Exempt Government from Regulatory Provisions that Impede Efficient Use of Communications Technology

The Legislature should amend the Public Utilities Regulatory Act (PURA) or the General Services Commission Act to remove obstacles that impede the efficient use of communications technology and service delivery.

Two major impediments to efficient and cost-effective use of communications by Texas government are the restrictions on intergovernmental sharing of communications resources and on rates for certain governmental telephone users that subsidize other users. Each of these impediments are related by their user subsidies for basic local service rates. The appropriateness of these practices depends on determining whether ratepayers benefit more from governmental costs being artificially increased or from opportunities to improve government service delivery through better use of communications and lower service costs.

Telephone companies have acted on the perception that state and local governments are many separate entities rather than operating divisions of a single entity as created by the Texas Constitution. These companies operating practices have been reinforced by the Public Utilities Commission s (PUC) interpretations of s tate statutes, regulatory rule formulation and determination and establishment of utility rates. Therefore, the companies apply rules or rates which in many ways prevent the efficient use of communications services and thereby increase total governmental c ommunications costs.

Moreover, the telecommunications industry defines each political subdivision as a separate customer for many of its communications services policies. For example, various school districts in the same geographical area may identify c ommon communications needs that could be provided to all at a much lower total cost through a sharing arrangement. However, telecommunications tariff provisions treat districts as individual entities, not as local parts of Texas government, and this preven ts or makes such sharing arrangements more expensive.

The General Services Commission chose the American Telephone and Telegraph Company (AT&T) to implement the current TEXAN II network. AT&T was chosen on the basis that its proposal represented the lowest price and best met the state government needs.

A major and unique part of AT&T s proposal addressed the manner in which telecommunications traffic flowed out of the TEXAN network and into the public switched network (i.e., calls from on-network to off-network locations) to handle the flow out of TEXAN. AT&T proposed to use Private Branch Exchange (PBX) switching machines located on state agency or local governmental premises where necessary. Switched access service, used to originate and terminate long distance calls, is priced far above direct cost.

After the award to AT&T, two local exchange carriers, Southwestern Bell (SWB) and GTE-Southwest (GTE-SW), refused to provide the PBX trunk lines. The telephone companies asserted that the AT&T/TEXAN arrangement violated their local exchange tariffs provisi ons, which prohibit the resale of local service.

According to SWB and GTE-SW, TEXAN is a resale network, since each of the entities using TEXAN is an individual organization and not defined as an operatin g division of a single entity. The telephone companies further argued that the primary purpose of the PBXs was to terminate long distance traffic, not to make and receive local exchange calls. Therefore, the only tariff that applied to this type of use was switched access.

AT&T filed a complaint against SWB at PUC arguing that the telephone companies were wrongly refusing to provide local exchange service to the PBXs, in violation of the tariff and the law. 1

PUC found against AT&T and ruled that the telephone companies interpretations were correct. AT&T must pay switched access rates rather than the basic PBX trunk rate, and the traffic in issue was determined to be long distance, not local. In addition, PUC determined that since the TEXAN network was use d for long distance, it should pay a higher level of indirect contribution over its direct cost to help defray local network costs.

PUC also ruled that TEXAN was a resale network since service was provided to individual state agencies and individual loc al political subdivisions. They found that different customers were involved, not subdivisions of state government. PUC ruled that since the network is used by local political subdivisions, as well as state agencies, state government was reselling to other governmental entities. This violates the prohibition against resale of local service contained in PUC-approved telephone tariffs.

PUC s rulings conflict with existing statutes. The Legislature has explicitly authorized the use of TEXAN by political subdivisions. 2 The same statute also provides that telecommunications facilities and services shall be provided on an integrated or shared basis. 3 Taken together, these two provisions imply that it is state policy that all governmental entities should have access to a shared network to minimize total governmental costs. An example of sharing is the Capitol Complex Telephone System, a single, shared PBX used by agencies in the Capitol Complex area and throughout the City of Austin.

Additional examples of share d local exchange services between state and local governments also abound. District judges are state officials, yet they are generally provided phone service by the county. The Legislature recently authorized and funded a marine research laboratory in Corp us Christi. In this facility, there will be state, federal and local governmental entities, all served by the same telephone system. Under SWB s tariff, these sharing arrangements are not allowed unless the sharers pay an extra $9.00 per month per user above the basic rate. If the operation is deemed to constitute resale, the only tariff that is available is access. The access or resale price for the underlying service is always more expensive than the price for the same service in other non-resale tariffs.

Switched access is or will be used to terminate 50 percent of off-network traffic under TEXAN II and TEXAN III. 4 The difference in cost between the PBX trunk rate and switched access is $3,060,000 per year. This higher rate for switched access incl udes no additional service, facilities or quality. Because of the terms of the contract with AT&T for TEXAN II, AT&T is presently paying the difference, but this will end when the contract expires. State government costs will be higher with these PUC rulin gs in effect.

Government is charged like businesses, with most communication rates being higher than residential customers and providing a subsidy to other ratepayers. As noted above, the price or rate for the same communications functionality often varie s depending on the identity, class or occupation of the customer, the use put to the service (e.g., local or long distance) or whether the service is used by only one entity or shared by multiple customers. Business customers pay more than residential customers for the same service. If the facility is used for long distance, the rate is higher than the same facility would cost if it were used only for local calling. In virtually every instance, if more than one customer is going to use the service, the price is considerably higher, or sharing is altogether prohibited.

Allowing government to pay the lowest possible price for a facility would reduce operational costs through greater sharing of communication resources, thus benefiting taxpayers in general. Although subsidies in general are not questioned, higher rates for government encourage inefficiencies far greater than the marginal benefits gained through these subsidies.

A. The Legislature should amend either the Public Utilities Reg ulatory Act, art. 1446c, or the General Services Commission Act, art. 601b, (either is feasible) to provide that effective September 1, 1993:

1. The TEXAN network should not be required to subscribe to switched access service offerings of local exchange carriers if the technical needs of the TEXAN network may be fulfilled by basic local exchange lines or some other less expensive tariff or offer ing;

2. No tariff provision of a local exchange carrier that prohibits a user from sharing or reselling any serv ice should apply to the TEXAN network, or to any state or local governmental entity. No tariff-based geographic or premise restriction on availability or use of a service should apply to the TEXAN network or to any state or local governmental entity;

3. A governmental network may provide service to any governmental or non-governmental entity where the entity has a close working relationship with a governmental or proprietary function of a state or local governmental body, and the traffic furthers that relationship;

4. If the TEXAN network or a long distance service used by a state agency uses a switched access offering of a local exchange carrier, those rate elements designed to recover costs over and above those directly imposed on the local exchange carrier by use of local exchange facilities for TEXAN traffic shall not apply; and

5. Access to or use of a governmental network by various governmental entities or a non-governmental entity shall not cause the network or the operator of the network to be dee med a carrier under state law or subject to regulation.

B. To achieve the savings, the Legislature should authorize the Comptroller of Public Accounts to make the appropriate reductions to each agency s telecommunications appropriations for the 1994-95 biennium.

These recommendations will reduce cost and promote more efficient service delivery. The overall cost of fulfilling government s communications needs will be reduced through sharing. Government will spend less and have access to more if allowed to share communications resources among its subdivisions. Sharing will not be mandated but only made more accessible and attractive when appropriate since unnecessarily high rate/tariff restrictions will no longer be a barrier. In addition, the state through the Attorney General has spent a considerable amount of time, effort and resources intervening in PUC rate cases in an attempt to reduce existing restrictions and prevent further restrictions that unnecessarily burden the state. Legislation m andating these changes will clarify the state s position in such cases so the total cost of services and litigation will be reduced for government.

To the extent that these changes encourage the sharing of communications resources, government s ability to provide services to their constituents will be enhanced when telecommunications is necessary or related to service delivery. This enhancement will c ome as a result of better, wider and more efficient use of communications resources. An example is the clar ification that independent school districts and state agencies like the University of Texas (UT) System and the Texas Education Agency (TEA) can establish and use a single network for distance learning and access to the TEA and UT computers. 5

The telephone industry will likely identify and oppose the single entity concept as special treatment for government. They will likely argue that sharing and resale restrictions exist to prevent tariff arbitrage. According to the industry, requiring sharers or res ellers to subscribe to higher priced tariff offerings like switched or special access is necessary to provide support for basic telephone users. They believe that large users and sharers should be required to pay above cost prices to subsidize residential rates. When government, which is a large user, is allowed to pay less, then residential and other users will have to pay more to make up the revenue shortfall.

In response, it is not certain that residential customers will or should bear the entire burden . PUC should be able to allocate the rate revenue difference among the various classes of customers as it deems appropriate. The Legislature should simply be indicating that government should not be required to use tax funds for utility costs that include subsidies.

Fiscal Impact
Exempting the state government from switched access subsidy elements and allowing the state government to subscribe to local rates for the System 75s or some similar switching system would avoid about $3.1 million per year long distance costs that are the difference between the PBX trunk rate and switched access. 6 In addition, $3.7 million in the first year (dropping to $3.4 million by the third year) would be saved by exempting the state from the switched access subsidy elements. 7 The total amount shown is only the impact on TEXAN. Additional savings will accrue to agencies that use non-TEXAN long distance services like WATS/ 800 lines.

Five-year cost savings from exempting the state from subsidies would be $17.4 million, while five-year cost avoidance from switched access charges would be $15.3 million. The Interexchange Carrier Access Charges would be gradually reduced until they are eliminated in March of 1995. These calculations assume current use of telecommunications services. However, TEXAN traffic should grow materially over five years, and actual savings should be more than the fiscal estimate. These savings would reduce the cost of telecommunications services for TEXAN, resulting in a reduction of appropriations f or telecommunications costs for state agencies.

It is not possible to calculate the total impact of eliminating sharing restrictions. Such action should reduce total governmental telecommunications costs and allow smaller governmental entities to have access to more sophisticated services and equipment than would be available or affordable on a stand-alone basis.

The legislation would also result in state and local governments obtaining ownership of all intrasystem wiring in government-owned buildings. Absent this legislation, the telephone industry could require government to purchase inside wire in many, if not most, of its buildings. One local exchange carrier has proposed to the PUC that it be allowed to grant ownership of inside wire to single unit buildings, but require purchase of wire in multi-unit buildings, at a unilaterally determined, non-negotiable price. 8 If more than one customer occupies the building served by the same telephone system, the building is defined as multi-unit. This legislation would result in all government buildings being classified as single unit for purposes of that pricing proposal.

The fiscal estimate below does not include cost avoidance of $15.3 million over fiveyears resulting from the difference between PBX trunk rate and switched access. Savings included below are those from subsidies that would be eliminated.

Gain to the Gain to Gain to
Fiscal General Revenue Other Dedicated All Dedicated Change in
Year Fund 001 Accounts or Funds Accounts or Funds FTEs

1994 $1,900,000 $1,800,000 $3,700,000 0
1995 1,800,000 1,700,000 3,500,000 0
1996 1,760,000 1,640,000 3,400,000 0
1997 1,760,000 1,640,000 3,400,000 0
1998 1,760,000 1,640,000 3,400,000 0

1 Petition of AT&T Communications for Declaratory Ruling, PUC Docket 8395.
2 Texas Annotated Civil Statutes, art. 601b, sec. 10.07.
3 Ibid., sec. 10.05.
4 The assumed configuration for TEXAN III will use switched access Feature Group D to originate off-to-on traffic and agency PBXs and switch ed access Feature Group B to terminate on-to-off traffic. Of the 78,132,000 intrastate terminating minutes, 38,892,000 will go over Feature Group B and 39,240,000 will traverse an agency PBX. GSC estimates that the new network will have 32,400,000 intrast ate originating minutes each year: 6,000,000 over Feature Group D, and 26,440,000 over 800 services.
5 UT operates the THENET, and provides access over THENET for TENET. Both are shared networks, used by several entities. SWB recently filed a case at the Public Utility Commission (since withdrawn without prejudice) that would have precluded TENET from continuing to use its present access configuration modems in certain cities tied to TENET via private lines. Local users dial a local number to access the modem and then the network. SWB s proposed tariff would have outlawed the use of local lines for interexchange access. Instead, the network would have had to use switched access, which is considerably more expensive. See Application of Southwestern Be ll Telephone Company to Revise General Exchange Tariff to Add Clarifying Language in Sections 8, 10, 14 and 23, Docket 10734.
6 Interview with Bruce Schremp, Telecommunications Division, General Services Commission, Austin, Texas, November 5, 1992, and Ibid., PUC Docket 8395.
7 Interview with Bruce Schremp, Telecommunications Division, General Services Commission, Austin, Texas, October 8, 1992.
8 See Docket 10831, Petition of Southwestern Bell Telephone Company to Revise Tariff to Define Network Interface.