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THE STATE CORPORATION COMMISSION
OF THE STATE OF KANSAS

Before Commissioners: Timothy E. McKee, Chair

        Susan M. Seltsam

        John Wine

In the Matter of a General Investigation

Into Competition within the Telecommunications

Industry in the State of Kansas

 Docket No. 190,492-U

94-GIMT-478-GIT



ORDER

NOW the above-captioned matter comes before the State Corporation Commission of the State of Kansas (Commission). Having examined its files and records, and being duly advised in the premises, the Commission finds and concludes as follows:

SUMMARY OF CONTENTS

I. Background

II. Summary of Parties' Positions

III. Findings of Fact and Conclusions of Law

Glossary

Attachment A Link updated 30.Dec.1996

Attachment B Link updated 30.Dec.1996

I. BACKGROUND

A. HISTORY

1. On April 22, 1994, the Commission issued an Order establishing a generic docket "to investigate the level of competition for each regulated or flexibly regulated telecommunications service within the telecommunications industry and other issues related to competition within the telecommunications industry." (Order dated April 22, 1994, at 14).

2. On August 17, 1994, the Commission issued an Order indicating deliberation of issues in this docket would be accomplished in two phases. Phase I would involve certain policy determinations pertaining to competition in the telecommunications industry. Phase II would involve implementation issues, including service pricing and costing issues. (Order dated August 17, 1994, at 2).

3. On May 5, 1995, the Commission issued its decision in Phase I. The Commission determined those changes in state regulatory structure necessary to provide a timely yet orderly transition to a competitive local exchange telecommunications market.

4. On April 4, 1996, the Commission issued an Order scheduling the Phase II competition hearing to be held August 12 - 15, 1996.

5. On April 4, 1996, the Commission issued another Order in this same docket and determined that a fund should be created to administer the collection and distribution of universal service support payments including a Lifeline program. Such fund should be called the Kansas Universal Service Fund (KUSF). The Commission stated that high cost rural service, low income customers who are affected by rate rebalancing, and residential customers who could experience rate shock should be supported by the KUSF. (Order dated April 4, 1996, at 6, 12). The Commission determined the need to have a fund administrator who should be a neutral third party responsible to the Commission. The Commission stated "Universal Service" is the group of services that local exchange companies (LECs) and alternative LECs (ALECs) offer to customers. "Basic Service" is a list of what consumers can expect when obtaining basic telephone service. (Order dated April 4, 1996, at 16). The Commission also determined that it is appropriate to accomplish a defined rebalancing of rates. (Order dated April 4, 1996, at 6-7).

6. The Commission further determined that it should continue its policy of requiring statewide average toll rates. However, the Commission noted that with the reduction in access and the similarity of the access charge levels among LECs, the pressure to deaverage rates should be relieved. (Order dated April 4, 1996, at 16).

7. On May 10, 1996, the Commission issued an Order on reconsideration in which it determined that various issues in the April 4, 1996 Order would be addressed in the Phase II proceeding: rate rebalancing, access rate reduction, end user common line charge (EUCL), assessment on toll minutes of use (MOU), additional rate rebalancing, subsequent rate rebalancing, support recipients, initial support, and managing future support.

8. On June 17, 1996, the Commission issued an Order scheduling four public hearings to be held across the state. The Commission determined that public hearings on the issue of rate rebalancing were necessary because of the potential for increased rates for local telephone service and decreases in long distance rates as a result of the revenue neutrality mandated by House Bill 2728. (HB 2728, State Act or Kansas Act). The public hearings were also necessary for the purpose of receiving public comment from telecommunications customers with regard to the proposed rate changes and other relief sought. The Commission directed all telecommunications companies to notify their customers of the hearings in the form of a billing insert during the July 1996 billing cycle and a newspaper advertisement in newspapers having general circulation in the counties where the telecommunications companies provide service.

9. On June 26, 1996, the Commission issued an Order amending the June 17, 1996 Order and determined that the LECs should generate an affidavit listing the newspapers and counties in which the advertisement was placed and the date on which the advertisement was published.

10. On July 1, 1996, the Commission issued an Order and determined that although Sections 3(c) and 5(b) of the State Act direct the Commission to initiate proceedings to adopt guidelines in regards to the issues outlined in each section, the Commission currently has open dockets which address such issues (Docket Nos. 190,492-U and 191,206-U). The Commission determined that a proceeding to adopt guidelines regarding universal service and rural entry requirements should be consolidated into Docket No. 190,492-U and a proceeding to adopt guidelines regarding quality of service should be consolidated into Docket No. 191,206-U.

11. On August 7, 1996, CMT Partners, Inc., AirTouch Cellular of Kansas, Inc. and Topeka Cellular Telephone Company, Inc. (collectively referred to as the "Wireless Providers") petitioned to intervene in the present docket for the limited purpose of: a) cross-examining witnesses; and b) filing a brief on issues relevant to wireless telecommunications service providers which arise during the proceedings. The Wireless Providers asserted that they sought intervention pursuant to K.A.R. 82-1-225(a) or K.A.R. 82-1-225(b). On August 12, 1996, the Commission issued a bench ruling granting intervention to the Wireless Providers.

12. On August 12, 1996, Wamego Telephone Company, Inc. (Wamego Telephone) filed an Affidavit demonstrating compliance with publication of the newspaper notice of the public hearing. On August 13, 1996, Moundridge Telephone Company, Inc. (Moundridge Telephone) filed a similar Affidavit. On September 5 and 17, 1996, Sprint Communications Company, L.P. (Sprint) and United Telephone Company of Kansas (United) (collectively referred to as "Sprint/United") filed their Affidavit and on September 20, 1996, Southwestern Bell Telephone Company (SWBT) filed its Affidavit demonstrating compliance.

B. PHASE II HEARING/APPEARANCES

13. The technical hearing was held August 12 - 15, 1996, with the Commission presiding. SWBT appeared by Michael C. Cavell and William R. Drexel; the Independent Telecommunications Group, Columbus, et al. (Columbus) appeared by Thomas E. Gleason, Jr.; the State Independent Alliance appeared by Mark E. Caplinger and James M. Caplinger; Sprint/United appeared by Stephen D. Minnis; AT&T Communications of the Southwest (AT&T) appeared by Robert A. Fox and Dana Bradbury Green; MCI Telecommunications Corporation (MCI) appeared by Michael Lennen; CompTel of Kansas (CompTel) appeared by James R. Roth; Kansas Cable Telecommunications Association (KCTA) appeared by Victor A. Davis, Jr.; Kansas City Fiber Network, L.P. (KC Fiber) and Multimedia Hyperion Telecommunications (MHT) appeared by Mark P. Johnson; KIN Network of Salina appeared by Jay Emler; the Citizens' Utility Ratepayer Board (CURB) appeared by Walker Hendrix and Edward E. Peterson; CMT Partners, Inc. (CMT), Topeka Cellular Telephone Co., Inc. (Topeka Cellular) and AirTouch Cellular of Kansas, Inc. (AirTouch Cellular) appeared by Marc E. Elkins; the Commission Staff (Staff) and the public generally, appeared by Eva Powers, Janette Corazzin and Marianne Deagle.

14. On August 13, 1996, Mark Johnson, counsel for Sprint Spectrum, L.P. (Sprint Spectrum), entered his appearance and orally moved its intervention. No party voiced objection and the Commission granted such intervention.

C. PETITION FOR APPROVAL AND ADOPTION OF STIPULATION AND AGREEMENT FILED BY COLUMBUS AND STATE INDEPENDENT ALLIANCE

15. On December 2, 1996, Columbus and State Independent Alliance (collectively referred to as "Petitioners") filed a Petition for Approval and Adoption of Stipulation and Agreement. The Stipulation and Agreement (S&A) was adopted by thirty-three (33) rural telephone companies providing local service in the state of Kansas. Petitioners stated that the S&A "provides for equitable and nondiscriminatory recovery from the stipulating parties' customers of these parties' contributions to the KUSF." (Petition at 1). "The terms of the S&A will limit and reduce possible increases in charges to customers of rural telephone companies for the preservation and advancement of universal telephone service at reasonable and affordable rates." (Petition at 1-2).

16. Petitioners asserted that the S&A's purpose is principally to provide contributions to the KUSF from rural telephone companies, and to recover such contributions from their customers, on a per-line basis applicable equally to all such companies and ratepayers. Petitioners stated "it is unclear that the legislature intended rural companies with low local service rates to increase those rates by $1.00 per month and additionally to impose the full scope of charges on their customers necessary to recover these companies' KUSF contributions." (Petition at 5). Petitioners concluded that in order to address the issue of multiple recovery from customers the S&A proposes, for those companies effectively required to raise their local rates to the statewide average, that customer charges for recovery of KUSF contributions be recognized as rate increases complying with the requirements of Section 6(d) of the State Act.

D. LEGISLATION

17. State and federal telecommunications laws were enacted this year in response to changes occurring in the telecommunications arena nationwide.

18. The Telecommunications Act of 1996 (Federal Act) establishes a pro-competitive, deregulatory policy framework for telecommunications. Generally, the Federal Act opens local telecommunications to competition by establishing ground rules for carrier interconnection and Universal Service; preempts State and local entry barriers; removes the remaining line-of-business restrictions in the Modification of Final Judgment and authorizes utility entry into telecommunications.

19. The State Act establishes a framework that calls for the implementation of competition in compliance with the new Federal Act and in a manner which accommodates the interest of Kansans. The State Act declares a public policy of ensuring access to a first class telecommunications infrastructure at an affordable price; ensuring consumers receive benefits of competition; promoting access to a full range of telecommunications services that are comparable in both urban and rural areas; advancing development of infrastructure that is capable of supporting public safety, telemedicine, distance learning, access to the Internet, etc.; and promoting protection of consumers from fraudulent business practices.

20. The primary action items of the State Act call for: establishment of quality of service standards; establishment of a KUSF; establishment of a Kansas Lifeline Service Program (KLSP); establishment of a funding mechanism to provide telecommunications equipment for persons with special needs and funding for the Dual Party Relay Services for speech and/or hearing impaired; establishment of regulatory reform plans for LECs; implementation of a discounted toll plan for use in accessing the Internet in areas where a local Internet provider is not yet located; and adoption of any additional guidelines that are necessary to parallel the federal standards in "slamming" enforcement.

21. The Commission is charged with oversight and implementation of the State Act. Addressed in the Competition Docket's Phase II are the issues of the KUSF, KLSP, reductions in access charges, regulatory reform plans for LECs, consumer protection and information.

II. SUMMARY OF PARTIES' POSITIONS

A. KUSF

1. RATE REBALANCING

22. SWBT proposes to increase local rates by $4.50 over three years to rebalance as required by the State Act. According to SWBT, this rebalancing proposal: a) will help keep the KUSF small and thus sustainable (approximately $35 million initially); b) will provide a larger per minute toll rate reduction than otherwise would occur with a larger KUSF; c) is consistent with prior actions at the federal level; and d) is appropriate in light of the increasingly competitive local service market. (Cooper, Tr. at 2151-47 to 2151-48).

23. According to SWBT, revenue neutral rate rebalancing would be accomplished by: reducing intrastate switched access rates to the interstate level over three years; imputing the switched access reductions into SWBT's intraLATA toll service; increasing residence and single-line business local exchange service by $4.50 over three years ($1.50 per year); increasing local coin service to $.35 per call; eliminating the free directory assistance call allowance and the HNAP (Home Numbering Area Plan) offset associated with directory assistance; eliminating free directory assistance calling from coin phones; establishing a Lifeline Service Program for Kansas consumers; and recovering any revenue shortfall as a result of revenue neutral rate rebalancing from the KUSF. (Brown, Tr. at 1840-4 to 1840-5).

24. SWBT states the $4.50 increase for both business and residential customers when fully phased in would offset approximately $58.8 million of the access and toll decrease for SWBT. SWBT also suggests that other phased in local exchange rate changes for coin and directory assistance would offset an additional $7.7 million of the toll and access decrease. (Cooper, Tr. at 2151-60 to 2151-61).

25. Sprint/United state the Commission rebalance local rates, dollar-for-dollar, to bring exchange prices in line with the federal benchmark affordable price. Sprint/United maintain if the Commission does not completely rebalance rates during any transition to cost-based prices, the KUSF should adopt a support plan that mirrors the Federal Communications Commission (FCC) plan, except that the KUSF would provide for contributions from all intrastate carriers based on intrastate revenues. (Harper, Tr. at 2633-18).

26. Staff proposes to initially rebalance local and access rates to reduce the intrastate access rate to the interstate access rate based on November 1, 1996 rate levels. Staff recommends that Billing and Collection rates for independent local exchange companies (ILECs) be reduced $.05 per message since they also provide substantial support to rural areas. This reduction is included in Staff's KUSF calculations. Staff includes all business lines in the rebalance calculation rather than excluding some select business services. (HB 2728 § 6(c); Lammers, Tr. at 2966-15).

27. Staff proposes that LECs increase their local service rates by an amount approximately equal to 14 percent of their local service revenues. The LECs would keep that amount rather than paying it into the KUSF and receiving a payment which includes an offset of that amount from the fund. Staff's plan can be summarized as follows:

a) SWBT's KUSF assessment would be $4.55 per access line at the end of three years. This amount is large enough to remove SWBT as a recipient of the KUSF. United would also rebalance $4.55 to its customers. For the ILECs, the estimate is an average of $1.72 per access line. (Lammers, Tr. at 2966-15).

b) LECs would avoid further KUSF contributions unless the percentage of assessment reached 14.1 percent. (Lammers, Tr. at 2966-16).

c) Companies defined as telecommunications carriers, including LECs providing toll service, and wireless providers would be assessed an amount equal to 9 percent of their retail revenues. The assessment amounts would be paid into the KUSF. (Lammers, Tr. at 2966-17).

d) Staff's proposal would reduce the size of the KUSF from $111 million to less than $30 million.

e) Staff asserts its proposal is equitable and non-discriminatory since all providers of telecommunications services contribute to universal service, even though the larger assessment on local revenues is not paid into the fund, but is retained by the company and off-set against the amount the company otherwise would receive.

28. AT&T asserts that the Staff and SWBT plans leave all subsidies implicit to SWBT and violate 47 U.S.C. § 254(c) of the Federal Act. Section 254(c) sets guidelines and accounting standards to prevent cross-subsidization of the competitive services by non-competitive services. (AT&T Post-Hearing Brief at 11).

29. MCI's position is that "each telecommunications carrier, telecommunications public utility and wireless telecommunications service provider be required to pay into the fund." (Klaus, Tr. at 3121-9). MCI does not recommend a specific rate for local service. However, MCI maintains that should the Commission deem it appropriate to rebalance local rates (as authorized by the Kansas Legislature) or establish an EUCL as previously decided in the Commission's April 4, 1996 Order, local exchange rates should not exceed the lower of the nationwide average rate of $18.00 or total service long run incremental cost (TSLRIC). (Klaus, Tr. at 3121-5).

30. MCI argues that if SWBT is not drawing from the KUSF, as proposed by Staff, the KUSF will not be paying any support for rural exchanges to SWBT nor to any ALEC serving residential customers in those exchanges. As a consequence, the potential for effective competition to serve higher cost areas in SWBT's service territory is suppressed, if not extinguished, and it does not achieve the competitive neutrality required by the Kansas Act. (MCI Post-Hearing Brief at 14).

31. The ILECs state that in the case of LECs other than rural telephone companies, rebalancing can be accomplished without demand on the fund by allowing reasonable local rate increases. (Krehbiel, Tr. at 2528-6).

32. KCTA asserts that it is critical that the Federal and State Acts be implemented in the most direct, accountable, and competitively neutral manner. This requires that all carriers pay on an equitable basis and have the opportunity to receive support from the fund. (Kravtin, Tr. at 2455-54).

33. KCTA also asserts that under Staff's proposal the incumbent LECs would not be required to make explicit payments into the KUSF unless the assessment rate on retail billed revenues for the other participants rises above 14.1 percent. Permitting some carriers to make "in-kind" contributions or some other form of non-explicit contribution is discriminatory when all others must make explicit payments to the fund. In order to be equitable and non-discriminatory and to have the fund work properly, all contributions by each and every carrier should be explicit in nature. (KCTA Post-Hearing Brief at 20).

34. KC Fiber states that under Staff's proposal a nine percent assessment on retail revenues would be paid into the KUSF by toll providers, wireless providers and "others." Incumbent LECs, such as SWBT and United, would not have to make any contribution to the KUSF for their local revenue or other revenue (excluding toll). KC Fiber contends that Staff's proposal does not state that ALECs are included in the definition of "others." ALECs are required to make a contribution to the KUSF for their local revenue and other revenue. KC Fiber asserts if that is the case, the incumbent LEC would have a considerable advantage over competitors. (Hollingsworth, Tr. at 3114-8 to 3114-9).

35. Sprint Spectrum argues that it should be exempt from contributing to the KUSF because of federal preemption. (Sprint Spectrum Post-Hearing Brief at 4).

36. The Wireless Providers argue that Staff's plan confuses and intermingles the concepts of rate rebalancing and support for universal service in a manner not permitted under the statute. According to the Wireless Providers, Staff's plan fails to satisfy the statutory requirement of Section 9(b) of the State Act because it excludes LECs from contributing to the KUSF. (Wireless Providers Post-Hearing Memorandum at 2-3).

37. CURB states that revenue neutrality for each of the three years of rate rebalancing should be established using base year (Year 1) revenues for the twelve months ending September 30, 1996:

a) Prior to any increases in basic local rates, the Commission should first authorize increases in other "local residential and business service rates" as part of the revenue neutrality element of rate rebalancing. (Ostrander, Tr. at 2684-19).

b) For Years 2 and 3 of rate rebalancing, any subsequent growth in other "local residential and business service rates" which were not included in Year 1 rate rebalancing should be authorized as offsets to any proposed increases in basic local rates (and if there are none then these should offset the KUSF).

c) For Sprint/United, the Federal Universal Service High Cost Funds (FUSHCF) should be directly offset against the incremental cost of basic local service prior to determining the amount of funds going to the KUSF.

d) For ILECs, if FUSHCF are not used to directly offset the incremental cost of basic local service, then the dollars allocated to KUSF should be reduced by these amounts.

e) If Yellow Page revenues are not used as a direct offset to the incremental cost of basic local residential and business services, then the KUSF should be reduced by the amount of Yellow Page revenues. (Ostrander, Tr. at 2684-20).

38. CURB states in its brief that the standard be implemented to minimize basic rate increase and to assure that all "residential and local service rates", without regard to classification, bear equal percentage contributions to Universal Service. (CURB Post-Hearing Brief at 3).

2. METHODOLOGY FOR FUNDING THE KUSF

39. Several parties propose that the KUSF be funded on the basis of a surcharge applied to toll MOU or "retail toll revenue." Those parties include SWBT (Cooper, Tr. at 2151-31), Columbus (Krehbiel, Tr. at 2528-4), the State Independent Alliance (Mikesell, Tr. at 2589-13) and Sprint Spectrum (Sprint Spectrum Post-Hearing Brief at 4).

40. Sprint/United acknowledge the need for state-specific universal service support where actual exchange service prices are below the federal benchmark affordable price and below the economic cost of providing the service. Mr. Harper, witness for Sprint/United, testified that the state jurisdiction should be responsible for funding the difference between the federal benchmark affordable price and the rate the State allows carriers to charge for the supported services. Mr. Harper also stated that there are other factors such as adjusting intrastate access rates to interstate levels and exogenous cost treatment. (Harper, Tr. at 2633-21 to 2633-22).

41. Other parties support a percentage surcharge assessment in various forms. AT&T's proposed KUSF would be funded by a surcharge on end user retail service revenues. (Rhinehart, Tr. at 3118-14). MCI proposes is that the KUSF be funded on a percentage of net intrastate common carrier revenues. (Klaus, Tr. at 3121-9).

42. CompTel proposes a quasi-sales tax on the customer's bill for all telecommunication service in lieu of having a surcharge on toll minutes. (Ensrud, Tr. at 3116-17). The quasi-sales tax should be limited to retail services only. (Ensrud, Tr. at 3116-34).

43. KCTA states that a preferable approach would be to impose a uniform percentage contribution based upon the value added by each industry participant. (Kravtin, Tr. at 2455-11).

44. KC Fiber proposes that each company's share of overall intrastate revenues equal its share of overall contributions to the KUSF. (Hollingsworth, Tr. at 3114-4). "The best formula would rely on the relative intrastate revenues of each carrier." (Hollingsworth, Tr. at 3114-5). However, in its brief, KC Fiber stated that the Commission should adopt SWBT's proposal which is "imposing the surcharge on billed toll MOU, not on retail revenues." (KC Fiber and MHT Post-Hearing Brief at 8).

45. The Wireless Providers argue that the burden of financing the KUSF be distributed among all Kansas telecommunications providers, including LECs, through an industry wide surcharge. (Wireless Providers Post-Hearing Memorandum at 2-3).

46. CURB proposes that contributions to the KUSF be based on gross intrastate company revenues earned in Kansas. (Ostrander, Tr. at 2684-32).

47. Staff proposes that the most equitable basis for contributions to the fund is intrastate retail telecommunications revenues. These revenues include local service, directory assistance, coin, private line, intrastate long distance, and an estimate of cellular revenues. (Lammers, Tr. at 2966-14).

48. Mr. Lammers, witness for Staff, testified the assessment on local revenues is an advantage for the ILECs since most ILECs have low rates and it fulfills the mandate in the Kansas Act. By participating at the 14.1 percent level, the ILECs along with SWBT and Sprint/United could avoid having to remit the funds to the KUSF. (Lammers, Tr. at 2966-16).

49. During the August 12, 1996 hearing, Mr. Krehbiel, witness for Columbus, and Mr. Mikesell, witness for State Independent Alliance, each modified his testimony after reviewing Mr. Lammer's proposal by stating that it is a generally acceptable alternative to their testimonies. (Krehbiel, Tr. at 2525-2526; Mikesell, Tr. at 2587-2588).

50. At the August hearing, Mr. Cooper, witness for SWBT, testified that he largely agrees with Staff's KUSF. (Cooper, Tr. at 2152). Mr. Cooper also stated that he recommends the Commission either adopt SWBT's proposal or Staff's proposal "because of their similarities." (Cooper, Tr. at 2151-1, 2153-2154).

3. SIZE OF THE FUND

51. Mr. Lammers, Staff's witness, testified the KUSF needs to recover $111.6 million which is 14.1 percent of the present intrastate revenues. (Lammers, Tr. at 2966-14).

52. Some parties were not in a position to quantify the appropriate size of the KUSF at this time. (Klaus, Tr. at 3121-8; Rhinehart, Tr. at 3118-16; Ostrander, Tr. at 2684-31). CURB stated "the fund size should be whatever falls out of a reasonable policy which will help ensure universal service, eliminate rate shock for all customers including rural customers and provide for a Lifeline program." (Ostrander, Tr. at 2684-31). Other parties stated the fund should be as small as possible. (Krehbiel, Tr. at 2528-5).

53. Mr. Klaus, MCI's witness, testified that ideally both the combined KUSF and the yet-to-be determined federal universal service fund would be sized to recover the difference between the TSLRIC of providing local exchange service and the nationwide average local exchange rate of $18.00. (Klaus, Tr. at 3121-8). However, MCI did not explain how to reconcile this approach with HB 2728.

4. LIFELINE SERVICE PROGRAM

54. Staff proposes to apply the criteria currently required of qualification for Link­Up Kansas and that the program be phased in over the same three year period as a local service increase to avoid a reduction followed by a rate increase. (Staff Post-Hearing Brief at 20). Staff asserts the programs can be funded by growth in access lines. (Lammers, Tr. at 2966-25 to 2966-26).

55. SWBT generally agrees with Staff's Lifeline proposal with one exception. The Lifeline subsidy should be funded on a competitively neutral basis by all telecommunications providers in the state, the same as is required for universal service support. (Mah, Tr. at 2261-14). SWBT cited Section 9(b) of the State Act. SWBT also recommends that the Lifeline program be administered by the administrator of the KUSF.

56. CURB states that enrollment of Lifeline and Link-Up customers should be proactive and virtually automatic. The carriers should work with Department of Social and Rehabilitation Services (SRS) to establish a data base that identifies individuals eligible for Lifeline and Link-Up and allows for expedited or automatic enrollment of these individuals. (Ostrander, Tr. at 2684-54).

5. KANSAS RELAY SERVICES, INC. (KRSI)

57. Columbus argues that funding for KRSI and the telecommunications devices for individuals with disabilities should not be handled through the KUSF. (Krehbiel, Tr. at 2528-7). CURB states that funds for KRSI and KUSF should not be commingled and that separate books should be maintained. Technically CURB is recommending two separate funds, two separate sets of books, and two separate bank accounts, although there could be one common independent administrator. (Ostrander, Tr. at 2684-34).

58. Staff proposes that the KUSF include KRSI. However, Staff recommends that the KUSF only collect the funding for KRSI and the equipment fund and not administer those programs. (Lammers, Tr. at 2966-7).

B. FORM OF REGULATION

1. PRICE CAP BASKETS

59. Section 6(e) of the State Act specifies three baskets of services for companies electing price cap regulation: a) residential and single-line business, including touch-tone; b) switched access services; and c) miscellaneous services basket. Section 6(f) requires the Commission determine the price cap adjustment formula for Baskets One and Three and any sub-categories within those baskets. The adjustment formula for Basket One is to be applicable after December 31, 1999, and for Basket Three it applies after December 31, 1997.

a. SUB-CATEGORIES WITHIN BASKETS

60. Although the State Act authorizes the creation of sub-categories within Baskets One and Three, it does not require the creation of sub-categories. In order to address concerns that falling prices for certain basic local services in Basket One might be offset with dramatically rising prices for other basic services, SWBT proposes 16 sub-caps for Basket One services (eight rate groups for residential service and eight for single-line business service). Under this proposal SWBT states the prices in each rate group would not rise more than the general level of inflation as measured by the Consumer Price Index Less Food and Energy (CPILFE). (Brown, Tr. at 1840-9 to 1840-10, 1840-24).

61. Staff testified sub-categories within Basket One for different rate groupings would be appropriate. (Matson, Tr. at 2691-15). Staff also proposed one sub-category (multi-line business, PBX and PLEXAR lines) in Basket Three, miscellaneous services to accommodate Staff's rebalancing proposal. (Matson, Tr. at 2691-16).

62. SWBT opposes Staff's proposal. SWBT states it would be willing to recover the residual $8-10 million in Staff's revenue neutral calculation from Basket Three services generally rather than from the KUSF. (SWBT Brief at 7).

63. AT&T recommends the creation of a limited number of sub-categories of services or elements in Basket Three. Factors considered in establishing the sub-categories would include:

a) basic network functions (BNFs) versus end user services;

b) the availability of both services and BNFs;

c) cost characteristics;

d) the ability of the LEC to cross-subsidize an end user service with a BNF; and

e) the competitiveness of the functions or services. (Rhinehart, Tr. at 3118-29).

b. PRICE CAP FACTORS

(1) PRODUCTIVITY FACTOR/PRICE CAP ADJUSTMENT FORMULA

64. The productivity factor "X" is critical in the development of a price cap plan. SWBT proposes a productivity offset not to exceed 1.25 percent for Basket One. (Van Pelt, Tr. at 2251-6). SWBT states that a 2.1 percent productivity offset is the starting point that represents the average of long term productivity offsets for telecommunications which were developed in seven widely recognized and accepted total factor productivity (TFP) studies. (Van Pelt, Tr. at 2251-7). According to SWBT, the 2.1 percent productivity offset is the difference between TFP growth of the U.S. economy to that of the telecommunications industry. (Van Pelt, Tr. at 2251-7). In his testimony, Dr. Van Pelt recommends, based on his experience with both the technical and practical aspects of productivity measurement, a productivity offset of 1.25 percent for Basket One. (Van Pelt, Tr. at 2251-6). SWBT recommends that no productivity offset be included in the Basket Three price cap index (PCI) formula. (Van Pelt, Tr. at 2251-16).

65. Sprint/United recommends the use of fifty (50) percent of the Gross Domestic Product Price Index (GDPPI) for the single-line and residential basket because of its simplicity and relative fairness. (Harper, Tr. at 2633-13). Sprint/United also recommends that if the Commission finds 50 percent of the GDPPI inappropriate, a productivity factor of approximately 1.25 percent be adopted. (Harper, Tr. at 2633-61).

66. AT&T expressed concern for any proposal of extremely low, or even no, productivity offset factors by SWBT and Sprint/United for the basic residential and single-line business basket and the miscellaneous services basket. Further, AT&T is concerned that the lack of sub-categories in these two baskets will give price cap-electing incumbents far too much ability to discriminate in the marketplace, particularly since the incumbent LECs continue to provide most miscellaneous services basket services. (Rhinehart, Tr. at 3118-87).

67. AT&T asserts that "X" be based on the expectation that the LECs' productivity will improve under price caps and should therefore be set to reflect those expectations. AT&T gave the example that in Illinois, Ameritech proposed an "X" of 0.7 and the Illinois Commerce Commission prescribed an "X" of 3.8 percent. In the FCC plan, the LECs may choose an "X" of either 4.0, 4.7 or 5.3 depending on the level of earnings sharing they are willing to do. (Rhinehart, Tr. at 3118-35 to 3118-36).

68. MCI does not recommend a specific adjustment formula or productivity factor. (Klaus, Tr. at 3121-39).

69. KCTA asserts there are two components of the "X" factor: a) a productivity growth rate; and b) an input price differential. The productivity growth rate is expressed as the TFP and measures the difference in the rate of growth between output and inputs. This should be based upon either total company or intrastate TFP, consistent with what the FCC does in this regard and should be in the range of two to three percent. The input price differential is designed to take into account the fact that the kinds of inputs the typical LEC purchases have experienced considerably less inflation over the past decade than the economy as a whole, and should be in the range of three to five percent. The TFP and the input price differential combine to make the total productivity offset in the range of five to seven percent. (Kravtin, Tr. at 2455-18 to 2455-19).

70. CURB's position is that rates should be subject to the same factors recently established by the FCC, which is GDPPI less the 5.3 percent productivity factor (subject to discouraging discriminatory pricing practices and not favoring urban customers over rural customers in any repricing). (Ostrander, Tr. at 2684-24). CURB, CompTel and Staff state that since SWBT adopted the 5.3 percent productivity option at the federal level it is reasonable for adoption in Kansas. (Ostrander, Tr. at 2684-26; Ensrud, Tr. at 3116-5 and 3116-51; Rearden, Tr. at 2867-10).

(2) EXOGENOUS ADJUSTMENTS

71. Various parties define exogenous adjustment as a factor which would allow changes to the price cap plan for circumstances beyond the carriers' control.

72. SWBT asserts that exogenous factors are particularly appropriate for legislative/regulatory mandates, such as number portability. (Brown, Tr. at 1840-68).

73. Sprint/United assert that it is essential that the Commission establish guidelines for the recovery of exogenous adjustments, either through the price cap adjustment formula or through the KUSF. Sprint/United propose exogenous treatment be given for significant changes in revenues or expenses incurred due to legislative or regulatory mandates outside the company's control. (Sprint/United Post-Hearing Brief at 8). Sprint/United suggest the Commission should clearly define the treatment of all exogenous costs before a LEC elects an alternative regulatory plan. (Harper, Tr. at 2633-70 to 2633-71).

74. AT&T expresses concerns about Sprint/United and SWBT's suggestions that tax law changes be considered eligible exogenous costs. (Rhinehart, Tr. at 3118-89).

75. KCTA asserts the adjustment formula should provide for exogenous conditions. Such adjustment should be used to flow through costs associated with one-time exogenous events resulting from conditions uniquely applicable to LECs. (Kravtin, Tr. at 2455-19 to 2455-20).

76. CURB's position is that exogenous costs should not be approved up-front. CURB asserts that a company should be required to petition the Commission for pass-through of certain uncontrollable "economic" cost increases, subject to a maximum 120-day proceeding. CURB maintains that "the petition should provide evidence of no offsetting cost decreases and that the cost increase has a significant negative impact upon company operations (and documenting the negative impact on earnings and other matters)." (Ostrander, Tr. at 2684-24 to 2684-25).

77. Staff urges the Commission to narrowly define the circumstances under which a petition for exogenous adjustment may be filed and to exercise great caution in granting such a petition.

(3) IMPUTATION

78. Section 6(j) of the State Act requires imputation by LECs as part of the price floor for toll services. "Access charges equal to those paid by telecommunications carriers to local exchange carriers shall be imputed as part of the price floor for toll services offered by local exchange carriers on a toll service basis." (HB 2728 § 6(j)). The purpose of imputation is to prevent the LECs from subjecting dependent competitors to price squeezes. (Rhinehart, Tr. at 3118-40; Klaus, Tr. at 3121-10; Staff Post-Hearing Brief at 8). Imputation is appropriate when the incumbent LEC is the sole or principal source of inputs necessary to the deployment of competitive or potentially competitive retail services. (Rhinehart, Tr. at 3118-41).

79. SWBT contends that toll services represent a single market and that the imputation required by HB 2728 should be applied across the entire toll service market, not on a plan-by-plan basis. (Vining, Tr. at 2298-9; SWBT Post-Hearing Brief at 28). However, Ms. Vining identifies an alternate application of the imputation test which requires each pricing plan to pass an imputation test without considering other toll pricing plans. The price floor for a new plan is the direct incremental costs associated with the new plan and the imputed access costs associated with the new plan. (Vining, Tr. at 2298-9, 2325).

80. Many parties raise concern regarding imputation being performed on a total toll service approach. Commingling individual pricing plans with all toll services will not disclose whether individual plans are priced below long run incremental costs and the imputed cost of access. (Klaus, Tr. at 3121-55). Combining all services in the imputation requirement allows one or more elements to be priced anti-competitively below cost, yet appear to be priced above cost because they are combined with other services. This places competitors at a competitive disadvantage.

81. CompTel also states that the purpose of imputation is to prevent a specific service from being priced anti-competitively. CompTel maintains that imputation must be applied to a specific service to have its intended effect. (Ensrud, Tr. at 3116-36).

2. RANGE OF RATE PRICING

82. Staff proposes two price range plans: range of rate-fixed and range of rate-flexible.

a. RANGE OF RATE-FIXED

83. Basket One prices would remain unchanged until the year 2000 except for rate changes authorized by the Commission as a part of the rate rebalancing between local and access. Basket Two prices would be reduced to parity with the corresponding interstate rates. (Matson, Tr. at 2691-15 to 2691-16).

84. Staff proposes that all services in Basket Three, except for the sub-category of local access lines (PBX, digital trunk for PBX, PLEXAR access lines and multi-line business services), would be eligible for immediate petitioning for movement into range of rate-fixed pricing. (Matson, Tr. at 2691-17).

85. Staff proposes the minimum/maximum rates be established as set forth in the Kansas Act. The price could be set no lower than the wholesale rate discount.(1)

Staff proposes the company be allowed additional flexibility to reduce rates by lowering the minimum range an additional amount each year by an amount equal to the productivity offset that is recognized in the rate cap adjustment formula. (Matson, Tr. at 2691-17).

86. Staff proposes the following constraints on rate changes: the rate for any one service may not increase more than 10 percent in any two year period; and the rates charged times quantities may not exceed the price cap for the basket as a whole. No service may be priced below long run incremental costs (LRIC) plus imputed access; or in the case of local service, imputed prices of unbundled network elements. Range of rate pricing must at a minimum apply to a rate group. Fines may be requested if a rate is found not to be in compliance. (Matson, Tr. at 2691-18 to 2691-19).

b. RANGE OF RATE-FLEXIBLE

87. Staff proposes that the next step in the transition would be a petition to move from range of rate-fixed pricing into the range of rate-flexible designation. The difference between fixed and flexible is that companies would be able to deaverage rates within a rate group provided that all similarly situated customers receive service at the same rate.

88. Staff proposes evaluation of the following criteria for movement to range of rate-flexible pricing: number of facility and resale based entrants in each exchange of the total service territory; number of providers offering comparable products and/or services; current and historical market share information of the company; and the essential nature of the service. (Matson, Tr. at 2691-19 to 2691-20).

89. SWBT asserts that Staff's proposed range of rate-flexible pricing would give SWBT the ability to price services on an individual customer basis within an exchange as long as the price is available to similarly situated customers. However, according to SWBT, Staff has conditioned the availability of this flexibility on ambiguous criteria similar to the effective competition criteria not adopted by the Legislature as a predicate to complete price deregulation. (Brown, Tr. at 1840-85). SWBT proposes that the Commission deregulate a service if there is an alternate provider as allowed by HB 2728 § 6(p). (SWBT Post-Hearing Brief at 12).

90. Sprint/United recommend that Basket Three have no sub-baskets and the annual change in aggregate prices for all services in the basket be constrained by the current year price cap index. (Harper, Tr. at 2633-64). Sprint/United argue that a company should be able to petition to have a service immediately moved to the range of rate-flexible or price deregulation status without first having to file for range of rate-fixed. (Harper, Tr. at 2633-66).

91. AT&T supports the general concept and methodologies expressed in the Phase I Order.(2)

In the alternative, AT&T supports Staff's recommendation concerning reduced regulation. According to AT&T many of Staff's recommendations overlap with the Commission's previous determination as to whether a service should be deregulated. AT&T also states that SWBT's request for a "competitive alternative" as the only requirement for reduced regulation should be denied. (AT&T Post-Hearing Brief at 27).

92. MCI concurs generally with Staff recommendations, but cautions that in the telecommunications setting most competitors are dependent on LECs for input services. MCI asserts that the incumbent LECs have enormous market power over interconnection prices for interexchange services and entering local exchange providers. Thus, development of effective competition is not possible unless the incumbent LECs impute the prices charged dependent competitors into the prices set for their competing retail services. (Klaus, Tr. at 3121-35).

93. CompTel generally supports Staff's recommendation on reduced regulation as well as the Commission's previously established two-pronged test contained in its Phase I Order of May 5, 1995. (CompTel Post-Hearing Brief at 22).

C. PUBLIC HEARINGS

94. Garden City, Kansas: Some attendees expressed concerns over telephone local rate increases "affordable basic telephone service is essential for all Kansans but it is extremely important to low income and older persons on a fixed income. It just does not seem fair or right that nearly seventy (70) percent of Kansas residential customers should be burdened with a rate increase that benefits only 30 percent of its users." (Garden City Public Hearing, Tr. at 7). However, other attendees welcomed the long distance reduction for business service and residence service. (Garden City Public Hearing, Tr. at 9).

95. Hays, Kansas: Some attendees expressed their opposition to telephone rate increases. (Hays Public Hearing, Tr. at 6). Attendees requested the Commission to keep the infrastructure investments flowing to the non-metro areas of the state to preserve and enhance the ability to stay connected to the information age. (Hays Public Hearing, Tr. at 9).

96. Other public hearings were also held in Topeka and Wichita, Kansas. Attendees expressed similar comments as stated above.

III. FINDINGS OF FACT AND CONCLUSIONS OF LAW

A. JURISDICTION

97. The Commission has been given full power, authority and jurisdiction to supervise and control the telecommunications public utilities doing business in Kansas, and is empowered to do all things necessary and convenient for the exercise of such power, authority and jurisdiction. K.S.A. 66-1,187 et seq. Although wireless providers are statutorily exempt from Commission jurisdiction (K.S.A. 66-1,143 - 1,145), the State Act covers all telecommunications providers and mandates that wireless providers be required to pay into the KUSF fund.

B. NOTICE

98. At the August 12, 1996 hearing, CURB entered an objection to notice. CURB stated the impact that rate rebalancing and other issues would have on rates was not reflected in the notice. (Tr. at 1761). In an accompanying brief, CURB contended that pay phones and directory assistance services were not part of this docket when first opened and should not be made a part of this proceeding. CURB stated no notice was given that pay phone and directory assistance rates would increase. It is a violation of due process to order increases of this kind without specific notice. (CURB Post-Hearing Brief at 4).

99. The record demonstrates that SWBT, Sprint/United, Wamego Telephone and Moundridge Telephone submitted proof of publication to the Commission(3)

attesting to the completion of the public notice of hearings before the Commission regarding possible rate changes. The public notice was provided in newspapers of general circulation where those telecommunications companies provide service. Notice was also provided to the customers by way of bill inserts. The content of the notice was broad enough to include "possible increases in local service rates to offset decreases in long distance rates in accordance with the Kansas Act." The language "possible increases in local rates" is all inclusive and covers any increase, even pay phone and/or directory assistance. The Commission finds notice is proper because ratepayers were provided sufficient notice of possible rate increases.

100. The Wireless Providers stated they objected to receiving notice via telephone call on August 1, 1996. The Wireless Providers alleged neither the Commission nor Staff gave notice of these proceedings to providers of wireless telecommunications services. (Wireless Providers Memorandum at 22; Tr. at 1761-1762). However, the Wireless Providers did not oppose going forward with the hearing in light of HB 2728. (Tr. at 1762).

101. At the hearing, the Commission noted the Wireless Providers' objection stating the docket had been opened since 1994. The Commission further noted it has no jurisdiction over cellular providers. However, due to HB 2728's mandate that all telecommunications carriers are to contribute to the KUSF fund, the Commission found the notice was proper and the Commission proceeded with the hearing. (Tr. at 1763).

102. The Wireless Providers again argued in their Post-Hearing Memorandum that notice was defective. The Commission reaffirms its bench ruling and finds that notice was proper. At the hearing the Wireless Providers were given the opportunity to either file testimony during the hearing or provide oral testimony. (Tr. at 1764). The Wireless Providers did not prefile testimony and did not provide oral testimony. The Wireless Providers were notified of the hearing and given the right to fully participate at the hearing, cross-examine all the witnesses, file briefs and/or findings of fact and conclusions of law. The Wireless Providers decided to go forward with the hearing, which demonstrated a waiver on their part. The Commission affirms its bench ruling and finds that notice to Wireless Providers was proper.

C. KANSAS UNIVERSAL SERVICE FUND

1. ACCESS RATE REDUCTION

103. The State Act states that all local exchange carriers shall reduce intrastate access charges to interstate levels. (HB 2728 § 6(c)). Rates for intrastate switched access, and the imputed access portion of toll, shall be reduced over a three-year period for SWBT and United with the objective of equalizing interstate and intrastate rates in a revenue neutral, specific and predictable manner. The amount of access rebalancing in Years 1 and 2 will correspond to the portion of assessment recovery by the LECs discussed below. That is, the move to interstate access parity shall be in proportion with the LECs KUSF assessment phase in, i. e., for SWBT, miscellaneous increases plus $2.00 per line, per month in Year 1 and $1.00 per line, per month in Year 2 and the remainder in Year 3.

104. The Commission also finds Staff's arguments persuasive that parity should be based upon the interstate rates in effect on November 1, 1996. (Lammers, Tr. at 2966-8).

105. MCI argued the State Act requires interstate access parity at interstate access rates in effect in 1999. (MCI Post-Hearing Brief at 9). However, the Commission believes interstate access and federal universal service will change considerably over the next two years. It is premature at this juncture to determine how interstate access parity will be achieved based upon currently unknown 1999 access rates. Consequently, the Commission will not specify how access parity will be achieved when the full impact and extent of such access changes are unknown at this time. However, the Commission believes it is reasonable to revisit the access parity issue after the FCC access guidelines are issued, and no later than September 1998.

2. REVENUE REDUCTION RECOVERY FROM KUSF

106. The initial amount of the KUSF shall be comprised of local exchange carrier revenues lost as a result of rate rebalancing pursuant to the State Act. Revenues shall be recovered on a revenue neutral basis. The revenue neutral calculation shall be based on the volumes and revenues for the 12 months prior to September 30, 1996, adjusted for any rate changes. (HB 2728 § 9(a)). The Commission interprets "adjusted for any rate changes" to require that revenues be determined by using the intrastate access rates in effect at the end of the twelve (12) month period, September 30, 1996. To ensure that current information is available, the interstate rates will be those in effect on November 1, 1996. (Lammers, Tr. at 2966-8). As part of the access rate reduction, the Commission finds that ILECs should reduce their Billing and Collection rates to $.05 per message as determined by the Commission in its April 4, 1996 Order. (Order dated April 4, 1996, at 8).

107. SWBT argued that changes in MOU subsequent to September 30, 1996, be factored into its revenue neutral calculation. (Brown, Tr. at 1840-29 to 1840-30). The Commission rejects this position for the purposes of this rebalance and finds that the State Act is specific in requiring the calculations of volumes and revenues be made on the twelve (12) months ending September 30, 1996. Reductions in access and toll rates will encourage further growth in MOU which will provide additional revenues to SWBT. The Commission does not believe the likely growth in MOU resulting from access rebalancing should result in further revenue neutral replacement.

3. KUSF ASSESSMENT ON ALL

108. In accordance with the State Act, the Commission shall require every telecommunications carrier, telecommunications public utility and wireless telecommunications service provider that provides intrastate telecommunications services to contribute to the KUSF on an equitable and non-discriminatory basis. (HB 2728 § 9(b)).

109. Upon review of the evidence presented by the parties, the Federal and State Acts, the Commission finds that the KUSF shall be funded by an equal assessment on all intrastate retail revenues. The State Act requires that the KUSF assessment be imposed on the LECs, telecommunications providers, and wireless providers. These companies all generate revenues. An assessment on revenues assures every telecommunications carrier, telecommunications public utility and wireless telecommunications service provider that provides intrastate telecommunications services, will contribute on an equitable and non-discriminatory basis in accordance with the State Act.

110. Various parties proposed that the KUSF be funded based on toll MOU or by assessing a quasi-sales tax on customer bills for telecommunications services in lieu of having a surcharge on toll MOU, or a percentage assessed in various forms. Unresolved is the method by which to separate the amount to be recovered from lines and MOU. The Commission believes these proposals may leave out some revenues and not assure an equitable contribution. The Commission rejects the proposals based on MOU or surcharges and finds the most equitable and reasonable approach is a contribution on a "retail revenue" basis as proposed by Staff. (Lammers, Tr. at 2966-14).

111. The phrase "rate rebalancing" is only applicable if the Commission decides to raise any rate in excess of the KUSF assessment amounts. Since the Commission is adopting an equal assessment on all retail revenue amounts, no rebalancing to local rates will occur beyond the impact of the KUSF assessment and the ILEC transition to the statewide average. The Commission finds all intrastate retail revenues shall be assessed on the same percentage basis, reaching an estimated 14.1 percent at the end of three years. (Lammers, Tr. at 2966-16).

112. The Commission finds that the initial revenue neutral amount should be consistent with the $111.6 million estimate originally proposed. The record supports that the size of the fund shall be determined in the same manner as the estimated $111.6 million and shall be phased in over three years. (Lammers, Tr. at 2966-14). The Commission also finds that LEC payments and distributions may be offset, so as to avoid unnecessary fund transfers. The Commission's intent is to have record keeping and monitoring reports to assure that all recipient LECs are only receiving payments due them which exceed the assessments retained by the LEC. The assessments shall be redetermined by the administrator annually. The Commission wishes to ensure that all telecommunications carriers forward the correct level of assessment to the fund administrator. Allowing LECs to retain their assessment will reduce the amount paid by the administrator and somewhat reduce the administrative burden on the LECs. This process does not reduce the size of the fund or in any way reduce the responsibility of LECs to assess their customers as prescribed in this Order and HB 2728. In the event a LEC's assessment exceeds its required rate rebalancing amount, the LEC will submit the difference to the administrator.

4. HOW LECs FLOW THRU

113. The portion of the assessment attributed to the LECs' local service which may be recovered on a flat per line basis will approximate $3.21 per month for SWBT customers over three years, and slightly less than $3.00 per month for United customers over three years. These amounts per line are after the adoption of increases in miscellaneous charges such as directory assistance and pay phones. These miscellaneous charges shall be increased by $7.7 million per year as requested by SWBT. (Cooper, Tr. at 2151-61). Similar miscellaneous increases shall be implemented by United. The rates for pay phone calls shall be $.35 and the free call allowances for directory assistance shall be eliminated. These rates shall go into effect March 1, 1997. SWBT and United are hereby ordered to file tariffs reflecting these rates thirty (30) days after receipt of this Order.

114. Since the assessment is based on retail revenue, flow through of the assessment should only apply to retail customers and not to resold or unbundled services. The purchasing ALEC will be responsible for its own KUSF contribution.

5. THREE YEAR TRANSITION

115. The estimated $3.21 per month rate increase for SWBT customers would be allocated as follows: a) $2.00 per month for the first year, b) $1.00 per month for the second year, and c) the remainder for the third year. United will implement the pass through of its KUSF assessment on a similar per line basis, determined by dividing its assessment amount (less coin and directory assistance) by its number of lines.

116. An equal assessment on the ILECs would result in a per line increase of $1.42 to $3.23 per month. However, the actual increase may be different since the Commission has reviewed the Stipulation and Agreement (S&A) submitted by the ILECs and finds the S&A is reasonable because it averages the impact on ILEC customers much the same as the flow through averages the impact on SWBT and United customers. This reduces the rate shock effect on customers who have the highest local rates while at the same time ameliorating the increase on those who are below the statewide ILEC average. The Commission approves the S&A with the following clarifications: a) Provision number 3 of the S&A combines the KUSF assessment with the movement to statewide average. The Commission finds this provision acceptable as long as it does not reduce the amount of funding for the KUSF. b) The Commission clarifies that the Petitioners reference to "an assessment on net revenues" is in actuality "an assessment on retail revenues". The Commission approves the S&A with these clarifications and incorporates it as Attachment "A" of this Order.

6. REVIEW PROCEDURES FOR KUSF ADMINISTRATION

117. The Commission requested bids from parties interested in being the KUSF administrator. Four parties submitted bids. Based upon qualifications and costs, the Commission has awarded the initial contract (January 1997 to June 1998) to the National Exchange Carriers Association, Inc. (NECA).

118. Various parties recommended that the Commission require an annual audit of the KUSF administration by an independent accounting firm and that the audit report be of public record. (Rhinehart, Tr. at 3118-16; Klaus, Tr. at 3121-9). AT&T also recommended that the size of the KUSF requirements and the resulting surcharge on retail service revenues be reviewed at least annually for the first five years. (Rhinehart, Tr. at 3118-16).

119. CURB recommended an audit be performed at least every two years (and at least once for every administrator's term) and that the audit focus on compliance with fund procedures and proper administration of funds. (Ostrander, Tr. at 2684-33).

120. The Commission generally agrees with the above recommendations and finds it is reasonable to require an annual audit of the fund administrator. This audit will include a traditional financial review, as well as a review of the sufficiency of NECA's internal controls. The Commission also directs Staff to conduct periodic audits of intrastate telecommunications providers to verify that intrastate revenues are being reported accurately for assessment purposes. Further, the Commission directs Staff to coordinate with an outside consultant in reviewing the internal controls for the KUSF administrator. Compliance with these controls will be included in the annual KUSF audit. However, the Commission is not limited to these audit options. Over time, circumstances may change, necessitating additional fund oversight or adoption of other procedures.

7. WHO RECEIVES SUPPORT AND ON WHAT BASIS

121. The Kansas Act provides KUSF support for companies "that are deemed eligible both under subsection (e)(1) of section 214 of the Federal Act and by the Commission." (HB 2728 § 9(c)). This could include ALECs which may be eligible for KUSF to the extent that they provide service in a high cost rural area. (Lammers, Tr. at 2966-27). CURB stated KUSF funds should be available to incumbent LECs and competitors on a non-discriminatory basis and under equivalent terms and conditions. (Ostrander, Tr. at 2684-31).

122. Section 254(e) of the Federal Act requires that subsidies go only to eligible telecommunications carriers certified by the Commission. (Harper, Tr. at 2633-22).

123. An ALEC is required to meet the following KUSF eligibility and qualification criteria:

a) Meet the Federal Act eligibility criteria (Section 214(e)(1). (Lammers, Tr. at 2966-27); and

b) The universal service area in which an ALEC may qualify for KUSF support is an exchange area with 10,000 or fewer access lines. (Lammers, Tr. at 2966-27).

124. Support should be distributed to achieve revenue neutrality pursuant to the State Act. (HB 2728 § 9(c)). Based on the evidence of record the Commission finds that those companies that provide service in high cost rural areas shall receive support. Rural areas shall be defined as exchanges with 10,000 or fewer access lines. ALECs are eligible to receive support to the extent they provide service in high cost rural areas. (Klaus, Tr. at 3121-7; Lammers, Tr. at 2966-27). The support shall be paid at a rate of up to $36.88 per residential loop. (Lammers, Tr. at 2966-31). A portion of the revenue neutral support for LECs will be designated as the amount per residential loop.

125. The pay out of $36.88 shall apply to residence lines only. Business service rates should generally be based on cost and not subsidized by the KUSF. (Rhinehart, Tr. at 3118-85 to 3118-86; Lammers, Tr. at 2962). The Commission recognizes that the FCC is currently reviewing universal service and access charges, the outcomes of which will impact all telecommunications providers. Therefore, the $36.88 pay out may need to be revisited based upon the ultimate decisions reached in those proceedings.

8. SUPPLEMENTAL FUNDING

126. The Commission must act on requests for supplemental KUSF funding within 120 days if the request is based on the criteria in Section 9(e) of the State Act. However, the Commission is not bound by the 120 day requirement if the request is based on the criteria in Section 9(f). Eligible new entrants providing local service are also permitted supplemental funding under the State Act § 9(f) on a per line served basis which can be fixed monthly with the KUSF administrator. The Commission concurs with the provisions of the State Act with regard to supplemental funding.

9. LIFELINE SERVICE PROGRAM

127. Section 7 of the State Act requires the Commission establish the Kansas Lifeline Service Program (KLSP) to assist low income persons in retaining and obtaining telephone service.

128. At the public hearings held across the state (Garden City Public Hearing, Tr. at 7; Hays Public Hearing, Tr. at 6) attendees expressed a strong concern regarding the impact rate increases may have on persons living on fixed incomes who are not eligible for or do not participate in the following programs:

a) Aid to Dependent Children (ADC)

b) Food Stamps

c) General Assistance (GA)

d) Medicaid

e) Supplemental Security Income (SSI)

f) Food Distribution Program

Based on the above programs, 1) an applicant must provide the LEC with proof of participation in any of the programs, and 2) the subscriber must not be a dependent (unless 60 years old or older). The Commission is aware that welfare reform is changing participation in these programs. The Commission is open to new criteria which may effectively identify low income households.

129. In order to protect the interests of this segment of the population, the Commission believes that an income specific criterion should be added. This criterion would include determining a minimum income level based on the Kansas Adjusted Gross Income as filed with the Kansas Department of Revenue which will become a benchmark below which a person qualifies for Lifeline support during the ensuing year. In addition:

a) The Department of Revenue would annually provide the Commission a data file of the names and telephone numbers reported on Kansas Income Tax forms for those with income below the benchmark level.

b) This data would be provided to the local telephone service provider to determine whether or not each identified subscriber is already participating in the KLSP.

c) Subscribers not already receiving benefit of Lifeline will be granted KLSP support for the next year (12 months) or until the service is disconnected. (i. e., If the data were available by May 15, the subscriber could receive Lifeline credit from July 1 through the following June 30.)

130. The Commission directs Staff to contact the Department of Revenue, the Department of Aging and any other state agency necessary to investigate the feasibility of applying a minimum income criterion plan. The investigation should also include the methodology of developing and implementing a minimum income criterion plan.

131. The Commission hereby adopts a KLSP plan in which all local service providers (existent LECs and new LECs or ALECS) will participate. The KLSP will use the criteria outlined above. The Lifeline discount of $3.50 per month as proposed by Staff will be recovered from the KUSF and will be phased-in in conjunction with the line assessment. (Lammers, Tr. at 2966-25). LECs should file tariffs annually to reflect the phase in reduction of $2.00 on March 1, 1997; $3.00 on March 1, 1998 and $3.50 on March 1, 1999. Funding of the Lifeline program will be collected by the KUSF administrator as part of the KUSF assessment.

10. KANSAS RELAY SERVICES INC. (KRSI)

132. Section 3(g) of the State Act requires the Commission to establish a competitively neutral mechanism or mechanisms to fund:

a) dual party relay services for Kansans who are speech or hearing impaired;

b) telecommunications equipment for persons with visual impediments; and

c) telecommunications equipment for persons with other special needs.

This funding mechanism(s) shall be implemented by March 1, 1997.

133. Dual party relay service for Kansans who are speech or hearing impaired was established in Docket No. 168,334-U. Operations have been funded by contributions from all toll service providers based on an assessment upon intrastate MOUs plus a proportional share assumed by each LEC based upon the distribution (local vs. toll) of traffic handled by the Kansas Relay Center (KRC).(4)

134. The only relay services issues to be addressed and decided in this proceeding are the funding mechanisms for KRSI and whether to direct the KUSF administrator to collect and distribute these funds. Most of the parties assert that KRSI is a part of universal service and should be funded on the same basis as the KUSF generally. The funding mechanism should be a percentage surcharge on all retail telecommunications service revenues. (SWBT Post-Hearing Brief at 25-26; Rhinehart, Tr. at 3118-86; Lammers, Tr. at 2966-6).

135. To ensure the competitive neutrality of future funding of KRC operations under the State Act, the Commission changes the assessment base for relay services to become an assessment on the retail revenues of all present and future intrastate telecommunications services providers in Kansas. SWBT and Sprint/United propose that KRSI be included in the KUSF. (Harper, Tr. at 2633-45). The economies of administration on a common or centralized basis seem apparent. The Commission finds that these funds shall be collected by the KUSF administrator as part of the KUSF assessment and paid out to KRSI for the ongoing operational support of both KRSI and the KRC.

136. The telecommunications equipment provisioning requirements of persons with hearing and visual impediments and persons with other special needs, are addressed in a separate proceeding, Docket No. 194,283-U (96-GIMT-435-MIS). Issues such as the size of the fund and the type(s) of equipment to be provided are part of that docket. However, the assessment methodology as well as the collection and distribution of funds for the Telecommunications Access Program (TAP) Fund(5)

should be part of the KUSF to gain the advantages and efficiencies of common, central administration.

137. The Commission finds that the funding for TAP shall be collected by the KUSF administrator as part of the KUSF and shall be distributed to the agent or designee of the TAP Fund as determined and prescribed in Docket No. 194,283-U (96-GIMT-435-MIS).

138. The KUSF administrator will keep separate accounting records for the various funds. Distribution of funds shall be made in the following priority: KRSI, TAP, Lifeline, and Universal Service. The Commission shall be notified of adjustments in the assessment percentages.

D. FORM OF REGULATION /SELECTION OF REGULATORY PLAN

139. Section 6 of the State Act requires that "each local exchange carrier shall file a regulatory reform plan at the same time as it files the network infrastructure plan." As part of the regulatory plan, LECs may elect traditional rate of return regulation or price cap regulation. Carriers that elect price cap regulation shall be exempt from rate base, rate of return and earnings regulation. Infrastructure plans must demonstrate a LEC's ability to comply on an ongoing basis with quality of service standards the Commission will adopt no later than January 1, 1997. If the Commission finds, after a hearing, that a carrier subject to price cap regulation violated minimum quality of service standards, the Commission may require the carrier to resume rate of return regulation. (HB 2728 § 6(a)(b)). The Commission directs Staff to review the election and infrastructure plans submitted by the LECs and review the applicant's request for either price cap or rate of return regulation in an expedited manner. The Commission retains its statutory requirement that rates be just and reasonable for carriers electing rate base rate of return regulation.

1. PRICE CAP BASKETS

a. COMPETITIVELY FLEXIBLE PRICING

140. A review of the evidence of record, the Federal Act and the State Act indicate there is a need for pricing flexibility by a LEC faced with a competitive local service provider or ALEC. SWBT indicated general agreement with Staff's range of rate-fixed and range of rate-flexible pricing, but suggested the latter does not go far enough. (SWBT Post-Hearing Brief at 11). Sprint/United recommended range of rate pricing flexibility within Basket Three. (Sprint/United Post-Hearing Brief at 2). These and other variations on the range of rate pricing plans are the reasons the Commission has decided to rename the pricing flexibility plan "Competitively Flexible Pricing" to avoid confusion. The Competitively Flexible Pricing plan combines range of rate-fixed, range of rate-flexible, as well as other comments and suggestions for change, revision or replacement. As compared to Staff's plan, the Competitive Sub-Basket provides greater flexibility to the LEC while simultaneously providing protection against cross-subsidization of competitive service losses or price reductions. This plan allows effective responses by competing firms within the telecommunications industry without disturbing the balance between consumer interests and competing providers. In determining this formula, the Commission has balanced the public policy goals of encouraging efficiency and promoting investment in a quality, advanced telecommunications network in the state of Kansas. The Competitively Flexible Pricing plan would function as follows:

(1) Basket One

141. Basket One shall contain rates for basic telecommunications services which will remain unchanged until the year 2000, except for rate changes authorized by the Commission. (HB 2728 § 6(g)). In the event a competitor enters a local market and the existing range of prices is constrictive to the incumbent provider for the purpose of meeting competitor pricing, the LEC may petition the Commission for additional price flexibility within that exchange without the necessity of maintaining averaged rates for all similarly situated exchanges. This relief is only applicable for lowering the rates, which must remain above incremental costs and meet an imputation test as appropriate. Rates within all other exchanges may not be increased for the purpose of offsetting potential revenue losses in the competitive exchange(s). Determinations will be made on a case-by-case basis.

142. An exception to the Basket One price cap for single line residence and single line business (until January 1, 2000, as set out in § 6(g) of the Kansas Act) shall be the reclassification of an exchange from one rate group to another based upon growth or decline in the number of telephone access lines. Pursuant to SWBT's Local Exchange Tariff (Section 1.3 Application of Rates, Paragraph 1.3.8 Classification of Exchanges), rates for local exchange services are based on the number of exchange access arrangements (EAAs) within the primary service area of an exchange or zone. 143. When an exchange or zone consistently exceeds the number of EAAs for the assigned rate group classification (over a minimum period of twelve (12) months or has remained above the range by two percent for six (6) months or more), SWBT shall inform the Commission and file amended tariffs for the purpose of regrouping the exchange(s). Conversely, should the number of EAAs in an exchange decline and remain consistently below the EAA level for the assigned rate group classification over a similar period of time, SWBT shall initiate action to regroup the exchange(s) downward. Access lines acquired for resale by an ALEC shall not be counted toward the total EAAs within an exchange or zone until connected for a subscriber's use. Regrouping will be done in a manner consistent with that employed prior to price cap regulation.

(2) Basket Two

144. Price cap adjustments are not applicable to switched access services. Prices are subject to reduction to match interstate rate levels. (HB 2728 §§ 6(c) and 6(e))

(3) Basket Three

145. Basket Three will contain rates for multi-line business and for services which are optional or more competitive in nature. The price cap will be adjusted annually after December 31, 1997. (HB 2728 § 6(i)) All Basket Three services shall be subject to a broader, less regulatory treatment when competition enters a local market and the existing prices are constrictive to the incumbent provider for the purpose of meeting a competitor's prices.

146. Section 6(p) of the State Act grants the Commission discretion to price deregulate within an exchange area, or on a statewide basis, any individual service or service category upon a finding that there is a telecommunications carrier or an alternative provider providing a comparable product or service, considering both function and price, in that exchange area.

147. A variety of factors determine when competition within a local exchange occurs. They include: the number and type of providers, comparable products and/or substitutable services, and customer choice of providers and/or services. Once competition exists, a LEC may petition for treatment of specific service(s) within the exchange to be moved into a Competitive Sub-Basket. Prices of these services are subject to a price cap and price floor which may change based upon an adjustment factor and applicable offset for the sub-basket as determined separately in this proceeding.

148. Within the Competitive Sub-Basket, the LEC will have additional pricing flexibility within the competitive exchange without the necessity of maintaining averaged rates for all other customers within that same exchange. Rates for the same services for other customers within the same exchange may be increased to offset the potential loss of revenue resulting from competitive pricing in any other location within the same exchange. However, rates for services for customers from other non-competitive exchanges or services may not be increased to offset revenue losses that may result from competitive pricing in competitive exchanges. The decreased rates must remain above incremental cost as well as appropriate imputation within this Competitive Sub-Basket.

149. When the Commission determines that services and/or an exchange are so competitive that the market can determine prices that are not too high without the need for price limits or other regulatory safeguards, then the prices will be deregulated.

b. SHOULD UNBUNDLED/WHOLESALE SERVICE REQUIRE PRICE CAPS

150. AT&T states that in the market for basic network functions, the LECs currently have market power and will for the foreseeable future. Access services and resold local services fall into that market. It is AT&T's position that the market for basic network functions, including services that are resold, will require price cap regulation. (Rhinehart, Tr. at 3118-32). The Commission finds that it is not necessary to provide price cap regulation for "unbundled" and/or "wholesale" prices.

2. PRICE CAP FACTORS

a. INFLATION FACTOR/PRICE CAP ADJUSTMENT FORMULA

151. The PCI calculated for each category (basket or sub-basket) would apply to the weighted average price of the elements within the category, not to each individual element. It is this provision in the mechanism that allows the LEC to have a certain amount of pricing flexibility. Beginning on March 1, 1997, a new price index would be calculated once a year, based on the percentage change in GDPPI over the previous year offset by "X" and "Z" factors. (Rhinehart, Tr. at 3118-34). The percentage change in the PCI is GDPPI minus "X" plus or minus an additional adjustment for "Z". (Rearden, Tr. at 2867-6).

152. There is general agreement among the parties on the use of the price cap formula of the GDPPI chain-weighted (GDPPI-CW) as the basic inflation index for Basket One. (Tr. at 1795). The chain-weighted index is recommended because the fixed weight index is based on spending patterns from a base period, and often referred to a market basket approach. As such, the fixed market basket is unable to reflect either new products or the substitution between products as rapidly as a chain-weighted index. The fixed weight index is likely to be discontinued as a published price index series in the year 2000. (Van Pelt, Tr. at 2251-5). The Commission agrees with SWBT witness Dr. Van Pelt that the GDPPI-CW is a more appropriate mechanism to incorporate into the price cap formula than a fixed weighting system. (Van Pelt, Tr. at 2251-5). Therefore, the Commission finds that the GDPPI-CW shall be the basic inflation index for Basket One.

153. SWBT proposes that the CPILFE is the appropriate index to be used as the basis for a PCI applicable to Basket Three services. (Van Pelt, Tr. at 2251-3). Based on the evidence of record the Commission finds that the price cap formula for Basket Three should be GDPPI-CW. (Rearden, Tr. at 2867-8). This index has several advantages. It is widely used, and it is a relatively stable index, since it incorporates all final goods produced within U.S. Boundaries. Although SWBT witnesses Dr. Weisman, Dr. Van Pelt and Mr. Brown offer output market reasons to justify the CPILFE as the inflation factor for Basket Three, no evidence was presented that indicates costs change differently between Baskets One and Three. The Commission was not persuaded by SWBT's position that a consumer price index (CPI) be used for Basket Three. The Commission has provided the opportunity for pricing flexibility as discussed at length within this Order. Additional pricing flexibility through the use of the CPILFE as the inflation factor is unnecessary. The Commission finds there is no compelling justification for the use of different inflation factors for Baskets One and Three.

b. PRODUCTIVITY FACTOR

154. The parties varied widely in their recommendations concerning an appropriate productivity factor, between 1.25 percent as proposed by SWBT and Sprint/United(6)

and 5.3 percent as proposed by Staff, CURB, and other parties. Concerns were expressed by some of the parties for any proposal of extremely low, or even no, productivity offset factors. (Rhinehart, Tr. at 3118-87; MCI Post-Hearing Brief at 23).

155. Many other states have already addressed the issue of TFP. The record demonstrates that a nationwide average of "indexed price cap states" TFP approximates 2.6 percent. (Weisman, Tr. at 2060-50).

156. The FCC has incorporated a stretch factor of 0.5 percent in the interstate LEC price cap plans. Further, KCTA proposed and supported the use of a stretch factor in order to both encourage the company to improve its overall efficiency and also recognize the salutary effects of alternative regulation itself in stimulating additional productivity improvements. (Kravtin, Tr. at 2455-19). However, the Commission is not persuaded to adopt a stretch factor because there are differences between interstate and intrastate operations. The LECs have existing incentives to achieve the greatest possible efficiencies. Further, the Commission finds that a 3 percent TFP factor is appropriate on a total company basis. (Kravtin, Tr. at 2455-18). The Commission believes that a finding in the upper end of the range as supported in the record is warranted given the KCTA's testimony concerning the input price differential.

157. The Commission has also considered the infrastructure requirements set forth in Section 6(a) of the Kansas Act for the deployment of universal service capabilities by July 1, 1998, and enhanced universal service capabilities by July 1, 2001, when establishing the TFP near the mid-range of those proposed by the parties. The higher TFP rates were deemed inappropriate and prohibitive given the required investment in infrastructure.

158. In reaching its decision of the 3 percent TFP, the Commission has reviewed not only the proposed productivity factors but the evidence as a whole. In Mobil Exploration & Producing U.S. Inc. v. Kansas Corporation Comm'n, 258 Kan. 796, 843 (1995), the Kansas Supreme Court determined that achieving such a result based on a review of all the evidence is proper:

Under these circumstances, the KCC crafted a compromise after viewing the evidence as a whole. The KCC decided to create an incentive to drill infill wells and produce allowables in an orderly fashion. (Emphasis added). Id. at 845.

159. The Commission, after viewing the evidence as a whole, hereby determines that the 3 percent factor for Baskets One and Three is well within the range of the productivity factors presented in the record, and balances public policy goals of encouraging efficiency and promoting investment in a quality, advanced telecommunications network in the state of Kansas. The Commission believes that its flexible pricing plan meets the flexibility objectives. The Commission generally agrees with SWBT that additional flexibility be granted for Basket Three services and the lower the productivity offset the more pricing freedom for the price cap firm. 160. The Commission believes that the combination of a low productivity offset and lack of sub-categories would provide a degree of pricing flexibility that is not in the public interest. The Commission finds that sufficient pricing flexibility is provided under the Competitively Flexible Pricing plan as determined in paragraph No. 140 of this Order. The establishment of a TFP is not an appropriate tool to provide for pricing flexibility. The Commission does not find persuasive evidence in the record to support a different TFP for Basket Three services compared with Basket One services.

161. SWBT argued that competition will have a negative impact on productivity (SWBT Brief at 9), thus any productivity factor must be reduced by a competitive adjustment for the onset of competition. Further, SWBT witness Dr. Bernstein quantified the competition effect on the productivity factor to be .45 percent. (Bernstein Tr. at 2278-82). The Commission finds this argument unpersuasive. As competition emerges in a given industry, companies which have previously enjoyed monopoly status are given incentive to increase efforts to improve efficiency. While the Commission realizes that SWBT has achieved efficiencies in the last several years, it is not persuaded that continued efficiencies are precluded due to the introduction of competition.

c. EXOGENOUS ADJUSTMENTS

162. As stated earlier, SWBT and Sprint/United have stated that exogenous cost adjustments are necessary. They agree that such adjustments should not be automatic, but be subject to a decision by the Commission upon the filing of a request for such an adjustment. Dr. Weisman testified that a failure to allow exogenous adjustments could undermine the Commission's commitment to price caps. (Weisman, Tr. at 2060-24). Dr. Weisman also stated "this would permit the Commission to review the specific facts and circumstances of any adjustment on a case-by-case basis in the future but would not require any binding determination by the Commission at the present time." (Weisman, Tr. at 2130).

163. The Commission finds that it should consider applications for exogenous adjustments on a case-by-case basis. Such requests should be infrequent and reserved for large dollar items. The Commission will take into consideration the general definition of exogenous in this record which is an event that is outside of the company's control and has a disproportionate effect on the industry so that its effect is not reflected by the price index. (Weisman, Tr. at 2060-22 to 2060-23; 2064). However, the Commission finds that it is premature to determine at this time which exogenous adjustments would be appropriate. The Commission further finds that this mechanism should be symmetrical in application such that a negative or a positive adjustment could result if the facts support such a conclusion.

d. NEW SERVICES

164. This section deals with the treatment of "new" services within the pricing flexibility structure. One of SWBT's witnesses, Mr. Brown, stated that any new service introduced subsequent to the establishment of the initial price caps will likely be in response to competition and should therefore be price deregulated with individual customer pricing flexibility approved at the time they are introduced. (Brown, Tr. at 1840-19 to 1840-20). However, Mr. Brown also stated that the Commission has discretion to determine whether these services are competitive. (Brown, Tr. at 1886). This argument does not seem sufficiently compelling to support automatic price deregulation of all new service offerings. A more practical and consumer oriented approach seems to be for the LEC to petition for treatment of a new service as it deems appropriate and for the Commission to determine where in the Competitively Flexible Pricing structure that service should be placed. The Commission finds that any new service should be reviewed to determine its placement based on the merits and the competitive aspects of the service.

165. Mr. Brown also expressed the opinion that LECs should be allowed to repackage existing services into bundles or packages of services not previously offered which would be "new" services (Brown, Tr. at 1840-20) for regulatory oversight purposes. This position was not widely supported. Professor Alfred Kahn refuted this assumption in cross-examination stating if the only novelty is that one takes existing services and bundles them in a way not previously bundled, that would seem to not qualify as a new service. (Kahn, Tr. at 2030).

166. Based on the evidence of record, the Commission finds that repackaged services should undergo the same scrutiny as new services to determine where they belong within the Competitively Flexible Pricing structure. The burden of proof as to whether or not a bundle of services previously offered separately or in any other combination constitutes a new service offering shall rest upon the LEC's ability to demonstrate the uniqueness of the new bundle/package. A "new service" is one which is introduced subsequent to the establishment of a company's price cap plan. Each application/petition filed by the LEC for placement of new or repackaged services will be considered on a case-by-case-basis and the Commission will determine after an appropriate proceeding the proper treatment of that new or repackaged service within the Competitively Flexible Pricing structure.

e. IMPUTATION

167. The Commission finds that requiring imputation on an individual service basis is consistent with the provisions of the State Act. Individual pricing plan imputation is preferred because it precludes a new service from being offered at retail rates which are below cost and established retail price based on LRIC costs plus imputed access price. Further, imputation on a service by service basis is necessary to prevent price squeezes. (AT&T Post-Hearing Brief at 22-23 citing Kravtin, Tr. at 2509-2510). The total service approach allows one or more services to be priced below cost while the toll service category remains above cost. When imputation is distributed over all toll services instead of by specific service element, the potential to price anti-competitively is increased. The Commission's directive is for the continued application of the "stand alone" imputation methodology to protect potential competitors from inappropriate, below cost pricing. It also addresses the concerns raised by some of the parties.

168. To the extent pricing flexibility is provided for local exchange service, imputation for local services is a concern for the Commission. The Commission believes that competition in the local service market through unbundled elements is comparable to the long distance market. Therefore, the Commission will continue to consider applications on a case-by-case basis.

f. BYPASS

169. Staff and SWBT testimony agree that bypass of LEC access services should decrease imputed access prices. (Vining, Tr. at 2298-5; Rearden, Tr. at 2867-23).

170. SWBT proposes to use local switching MOUs to estimate bypass. The formula for bypass percentage on both ends of a call proffered by SWBT is (originating local switching MOU minus terminating local switching MOU) divided by the originating local switching MOU. (Vining, Tr. at 2298-18). The Commission agrees with Staff that this formula may not be valid for bypass on both originating and terminating ends of a call. (Rearden, Tr. at 2867-23). Therefore, the Commission orders use of a bypass adjustment when it is appropriate for any particular service being examined.

3. RATE OF RETURN REGULATION

171. Section 6(b) of the State Act requires that a local exchange carrier may elect traditional rate of return regulation or price cap regulation. Therefore, the Commission's policy with regard to rate of return will for the present remain unchanged. The companies retain the right to request rate increases while the Commission retains the right to investigate the rates of any company.

E. MISCELLANEOUS ISSUES/POSITIONS AND CONCLUSIONS

1. RURAL ENTRY GUIDELINES

172. Section 5(b) of the State Act requires the Commission "to adopt guidelines to ensure that all telecommunications carriers and local exchange carriers preserve and enhance universal service, protect the public safety and welfare, ensure the continued quality of telecommunications services and safeguard the rights of consumers."

173. The Commission, in accordance with the State and Federal Acts, affirms that preservation and enhancement of Universal Service is a primary concern. (HB 2728 § 5(b)). Competition may develop at a slower pace in rural areas than in urban locations, and the Commission recognizes that concern for continued availability of service is great in the rural areas of the state. To ensure continued service availability in all areas, the State Act designates incumbent local exchange carriers as "carriers of last resort." (HB 2728 § 10(a); Krehbiel, Tr. at 2528-40).

174. The Federal Act, in apparent recognition that the viability of competition in rural areas is not assured, exempts rural telephone companies from requirements of the Federal Act which are essential prerequisites for competition. (See § 251(f)(1)). Loss of this exemption is triggered by a bona fide request for interconnection, services or network elements, and a state commission's determination that such a request is not unduly or economically burdensome, is technically feasible and is consistent with Section 254 of the Federal Act (preservation of Universal Service). (See § 251(f)(1)(A)(B); Mikesell, Tr. at 2589-10; Columbus and State Independent Alliance Post-Hearing Brief at 4).

175. Section 251(f)(2) of the Federal Act allows incumbent rural telephone companies to petition state commissions for suspension or modification of the interconnection requirements of Section 251(b) or (c). (Staff Brief at 24-27). Staff attached an Appendix to its Brief which enumerated the statutory requirements for rural entry. The Commission hereby adopts those guidelines for rural entry and it becomes Attachment "B" of this Order. Conditioning rural entry on these guidelines will help ensure universal service in rural areas.

176. The Commission further finds that in accordance with Section 5(c) of the State Act, any telecommunications carrier seeking to provide services in a rural telephone company area must be designated by the Commission as an "eligible telecommunications carrier" as defined in Section 214(e)(1) of the Federal Act. The Commission agrees with Staff that the standards should be applied on a case-by-case basis and each applicant must meet the requirements of K.S.A. 66-131.

177. Section 214(e)(4) of the Federal Act establishes the procedure which state commissions must follow to assure continued universal service if a carrier wants to abandon service. The protection of the public safety and welfare, and assurance of the continued quality of telecommunications services, will be addressed in Docket No. 191,206-U. Further, the Commission has opened Docket No. 194,734-U to consider issues arising from the State Act. In that docket the Commission is addressing many issues such as customer notice and billing issues.

2. CUSTOMER INFORMATION

178. The LECs believe it is not appropriate to require incumbent LECs to provide in-depth information regarding a competitive LEC's services. However, it may be appropriate to provide specific information in the white pages regarding a competitive LEC, but not without a charge for additional listings. (Harper, Tr. at 2633-27).

179. SWBT proposes that incumbent LECs not be required to provide their customers' specific information regarding competitors' services or prices. The nature and extent of information a competitor chooses to provide to its customers is a business decision to be reached by the individual providers. (Mah, Tr. at 2261-4).

180. The Commission's role in providing general information to consumers regarding the expansion of competition could come in a variety of forms including news releases, brochures, etc. (Mah, Tr. at 2261-5).

181. Staff suggests that, at least during the initial stages of competition, consumers will continue to rely on telephone directories for consumer information and telecommunications services. Staff proposes that the Commission require LECs to list all certificated telecommunications service providers by name in their directories. (Matson, Tr. at 2691-32). Staff also recommends that the LECs' standard directory information section include each company and the services each company provides.

182. The Commission finds a modification of the above proposals is reasonable. Due to the "static" nature of information published in an annual telephone directory and the anticipated "dynamic" status of competitors entering the local market throughout the year, Staff shall draft a generic notice which describes local competition and consumer rights, but does not list the competitive service providers. Upon approval and adoption by the Commission, this notice shall be published in the "call guide" pages of each directory produced by every telecommunications provider and/or affiliate. LECs must make directory advertising available to ALECs on a comparable and non-discriminatory basis. The LECs shall advise Staff of directory information due dates. Staff shall update the information as necessary.

3. BOUNDARY ISSUE

183. Staff recommended the Commission review the way LECs provide service across exchange boundaries to allow consumers greater choice and more competitive flexibility without requiring ALEC qualification. Staff proposed allowing service to ten subscriber access lines in a neighboring exchange as the limit, with requests or demand for service to greater numbers of customers functioning as the trigger which would require an investigation into the incumbent's competitive status outside its home territory. (Matson Tr. at 2691-29).

184. Some parties expressed concern and others commented on the implication of possible stranded investment. Columbus was specific that if one of its customers nearest to its service area boundary elects to receive local service from a neighboring provider, the investment Columbus has made to provide facilities to that customer's location may represent a significant stranded investment.

185. The Commission notes that the LECs have tariffs which contemplate service to a customer outside their service territory by agreement between the affected companies. Those tariffs require the customer to pay for construction of facilities beyond the LECs' existing plant at a fixed rate within the LECs' service territory, and at actual cost beyond the LECs' boundary. The Commission also notes that boundary change requests have been determined on a case-by-case basis. The Commission finds that the boundary change requests shall continue to be considered and determined on a case-by-case basis and denies Staff's proposal at this time.

4. SPRINT SPECTRUM'S ARGUMENT OF FEDERAL PREEMPTION

186. Sprint Spectrum argued that the Commission cannot impose the KUSF obligation on it and other providers of commercial mobile radio service because of the preemption mandated by Section 332(c)(3) of the Communications Act of 1934, as amended, 47 U.S.C. § 332(c)(3). This provision preempts the states from regulating rates charged by any commercial mobile service provider. (Sprint Spectrum Post-Hearing Brief at 2-3). Sprint Spectrum contended it should have no funding obligation.

187. The State Act and the Commission are not trying to regulate cellular/wireless rates or prices in any manner. However, the Federal Act expressly allows states to adopt their own universal service definition and funding mechanisms, as long as funding is provided by all telecommunications carriers on an equitable and non-discriminatory basis. (47 U.S.C. § 254(f). Wireless Providers, both cellular and Personal Communications Service (PCS) Providers, are carriers under federal law. Carrier is defined as "any person engaged as a common carrier for hire, in interstate or foreign communication by wire or radio." (47 U.S.C. § 153(10)). Wireless/PCS Providers provide telecommunications service. Telecommunications service is defined as "the offering of telecommunications for a fee directly to the public." (47 U.S.C. § 153(46)). Wireless/PCS Providers are common carriers providing telecommunications service. State universal service fund assessments are authorized by the Federal Act. (See § 254(f)). Therefore, the Commission concludes that in accordance with state and federal law, Wireless/PCS Providers must contribute to the KUSF funding in an equitable and non-discriminatory manner as discussed in paragraph Nos. 109 and 110 of this Order.

5. WIRELESS PROVIDERS ARGUMENT: STATUTORY TERMS "EQUITABLE AND NON-DISCRIMINATORY" ARE NOT SYNONYMOUS WITH "EQUAL"

188. The Wireless Providers assert that the Legislature has given the Commission latitude to consider equitable factors in addition to equality of assessment in determining contribution for the KUSF. (Wireless Providers Post-Hearing Memorandum at 16-27).

189. The Wireless Providers allege that their rate of assessment should be lower than that imposed on the IXCs because wireless providers offer functionally equivalent services to those provided by LECs. (Wireless Providers Post-Hearing Memorandum at 18). The Wireless Providers assert that consumers can use either LEC service or cellular service to make the same telephone call. In contrast, IXC service is not a functional alternative to LEC service. This difference warrants a difference in the rate of assessment for the KUSF imposed on IXCs and Wireless Providers. (Wireless Providers Post-Hearing Memorandum at 18).

190. Further, the Wireless Providers allege that the rate of assessment to them should be smaller than the amount assessed to the IXCs because Wireless Providers will realize a much smaller savings from the reduction in intrastate access charges. The Wireless Providers state according to Staff estimates, the IXCs will realize a 30 percent reduction in the access charges paid in connection with providing intrastate long distance service. (Wireless Providers Post-Hearing Memorandum at 19 citing Lammers, Tr. 2966-17 to 2966-18).

191. The Wireless Providers also allege that their rate of assessment should be smaller than that of the IXCs because they will not use the network and infrastructure supported by the KUSF to the same extent as IXCs. The Wireless Providers argue that the LECs will enjoy the benefit of maintaining universal service on both the originating and terminating calls they carry in high cost areas. IXCs will similarly benefit because their residential service requires that local network and infrastructure for both ends of every intrastate long distance telephone call. (Wireless Providers Post-Hearing Memorandum at 21 citing Lammers, Tr. at 3088).

192. In contrast, the benefit to cellular service providers from the creation and maintenance of infrastructure is qualitatively different. Cellular service providers have constructed and PCS providers are beginning to construct, at their own risk and expense, infrastructure and network to process whichever end of a telephone call involves a cellular customer. (Wireless Providers Post-Hearing Memorandum at 21 citing Lammers, Tr. at 3084).

193. HB 2728 requires "every telecommunications carrier, telecommunications public utility and wireless telecommunications service provider that provides intrastate telecommunications service to contribute to the KUSF on an equitable, non-discriminatory basis."

194. Black's Law Dictionary defines "equitable" as [j]ust; conformable to the principles of justice and right. (Black's Law Dictionary, at 279. Abridged Fifth Ed.). Equitable is also defined as . . . .  Equitable does not necessarily mean "equal." In utilizing the term equitable to determine a telecommunications carrier's contribution, the Legislature was clearly stating the contribution may or may not be the same. The Legislature granted the Commission discretionary authority to set the contribution level on a basis the Commission determined was justified.

195. The Wireless Providers contend that this is not equitable in that it will require them to provide contributions for calls that do not touch the wireline network. For example, calls made from cellular to cellular do not utilize the wireline network and should not be subject to the KUSF. However, the record does not indicate how much revenue arises solely from wireless to wireless calls which do not utilize a wireline network, nor is there any evidence that the value of wireless service can be sustained without the existence of the wireline network. The wireline network remains accessible and available for all wireless subscribers.

196. There is no dispute that wireless providers have benefitted for the past few years by providing service for calls that do use a wireline network but have not been providing support for universal service. Further, the Wireless Providers claim that they receive no benefit from the changes occurring as a result of competition. However, the August 8, 1996 FCC Interconnection Order, Docket No. 96-98, allows wireless carriers to negotiate interconnection agreements with LECs in the same manner as ALECs. Such agreements could substantially reduce the interconnection charges currently paid by cellular companies from around $.03 to less than $.005. (FCC Docket No. 96-98, ¶¶ 1041-1045; Staff Post-Hearing Brief at 28-29). Interconnection charges are in a State tariff, and interconnection agreements will require state commission approval. The Commission has looked at the totality of the circumstances in determining the level of contribution. Based on the evidence of record the Commission finds that it is equitable and non-discriminatory for the LECs, the telecommunications providers, and the Wireless Providers to contribute to the KUSF on the same basis, as an equal assessment based on intrastate retail revenues, because wireless providers are in a position to benefit from the changes occurring as a result of competition. The Commission concludes that the equal assessment is equitable and non-discriminatory in accordance with state law. The Commission also recognizes that changes may provide compelling reasons for future revision to allow different treatment based upon developing criteria.

6. WHETHER THE STATE ACT (HB 2728) VIOLATES THE FEDERAL TELECOMMUNICATIONS ACT OF 1996

197. CURB argues that HB 2728 violates the Federal Telecommunications Act of 1996. CURB argues HB 2728 provides reductions in access charge costs to competitors and raises local rates to preserve excessive profits of LECs, but it does not ensure that local service will "bear no more than a reasonable share of the joint and common costs of facilities used to provide those services." (Ostrander, Tr. at 2684-2). CURB argues that HB 2728 focuses on deregulating monopoly carriers at the expense of residential and small business customers, rather than promoting a rational and economic solution to high access charges and an orderly transition to local competition. (Ostrander, Tr. at 2684-2).

198. The Kansas Supreme Court has expressly stated that, "[a] fundamental rule of statutory construction is that the intent of the legislature governs when the intent can be ascertained from the statute. In construing statutes, legislative intent is to be determined from a general consideration of the entire act. . . . " Steele v. City of Wichita, 250 Kan. 524, 529, 826 P.2d 1380 (1992), citing State v. Adee, 241 Kan. 825, 829, 740 P.2d 611 (1987).

199. The intent of the State Act is to "ensure that every Kansan will have access to a first class telecommunications infrastructure that provides excellent services at an affordable price; ensure that consumers throughout the state realize the benefits of competition through increased services and improved telecommunications facilities and infrastructure at reduced rates." (HB 2728 § 1(a)(b) et seq.). The interpretation of a statute is a question of law, and it is the function of the court to interpret a statute to give it the effect intended by the legislature. It is a fundamental rule of statutory construction, to which all other rules are subordinate, that the intent of the legislature governs if that intent can be ascertained. City of Wichita v. 200 South Broadway, 253 Kan. 434, 855 P.2d 956 (1993). The intent of the State Act can be ascertained. It is clear the State Act promotes consumer access to a full range of telecommunications services, including advanced telecommunications services that are comparable in urban and rural areas throughout the state of Kansas. (HB 2728 § 1(c) et seq.). The Commission concludes that the intent of the State Act is clear and does not violate the Federal Act.

7. YELLOW PAGES PROFITS ADJUSTMENTS

200. The Commission believes suggestions that yellow pages profits be considered in this proceeding are misdirected. The current proceeding is not a rate case, where issues such as the appropriate treatment of yellow pages profits would be at issue. The Commission is not making a finding with respect to the inclusion of yellow pages in a traditional rate of return proceeding. The issue is not relevant in this docket.

8. INTERIM ACCESS PLAN

201. On January 22, 1996, the Commission issued an Order in Docket No. 190,383­U, In the Matter of a General Investigation Into Access Charges. In that Order, the Commission determined that "the Interim Plan for access charges should be for a period to include two adjustments, expiring March 2, 1997, or until such other order is issued by the Commission". (Docket No. 190,383-U, Order dated January 22, 1996, at 10). Staff testified that the Commission "will need to include in its order whether the Common Carrier Line (CCL) should be adjusted, thereby decreasing the amount which will need to be rate rebalanced." Staff stated the time period for the CCL and the revenue neutral determinations is the same: twelve (12) months ending September 30, 1996. (Lammers, Tr. at 2966-40).

202. The State Act provides the same twelve (12) month period ending September 30, 1996, as specified in the Interim Access Plan and that the transition be revenue neutral. The Commission is implementing an access reduction plan in this Order. (See Section III.C. of this Order). Therefore, the Commission hereby replaces the January 22, 1996 Order in Docket No. 190,383-U on Interim Access Plan with regard to the CCL rate adjustment.

9. ALEC ACCESS RATES

203. Staff raised a concern regarding the access rates charged by ALECs to the IXCs. (Lammers, Tr. at 2966-21). The ALEC has a monopoly situation with regard to access service for the local exchange customers which it serves. An ALEC could offer its customers equal access to all the IXCs and then charge the carriers exorbitant rates per MOU access service. But the IXCs who are required to serve would be trapped, because they are required to have statewide average rates and would not be able to pass these rate disparities on to specific ALEC customers. (Lammers, Tr. at 2966-21).

204. The Commission is mindful of the concern raised by Staff. In this Order, the Commission is lowering access charges. The Commission favors competition, however, it will not allow abusive pricing practices by ALECs.

10. APRIL 4, 1996 ORDER RE: UNIVERSAL SERVICE ISSUES

205. Parties to this proceeding requested reconsideration of several issues in the Commission's April 4, 1996 Order which addressed several universal service issues. On May 10, 1996, the Commission issued an order on reconsideration and granted a hearing on the following issues: rate rebalancing, access rate reduction, EUCL, assessment on toll minutes of use, additional and subsequent rate rebalancing, support recipients, initial support, and managing future support. In this Order, the Commission has made findings as a result of the State Act, the Federal Act, and the evidence of record. The remaining issues in the April 4, 1996 Order stand as originally ordered.

IT IS, THEREFORE, BY THE COMMISSION ORDERED THAT:

All local exchange carriers shall reduce intrastate access charges to interstate levels. Rates for intrastate switched access, and the imputed access portion of toll, shall be reduced over a three-year period for SWBT and United with the objective of equalizing interstate and intrastate rates in a revenue neutral. ILEC access charges will reduce to interstate parity on March 1, 1997, as set forth in this Order.

Every telecommunications carrier, telecommunications public utility and wireless telecommunications service provider that provides intrastate telecommunications services shall contribute to the KUSF through an equal assessment on all intrastate retail revenue amounts as set forth in this Order.

The amount of the assessment attributed to the LECs' local service which may be recovered on a flat per line basis will approximate $3.21 per month for SWBT customers over three years, and slightly less than $3.00 per month for United customers over three years. The rates for pay phone calls shall be $.35 and the free call allowances for directory assistance shall be eliminated. These rates shall go into effect March 1, 1997, as set forth in this Order.

ILECs' amount would have resulted on an equal assessment basis in a per line increase from $1.42 to $3.23 per month. However, the ILECs did file a Stipulation and Agreement (S&A) which averages the impact on ILEC customers much the same as the flow through averages the impact on SWBT and United customers. Therefore, the Commission hereby approves the S&A with some clarifications as set forth in this Order.

The Commission hereby determines that the funding for the KRSI and Telecommunications Access Program (TAP) shall be collected by the KUSF administrator as part of the KUSF as set forth in this Order.

The Commission hereby adopts a KLSP plan in which all local service providers will participate.

The Commission hereby approves and renames the pricing flexibility plan "Competitively Flexible Pricing." The Competitively Flexible Pricing Plan combines range of rate-fixed, range of rate-flexible, as well as other revisions and suggestions. In determining this plan, the Commission has balanced the public policy goals of encouraging efficiency and promoting investment in a quality, advanced telecommunications network in the State of Kansas as set forth in this Order.

The Commission hereby adopts GDPPI-CW and a three percent total factor productivity (TFP) offset for the price cap adjustment formula. The Commission hereby determines a higher TFP was inappropriate and prohibitive given the required investment in infrastructure as set forth in this Order.

These and other issues are determined as specifically set forth in this Order.

A party may file a petition for reconsideration of this Order within fifteen (15) days of the service of this Order. If this Order is mailed, service is complete upon mailing, and three (3) days may be added to the above time limit.

The Commission retains jurisdiction of the subject matter and the parties for the purpose of entering such further order or orders as it may deem necessary and proper.

BY THE COMMISSION IT IS SO ORDERED.

McKee, Chr.; Seltsam, Com.; Wine, Com.

Dated:                   

                                                     

Judith McConnell

Executive Director

MLC



GLOSSARY

ALEC Alternative Local Exchange Company

BNF Basic Network Function

CCL Common Carrier Line

CPILFE Consumer Price Index Less Food and Energy

EAA Exchange Access Arrangements

EUCL End User Common Line Charge

FUSHCF Federal Universal Service High Cost Funds

GDPPI Gross Domestic Product Price Index

GDPPI-CW Gross Domestic Product Price Index Chain Weighted

HNAP Home Numbering Area Plan

ILEC Independent Local Exchange Company

IXC Interexchange Carrier

KLSP Kansas Lifeline Service Program

KRC Kansas Relay Center

KRSI Kansas Relay Services, Inc.

KUSF Kansas Universal Service Fund

LEC Local Exchange Company

LRIC Long Run Incremental Costs

MOU Minutes of Use

NECA National Carriers Association

PCI Price Cap Index

PCS Personal Communications Service

TAP Telecommunications Access Program

TFP Total Factor Productivity

TSLRIC Total Service Long Run Incremental Cost









1. 1 The Federal Communications Commission's interconnection order establishes a default discount of 17-25 percent. (Docket No. 96-98).

2. 2 The Commission's Phase I Order determined a two-pronged test to categorize a service as competitive. First, there must be at least one actual competitor certificated to serve in the specific geographic and product market. Second, the market must be effectively competitive. The Commission indicated it would consider relevant market factors on balance to determine whether the market was effectively competitive: the incumbent's current market share; the capacity of competitors in the market; the degree of substitutability of services offered by alternative suppliers; the existence and level of barriers to entry; and the existence of sustained economic profits for the service over a long run period. (See Order dated May 5, 1995, at 37-38).

3. 3 Wamego Telephone filed proof of publication on August 12, 1996; Moundridge Telephone filed proof on August 13, 1996; Sprint/United filed proof on September 17, 1996; and SWBT filed proof on September 20, 1996.

4. 4 SWBT operates the KRC under competitive contract for KRSI.

5. 5 The Telecommunications Access Program (TAP) replaced the former Disabled Equipment Acquisition (DEA) Fund in Docket No. 194,283-U.

6. 6 Sprint/United originally proposed 50 percent of GDPPI. (Harper, Tr. at 2633-13).

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