The current WUSF system creates two perverse incentives.
1. Investment
The current WUSF mechanism contains little or no incentive to invest in modern plant and equipment, especially in high-cost areas. Because TSLRIC rates were set ten or more years ago, the net effect has probably discouraged investment in Wyoming’s network.
When the Commission first implemented the 1995 statute, it established rates for essential services. In many cases the rates were set based on TSLRIC studies, which used computer models that estimate the loop and switching costs of hypothetical plant construction.156 TSLRIC estimates can overstate actual investment, particularly when networks are highly depreciated or poorly maintained. Rates set on a TSLRIC basis can be higher than those based on a carrier’s actual investment and its service quality.
The key issue, however, is how rates change over time. Since the Commission initially set essential service rates in the late 1990s, we understand they have been effectively capped. Under “rate-of-return” type regulation, a carrier that fails to invest in plant finds that its authorized “revenue requirement” is reduced, and eventually its rates are reduced. Under “price cap”
regulation, however, a carrier can fail to invest, allow its network degrade, and continue to charge customers at the capped rate. Moreover, WUSF support is based on the carrier’s rates. Therefore a Wyoming carrier that fails to invest can continue charging its current rates indefinitely, and it can continue receiving high WUSF indefinitely.
In sum, the existing WUSF support mechanism may have contributed to a historical reduction in network investment by some carriers. When their rates for essential services are capped, and when those capped rates generate support indefinitely, carriers have little financial incentive to upgrade or even properly maintain their networks.
156
2. High Rural Essential Rates
The existing WUSF mechanism contains an incentive to maintain high rates, at least for customers receiving WUSF support. To the extent that a carrier geographically deaveraged its rates in the 1998-2000 period, that carrier has an incentive today to leave rates deaveraged in that manner. Moreover, except for the fact that the Commission has imposed a cap on essential service rates, carriers have an incentive to raise those rates.
To illustrate, consider Carrier A that receives WUSF of $2.00 per line per month. If A were to reduce its gross rate by $1.00, its WUSF support would decline by an equal amount. A’s
competitiveness would not change, since its customers would continue to pay the same net bill amounts. The only effect of the rate reduction would be reduced WUSF support.157
This dynamic illustrates the close general connection between USF policy and regulatory policy regarding rates. Undesirable incentives can arise where USF policy is not well adapted to regulatory policy. More specifically, to the extent that Wyoming has decided to deregulate rates, it limits its own ability to base effective USF policy on rates.
IV. Other Concerns and Short-Term Recommendations
This section presents three recommendations that are within the current authority of the Commission and that the authors suggest be taken over the next year. Later sections discuss longer term changes that require reconceptualization of the program and almost certainly would require legislative action.
A. Simplify the process for calculating the statewide average cost and the rate benchmark
The authors recommend that the Commission terminate the annual calculation of statewide essential service rates. We recommend that the Commission freeze the state wide rate at the 2010 level of $25.74.158 This action would add stability to the current support mechanism and reduce the controversy arising from annual calculations. Support based on a frozen benchmark should be accepTable Erom now to 2015 when the statutory sunset takes effect.
As an alternative, the Commission could freeze the state wide rate after first making
adjustments for recent changes in federal USF support. One recent change increased federal support for CenturyLink as a result of the Wyoming Commission’s petition for extraordinary support. The amount of the support is known and is currently measurable. The effect of the additional
CenturyLink FUSF would likely be to reduce WUSF support to CenturyLink and increase support to
157
Conversely, if essential service rates were not capped, A could increase its gross rate by $1.00, and its WUSF would increase by the same amount.
158
other carriers. Although such an adjustment for recent events would be reasonable, we do not recommend it because of the great uncertainty created by the November, 2011 CAF Order.
A second alternative would be to continue to calculate the statewide average rate annually, but to simplify the task by narrowing the input sample to cases where rates for essential service are clear and undisputed. For example, as noted above, the Commission could exclude customers of Bresnan/Cablevision/Optimum since that company does not offer a stand-alone essential voice service.
Each of these options would reduce the number of substitutions and assumptions necessary for the Commission to develop a WUSF benchmark. The first two options also rely less on
confidential data that cannot be shared with public.