**STATEMENT OF**

**COMMISSIONER RAY BAUM**

**APPROVED/CONCUR IN PART**

> ***In the Matter of High-Cost Universal Service Support, WC Docket No.
> 05-337; Federal-State Joint Board on Universal Service, CC Docket No.
> 96-45***

I support the Recommended Decision (RD) of the Federal-State Joint Board
on Universal Service. Its provisions contain fundamental forward-looking
reforms that deserve the FCC's serious consideration. The RD proposes
significant changes to the High Cost Fund component of the Universal
Service Fund (USF). It does so by clearly directing funds to truly high
cost and unserved areas, by expanding and redefining the scope of
supported services to explicitly recognize mobility and broadband, and
by increasing accountability to better benefit the consumers who pay to
support the fund.

The RD recommends the FCC change the basic paradigm of High Cost support
by creating three distinct categories of High Cost funding. This
approach appropriately recognizes key distinctions between traditional
wireline telephone services (the Provider of Last Resort or POLR Fund),
wireless mobility services (the Mobility Fund), and high speed Internet
access (the Broadband Fund). I am convinced that the best course is to
make these distinctions explicit rather than continue to muddle support
for each within traditional High Cost funding. This is particularly
important for reforming wireless CETC support. Moving wireless CETC
funding into a new Mobility Fund responds effectively to the concern
that current High Cost support to wireless CETCs primarily subsidizes
competition where competition already exists. The new Mobility Fund
targets support toward the task of building infrastructure to bring
wireless service to the unserved areas of rural America. As wireless
build-out is completed across the country, the Mobility Fund should
decrease in size over time.

The RD jump starts deployment of broadband to unserved areas by
recommending the FCC establish a new Broadband Fund. All states would be
eligible for a base allocation of funds. Supplemental allocations would
match state efforts similar to Connect/Kentucky. This, along with the
other recommendations in the RD, help ensure that monies are used
effectively and efficiently. The Joint Board debated whether to use
"unserved" or "under-served" to describe the areas to be targeted for
infrastructure build-outs under the Broadband Fund, and under the
Mobility Fund as well. In my mind, this discussion is largely over
semantics. What constitutes a qualified area should be left to the
individual states to decide on a case by case basis, within FCC
guidelines. The key point here is that states will make these decisions
within their fixed dollar allocations. Leave it to each state to decide
whether it is a priority to spend some broadband dollars on areas where
service is available, but not reliable. The state may have very
important public safety reasons for doing so. That decision will neither
burden the Broadband Fund nationally nor reduce funding to any other
state.

The new Broadband Fund will greatly accelerate broadband access in rural
areas served by the non-rural incumbent local exchange carriers
(non-rural ILECs). The new fund will also assist rural ILECs (RLECs) who
are caught in the "parent trap" when purchasing service areas from
non-rural ILECs. The idea is to direct funds to those portions of the
country where broadband deployment is lagging, and where Rural Utility
Service (RUS) loans and other types of support are not available. The RD
points out that current High Cost support mechanisms have allowed RLECs
to more effectively deploy broadband to their consumers. RLEC access to
low-interest RUS loans helps to fill any gaps.

As for overall funding, I support the recommendation to cap High Cost
funding at \$4.5 billion for the near term. The RD appropriately exempts
from the cap any additional funding that may be required when the FCC
implements changes to comport with the 10^th^ Circuit decision regarding
the non-rural mechanism. The RD supports capping the CETC side of the
fund at \$1.0 billion based on year-end 2006. However, we need to
acknowledge that a \$1.0 billion cap on CETCs is unlikely to happen,
since the FCC appears to be moving toward a somewhat higher cap amount
based on fund numbers at the end of June 2007. This June date is
consistent with the FCC's approval of the Alltel transaction terms. As a
result, the CETC cap is more likely to be in the neighborhood of \$1.15
billion.

While I support an overall cap on High Cost funding, I have practical
concerns about capping the ILEC portion of the fund. First, capping the
separate funds within the ILEC portion as recommended in the RD seems
unnecessary. The ILEC side of the High Cost Fund is not growing and is
not expected to do so in the near future. Second, I anticipate the ILEC
portion of the fund will be subject to some adjustment during the next
five years as a consequence of intercarrier compensation reform. The RD
should have taken this into account.

In addition to these practical concerns, the RD did not meet my
expectations when it failed to address some basic inequities in how High
Cost support is distributed among non-rural ILECs and among the states.
Inequitable distribution of support to states has been compounded by the
equal support rule for CETCs. The exponential growth in the CETC portion
of the fund over the last 6 years has gone to states where per line
reimbursements to ILECs are the highest and where the politics are the
most favorable. As a result, by the end of 2006, the top 10 states,
exclusive of the insular jurisdictions of Alaska and Puerto Rico,
received almost 45%, or over \$450 million, of the \$1 billion CETC
support. Other similarly situated rural states received less than 10% of
that amount. Mississippi (\$140m), Kansas (\$55m), Wisconsin (\$51m),
and Washington (\$44m) lead the way with \$290 million. Idaho (\$0),
Missouri (\$.1m), Utah (\$.3m) and Tennessee (\$1.5m) received the least
with \$1.9 million. It is clear that the current distribution system is
broken.

The current FCC rules have resulted in a vast misallocation of public
dollars to the benefit of only a small portion of rural consumers, and
to the detriment of the rest. The RD missed an opportunity to partially
correct this misallocation when it failed to recommend replacing current
support calculations based on statewide averages with calculations at
the wire center level. Statewide averaging relies on implicit
subsidization of rural rates by urban consumers. This kind of subsidy is
not sustainable in an increasingly competitive environment. A change to
a wire center basis for calculation of support would have targeted
support where it is needed on a more granular basis. This could have
been accomplished without increasing the size of the fund simply by
reallocating existing support.

Again, I support an overall cap on the High Cost Fund of \$4.5 billion,
including the new Broadband Fund. The Joint Board discussed funding the
Broadband Fund at \$300 million dollars within the \$4.5 million cap.
This \$300 million dollar figure was originally projected to be
available from the savings gained by capping the CETC portion of the
fund at the 2006 year-end level (i.e., \$1 billion) as set forth in the
Joint Board's original CETC cap recommendation in May of this year.

However, it now appears likely that the FCC will adopt a cap on CETC
funding based on levels at the end of June 2007. This would eliminate
about \$150 million, or half the savings, that would otherwise have been
available for the Broadband Fund under our proposal. If the current
collection rate is maintained through the end of 2008, probably the
earliest date the fund could be implemented, the remaining \$150 million
needed to fully support the Broadband Fund at \$300 million would be
available under the \$4.5 million cap by the end of 2008. In subsequent
years, broadband funding could be supplemented by as much as \$150
million per year, subject to the cap and within the current surcharge.
By the end of 2009, approximately \$450 million could be accumulated and
available for broadband deployment. At that point the FCC should review
the collection mechanism to determine whether additional funding is
needed. As broadband build-out is completed across the country, the
Broadband Fund should decrease in size over time.

Finally, the RD leaves several details of the implementation of its
fundamental reform concepts to the FCC for further clarification. This
is entirely appropriate. At a policy level the RD recommends major
changes by designating two new qualifying services, creating two new
funds, imposing caps on the respective fund(s) and fundamentally
reforming how at least 29% of the current fund is distributed. I urge
the FCC to put the RD out for comment as soon as possible with the goal
of instituting the recommended reforms by June of 2008.