ORDER NO. 99-038

ENTERED JAN 28 1999

This is an electronic copy. Appendices and footnotes may not be included.

OF OREGON

DISPOSITION: EAS POLICIES MODIFIED

Summary

After comment from industry representatives, rural customers, and other interested parties, we have modified EAS standards to allow these rural exchanges the ability to qualify for EAS if certain criteria are satisfied. These new standards are designed to permit a community of interest finding between non-contiguous exchanges where the EAS route is required to meet the critical needs of customers in the petitioning exchange.

Introduction and Overview

The Commission has long recognized the problem with out-dated telephone exchange boundaries. In many parts of the state, original exchange boundaries no longer correspond to community boundaries. Improved roads and highways, changes in local economies, and the general growth or decline of cities and towns have greatly modified the boundaries of what local residents view as their community.

To address this problem, we established procedures that allow telephone exchange customers the ability to request EAS to other exchanges to increase their toll-free calling area. To qualify for EAS, the customers of a telephone exchange must demonstrate a community of interest with the target exchange. This standard, used to ensure a sufficient degree of dependence or interdependence between exchanges, is measured primarily by a review of calling pattern data.

To avoid unlimited and chaotic EAS expansion, we also require that EAS petitions be limited to requests between contiguous exchanges. However, while it is important to ensure that the addition of new EAS routes proceed in an orderly fashion, this contiguity requirement has precluded certain communities from obtaining EAS to exchanges they heavily depend upon for basic goods and services. This problem is particularly frustrating for these exchanges for two reasons.

First, their inability to obtain the needed EAS routes is often caused by the same problem that EAS is intended to address—circumstantial placement of exchange boundaries. While some rural communities are fortunate to share a common boundary with a larger urban community, other rural areas (some of which are located closer to urban centers) are less fortunate because they are separated by a small intervening exchange with little or no centralized business. For example, the city of Mitchell is located some 45 miles from Prineville, yet the Mitchell and Prineville exchanges are contiguous and Mitchell exchange residents are able to call Prineville toll-free. On the other hand, the city of Long Creek lies just over 25 miles from John Day, but is separated from that exchange by the sparsely populated Mt. Vernon exchange. Due to that fact, the Long Creek exchange residents were unable to qualify for EAS under existing Commission standards and must continue to pay long distance charges for non-discretionary calls for medical and other essential services. See Order No. 97-301.

The second reason for frustration is the fact that these less populated rural exchanges are often more dependent on urban centers than other more populated exchanges. Due to the declining timber economy and overall urbanization of the state, many of the businesses that once operated in these rural communities have gone out of business or relocated to larger cities. No longer self-sufficient, these towns heavily rely on distant population centers for jobs and essential goods and services for their local citizens. Census data also shows that these areas tend to be some of the poorest in the state, thus increasing the need and desire for toll-free calling to critical areas.

For the reasons cited above, we decided to reevaluate existing EAS policies. At our November 3, 1998 Public Meeting, we adopted Staff’s recommendation to open docket UM 189(2) and initiate a notice and comment proceeding to determine whether policies should be modified to allow rural communities the ability to obtain EAS to non-contiguous exchanges in warranted circumstances. The following day, November 4, 1998, we distributed a Proposed Order that set out following standards that we believed would allow outlying exchanges the ability to obtain EAS to areas of critical need, while ensuring the continued orderly and limited EAS expansion.

 The Proposed Order included three primary parts. First, it set forth proposed standards that would permit a community of interest finding between non-contiguous exchanges. Second, it explained how petitions for non-contiguous EAS would be processed. Finally, the Proposed Order identified how the procedures would be applied to existing and future dockets. We restate those sections below.

1. Proposed Standards

The Commission will find that a community of interest exists between non-contiguous exchange if three criteria are satisfied. Those criteria, and the rationale supporting them, are as follows:

Meet existing community of interest criteria with target exchange.

In Order Nos. 89-815 and 92-1136, we adopted two calling related objective criteria to determine a community of interest. The first of those criteria, calling volume, requires that an average of 4 or more toll calls per line per month be placed between the petitioning and target exchange. The second criterion, customer distribution, requires that at least 50 percent of customers in the petitioning exchange make at least 2 toll calls per month to the target exchange.

A petitioning exchange seeking EAS to a distant population center should meet these calling data requirements with the non-contiguous exchange. This will ensure widespread support and need for the proposed interexchange route. A petitioning exchange that fails these calling standards will be allowed the opportunity to present evidence that the actual calling between the exchanges is greater than that reflected in the calling pattern data. Such evidence would include use of cellular phones, Feature Group A lines, internet e-mail, and other toll-avoidance practices.

EAS to non-contiguous exchange is necessary to meet critical needs of petitioning exchange customers.

In docket UM 189(1), we adopted a two-part procedure for processing requests for interLATA EAS. In addition to meeting the objective community of interest criteria, petitioners seeking interLATA EAS are required to demonstrate that the proposed interLATA EAS route is necessary to meet the critical needs of the customers because there is no adequate intraLATA alternative. See Order No. 95-1168.

Petitioners seeking EAS to a non-contiguous exchange should similarly be required to make a "critical needs" determination. That is, petitioners should be required to demonstrate that the proposed EAS is necessary to meet the critical needs of customers because of the lack of essential goods and services in their own exchange or in a contiguous exchange. In evaluating the critical needs of customers, we would consider the customers’ access to emergency, dental, medical, professional, business, educational, and governmental services.

The petitioning exchange is located within same county as target exchange.

In order to avoid chaotic EAS expansion, the petitioning exchange must be located within the same county as the non-contiguous target exchange. This requirement will help limit chaotic and unlimited EAS expansion, while ensuring the ability of outlying exchanges to obtain EAS to meet critical needs (i.e., governmental services). It will also help screen out cases where the desire for toll-free calling to a certain exchange is due to matters of convenience (i.e., Salem to Portland), rather than necessity.

2. Processing of Dockets

The current procedures for the processing of EAS dockets will continue with only a few minor changes. Those procedures are as follows:

Docketing

The procedures for establishing EAS dockets will remain unchanged. A petitioning exchange shall file a petition, signed by at least 25 percent of exchange customers, with the Commission. Once signatures are validated, a docket will be established to investigate the EAS request. A petitioning exchange seeking EAS to a non-contiguous exchange should also request EAS to all intervening exchanges.

Phase I (Community of Interest)

As with current practice, the Commission will first determine whether there is a community of interest between the petitioning exchange, intervening exchange(s), and target exchange(s) using existing standards. After docketing, Staff will prepare a data request and submit it the local exchange carriers (LECs) that serve the exchanges listed in the petition. Upon receipt of responses from the LECs, Staff will analyze the data and prepare testimony. If the request meets current objective community of interest standards, an Administrative Law Judge (ALJ) will issue a ruling adopting Staff’s findings and designating the petition to proceed to Phase II (Tariff Analysis).

If the request fails current objective standards, the ALJ will issue a proposed order. The proposed order will adopt Staff’s findings, and notify the petitioners of the opportunity to request a hearing to establish through demographic and other evidence that a community of interest exists with the target and intervening exchanges. If the petition is seeking EAS to a non-contiguous exchange that is located within the same county, the proposed order will also explain the standards set forth above and the additional requirement that petitioners must also make a critical needs showing for that non-contiguous exchange.

If a hearing is requested, petitioners will attempt to establish either: (1) a community of interest with the intervening exchange and, if necessary, the non-contiguous exchange, based on demographic information; or (2) that a community of interest exists with the non-contiguous exchange and that the proposed EAS route to the non-contiguous exchange is necessary to meet the critical needs of customers because of the lack of essential goods and services in a contiguous exchange. If the Commission concludes that petitioners have satisfied either requirement and that other applicable criteria have been meet, it will issue an order finding a community of interest between the exchanges and designating that the petition proceed to Phase II.

If the Commission finds that a community of interest exists between non-contiguous exchanges under the standards set forth in this proposed order, it will also find that a community of interest exists between the petitioning exchange and intervening exchange(s). This will avoid customer confusion as to long distance calling areas. Otherwise, a call to a neighboring exchange would be more expensive than a call to a distant one. While this is contrary to Commission policies against granting EAS between exchanges that lack a sufficient degree of dependence or interdependence, the costs associated with the additional EAS route would be relatively minor, as there is little toll calling being placed between the exchanges.

Phase II (Tariff Analysis)

Phase II procedures will remain unchanged. All successful petitions will be grouped with other petitions that have completed Phase I processing by August 1 of each year. The entire group of dockets will be processed jointly for cost and rate purposes.

3. Application of Standards

The Commission will apply these proposed standards only in exchange-by-exchange EAS cases. The Commission will not apply these criteria in any EAS Region expansion docket.

The Commission also will allow petitioners who previously failed to obtain EAS due to the presence of a small intervening exchange to request the reopening of their respective dockets for further proceedings consistent with the order. These dockets include UM 806 - Oakridge, UM 841 - Long Creek, and UM 851 - Monument. Within 30 days from the date of a final order in this investigation, these petitioners may request a hearing to establish that their petition satisfies the conditions set forth in the order to allow EAS to a non-contiguous exchange.

 Comments

GTE opposes the expansion of EAS to non-contiguous exchanges. It believes that the Commission should allow competitive markets to deliver the services that customers desire. It contends that such expansion of EAS will perpetuate the "implicit" subsidies that the Telecommunications Act is designed to end. By spreading the cost of expanded local calling through the EAS charge, GTE states that high volume users are subsidized by low volume users. Because EAS is two-way, GTE points out that the problem with implicit subsidies is further aggravated as target exchange customers will be forced to share EAS expansion costs when they may see little or no benefit from the service.

GTE notes that customers have other alternatives than toll calling to distant exchanges. These alternatives include wireless services, Feature Group A lines, and Internet E-mail. Given the existence of such options, GTE contends that there is no need for a regulatory mandate setting the price and conditions for telephone traffic between one exchange and another, especially if they are not contiguous. It adds that continuing implicit subsidies through mandatory EAS will distort market entry decisions of potential new competitors using newer technologies, including cable modems and low orbiting satellites. Because these potential competitors are evaluating which markets to enter, GTE believes that the mandatory flat rate pricing supported by implicit EAS subsidies may cause these new providers to bypass the market entirely.

GTE believes that the Commission should allow companies to develop local and discount calling plans designed to meet customer calling needs. GTE states that it is in the process of reviewing and designing new local calling plans tailored to meet the needs of customers in Oregon. It does not believe that such plans can compete effectively against subsidized EAS rates.

If the Commission decides to amend EAS Criteria, GTE contends that the other modifications should be made. First, before EAS is approved to an non-contiguous exchange, GTE believes that there should be a clear indication that the intervening exchange does not provide the community of interest required by the requesting exchange. Thus, calling records should be examined for the intervening exchanges as well as between the requesting and target exchanges. GTE also contends that EAS should not be granted to the target exchange if there is greater level of calling to the intervening exchange, and that calling pattern data must show that at least 50 percent of the callers from the requesting exchange make at least two toll calls a month to the target exchange.

Second, GTE contends that calls between the intervening exchange and both the target and requesting exchanges should not automatically be included in the expanded local calling area. Rather, GTE argues that the Commission should use existing criteria for evaluating EAS between contiguous exchanges based on the specific needs of the individual communities involved.

Third, GTE notes that expanded EAS will result in greater trunking and switching costs to maintain acceptable service levels. Therefore, GTE requests that the Commission make clear that local exchange carriers will be permitted full cost recovery and revenue neutrality per Criterion 8 and Criterion 10 outlined in docket UM189, Order No. 89-815. GTE maintains that such cost recovery should include lost toll and access revenues that would otherwise have been realized.

Finally, GTE states that expanded EAS may require GTE to pay additional reciprocal compensation to other carriers for termination of traffic. This includes calls to Internet Service Providers (ISPs) located in the target exchange that are served by another carrier. Such traffic subject to reciprocal compensation payments must be included for recovery in EAS rates caused by the mandatory expansion.

Oakridge, Ukiah, and Monument exchange customers endorse the proposed modifications that would allow them the ability to obtain EAS to their county seats. Most customers noted the tremendous need to call their respective county seats due to the number of essential goods and services located there. In addition to county governmental services, these larger metropolitan centers also provide the only available medical, dental, and emergency services, as well as other professional business services. These county seats also provide essential goods to these customers, including groceries, over-the-counter drugs, building materials, and ranching supplies. For these reasons, the customers are anxiously awaiting the opportunity to renew efforts to obtain EAS to these areas of critical needs.

Commission Discussion

Current EAS policies have been very successful in bringing expanded toll-free calling to almost all Oregonians. Under these practices, the Commission has been able to approve a significant number of EAS routes without dramatic increases in local rates. At the same time, however, Commission policies have created a small number of anomalies in the EAS landscape. Certain rural exchanges have been unable to obtain toll-free calling to areas of critical goods and services.

We share GTE’s desire for a competitive solution to this problem. The Commission has always encouraged telecommunication carriers to develop and offer new and innovative services to help meet the needs of telephone customers in Oregon. The fact remains, however, that few if any residential customers in the state have benefited from local exchange competition. Almost exactly three years ago, Congress enacted the Telecommunications Act of 1996 with hopes of opening the local markets to competition. Since that time, we have certified over 100 competitive providers of local service and approved an equal number of interconnection agreements. Yet, as another year passes, almost all Oregonians have but one choice for residential local service—the incumbent provider.

This lack of choice is even more frustrating for rural customers, as the incumbent providers are failing to invest in improving the telephone service in rural communities. We have recently decided to hold a series of hearings to investigate the complaints from rural communities about this lack of investment. See Public Meeting Minutes, January 5, 1999. Incumbent providers have also failed to bring new services to rural exchanges. Despite assurances that CLASS services would be available to all customers, incumbent providers have yet to deploy these services in several rural exchanges.

We also do not agree that alternatives such as Feature Group A lines, wireless services, and Internet e-mail are legitimate alternatives to EAS. While Feature Group A services provide customers with LATA-wide calling, its cost of approximately $265-300 per month is prohibitive for most residential customers. Wireless services are becoming more common and may soon be an competitive choice to landline service in urban areas. The wireless coverage, however, is not as widespread in rural areas—especially eastern Oregon—and thus creates reliability concerns. E-mail is also becoming more and more common, even in rural exchanges. Many rural customers, however, must make long distance calls to connect to an ISP, negating some of the cost savings from using the alternative service. Furthermore, not all business and residential customers can be contacted via the Internet, and the receipt and delivery of messages between those who are connected electronically is often unpredictable.

For these reasons, we are unwilling to wait for a competitive response to this problem facing the rural exchanges. The EAS standards should be modified to help eliminate the irrationalities in the EAS process and provide an opportunity for rural customers to seek EAS to exchanges where essential goods and services are located. In making this decision, we acknowledge GTE’s concerns about the continuation of implicit subsidies between customers and its argument that such subsidies may distort market entry decisions of potential competitors. However, concerns about cost shifts from high-volume to low-volume callers are mitigated by the availability of a measured rate for EAS service. While high-volume users will no doubt benefit from a flat rate for unlimited EAS calling for any new routes approved under these standards, low-volume customers will have the option to select a measured rate and will be billed a discounted rate for each minute of calling. Moreover, given that these new policies are designed to benefit a handful of sparsely populated rural exchanges, we do not believe that the potential for a few new EAS routes to serve these customers will distort the market entry decisions of satellite-based service providers and other potential competitors.

After review of the comments, however, we agree with OTA and GVNW that the modified standards should not be limited to petitioning and target exchanges located in the same county. This requirement was intended to prevent unlimited and chaotic expansion of EAS, and to help eliminate cases where the desire for toll-free calling to a certain exchange is due to matters of convenience (i.e., Salem to Portland), rather than necessity. Upon further consideration, however, we now agree that this requirement would only act to perpetuate the artificial boundaries that divide communities of interest. Telephone exchange boundaries are entities unto themselves. They do not correlate to political boundaries, including county boundaries. Indeed, exchange boundaries often encompass portions of more than one county. We agree with OTA and GVNW that a petitioning exchange should not be denied EAS to an exchange where essential goods and services are located simply because of the existence of a county line.

We do not believe that the elimination of this standard will lead to unlimited EAS expansion. As GVNW points out, the "critical needs" standard should be sufficient to ensure that EAS expansion to a non-contiguous exchange is based on necessity rather than convenience. It is difficult to imagine how, for example, that Salem exchange customers could meet the "critical needs" requirement for the Portland exchange. Salem exchange customers have local access to emergency, dental, medical, and other essential services and, therefore, would be unable to show that EAS to Portland was necessary to obtain these services.

We decline to similarly eliminate the requirement to include the intervening exchange in any new expanded calling area under these standards. As stated above, the inclusion of the intervening exchange will avoid customer confusion as to long distance calling areas. Otherwise, a call to a neighboring exchange would be more expensive than a call to a distant one. Although GVNW and GTE claim that the costs of including the intervening exchange could be significant, our prior experience with EAS expansion does not support this. Many EAS expansions require additional trunking and switching capacity to handle increased traffic between the exchanges due to calling stimulation. Nonetheless, the largest percentage, by far, of EAS costs has always been loss of toll revenues. Therefore, we believe that, as a general rule, costs associated with the additional EAS route to the intervening exchange will be relatively minor. Indeed, the lack of toll calling to an intervening exchange is often the reason why many rural exchanges have been unable to obtain EAS to larger urban areas. Furthermore, the lack of essential goods and services available in the intervening exchange will diminish the amount of calling stimulation that is experienced with other EAS conversions.

Accordingly, with the exception of the "same county" requirement, the Commission adopts the proposed modification to EAS standards as set forth in the proposed order. In doing so, we clarify that any additional costs due to EAS expansion under these modified standards will be subject to recovery by the local exchange companies in the same manner as other EAS implementations. We decline to address GTE’s concerns regarding the possible increase in reciprocal compensation the company may be required to pay another local exchange carrier due to Internet traffic. GTE is aware of the ongoing jurisdictional determination of ISP traffic. The Commission will consider that issue in other pending dockets.

Order

IT IS ORDERED that the Commission adopts new standards and procedures for the processing of petitions seeking extended area service to non-contiguous exchanges as set forth in this order. Under the new standards, the Commission will find a community of interest between the two exchanges where the petitioning exchange establishes: (1) a community of interest exists between the two exchanges under existing standards; and (2) that the EAS route is necessary to meet the customers’ critical needs due to the lack of essential goods and services located in their own exchange or in a contiguous exchange. Within 30 days from the date of this order, petitioners who previously failed to establish EAS due to the presence of a small intervening exchange may request the reopening of their respective dockets for further proceedings.

Made, entered, and effective ________________________.