April 20, 1998 VIA MESSENGER Paul Curl, Acting Secretary Washington Utilities and Transportation Commission 1300 S. Evergreen Park Drive S.W. P.O. Box 47250 Olympia, WA 98504-7250 Re: USF and Obligation to Serve Rulemaking, Docket No. UT-970325 Dear Mr. Curl: Pursuant to the Commission's Notice of Opportunity to File Comments (April 17, 1998) ("Notice") in the above-referenced docket, NEXTLINK Washington, L.L.C. ("NEXTLINK") and TCG Seattle ("TCG") provide the following comments on obligation to serve issues. Overview "Every telecommunications company shall, upon reasonable notice, furnish to all persons and corporations who may apply therefor and be reasonably entitled thereto suitable and proper facilities and connections for telephonic communication and furnish telephone service as demanded." RCW 80.36.090. The obligation to serve established by the Legislature in this statute applies to all registered providers of telecommunications service in Washington, and the Commission has never waived this requirement for any local exchange carrier, even those that have been classified as competitive. See, e.g., In re Petition of TCG Seattle, Docket No. UT-941204, Order Granting Petition, Appendix A (June 30, 1995). The issue raised by the Commission in this rulemaking, therefore, is whether and to what extent this "obligation to serve" should continue to include the historic requirement that incumbent local exchange carriers ("ILECs") act as carriers of last resort in the provision of local service. The Commission must address this issue in the context of the policy concerns that gave rise to, and continue to affect, the legislative directive. The obligation to serve as a carrier of last resort in a monopoly environment ensures that all citizens have access to affordable telephone service. That goal has not changed. See, e.g., RCW 80.36.300(1). What has changed is that the Commission and the Telecommunications Act of 1996 ("Act") have opened the historical bottleneck local telephone monopoly to competing providers, and that change has prompted the Commission to reexamine monopoly regulation. The touchstone for any such reexamination, however, must remain the consumer, and the Commission has framed the issue accordingly: How can the Commission continue to ensure that service, including both additional service in existing served areas and new service in unserved areas, is available when customers request service, given the technological and market changes that may occur in Washington? Notice at 1. NEXTLINK and TCG, as new entrant carriers, are optimistic that the Commission can craft a framework that ensures the affordable availability of service to all customers in Washington. In creating this new framework, however, the Commission must remain cognizant that competition in the local telephone market is still in a nascent state of development and that substantial remnants of the historical regulatory environment remain on the telecommunications landscape. This regulatory arrangement generally represents the obligations an ILEC must accept in exchange for its monopoly -- the ILEC must serve as the "carrier of last resort," providing service to all requesting customers, and in return receives the benefits associated with being the monopoly service provider, including a virtually guaranteed rate of return on its investment. No one can deny that over the past few decades this regulatory arrangement was an essential element in successfully raising telephone subscribership rates well above 90 percent in Washington and throughout the nation. The key element supporting this success was the conjunction of the ILEC's obligation to serve as carrier of last resort and rate-of-return regulation, which served as a counterforce to an incumbent's natural economic incentive not to provide service to a particular customer when the incumbent would not profit from the revenues it receives from that customer. Rate of return regulation allows the ILEC to generate revenues substantially above its costs from some customers to make up for revenue shortfalls from other customers. The opening of the local telephone market to competition has created a new legal and regulatory paradigm. The development of effective competition will create greater consumer choice and its attendant benefits but will undercut the continued use of the historic regulatory arrangement as an effective mechanism to ensure that all customers in Washington have access to telecommunications service. The Act envisions that an explicit and competitively neutral universal service fund ("USF") will enable the Commission to develop an appropriate market-based substitute for the carrier of last resort obligation as the transition to a fully competitive local market continues to develop. Until that USF is in place, however, the historic requirement that ILECs act as carriers of last resort cannot be removed without significant detriment to the legislative goal of universal service. The Commission cannot ensure the affordable availability of service to all customers without regulation until the market is able to compensate for the lack of that regulation. The potential market substitute for the obligation to serve as carrier of last resort is a viable and competitively neutral USF, which the Commission is developing in another phase of this docket. Rather than compelling the ILEC to rely on implicit cross-subsidies among services to generate sufficient overall company revenues, a properly sized and established USF would provide an explicit source of additional revenue in an amount sufficient to allow the carrier profitably to serve a customer who pays rates that do not adequately cover the costs of providing the service. This USF would render all customers attractive to serve because a carrier is able to generate sufficient revenues to be profitable on an individual customer, rather than company-wide, basis. Such an economic incentive to serve all customers thus reduces the need to impose a carrier of last resort obligation requiring the ILEC to serve all customers. The critical aspect of substituting market forces for regulation, however, is the transition. An ILEC that is relieved of its carrier of last resort obligation prior to the establishment of an appropriate USF can be expected to act according to its economic self-interest. The ILEC will likely refuse to provide service that does not generate sufficient revenues, resulting in customers who are unable to obtain telephone service. The Commission, therefore, must implement a fully functioning USF -- including adequate and competitively neutral funding and rules governing access to the fund -- before relieving or modifying any ILEC's obligation to serve as a carrier of last resort. The Commission obviously has not yet established, much less implemented, a USF that will replace existing ILEC implicit cross-subsidies with explicit cost recovery support. Accordingly, any consideration of adjustment to ILECs' obligation to serve as carriers of last resort should await or accompany Commission resolution of the other issues presented in this docket. Comments on Specific Issues NEXTLINK and TCG have focused their comments on the general issue posed by the Commission, but provide the following brief comments on the sub-issues listed in the Notice. 1. How should the obligation to serve differ, if at all, between: (a) The obligations of an incumbent to serve its retail customers, and to provide unbundled network elements and resale services to its wholesale customers; (b) The obligations of an entrant to its retail customers, and the obligation of an incumbent to its retail customers; (c) The obligations of incumbents and new entrants with respect to customers outside any incumbent's current exchange boundaries; (d) The obligations of incumbents and new entrants to customers who switch to a competitor and then wish to return to their preceding service provider; (e) The obligation of an incumbent to serve the additional demands of existing customers, for example, second lines, and its obligation to serve new customers within existing exchange map boundaries? Again, the Commission needs to differentiate between obligation to serve and obligation to serve as a carrier of last resort. All telecommunications carriers share the same obligation to serve, but only the ILECs, as the incumbent monopoly providers, must serve as carriers of last resort. Specifically with regard to the Commission's questions: (a) The ILEC has the same obligation to serve both end users and competitors under federal, as well as state, law; (b) The ILEC and the new entrant have the same obligation to serve their end users, but the ILEC alone has the obligation to serve as a carrier of last resort; (c) Only the ILEC may have an obligation as carrier of last resort to serve customers outside its exchange boundaries depending on the relative ability of an adjoining ILEC to fulfill that obligation --as the Commission develops criteria and implements requirements for Eligible Telecommunications Companies, this issue becomes one of the responsibilities of an ETC, rather than an ILEC or CLEC; (d) ILECs and new entrants have the same obligation to serve end user customers they formerly served; and (e) The ILEC has the same obligation to serve existing customers as it has to serve new customers within its service area. 2. What conditions must exist before the Commission can permit an ILEC to be relieved of its obligation to provide service on demand within its service area? Should the conditions include: (a) Generally available (tariffed) terms and conditions for unbundled network elements and resale of services; (b) The presence of effective competition in the service area at issue, and if so, measured by what standard; and (3) The existence of more than one eligible telecommunications carrier ("ETC") in the service area at issue? The first condition that would have to exist before the Commission could permit an ILEC to be relieved of its obligation to provide service on demand is repeal or waiver of RCW 80.36.090 and other statutory provisions prohibiting unreasonable preference or discrimination. See, e.g., RCW 80.36.170-190. These are legislative requirements that the Commission has never waived for any local exchange carrier, even after finding that a carrier is subject to effective competition. No ILEC should be relieved of its obligation to serve as carrier of last resort in its service area until market forces effectively take the place of that obligation, including but not limited to, (a) establishment of explicit subsidy mechanisms through a USF; (b) elimination of implicit subsidies through cost-based pricing of all facilities and services the ILEC provides to both end users and competitors; (c) the existence of effective alternative sources of telecommunications service throughout the ILEC's service area (including at least one ETC); and (d) accounting and other safeguards to ensure that the ILEC is not able to engage in internal cross-subsidization or to obtain unjust enrichment from any financial transaction occurring from any sale of plant and facilities upon any discontinuance of service to a formerly served area. 3. What difference, if any, is there between the obligation to serve requirement imposed by RCW 80.36.090, and the requirement that an ETC offer basic service in its designated service area? Are obligation to serve and universal service concepts necessarily related to each other? The obligation to serve requirement in RCW 80.36.090 applies to all services offered by a telecommunications carrier, including both toll and local service, as well as facilities and services provided to other carriers. The basic service required of an ETC is only a small sub-set of the services required by RCW 80.36.090 and is intended to ensure that all consumers have at least minimal access to the public switched network. The obligation to serve as a carrier of last resort and universal service concepts are inextricably intertwined. Whether in a monopoly or a competitive market, a service provider must have the opportunity to earn a reasonable return on its investment. In the monopoly environment, the obligation to serve is coupled with rate of return regulation that ensures, through implicit internal subsidies, that the ILEC is able to earn its permissible rate of return by serving all customers within its service area. One goal of USF reform should be to ensure that an obligation to serve is replaced or accompanied by the availability of explicit sources of additional revenue, so that the carrier can economically serve requesting customers within a designated area. Such a USF, however, must be established and implemented before the Commission makes any adjustment to an ILEC's obligation to serve as a carrier of last resort. 4. For purposes of fulfilling the obligation to serve requirement, are ILECs' designated (tariffed) service areas appropriate, or could some other geographic area be considered? Carriers, including ILECs, should be permitted to designate the service areas in which they will operate, whether by tariff, price list, or some other nondiscriminatory and publicly available list of terms and conditions. One object of the USF the Commission eventually adopts, however, should be to provide sufficient cost support to make all geographic areas attractive to at least one local service provider. 5. Section 214(e)(3) requires state commissions to designate an ETC for unserved areas of the state. What process should the Commission use to designate providers that will have an obligation to serve currently unserved areas of the state? If a case-by-case approach is recommended, what specific criteria should the Commission consider? Designation of an ETC for currently unserved areas should be undertaken on a case-by-case basis. The criteria for the designation should be (a) willingness to serve the area; (b) technical capability to serve; and (c) relative cost to serve. The Commission should endeavor to designate only those carriers who are willing and able to serve a currently unserved area at the least cost and best level of service. 6. What service(s) should be provided pursuant to the statutory obligation to provide service requirement? Should the service(s) provided differ depending upon whether the customer is located in an existing exchange area or in an unserved area? Again, the Commission must distinguish between a general obligation to serve and the obligation to serve as carrier of last resort. The statute does not specify which services must be provided but states generally that every telecommunications carrier must "furnish telephone service as demanded." This general obligation to serve should include any service offered by the telecommunications carrier in a particular defined area. As to the obligation to serve as a carrier of last resort, however, the service(s) provided should not differ based on whether the customer is located in or outside of an existing exchange area, but may differ based on the technical requirements, cost, and availability of USF funds to provide a particular service to the requesting customer. USF funds are available only to ETCs and to subsidize only basic telecommunications services. If a customer requests any other service in an area where the carrier does not provide it, the designation of that area as "served" or "unserved" is less of a factor than whether the carrier is willing and technically able to provide the service and at what cost. These considerations highlight the importance of properly and narrowly defining "basic telecommunications service" and the eligibility requirements and obligations for ETCs. 7. Do the FCC infrastructure sharing rules, implementing Section 259, necessitate consideration by the Commission of state specific infrastructure sharing rules? NEXTLINK and TCG have no comment on this issue at this time. 8. Are the availability of tariffed terms and conditions for unbundled network elements, resale, and infrastructure sharing sufficient to ensure that non-ILEC carriers could provide service under an obligation to serve requirement in designated service areas? No, for several reasons. First, unbundled network elements ("UNEs"), resale, and infrastructure sharing currently are not tariffed in Washington. Even if tariffs were in place, however, the Act requires contract rates that satisfy specific pricing standards. The Commission has established only interim contract rates for these elements and services (and only for those provided by U S WEST and GTE), and the Commission has not set any deadline for making a final determination on generic pricing, including any geographic deaveraging of loop rates. Second, the Commission should not dictate how a non-ILEC carrier provides service. Facilities-based carriers like NEXTLINK and TCG, for example, should not be designated to serve an area where they do not have facilities and must rely on resale or recombining unbundled network elements provided by the ILEC that currently serves the area. The costs, provisioning, control, and often service quality are substantially different -- particularly if the facilities-based carrier does not otherwise use resale or recombination of ILEC services and elements and has not negotiated or arbitrated an interconnection agreement that contemplates substantial use of such services and elements. Third, the Commission has yet to determine how the USF will be funded, which carriers may draw from the fund (and under what conditions), and what facilities or services give rise to eligibility for USF revenues (and how much). These decisions will have a potentially enormous impact on whether, and the extent to which, resale or recombination of UNEs will be an economically viable way to provide service in a particular area. 9. Are there any legal, institutional, or market factors that the Commission should consider in altering the existing ILECs' obligation to serve? See Comments on Issue No. 2, supra. 10. Can the limits of an obligation to serve requirement be defined by technology, by business plan, or by any other attribute or attributes other than a tariff? The limits of an obligation to serve requirement should be derived from the statute and the carrier's tariff, price list, or other means by which the carrier holds itself out to the public to provide service. In other words, a carrier should not have an obligation to serve customers outside of its service area or to provide services it does not generally offer to the public in that area, unless the carrier is an ILEC with the obligation to serve as a carrier of last resort. The tariff or price list, however, could and should reflect factors such as technical capability to provide a particular service, a business plan or cost/benefit analysis of providing that service, etc. 11. What other issues, not addressed here, should be addressed by a Commission rule concerning the obligation to serve requirement? NEXTLINK and TCG have no suggestions for additional issues concerning the obligation to serve requirement that the Commission should address at this time. 12. Do wireless providers have an obligation to provide service within their designated serving areas? Can the Commission designate wireless providers as ETCs? Wireless providers are not subject to Commission regulation, including the obligation to serve. See RCW 80.36.370(6). NEXTLINK and TCG, however, support a competitively and technology neutral USF. Wireless carriers, like any other carrier, should be eligible to become ETCs and receive universal service support if they satisfy all statutory and regulatory requirements associated with being an ETC. Conclusion All telecommunications carriers in Washington have a statutory obligation to serve, but only ILECs have the duty to provide local service as a carrier of last resort. This requirement, in conjunction with rate-of-return regulation, has resulted in nearly universal service in Washington. The Commission should not jeopardize that accomplishment by removing or substantially altering the ILECs' obligation to serve as carrier of last resort until a competitively neutral USF has been established and is operational in Washington. Only then will the Commission be in a position to determine, based on actual experience, whether and the extent to which that fund provides an adequate market substitute for the existing carrier of last resort obligation. The Commission nevertheless should continue to develop and implement USF and ETC requirements as rapidly as possible to hasten the day when an effectively competitive local market is a reality. NEXTLINK and TCG appreciate the opportunity to provide comments to the Commission on these issues. Please contact me if you have any questions about these comments. Sincerely yours, DAVIS WRIGHT TREMAINE LLP Gregory J. Kopta Attorney for NEXTLINK Washington, L.L.C. and TCG Seattle cc: Deborah Jaques Deborah Waldbaum Karen Notsund bcc: Dan Gonzalez