ORDER NO. 99-001

ENTERED JAN 06 1999

This is an electronic copy. Appendices and footnotes may not appear.

OF OREGON

UM 751 and UM 760

(Phase II)

In this order, the Commission grants two petitions for Extended Area Service (EAS). The two petitions are unique, in that they seek EAS across a LATA boundary. In docket UM 751, customers in the Scio exchange seek EAS with the Albany exchange. The Scio exchange is located in the Portland LATA, while the Albany exchange is located in the Eugene LATA. In docket UM 760, customers in the Huntington exchange seek EAS with the Ontario exchange. The Huntington exchange is in the Portland LATA, while the Ontario exchange is in the Boise LATA.

The Commission has reviewed the proposed rates, terms, and conditions for the two EAS routes and believes they are reasonable. The Commission has also reviewed customer survey results and, based on the entire record in this matter, believes that the interLATA EAS routes are in the public interest. Final approval of these routes, however, does not rest with this Commission. Two of the local exchange companies involved in this proceeding, U S WEST Communications, Inc. (U S WEST), and Malheur Home Telephone (Malheur) are prohibited under federal law from providing telecommunications services across LATA boundaries. Consequently, to allow these interLATA EAS routes, U S WEST and Malheur must obtain a waiver of the LATA restriction from the Federal Communications Commission (FCC).

The Commission directs U S WEST and Malheur to petition the FCC for a LATA waiver with regard to these two EAS petitions. The Commission is hopeful that the FCC will complete its review of the matter and grant the requested relief in time to allow toll-free calling at EAS rates for the interLATA EAS routes by October 2, 1999.

Procedural History

In Order No. 95-1168, the Commission recognized that requests for interLATA EAS pose different problems than intraLATA requests. First, the Commission noted that that the interLATA toll market is much more competitive than the intraLATA toll market. Second, the Commission recognized that Bell Operating Companies (BOC), including US WEST and Malheur, are generally prohibited from carrying telephone calls across LATA boundaries and that, under policies in effect at that time, new interLATA EAS routes required approval from Judge Harold Greene, a federal judge who presided over the AT&T divestiture litigation.

Because of these unique characteristics, the Commission adopted a two-part procedure for processing interLATA EAS petitions. As with other EAS requests, the Commission would first determine whether a community of interest exists between the exchanges to warrant the elimination of toll calling. See Order Nos. 89-815 and 92-1136. In addition to meeting those criteria, petitioners seeking interLATA EAS must also demonstrate that the proposed interLATA route is necessary to meet the critical needs of the customers because there is no adequate intraLATA alternative. The Commission adopted this additional requirement in part to reflect the competitive nature of the interLATA toll market. In evaluating the critical needs of customers, the Commission considers the customers’ access to emergency, dental, medical, professional, business, educational and governmental services.

Federal Legislation

Shortly after the Commission adopted the new interLATA EAS procedures in Order No. 95-1168, the United States Congress passed the Telecommunications Act of 1996. The Act, signed into law on February 8, 1996, supersedes the obligations and restrictions brought about by the AT&T divestiture. See 47 USC Sec. 601(a)(1), and (e). Consequently, the interLATA EAS waiver procedures before Judge Greene, as described in Order No. 95-1168, no longer exist.

The Act did not expressly provide any procedures for the waiver of LATA restrictions to allow interLATA EAS. Because of uncertainties as to if and how the FCC would process a LATA waiver request for EAS, the Commission reopened UM 189(1) for further investigation. After further comment, the Commission issued Order No. 96-206 setting forth policies governing LATA waiver requests.

Phase I Proceeding

During the reopened UM 189(1) proceeding, the Commission moved forward with its community of interest and critical needs determinations in the Scio and Huntington dockets. After public comment hearings in both exchanges, the Commission concluded that a community of interest existed between Scio and Albany and Huntington and Ontario. It further concluded that the proposed interLATA EAS routes were necessary to meet the critical needs of the Scio and Huntington petitioners. Accordingly, the Commission directed U S WEST and Malheur to pursue LATA waivers from the FCC. See Order Nos. 96-206 and 96-250.

In light of the FCC’s order, the Commission once again reopened UM 189(1) to reexamine its EAS policies. After further proceedings, the Commission issued Order No. 98-201 revising EAS procedures. The Commission agreed that its EAS standards should be modified to allow only nonoptional, flat rate EAS on interLATA routes in Oregon. The Commission believes that this modification will secure a LATA waiver from the FCC to allow implementation of the proposed interLATA EAS routes.

With the adoption of revised interLATA EAS policies, and the favorable community of interest and critical needs determinations, dockets UM 751 and UM 760 were consolidated for a Phase II Tariff Analysis to determine the rates for the new EAS routes.

PHASE II

On June 2, 1998, Michael Grant, an Administrative Law Judge (ALJ), held a prehearing conference to initiate Phase II proceedings in Salem, Oregon. Robert Shelton and Tom Barth, authorized representatives, appeared on behalf of Scio Mutual Telephone Association (Scio). Ben Harper, authorized representative, appeared on behalf of GVNW. Calvin Simshaw, attorney, appeared on behalf of CenturyTel of Oregon (CenturyTel). Sheila Harris, authorized representative, appeared on behalf of U S WEST. Dave Overstreet, authorized representative, appeared on behalf of GTE Northwest Incorporated. Teya Penniman, Attorney General, appeared on behalf of the Commission Staff.

In an interLATA EAS conversion, the Phase II proceeding is comprised of two primary events. First, as with other EAS conversions, the parties engage in a review of proposed rates and cost recovery for each affected local exchange carrier (LEC). Second, due to the unique requirement that customers of BOCs pay a nonoptional flat EAS rate, the Commission conducts a balloting of those customers to gauge the level of interest for the proposed interLATA EAS routes. The ballot results are not decisive, but rather advisory in nature. See Order No. 98-201. The Commission will then review the LEC filings and customer ballot results, as well as other evidence in the record, and determine whether the interLATA EAS conversion is in the public interest.

1. Proposed Tariffs and Cost Recovery

Pursuant to the procedural schedule, the four LECs serving the affected exchanges filed cost studies and proposed tariffs for the interLATA EAS routes. The LECs are CenturyTel, Malheur, Scio, and U S WEST.

Staff reviewed the telephone companies’ costs studies and proposed tariffs. After conducting discovery and the exchange of information, Staff entered into a stipulation with each company. No party filed an objection to the stipulations, which are set forth in Appendices A through D. The stipulated EAS rates for each of the four LECs are set out in Appendices E through H. On November 13, 1998, Lance Ball, a member of the Commission Staff, filed testimony in support of the stipulations.

In Orders No. 89-815 and 98-201, the Commission adopted ten rate design criteria that apply to interLATA EAS conversion. Staff states that the stipulated rates for all four LECs substantially meet these rate and cost recovery criteria and recommends that the Commission adopt them. The Commission addresses each rate design requirement separately.

Criterion 1: Flat EAS rates must be available for all EAS routes.

The stipulated EAS rates for all four LECs comply with Criterion 1. Each LEC has a flat rate available for both proposed EAS routes.

Criterion 2: A measured rate option must be available for all EAS routes.

This requirement does not apply to the two BOCs (U S WEST and Malheur) in this proceeding, due to LATA restrictions imposed by the Telecommunications Act of 1996, and the FCC. See Order No. 98-201.

The stipulated rates for the two LECs subject to this requirement comply with Criterion 2. Both CenturyTel and Scio have an existing measured rate option and propose to make the option available for the proposed interLATA EAS routes.

Criterion 3: A combination of flat local exchange service and measured EAS must be offered.

This requirement does not apply to the two BOCs (U S WEST and Malheur) in this proceeding, due to LATA restrictions imposed by the Telecommunications Act of 1996, and the FCC. See Order No. 98-201.

The stipulated rates for the two LECs subject to this requirement comply with Criterion 3. Both CenturyTel and Scio currently provide a combination of flat rate local exchange service and measured rate EAS. These LECs will make this combination available in the Huntington and Scio exchanges with the proposed interLATA EAS routes.

Criterion 4: Flat EAS rates should be asymmetrical between exchanges to reflect differences in the number of subscriber lines.

The stipulated rates for all four LECs comply with Criterion 4. CenturyTel uses an existing company-wide matrix of EAS rates which satisfies Criterion 4. Scio proposes a standard company-wide EAS charge that reflects the addition of the EAS route between the Scio and Albany exchanges. U S WEST and Malheur both propose the establishment of a nonoptional, flat rate EAS charge for the applicable EAS routes.

Criterion 5: One flat rate option should incorporate all EAS available to the customer.

The stipulated rates for all four LECs comply with Criterion 5. U S WEST and Malheur both provide a flat rate that is, in part, required by federal law. CenturyTel and Scio provide a flat option that incorporates all EAS available to the customer.

Criterion 6: Flat EAS rates must include a residential/business differential under which business customers pay a higher flat rate.

The stipulated rates for all four LECs comply with Criterion 6. Each of the companies charge a higher flat EAS rate to their business customers. All propose to substantially retain the business to residential rate ratio in their current tariffs.

Criterion 7: Measured EAS rates must be the same for business and residential customers.

The stipulated rates for CenturyTel and Scio comply with Criterion 7. Both companies charge the same measured rate to each of their residential and business customers. U S WEST and Malheur are prohibited from offering a measured rate to Albany and Ontario business customers due to federal restrictions. See Order No. 98-201.

Criterion 8: EAS rates must recover the costs of switching and transport and make a contribution to common overhead and the cost of the local loop.

The stipulated rates for four LECs substantially comply with Criterion 8. If the new routes are implemented, CenturyTel will experience a deficit of over $18,000 on its marginal conversion costs. This figure represents 0.4 percent of the company’s total Oregon EAS revenues. Neither CenturyTel nor Staff believes that additional increases to EAS or local rates are necessary due to the small loss incurred on the interLATA EAS expansion.

Criterion 9: Revenue shortfalls due to new EAS routes must be made up first from company-wide EAS rates, then from company-wide local exchange rates.

The stipulated rates for three LECs, CenturyTel, Malheur, and U S WEST, comply with Criterion 9. The rates proposed by Scio, however, violate the Commission’s

50 percent guideline in determining the monthly flat rate for EAS. See Order No. 91-1140. Under that guideline, the flat EAS rate should not exceed 50 percent of the total intrastate charge for flat rate local exchange and flat rate EAS combined. In other words, the flat EAS rate should not be greater than the local exchange rate.

The flat EAS rates proposed by Scio exceed this 50 percent rule. Under its rate proposal, customers may chose a combination of services with regard to the Albany exchange and its existing EAS routes to Stayton, Lyons, and Salem. For example, a customer can pay a monthly flat rate for the new EAS route to Albany ($13.00/residential; $19.11/business), plus the current monthly flat rate to existing EAS exchanges—Stayton, Lyons, and Salem ($11.65/residential; $17.11/business). A customer could also elect to pay a flat rate for either the Albany or existing routes, and select a measured rate for the other at $0.08/minute. Under most combinations, a customer’s EAS rates will be greater than the monthly local service rate ($11.50/residential; $13.75/business).

This rate balancing problem is caused by Scio’s difficulty in trying to reconcile a high toll revenue loss with a small customer base. The Commission adopts Staff’s recommendation that an exception be made to the 50 percent guideline for the Scio exchange. The Commission has limited jurisdiction over local exchange rate levels of cooperative telephone companies like Scio.

Criterion 10: EAS tariff proposals should be revenue neutral.

Under Criterion 10, the additional EAS revenues proposed should equal the sum of the cost shift attributed to the EAS conversion plus any additional costs for EAS deployment. The stipulated rates for all four LECs substantially comply with Criterion 10. Deviations from revenue neutrality are either very small or the result of a LEC’s decision to accept a net revenue loss.

2. Customer Balloting and Public Hearings

During the month of November, 1998, U S WEST and Malheur mailed their customers an advisory ballot prepared by the Commission informing them of the unique characteristics of interLATA EAS. The ballot also explained that, due to federal restrictions, Albany and Ontario exchange customers would be required to pay a nonoptional flat rate for the proposed EAS route. For Albany exchange residents, the proposed EAS rate to Scio is $0.14 per month for residential customers, and $0.20 per month for business customers. For Ontario exchange customers, the proposed EAS rate to Huntington is $0.35 per month for residential customers, and $0.50 per month for business customers.

To provide additional information and to answer customer questions, ALJ Grant conducted public comment hearings in Ontario and Albany on December 2, 1998, and December 10, 1998, respectively. At both hearings, Staff member Lance Ball made an informational presentation explaining the Commission’s interLATA EAS policy and requirements imposed by federal law. Mr. Ball also prepared and distributed a handout explaining the companies’ proposed EAS rates.

Only five customers attended the hearing in Albany; six attended the hearing in Ontario. Some of the customers testified that the proposed rates were reasonable and supported EAS implementation. Some had family or friends in Scio or Huntington and viewed the proposed rates as an affordable alternative to existing toll charges. Other customers opposed the EAS rates. In general, these opponents testified that they had little need to call either the Scio or Huntington exchange and did not anticipate a future need to do so. These customers felt strongly that any increase in their EAS rate was a charge for a service they would not use.

The Commission received similar input from the advisory customer ballot. A total of 2,637 Albany customers returned informational ballots to the Commission. Approximately 53 percent of those responding opposed EAS expansion to the Scio exchange, primarily due to the lack of a perceived need to call the Scio exchange. The remaining 47 percent favored EAS expansion to the Scio exchange, notwithstanding the nonoptional flat EAS rate. A total of 945 Ontario customers returned ballots to the Commission. Of those responding, about 70 percent opposed EAS expansion to the Huntington exchange. The remaining 30 percent favored EAS expansion.

Resolution -- Phase II

Based on the entire record in these proceedings, the Commission concludes that the two interLATA EAS routes should be implemented as proposed. The stipulated rates for all four LECs satisfy the rate design criteria for EAS conversion and are just and reasonable. Accordingly, the Commission adopts the stipulated rates and other provisions included in the stipulations between Staff and the LECs, subject to the terms of this order.

The Commission further concludes that the record, viewed as a whole, supports a finding that the proposed interLATA EAS routes are in the public interest and should be approved. A community of interest exists between the Albany and Scio exchanges and between the Huntington and Ontario exchanges. The interLATA EAS routes are necessary to meet the critical needs of Scio and Huntington exchange customers. These customers depend heavily on the Albany or Ontario exchanges for emergency, dental, medical, professional, educational, and governmental services. The implementation of these routes will provide a much needed service to customers.

In reaching this decision, the Commission acknowledges a certain amount of opposition to EAS expansion from customers in the Albany and Ontario exchanges. This opposition was expected for two reasons. First, given the size difference between the exchanges, many Albany and Ontario customers may perceive a lack of need to call the smaller petitioning exchanges. Indeed, the Commission has determined that both the Scio and Huntington exchanges lack sufficient business resources to support the needs of their own customers, let alone the needs of residents located in a larger neighboring exchange. Second, the Albany and Ontario customers will be required to pay a nonoptional flat EAS rate to the petitioning exchange. Given the federal LATA restrictions, the Albany and Ontario customers will lack a measured option for the interLATA EAS routes. See discussion, Order No. 98-201 at 3.

Due to these reasons, the Commission took efforts to mitigate the concerns of the Albany and Ontario customers. In addition to conducting a customer ballot, the Commission directed U S WEST and Malheur to develop interLATA EAS flat rates that identify toll losses (or costs) on a route-specific basis. Due to the unique nature of interLATA EAS, the Commission believes that it is appropriate to isolate costs for each route and establish a distinct EAS rate class. The Commission also ordered both companies to provide flexible billing to the Albany and Ontario customers. Under this billing method, U S WEST and Malheur must provide customers both flat rate and measured rate options on intraLATA EAS routes, and nonoptional, flat rate service on interLATA EAS routes. In other words, the flexible billing will enable the U S WEST and Malheur to maintain the Commission’s customer choice EAS billing policy for non-interLATA routes for customers in the target exchanges. The Commission believes that these measures will help balance the interests of customers in both the target and petitioning exchanges.

Accordingly, while the Commission is always reluctant to impose an unavoidable rate increase—particularly for those customers on fixed incomes—it believes that the EAS rates are reasonable to provide a valuable service to customers of both the petitioning and target exchanges. Furthermore, the Commission notes that the nonoptional, flat EAS rates imposed on customers of the Albany and Ontario customers are not permanent. While both U S WEST and Malheur are currently prohibited from carrying traffic across LATA boundaries, both can obtain such authority upon opening their local markets to competition and petitioning the FCC for approval under Section 271 of the Telecommunications Act of 1996. Once U S WEST and Malheur obtain such approval, the nonoptional, flat EAS rates will be eliminated.

CONCLUSIONS

Based on the record developed in these dockets, the Commission concludes that the proposed EAS routes between the Albany and Scio exchanges and between the Ontario and Huntington exchanges are in the public interest. U S WEST and Malheur are directed to pursue a LATA waiver to allow the interLATA EAS routes. If and when FCC approval is obtained, the Commission will provide additional information regarding customer notification, requirements for default service, and other matters necessary to allow implementation of the interLATA routes by October 2, 1999.

ORDER

IT IS ORDERED that:

1.  The petition filed by the Scio exchange for EAS with the Albany exchange (UM 751) is granted.

2.  The petition filed by the Huntington exchange for EAS with the Ontario exchange (UM 760) is granted.

3.  The stipulations entered between Staff and the four local exchange telephone companies, set forth in Appendices A through H, are adopted.

4.  U S WEST Communications, Inc., and Malheur Home Telephone shall promptly submit to the Federal Communications Commission a request for approval of a LATA boundary modification sufficient to allow each utility the ability to provide the proposed and existing EAS routes.

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.