BEFORE THE WASHINGTON UTILITIES AND TRANSPORTATION COMMISSION Investigation of the Cost of Universal ) ) UT-970325 Service and Access Charge Reform ) ) COMMENTS OF GTE NORTHWEST INCORPORATED APRIL 17, 1998 Pursuant to the Commission’s Preproposal Statement of Inquiry and to its March 23, 1998 and April 1, 1998 Notices, GTE Northwest Incorporated (“GTE”) presents its comments on the “obligation to serve” and bidding process issues. INTRODUCTION GTE agrees with the Commission that traditional notions of “obligation to serve” need to be reexamined in light of the new federal and state regulatory policy, technological changes and market developments, and that new rules and requirements must be applicable on a competitively neutral basis. Notice of Opportunity to File Comments, March 23, 1998, p. 1; Preproposal Statement of Inquiry, March 18, 1998, p. 1. With this new environment in mind, GTE provides an overview of the public policy and business issues facing the Commission and the industry, answers the specific questions posed by the Commission, and gives its recommendations for new rules. GTE does make one initial observation. The obligation to serve defines, to some degree, the costs associated with universal service. Thus, these obligations are an integral component of the issues under consideration in Docket No. UT-980311, and these two dockets should be consolidated. OVERVIEW When a major change is occurring, whether it is a business change or a regulatory change, it is a good idea to step back and re-ask some fundamental questions. This helps to provide orientation and direction. In the context of these requested comments, the fundamental question is: Why is a government “obligation to serve” mandate needed? In what circumstances, if any, should the government be compelling carriers to provide telecommunications services, especially services at government set prices? The obvious answer is that the government perceives there will be situations when carriers will not voluntarily provide services the government thinks should be provided -- at all, or at least at prices the government deems acceptable. Thus, in this proceeding the Commission and the parties must (a) focus on those situations in which carriers may not voluntarily provide service or prices in-line with the government’s view, (b) understand the legitimate business reasons for carriers not voluntarily providing service in a manner preferred by the government, and (c) develop a fair solution that reasonably accommodates these realities. During the past several decades, this basic question rarely needed to be asked, because it had been resolved by the “regulatory compact.” Telephone companies provided service upon reasonable demand within their serving territories at rates set by the Commission because the Commission set rates, paid by all subscribers, which covered the company’s revenue requirement and allowed an opportunity to earn a fair return upon those mandated investments. Of course, that compact is no longer in force. As the Washington Supreme Court made clear, telephone companies do not have the exclusive right to serve their serving territories. In re Electric Lightwave, Inc., 123 Wn.2d 530, 869 P.2d 1045 (1994). Thus, telephone companies are no longer guaranteed the opportunity to earn a fair return on the investments through mandated rates paid by all subscribers in the serving territory. The ELI decision illustrates that long-held industry and Commission statutory interpretations may be incorrect and invalidated by the courts when the issues are presented in new contexts. A new context has, in fact, arisen. The old approach is not valid or fair in a competitive paradigm. However, because of the prior expectation of a guaranteed opportunity to earn a return on investment, incumbent local exchange carriers are providing service in places and/or at prices they would not do voluntarily. The resolution of the obligation to serve issues needs to take this into account and assure that the ILECs are not left servicing investments and commitments which would never be made today under any rational economic analysis. Since the existing legal framework does not require an obligation to serve which would ensure the availability of service at affordable rates to all customers in Washington, the question then arises as to whether the Commission should develop a new obligation to serve which would be suitable for the new competitive framework established by the Act. Such an obligation would be part of a competitively neutral policy to maintain universal service in this competitive environment. THE TELECOMMUNICATIONS ACT OF 1996 It is the Act, of course, which is the single most integrated expression of this new paradigm. While expressly intended to foster competition in local telephony, the Act also expressly seeks to maintain universal service. GTE will not reiterate here its extensive comments about the universal service obligations which the Act imposes on ILECs, other carriers, and state commissions. For purposes of the questions raised in this docket, however, it is critical to keep in mind several of the Act’s specific requirements. First, it is a recurring theme that the Act intends for universal service support to enable both basic and advanced services to be available to both rural and urban customers at comparable, affordable rates. Section 254(b). In order to do so, eligible telecommunications carriers (“ETCs”) are eligible for explicit support from the universal service fund. Section 214(e). That support must be specific, predictable and sufficient. Section 254(b)(5). The Act specifically indicates that state commissions may conscript ETCs for unserved customers. Note that the Act speaks in terms of an unserved “community or portion thereof,” Section 214(e)(3), not a “service area” as that term is otherwise used. Section 214(e)(2). Act, section 102, amending 47 U.S.C. § 214, (e)(3). Thus, the Act has a clear mandate: the receipt of universal service funding is linked to the assumption of an obligation to serve. Conversely, a carrier that accepts this obligation is eligible to receive federal universal service support “in accordance with” Section 254. Section 214(e) requires that a carrier provide the supported services, as defined by the FCC, to any customer within a serving area defined by the state. The ETC must also advertise the availability of its service. Section 214 does not require a carrier to be an ETC in order to be eligible for state support. Section 214(e) does not specifically mention the rate at which service is to be provided. However, the FCC could have chosen to include an affordability standard in its definition of basic local service. Further, the FCC’s decision of May, 1997, does not specify whether the defined basic service may include features other than those included in the definition; more recently, the FCC has sought comment on the issues raised by “hybrid” services which combine the required features with other capabilities, or with information. Section 214(e) does not guarantee that an ETC will be entitled to receive funding from the Federal universal service mechanisms. Rather, it says that an ETC will be eligible to receive funding “in accordance with” Section 254. Thus, it is possible that the implementation of the universal service funding mechanisms, pursuant to Section 254, would establish the manner in which ETCs will receive funding, and any conditions they must satisfy in order to do so. Since the purpose of Section 254 is to ensure the widespread availability of service at affordable rates, it would be reasonable for the Commission to require an ETC to offer the defined basic local service at reasonable rates as a condition for the receipt of support. WASHINGTON STATE LAW Washington state law is slightly different. As this Commission has just made clear, the obligation to provide service on demand within an established serving territory, expressed in RCW 80.36.090, is subject to a “rule of reason.” WUTC v. US West Communications, Inc., Docket No. UT-961638, Fourth Supplemental Order Re