20021209_343.pdf

DECISION MEMORANDUM
TO:CO MMISSI 0 NER KJELLAND ER
COMMISSIONER SMITH
COMMISSIONER HANSEN
JEAN JEWELL
RANDY LOBB
DON HOWELL
JOE CUSICK
BIRDELLE BROWN
CAROLEE HALL
DOUG COOLEY
BEVERLY BARKER
GENE FADNESS
TONY A CLARK
RON LAW
WORKING FILE
FROM:WAYNE HART
DATE:DECEMBER 6, 2002
RE:QWEST TARIFF ADVICE NOS 02-24-N AND 02-06-S REDUCING THE
CHARGES FOR PAL LINES.
On November 12, 2002, Qwest Corporation submitted Tariff Advice Nos. 02-24-N and
02-06-S reducing the rates for Public Access Line (PAL) service, which is provided to payphone
operators. Qwest indicated the filing was being made to comply with FCC Order No. 02-025.
Advice 02-24-N reduces the recurring charge rates for a flat rate Basic PAL line from the
current rate for a business line (now either $27.40 or $30.40) to a rate of $15.10. The rate for a
Smart PAL was reduced from $32.39 to $15.71. The rate for call screening was not changed
and remains at $2.00. The rate for a PAL line carrier package (typically purchased by
interexchange carriers, and includes call screening and local call restrictions) was reduced from
$26.75 to $17.10.
Advice No. 02-06-S reduces the rates for the various versions of Basic PAL service to
$16.30 from the current rates of$51.71to $52., depending upon rate zone. Measured PAL is
reduced to $15., from the current levels of $32.40 to $38.41 with the measured usage rate
reduced from the current rate of 4 cents for the initial minute and 1.5 cents for all subsequent
DECISION MEMORANDUM DECEMBER 6, 2002
minutes, to a flat rate of 1 cent per minute. The current tariff includes an allowance of $3 .00 of
usage charges before any usage charges are incurred. This would be changed to an allowance of
600 calls before usage charges would be incurred.
The rates for Smart PAL service would be reduced to $16.91 for flat rate service or
$15.77 for message PAL service. The rate per call for message line service would be reduced
from 9 cents per call to 2 cents per call. The filing for Southern Idaho has an effective date of
December 13 , 2002, while the filing for Northern Idaho has an effective date of December 20.
FCC Order No. 02-025 (The Wisconsin Order)
This Order is a decision in a complaint case filed by Wisconsin local exchange carriers
regarding elements of a series of FCC decisions known collectively as the Payphone Orders.
Among other things, this Order clarifies the previous decisions of the FCC in regards to the
prices that LECs (local exchange companies) and BOCs (Bell operating companies) may charge
for services provided to payphone service providers, including themselves. The Payphone
Orders had indicated that the determination of the specific prices at which these services were to
be provided was to remain the jurisdiction of the state commissions, but that the state
commissions were to set prices that clearly did not allow any subsidization of any other non-
payphone services. For BOCs, the FCC indicated these prices should be "cost based" and
subject to the new services test identified by the FCC in its Computer III proceedings.
This Order clarified that the new services test required prices to be based upon a forward-
looking cost model, similar to the manner in which prices are established for unbundled network
elements (UNEs). The Order also clarified that the overhead allocation and loading factors to be
used should be those used for the pricing ofUNEs, and if not, any differences needed to be
justified. The FCC did not require the rates to be the same as UNE rates, nor the use of the
TELRIC model used for UNE rates, but indicated a forward-looking cost model, such as
TELRIC or TSLRIC should be used.
The FCC also specified that all revenues, including any revenues from measured usage
fees or subscriber line charges should also be taken into account in the establishment of the rates.
DECISION MEMORANDUM DECEMBER 6, 2002
Staff Analysis
Upon request from Staff, Qwest provided copies of the cost study used to establish the
proposed rates. Qwest used a TSLRIC model. Staff performed a cursory review of the cost
study, and none of the inputs and assumptions used in the analysis appeared to be significantly
out of range of our expectations. However, the cost study was only recently provided (December
2002), so Staffs review was far from thorough. Staffhas compared the final results of this
cost study with those conducted for UNEs, but has not had an opportunity to compare the details
of the various models, inputs or assumptions. The loading factors and overhead allocations
appear to be consistent with those used in the UNE cost proceedings. The proposed rates are in
the high end of the range of prices produced by the different models used in the UNE cost
discussions, and slightly higher than the rates eventually filed by Qwest that had been indexed to
rates established by the Colorado Commission.
This filing also reduces the rates charged for both message and measured usage. (Smart
PAL lines have usage rates on a per call basis; Measured Basic PAL lines have usage rates on a
per minute basis.) The proposed rates (1 cent per minute for measured service, 2 cents per call
for Smart PAL message service) are also supported by outputs from the cost study.
Both usage rates go into effect after a 600 call per month allowance so no usage charges
are incurred on the first 600 calls placed on each line each month. This is a change for Measured
Basic PAL lines as the current allowance is $3.00 regardless of the number of calls. A revenue
impact analysis submitted by Qwest indicated the average line did not exceed this 600-call
allowance, and therefore indicated no revenue impact to the change in the usage charges and
essentially no revenue from usage charges. Staff does not agree with the logic of this study, as
the usage charges are not imposed on an average basis and would have been and will still be
incurred by any high usage lines. As the total revenue from the line, including the revenue from
usage charges is to be used in determining whether the rates are in compliance with the
Wisconsin Order, this error in logic may be significant. However, Staff accepts that the
allowance is high enough to significantly limit the overall revenue from usage fees and that the
cumulative financial impact of these usage charges would be minimal.
In addition, Staff asked for a cost study for call screening (toll restriction) or fraud
protection services even though no change was proposed in this rate at this time. The current
rate is $2.00 per month. This is only a separate product in the tariff for North Idaho. In Southern
DECISION MEMORANDUM DECEMBER 6, 2002
Idaho the rate for a basic PAL line with fraud protection is currently priced $2.00 more than the
rate for a Basic PAL line without fraud protection. However, this filing prices both lines the
same, essentially eliminating any charge for fraud protection. Qwest provided a TSLRIC model
cost study, which produces a final rate of $0.11 (eleven cents) per month. Qwest does not
currently have UNE rates for either call screening or fraud protection in its Statement of
Generally Accepted Terms (SGA T), so no direct comparison is possible. However, this is less
than the $0.16 (sixteen cents) rate for toll restriction in some of Qwest's negotiated
interconnection agreements, and it is also at the upper end of the range expected by Staff.
Qwest has informed Staff that it intends to comply with the Wisconsin Order in two
steps. The first step, the current filing, reduced the rates for the actual PAL line and for usage
elements. The second step, which they indicated would be made before the second quarter of
2003 , would bring the rates for call screening/fraud protection into compliance. This second step
would involve an increase of eleven cents to the rate for Basic PAL lines with fraud protection in
Southern Idaho, and a reduction in the rate for the stand-alone product of call screening in North
Idaho from $2.00 to 11 cents.
Staff is concerned that the delay in filing this second step allows Qwest to provide
discriminatory service to itself, and will harm the independent payphone providers. Qwest
primarily purchases the Smart PAL product, which includes call screening, fraud protection, coin
supervision and other features that are provided by the switch. Independent payphone providers
typically purchase the Basic PAL line, using the intelligence built into their payphones to
provide coin supervision and other features, but must rely upon the LEC to provide call
screening. Without the reduction in the price of call screening the price of a Basic PAL line plus
call screening would exceed the price of a Smart PAL line, providing a competitive advantage to
Qwest.
In response to Staff inquiries as to why the delay to the call screening/fraud protection
rate changes, Qwest indicated it was due to the timing of filings at the federal level. Staff fails to
understand why an Idaho intrastate rate change should be delayed to accommodate a federal
filing.
While the impact of the Wisconsin Order is primarily to the rates charged by BOCs for
service they provide to payphone companies, it may also affect the rates charged by other LECs
in Idaho. In that Order, the FCC found that the Telecommunications Act of 1996 (Act) provided
DECISION MEMORANDUM DECEMBER 6, 2002
it with the authority to require BOCs to establish rates for payphone services that were "cost
based" and consistent with the new services test of the Computer III proceedings. However, it
also found that the Act failed to provide the same authority over the rates for payphone services
provided by non-BOCs.
Because sections 276(a) and (b)(I)(C) apply only to BOCs, we do not
find that Congress has expressed with the requisite clarity its intention
that the Commission exercise jurisdiction over the intrastate payphone
prices of non- BOC LECs... Although the federal regulatory pro gram
implemented in section 276 would surely benefit if all LECs were
required to use cost-based rates for their payphone line services, we
cannot say that, with respect to non-BOC LECs, Congress has spoken
with sufficient clarity to overcome the presumption of section 2(b).
We do, however, encourage states to apply the new services test to all
LECs, thereby extending the pro-competitive regime intended by
Congress to apply to the BOCs to other LECs that occupy a similarly
dominant position in the provision of payphone lines.
(Paragraph 42, FCC 02-025)
The use of the new services test and "cost-based" rates was specified as a means for
ensuring that BOCs complied with the elimination of subsidy requirements contained in section
276 (b) (1 )(B). The requirement to eliminate such subsidies applies to all LECs, not just BOCs.
The Act does not require non-BOC LECs to use these same measures to ensure their rates no
longer contain subsidies, but nothing precludes the Commission from doing so as recommended
by the FCC.
In the multiple Commission proceedings held during 1997 and 1998 to implement the
requirements of FCC's Payphone Orders Staff did not interpret the requirements of the Payphone
Orders in the manner that was clarified by the FCC in the Wisconsin Order, as is evident by the
dramatic changes in the rates proposed by Qwest. In particular, the overhead allocations and
loading factors used in establishing the rate(s) approved by the Commission at that time
sometimes varied considerably from that specified in the Wisconsin Order. A fresh look at the
payphone service rates charged by other LECs in Idaho may now be appropriate.
The payphone industry has seen dramatic reductions since 1998. Competition from
wireless providers, calling cards and dial-a-round service providers has reduced payphone
revenues considerably. As locations have become unprofitable, the phones have been removed.
Based upon the numbers provided in Qwest's recent cost study, the total number of pay phones in
DECISION MEMORANDUM DECEMBER 6, 2002
Qwest's service area is approximately 1/3 ofthat reported in 1998's cost studies, dropping from
about 3 000 to just over 1 000. Qwest's reduction in the rates charged to payphone providers
(including itself) should help to reduce the cost of providing a payphone, thereby reducing the
number of locations that are being abandoned. While similar reductions are not expected in the
rates of all the other Idaho LECs, a new look may certainly be appropriate.
COMMISSION OPTIONS
Staff believes the Commission has a number of options in how to proceed with this filing.
These are:
1. Suspend this tariff advice and open a full proceeding to consider these
changes. This could either be a generic proceeding to examine the impacts of the Wisconsin
Order on the rates of all Idaho LECs, or a Qwest specific proceeding. This would enable the
Commission to obtain input from other parties, as well as allow the Staff more time to fully
analyze the cost study and other issues in this filing.
2. Approve this filing as is. The Commission could either be silent about the
second step identified by Qwest that would revise the rates for call screening/fraud protection, or
identify a date by which Qwest would be expected to file such revisions.
3. Suspend this filing and require Qwest to file a revised tariff that includes the
changes in rates identified in this filing, as well as the changes in the rates for call
screening/fraud protection. The Commission could either specify a date for such a filing, or ask
the Company to identify an appropriate date.
STAFF RECOMMENDATION
Staff recommends the Commission suspend these two filings and require the Company to
file a replacement that also includes the appropriate changes for call screening/fraud protection
within 14 days. The Commission could provide Qwest with a deadline for identifying when this
filing could be implemented.
Staff does not believe the benefits of a full proceeding are significant enough to delay the
benefits of the reduced rates included in these filings. Staff believes these rates are within the
range of reasonableness, and can be supported as complying with the Wisconsin Order. While it
is likely that a full proceeding would result in changes to some of these rates that is not assured
DECISION MEMORANDUM DECEMBER 6, 2002
and any such changes are expected to be small. In addition, nothing precludes the Commission
from making further adjustments at a later date should subsequent information indicate such
changes are warranted.
Staff is very concerned about the discrimination that would result if these changes were
to be implemented without also changing the call screening/fraud protection rates.
Staff recommends that the Commission conduct a preliminary review of the rates of other
Idaho LECs, and recommends the Commission open a specific proceeding for any company in
which Staff finds such a proceeding may be warranted.
COMMISSION DECISION
Does the Commission wish to adopt Staff recommendations? Another option identified
by the Staff? Other alternatives?
i:udmemos/qwest pal line rates dm
DECISION MEMORANDUM DECEMBER 6, 2002