ORDER NO. 98-239

ENTERED JUN 12 1998

This is an electronic copy.

BEFORE THE PUBLIC UTILITY COMMISSION

OF OREGON

UD 5

DISPOSITION: PETITION APPROVED

Background. On July 3, 1997, the Commission entered Order No. 97-257 granting the petition of United Telephone Company of the Northwest, dba Sprint (UTNW) to become a primary toll carrier (PTC). As a PTC, UTNW accepts all intraLATA toll calls from its customers except in those cases where the customer has selected another interexchange carrier. The conditions for UTNW’s amended certificate of authority to act as a PTC are provided on page 6 of that order.

At its July 8, 1997, public meeting, the Commission approved UTNW’s Advice Nos. 462 and 463, which established rates, terms and conditions for intraLATA toll service (Advice No. 462) and reduced rates for its switched and special carrier access services (Advice No. 463). The tariffs were allowed to take effect on July 9, 1997.

Also at the July 8, 1997, public meeting, the Commission approved UTNW’s intraLATA dialing parity plan. Dialing parity allows UTNW customers to presubscribe to intraLATA interexchange carriers in the same fashion that its customers presently do for interLATA interexchange carriers. Consistent with the Commission’s dialing parity order, Order No. 97-107, UTNW notified its customers of the dialing parity conversion and allowed a six-month period for customers to select or change their carrier without charge. The customer notification included a randomly ordered list of interexchange carriers available for presubscription.

On April 9, 1998, UTNW filed a petition to price list its intraLATA toll service. It also filed Advice No. 482 that deleted its current toll service tariff and transferred the information to its Oregon Price List. Prices, terms, and conditions of its toll service were transferred without change except that UTNW proposes to grandfather Toll Personalized Area Calling (TOLL PAC) service as of June 15, 1998. TOLL PAC service provides a 30 percent discount over the rates for standard message toll for up to three nearby exchanges.

On May 20, 1998, UTNW filed Supplement 1 to Advice 482 together with a request for less than statutory notice to make certain changes requested by Staff and to delay the effective date of the advice to June 15, 1998. Staff requested changes to the advice to remove directory assistance service, and operator verification and interrupt service from the price list proposal. These services were not supported by the company’s arguments for price listing toll service. The delay in the effective date of the advice to June 15, 1998, is to allow time for the Commission to prepare and issue an order.

Staff presented its recommendations to the Commission in a memorandum prepared for the June 2, 1998 public meeting.

Discussion: Price Listing. ORS 759.030 and OAR 860-032-0035 establish certain procedures and requirements for price listing. OAR 860-032-0035(3) and (4) state that after notice and investigation, the Commission may, by order, grant a petition to price list a service, subject to reasonable conditions, if it finds that the service is subject to competition or is not essential.

OAR 860-032-0035(5) states that prior to making a finding that a service is subject to competition, the Commission shall consider:

The extent to which services are available from alternative providers in the relevant market;

The extent to which the services of alternative providers are functionally equivalent or substitutable at comparable rates, terms and conditions;

Existing economic or regulatory barriers to entry; and

Any other factors deemed relevant by the Commission.

UTNW argues in its petition that (1) intraLATA toll service is subject to competition; (2) there are alternative providers in its specific market; (3) the alternative providers provide message toll services at comparable rates, terms, and conditions; and (4) given the current toll market and the number of competitive providers certified by the PUC and operating in UTNW territory, it is clear that no economic or regulatory barriers to entry exist. UTNW states that since its dialing parity conversion in August 1997, 26 percent of its customers have presubscribed to other interexchange carriers for intraLATA toll. UTNW notes that its dialing parity conversion allows customers to easily change their intraLATA carrier by notifying either the company or the desired carrier.

Staff agrees with the company’s arguments and recommends that the Commission approve UTNW’s price list petition.

Discussion: Price List Conditions. OAR 860-032-0035(4) allows the Commission to impose reasonable conditions in UTNW’s petition for price listing. As previously noted, UTNW is already subject to nine special conditions governing its operations as a PTC. See Order No. 97-257. UTNW recognized in its petition that its toll rates are currently subject to an imputation test that is based on the access service prices it charges other carriers plus any incremental costs of additional services or functions required to provide toll service. The purpose of the imputation test is to prevent a price squeeze on its toll competitors. UTNW agrees to continue to be subject to this test. Staff notes that Condition No. 2 of Order No. 97-257 governs the design and development of nondiscriminatory intraLATA toll rates in compliance with Commission rules and orders. This condition covers the UTNW imputation agreement without the need for additional conditions on its price list petition.

UTNW notes that it is making no rate changes at this time and that its current toll rates have been reviewed by Staff and found to cover imputed cost. Staff agrees. UTNW’s current toll rates were reviewed by Staff pursuant to Advice No. 462 and approved by the Commission at its July 8, 1997, public meeting.

Staff recommends no conditions other than those already in effect of UTNW's PTC operations.

Discussion: TOLL PAC. UTNW proposes to grandfather TOLL PAC. TOLL PAC has been addressed by the Commission a number of times in the past. In Order No. 91-100 (Docket UT 94), the Commission denied a U S WEST Communications, Inc., request to delete TOLL PAC. In Order No. 94-366, Fifth Stipulation, Section II.H (Docket UT 113), GTE Northwest agreed to retain TOLL PAC as part of its PTC operations. In Staff’s memorandum regarding UTNW’s Advice No. 462, UTNW agreed to retain TOLL PAC. In each of these cases, toll service remained under full regulation as a tariff offering.

In this case, however, Staff supports UTNW’s proposal to grandfather TOLL PAC, but for a limited period. In Order No. 91-100, the Commission recognized that although TOLL PAC did not recover imputed access charges, it did provide a valuable middle ground between toll and EAS in cases where the community of interest was not broad enough to support EAS conversion. Based on this public interest and on the facts that intraLATA toll competition was not pervasive and that toll remained a fully regulated service, the Commission chose to retain TOLL PAC. In this case, UTNW’s price list petition is in response to greater competition in the intraLATA toll market (brought on, in large part, by UTNW’s dialing parity conversion), and the concurrent need for pricing flexibility. In granting pricing flexibility and reduced regulatory oversight, competitive issues such as price squeeze must be given relatively more weight than the public interest concerns the Commission expressed in Order No. 91-100.

Grandfathering TOLL PAC rather than simply eliminating it will prevent further growth in the service without causing service disruption to existing customers. However, because of the competitive concerns, Staff recommends a limited grandfathering period, not to exceed six months. Staff urges UTNW to use the transition period to modify TOLL PAC so that it covers access cost, to show that TOLL PAC is above the imputed cost of access and keep the service unchanged as a regular offering, or to migrate customers to other calling plans. In 1997, TOLL PAC represented about 4 percent of UTNW’s toll minutes.

Staff Recommendations. Staff recommended that the Commission issue an order approving UTNW’s petition to price list its intraLATA message toll service and allow tariff sheets and price lists filed with Advice No. 482, Supplement 1 to take effect on June 15, 1998. Staff also recommended that the Commission include in the order a provision that limits the grandfather period for UTNW’s current TOLL PAC rates to a period not to exceed six months from the date of the order.

Conclusion. At its June 2, 1998, public meeting, the Commission considered Staff’s recommendation and adopted it. The Commission voted to approve UTNW’s petition to price list its intraLATA message toll services effective June 15, 1998. The Commission also approved the company’s proposed grandfathering of TOLL PAC service for a limited period not to exceed six months from the effective date of this order. Because of the Commission’s concern that TOLL PAC may not cover the imputed cost of access and thereby may represent a price squeeze on competitive telecommunications providers, the Commission believes that a limited grandfather period is appropriate. The six-month period will allow the company to choose one of the three options set out in the ordering paragraphs.

ORDER

IT IS ORDERED that:

UTNW’s petition to price list its intraLATA message toll services effective June 15, 1998, is granted.

UTNW’s TOLL PAC service is grandfathered for a period not to exceed six months from the date of this order.

Within the six month period, UTNW may choose one of three options with respect to TOLL PAC:

It may terminate TOLL PAC service and migrate current TOLL PAC customers to its other toll services;

It may reprice TOLL PAC to cover access imputation; or

It may submit a cost study to the Commission demonstrating that TOLL PAC price covers access imputation.

If the company elects options (b) or (c), it shall remove the grandfather condition from TOLL PAC service within the six month period.

Made, entered, and effective ________________________.

A party may request rehearing or reconsideration of this order pursuant to ORS 756.561. A request for rehearing or reconsideration must be filed with the Commission within 60 days of the date of service of this order. The request must comply with the requirements in OAR 860-014-0095. A copy of any such request must also be served on each party to the proceeding as provided by OAR 860-013-0070(2). A party may appeal this order to a court pursuant to ORS 756.580.