Introduction

 The obligation to serve issue is one of the most difficult issues to address 
as the telecommunications industry becomes more competitive.  In this 
memorandum, the Washington Independent Telephone Association (WITA) will 
express its initial comments on this subject.
Background
 Historically, the issue of the obligation to serve was rarely a front-burner 
issue.  In a monopoly-era environment, companies were willing to build 
facilities to serve customers in remote areas.  It was generally accepted that 
extending service wherever possible was the national policy expressed in the 
1934 Communications Act.  Support mechanisms were in place, either through 
internal company subsidies or external support mechanisms.  The investment 
could be made to provide state-of-the-art telephone service to all but the most 
remote of customers.  
 The obligation to serve issue began to get more complicated with the beginning 
of competition through the entry of what were initially called Competitive 
Access Providers (CAPs) in the late 1980s and early 1990s.  The issue of 
obligation to serve was brought to the forefront with the passage of the 
Telecommunications Act of 1996 (the Act).  The Act clearly opened the door to 
competition in all telecommunications markets.  
 A number of regulatory initiatives have been undertaken to encourage 
competition. For example, this Commission, in its recent report to the 
Legislature on universal service, indicated that it viewed its role is to use 
universal service programs to create a competitive market in rural areas.  
Commission Staff openly solicited wireless carriers to seek designation as an 
eligible telecommunications carrier (ETC) for receipt of universal service 
funds.  As another initiative, although it is not a necessary precondition 
contained in the Act, most regulatory entities have adopted the position that 
universal service support should be portable.  And, there is a clear push by 
some parties to limit the size of any universal service fund.  As a related 
part of this regulatory environment, the Commission has before it at least one 
proposal by Commission Staff which would seek to unilaterally reduce revenue 
streams from access charges for rural incumbent local exchange carriers without 
any consideration for what that does to the further investment in 
telecommunications infrastructure.  That initiative is the Commission Staff 
revised proposal for access reform in this docket, which would move access 
rates to total service long-run incremental cost (TSLRIC). The most recent 
revision of Staff’s proposal would allow small companies to put the revenue 
lost from terminating access on originating access.  However, the interexchange 
carriers in this proceeding have advocated this type of rate design to allow 
the originating access to be “competed away” or bypassed.  At best, this only 
delays the loss of revenue for a short period of time.  This environment raises 
the obligation to serve issue to one of the most critical before the Commission.
 Perhaps the following examples help to explain why this is now a critical 
issue. Assume there is a large rural exchange in eastern Washington for which a 
rural land-line company and a wireless carrier have both been designated as an 
ETC.  There is a customer at the edge of the exchange who is in the fringe of 
the wireless carrier’s coverage area and a mile from the existing wireline 
company’s current facilities.  That customer goes to the wireless carrier and 
asks for service.  The wireless carrier says that they could provide service, 
but coverage would be spotty at best.  The wireless carrier suggests that the 
customer seek service from the wireline carrier, telling that customer that in 
a year or two, it will have upgraded its coverage in that area and could 
provide excellent service at that time.  That customer then goes to the 
wireline carrier and demands service. The wireline carrier builds facilities 
out that extra mile at a cost of $30,000 or $40,000. The customer takes the 
wireline service for a year and a half, but then attracted to the broader 
calling area of the wireless carrier, switches to the wireless carrier.  The 
universal service support is portable.  The wireless carrier then receives the 
universal support funds for that customer, and the wireline carrier’s 
investment is stranded.  One simple answer to this scenario might be, “Gee, 
that’s too bad, but that’s the risk the wireline carrier took when it was 
designated as an ETC for that exchange.”  But in that environment what rational 
business would make the initial investment?
 Now assume that the customer is just across the exchange boundary in an 
unserved territory.  Under what circumstances would any carrier, wireline or 
wireless, put investment in to serve a customer if it does not appear that 
there is a realistic chance that the investment required to serve that customer 
will ever be recovered?
 There is another example which applies in the more urbanized areas, as well as 
the rural areas.  Many companies are installing SONET rings for local service 
to ensure reliability.  They are building access nodes using digital loop 
carrier.  The long-run effect of this construction is to shorten loop lengths.  
Ultimately, this means loop investment will be reduced and service will be 
improved.  
 In making decisions for construction purposes, there may be a difference in 
the time frame that is used to evaluate the level of investment to make if the 
investment is at risk to competition.  In the past, companies have generally 
built to cover all of the anticipated growth in an area.  This has been 
recognized as being, in the long run, the most efficient methodology.  This 
type of decision avoids reopening trenches, reinforcing cable, and making other 
investments which can be fairly costly if postponed to the future.  
 However, in discussions of a forward-looking long run economic cost model, 
incumbent local exchange companies (ILECs) are being criticized for having too 
much unused capacity.  Ironically, both the Hatfield and the BCPM models have 
difficulty in accepting a long-run view of initial investment decisions.  The 
models discourage investment in capacity to serve anticipated growth. 
 In addition, in a competitive environment, it may well be that a company will 
not serve 100% of the market.  This means that sizing decisions for engineering 
of plant may have to be made differently.  In a competitive market, it may be 
better to put in less plant initially.  Then, if market share estimates are 
lower than the actual number of customers served, a company would incur the 
expense of retrofitting.  This may mean the initial investment is lower, 
although the long-term cost to serve new customers may be higher. However, at 
least there is less capital at risk to serve the initial set of customers.  
This is a decision that must play into planning in a competitive environment 
where there is no certainty that the investment will be recovered.
 Under this increasing criticism from forward-looking cost model advocates and 
increasing competition, ILECs are questioning whether to invest in plant 
designed to serve long-term expected growth. 
Obligation to Serve
 There are at least three different scenarios in which to discuss the 
obligation to serve.  The first is the service provided by an ETC.  The second 
is the provision of service to currently unserved areas.  The third is the 
extent of the obligation in an area which is subject to active competition.
ETC Areas
 In the area where a company is designated as an ETC, it has an obligation to 
serve imposed on it by the Act. 47 U.S.C. 214(e).  There are two ways in which 
the Commission can establish reasonable ground rules for an ETC’s obligation to 
serve.  The first is the appropriate targeting of support.  Universal service 
support is portable.  Use of study area or exchange averages to calculate the 
amount of support which is portable per customer overstates the amount in the 
relatively more dense areas and understates the support needed to serve 
sparsely populated areas.  This encourages creamskimming in the dense areas and 
provides a barrier to entry in more rural areas.  However, if universal service 
support is targeted so that some of the anomalies that otherwise exist with the 
porting of support are ameliorated, an incumbent ETC can continue to provide 
service throughout the designated service area while sending appropriate market 
signals to competitors.  
 The second mechanism is the development of appropriate line extension policies 
for a more competitive environment.  For extension of service to a customer 
that is located a substantial distance from existing facilities, there should 
be an appropriate sharing of the cost of construction of those facilities 
between the customer and the company, with support from the universal service 
fund.  
 A line extension policy in an ETC area should contain three elements.  The 
first is the determination of a reasonable amount that a company should be 
willing to risk to serve any customer in the area they have volunteered to 
serve as an ETC.  At this stage of the discussion of these concepts, WITA is 
not recommending any specific dollar amount.  The specific figure could be 
developed using the forward-looking investment numbers from BCPM.  The numbers 
could be a statewide average, a company average, or even an exchange-specific 
number.  For now, the important concept is that there should be some level of 
investment a company is willing to risk to gain the customer.
 The second element of the line extension policy is support from the universal 
service fund for construction of the facilities.  This is not a monthly figure 
for operating expenses and return of investment over a long period of time.  It 
is up-front reimbursement at the time the investment is made.  This support 
should have a cap to it.
 The cap for this investment level support should be what is reasonable from 
society’s viewpoint as the cost of adding an additional customer to the 
network.  For example, the BCPM model in its default mode places an investment 
cap of $10,000 per line.  This is not to advocate that $10,000 is the right 
number.  The docket can address that question at a later date.
 This type of universal service fund support has the advantage of getting 
facilities built without deterring competition.  Once the facilities are in 
place, the customer can choose to go to another competitor, taking the more 
traditional, portable monthly support to the competitor.  The company that has 
built the facilities has been reimbursed only for the cost of the facilities, 
has the “at-risk” amount, and competition is not inhibited.  This approach will 
encourage continued extension of service in a competitive environment.
 The third element of the line extension policy is to have the customer pick up 
the cost of construction above the cap.  For example, if the cost to construct 
new facilities to serve a customer is $12,000, the company would pay $1,000, 
This assumes that $1,000 is the investment figure agreed to be appropriate for 
a company in this hypothetical.  The same is true for the universal service 
fund number. the universal service fund would pay $9,000, and the customer 
would pay $2,000.
Unserved Areas
 For unserved areas, the ground rules may be a little different.  Although it 
will be tested at some point in time, these Comments assume that the authority 
contained in the Act 47 U.S.C. 214(e)(3). to compel a carrier to provide 
service to an unserved area is constitutional.  Under those circumstances, it 
again seems fair to have special construction policies in place.  In addition, 
it is even more compelling to recover investment over a short period of time if 
a company is forced by governmental intervention to expend resources.
 In this case, the line extension policy should contain only two components: 
support from the universal service fund and customer contribution.  It is not 
appropriate to force a company to risk capital to serve customers it does not 
want to serve.  However, it is appropriate to cap the amount of support from 
the universal service fund. In a world of unlimited resources, a cap would not 
be necessary.  However, the reality is that there is increasing pressure to 
reduce, not increase, support mechanisms. Thus, the need for a cap.
 Using the example of $12,000 in facilities needed to serve a new customer in 
the unserved areas, the universal service fund would provide the capital 
reimbursement up to the cap, hypothetically $10,000.  The customer would pay 
$2,000.
Multiple Carriers
 In the case of an area where there is effective competition, then the market 
will take care of itself, and there is no need for regulation.  When an area is 
in the transition to effective competition, the issues are less clear.  For 
areas served by multiple carriers, the Commission should establish specific 
ground rules that allow for the reasonable recovery of costs, whether by ILEC 
or CLEC.  Competitive decisions of where to serve and how to serve an area 
should be left to the market as much as possible.  One way in which the 
Commission can help this develop is to get out of the business of setting 
depreciation rates for facilities in areas in which there is more than one 
ETC.  Companies can make their own investment decisions based upon their own 
beliefs on how best to recover those costs. This relinquishment of control over 
depreciation rates will help provide companies with pricing flexibility.  
Pricing flexibility will maximize the benefits to customers as carriers develop 
multiple market offerings.


Use of Facilities by Other Carriers
 It is not appropriate for an ILEC (or a CLEC) to be forced to build facilities 
solely to be used by another company to deliver service to customers the second 
company wishes to capture.  Compelling construction of facilities to benefit 
competitors does not appear to meet the test of a constitutional exercise of 
regulatory authority.  As much as possible, competitors should be left to make 
their own decisions about investment and service to customers.
Summary
 The obligation to serve issue is critical for public policy purposes to ensure 
that service is available when customers request service in Washington State.  
It is especially important to WITA’s members for investment decisions and 
business planning purposes.
 WITA thanks the Commission for its consideration of these comments.  We look 
forward to the May 1 workshop to discuss the material provided in the written 
comments by the parties to this docket.