriers (incumbent and new entrant alike). This proposal will also create opportunities for fair and efficient competition, allow for innovative new products and services, and greatly simplify the access charge system within the state of Washington.
Proposal Changes the Following Existing Rules: Rule would replace existing rule governing access charges.
A small business economic impact statement has been prepared under chapter 19.85 RCW.
Small Business Economic Impact Statement
Washington Utilities and Transportation Commission Docket UT-970325 re: Intrastate Access Charge Reform. Proposal of a new section to be added to chapter 480-120 WAC, under the title of Terminating access charges, WAC 480-120-540, applicable to all local exchange telecommunications companies.
Background: The Washington Utilities and Transportation Commission (WUTC) is proposing changes to the current intrastate carrier access charge regime applicable to all local exchange telecommunications companies (a subset of SIC 4813; see Appendix 1 for list) operating in the state of Washington.
The need for these changes is demonstrated by the Telecommunications Act of 1996 (TCA '96), the Federal Communications Commission's (FCC) rules and policies, and the general procompetitive deregulatory policy framework which is now redefining the telecommunications industry.
Essentially, the goal of the proposed rule is to make Washington's intrastate access charge rate structure more compatible with competition.
For more explanation see the January 13, 1998, version of the "WUTC Staff Report on Access Charge Reform Options." A copy can be obtained by calling (360) 664-1234 and referencing UT-970325, or by accessing the commission's website for this topic at: <http://www.wutc.wa.gov/telecom/access_reform>.
Summary of the Amendments Proposed: Addition of new rules which relate to the general structure of intrastate access charges. Essentially, terminating access charges must be based on cost. This simple step will: Remove implicit subsidies, correct the current discrimination among "local" and "toll" termination charges (which has been one of the factors causing toll rates to greatly exceed costs), create opportunities for fair and efficient competition, allow for innovative new products and services, and greatly simplify the access charge system within the state of Washington.
Committee Process: This statement has been developed in consultation with a Small Business Economic Impact Statement (SBEIS) Committee. This committee was comprised of a group of volunteer representatives from the telecommunications industry, Public Counsel of the Attorney General's Office, and various other general business-related associations.
The analyses and conclusions reached are not the result of a consensus, but rather are based upon consideration and judgement of the issues presented by the various committee members and industry responses to a related questionnaire.
Professional Services Possibly Needed: In order to comply with these new requirements a local exchange telecommunications provider may require the following professional services: Cost Consultant to perform a cost study if one has not already been prepared, Tariff Consultant to prepare and file the required tariff changes, Legal Counsel to defend the cost study and tariff filing in anticipation of opposition, Billing Systems Update to implement the required tariff changes, and other Administrative functions as may be necessary.
Costs of Compliance: In order to comply with the new requirements a local exchange telecommunications company may need to incur the following estimated one-time expenses:
| Small | Large | |
| Cost Study: | $10,000 | $5,000 |
| Tariff Filing: | 2,000 | 3,000 |
| Notification: | 1,000 | 30,000 |
| Billing Changes: | 2,000 | 15,000 |
| Administrative: | 2,000 | -0- |
| Total Costs: | $17,000 | $53,000 |
| Lost Access Revenue: | -0- * | 16.5 Million |
| Total Impact: | $17,000 | $16.553 Million |
* Range without mitigation is that 20% - 30% of revenues would be at risk. An example could be anywhere from $500,000 to $2 Million, depending on the size of the company.
RCW 19.85.020 defines small companies as those local exchange telecommunications companies which have 50 or fewer employees. RCW 19.85.040 requires comparison with the largest companies, or those which comprise the top ten percent of the local exchange telecommunications industry.
The estimates above were derived through the committee process and through the analysis of the April 20, 1998, responses to an industry-wide questionnaire (see Appendix 2 for range of responses). Representative and reasonable costs were selected from the responses for use in quantifying the impact of the proposed rule and proposed mitigations. Not all responses were taken at face value because the rule does not require company specific cost studies or rate case proceedings. Cost models are currently publicly available information through the FCC and most are open to variable inputs. Each company's switch vendor also likely has the information readily available. Therefore, the cost study estimates have been adjusted to a more reasonable level. This level is also reinforced by some competitive local exchange carriers' estimates which are not driven by the obvious ("cost plus") incentives of rate-base rate-of-return regulated incumbents. Nonetheless, the availability of the proposed mitigations also brings into question the necessity of excessive outside legal and economic advice.
Comparison of Costs: Almost all of the costs of implementing this rule will be administrative in nature (with the exception of lost revenue). Local exchange telecommunications companies are familiar with these costs, as they are an ongoing expense of running a business in the regulated telecommunications industry. Because these administrative costs are ongoing, small employers already experience disproportionate administrative costs per employee as compared to large employers, in general. This fact is also recognized in the economies of scope and scale inherent in the distinction between small and large employers within the telecommunications industry. Smaller employers usually have smaller operations and typically serve in the less dense and/or rural areas of the state (historically). Therefore, due to the capital intensive nature of the telecommunications industry smaller employers have become accustomed to disproportionately higher costs. There are currently in effect support mechanisms through federal and state universal service programs which help defray these distinctions between urban and rural (e.g. large and small) companies.
Other newer companies, which may also be relatively small employers but most likely are not rural, are known as competitive local exchange companies or "CLECs." They are not as entrenched as the incumbent monopolies (both small and large). These CLECs are incurring initial start-up costs at this time, and therefore the costs likely to be caused by implementing this rule will incrementally be fairly minor. The rule should also remove (economic) barriers to entry which will benefit all competitors, including the new entrants.
As can be seen from the "cost of compliance" chart above, the total costs and total impacts are estimated to be lower for small businesses. This fact can also be reinforced and illustrated by using the average cost per employee analysis (see below). It remains apparent that the disproportionate effects of the proposed rule on small local exchange telecommunications companies have been addressed.
The estimated costs per employee are provided below:
| Small | Large | ||
| Employees: | 13 | 40 | 6,000 |
| Total Cost/Employee: | $1,308 | $425 | $ 8.83 |
| Total Lost Rev/ Employee: | $-0- | $-0- | $2,750 |
| Total Impact/Employee: | $1,308 | $425 | $2,759 |
Although these costs per employee appear fairly high, one must compare to the other costs incurred and revenues realized in the telecommunications industry. In this context, an example of revenues per employee follows:
| Small | Large | ||
| Employees: | 13 | 40 | 6,000 |
| Total Revenue: | $2 Million | $7 Million | $1.3 Billion |
| Total Revenue/
Employee: |
$155,000 | $175,000 | $217,000 |
The cost per 100 dollars of sales revenue is another
analysis which is useful in determining the relative (or
proportionate) costs of implementing this proposed rule:
As can be seen from each of these analyses, the
proportionate total impact of implementing this rule will not be
materially disproportionate for small businesses in the local
telecommunications industry. This outcome, in large part, is the
result of the mitigation efforts proposed by the Washington
Utilities and Transportation Commission under subsections (4) and
(5) of the proposed new rule language. (It should be noted that the outcome above is conservative
given the fact that "Cost Study" costs have been included, even
though the mitigation under subsection (4) of the rule alleviates
the absolute need to perform a cost study. However, this cost
remains in the analysis to recognize that a small local exchange
telecommunications company may, as a matter of its management's
discretion, wish to perform its own cost study if it feels the
proposed mitigation in this area is not appropriate for its use.
However, the most material mitigation effort is, under subsection
(5) of the rule, the allowance for small local exchange
telecommunications companies to offset the revenues lost from the
lower terminating access rate by increasing (or adding to through
restructuring) its originating access rate(s), hence producing a
revenue neutral effect (i.e. zero lost revenues for small
employers).
Small
Large Total Sales/100:
$20,000
$70,000
$13
Million Total Cost/Sales/100:
$0.8500
$0.2429
$0.0041 Total Lost Rev/Sales/
100:
$-0-
$-0-
$1.2692 Total Impact/Sales/
100:
$0.8500
$0.2429
$1.2733
Mitigation of Disproportionate Costs to Small Employers: As explained above (in the italics), the proposed mitigation efforts provided for under subsections (4) and (5) of the proposed new rule will greatly mitigate any disproportionate cost attributed to small employers through the implementation of this rule.
This section will explain each proposed mitigation effort, and illustrate how these accommodations may be implemented in order to reduce the costs incurred by small local exchange telecommunications companies:
Cost study avoidance (4) - A small business may concur in the terminating rate of any local exchange company that is not a small business and has filed a terminating rate that complies with the actual cost requirement of subsection (1) of the proposed rule. This provision will enable the small company to avoid the expense of performing a "cost study," which may be perceived as burdensome for a small company.
The impact of this proposed small company mitigation can be
illustrated by removing the cost of performing a cost study (and
related legal expenses) from the total cost and comparing these
to the analyses above, as follows:
Revenue neutrality (5) - A small business that is required
to lower its terminating access rate to comply with the proposed
rule may file an increase in its originating access rate to
offset the possibility of lost revenue. The commission will
approve the increased originating access rate(s) as long as the
net effect of the two filings is not an overall increase in
revenues. This provision will likely have the greatest positive
impact on small businesses (most are rural), due to the current
practice of collecting higher margins on terminating access
services. This mitigation in coordination with subsection (2) of
the proposed rule will have the effect of continuing to ensure
adequate and affordable service to rural and high cost areas,
while at the same time ensuring that access charges become more
compatible with competition. Most responses to the questionnaire reflected a speculation
that shifting terminating access revenues to originating access
rates could cause lost revenues due to "bypass." This concern is
well taken; however, the proposed rule allows for universal
service support to be collected explicitly on the terminating
access service, so the likelihood of uneconomic overly priced
originating access is not as great as the companies might fear.
To the extent that competitive forces apply pressure to the
originating rates, companies will be expected to react through
normal competitive responses. In fact, as the industry reprices
terminating access charges, companies will be empowered to
respond to market demands and provide more flexible and
reasonably priced calling plans. The concern of "bypass" has also been described as an
opportunity for customers to order special access (i.e.
dedicated facilities) in place of the switched originating access
(i.e. shared facilities). In this case the local exchange
telecommunications companies will continue to have the
opportunity to serve the customers and should realize revenues
left unquantified in response to the questionnaire. Effect on Other Small Businesses Which are not Telephone
Companies: The overall purpose of this rule is to increase
competition in local and long-distance telephone markets. At
present, substantially above-cost terminating access charges
increase the price many customers pay for long-distance services
and often make larger local calling areas cost prohibitive. A reduction of terminating access charges to a price
approaching economic cost of the service will permit reductions
in long-distance rates and the possibility of innovative new
products and services which customers demand in today's
telecommunications market. Small businesses which use telecommunications services in
their business may take advantage of reduced toll prices and
greater availability of wider and more diverse local calling
areas, among other innovative products yet to be discovered. The increase in originating access in some locations will
offset the potential for long-distance savings by keeping prices
to customers at about the same level as they are today. However,
small businesses that want to make an effort to find lower cost
long-distance alternatives will be able to locate them in a more
competitive market. The shift from terminating to originating
access should result in long-distance competition even greater
than that presently available and this would continue to be a
benefit to small business long-distance users. A copy of the statement may be obtained by writing to
Records Center, Washington Utilities and Transportation
Commission, P.O. Box 47250, Olympia, WA 98504-7250, please
reference Docket No. UT-970325, phone (360) 664-1234, FAX (360)
586-1150. RCW 34.05.328 does not apply to this rule adoption. The
commission is not an agency to which RCW 34.05.328 applies. Hearing Location: Commission Hearing Room, Second Floor,
Chandler Plaza, 1300 South Evergreen Park Drive S.W., Olympia, WA
98504, on June 25, 1998, at 9:30 p.m. Assistance for Persons with Disabilities: Contact Pat
Valentine by June 18, 1998, TDD (360) 586-8203, or (360) 664-1133. Submit Written Comments to: Carole Washburn, Secretary,
P.O. Box 47250, Olympia, WA 98504-7250, FAX (360) 586-1150, by
June 12, 1998. Date of Intended Adoption: June 25, 1998. May 19, 1998 C. Robert Wallis for Paul Curl Acting Secretary
Small
Large Costs per employee: Total Cost/Employee:
$538
$175
$8.83 Total Lost Rev/
Employee:
$-0-
$-0-
$2,750 Total Impact/
Employee:
$538
$175
$2,759 Cost per 100 dollars of sales revenue: Total Cost/Sales/100:
$0.3500
$0.1000
$0.0041 Total Lost Rev/Sales/
100:
$-0-
$-0-
$1.2692 Total Impact/Sales/
100:
$0.3500
$0.1000
$1.2733
OTS-2177.2
NEW SECTION
WAC 480-120-540 Terminating access charges. (1) Except for any universal service rate allowed pursuant to subsection (2) of this section, the rates charged by a local exchange company for terminating access shall not exceed the lowest rate charged by the local exchange company for the comparable local interconnection service, such as end office switching or tandem switching. If a local exchange company does not provide local interconnection service (or does so under a bill and keep arrangement), the rates charged for terminating access shall not exceed the cost of the terminating access service being provided. The cost of the terminating access shall be determined based on the total service long-run incremental cost of terminating access service plus a reasonable contribution to common or overhead costs.
(2) If a local exchange company is authorized by the commission to recover costs for support of universal access to basic telecommunications service through access charges, it shall recover such costs as an additional, explicit universal service rate element applied to terminating access service.
(3) Definitions.
(a) "Access charge" means a rate charged by a local exchange carrier to an interexchange carrier for the origination, transport, or termination of a call to or from a customer of the local exchange carrier. Such origination, transport, and termination may be accomplished either through switched access service or through special or dedicated access service.
(b) "Terminating access service" includes transport only to the extent that the transport service is bundled to the end office or tandem switching service. Dedicated transport unbundled from switching services is not subject to subsection (1) of this section.
(c) "Bill and keep" (also known as "mutual traffic exchange" or "payment in kind") is a compensation mechanism where traffic is exchanged among companies on a reciprocal basis. Each company terminates the traffic originating from other companies in exchange for the right to terminate its traffic on that company's network.
(4) The requirement of subsection (1) of this section that any terminating rate be based on cost shall not apply to any local exchange company that is a small business if it concurs in the terminating rate of any local exchange company that is not a small business and has filed a terminating rate that complies with the requirements of subsection (1) of this section. For the purposes of this subsection, "small business" has the same meaning as it does in RCW 19.85.020.
(5) Any local exchange company that is a small business and that is required to lower its terminating access rates to comply with this rule may file tariffs to increase or restructure its originating access charges. The commission will approve the revision as long as it is in the public interest and the net effect of the two filings is not an increase in revenues. For the purposes of this subsection, "small business" has the same meaning as it does in RCW 19.85.020.
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