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93–053 PDF 2005

S. HRG. 107–1106

THE FUTURE OF UNIVERSAL SERVICE: ENSURING

THE SUFFICIENCY AND STABILITY OF THE FUND

HEARING

BEFORE THE

SUBCOMMITTEE ON COMMUNICATIONS

OF THE

COMMITTEE ON COMMERCE, 

SCIENCE, AND TRANSPORTATION 

UNITED STATES SENATE

ONE HUNDRED SEVENTH CONGRESS

SECOND SESSION

JUNE 19, 2002

Printed for the use of the Committee on Commerce, Science, and Transportation

(

(II)

SENATE COMMITTEE ON COMMERCE, SCIENCE, AND TRANSPORTATION

ONE HUNDRED SEVENTH CONGRESS

SECOND SESSION

ERNEST F. HOLLINGS, South Carolina, Chairman 

DANIEL K. INOUYE, Hawaii 

JOHN D. ROCKEFELLER IV, West Virginia 

JOHN F. KERRY, Massachusetts 

JOHN B. BREAUX, Louisiana 

BYRON L. DORGAN, North Dakota 

RON WYDEN, Oregon 

MAX CLELAND, Georgia 

BARBARA BOXER, California 

JOHN EDWARDS, North Carolina 

JEAN CARNAHAN, Missouri 

BILL NELSON, Florida 

JOHN MCCAIN, Arizona 

TED STEVENS, Alaska 

CONRAD BURNS, Montana 

TRENT LOTT, Mississippi 

KAY BAILEY HUTCHISON, Texas 

OLYMPIA J. SNOWE, Maine 

SAM BROWNBACK, Kansas 

GORDON SMITH, Oregon 

PETER G. FITZGERALD, Illinois 

JOHN ENSIGN, Nevada 

GEORGE ALLEN, Virginia 

KEVIN D. KAYES, Democratic Staff Director 

MOSES BOYD, Democratic Chief Counsel 

JEANNE BUMPUS, Republican Staff Director and General Counsel 

SUBCOMMITTEE ON COMMUNICATIONS 

DANIEL K. INOUYE, Hawaii, Chairman 

ERNEST F. HOLLINGS, South Carolina 

JOHN F. KERRY, Massachusetts 

JOHN B. BREAUX, Louisiana 

JOHN D. ROCKEFELLER IV, West Virginia 

BYRON L. DORGAN, North Dakota 

RON WYDEN, Oregon 

MAX CLELAND, Georgia 

BARBARA BOXER, California 

JOHN EDWARDS, North Carolina 

JEAN CARNAHAN, Missouri 

CONRAD BURNS, Montana, 

TED STEVENS, Alaska 

TRENT LOTT, Mississippi 

KAY BAILEY HUTCHISON, Texas 

OLYMPIA J. SNOWE, Maine 

SAM BROWNBACK, Kansas 

GORDON SMITH, Oregon 

PETER G. FITZGERALD, Illinois 

JOHN ENSIGN, Nevada 

GEORGE ALLEN, Virginia 

(III)

C O N T E N T S 

Page 

Hearing held on June 19, 2002 ............................................................................... 1

Statement of Senator Burns ................................................................................... 2

Statement of Senator Dorgan ................................................................................. 6

Statement of Senator Inouye .................................................................................. 1

Statement of Senator Nelson .................................................................................. 5

Statement of Senator Rockefeller ........................................................................... 3

Statement of Senator Stevens ................................................................................ 7

WITNESSES

Altschul, Michael F., Senior Vice President, and General Counsel, Cellular 

Telecommunications and Internet Association .................................................. 73

Prepared statement .......................................................................................... 76

Attwood, Dorothy T., Chief, Wireline Competition Bureau, Federal Communications Commission .......................................................................................... 8

Prepared statement .......................................................................................... 10

Bond, Don, President and Manager, Public Service Telephone Company, Georgia .......................................................................................................................... 64

Prepared statement .......................................................................................... 65

Greene, Margaret H., President, Regulatory and External Affairs, BellSouth 

Corporation, Georgia ............................................................................................ 57

Prepared statement .......................................................................................... 59

Gregg, Billy Jack, Director, Consumer Advocate Division, Public Service Commission of West Virginia ..................................................................................... 24

Prepared statement .......................................................................................... 27

Harker, Victoria D., Chief Financial Officer, MCI Group .................................... 48

Prepared statement .......................................................................................... 50

Jaber, Lila A., Chairman, Florida Public Service Commission ............................ 19

Prepared statement .......................................................................................... 22

Thompson, G. Nanette, Chair, Regulatory Commission of Alaska ...................... 13

Prepared statement .......................................................................................... 14

APPENDIX

Carson, Wesley E., President and Chief Operating Officer, Alaska Communications Systems Holdings, Inc., prepared statement ..................................... 86

Jaber, Lila A., Chairman, Florida Public Service Commission, supplemental 

testimony .............................................................................................................. 99

Sandusky, Vincent R., President, American Public Communications Council, 

prepared statement .............................................................................................. 84

Snowe, Hon. Olympia J., U.S. Senator from Maine, prepared statement .......... 83

Response to Written Questions Submitted by Hon. Max Cleland to: 

Billy Jack Gregg ............................................................................................... 104

Lila A. Jaber ..................................................................................................... 100

G. Nanette Thompson ...................................................................................... 96

The Federal Communications Commission .................................................... 89

Response to Written Questions Submitted by Hon. Daniel K. Inouye to: 

Billy Jack Gregg ............................................................................................... 105

Lila A. Jaber ..................................................................................................... 101

G. Nanette Thompson ...................................................................................... 96

The Federal Communications Commission .................................................... 90

(1)

THE FUTURE OF UNIVERSAL SERVICE:

ENSURING THE SUFFICIENCY AND

STABILITY OF THE FUND 

WEDNESDAY, JUNE 19, 2002

U.S. SENATE, 

SUBCOMMITTEE ON COMMUNICATIONS, 

COMMITTEE ON COMMERCE, SCIENCE, AND TRANSPORTATION, 

Washington, DC. 

The Subcommittee met, pursuant to notice, at 10:10 a.m. in room 

SR–253, Russell Senate Office Building, Hon. Daniel K. Inouye, 

Chairman of the Subcommittee, presiding. 

OPENING STATEMENT OF HON. DANIEL K. INOUYE,

U.S. SENATOR FROM HAWAII 

Senator INOUYE. My apologies for being late. Believe it or not, I 

got stuck in an elevator. 

[Laughter.] 

Senator INOUYE. This morning’s hearing focuses on one of the 

oldest and most revered principles of U.S. telecommunication policy, universal service. The Federal Government’s commitment to 

universal service is grounded in our belief that basic telecommunications services should be available to all Americans at rates that 

are affordable and relatively uniform. 

As each of us can attest, access to adequate telecommunications 

services is essential to modern-day social and economic commerce. 

These challenges are acutely felt by millions of Americans in remote areas who rely on telephone and Internet connections to contact families and friends, to benefit from expanded job opportunities offered by telecommuting, to access educational information 

from remote libraries, and to maintain critical contacts with health 

and emergency service personnel. 

Yet beyond these specific uses, as telecommunications services 

reach more and more individuals, all Americans benefit from the 

network effects of a ubiquitous communications network. 

In 1934, when only 40 percent of U.S. households had access to 

telephone service, Congress passed the Communications Act clearly 

expressing its intention to make available, so far as possible, to all 

of the people of the United States, a rapid, efficient, nationwide 

and worldwide wire and radio communications service with adequate facilities at reasonable charges. And in response to that mandate, Federal and state regulators developed a system of pricing 

and cost recovery designed to promote expansion of telecommuniVerDate 0ct 09 2002 14:41 Feb 08, 2005 Jkt 093053 PO 00000 Frm 00005 Fmt 6633 Sfmt 6633 S:\WPSHR\GPO\DOCS\93053.TXT JACK PsN: JACKF
2

cations networks and to provide all Americans with access to telecommunications services at affordable prices. 

By enacting the 1996 Telecommunications Act, Congress ensured 

that its longstanding commitment to universal service would survive in a competitive telecommunication marketplace. As a result, 

Members of this Committee worked diligently to explicitly define 

the term ‘‘universal service’’ in Section 254 of the act. In so doing, 

Congress made sure that this definition was sufficiently flexible to 

capture an evolving level of telecommunications services and that 

contributions to the fund would be equitably imposed on telecommunications carriers. 

As implemented by the Federal Communications Commission, 

the current mechanism for funding universal service relies on assessments to telecommunications carriers interstate and international revenues. For many years, this system adequately and effectively fulfilled a mission of universal service. 

Of late, however, an increasing chorus of carriers have begun to 

express their dissatisfaction with the current revenue-based assessment mechanism. New technology, such as Internet telephony, the 

emergence of bundled-service offerings, and the introduction of new 

competitive providers of interstate services have led some to question the long-term viability of current contribution mechanism and 

to advocate an assessment based on the number and capacity of 

carrier connections. 

Other parties, however, argue that such wholesale changes are 

unneeded, unlawful, and unwise in light of less radical reforms 

that may stabilize the current system during the current economic 

downturn. 

In light of these competing claims, it is my hope that today’s 

hearing will allow the Committee to examine, first, the nature and 

extent of the problems facing the current contribution mechanism, 

and, second, the impact that proposed changes will have on consumers and the future of the universal-service fund. 

To assist us, we are fortunate today to hear from two distinguished panels of government and industry experts. And I look forward to their testimony. But, before I do, may I call upon my colleagues? Senator Burns? 

STATEMENT OF HON. CONRAD BURNS,

U.S. SENATOR FROM MONTANA 

Senator BURNS. Thank you, Mr. Chairman. I’m very pleased 

you’re having this hearing today to address the vital topic of universal service. 

I am a strong supporter of universal-service programs. During 

my time here in the Senate, in particular, I have worked to ensure 

that the rural, commercial, and cooperative companies of Montana 

continue to recover their costs of providing voice-grade service from 

the high-cost universal-service system through my introduction of 

the Universal Service Support Act and other acts that we’ve sponsored in the past. 

I firmly believe that a solvent and stable universal-service fund 

benefits consumers throughout Montana and this country through 

the availability of high-quality and affordable service. The topic of 

this hearing is particularly timely, given the FCC is currently 

3

reaching a conclusion on its proceeding to reform the manner in 

which the universal-service programs are funded. In fact, within 

the order released by the Commission this past Friday, the FCC 

expressed its desire to complete this proceeding and implement its 

changes by early next year. 

Clearly, some significant reforms to the universal-service contribution system need to be made. Market forces, such as competition in the long distance market, alone, warrant such changes. 

I’m going to carefully review the Commission’s work to ensure 

that it adheres to the stated core principles which include: to ensure stability and sustainability of the universal-service fund, to 

ensure that contributors are assessed in an equitable and nondiscriminatory manner, to minimize the regulatory costs associated 

with complying with universal-service obligations, and to develop a 

contribution recovery process that is fair and readily—and understood by the consumers. 

This universal-service contribution proceedings impacts all providers of interstate telecommunications services. The proceeding 

also impacts consumers because of the uncertainty of how carriers 

will ultimately be allowed to recover their contributions from end 

users. 

My thinking on universal service has been greatly informed by 

the experience that Montanans have had with their small, rural operators. I want to specifically point out the tremendous job that 

these independent companies and rural cooperatives have done in 

providing quality service to Montana for decades. In particular, the 

smaller operators have been incredibly productive in the area of 

providing advanced services. There will soon be 121 small Montana 

communities that will have access to high-speed Internet services 

because of the foresight and the hard work of these operators—just 

to name a few, in cities like Circle, Multa, and Plentywood that are 

not really on the large-city radar screen. 

With these and many other contributions to our rural providers 

in mind, I’d like to examine the proceedings to make sure that it 

is consistent with the Act’s requirement that universal-service support be specific, predictable, and sufficient. As a sponsor of the Universal Service Support Act, I view any artificial limits on universal 

service as a discouragement to investment and inconsistent with 

the 1996 act. I’m against imposing barriers to investment upon any 

new universal-service contribution regime. 

Thank you, Mr. Chairman, again, for holding this hearing. I look 

forward to hearing from our witnesses. 

Senator INOUYE. Thank you very much, Senator Burns. 

Senator Rockefeller? 

STATEMENT OF HON. JOHN D. ROCKEFELLER IV,

U.S. SENATOR FROM WEST VIRGINIA 

Senator ROCKEFELLER. Thank you, Mr. Chairman. 

I want to first acknowledge that we have our director of Consumer Advocate Division in the Public Service Commission of West 

Virginia, Billy Jack Gregg, here. And I’m very happy about that, 

because he’s very good. 

And, second, I have to apologize, because I’ve got to go to that 

Intel hearing, so I won’t be able to do all I want to do. 

4

I want to make a couple of points, however. The FCC has to be 

much more aggressive and timely in, sort of, redefining this whole 

contribution system. I think some of the—my colleagues will remember that I had each of the FCC members swear that they 

would do nothing—swear, on their confirmation hearings, that they 

would do nothing to undermine the universal-service funding. And 

they all swore. Some of them are proceeding, however, to back off 

on that, particularly Chairman Powell. 

It is—you know, what they are basically doing now is, they are 

taking uncommitted e-rate funding, and they are using it to keep 

universal-service contributions stable. Now, I could have made a 

heck of a fuss about that, and I do make a heck of a fuss out of 

it, and I decided not to because of—what it would have done is 

spiked up telephone rates and e-rate would have gotten a black 

eye. And, around here, and in the, sort of, climate here in Washington, you have to fight every year to protect e-rate. And I suspect 

that Byron Dorgan and Conrad Burns had some of the same feelings. 

But let’s just make no mistake about it. This is a really bad thing 

to do. It’s a really bad thing to do to be using e-rate. In fact, Chairman Powell wants to use this way beyond the April date. He was 

the lone dissenting vote on this. 

He wasn’t the lone dissenting vote? Another matter. 

He was the lone dissenting vote. And it was—that’s very discouraging to me, because I’m not sure, one, of his commitment to erate, I’m not sure of his commitment to universal service, and I’m 

not sure of the FCC’s ability, other than Michael Copps and our 

witnesses here, to withstand his cerebral force. 

Nevertheless, we went ahead with it, but I’m very unhappy about 

it. The FCC is being very slow to look at this whole contribution 

thing. And I don’t like that. 

So I’m just saying, Mr. Chairman, as loudly as I possibly can, 

that we need to get a contribution system worked out, certainly by 

April, certainly not later than April, and not put the e-rate further 

at risk. 

And just to add on as a freebie here, although we won’t be able 

to discuss it, that I also don’t like the fact that the FCC is redefining information services—Internet services—that they should be 

classified as information services under the 1996 act, rather than 

as telecommunications. That makes a very big difference. I won’t 

get into that now, but it, again, has to do with how we’re going to 

preserve universal service if we’re going to do it, and if there’s a 

will in the FCC, if they feel that that’s something which is useful 

to the nation. Some of us certainly do. 

The final point I want to make is that there is this problem of 

the migration of regulated voice services to unregulated Internet 

services. And that migration is very concerning to me. When the 

FCC has taken a number of steps recently to deregulate broadband 

service, I’m not sure that it has adequately explored the effects of 

these rulings, that they have on the universal-service funding. Universal-service funding is everything to those of us in rural states 

and inner cities. So I think this is too much business-as-usual. 

The Chairman has handed me a little note here saying, ‘‘The 

change has a profound implication, not only for competition in the 

5

telephone industry, but also for people who live in rural and poor 

areas where telephone services are heavily subsidized under current regulatory regimes.’’

So I think that the time for reform of the contribution system is 

long past due. The FCC is much too slow, of course, in my judgment. And I’m not really sure how anxious they are to change it, 

particularly at the leadership level. 

So I will leave it at that, and I thank the Chairman. 

Senator INOUYE. I thank you very much. 

Senator Nelson? 

STATEMENT OF HON. BILL NELSON,

U.S. SENATOR FROM FLORIDA 

Senator NELSON. Thank you, Mr. Chairman. 

This is a subject matter that is extremely important to Florida, 

from two different perspectives. I’m doubly pleased that we have 

our chair of the Florida Public Service Commission here to testify. 

And you’ll be hearing, essentially, that, not only do we have a lot 

of rural parts of Florida, but, of course, Florida being 16 million 

people now, we contribute into this, and we’re concerned that we 

examine the existing contribution system and consider changes, because I’m concerned that there is a huge imbalance, that Florida 

is at the top of the list of states that put in the most and get back 

the least, as compared to all of the states. And yet I support the 

universal-service system. All consumers deserve access to telecommunications services, at rates that they can afford, and we 

clearly have a lot of our state that is rural that benefits from this 

program. 

I’ve got some concerns about how transitioning to a per-connection system may impact Florida’s senior citizens, because the elderly often make very few interstate and international calls. And, as 

you know, we have a greater percentage of the elderly in Florida, 

more than any other state. As a result, they might shoulder a disproportionate burden of a per-connection system. 

So, Mr. Chairman, we have, on the floor of the Armed Services, 

a DOD Authorization Bill, of which my presence is needed there, 

and so I would just like to proffer some questions for you all to consider. 

Do you feel there is a penalty or reward for state commissions 

that have already provided advanced services for schools and libraries prior to the passage of the 1996 Telecommunications Act? 

What are better ways than increasing the size of the fund to address universal-service issues? And maybe our Chair can discuss 

some of the initiatives in Florida. 

What types of consumer education has Florida initiated to tell 

customers about the lifeline linkup program? 

And do you think that the size of the fund should be limited? 

So, with proffering of those provocative thoughts, I’m going to request your permission that I might go and help out our Armed 

Services Committee chairman on the floor, Mr. Chairman. 

Senator INOUYE. Thank you very much. 

And now may I call upon Senator Dorgan? 

6

STATEMENT OF HON. BYRON L. DORGAN,

U.S. SENATOR FROM NORTH DAKOTA 

Senator DORGAN. Mr. Chairman, thank you very much. And let 

me add my thanks. This hearing is right on point, it’s timely, and 

it’s very important. 

And, as I was listening to my colleagues, we all pretty much 

have the same mentality. We get up and put on a necktie in the 

morning and come here prepared to speak in our special language 

in very low and polite tones. But, you know, what’s happening here 

is really an outrage—really an outrage—with respect to universal 

service. And I want to explain why I think that and why I think 

the FCC really owes us aggressive action here to respond to these 

issues. 

Mr. Chairman, I grew up in a town of 300 people. We had a telephone number that had only four digits. Now, I—as is the case, 

perhaps, with West Virginia and Montana, I have a special understanding of high-cost areas. And why the universal-service fund decided that the telephone in Regent, North Dakota was just as valuable as a telephone on Donald Trump’s desk? Because one was 

available to connect to the other. And without one, the other was 

diminished. That’s why we have universal service in this country. 

Now, we passed an act 6 years ago, and we included in that act 

Section 254. It’s not foreign language. It’s not in code. This isn’t 

about wind-talkers having to convert it to understandable English. 

Let me just read a part of it. ‘‘Consumers in all regions of the nation, including low-income consumers and those in rural, insular, 

and high-cost areas, should have access to telecommunications and 

information services, including inter-exchange services and advanced telecommunications and information services that are reasonably comparable to those services provided in urban areas and 

that are available at rates that are reasonably to rates charged for 

similar services in urban areas.’’

Now, that’s not something that’s hard to understand. And yet, 

through a series of bungling efforts by the FCC—not just the current FCC, but including the current FCC—and the FCC that began 

in 1996 to implement this act, I include them as special bunglers—

through bungling, through court decisions, and through people who 

come to this job in the FCC with a philosophy that says, ‘‘You 

know, we’re not interested in what the law says. We have our own 

philosophy about how things should work,’’ we now end up in a situation where we have a universal-service program that, in my 

judgment, is in great jeopardy. The FCC should know, in my judgment, that the Congress placed the responsibility on the Commission to preserve and advance universal service, not to minimize it 

or neglect it. 

And I’m not going to go through the whole series of things that 

we have to do, but there are three very quick points. Section 254 

makes it clear universal-service support is supposed to support advanced services—not debatable, in my judgment; it’s written in 

law. Second, universal service was to be the mechanism by which 

we have comparable service at comparable rates. And, third and finally, it was to require all telecommunications carriers to contribute to universal service. 

7

Now, Mr. Chairman, we’re in a situation where slowly, but surely, relentlessly over time this universal-service fund has been neglected and chopped away at, and we will not long have a universal-service fund that works relevant to he philosophy that we 

have embraced for many decades, and especially relevant to what 

is in Section 254 in the act. And I hope very much, Mr. Chairman, 

that we will get Chairman Powell down here, as well, at some appropriate time in the future, because I think we—I like him a great 

deal, personally, but I think the Commission has a lot to answer 

for with respect to what’s gone on in recent years on universal 

service. 

I thank you for allowing me this therapy of waking up and saying these things this early in the morning. But it’s so important to 

a state like North Dakota and other rural states. 

Mr. Chairman, thank you. 

Senator INOUYE. I’m happy to oblige, sir. 

Senator Stevens? 

STATEMENT OF HON. TED STEVENS,

U.S. SENATOR FROM ALASKA 

Senator STEVENS. Mr. Chairman, I’m sorry to be late, so I’ll be 

very short. 

Along with you, I believe I’m one of the original sponsors of the 

concept of universal service, and I do believe that this concept has 

made modern communications a reality, in my state and many 

rural areas, facilities that would otherwise still be a dream. I’m delighted that you’ve permitted Ms. Thompson—Nan Thompson to 

appear here today. 

I don’t want to offend the Senator from West Virginia, but sometimes I think those of us who invented universal service are sort 

of watching the tail wag the dog, because the concept of taking 

money from universal service and using it to provide service to 

schools, libraries, and health facilities, the inner-core cities—what 

we call the urban centers of the country—has really provided—presented us with this problem. This universal-service fund cannot 

stand the continued deviation of funds from its original purpose if 

we don’t find some way to assure that all concepts of communication carried through the airwaves will contribute to this fund and 

also put some limits on what is taken out of the fund for non-communications service. The hookup of the schools, libraries, and 

health facilities, we all supported, but we never dreamed it would 

be taking billions annually out of this fund. 

And I’m anxious to hear the witnesses, because I do believe that 

there has to be some changes made if this basic concept is to survive. Contrary to my friend from the Dakotas, I commend Chairman Powell for what he’s been trying to do to reform the way we 

use the universal-service fund, and I think that as long-distance 

revenues decline, we must find some way to have those who provide similar concepts of service in the communications field contribute to the support of the activities of the universal-service fund, 

or the day will come when, once again, rural America is not online. 

And if that happens, then I think we’ve lost our whole concept of 

the unity of this country, and we cannot afford that. So if we don’t 

act aggressively, there’s going to be no one paying into the uniVerDate 0ct 09 2002 14:41 Feb 08, 2005 Jkt 093053 PO 00000 Frm 00011 Fmt 6633 Sfmt 6633 S:\WPSHR\GPO\DOCS\93053.TXT JACK PsN: JACKF
8

versal-service fund if all of these concepts migrate to another form 

of service other than the traditional long-distance service. 

Thank you very much, Mr. Chairman. 

Senator INOUYE. I thank you very much, sir. 

We have two panels this morning. Our first panel is made up of 

the chief of Wireline Competition Bureau of the FCC, Ms. Dorothy 

Attwood; commissioner of the Alaska Public Utilities Commission, 

Ms. Nan Thompson; commissioner of Florida Public Service Commission, Ms. Lila A. Jaber; and director of the Consumer Advocate 

Division, Public Service Commission of West Virginia, Mr. Billy 

Jack Gregg. 

May I first recognize Ms. Attwood? 

STATEMENT OF DOROTHY T. ATTWOOD, CHIEF,

WIRELINE COMPETITION BUREAU, FEDERAL

COMMUNICATIONS COMMISSION 

Ms. ATTWOOD. Good morning, Mr. Chairman and senators. My 

name is Dorothy Attwood, and I’m chief of the Wireline Competition Bureau at the FCC. I appreciate the opportunity to appear before you today to discuss universal service. 

Universal service is certainly a cherished principle, and I’m sure 

that all on this panel and everyone in this Subcommittee recognizes the importance of maintaining universal service support and 

achieving the goals of ensuring affordable and ubiquitous telecommunications service. 

In the Telecommunications Act of 1996, Congress directed the 

Commission to ensure the affordability and availability of telecommunications for all Americans. Congress mandated that the implicit subsidies and universal service support in a monopoly environment be replaced by explicit, predictable, and sufficient support 

mechanisms. The task Congress set out for us was a monumental 

one requiring a massive overhaul of the existing universal service 

system so that it would be sustainable in an increasingly competitive marketplace. 

The Commission’s initial implementation of the universal service 

provision of the 1996 act is now complete. Implementing the statutory mandate, the commission made certain policy choices. First, 

contributions to support universal service are based on interstate 

telecommunications mechanisms service revenues. Second, we have 

seperate high-cost support for both rural and non-rural carriers. 

Third, high-cost support for competitors is based on the costs of the 

incumbents. 

Now, as the marketplace evolves, though, each of these policy 

choices brings new complexities. Though the Commission has done 

much work, more work needs to be done in the future to account 

for the advances in technology, the shifting consumer preferences, 

and the realities of the competitive marketplace. 

One striking development that we’ve witnesses in the interstate 

marketplace is the steady decline of interstate revenues. Although 

traditional long-distance revenues grew consistently between 1984 

and 1997, they’re now in a period of steady decline. 

A variety of factors are responsible. First, new carriers are entering the long-distance market bringing aggressive price competition 

that benefits consumers, but also drives down the overall interstate 

9

revenues. Second, wireless substitution is increasing. And, third, 

companies are marketing innovative bundled packages of service 

that blur traditional service categories. 

These changes—price competition, technological substitution, and 

the development of service bundles—are precisely the kind of development that Congress sought to stimulate when it passed the 1996 

act. They’re good things. Nonetheless, they strain traditional regulatory distinctions. They present challenges to our current universal service framework, and they require us to consider difficult 

questions. 

Now, the Commission is up to the task and is guided overall by 

the 1996 act and the principles of Section 254. Our reexamination 

of the policy choices we made to implement the 1996 act will rest 

on a few core concepts. First, the competitive telecommunications 

market requires a more sophisticated targeting of universal service 

support than in a monopoly environment. This support needs to be 

sufficient, but not excessive. 

Second, universal service policy should not encourage inefficient 

investment or preclude innovation. In other words, the Commission 

must be cognizant of the market-distorting effects of universal 

service support and target support in a manner that reduces the 

impact of this distortion. 

Finally, universal service must be maintained as technologies 

and markets evolve. The Commission’s framework must be flexible 

so it can accommodate legal, technological and market developments. 

The Commission already has begun to take on these issues in a 

new set of foundation proceedings. Throughout these proceedings, 

we seek to work closely and collaboratively with our state colleagues and our industry stakeholders. 

First, in May of 2001, the Commission began a proceeding to reexamine the way in which contributions are assessed on carriers 

and recovered from consumers. We take this action in response to 

the contributors’ concerns about the competitive effect of the current assessment system and the consumers’ growing frustration 

with line items on their bills. 

In February 2002, the Commission requested further comment 

on a specific industry proposal to replace the existing revenuebased assessed mechanism with one based on the number and capacity of connections provided to a public network. And we refreshed the record on a variety of other proposals. We’ve received 

a voluminous record and will be holding a public forum to further 

develop these records with our state colleagues this Friday. 

The Commission intends to adopt a new foundation for a contribution methodology before the end of the year. In the interim, 

the Commission has acted to stabilize the contribution factor for 

consumers by using unused funds from the schools and libraries 

program to decrease the upward pressure on consumer line items 

caused by declining interstate revenues. 

Second, in February of 2002, the Commission initiated a foundation proceeding concerning universal service and broadband technology. As traditional services migrate to broadband platforms, the 

Commission must assess the implications for funding universal 

10

service and determine how to sustain universal service in an evolving telecommunications market. 

In addition, the Commission has underway foundation proceedings to streamline and strengthen universal service support 

mechanism for schools and libraries and rural healthcare. 

Finally, the Commission also intends to initiate other proceedings later this year which will examine other critical universal 

service issues. In particular, the Commission intends to begin a 

foundation proceeding to take a look again at the nature and level 

of support for competitive service providers whose costs may differ 

from those of the incumbent carriers. 

As part of its comprehensive high-cost review, the Commission 

also intends to begin the complex process of examining the disparate rural and non-rural support mechanisms so that we can assure our universal service framework is resilient over time. 

I’d like to thank you, Mr. Chairman, for the opportunity to appear before you today, and I look forward to working with you and 

other Members of the Subcommittee on these universal service 

issues. 

Thanks. 

[The prepared statement of Ms. Attwood follows:]

PREPARED STATEMENT OF DOROTHY T. ATTWOOD, CHIEF, WIRELINE COMPETITION

BUREAU, FEDERAL COMMUNICATIONS COMMISSION

I. Introduction 

Good morning, Chairman Inouye, Senator Burns, and Members of the Subcommittee. 

My name is Dorothy T. Attwood, and I am the Chief of the Wireline Competition 

Bureau at the Federal Communications Commission. I appreciate the opportunity 

to appear before you today to discuss universal service. 

Universal service is a cherished principle. I am sure that all of us on this panel 

and everyone on this Subcommittee recognizes the importance of maintaining universal service support and achieving the goals of ensuring affordable and ubiquitous 

telecommunications service. Universal service ensures that consumers living in 

rural, insular and high cost areas have access to telecommunications services. Universal service ensures that millions of school children and library patrons, including 

those in many of the nation’s poorest and most isolated communities, obtain access 

to modern telecommunications and information services for educational purposes. 

Through universal service, rural health care providers can provide access to highquality medical service in rural America. Universal service also increases the availability of telecommunications services in underserved areas such as Indian tribal 

lands. In short, universal service ensures the delivery of telecommunications to all 

Americans. 

II. Background 

In the Telecommunications Act of 1996, Congress directed the Commission to ensure the affordability and availability of telecommunications for all Americans. Congress mandated that the implicit subsidies that ensured universal service in a monopoly environment be replaced with explicit, predictable, and sufficient support 

mechanisms. The task Congress set out for us was a monumental one, requiring a 

massive overhaul of the existing universal service system so that it would be sustainable in an increasingly competitive marketplace. 

The Commission’s initial implementation of the universal service provisions of the 

1996 Act is now complete. Starting with the First Universal Service Order in 1997, 

the Commission created an equitable and non-discriminatory assessment methodology for contribution to universal service, and implemented the statutory mandate 

to provide support to schools, libraries, and rural health care providers. The Commission removed implicit support from access charges and created explicit interstate 

support mechanisms in two proceedings in 2000 and 2001. The Commission also reformed intrastate high cost support for all carriers, creating separate mechanisms 

for non-rural and rural carriers in 1999 and 2001, respectively. In undertaking 

11

these reforms, the Commission recognized the differences between the larger price 

cap carriers, and the rate of return carriers that typically operate in rural areas, 

and it proceeded in a staged fashion to minimize disruption to the smaller rural carriers. 

In implementing the statutory mandate, the Commission has made certain policy 

choices. First, contributions to support universal service are based on interstate telecommunications service revenues. Second, we have disparate high cost support systems for rural and non-rural carriers. Third, high cost support for competitors is 

based on the costs of incumbents. As the marketplace evolves, each of these policy 

choices brings new complexities. 

III. Changing Conditions for Universal Service 

The preservation and advancement of universal service—the goals of which remain paramount—presents significant prospective challenges. Though the Commission has done much work implementing the 1996 Act, more work needs to be done 

in the future. 

As Congress has recognized, universal service policy cannot remain static. The 

Commission must reexamine its regulatory framework in light of the changing and 

maturing nature of the telecommunications market as a whole. The foundation of 

universal service needs to be refined to account for advances in technology, shifting 

consumer preferences, and the realities of a competitive market environment. 

In doing so, first, and foremost, the Commission is guided by the principles in the 

1996 Act, informed by what we know about the telecommunications market today. 

Interstate revenues are decreasing. Although traditional long distance revenues 

grew consistently between 1984 and 1997, they are now in a period of steady decline. A variety of factors are responsible. First, new carriers are entering the long 

distance market, bringing aggressive price competition that benefits consumers, but 

also drives down overall interstate revenues. 

Second, wireless substitution is increasing. Consumers are substituting new mobile services for traditional wireline services such as payphones and second lines to 

the home. A small but growing number of customers have substituted mobile wireless for their primary residential lines. Many consumers now use their wireless 

service rather than traditional wireline interexchange service to make long distance 

calls. According to one report, 16 percent of customers now make most of their long 

distance calls using mobile services, which may skew the balance of universal service contributions. 

And third, companies are marketing innovative bundled packages of service that 

blur service category lines. For example, carriers increasingly are bundling services 

together in creative ways, including offering flat-rate packages that include both 

local and long distance services. Carriers also are offering bundled packages of telecommunications services and customer premises equipment and packages with telecommunications and information services, like broadband Internet access. 

These changes—price competition, technological substitution, and development of 

new service bundles and new services—are precisely the kind of developments Congress sought to stimulate when it passed the 1996 Act. These are good things. Nonetheless, they strain traditional regulatory distinctions. They present challenges to 

our current universal service framework. They require us to consider difficult questions. 

The Commission is up to this task. The realities of the maturing telecommunications market require us to consider how, for instance, we can ensure that the collection of funds to support universal service does not favor one class of carriers or 

one technological platform over another. As a related matter, the Commission must 

consider how to maintain universal service as traditional communications services 

migrate toward delivery over convergent broadband platforms. In this changing environment, the Commission also needs to refine its thinking on how to provide sufficient support to eligible providers in order to ensure nationwide access to quality 

services in rural areas at rates comparable to those in urban areas. Inasmuch as 

these are significant challenges, the changed landscape does afford the Commission 

the opportunity to promote universal service objectives in economically sound ways. 

Again, the Commission is guided above all by the statutory text. The paradigm 

we are developing rests on a few core concepts. 

First, the competitive telecommunications market requires a more sophisticated 

targeting of universal service support than in a monopoly environment. This support 

needs to be sufficient, but not excessive. 

In addition, universal service policy should not encourage inefficient investment 

or preclude innovation. In other words, the Commission must be cognizant of the 

market distorting effects of universal service support and target support in a manner that reduces the impact of this distortion. 

12

Finally, universal service must be maintained as technology and markets evolve. 

The Commission’s framework must be flexible so it can accommodate legal, technological, and market developments that we cannot even foresee. 

IV. A New Phase in Universal Service Policy 

In sum, the Commission is entering a new stage in the development of universal 

service policy. With implementation of the 1996 Act complete, the Commission’s current task is to reexamine and reassess the foundation it has built in order to ensure 

the preservation and advancement of universal service in the modern telecommunications marketplace. Throughout this endeavor, we seek to work closely and collaboratively with our state colleagues and industry stakeholders. 

The Commission already has begun to take on these issues in a new set of foundation proceedings. By examining universal service issues in these vehicles and others 

that will be introduced before the end of the year, the Commission will incorporate 

its understanding of the evolving market in an updated framework consistent with 

the basic principles in the 1996 Act. 

In May 2001, the Commission began a proceeding to revisit its universal service 

contribution methodology. This system has two distinct but related components: the 

assessment of contributions on telecommunications providers and the recovery of 

contribution payments by providers from their customers. Contributors are assessed 

on the basis of their interstate and international end-user telecommunications revenues, based on a percentage or ‘‘contribution factor’’ that is calculated every quarter. 

Because interstate revenues are declining, the contribution factor—which carriers 

typically pass along as a line item on consumer bills—has increased over time. Consumers understandably are frustrated with these growing charges. 

The Commission must work to ensure that our contribution system is both equitable and non-discriminatory. To this end, in February 2002, the Commission requested comment in a Further Notice on a specific industry proposal to replace the 

existing, revenue-based assessment mechanism with one based on the number and 

capacity of connections provided to a public network, and refreshed the record on 

other proposals. We have received a voluminous record, and will be holding a public 

forum to further develop the record on these pending proposals later this week. 

The Commission intends to adopt a new foundation for contribution methodology 

before the end of this year. In the interim, the Commission has acted to stabilize 

the contribution factor for consumers by using unused funds from the schools and 

libraries program to decrease the upward pressure on consumer line items caused 

by declining interstate revenues. 

In February 2002, the Commission also initiated a foundation proceeding concerning universal service and broadband technology. Universal service has historically been based on the assumption that consumers use the network for traditional 

voice-related services and that those voice services are provided over circuitswitched networks. As traditional services migrate to broadband platforms, the 

Commission must assess the implications for funding universal service and determine how to sustain universal service in an evolving telecommunications market. 

At the same time, the Commission must seek to avoid policies that may skew the 

marketplace or overburden new service providers. Thus, the proceeding seeks to answer the fundamental question: in an evolving telecommunications marketplace, 

should facilities-based broadband Internet access providers be required to contribute 

to support universal service? 

In addition, the Commission has underway foundation proceedings to streamline 

and strengthen the universal service support mechanisms for schools and libraries 

and rural health care. As with other areas of universal service policy, the Commission seeks to ensure the continued efficient and effective implementation of 

Congress’s goals as established in the statute, while taking into account the evolving 

nature of the telecommunications market. 

Finally, the Commission also intends to initiate other proceedings later this year 

that will examine other critical universal service issues. In particular, the Commission intends to begin a foundation proceeding to take a look again at the nature 

and level of support for competitive industry providers, whose costs may differ from 

those of incumbent carriers. As part of its comprehensive high cost review, the Commission also intends to begin the complex process of examining the disparate rural 

and non-rural support mechanisms, so that we can ensure our universal service 

framework is resilient over time. 

I would like to thank you, Mr. Chairman, for the opportunity to appear before you 

today. I look forward to working with you and other Members of this Subcommittee 

on these important universal service policy issues. I would be pleased to answer any 

questions you might have.

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Senator INOUYE. Thank you very much, Ms. Attwood. 

We will now recognize Commissioner Thompson. 

STATEMENT OF G. NANETTE THOMPSON, CHAIR,

REGULATORY COMMISSION OF ALASKA 

Ms. THOMPSON. Mr. Chairman and Members of the Subcommittee, I want to thank you for the opportunity to testify today. 

I’m Nanette Thompson, the chairman of the Regulatory Commission of Alaska, and state chair of the Federal–State Universal 

Service Joint Board. The focus of my testimony today will be the 

importance of universal-service funding for rural areas. 

Congress expressed its desire that universal service be preserved 

in light of emerging competition and other market forces through 

Section 254 of the Telecommunications Act of 1996. Section 254 

was written largely for the benefit of small telephone companies in 

the rural areas of the nation. It is not clear that the full benefits 

of the universal service have been achieved as Congress intended. 

In 1998, before the universal-service reforms enacted by the 

FCC, the total high-cost universal-service fund was about $1.7 billion and was devoted primarily to small and high-cost telephone 

companies. By comparison today, the universal-service programs 

total about $4.3 billion. 

While the universal-service fund has seen exception growth since 

1998, rural companies have been largely left behind as the FCC 

has concentrated its efforts to non-rural company support and access-charge reform. While the rural mechanism supporting local 

rates has remained largely unchanged, many non-rural companies 

receive substantially greater levels of universal-service support 

than they did before the act was passed. For example, even though 

the FCC’s cost model deems only seven states worthy of non-rural 

high-cost support, the FCC has provided an additional $435 million 

to non-rural companies in 44 states under the CALLs access-charge 

support program. California, New York, and Virginia, which are all 

relatively low-cost states, receive about 20 percent of this funding. 

Similarly, while the schools and library universal-service program, in concept, is a worthy effort, a high proportion of the $1.4 

billion in program funding goes to the relatively urban, low-cost 

areas. For example, California, Illinois, and New York receive 

about $565 million, or 40 percent, of the total school and library 

funding. The funding to these three states is close to half of that 

available to all rural companies nationwide for high-cost loop support, which totals about a billion dollars. I’m not suggesting that 

California, Illinois, and New York shouldn’t receive school and library support, but it’s not evident that Congress intended such 

high levels of school and library funding to be so devoted. 

As a member of the Federal–State Joint Board on universal service, I’m concerned that the fund not grow to such high levels as to 

burden consumers throughout the nation. We must use our universal-service funds wisely, and target funding to the most needing 

areas. Without universal-service funding, many areas of Alaska 

would face local rate increases ranging from $25 to $97 a month. 

Telephone service throughout much of rural Alaska would be 

unaffordable, absent Federal support. 

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I hope to work cooperatively with the FCC to ensure that the 

rural areas of the country are provided with sufficient support, 

while ensuring that universal-service funds benefit the public, as 

intended by Congress. We must ensure that any funding provided 

accrues to the benefit of consumers and not to the utilities’ pocketbooks. 

While I believe there may be need for room for improvement with 

some of the current Federal universal-service programs, I wish to 

express my strong support for Commissioners Abernathy, Martin, 

and Copps, who presently serve with me on the Universal Service 

Joint Board, as well as for Chairman Powell. This group, under the 

leadership of Chairman Powell, has worked well with the states 

and supported the Joint Board’s efforts. The FCC has a daunting 

task in attempting to balance the conflicting public needs while addressing controversial and complex issues. This group has actively 

sought input from the states in important policy issues. 

The Universal Service Joint Board is now working o three important issues. We’ve been asked to recommend additions or deletions 

to the list of services supported by universal-service funding, to recommend changes to the lifeline and linkup programs to make them 

more effective, and also to recommend definitions of reasonably 

comparable rates and sufficient support to be used to benchmark 

universal-service funding. 

We are also participating with the FCC in a hearing later this 

week to take testimony on various proposals for modifying the 

fund’s contribution mechanism. This joint board has been working 

effectively to analyze specific issues that have big impacts in the 

states. It provides an opportunity for me to strive to ensure that 

affordable, reliable telecommunications services are available to all 

Americans. 

Thank you. 

[The prepared statement of Ms. Thompson follows:]

PREPARED STATEMENT OF G. NANETTE THOMPSON, CHAIR, REGULATORY COMMISSION

OF ALASKA

Mr. Chairman and Members of the Subcommittee: 

Thank you for the opportunity to testify. I am Nanette Thompson, Chair of the 

Regulatory Commission of Alaska and state chair of the Federal-State Universal 

Service Joint Board. 

The focus of my testimony today will be the importance of universal service funding for rural areas. 

Congress expressed its desire that universal service be preserved in light of 

emerging competition and other market forces through Section 254 of the Telecommunications Act of 1996. Section 254 was written largely for the benefit of small 

telephone companies in rural areas of the nation. It is not clear that the full benefits 

of universal service have been achieved as Congress intended. 

In 1998, before the universal service reforms enacted by the FCC, the total high 

cost universal service fund was about $1.7 billion and was devoted primarily to 

small and high cost telephone companies. In comparison, today the universal service 

programs total about $4.3 billion. 

While the universal service fund has seen exceptional growth since 1998, rural 

companies have been largely left behind as the FCC has concentrated its efforts to 

non-rural company support and access charge reform. While the rural mechanism 

supporting local rates has remained largely unchanged, many non-rural companies 

receive substantially greater levels of universal service support today than they did 

before the Act was passed. For example, even though the FCC’s cost model deems 

only 7 states worthy of non-rural high cost support, the FCC has provided an additional $435 million to non-rural companies in 44 states under the CALLs access 

15

charge support program. California, New York, and Virginia, which are relatively 

low cost states, collectively receive about 20 percent of this funding. 

Similarly, while the schools and library universal service fund, in concept, is a 

worthy effort, a high proportion of the $1.4 billion in program funding goes to relatively urban, low cost areas. For example, California, Illinois, and New York collectively receive $565 million, or about 40 percent of all school and library funding. 

The funding to these three states for their school and library programs is close to 

half that available to all rural companies nationwide for high cost loop support ($1 

billion). I am not suggesting that California, Illinois, and New York should not receive school and library support, but it is not evident that Congress intended such 

high levels of school and library funding to be so devoted. 

As a member of the Federal State Joint Board on universal service, I am concerned that the fund not grow to such high levels as to burden consumers throughout the nation. We must use our universal service funds wisely and target funding 

to our most needy areas. Without universal service funding, many areas of Alaska 

would face local rate increases ranging between $25 and $97 per month. Telephone 

service throughout much of rural Alaska would become unaffordable absent federal 

support. 

I hope to work cooperatively with the FCC to ensure that the rural areas of the 

country are provided sufficient support while ensuring that universal service funds 

benefits the public as intended by Congress. We must ensure that any funding provided accrues to the benefit of consumers and not to the utilities’ pocketbooks. 

While I believe there may be room for improvement in many of the current federal 

universal service programs, I wish to express my support for Commissioners Abernathy, Martin and Copps who presently serve on the Universal Service Joint Board 

as well as Chairman Powell. The FCC has a daunting task attempting to balance 

conflicting public needs while addressing controversial and complex issues. 

The universal service joint board is working on three important issues. We have 

been asked to recommend additions or deletions to the list of services supported by 

universal service funding, to recommend changes to the lifeline and linkup programs to make them more effective and to recommend definitions of reasonably 

comparable rates and sufficient support to be used to benchmark universal service 

funding. We are also participating with the FCC in a hearing later this week to take 

testimony on the various proposals for modifying the fund’s contribution mechanism. 

The Joint Board has been working to effectively analyze specific issues that impact 

the states. It provides an opportunity for me to strive to insure that affordable, reliable communications services are available to all Americans.

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Senator INOUYE. I thank you very much, Commissioner Thompson. 

May I now recognize Commissioner Jaber? 

STATEMENT OF LILA A. JABER, CHAIRMAN, FLORIDA PUBLIC 

SERVICE COMMISSION 

Ms. JABER. Thank you, sir. 

Mr. Chairman and Members of the Committee, I, too, want to 

join in thanking you for the opportunity to testify before you today 

on this very important topic of universal service. 

To give some context to my comments, I believe it is important 

for you to know some basic facts about Florida and the universalVerDate 0ct 09 2002 14:41 Feb 08, 2005 Jkt 093053 PO 00000 Frm 00023 Fmt 6633 Sfmt 6601 S:\WPSHR\GPO\DOCS\93053.TXT JACK PsN: JACKF

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service fund. And let me say that I am here on behalf of the Florida Public Service Commission, although I do have the privilege of 

serving on the Universal Service Joint Board with Commissioner 

Thompson. 

In the year 2000, the size of the fund was $4.7 billion, and Florida ratepayers contributed $438 million of that, or 7.24 percent of 

the entire fund. By comparison, Florida only received $121 million, 

or 2.59 percent, in benefits from the fund, making Florida, we believe, the net largest contributor to the fund. Based on recent projected data for the year 2002, we believe the fund will increase by 

an additional billion dollars from that seen in the year 2000. 

Now, let me say that Florida is extremely supportive of the goal 

of access to all telecommunications services, and we support all of 

the programs currently under the universal-service umbrella. I 

think, though, that Florida believes that the current level of funding is sufficient to provide the continued support necessary to all 

states and everyone who seeks the support. 

We have some concerns with respect to rules and procedures in 

the programs that have led or may lead to gaming and abuse with 

respect to the programs. In general, we believe that some adjustments to add more accountability to these programs make the programs more efficient and effective. 

An example of the kind of problem I would like to see addressed 

by the FCC is the wide disparity in participation rates in the lifeline program. Specifically, some states use a self-certification process for determining eligibility for lifeline. Florida is concerned that 

verification procedures may vary across states and perhaps unintentionally lead to misapplication of the fund. At a minimum, we 

believe that the states should be required to inform the FCC of 

their efforts to ensure that only eligible customers receive the benefits from the fund. 

Furthermore, we believe the FCC should address the disparity in 

the lifeline participation rates and identify the reasons for the disparity. In this way, a targeted and more economically efficient approach to addressing low participation could be identified, rather 

than simply expanding the eligibility criteria and, hence, expanding the fund itself. 

Under the high-cost program, which is by far the largest universal-service fund program, in dollar terms, we believe the current 

provisions allow for multiline consumers in high-cost areas to receive support, not just for their primary lines, but additional lines. 

It’s not clear to Florida that that sort of support which goes beyond 

the primary line is the intent of the universal-service provisions 

found in Section 254. This may be an area where greater stability 

and efficiency can be achieved by a change in the administration 

of the fund. 

With respect to the issue of expanding the definition of ‘‘universal service’’ to include broadband, the Florida Public Service 

Commission has taken the position that it is premature to expand 

the coverage of the universal-service fund. We are concerned that 

expanding the fund to accommodate broadband Internet access, at 

this time, will prevent the marketplace from determining the most 

appropriate technology. 

21

The marketplace should be permitted to work. Broadband is a 

relatively new consumer service. And, as we speak, entrepreneurs 

are busy developing the applications and the technologies to provide all of these good services to our end users. Just to give you 

an indication, without universal-service support, the FCC advanced-services report indicates that Florida ranks fourth nationwide in the number of high speed Internet access lines, and third 

in residential and small-business penetration. So we have that 

level of broadband deployment without the universal-service fund 

having supported those programs. 

Second, recent reports from a variety of sources indicate that 

broadband demand is lagging behind broadband supply. The PSC 

believes that it is crucial to identify the reasons for the alleged lack 

of demand, and, as a result, as the chairman of the 706 Joint Conference, we are undertaking a study of take-rates, penetration 

rates, to determine what the reason is for low penetration in certain states and in certain areas within the state. And again, my belief is if we could target where the problems are, we could craft a 

solution that is more economical and efficient for those areas in 

those states. 

Finally, I would like to reiterate my support of this hearing. And 

certainly I thank you for the invitation to testify. I, too, want to 

share in Commissioner Thompson’s compliment to the FCC. What 

we’ve seen from the FCC is that they are reaching out to the states 

to identify where the problems are. I look forward to the en banc 

hearing this Friday. 

In just the couple of seconds I have left, I’d like to address some 

questions that Senator Nelson asked before he left, with respect to 

examples Florida has in enhancing lifeline enrollment. We 

partnered with AARP and our consumer advocates and the FCC in 

the state of Florida in a proactive consumer-education program to 

make sure that consumers knew the benefits of lifeline and linkup 

and the assistance they could receive. We did a press conference. 

We have published brochures—in Spanish, as well—and sent them 

out, mass media, through the partnerships of news medias and 

press to make sure that the consumers knew about the lifeline program. Those are the examples we’d like to see the FCC undertake. 

With respect to the reward or penalty question I think the Senator is referring to, Florida undertook, years ago, before the 1996 

act was implemented, to wire its schools and libraries with the 

most efficient technology possible. So when the act was implemented and the universal-service fund was created, Florida did not 

need as much money in the schools and libraries program as other 

states did. So it looks like, for states like Florida, there is a penalty. We continue to contribute, although we may not need as much 

access to the fund as other states. 

I don’t see this as a state-versus-state issue, but certainly, we 

would be—we would advocate for an allocation or a reward or some 

recognition that Florida shouldn’t contribute as much as it has because it was already ahead of the game with respect to schools and 

libraries. 

Thank you. 

[The prepared statement of Ms. Jaber follows:]

22

PREPARED STATEMENT OF LILA A. JABER, CHAIRMAN, FLORIDA PUBLIC SERVICE

COMMISSION

I. Introduction 

Thank you, Chairman Hollings, Members of the Committee, for the opportunity 

to testify before you on the important topic of Universal Service in telecommunications. I am here today on behalf of the Florida Public Service Commission (FPSC). 

I also have the privilege of currently serving as a member of the Federal-State Universal Service Joint Board and as the State Chair of the Federal-State Advanced 

Services Joint Conference. While I do not represent the positions of anyone other 

than the FPSC, I believe my participation in those bodies does give me a unique 

perspective on the issues of Universal Service and Advanced Telecommunications 

Services. I also want to commend the FCC for reaching out to the Joint Board in 

a way that allows greater state commission input. 

The Florida Public Service Commission strongly supports the goal of access to 

telecommunications services at affordable rates, and we support all of the programs 

currently funded under the Universal Service umbrella. We do have some concerns 

about various rules and procedures in the programs that have led or may lead to 

gaming or abuse. In general, we believe that making some clarifications and adjustments to add more accountability to the programs will make the programs more effective and efficient. 

II. Highlights of FPSC Comments on Universal Service Issues 

The following are highlights of comments filed by the FPSC on the Universal 

Service issues:

A. Review of the Definition of Supported Service

1. The FPSC believes that the current services meet the criteria established in 

the Telecommunications Act of 1996 and recommends maintaining the current list of supported services at this time. In addition, the FPSC believes 

that expanding the definition to include advanced services or high-speed 

Internet access is not warranted in part because support is conditioned on 

the ability of a carrier to provide all of the supported services. As such, any 

proposal to expand the definition to include advanced services would not be 

technologically neutral.

2. The FCC invited comment on changing the definition of voice grade access, 

including whether support for a network transmission component of Internet 

access beyond the existing definition of voice grade access is warranted at 

this time. While we wholeheartedly support the idea of quality Internet access for all Americans and understand its importance to our nation, we do 

not believe that modification of the voice grade access is in the best interest 

of consumers. We also have technical concerns that if the intent of this proposal is to improve data transfer rates in the rural areas, the mere widening 

of the bandwidth specification, without concurrent standard setting for other 

specifications (i.e., signal-to-noise ratio), will not achieve the stated goals of 

improved transfer rates. The cost of requiring complex equipment to tweak 

the existing analog phone network could prove prohibitive and result in a 

misallocation of resources; resources that might be better deployed in a true 

digital system.

B. Review of Lifeline and Link-up Service for All Low-income Consumers

1. Before proceeding with changes to the current Lifeline program, the FCC 

should endeavor to understand the reasons for low versus high participation 

rates in the various states. The FPSC continues to support the original intent of the Lifeline program, which is to increase subscribership for low-income households that want, but cannot afford, telephone service.

2. States should make every effort to ensure that eligible households with and 

without telephone service are aware of and can easily enroll in the Lifeline/

Link-up programs. Keeping the program objective in mind, low program participation should not be cause to manipulate eligibility criteria to increase the 

number of households that could qualify.

3. The FPSC recommends that the Joint Board and the FCC encourage states 

to explore various automatic enrollment strategies to effectively target funding to consumers and determine eligibility for Lifeline and Link-up support. 

We believe that it is necessary to certify consumers’ eligibility and perform 

periodic verifications in order to prevent waste, fraud, and abuse, and to ensure the integrity of the program. We recommend increased promotion of the 

program through more frequent bill inserts and requiring all ETCs to post 

23

application information about their Lifeline service on the Lifeline Support 

website.

C. Schools and Libraries Universal Service Support Mechanism

1. Development of Rules to Limit Equipment Transferability. The FPSC believes 

it is necessary for the FCC to establish rules governing when and how equipment can be transferred without charge, before seeking to acquire new discounted equipment. While the FPSC recognizes that there may be some legitimate reasons to upgrade facilities because of technological innovations, 

manipulation of the program consumes resources that otherwise would have 

been better targeted to other program applications.

2. Accountability. The FPSC believes that one way to deter waste, fraud, and 

abuse is to make the current program more transparent. Making available 

additional data about the recipients of support would build greater confidence that the program is fair. Currently, it is difficult to acquire data in 

significant detail and format. More information relating to what specific services have been committed to by a school or library should be made publicly 

available. This information, as well as the size of the school or library, would 

be of great use to increase the integrity and accountability of the system.

3. State Funding Cap. The FPSC believes that establishing a new, efficient direction for the E-Rate program can be achieved by focusing on an equitable 

distribution of funds to each state. We believe there is merit in establishing 

a state funding cap based on poverty. Schools and libraries within a state 

would only have access to an equitable distribution of the $2.25 billion according to the poverty level of a state.

4. Application Process. FPSC supports the FCC development of a list of specific 

eligible products or services that is accessible online. Applicants could select 

the specific products or services as part of their FCC Form 471 application. 

This could help reduce accidental funding of ineligible services. We believe 

it would be prudent to periodically review the eligibility of services on the 

list to ensure that ineligible services do not become bundled with eligible 

services.

5. Internet Access When Bundled with Content. The FPSC supports continuation 

of the FCC policy that schools and libraries may receive discounts on access 

to the Internet, but not for any proprietary content. Expanding support to include proprietary content would likely increase the expense, and the current 

annual funding requests already exceed the $2.25 billion cap.

D. Tenth Circuit Remand

1. The FPSC finds merit in the proposal filed by Verizon to define ‘‘reasonably 

comparable’’ as rates in urban and rural areas that are within two standard 

deviations of each other or of the national mean. We agree with several commenters that ‘‘reasonably comparable’’ does not mean identical. We believe 

that the data recently gathered by the General Accounting Office could serve 

as a useful sample of rates.

2. On sufficiency, the FPSC agrees with the comments filed by Verizon that a 

sufficient fund ‘‘must be one that allows reasonable comparability of rates in 

urban and rural areas without causing excessive demands on the total universal assessment and without impairing the amount of funds available for 

other universal service programs.’’ The FPSC supports Verizon’s proposal to 

define a ‘‘sufficient’’ federal high cost fund as a fund that would provide assistance to states that cannot maintain rates that are reasonably comparable 

to the nationwide average due to high costs within those states.

3. Regarding the high-cost benchmark, the FPSC said that the FCC should retain its existing cost-based approach in identifying states that need support 

from the federal fund. (The current benchmark is l35 percent).

4. On State Inducements, the FPSC said that the FCC should not dictate the 

method that states take to address high-cost support. The FPSC does see a 

benefit in adding a layer of accountability into the program as to the individual states’ need for high cost support. The FCC could require that state 

commissions provide notification of the steps their state has taken to achieve 

this rate comparability. The FPSC agrees with Verizon that states should be 

allowed to verify rate comparability within the state by showing either: (1) 

that its rates in urban and rural areas are within two standard deviations 

of each other; or (2) that its rates in rural areas are within two standard deviations of the nationwide average urban rate.

24

5. In the alternative, the FCC should embark on a collaborative model of ‘‘state 

inducements’’ that will satisfy the Court’s remand. Under this model, the 

FCC would undertake an outreach with the states to develop ‘‘inducements’’ 

in instances where rate comparability within a state has not been achieved. 

In no way should these inducements be preemptive of a state legislature’s 

authority... The FCC could send a few staff to meet with individual State 

Commissions on this matter or establish individual conference calls to develop incentives for states to address their high cost universal service needs. 

The focus should begin with those states that are net recipients of the Federal program funds. 

III. Key Concerns of Florida Public Service Commission 

A. Accountability—The funds should go where they are supposed to go. We believe more can be done to make the programs more efficient and reduce the need 

to expand the size of the fund. I don’t believe that it is necessary at this time to 

expand the Universal Service Fund to include broadband Internet access services. 

I would not preclude that ever happening but simply suggest that it is premature 

at this time.

B. Size of the fund—Some states are net contributor states and others are net 

recipients. Florida is a net contributor state and is concerned that the size of the 

fund is not any larger than it needs to be to serve its purpose. It is important to 

provide some basic facts about Florida and the Universal Service Fund. In 2000 (the 

most recent data available to us), the size of the fund was $4.7 billion. In that year, 

Floridians contributed $338 million or approximately 7.24 percent of the entire fund. 

By comparison, Florida received $121 million or only 2.59 percent in benefits from 

the fund, making Florida a net contributor state by a significant margin. Based on 

recent projected data for 2002 from USAC, we believe that the fund will increase 

by an additional billion dollars for 2002 from that seen in 2000.

C. Lifeline—This year, the FPSC, the AARP, and a representative from the FCC 

joined forces in April to kick off an education campaign for the Lifeline and Linkup 

programs in Florida in an effort to increase awareness and boost enrollment. I believe this is the kind of initiative that is vital to getting low income consumers on 

the network. 

IV. Additional Information 

We would be glad to provide the Florida Commission’s comments on the above 

topics that we filed with the FCC. Contact Cindy Miller, head of our Office of Federal and Legislative Liaison, (850) 413–6082, for the additional information.

Senator INOUYE. Thank you very much, Ms. Commissioner. 

May I now recognize Director Gregg? 

STATEMENT OF BILLY JACK GREGG, DIRECTOR, CONSUMER 

ADVOCATE DIVISION, PUBLIC SERVICE COMMISSION OF 

WEST VIRGINIA 

Mr. GREGG. May it please the Committee, I’m Billy Jack Gregg, 

director of the Consumer Advocate Division of the Public Service 

Commission of West Virginia. My office is also a member of the National Association of State Utility Consumer Advocates, NASUCA. 

However, I should make clear that today I’m testifying on my own 

behalf and on behalf of my office, and not NASUCA. 

I believe that universal service has been a great public-policy 

success. The biggest issue facing us today is how to sustain the 

universal-service fund, long-term. I want to go over a little bit of 

the history of the fund, first, before addressing the current problems facing the fund. 

As Chairman Thompson indicated, before the passage of the 1996 

act, the universal-service fund aggregated about $1.8 billion per 

year. As a result of the changes wrought by the act and the expansion created by the FCC pursuant to that act, the total funds from 

the universal-service fund have more than tripled, to about $5.7 

billion this year, prior to the action of the FCC last Thursday to 

25

use unused schools and libraries fund. That action will take about 

$240 million in each of the last two quarters of this year, resulting 

in total universal-service commitments for this year of about $5.2 

billion. 

Now, that sounds like a lot of money. And, indeed, it is. However, 

it must be kept in perspective. Last year, the total telecommunications revenues in the United States were more than $220 billion. 

What that means is that, in return for collecting and redistributing 

less than 3 percent of the total telecommunications revenues—in 

this nation each year, we have supported high-cost areas and kept 

rates affordable. We have supported rates for low-income individuals. We have wired schools and libraries. We have helped rural 

healthcare providers. Moreover, all states have benefited from the 

universal-service fund. 

I have attached to my testimony, as Attachment 1, a listing of 

the actual disbursements during 2001, as listed by the Universal 

Service Administrative Company in its annual report. This attachment breaks down the funds received by each state under each 

support mechanism—the high-cost mechanism, the low-income 

mechanism, the schools and libraries mechanism, and the rural 

health mechanism. What is obvious is that all benefit. The success 

of the universal-service fund in distributing these benefits to all 

areas of our country is a accomplishment that all involved should 

be very proud of. 

However, there are problems, as everyone here has recognized. 

As indicated by Ms. Attwood, the FCC decided to base the funding 

for universal service on interstate revenues. Initially, they had decided to base the funding for schools and libraries and rural health 

on all revenues. However, that was struck down by the Fifth Circuit Court of Appeals in 1999 based on the wording of the act. And 

this is the root part of the problem that we’re facing today. 

The principles of 254—listed in 254(b)—state that all providers 

of telecommunications services shall contribute to universal service. 

However, 254(d) limits that obligation to a subset of all providers, 

only those who are providers of interstate telecommunications services. So we have an anomaly whereby all benefit—all states, all 

areas benefit—but yet not all contribute. 

And this has been the problem. Everybody loves universal service, but nobody wants to pay for it. The reality is that, since all 

benefit, all should contribute to universal service. And that is what 

we are grappling with today, how to transition our existing universal-service funding within the constraints of the existing law. 

Now, I have listed, on Attachment 2 to my testimony, graphs and 

figures showing the growth of the fund and the various components 

of the fund since 1997. I’ve also listed the funding base, which is 

interstate revenues. As you can see from review of this attachment, 

interstate funding grew at a fairly rapid pace in the first few years 

and kept pace with the increases in funding for the universal-service fund. However, starting in 2000 and continuing to the present, 

interstate revenues have flattened out and now started to decline. 

The result is that, when coupled with an increasing demand on the 

universal-service fund, the assessments on carriers and ultimately 

on their consumers have risen rapidly. 

26

In the fourth quarter of 2000, the assessment level was about 5.6 

percent on all carriers, based on their interstate revenues. By the 

second quarter of this year, it had risen to 7.2 percent of interstate 

revenues. Without the FCC’s action of last Thursday, the assessment rate would have risen to 8.77 percent on interstate revenues 

of all carriers. The impact on consumers would have been even 

greater. 

I’m sure all of you have heard complaints from consumers concerning the fact that they are looking at assessments on their bills 

from their long-distance carriers of 11, 12, 13, 15 percent, much 

greater than the actual assessment on those carriers themselves. 

This is the crisis, the fact that the funding base is not stable. 

Prior to looking at alternatives, though, I think it’s important to 

keep in mind that, if you take a broader perspective, this is a crisis 

created by the wording of the law. 

If you look at Attachment 3, you can see there charted universalservice funding, the interstate funding base, and total telecommunications revenues. If the law had been clear that we could 

base assessments for universal service on total telecommunications 

revenues, we wouldn’t be here today. The assessment rate on all 

carriers would have been less than 3 percent, and we would have 

been able to achieve all of the universal-service goals set out in the 

act; plus, we would have room for future growth as revenues grew. 

Unfortunately, that is not the case, nor is it likely to be the case 

that we will get a quick and easy change in the law to make the 

contribution-base broader. 

Given that, we have to look at different alternatives. One alternative is simply to tinker with the existing system to remove caps 

and safe-harbor provisions that have been provided for wireless 

carriers, for paging carriers, and other carriers. However, I think 

this is a short-term Band-aid that will not address the long-term 

sustainability of the fund. 

Another alternative that has been mentioned by several parties 

here is the connection-based contribution system, whereby all carriers would be assessed based on the number of connections they 

provide to the public switched telephone network. 

However, this proposal has its own problems. 254(d) requires 

that every provider of interstate telecommunications service contribute to the fund. Going to a connection-based system would exempt pure interstate long-distance carriers, the very carriers who 

are today carrying the majority of the burden in funding the universal-service fund. 

While we look at the contribution base, we cannot ignore the 

funding outflow from the fund. The fund, in fact, should be based 

like a pyramid, have as broad a base as possible to be as stable as 

possible at the bottom; at the top, to have a sufficient but targeted 

place for these funds to go to benefit America. 

In looking at the different funds, I want to highlight one issue 

that is very important that the FCC will be looking at apparently, 

from what Ms. Attwood said, and that is the fact that currently all 

lines are supported, all lines supplied by an eligible telecommunications carrier. 

The conception, initially, when people thought about universal 

service, there would be competition for the subsidy provided by uniVerDate 0ct 09 2002 14:41 Feb 08, 2005 Jkt 093053 PO 00000 Frm 00030 Fmt 6633 Sfmt 6601 S:\WPSHR\GPO\DOCS\93053.TXT JACK PsN: JACKF
27

versal service in high-cost areas since all providers would be competing for the same per-line support. However, in 1999, the Commission decided to support all lines. That means if a family lives 

in a high-cost area, and they’re getting $9 per month of support per 

line, and they have two lines—two land-line phones—they get 

$18—the phone company gets $18, $9 for each of those lines. If a 

wireless carrier happens to come in and get ETC status and provides three lines—three phones—three separate numbers to that 

family, they also get $9 per line for each of those numbers. This 

fact has the potential to greatly explode the fund in the future and 

must be looked at very carefully as more and more wireless carriers, who are supplying additional phones in high-cost areas, become eligible telecommunications carriers. 

I want to thank you for allowing me to appear here today. We, 

as members of the Joint Board, will continue doing our best to look 

at both sides of the equation—the inflows of cash into the fund, as 

well as the outflows—and we will continue to try to ensure that we 

support access and not excess so that we can continue this great 

public-policy success that is the universal-service fund. 

Thank you. 

[The prepared statement of Mr. Gregg follows:]

PREPARED STATEMENT OF BILLY JACK GREGG, DIRECTOR, CONSUMER ADVOCATE

DIVISION, PUBLIC SERVICE COMMISSION OF WEST VIRGINIA

My name is Billy Jack Gregg and I am the Director of the West Virginia Consumer Advocate Division. My office is charged with the responsibility of representing West Virginia utility ratepayers in state and federal proceedings which 

may affect rates for electricity, gas, telephone and water service. My office is also 

a member of the National Association of State Consumer Advocates (NASUCA), an 

organization of 42 state utility consumer advocate offices from 39 states and the 

District of Columbia, charged by their respective state statutes with representing 

utility consumers before state and federal utility commissions and before state and 

federal courts. I am a former member of the Board of Directors of the Universal 

Service Administrative Company (USAC) and currently serve on the Federal-State 

Joint Board on Universal Service. I greatly appreciate the opportunity to testify at 

this legislative hearing on the future sufficiency and stability of the Federal Universal Service Fund (USF). 

I. Introduction 

First, I would like to commend Chairman Inouye, the Members of the Subcommittee, and your staffs for conducting this review of the operation of the universal service fund at this time. I and other members of NASUCA truly appreciate 

your continuing efforts to seek out the views of consumers and consumer representatives. We look forward to continuing to work with you in developing telecommunications policies and legislation that benefit all consumers and the nation as a whole. 

II. Background 

The most important issue facing the Federal Universal Service Fund is its longterm sustainability, that is, ensuring that the USF is sufficient, predictable and affordable for all parties involved: fund recipients, telecommunications providers and 

consumers. Before I address the current problems facing the USF, I believe it is appropriate to review the achievements of the USF since the passage of the Telecommunications Act of 1996 (the Act). 

Section 254 of the Act enshrined and expanded universal service principles which 

had been followed by the Federal Communications Commission for decades. Based 

upon the requirements of Section 254, the FCC, after consultation with the FederalState Board on Universal Service, created a new Universal Service Fund in 1997 

containing several distinct support mechanisms. As a result, total USF funding has 

grown from $1.8 billion in 1997 to $5.7 billion during 2002. While these support 

amounts are large, they must be kept in perspective. Total telecommunications revenues in the United States last year were in excess of $220 billion. By annually collecting and redistributing less than 3 percent of these total revenues, we are able 

28

1The interstate revenue base for a particular year generally represents revenues reported 

from the previous year. The USF assessment rate shown on Attachment 2 is not the actual rate 

used in any quarter, but is derived by dividing annual funding by the interstate revenue base. 

The interstate revenue base for years 1998—2002 comes from USAC reports. The interstate revenue base for 1997 is estimated. Full year data for 2002 assumes that the Fourth Quarter demand and revenue base will be the same as in the Third Quarter. 2The figures for this year do not take into account the actions taken by the FCC on June 

13, 2002, to hold down the size of the fund by tapping unused schools and libraries funds. 

to make phone service affordable in all high-cost areas of the nation; support lowincome customers; assist rural health care providers; and connect all classrooms to 

the internet. Moreover, all states and territories benefit from the USF as shown on 

Attachment 1 to my testimony. That’s quite an accomplishment, and one that everyone involved in the USF should be proud of as we move forward to ensure the longterm sustainability of the fund. 

III. The Funding Base Crisis 

As I mentioned earlier, total funding for the USF has grown from $1.8 billion to $5.7 billion. Unfortunately, the funding base for the USF has not kept pace with 

the growth in the fund, resulting in higher and higher USF assessments on carriers 

and their customers. The problem stems in large part from the wording of the Act 

itself. Section 254(b)(4) states that: ‘‘All providers of telecommunications services

should make an equitable and nondiscriminatory contribution to the preservation 

and advancement of universal service.’’ However, Section 254(d) states: ‘‘Every telecommunications carrier that provides interstate telecommunications services shall 

contribute on an equitable and non-discriminatory basis, to the specific, predictable, 

and sufficient mechanisms established by the Commission to preserve and advance 

universal service.’’ In other words, even though the principle set forth in the Act 

is that all telecommunications providers should contribute to the fund, and even 

though the fund benefits all areas of the country, Section 254(d) limits the obligation to support the fund to a subset of telecommunications carriers—providers of 

interstate telecommunications services. 

In 1997 the FCC decided to base the funding for the high-cost and low-income 

support mechanisms on each carrier’s interstate and international revenue, while 

the funding for schools and libraries and rural health support mechanisms were 

supported by assessments on all revenues, interstate and intrastate. The use of 

intrastate revenues for USF assessment purposes was struck down by the Fifth Circuit Court of Appeals in 1999. Since that time the contribution base for the USF 

has been limited to only interstate revenues. As the USF has grown in order to meet 

the Act’s direction that support be sufficient and explicit, the assessment rate has 

also increased. 

Attachment 2 to my testimony shows the change in USF funding since 1997, 

along with changes in the interstate revenue contribution base for the USF. 1 As you 

can see, the introduction of the schools and libraries fund and increases in the highcost fund have driven the overall size of the fund. As a result, the fund has tripled, 

rising from approximately $1.8 billion in 1997 to approximately $5.8 billion this 

year. 2 So long as interstate revenues grew at a reasonable rate, the ultimate impact 

of fund growth on the USF assessment rate and customers’ bills was fairly moderate. However, beginning in 2000 interstate revenue growth began to flatten out 

and during 2002 started to decline. The result has been a steep escalation in the 

assessment rate, from 5.67 percent in the fourth quarter of 2000 to 7.28 percent in 

the second quarter of 2002. Without the FCC’s actions of June 13, 2002, the assessment rate on providers would have risen to 8.77 percent beginning July 1. The impact on customers would have been even worse. Clearly, a universal service fund 

which cannot depend on its funding base is not predictable, is not sufficient, and 

is clearly not sustainable. 

IV. Alternatives for the Contribution Base 

There are several alternatives available in order to stabilize the USF contribution 

base. One alternative would be to remove the caps or safe harbor provisions in current rules which artificially depress the existing interstate revenue contribution 

base. However, I believe such actions would amount to short term band-aids which 

would not address the long term needs of the fund. 

Another alternative would be to grant the FCC the authority to base contributions 

to the fund on total telecommunications revenues. While growth in the interstate 

revenue base has flattened out and begun to decline, total telecommunications revenues from end-users have continued to grow at a healthy pace. Shown on Attachment 3 to my testimony is a comparison of changes in the universal service fund, 

the interstate revenue base, and total telecommunications revenues from 1997 to 

29

3Total telecommunications revenues are taken from the FCC’s Telecommunications Industry 

Revenues reports. To be consistent with the interstate revenue base, reported revenues from a 

particular year are shown on the graph as the funding base for the next year. For example, 

the total reported revenues for 2000 of $229.1 billion are shown on the graph as the funding 

base for 2001. Total revenues available for 2002 have not been reported. The funding base for 

1997 is estimated. 

2002. 3 As you can see, total telecommunications revenues would provide a healthy 

funding base for the USF. In fact, if total telecommunications revenues had been 

used as the funding base from the start, we would not be here today. The growth 

in the fund could have been accommodated while keeping the assessment rate below 

3 percent. 

Use of total revenues would also eliminate disputes about whether revenues are 

intrastate or interstate, and would equitably spread the obligation to support universal service to all providers and to all customers based on their use of the network. However, basing federal universal service on total revenues would require a 

statutory change to clarify that the FCC has the authority to base contributions on 

all revenues, intrastate as well as interstate. In addition, a total revenues base 

could be susceptible to erosion in the future as more and more traffic, including 

voice traffic, migrates to the internet and is classified as ‘‘information services’’ exempt from USF assessment. 

A third alternative would be base assessments on connections to the public 

switched telephone network. The FCC is currently considering such a proposal. 

While the proposal does enlarge the base of the USF and open the opportunity for 

growth in the base in the future, it does have several flaws: (1) it radically shifts 

the funding of the USF among industry groups; (2) it appears to exempt a pure provider of interstate long distance from making any contribution to the fund in contravention of the plain wording of Section 254(d); and (3) it shifts responsibility for 

payment of USF charges from high-use to low-use customers. In spite of these flaws, 

the proposal does offer a promising avenue to avoid future problems with classification of services or revenues as information services, and deserves serious consideration. 

IV. ISSUES RELATED TO PARTICULAR SUPPORT MECHANISMS 

In looking at the long-term sustainability of the fund, we need to focus not only 

on the contribution base, but also on the individual support mechanisms which 

make up the overall fund. Each of these support mechanisms presents unique issues 

which will have to be resolved. Even though the focus of this hearing has been on 

stabilizing the fund—which implies that we should limit funding—we must be mindful that the Act requires the fund to be sufficient to carry out each of the universal 

service principles. For some mechanisms this may require a limitation in funding, 

while for others an expansion will be needed. 

A. HIGH-COST SUPPORT 

The high-cost support mechanism is the oldest portion of the fund, and is still the biggest. High-cost support has grown by over $1.2 billion in the last six years as 

the FCC has introduced three new parts to the fund: high-cost model support, interstate access support, and interstate common line support, which begins July 1. 

These new funds helped adapt the USF to the introduction of competition by making support explicit and portable. However, there is one issue common to all parts 

of the high-cost fund which threatens to enlarge the fund to an unsupportable size. 

Under current rules, all lines provided by eligible telecommunications carriers 

(ETCs) in high-cost areas receive support. The support in any particular wire center 

is the same for all carriers, and is based on the costs of the incumbent carrier. Rather than competing for universal service support, all ETCs that provide service receive support in equal per line amounts. For example, a single family in a high-cost 

wire center could be provided two landlines by an incumbent ETC and three cellular 

lines by a wireless ETC. Each of these carriers would receive equal support for each 

of the lines provided. As a result, the potential exists for a large increase in the 

high-cost fund as more and more carriers, especially wireless carriers, attain ETC 

status. If the high-cost fund is meant to provide affordable access in all parts of the 

country, but not to subsidize the unlimited desires of each individual, then this 

issue will have to be dealt with in some manner. 

B. LOW-INCOME SUPPORT 

The FCC greatly expanded the eligibility criteria and the size of the low-income 

support mechanism in 1997. Nevertheless, the participation in the program varies 

widely among the states. As shown on Attachment 1, of the $584 million paid out 

for low-income support in 2001, over half went to one state, California. This is not 

30

to disparage California’s low-income program, but to point out that low-income support funds are distributed very unevenly throughout the nation. There are also overall fund size implications from this skewed distribution. If every state’s program 

was as successful as California’s, the size of the low-income support fund would almost triple to $1.5 billion. The FCC currently has a proceeding open to review the 

operation of the low-income support mechanism. 

C. SCHOOLS AND LIBRARIES SUPPORT 

The schools and libraries fund has been capped since its inception at $2.25 billion. 

Demand for schools and libraries funds have always far exceeded the cap. As noted 

by the FCC in its Order of June 13, 2002, demand in the current year is almost 

double the funds available. As more and more schools have become connected to the 

internet through the e-rate, the demand for recurring or priority one funds has increased. The result has been that the money available for internal connections in 

the schools yet to be wired has been declining. The FCC’s resolution of the unused 

funds issue its June 13, 2002, Order may help resolve this problem, but pressure 

on the cap is likely to continue. The FCC is also currently considering comments 

on reforms to the schools and libraries fund. 

D. RURAL HEALTH CARE SUPPORT 

Unlike the other support mechanism, the rural health fund has had difficulty generating sufficient demand. The FCC originally anticipated a $100 million per year 

fund. However, in spite of repeated attempts to remake the fund, disbursements 

have remained low, only $7.9 million in 2001. Although the FCC is currently examining the operation of the rural health fund, the root cause of the problems for the 

rural health fund lie in the wording of Section 254. Unlike the schools and libraries 

support mechanism which provides discounts from regular prices on all telecommunications services, and pays for internal connections, Section 254(h) limits 

the rural health fund to the difference between rates available to health care providers in rural and urban areas of a state. Since many states have rural rates which 

are lower than urban rates, or have ‘‘postage stamp’’ rates for data services, the 

rural support mechanism has been of limited utility in meeting the needs of rural 

health providers. A statutory change should be considered which would make the 

rural health section of the Act parallel with the schools and libraries by providing 

services ‘‘at rates less than the amounts charged for similar services to other parties.’’

V. CONCLUSION 

In order to be sustainable in the long-term, the USF must be configured like a 

pyramid: it must have a broad and stable base of contributions at the bottom, and 

a narrow but sufficient focus of support at the top. The current universal service 

fund requires work on both ends: issues related to the contribution base must be 

resolved, and the limited resources of the fund must be properly targeted. In order 

to continue the public policy success of the universal service fund, we must support 

access, not excess.

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Senator INOUYE. I thank you very much, Mr. Gregg. 

As one can imagine, all of us receive many letters and calls from 

critics, and contributors. I think most of the calls focus on the funding or contribution mechanism and cite that there’s a lag between 

prior reported revenues, which are 6 months old, and current revenues, which are assessed based on the contribution factor. 

My questions are: Is it possible to eliminate this lag, but retain 

the revenue-based assessment mechanism? Are there ways to minimize the competitive distortion that one finds between carriers 

with rising revenues such as the RBOCs and carriers with falling 

revenues? And how would the adoption of collect-and-remit proposals advanced by some of the carriers affect the administration 

and stability of the fund. Anyone can take this one. 

Ms. ATTWOOD. The answer would be yes, yes, and yes. 

[Laughter.] 

Ms. ATTWOOD. The questions you raise really go to the choices 

that are now before the Commission in the contribution proceeding—the contribution methodology proceeding. And as each of 

the panelists has described, there are a variety of proposals that 

are before us. 

One proposal would be, in effect, to rely on projected revenues, 

for example, which goes to your first question, is there a way in 

which to minimize the lag. The Commission could adopt—and I’m 

sure we’ll hear testimony about that on Friday in the Joint Board 

hearing—the Commission could adopt to look at forward-looking 

revenues. And that would do several things. One, in all likelihood, 

it would eliminate the lag which is caused by declining revenue 

being assessed on the basis of 6-month-ago revenue. It would also 

attempt to eliminate some of the distortions among industry players, because those that are in the increasing-revenue mode would, 

in fact, be paying more than those that are obviously in a declining 

revenue mode. So there are real advantages to looking at a projected mechanism. 

There are disadvantages, however, as well. The projected-revenue mechanism doesn’t address the overall decline in interstate 

revenue. That overall decline will continue as an industry. And the 

question that begs that is—whether some of these bundled services 

and technological migration to other platforms, in fact, threaten the 

long-term stability of the fund so that we need to look at the contributor-base generally more broadly than just those that are based 

on interstate revenues. So that’s a disadvantage. 

And those are the kinds of reasons why we’re looking at the industry proposal that bases it on a per-connection approach, because 

the per-connection approach would, in fact, be arguably more stable, since the number of lines, or the connections, don’t grow per 

quarter or fluctuate nearly the same way that the revenues might. 

So the answer is, yes, there are a variety of proposals that could 

address some of the concerns that we’ve heard this morning on a 

projected-revenue basis, but there are also—it’s not a complete answer—there are other advantages to some of the proposals that 

have been raised by industry. 

Mr. GREGG. I’ll have to disagree a bit. One of the reasons that’s 

espoused by proponents of the connection-based system is that it is 

still growing at a health clip, and, thus, can keep up with any inVerDate 0ct 09 2002 14:41 Feb 08, 2005 Jkt 093053 PO 00000 Frm 00040 Fmt 6633 Sfmt 6601 S:\WPSHR\GPO\DOCS\93053.TXT JACK PsN: JACKF
37

creases in the fund. I believe that, even if you went to a connectionbased system, you would still have the problem of lags with reporting lines. Those that are gaining lines would benefit from the lag. 

Those that are losing lines would be hurt by the lag. 

On the collect-and-remit system, it would be easier for consumers 

to understand, in that they would be assessed exactly what the 

FCC assesses on carriers. The carrier’s burden would be made 

somewhat easier, in that they are simply turning over whatever 

they collect. But it would have to be made up by the fact that 

USAC, the Universal Service Administrative Company, would have 

to carry some sort of reserve balance to protect against any shortfalls. 

Happily, however, USAC at the end of last year was carrying a 

cash balance of about two-and-a-quarter-billion dollars. That was 

some of the money that the FCC tapped last Thursday to help stabilize the assessment factor in the fund. So the reality is you already have a built-in reserve fund just from the natural lag between collections for schools and libraries and disbursement for 

schools and libraries. 

Senator INOUYE. Any others? 

Should pay-phone services be eligible for universal-service support? 

Ms. JABER. Mr. Chairman, I’ll take a stab at that, and perhaps 

the other panelists would like to add something. We are currently 

reviewing that as a Joint Board in our review of the definitions of 

universal service, and there appear to be two schools of thought—

without getting into the pending matter that’s in front of us, there 

appear to be two schools of thought. To the degree that public-interest pay phones are in demand and necessary within the states, 

then perhaps the states should take the lead in crafting the appropriate funding mechanism. With respect to the general pay-phone 

industry, however, the school of thought is, perhaps that issue is 

important enough and strong enough that the FCC might want to 

spin out that discussion into a generic proceeding and receive additional information from the pay-phone industry itself. 

They are current—the industry is currently funded with respect 

to the universal-service fund. They are receiving funds. It’s a question of additional funding. From a Florida perspective, we have not 

spoken on that issue at all. I have to tell you, just because I want 

to be very inclusive with respect to getting information on the 

issue, I would very much be in support of the FCC taking a very 

good, hard look at the pay-phone industry and whether funding is 

appropriate, because they do serve public interest. 

Mr. GREGG. In 1998, when the FCC deregulated pay phones, they 

found that the then-current number of pay phones, 2.2 million, represented widespread deployment of pay phones throughout the nation, as required by the act. Currently, there are only 1.7 million 

pay phones in the United States. There has been a rather dramatic 

decline. 

The reasons for that are fairly obvious. Cell phones have increased in the same time period from 47.8 million up to currently 

136 million. Incredible growth. And people are substituting cellular 

usage for pay-phone usage. 

38

The issue of whether pay phones deserve special or extra support 

should be looked at as a separate matter, I believe, by the FCC. 

It doesn’t fit nicely into any of the existing support mechanisms 

that we have. In fact, any pay phone in a high-cost area currently 

receives support as a line, just like any other line. But pay phones 

in low-cost areas receive nothing. 

It may be appropriate to establish a separate and distinct support mechanism on top of state public-interest pay-phone programs 

in order to continue to ensure the widespread deployment of pay 

phones, because they continue to be necessary for public health and 

safety. All of us have had the experience of being on a dark, deserted road at night when we needed to make a call. And, second, 

it still represents a lifeline for low-income families throughout the 

country, in both rural and urban areas. 

Ms. THOMPSON. Senator Inouye, if I could add, I believe—it is an 

issue that needs to be addressed. The decline of pay phones nationwide is one that’s been dramatic. I believe it’s one that should be 

addressed by the states. And the state of Alaska is a good example 

of that. 

We have supported public-interest pay phones through our state 

universal-service fund. We’ve recognized in Alaska—we don’t have 

dark and deserted streets, but we have dark and deserted air strips 

in most of our rural communities. And our state commission has 

funded through our state fund two pay phones in each community. 

The communities designate them, where they are necessary for 

rural health and safety issues. So I think it’s an important issue 

to continue to look at, but I think it’s one because of, at least in 

Alaska’s case, where we have particularly unique health and safety 

concerns, the state’s been able to effectively address. 

Senator INOUYE. Thank you very much. 

Senator Burns? 

Senator BURNS. I’m going to yield to my friend. He has a Defense 

authorization and a lot of other things he’s supposed to attend, and 

I wanted to defer to my friend from Alaska. 

Senator STEVENS. I’m just going to take a brief moment. I’d like 

to ask the four of you this. We developed this concept of universal 

service. As a matter of fact, Senator Inouye and I started it with 

the idea of integration of rates—national integration of rates. That 

caused the creation of the interstate rate pool. And from that came 

the universal-service fund. All of that was intended to try and permit all Americans to have equal access to long-distance. 

Many of you have been talking about local telephone service. We 

are dealing with something that’s not a tax. It’s a contribution from 

other users to a fund to assure that their telephone calls to some 

of those rural areas would get through, on an interstate basis. 

Now, as I hear you, I think you’re all talking about, in effect, taxing the users of telephone service to assure there’s equal access to 

telephone service on a local basis, without regard to long distance 

and without regard to who’s the provider. Are we justified in giving 

the FCC the power to tax users of communications services to provide such assistance, when if we authorize them to do that, the 

FCC will be levying a charge against users, which have nothing to 

do with interstate commerce. And I think we’re headed toward the 

total collapse of the universal system fund. 

39

Now, is it possible to get back to the point that we’re trying to 

unite the communications systems so that one can communicate, 

without regard to where they are, to every other place in the 

United States without getting caught up in a battle over allowing 

the FCC to impose fees, which really are taxes, on all users in 

order to meet some social objectives? 

The libraries, health facilities, and schools hook-up was one 

thing. I think I’m hearing now that we’re supposed to pay for the 

service to those schools and libraries and health facilities, and pay 

for it by assessing the users of the system, nationally. Is that 

where you all are going? 

Mr. GREGG. Senator Stevens, in fact, out of the two-and-a-quarter-billion dollars of the schools and libraries fund, which is capped 

and has been capped from the beginning, currently about $1.9 billion goes to pay for recurring or priority-one services. In fact——

Senator STEVENS. I know that, Mr. Gregg, but what I’m asking 

you is why? Why? 

Mr. GREGG. Because the act——

Senator STEVENS. We didn’t create that fund for that purpose. 

Mr. GREGG. Under 254(h), it says that schools and libraries are 

to get services at prices less than offered to others, and it also says 

that they shall pay——

Senator STEVENS. That’s——

Mr. GREGG.—for hooking up classrooms. 

Senator STEVENS.—acquisition. It’s not service. And we’re going 

into service charges as we get into the complete digital concept, 

this fund won’t survive. And what’ll happen is my state will have 

areas the size of Texas that have no communications at all. 

We designed it for rural America. And I’ve just added it up. Ten 

states took almost 50 percent of this fund in the last year. None 

of them were rural. None of them. 

Now, why should we have a fund to do the inner-core city work 

that you’re suggesting? Even Alaska paid for local funds out of 

state funds for the local pay phones. But I’m hearing here that this 

is to become a new social-services fund. And if it is, my people are 

out of business, because this fund will collapse soon. 

Mr. GREGG. OK. If you look at Attachment 2 to my testimony, 

you’ll see that the high-cost portion of the fund is still the largest 

portion of the fund—about $2.9 billion this year, compared to $2.2 

billion for schools and libraries. As I said, the schools and libraries 

is capped. The high-cost fund is not capped and will continue to 

grow. 

Senator STEVENS. High-cost fund, to you, means the problems of 

people in the inner-core city. 

Mr. GREGG. No, no. It means everything, rural and non-rural. 

Senator STEVENS. But the bulk of the money you’re talking about 

went to the inner-core city. It did not go to—do you want to add 

up—I could add up for you pretty quickly the money that went to 

rural states for rural telephone service, rural communications service, and it’s nowhere near $2.9 billion. 

Mr. GREGG. $2.9 billion is the total high-cost support that 

went——

Senator STEVENS. Yeah, but then—see, you’re using high-costs 

now, rather——

40

Mr. GREGG. Right. And it’s——

Senator STEVENS.—than connection to people. 

Mr. GREGG.—it’s made up of a number of different mechanisms. 

Senator STEVENS. We were trying to provide a fund to assist people who would not otherwise have service. You’re trying to provide 

funds so that people can be subsidized for existing service. 

Mr. GREGG. Part of the reasons why the high-cost fund has gone 

up, besides supporting rural carriers, as Nan Thompson said, a billion dollars for high-cost loop support, $400 million for local switching support, about $380 million for long-term support. All of that 

goes to rural carriers. There is also support that goes to non-rural 

carriers to support the rural portions of their service territory. For 

example, the Verizons and the BellSouths, while they serve the 

large metro areas, they also have very large rural areas, and some 

of those are so high-cost that they qualify for funds. All of that together is the high-cost fund. 

Senator STEVENS. All right. Well, I’ve got to go, and I don’t want 

to take time. I would urge you to keep your eye on ball. 

Mr. GREGG. Yeah, and I would—I would just mention that 

254(g), which you got added to the Telecom Act, is one of the most 

important things that came out of the 1996 Telecom Act, the ability 

that all people in the United States have access to the same longdistance rates is critical. 

Senator STEVENS. But we started that before the act. That was 

in the rate-integration resolution that the Congress passed and the 

President approved. That’s a long time ago. 

But that goal was carried through in the 1996 act because of the 

concepts of the rural coalition. And those of us who tried to work 

out were sure our people would stay modern. But we didn’t dream 

that this little amendment talking about schools, health facilities, 

and libraries would end up by taking more than half of the fund 

and causing such an increase now. I don’t think it’s too long until 

you get to the point that the people who pay the bills are going to 

complain that this service is not helping them. It’s not to help them 

call their son or daughter in North Dakota or Alaska or Hawaii 

when they’re stationed in some remote place. 

Ms. JABER. Senator, may I——

Senator STEVENS. That was the theory, and we are abandoning 

the theory of it, and you’re going to destroy the fund. And I want 

to put down a warning. We’re going to fight—rural states are going 

to fight to keep this fund for its original purpose, and we’re not 

going to have it turn into a slush fund for inner-core city activities. 

And if it is, we’ll all lose. 

Ms. JABER. Senator, may I agree with you and clarify? You said, 

with respect to the four panelists, you heard advocacy for increasing the fund and subsidies on the local level. I wanted to clarify. 

From Florida’s perspective, we have identified the same concerns 

you have. And when I talk about accountability, we are talking 

about stepping back and analyzing the purpose of the fund, taking 

a look at where the money is going and the purpose for which it 

was intended before we increase the size of the fund, before we talk 

about eligibility requirements, and before we add more programs. 

So I wanted to clarify, for the record, that’s what Florida means 

by ‘‘accountability.’’

41

Senator INOUYE. Thank you. 

Senator Dorgan? 

Senator STEVENS. I’m told that this assessment could go as high 

as 15 percent on each bill, at the rate we’re going right now. Fifteen percent. There’s no state tax that high. It wasn’t intended to 

be a tax. And I don’t see any way that can survive if it goes beyond 

15 percent. Matter of fact, I don’t see it surviving if it goes up to 

15 percent. And my fear is, if it doesn’t survive, if Congress decides 

to call this off, what do we do for our states? Hawaii has an enormous problem. We have enormous problems in these Western 

states, and I just hope that people will listen to you and go back 

to the original purpose and try to see to it that all providers of communications services pay into a fund to assure that anyone who 

uses the service can reach any place in the United States. And 

leave it right there. 

Thank you very much. 

Senator DORGAN. Mr. Chairman, I’m going to come to this central point, but let me ask Ms. Attwood a question on the level of 

contribution. The FCC determines the carriers contribute 7.2 percent of their interstate and international revenues in the universalservice fund. Major carriers are charging customers roughly 11-

plus percent in the universal-service line item. Tell me about how 

that happens. 

Ms. ATTWOOD. The factor of 7.2 percent of interstate revenues reflects what we believe to be the costs that we will need to recover 

from each of the carriers. They—in addition to that measure, they 

also have to look, in terms of their uncollectibles, so they look and 

determine—they have the obligation to pay, regardless of whether 

the consumer pays them. 

In addition to that, and as we’ve talked about this morning, we 

assess on the basis of revenues 6 months earlier, and there is a lag 

issue that we have taken one step to reduce. We used to have a 

lag of 12 months. Now it’s 6 months. But as the base of customers 

declines, but the overall need to pay continues to be evident for 

that carrier, it’s going to have to assess higher amounts on the existing customer in order to cover the fact that there’s been a reduction in those consumers. 

Senator DORGAN. And the carrier makes that judgment? 

Ms. ATTWOOD. Well, right now, we actually don’t tell the carrier 

that they must put a line item, but we permit them to——

Senator DORGAN. They do. They do, though. 

Ms. ATTWOOD. Yes, for the most part. 

Senator DORGAN. Have you ever audited to determine that which 

is being charged to the customers and being sent into the fund? 

Ms. ATTWOOD. We have looked very closely at the arguments 

raised by the carriers because of the inexplicable difference between——

Senator DORGAN. I’m asking you about audits. Have you ever—

there’s a substantial amount of money involved in this. Any audits? 

Ms. ATTWOOD. We’ve—actually, we’ve—well, investigations are 

not something that we comment on publicly. We have looked very, 

very closely at the explanations given by——

Senator DORGAN. I’m asking if you have an audit program. 

Ms. ATTWOOD. We have audits at the Commission. Of course. 

42

Senator DORGAN. You’re auditing the charges that are occurring 

on the consumers’ bills for the company? 

Ms. ATTWOOD. Over the course—since the beginning——

Senator DORGAN. So that’s not the case. 

Ms. ATTWOOD.—where there has been a difference between what 

the carrier has charged and what has appeared on the line item, 

we have taken an active role in reviewing the difference. In fact, 

the contribution-methodology proceeding arose because of the fact 

that consumers were very confused by this difference. 

Senator DORGAN. But you don’t have an audit program, do you, 

down there? 

Ms. ATTWOOD. We have an audit——

Senator DORGAN. I’m told you don’t. 

Ms. ATTWOOD. We have——

Senator DORGAN. Oh, you do? 

Ms. ATTWOOD.—audit program, yes. 

Senator DORGAN. OK. Would you send me information about it? 

Ms. ATTWOOD. Sure. 

Senator DORGAN. Let me go on to this other question that—I was 

not aware of that, but if you have an active audit program, send 

me information——

Ms. ATTWOOD. Sure. 

Senator DORGAN.—so we can understand that. 

The issue of the universal-service fund and what I think is a future of—shrinkage of that fund, based on judgments that the FCC 

is making and also assisted, in part, by a court decision, one court 

decision that was never appealed—so tell me, with respect to 254 

and the language that deals with advanced telecommunications 

services—as I and others helped write that language, so we put it 

in deliberately and knew what it meant—how do you see the current universal-service fund support-mechanism supporting that 

which we intended with 254, including advanced services? 

Ms. ATTWOOD. Well, the question of whether the advanced services should be directly supported is currently before the Joint 

Board, and the question of, what we call, the definitional question, 

whether, in fact, it is a supported service. 

Senator DORGAN. Well, have you read——

Ms. ATTWOOD. That’s actively being worked on by the Joint 

Board. 

Senator DORGAN. Can I read 254 to you, though? 

Ms. ATTWOOD. Sure. 

Senator DORGAN. I mean, I don’t think the—in my opening statement, I read the Section 254, in which we talked about advanced 

telecommunication—including inter-exchange service and an advanced telecommunications and information services. So, I mean, I 

don’t want you to deliberate too long about this. 

Ms. ATTWOOD. Well, I——

Senator DORGAN. We wrote it in a pretty explicit way. 

Ms. ATTWOOD. And I appreciate that. And I think your points 

have been well taken and are really actively being reviewed by the 

Commission—both the state commissions and the federal commission. 

There’s also language in the Act, though—and I think this is 

what confuses the issue—there’s language in the act that talks in 

43

terms of the criteria for supported services, and that criteria include that the service, in fact, is being provided by a substantial—

or taken by a substantial number of consumers. 

And I think, in addition to that, there are concerns raised that—

in order for you to receive support, that—under the terms of the 

Act, you have to be able to provide all of those supported services. 

So there is a concern that’s been raised by several folks that if, in 

fact, there is a direct requirement that advanced services be supported, before that support could flow, the carrier would have to acknowledge that it was capable of, in fact, offering that service, 

which would require substantial upgrades to some carriers and 

would, in fact, cutoff their——

Senator DORGAN. Who are these——

Ms. ATTWOOD.—ability to receive money prior to being able to 

make themselves available to——

Senator DORGAN. Who are these ‘‘several folks’’ that have expressed that concern? Are you just being——

Ms. ATTWOOD. Oh, I’m—you know, we have all—in all forms of 

industry segments, and there are various industry segments that 

comment. So when I talk about ‘‘folks,’’ I mean our industry folks. 

Senator DORGAN. Do you agree that when you redefine wire-line 

broadband as something other than a telecommunications service, 

you’re involved in the shrinkage in the potential for universal-service support in the long-term? 

Ms. ATTWOOD. I wouldn’t agree with that statement the way you 

stated it. I would say that the Commission is very concerned. And, 

in fact, when we launched the NPRM that looked at the question 

of how broadband services ought to be defined or how they are defined under the Act, the Commission was extremely concerned 

about the potential impact that that would have on the base for 

contributions—or in the current universal-service system. And 

that’s why the Commission, in fact, issued a further notice that 

sought to have and generate comment on this. While we see migration, while we see this definitional question being resolved, we 

want to ensure that there is no effect on universal service and have 

developed a huge record on that point. It’s not even fully closed yet. 

Senator DORGAN. Ms. Attwood, I don’t understand, because I 

think—I mean, I may be observing this inappropriately, but my observation is that you are systematically taking steps to shrink the 

base. And if you shrink the base, you’re going to end up with less 

revenue. 

Ms. ATTWOOD. Well, I give you credit, because, in the Act, it also 

indicates that—that support can be based on the fact that there is 

a telecommunications provider. And, as we indicated in the further 

notice, when you’re a telecommunications service provider, you 

shall contribute. However, if there is an information service provider that, in fact, has a telecommunications component, the Act—

and Congress, in its wisdom—gave the Commission discretion to, 

in fact, look at that contributing base. And that’s the kind of question that we asked in that further notice. 

Senator DORGAN. But my concern, for a long period of time—not 

just this commission, but for a long period of time——

Ms. ATTWOOD. Uh-huh. 

44

Senator DORGAN.—my concern is that the FCC has used whatever discretion it has to shrink, rather than expand, the base. And 

the result is, I think you have precious little opportunity to provide 

universal service fund support for advanced services. In fact, I wonder whether we will be providing the kind of universal service support that we expect for basic telephone services. 

Now, the thing I did not quite understand with Senator Stevens’ 

comments—my impression of the universal service fund has always 

been that there are some parts of the country in which, if you were 

to create a telephone system there, based on its own pricing, it 

would cost you $200 a month for basic service. Well, nobody’s going 

to afford that. And so we have a universal-service fund support so 

that the lower-cost areas—New York City, for example—can contribute into a universal-service fund to drive down the cost in 

North Dakota, for example, which would be very expensive. That’s 

always been my notion of what the universal-service fund has been 

about. And then when we wrote this act, we explicitly called for reform——

Ms. ATTWOOD. Uh-huh. 

Senator DORGAN.—of the universal-service fund. And my concern—I hope you’ll take this back to the commissioners, and I 

would be happy to do this directly when we get Chairman Powell 

here—my concern is that in every opportunity where the Commission has had discretion, they’ve chipped away at the base, and, 

thereby, in my judgment, injured our opportunity in the long-term 

to use the universal-service fund support the way we intended it 

to be used—aggressively, in a robust way. 

And so—at any rate, I think that’s—that represents my concern. 

I did not ask others of you questions. I appreciate the testimony 

you’ve provided today. 

This, I think, will become a festering, significant problem between the Congress and the Commission, because it—at its roots 

are the answers to the questions, who’s going to be able to afford 

the kind of communications services in the future in this country? 

How will they afford them——

Ms. ATTWOOD. Right. 

Senator DORGAN.—and how will they be priced. So that this will 

be a—this problem will grow, unless it’s handled delicately and appropriately by the Federal Communications Commission. 

Mr. GREGG. Senator Dorgan, I would just state, if you’re concerned about the contribution base, you should look with interest 

at what the FCC does in the current inquiry on the connectionbased system, because if we’re going to change from a revenuebased to a connection-based system, this would present the golden 

opportunity to cast the net very far and wide to encompass all providers, including broadband providers. Today, when they serve only 

10 percent of the customers in this country, even though about 80 

percent have access to it, this would be the time to bring them 

under the tent. 

Senator DORGAN. There are many issues that relate to that, of 

course. I understand your point that—my interest is in broadening 

the base in a way that provides a robust fund that allows us to do 

what the act intended to do. 

Senator INOUYE. Senator Burns? 

45

Senator BURNS. I am finding the testimony fascinating this 

morning and just looking at the numbers and everything. I’m wondering, on the board, the universal-service board, can we get—can 

this Committee—do you do any projections on—if we don’t change 

anything—if Congress doesn’t change anything, if the FCC does not 

change anything—where are we in 5 years, using current trends 

and projections? 

Ms. THOMPSON. Senator Burns, we haven’t done that kind of 

analysis, but I’d be happy to. We would work with the Universal 

Services Administrative Corporation that collects and distributes 

the funds. But I think that’s a very interesting question. 

Mr. GREGG. I would state that the commenters in the current 

contribution-base inquiry have presented various projections of 

where they think revenue growth will be and where they think line 

growth will be, because those will be the drivers of whether the 

fund stays affordable. 

Senator BURNS. Well, if we just stay where we are now and at 

the present level of around 7 percent, I think we’re headed for 

tough times if we just did nothing or the FCC did nothing to 

change those things. In light of that, and receiving that information, I’d like to see those figures and do some projecting on our 

working with those people. And you have knowledge of that. 

Does Section 254 of the Tel-co Act of 1996, which codified our national longstanding universal-service policy—do you think we’re 

going to have to revisit 254 and take a look at that? Because what 

I see, in the growth of these numbers—we had no idea that the 

growth of schools and libraries would be so huge and so dramatic, 

especially when we were being told that most of them had already 

been wired and we passed a regular tax that contributed to that. 

They also have access to that. I’m very concerned about that. 

Is there abuse? And where do we go from here? Or is the majority of the growth already done? And can we see a decline in the 

use of those funds? 

Mr. GREGG. Senator Burns, as I indicated, the schools and libraries fund has been capped, since its inception, at two-and-a-quarter 

billion. The actual disbursements under the cap have varied year 

to year, and now they’re pretty much trending at the cap. 

The only other portion of the fund that is capped is the rural 

high-cost loop support. There was a rebasing of the cap a year and 

a half ago as a result of the rural task-force order that the FCC 

issued. The cap grows each year based on a number of factors; however, the schools-and-libraries cap does not grow. That’s why, if you 

look at my Attachment 2, you can see that once the schools-andlibraries fund reached about $2 billion, it has stayed there; whereas, high-cost continues to grow. 

Senator BURNS. Do we need to revisit 254? 

Mr. GREGG. I think perhaps you should. One thing that I would 

change would be the assessment-based language in 254(d). I would 

make it broader, give more discretion to the Commission to take 

whatever action necessary to keep that contribution base broad. 

The other fix that I would recommend would be for the rural 

healthcare program. The way that it was originally conceived—and 

this goes toward making the fund bigger—almost every other part 

of the fund, we’re worried about getting too big. Rural health is 

46

just the opposite. Originally conceived, it was going to be a $400 

million fund. And that’s a mistake in my testimony. I said a hundred million. Originally, the FCC had said it was going to be $400 

million a year. In reality, it has been closer to $10 to $15 million. 

The problem is the statute. It was meant to eliminate the disparity between rural and urban rates for rural healthcare providers. In reality, a lot of rural rates are actually lower than urban 

rates, and a lot of states have postage-stamp data rates. In other 

words, it’s the same wherever you are. There’s no mileage component. Therefore, the rural health provisions have been of limited 

utility. 

If you truly want to get rural health providers wired and into the 

new digital age, you might consider adopting parallel language to 

what you have for schools and libraries. But, on the other side of 

that, it’s going to cost money. And if you’re worried about schools 

and libraries and rural healthcare stealing money away from rural 

telephone providers, that’s a consideration. 

Ms. JABER. Senator, may I address——

Senator BURNS. Yes. 

Ms. JABER.—with respect to the schools and libraries program 

and are there abuses? We have seen that there are. And I think, 

actually, the FCC has seen that there are. In their NPRM on the 

schools and libraries program, they talked about the potential 

abuse, documented abuse with respect to equipment transferability. 

And what that is, is when a school applies for equipment and connections to a given school, it’s been alleged that that equipment 

stays in the school for a small amount of time and is transferred 

elsewhere and the same school applies other places. The FCC acknowledges that. Florida filed comments with respect to at least 

putting a cap or a time limit with respect to how long that equipment needs to stay at the location for which it was requested. 

The accountability theme, though, whether that takes a change 

to Section 254 to give the FCC the absolute requirement to communicate with states in identifying where those abuses are, we talked 

about auditing, whether the FCC needs broad auditing authority or 

requires the states to be accountable for their own use of these programs, is something I would be an advocate for. 

It’s about accountability. No one disagrees, at this table, that the 

universal-service fund has benefited many, many people. I certainly 

have seen firsthand the benefits of universal service, but I’d like 

to see more people that need to benefit from the fund receive the 

benefits. And until we see that all of those end users have the benefits, we would advocate for an overall cap in the program. And, 

again, that may take a change to 254 to give the FCC the flexibility 

to cap the overall program until those sorts of abuses are identified 

and addressed. 

Ms. ATTWOOD. Can I comment, just briefly? 

Senator BURNS. Yes, ma’am. 

Ms. ATTWOOD. Because I think that all the themes here, we 

would agree with. But I think there are two points that are important to recognize about the schools and libraries program. 

First of all, the question of accountability and waste, fraud, and 

abuse. Obviously, it’s of foremost concern to the Commission to 

make sure that the funds go where they’re intended. There is no 

47

value in funds not, in fact, being used to provide the service that 

it was intended for. So the Commission has clearly—and this chairman—has clearly made an effort to make sure that, in fact, we 

have those programs that would increase accountability. And, as 

Commissioner Jaber indicated, we flagged those in our recent 

schools NPRM. 

But I also don’t want to leave you with the impression that this 

is something that, in fact, is a huge problem, other than when you 

have a fund that is supporting large amounts of support, you’re 

going to make sure that you have accountability and you have appropriate oversight. And so the Commission is acting very responsibly in that regard and ferreting out those issues where our rules 

need to be improved with respect to this fund and all other support 

mechanisms. 

The other point I guess I think is important to make is that we 

talk about schools and libraries program as solely benefiting an 

urban area. And I think it’s really worth mentioning and reminding ourselves that, in fact, what schools and libraries does is, it 

also dramatically helps those in rural areas, as well. What it does 

is—it, in fact, focuses on communities, and those communities that 

need additional assistance. And, for example, I know we were looking at the—Senator Stevens isn’t here, unfortunately, but I know 

we were looking at the kind of support that schools and libraries 

has provided to Alaska, clearly a rural area. And when you look at 

the per-student amount of support, in fact, Alaska is No. 2 in the 

receipt of funds. 

So, while clearly the program supports inner city as well as other 

areas, it also benefits, ultimately, the rural consumer. And when 

we look at all of our universal service policies, the focus isn’t on 

helping rural carriers. It’s on helping rural consumers. And that 

help comes from a variety of both big companies, small companies, 

and schools and library support. 

Senator BURNS. Well, I’m well aware of the rural impacts, because we did two or three projects of distance learning that are 

still——

Ms. ATTWOOD. Uh-huh. 

Senator BURNS.—operating today in the rural areas. We’ve got 

four schools wired together that one biology teachers teaches in 

four schools. Those schools are almost 150 miles apart. And so 

we’re well aware of that. 

You wanted to make a comment, Ms. Thompson. 

Ms. THOMPSON. I did, Senator Burns, thank you. I wanted to—

you asked about changes to Section 254——

Senator BURNS. Uh-huh. 

Ms. THOMPSON.—and I wanted to let you know that I’m concerned that the current language of the act may not be able to accommodate the dramatic changes in technology we’ve seen since 

the act was passed. So in the context of this contribution proceeding—again, we have a hearing Friday, we’ll hear more testimony—I’d like the opportunity to community with you further on 

specific changes that we feel are necessary after we’ve completed 

that process. 

Accountability was another theme. And I think states have an 

important role in assuring accountability for use of universal-servVerDate 0ct 09 2002 14:41 Feb 08, 2005 Jkt 093053 PO 00000 Frm 00051 Fmt 6633 Sfmt 6601 S:\WPSHR\GPO\DOCS\93053.TXT JACK PsN: JACKF
48

ice moneys. That’s something that the FCC recently has, under the 

terms of the high-cost fund, given states that responsibility. And I 

think that we have an important role to play, in terms of the other 

programs, as well. 

And, finally, I’d agree with Dorothy Attwood that the focus has 

been on supporting rural communities and the schools-and-libraries 

use. And I’m aware of the dramatic—the great work that’s been 

done in the state of Montana to use that. You have the same problem we have, with distance and population, that can often be 

bridged by technology for benefit. But, again, the focus should be 

on supporting the educational process in those communities that 

need the support in order to be able to offer a level comparable to 

what folks in urban areas receive. 

Senator BURNS. Well, we’ve had this panel up here, and we want 

to thank you for your patience and the same, but if you would supply to the Committee those projections and give us some information that we can base some sort of a judgment, because of a shrinking base and an increasing demand for money, we’re going to have 

to make some hard decisions. There’s no question about that. But 

I appreciate your good work, and I appreciate your testimony here. 

As soon as I look at those projections—and off of that, there’ll probably be—we’ll spin off a lot more questions. But I think we ought 

to look at that because I’m very concerned about the viability and 

the sustainability of that. So thank you for coming today. 

And I thank the Chairman. 

Senator INOUYE. I’d like to thank the panel in behalf of the Committee. Obviously, we have many other questions. And if we may, 

we’d like to submit them to you for your consideration and response. Thank you very much. 

And now may I call upon the second panel: the chief financial officer of the MCI Group, Ms. Victoria D. Harker; the president of 

Regulatory and External Affairs, BellSouth Corporation of Atlanta, 

Georgia, Ms. Margaret H. Greene; the president and manager of 

the Public Service Telephone Company of Reynolds, Georgia, Mr. 

Don Bond; and the senior vice president for policy and administration and general counsel of the Cellular Telecommunications and 

Internet Association of Washington, Mr. Michael F. Altschul. 

Before we proceed, I just receive word from the office of Senator 

Cleland advising me that he had to suddenly return to Georgia, 

and so he wishes me to extend to Ms. Greene and Mr. Bond his 

personal regrets. He would have wanted to introduce you. 

But, with that, may I call upon chief financial officer, Ms. 

Harker? 

STATEMENT OF VICTORIA D. HARKER, CHIEF FINANCIAL 

OFFICER, MCI GROUP 

Ms. HARKER. Thank you and good morning, Mr. Chairman. My 

name is Victoria Harker, and I’m the chief financial officer and 

senior vice president of operations of the MCI Group, an operating 

unit of WorldCom. 

I’m pleased to address a very important issue this morning, the 

continued sufficiency and stability of the universal-service fund. 

This issue arises because of the dynamic changes that have transformed the telecommunications marketplace since the enactment of 

49

the 1996 Telecom Act. The benefits for consumers have been enormous. 

MCI, of course, has been an instrument of that change. MCI pioneered competition in the long-distance industry. Today we are also 

the largest competitive provider of local services in the United 

States. In fact, MCI just recently launched ‘‘The Neighborhood,’’ a 

set of national consumer products that serve to fulfill the vision of 

the 1996 act. Our flagship product, ‘‘Neighborhood Complete,’’ is 

the first residential product that combines unlimited local and 

long-distance service plus features, such as call-waiting, caller–ID, 

and voicemail, all in one package for one flat monthly fee. Consumer response has been tremendous, with over 600,000 sales just 

since mid April. 

We are proud of our pro-competition legacy. MCI’s industry-leading products benefit all customers. Technology convergency and 

product bundling are hallmarks of our industry today. But industry 

change, while good for consumers, now threatens the sustainability 

of universal service. 

The current funding mechanism must be reformed immediately 

to assure three critical policy goals—fund sustainability, competitive neutrality, and administrative efficiency. The existing mechanism fails to meet many of these goals. 

WorldCom participates in a coalition of carriers and users that 

proposes to change the current mechanism to an assessment on all 

connections to the public network. Our proposal is the only one 

that achieves those three policy goals. 

Because of declining interstate and international revenues, the 

existing fund mechanism is not sustainable. When the FCC created 

the current funding mechanism in 1997, interstate and international telecom revenues had been growing steadily for more than 

a decade. Bundling was not the norm, as it is today. But that’s all 

changed. The rapid growth in interstate and international revenues 

in the late 1990’s has been replaced by sustained annual decline. 

As shown in Chart 1, quarterly revenues have dropped nearly 12 

percent from their peak of $21.2 billion in 1999 to just $18.7 billion 

in the first quarter of 2002. 

Consider the substitution of other services that have reduced traditional long-distance calling—e-mail, and instant messaging, wireless packages that offer free long-distance service—and soon voice 

over the Internet will be a major factor. Bundled products make it 

difficult to clearly identify assessable revenues by links started 

with wireless products, but has since moved to local and long-distance wire-line packages. 

The problem is even more complex for the large-business customers. As their USF charges approach 10 percent, they have a 

growing incentive to bypass the system. This creates a vicious 

cycle. As the assessment base declines, the USF rate and remaining revenues continues to grow, further encouraging customers to 

use services that are either unassessed, such as voice over the 

Internet, or under-assessed, like wireless. Residential customers 

will likely bear the brunt and face increasing assessments unless 

a more rational approach is adopted. 

The existing funding mechanism fails to meet the competitive 

neutrality test. It was created before local long distance and wireVerDate 0ct 09 2002 14:41 Feb 08, 2005 Jkt 093053 PO 00000 Frm 00053 Fmt 6633 Sfmt 6601 S:\WPSHR\GPO\DOCS\93053.TXT JACK PsN: JACKF
50

less markets began to converge. With convergence, the existing 

mechanism creates competitive imbalances. For example, because 

their services are subject to much lower assessments, wireless carriers are provided with an artificial market advantage over longdistance carriers. 

Also, because the current mechanism assesses carriers based on 

their actual revenues 6 months earlier, it disadvantages carriers 

whose revenues are declining, versus carriers with growing revenues. Thus, the long-distance companies are forced to increase the 

fees on customers’ bills to fully recover their USF obligations, while 

the Bells and wireless carriers enjoy a windfall simply by charging 

their customers the FCC’s assessment rate on a growing base. 

The coalition plan is the only one that achieves all policy goals—

fund sustainability, competitive neutrality, and administrative efficiency. Every carrier would pay on a collect-and-remit basis, based 

on the number of interstate or international connections to the 

public network that it provides to end users. Connections to the 

public network are stable and growing; thus, meeting the goal of 

fund sustainability. 

Assessments would vary, based on customer class and capacity, 

rather than on technology. Carriers offering services that compete 

with one another would be assessed at the same rate. Thus, this 

plan is competitive neutral. 

Initial rates would be set as follows. One dollar for residential 

lines, wireless, and single-line businesses. Approximately $2.75 for 

switched multiline business connection. Private-line assessments 

will be based on capacity. 

Last, this plan is the most efficient. The provider of a customer 

connection already bills monthly for that connection. Generally, a 

long-distance or dial-up Internet service connection occurs by the 

local telephone wire. It’s efficient for the assessment to be imposed 

on the provider of that connection. In most cases today, that would 

be the ILEC. Over time, though, a growing portion of those connections will be provided by competitive carriers. 

As noted earlier, WorldCom is the largest competitive provider of 

local services. Because it is efficient, its overall impact on consumers would be positive. Lifeline customers would pay nothing. 

Residential customers across all income groups and demographics 

would pay less, on average, in USF fees than under the current 

mechanism or under a proposal advocated by FCC and BellSouth. 

In conclusion, irreversible marketplace changes render the current universal-service funding mechanism insufficient and unstable. Prompt action by the FCC is needed to adopt an approach that 

makes an assessment on all connections to the public network. This 

is only approach that will achieve fund sustainability, competitive 

neutrality, and administrative efficiency. 

Thank you. 

[The prepared statement of Ms. Harker follows:]

PREPARED STATEMENT OF VICTORIA D. HARKER, CHIEF FINANCIAL OFFICER,

MCI GROUP

Good morning, Mr. Chairman and Members of the Subcommittee. My name is Victoria Harker. I am the Chief Financial Officer of the MCI Group, an operating unit 

of WorldCom. I am honored to have this opportunity to testify before the SubVerDate 0ct 09 2002 14:41 Feb 08, 2005 Jkt 093053 PO 00000 Frm 00054 Fmt 6633 Sfmt 6621 S:\WPSHR\GPO\DOCS\93053.TXT JACK PsN: JACKF
51

committee on a very important issue: ensuring the continued sufficiency and stability of the universal service fund (USF). 

This issue would probably not command your attention but for the dynamic 

changes that have transformed the telecommunications marketplace in the last few 

years. The benefits for consumers have been enormous. Spurred in large measure 

by the historic Telecommunications Act of 1996, tremendous changes and opportunities have been experienced since its enactment. Technological convergence and product bundling are now two of the hallmarks of our industry. 

MCI, of course, has been an instrument of change. More than 30 years ago, MCI 

pioneered competition in the long distance industry. Now a part of WorldCom, MCI 

is no longer just a long distance company. Among other things, we are now the largest competitive provider of local services in the United States. 

In fact, MCI recently launched The Neighborhood, a new set of national consumer 

products that serve to fulfill the vision of the 1996 Act. Our flagship product, Neighborhood Complete, is the first residential product that combines unlimited local and 

long distance voice service plus features such as call waiting, caller ID and voice 

mail—all in one package for one flat monthly fee ($49.99 or $59.99 monthly, depending upon the customer’s location). Consumer response has been tremendous. We 

didn’t stop there. Last week, we also launched a similar program for small businesses—Business Complete.

We are proud of our pro-competition legacy. When MCI brings industry-leading 

products to market, all customers benefit. In this context, change is clearly good. 

But industry change, while good for consumers, now threatens the sustainability of 

universal service. 

Universal service has been an essential feature of U.S telecommunications policy 

for almost a century and has benefited all Americans by extending the public 

switched network to rural communities and to low-income households and by supporting schools, libraries, and rural health care facilities. Adequate universal service 

support for these important programs and activities must be maintained. Given the 

rapid changes in the marketplace, however, the current funding mechanism must 

be reformed immediately to assure three critical policy goals: the fund’s continued 

sustainability, competitive neutrality and administrative efficiency. The existing 

funding mechanism fails to meet any of those three goals. 

In constructing the 1996 Act, Congress recognized that a major source of universal service support—revenues generated by above-cost access charges—could not 

be sustained if its overarching goal of competitive telecommunications markets were 

to be achieved. Congress therefore required the Federal Communications Commission (FCC) to reform both access charges and the universal service funding mechanism. It directed the FCC to replace the implicit subsidies with specific, predictable, 

and sufficient universal service funding mechanisms that telecommunications providers contributed to on an equitable and nondiscriminatory basis. 

When the FCC first acted in 1997, interstate and international telecommunications revenues had been growing steadily for more than a decade. Except for the 

case of wireless offerings, interstate and international services were not being bundled with intrastate or information services and thus represented a stable and growing assessment base that was relatively easy to identify and measure. 

This made possible a system for assessing and collecting universal service funds 

from carriers based on historical revenues. Carriers are required to report their 

interstate and international revenues on a periodic basis. The FCC estimates the 

total amount needed for the fund for a forthcoming period and, dividing that need 

by the total assessable industry revenues reported, calculates a ‘‘contribution factor’’ 

(currently 7.28 percent) that is applied to each carrier’s reported revenues to determine the dollar amount owed by each carrier. Carriers recover their universal service costs from customers. 

Problems arose, however, as market conditions changed. As I shall discuss in 

greater detail below, the sustainability of this revenue-based mechanism has been 

threatened as competition from products not subject to the assessment has substantially and irreversibly reduced total interstate and international telecommunications 

revenues. Moreover, the revenue-based assessment mechanism proved not to be 

competitively neutral as markets converged and now-competing services are subject 

to different levels of universal service assessment. 

WorldCom participates in a coalition of telecommunications carriers and users 

that is proposing that the FCC change the current mechanism to an assessment on 

all connections to the public network. For reasons I’ll explain, our coalition proposal 

is the only one that achieves the three policy goals of sustainability, competitive 

neutrality, and administrative efficiency. It has an additional advantage—it can be 

implemented immediately. 

52

The Existing Funding Mechanism Is Not Sustainable 

Changes in the marketplace are driving the need for reform of the USF funding 

mechanism. While these changes, by and large, have been very beneficial to consumers and business users, they pose a significant threat to the future sufficiency 

and stability of the universal service program. Time is of the essence. In the context 

of universal service policy, he who rejects timely and meaningful change is an architect of destruction. 

The universal service funding mechanism that worked well just five years ago 

now faces a death spiral. The rapid growth in interstate and international telecommunications revenues in the late 1990s has been replaced by sustained annual 

decline (see Chart 1). Quarterly revenues have dropped nearly 12 percent from their 

peak of $21.2 billion in 1999 to just $18.7 billion in the first quarter of 2002. Email and instant messaging have replaced many long distance calls. Internet 

searches are used as a substitute for 800 calls. Of course, wireless service packages 

with ‘‘free’’ long distance have contributed enormously to this fundamental market 

change. Although not yet a major factor, voice over the Internet will soon have a 

significant impact on interstate and international revenues. 

At the same time, it is becoming much more difficult to identify assessable revenues as customers demand that providers offer bundles of interstate and international telecommunications services, intrastate telecommunications services, information services, and even customer premises equipment priced in a fashion that 

does not explicitly measure the interstate and international telecom revenues generated. There is no simple way to measure assessable revenues for bundled products. Bundling started with wireless products but has since moved to local and long 

distance bundles offered by the Bell monopolies and competitive companies. The 

problem is even more complex for large business customers who negotiate contracts 

for the purchase of services and equipment that can exceed $100 million a year. As 

USF charges assessed to businesses approach 10 percent, these enterprise customers have a growing incentive to ‘‘bypass’’ the system to minimize the portion of 

revenues subject to the assessment, including a migration toward Internet solutions 

that could significantly reduce their universal service burden. 

This creates a vicious cycle. As the current assessment base declines, the assessment rate on remaining interstate and international telecommunications revenues 

continues to grow, further encouraging customers to shift their purchasing decisions 

toward services that either are unassessed (e.g., voice over the Internet) or underassessed (e.g., wireless). Residential customers have fewer opportunities for avoidance and will likely bear the brunt of this cycle. 

Most residential customers are already being assessed at least 9.9 percent of their 

interstate bill and will likely face even higher assessments unless a more rational 

approach is adopted. Prompt reform of the existing funding mechanism is an urgent 

necessity. 

Although interstate telecom revenues are declining, customers still must connect 

to the public network. Fortunately, connections to the public network are stable and 

growing. For that reason, WorldCom and its partners in the Coalition for Sustainable Universal Service (CoSUS) have submitted a detailed funding mechanism proposal to the FCC that would assess the provider of every customer connection to 

the public network. 

Existing Funding Mechanism Fails Competitive Neutrality Test 

The current funding mechanism was created before local, long distance, and wireless markets began to converge, and thus it had little competitive impact on the 

marketplace. Today, however, several imperfections in the mechanism have a glaring impact on the marketplace. When the Commission could not identify the proportion of wireless service that was interstate a few years ago, it created a temporary 

15 percent ‘‘safe harbor’’ for wireless carriers based on the proportion of local exchange carrier (LEC) traffic that was interstate in nature. Wireless carriers therefore bear a federal USF assessment on, at most, 15 percent of their revenues. As 

we all know, however, the major wireless carriers concentrate their marketing efforts today on regional and national calling plans that provide large buckets of alldistance minutes for a fixed monthly rate. Many customers increasingly use these 

plans for long distance calling. These service offerings compete directly with both 

the long distance and all-distance offerings of wireline carriers. Because their services are subject to much lower universal service assessments, wireless carriers are 

provided with an artificial market advantage. 

Similarly, international carriers with no or minimal interstate revenues enjoy an 

advantage over carriers that offer domestic as well as international services because 

they are exempt from the universal service assessment. For example, a carrier with 

mostly international revenues (such as Loral Space Communications or Lockheed 

53

Martin) that does not have to contribute to universal service would be able to provide a customer with a service offering free of any universal service surcharges, 

while WorldCom would have to charge that same customer a universal service recovery fee. This obviously provides some of our international competitors with a significant yet artificial advantage. 

Also, because the current mechanism assesses carriers based on their actual revenues six months earlier, it disadvantages traditional long distance carriers vis-a`-vis 

wireless and local carriers, particularly those Bell companies that are now entering 

the long distance market for the first time. Traditional long distance companies are 

experiencing sharp declines in interstate revenues. Wireless carriers and Bell companies gaining entry into the long distance market, on the other hand, are experiencing substantial increases in interstate revenues. Long distance companies are 

forced to increase the federal universal service fee on customers’ bills to recover 

fully their USF obligations, while the Bells and wireless carriers enjoy a windfall 

simply by charging their customers the FCC’s assessment rate on a growing base. 

While it is important to remove these anticompetitive distortions in the market, 

simply correcting these competitive imbalances would not achieve the other two policy goals—sustainability and administrative efficiency. 

The CoSUS Plan Is the Only One That Achieves All Policy Goals 

Under the CoSUS proposal, every telecommunications carrier and private carrier 

would pay universal service contributions based on the number of interstate or 

international connections to the public network that it provides to end users. The 

assessment would vary based on customer class and capacity, rather than on the 

technology used to provide service, so that carriers offering services that compete 

with one another would be assessed at the same rate. Initial rates would be set as 

follows:

• $1.00 per residential line, single-line business, and non-paging wireless connection. Lifeline connections are exempt.

• $0.25 per paging connection.

• Approximately $2.75 per switched multiline business connection, determined as 

follows: during a one-year transition period for carriers to develop tracking, reporting, and billing systems for high capacity connections, the contribution for 

private line and special access connections would remain the revenue-based contribution percentage in effect for the last quarter under the current mechanism. 

Switched lines would then be assessed on a per connection basis to cover the 

residual between the fund size and the other USF funds generated. Centrex 

lines would be assessed one-ninth the basic switched access line rate.

Switched connection providers (LECs and wireless carriers) already have a line 

item for universal service recovery, so billing systems changes are not needed other 

than to change the amount of the USF fee. After the one year transition period, per 

connection multiline business connection assessment rates would be established 

based on the total contribution that would have been collected from the combination 

of switched multiline business and private line/special access connections had the 

transition continued. That total contribution would be collected through simple capacity-based charges, relying on the long-standing industry categories of DS0, DS1, 

and DS3 to assign greater weight to higher-capacity connections. Going forward, depending on the growth of the fund size relative to the growth in the number of 

(weighted) connections, all assessment rates would increase or decrease in uniform 

proportion. 

Under the CoSUS proposal, the impact on consumers will be positive. Lifeline customers would pay no universal service fees. Residential customers across all income 

groups would pay less, on average, in universal service fees under the CoSUS proposal than under either the current revenue-based mechanism or the proposal advocated by SBC and BellSouth (see Chart 2). In addition, a single per-connection 

charge will be much more understandable and more uniform for similar services, 

simplifying the customer task of comparing alternative offerings. 

Carriers would pay contributions on a collect and remit basis that is analogous 

to the efficient process used to collect the federal excise tax. The CoSUS proposal 

can be implemented without the FCC first determining how it intends to define and 

regulate broadband providers; it can accommodate any FCC decision on that issue 

in other pending proceedings. 

The CoSUS Proposal Would Achieve the Greatest Administrative Efficiency 

It is essential that the assessment mechanism be as administratively efficient as 

possible because the cost of universal service funding is ultimately borne by telecommunications users. As explained earlier, it is no longer possible to identify readVerDate 0ct 09 2002 14:41 Feb 08, 2005 Jkt 093053 PO 00000 Frm 00057 Fmt 6633 Sfmt 6621 S:\WPSHR\GPO\DOCS\93053.TXT JACK PsN: JACKF
54

ily which revenues are generated by interstate telecommunications services. By collecting assessments for any customer connection from the single provider of the connection to the public network, rather than from multiple intermediate service providers (long distance companies and ISPs), transaction costs are minimized. 

A long distance company or Internet dial-up service provider will not know the 

particulars of the connection its customer uses to receive that service. In these 

cases, the customer’s connection occurs via their local telephone wire. If MCI, for 

example, were assessed based on those connections (as proposed by SBC and 

BellSouth), my company would have to depend on data that only our customer’s 

local exchange carrier possesses. 

The industry and many customers learned from painful experience that it is cumbersome and expensive to create mechanisms to transmit that information from connection providers to intermediate carriers in a usable and auditable form. When implementing access charge reform, the FCC required the large ILECs to assess a perline charge, called PICC, on long distance carriers. That charge varied according to 

connection characteristics—such as whether a residential line was a primary line 

or whether a business line was a Centrex line—for which only the ILECs had the 

relevant information. The IXCs could neither audit the charges they received from 

the ILECs nor determine the right amount to recover from their end-user customers. These large ILECs ultimately developed electronic systems to provide and 

update the connection information (for which they charged the IXCs), but they had 

no incentive to accurately maintain the data and thus the IXCs had to develop complex systems to compensate for errors in the data and to this day are forced routinely to issue credits to customers to offset charges billed as a result of inaccurate 

identification of customer line types. 

As difficult as the PICC experience has been, the SBC-BellSouth proposal would 

be worse. Only the 13 or so very largest ILECs charged PICCs and therefore only 

they had to construct the electronic systems needed to provide the relevant line information to IXCs. Under the SBC-BellSouth proposal, all 1,300+ ILECs—most of 

which are very small—would have to construct the electronic systems. Moreover, the 

data they would have to provide—customer specific information on the capacity of 

connections, the number of Centrex connections, etc.,—is increasingly market-sensitive as recipient companies, like mine, become actual or potential competitors to 

the ILECs. ILECs, then, would have even stronger incentives not to provide the 

data that the IXCs would need in order to know how much to pay into the fund 

and how much to collect from individual customers. 

These administrative costs could be as great as the assessments themselves and 

would have to be passed on to the customer. Moreover, many long distance customers have zero usage during a particular month and therefore do not generate 

a bill. If the long distance companies were assessed for each customer to which they 

provided service, they would have to send out bills to millions of zero-usage customers each month just to recover the universal service assessment. 

By contrast, the provider of a customer connection to the public network will 

know the characteristics of the provided connection and already bills monthly for 

that connection. Therefore, it is administratively efficient for the universal service 

assessment to be imposed on the provider of that connection. In most cases today, 

that would be the incumbent local exchange carrier (ILEC). In many cases, though, 

the obligation would be imposed on a competitive carrier. For example, it is efficient 

to impose a USF assessment on WorldCom for each interstate private line connection we provide to our customers (even if the ILEC is providing the underlying access circuit to us) because we have all the relevant billing and line characteristic 

information. Similarly, it is efficient to impose a USF assessment on all the 

switched connections we provide to our residential and business customers, whether 

we use our own facilities, unbundled loops, UNE-platform, or resale. As noted earlier, WorldCom (including its MCI operating unit) is the largest competitive provider 

of local services. 

The CoSUS proposal also would improve the efficiency of the universal service assessment process by implementing ‘‘collect and remit,’’ by which carriers would only 

have to remit those universal service charges they actually collect. Rather than requiring carriers to perform ‘‘true-ups’’ lagged over the period of time necessary to 

determine which of their universal service revenues are uncollectible, carriers would 

simply report their connections and (subject to audit) their historical uncollectible 

rate for those connections, and pay into the fund accordingly. This not only eliminates the need for carriers to recover their uncollectible universal service charges 

from paying customers, but also eliminates the lag between setting and recovering 

the carrier’s assessments. 

55

Legislative and Regulatory Threats to USF Sustainability 

While my testimony explains why the current system of USF funding is not sustainable, I also must add that certain proposed changes at the FCC and in Congress 

would also jeopardize the universal service system. 

The FCC has proposed to eliminate the Computer II unbundling requirement for 

ILEC broadband Internet access services. Under current rules, the elimination of 

the Computer II unbundling obligation for broadband Internet access services could 

also exempt the ILECs from the universal service contribution obligation associated 

with those services. Not only would there be an immediate reduction in the contribution base, but the impact on the contribution base would only grow as the 

ILECs acted on their incentive to expand the scope of services offered through the 

contribution-exempt Internet platform. 

Also, legislation pending before the Commerce Committee would have negative 

consequences for universal service. S. 2430, the Breaux-Nickles bill, is objectionable 

for many reasons, particularly the devastating impact it would have on telecommunications competition. My testimony today, however, addresses only its impact on universal service. The proposed legislation states that all providers of 

broadband services must be subject to the ‘‘same regulatory requirements, or no regulatory requirements’’ and that this policy must be implemented ‘‘without increasing 

regulatory requirements applicable to any provider of broadband service.’’ Since nonLEC broadband providers do not currently contribute to universal service, the bill 

would seem to require the FCC to relieve the Bells of the current and future contribution requirements on their broadband services. 

Under the current revenue-based mechanism, as the Bells shift more and more 

traffic to high speed data service, Internet access and IP telephony, the potential 

base for contributions to the universal service fund would decrease. This would further destabilize the USF and raise even greater concerns about the sustainability 

of its current programs, such as the high cost fund designed to keep rural subscribers on the network. In addition, under Breaux-Nickles, the contribution burden 

would fall increasingly upon those consumers with the most basic of telecommunications services. 

Conclusion 

WorldCom shares this Subcommittee’s strong commitment to universal service. Irreversible marketplace changes render the current funding mechanism insufficient 

and unstable. Prompt action by the FCC is needed to avert disaster. Now is the time 

for the FCC to adopt an approach that makes an assessment on all connections to 

the public network. This is the only approach that will achieve three critical policy 

goals: fund sustainability, competitive neutrality and administrative efficiency.

56


hark1.eps
57

Senator INOUYE. Thank you very much. 

Ms. Greene? 

STATEMENT OF MARGARET H. GREENE, PRESIDENT,

REGULATORY AND EXTERNAL AFFAIRS, BELLSOUTH

CORPORATION 

Ms. GREENE. Thank you, Mr. Chairman, Senator. I’m Margaret 

Greene, president for——

Senator INOUYE. Pull the microphone closer. 


hark2.eps
58

Ms. GREENE. OK. I’m Margaret Greene, president for Regulatory 

and External Affairs for BellSouth, and thank you for inviting me 

here today. 

Today, in this country, we have achieved universal telecommunications service. That has taken decades to accomplish, plus a great 

deal of industry investment. We’ve accomplished this universal 

service, moreover, by guaranteeing universal industry participation. Existing FCC rules in the 1996 Telecom Act require all carriers to participate fully in the FCC’s universal-service program, 

and that approach has worked. 

But today we face several critical choices. First, there’s the overall state of our telecommunications economy. Market conditions are 

leading company after company to temper their investment plans. 

Concerns regarding the overall fairness of the regulatory system 

may also be having a negative affect. Where regulatory burdens are 

unbalanced, unnecessary, or excessive investment will, and, indeed, 

has been, deterred. We need to address this challenge. 

Second, however, we face very real questions about the sustainability of the current universal-service system over time. At 

present, the Federal universal-service support level is about $6 billion a year. Some $2.65 billion of that goes to support schools and 

libraries and rural medical Internet connections. That support obligation, in turn, is assessed against the interstate revenues associated with traditional wire-line services. 

But, as I describe in my full statement, today’s bundling of local 

and long-distance services, of wire-line and wireless services, of information and video services is making it increasingly difficult to 

identify and separate interstate revenues. For example, the FCC 

believes that some 20 million cell-phone customers today buy a 

bucket of local and long-distance minutes for which they pay a flat 

monthly rate. Wireless traffic is displacing wire-line traffic and, as 

a result, eroding the traditional revenue base for universal-service 

support. And most experts, including the FCC, believe this situation will deteriorate over time. 

Several approaches have been advanced. The Universal Service 

Coalition, as discussed by my—the person who immediately preceded me, for instance—has proposed that there would be a flat 

monthly charge per connection—$1 per cell phone and wire-line 

connection, and so forth. This option seems simple and appealing. 

But the practical effect, if not the purpose, of this plan would be 

to exempt long-distance carriers and their customers from paying 

universal-service support. 

Then there’s the approach which Sprint PCS has urged. This 

would basically freeze universal-service contributions by wireless 

carriers, despite an increase in their provision of interstate communications. The practical effect of this approach would be to confer 

a competitive advantage on wireless carriers for the foreseeable future. They would not have to bear the burden of universal service 

placed on wire-line companies, and would no doubt acquire a large 

share of interstate revenues based on that free pass. 

Mr. Chairman, the 1996 act requires a universal-service approach that is competitively neutral. The act does not envision conferring a special advantage on one group of carriers or on one technology. We should not depart from our tradition of ensuring uniVerDate 0ct 09 2002 14:41 Feb 08, 2005 Jkt 093053 PO 00000 Frm 00062 Fmt 6633 Sfmt 6601 S:\WPSHR\GPO\DOCS\93053.TXT JACK PsN: JACKF
59

versal carrier participation in these support programs. That would 

be unfair. It would also deter the future investment in new network capabilities that American consumers expect and deserve. 

BellSouth and SBC have developed a connections-based contribution mechanism that would meet the statute’s requirements. We 

think our approach guarantees the support the program needs. It 

avoids the creation of new loopholes. It is a broad-based approach 

designed to create a strong fabric for sustainable universal service. 

In conclusion, we share your commitment. We want to continue 

to work with you to ensure that every American has access to telecommunications services at reasonably comparable rates. In 

BellSouth’s view, it is not an overstatement to suggest that the nation’s economic well being and its security depend on it. 

Thank you again for the opportunity to appear before you today. 

[The prepared statement of Ms. Greene follows:]

PREPARED STATEMENT OF MARGARET H. GREENE, PRESIDENT, REGULATORY AND

EXTERNAL AFFAIRS, BELLSOUTH CORPORATION

Mr. Chairman, my name is Margaret Greene; I am President for Regulatory and 

External Affairs at BellSouth. Thank you for the invitation to participate in today’s 

hearing. 

BellSouth Corporation is a leading communications services company 

headquartered in Atlanta, Ga., with $51 billion in assets and 85,000 employees serving nearly 45-million customers in the United States and 14 other countries. 

BellSouth is also one of the fastest growing ISPs in the Southeast with over 1 

.3 million customers including 729,000 households and small businesses that subscribe to our high-speed DSL Internet access service. 

Through a joint venture with SBC Communications, we also operate Cingular 

Wireless, the nation’s the second largest wireless carrier with more than 22 million 

voice and data customers across the United States. 

I mention the breath of BellSouth’s involvement in the communications marketplace because it places the company in a unique position to comment on how universal service funds should be collected and from whom. 

The Principal of and Need for Universal Service 

Today, Mr. Chairman, virtually every American has access to telecommunications—regardless of where they live or are visiting. This is the product of more 

than 50 years of Federal and state policy, and literally hundreds of billions of dollars in capital investment. Universal service also is a product of universal industry 

participation. 

The provision of universal services extends beyond the $6 billion annual universal 

service support mechanism that is administered under the auspices of the FCC pursuant to Sec. 254 (d) of the Telecommunications Act of 1996, which many Members 

of this Subcommittee helped craft. 

Simply put, universal service is about investment in telecommunications networks 

that serve all Americans. Never before has the importance of America’s communications networks been more clear. As the drama and tragedy of September 11th unfolded, Americans reached for their phones. Never before has the capacity and reliability of our nation’s telecommunications network been put to such a test—or 

played a more important role in preserving national security. 

It is for this reason, Mr. Chairman, that the Subcommittee should be very concerned about the state investment in the nation’s telecommunications network. According to published reports, capital expenditures by telecommunications providers 

are at disturbingly low levels and falling. Industry analysts estimate that telecommunications capital investments will be sharply reduced this year from last 

year’s already depressed levels. R&D spending by U.S. communications equipment 

companies has slowed dramatically along with equipment sales and in some cases 

is moving off shore. And, nearly every telecommunications company has seen its 

market value drop in the last year. 

The confluences of market, regulatory and universal service conditions are leading 

company after company to temper their investment plans. The ability to deliver 

modem, affordable universal services depends not only on a workable universal service support system, but a healthy business and regulatory environment. 

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1 47 U.S.C. § 254(d). 

In general, if the regulatory environment is fair, the private sector will invest in 

telecommunications networks. Where the rules and regulatory burdens are unbalanced, unnecessary or excessive, investment will and, indeed, is being deterred. 

The most powerful universal service tool is a fair set of rules. Companies should 

compete for customers, not regulatory classification. Success in the marketplace 

should be based on a carrier’s ability to respond to customer needs at reasonable 

rates not regulatory preference and those rules should treat providers of like services alike. Unfortunately, that is not the current state of telecommunications regulations today. 

While the focus of this hearing is the universal service support system, it is critically important for the Subcommittee to consider the larger question of whether the 

conditions are right for companies to make the investment that will be needed to 

keep the capabilities of the nation’s telecommunications networks in sync with user 

needs for traditional voice services as well as new data applications like high speed 

Internet access. Too often, in BellSouth’s view, regulators look at universal service 

policy as a discreet and separate discipline, rather than a fundamental guiding principal for all policy. 

We believe that a competition policy and a universal service policy, which is based 

on a principal of treating all providers fairly and equitably, best facilitates the delivery of universal services. 

The Universal Service Support System 

The universal service support system is an important driver of investment. There 

are areas of high cost and low density where market forces alone will not lead companies to invest. There are also families who cannot afford market prices for essential telecommunications services. That is where the universal service support system 

comes in. Congress also determined that schools, libraries and rural health care providers should improve their access to modem telecommunications and information 

services through the universal service support system. This alone entails some $2.65 

billion in support each year. 

In section 254 of the Telecommunications Act, Congress did not prescribe a particular system of support, but outlined a set of essential principals that must be followed. Specifically, Congress stipulated that:

Every telecommunications carrier that provides interstate telecommunications 

services shall contribute, on an equitable and nondiscriminatory basis, to the 

specific, predictable, and sufficient mechanisms established by the Commission 

to preserve and advance universal service. 1

Since the passage of the Telecom Act, Federal and State regulators have spent 

a great deal of time dealing with competitive issues, sometimes without fully considering the effects of those policies on the delivery of universal services. There also 

has been significant attention on the uses of universal service funds. Only recently, 

however, has much focus been placed on how universal service funds will or should 

be collected in an increasingly competitive market environment. 

These questions are now being raised because changes in the telecommunications 

marketplace have raised concerns that the current the universal service support system no longer collects requisite funds in an ‘‘equitable and non-discriminatory 

basis,’’ as is expressly required by Sec. 254 (d) of the Telecom Act. These concerns 

unfortunately, are symptomatic of a larger problem of technology and customer 

choice outpacing regulatory classifications. The convergence of technologies and 

services and the changing market have placed the current support mechanism 

under considerable stress. That convergence also raises doubt about the consistency 

of the current system with the requirements of the law. 

Just as the regulatory environment must keep pace with the dynamic nature of 

the telecommunications market, so must universal service policies. 

In the past, BellSouth has recommended that the Congress consider using the 

current federal excise tax to fund the nation’s universal service support system. 

While we understand the political and budgetary challenges of such a reform, the 

mathematical coincidence of the projected cost of the universal service support system and the revenues generated by the excise tax is compelling. Each is about $6 

billion a year. Using excise tax revenues to pay the cost of universal service also 

is good public finance in that it would correlate those who pay for universal service 

with those who benefit by it. Analogs include the Federal excise tax on gasoline 

which is used to help underwrite the cost of maintaining the nation’s highways, and 

the Federal excise tax of airline tickets which is used to help keep airports in good 

working order. 

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2See Further Notice ¶¶ 7–8. 3 Id., ¶ 10. 4 Id., ¶ 12. 5 Id., ¶ 15. 

Short of major legislative action, however, any regulatory reform of the universal 

service system, as well as a continuation of the current system, must fully comply 

with the requirements of the Telecommunications Act of 1996 as written. 

Universal Service Contributions 

The FCC has sought comment on the assessment and recovery of universal service 

contributions. The current system is based on an assessment or surcharge on revenues attributable to interstate and international services. 

The Commission identified trends that raise questions about the viability of the 

current revenue-based contribution mechanism. The Commission noted, for example, 

that interstate revenues have recently declined for interexchange carriers and that 

the contribution base could continue to erode over time. That, in turn, could necessitate increasing the universal service contribution factor just to maintain existing 

levels of support. 2 Most carriers pass those costs along to customers in the form of 

line items on monthly bills. 

The FCC also raised concerns about the current contribution mechanism’s reliance on historical revenues and the ability to adjust quickly to relative changes in 

carriers’ revenues. Because a carrier’s contribution is based on revenues earned six 

months prior to the calculation of the factor, the FCC noted the possibility that carriers with increasing revenues obtain a benefit, albeit for a short duration, to the 

detriment of carriers with decreasing revenues. 3

The FCC identified another market change that is having a profound effect on 

universal service support. That change is the growth of wireless communications. 

The Commission observed that carriers are bundling services together in flat-rate 

packages that include both local and long distance services. According to the FCC’s 

Further Notice, nearly 20 million mobile wireless customers subscribe to these types 

of (flat rate) calling plans. 4

The bundling of long distance and local services, wireline and wireless services, 

offerings of information services and telecommunications and the one-stop offers of 

voice video and data service make it increasingly difficult to identify and segregate 

interstate revenues. 

The FCC opened a much-needed debate on the current assessment mechanism. 

The Further Notice sought comments on ways to ensure the stability and the sufficiency of the universal service fund as the marketplace continues to evolve, to reduce regulatory costs, to continue to have an assessment mechanism that is equitable and nondiscriminatory and to provide contributors with certainty. 5

BellSouth shares the FCC’s concerns. The marketplace is witnessing a substitution of bundled local and long distance packages for discrete local and interstate 

long distance offerings. With these market changes, interstate revenues are becoming masked. The decline in discretely identifiable interstate revenues, however, does 

not necessarily mean that the interstate revenue base is unstable. Instead, interstate revenues are mixed into packaged revenues and require a more sophisticated 

approach to identification and attribution. 

While the identification and segregation of interstate revenues that are in packaged arrangements of both wireline and wireless carriers presents an increased 

challenge, such a challenge does not make a revenue-based contribution mechanism 

unworkable. The FCC has the authority to obtain the information and data that is 

necessary to adjust the revenue mechanism to insure that the universal service assessment mechanism captures the interstate revenues that have migrated away 

from traditional forms of interstate interexchange services toward the bundled offerings. However, the Commission would have to close the current contribution loopholes that allow for interstate communications to shift to internet-based offerings 

provided by Internet service providers (‘‘ISPs’’) and, thus, escape assessment for universal service purposes. 

While the question of having ISPs contribute to the universal service fund is before the FCC in a different proceeding, there is an important principle that must 

be recognized. Regardless of the assessment mechanism, if it contains exceptions, 

loopholes, and special treatment; providers and customers will gravitate toward 

those exceptions in order to avoid universal service assessments. 

Exceptions instill instability and inequality in the assessment mechanism. Exceptions could undermine any future system as well. It does not matter whether the 

mechanism continues to be revenue-based or whether the Commission adopts a flatrate mechanism. The only way to avoid instability is to follow the law’s requirement 

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6 Id. 7The USF Coalition is comprised of AT&T, Ad Hoc Telecommunications Users Committee, 

WorldCom and e-TUG. 

that all providers of telecommunications contribute to universal service support on 

a competitively neutral basis. 

The statute is unequivocal in its requirement—every carrier providing interstate 

services must contribute to the universal service fund. The only exemption from contributing to the fund that the Commission is permitted to make is for a carrier or 

class of carrier ‘‘if the carrier’s telecommunications activities are limited to such an 

extent that the level of such carrier’s contribution to the preservation and advancement of universal service would be de minimus.’’ 6

Any assessment mechanism must be evaluated in terms of this statutory requirement. If the mechanism fails to pass statutory muster, it must be rejected. The statutory requirement is non-optional. 

In this regard, The FCC’s Further Notice seeks comment on the proposal submitted by the USF Coalition. 7 The essential elements of the Coalition’s proposal are 

that residential wireline and wireless connections would be assessed $1.00 per connection per month and pagers would be assessed $.25 per month; business connections would be assessed based on connections and capacity. Under the Coalition proposal, ILECs and CLECs would be responsible for paying the wireline assessments, 

the wireless carriers would be responsible for the wireless assessments and paging 

carriers would be responsible for pager assessments. 

While simple, the Coalition proposal nevertheless exemplifies the type of mechanism that does not stand up to the statute’s requirement that all interstate carriers 

contribute to the universal service fund on a nondiscriminatory and equitable manner. Indeed, adoption of the Coalition’s proposal would reduce the level of contributions from the interexchange carriers from just less than 60 percent under current 

FCC rules to less than 10 percent. 

The Commission also sought comment on Sprint’s proposal that would create perconnection contribution obligations based on the proportion of industry interstate 

revenues currently reported by the different industry segments. The specific question asked by the Commission, i.e., would the proposal be equitable, nondiscriminatory and competitively neutral, signals the infirmity in the proposal. The concerns that led the Commission to consider alternatives to a revenue-based contribution mechanism are imported to Sprint’s connection-based proposal. For example, 

Sprint’s proposal would not adjust a wireless carrier’s contribution despite an increase in the provision of interstate communications. An assessment mechanism 

cannot freeze contribution levels in the face of known industry changes and pass 

muster. Such a freeze is not equitable nor is it competitively neutral. One industry 

segment—wireless carriers, in the case of Sprint’s proposal—is favored at the expense of all other industry segments. It is not equitable for non-wireless carriers to 

shoulder the universal service contribution burden that properly belongs to wireless 

earners. Equally significant is the competitive advantage wireless carriers obtain 

over both wireline local exchange carriers and interexchange carriers. Wireless carriers’ services are competitive alternatives for wireline exchange and interexchange 

services. Shifting a portion of the wireless carriers’ contributions to wireline carriers 

provides a price advantage to the wireless carrier because the wireline carriers’ universal service recovery charges are higher than they would otherwise be if the wireless carriers bore their equitable share of the universal service burden. 

Despite the infirmities of the USF Coalition and Sprint’s connection-based proposals, such infirmities do not mean that a connection-based proposal cannot be designed in a manner that conforms to the statute’s requirements. A connectionsbased mechanism can be formulated that is equitable, nondiscriminatory and competitively neutral. Such a formulation will require an innovative view of connections. 

In order for a connection-based contribution mechanism to meet statutory muster, 

it should recognize that every provider of interstate telecommunications that sells 

service to an end user has an interstate connection that should be counted and contribute to the universal service fund. Looking at connections in this manner enables 

the Commission to adopt a mechanism that not only fulfills the statutory mandate 

that all interstate carriers contribute to the fund but also encompasses the full 

range of interstate telecommunications providers. A broadened view of connections 

forms the foundation of a contribution mechanism that is fair and equitable among 

all providers, and, equally important, minimizes the opportunity for manipulation 

or avoidance of the contribution obligation through the way services are packaged 

or classified. 

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A broadened view of connections would be competitively neutral because no provider of interstate telecommunications would gain an advantage vis a vis a competitor simply by the way it chooses to offer service. Competitive neutrality is a particularly important component of a connections-based mechanism in an environment 

that continues to be characterized by disparate regulatory regimes. Ensuring that 

all providers of interstate telecommunications contribute to the universal service 

fund will bring stability to the fund. 

BellSouth and SBC have jointly developed a proposal for a connections-based contribution mechanism that would meet the statute’s requirements. It counts all connections. It avoids the creation of new loopholes and seeks to close existing loopholes. 

Summary of BellSouth/SBC Proposal 

Under our plan, universal service support would come from all interstate telecommunications activity. Interstate telecommunications activity occurs when a service provider sells interstate telecommunications services or services that use an 

interstate telecommunications component. These services require that a connection 

be established so that a retail customer can gain access to other users of interstate 

telecommunications services. The connections can be provided through a variety of 

service architectures that have an access and a transport component. Universal 

service contribution requirements would apply to both the access and transport components. For example, in the case where a customer has established two retail relationships, one with a local telephone company (access) and another with a long distance carrier (transport), both the local telephone company and the long distance 

carrier would bill the customer to recover its universal service contribution. The 

total amount that individual customers pays would simply reflect the total amount 

of universal service support divided by the total number interstate (access and 

transport) components. 

BellSouth’s and SBC’s proposed universal service contribution and recovery mechanism is consistent with the requirements of Sec. 254 and provides a number of important benefits. First, the proposal provides a stable universal service fund in an 

evolving market by assessing contributions on all interstate telecommunications activity. By including all interstate telecommunications activity, the proposal ensures 

that residential telephone customers will not be forced to bear an unreasonable 

share of the universal service costs as more and more customers migrate to alternative technology platforms that are outside the scope of the current contribution 

mechanism. 

Second, the proposal establishes a straightforward method for assessing universal 

service contributions that does not rely on the distinctions such as residential versus 

business, circuit versus packet-switched connections, or interstate versus intrastate 

revenues. The proposal addresses the concern about fluctuating revenues and the 

ability to identify the jurisdiction of the revenue. 

Third, the proposal correlates the amount of assessment to the provider’s interstate telecommunications activities. Higher bandwidth services would be assessed 

more based on a progressive contribution methodology. 

BellSouth and SBC have developed its contribution proposal in good faith. As this 

testimony indicates, there are alternative ways to design a universal service support 

system of assessments, which meet the requirements of the Telecommunications 

Act. We welcome the opportunity to work with the various industry sectors, federal 

and State regulators and the Subcommittee to find a workable solution to this serious problem. 

More broadly, it is not too early to begin a dialogue on the next chapter of the 

universal service story. The various universal service plans, which have been adopted by the FCC including the CALLS plan, the Rural Task Force Recommendations 

and the Multi Association Group plan, operate for a limited period of time. It would 

be an understatement to say that the resulting universal service system is complex. 

Conclusion 

BellSouth appreciates the opportunity to present its views to the Subcommittee. 

The coming crisis in the universal service support system is real. That crisis is a 

symptom of a larger problem of technology and customer choice outpacing regulatory classifications. The convergence of technologies and services and the changing 

market place make the current base of support unsustainable. The reduced levels 

of investment in the nation’s telecommunications networks also raise concerns about 

the current regulatory, market and universal service landscape. 

BellSouth also supports, without reservation; the vision embodied in Section 254 

of the Telecommunications Act, which we know many Members of this Committee 

were deeply involved in when Congress wrote the 1996 Act. We share your commitVerDate 0ct 09 2002 14:41 Feb 08, 2005 Jkt 093053 PO 00000 Frm 00067 Fmt 6633 Sfmt 6621 S:\WPSHR\GPO\DOCS\93053.TXT JACK PsN: JACKF
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ment that the universal service system should ensure that citizens in all regions of 

the Nation have access to advanced services and that all Americans deserve comparable services at comparable rates. We look forward to working with this Committee, the FCC, and the states to achieve these important goals. 

For America to stay connected the regulatory and universal service policies must 

keep pace with the dynamic nature of the telecommunications market. 

Thank you Mr. Chairman.

Senator INOUYE. And thank you very much. 

President Bond? 

STATEMENT OF DON BOND, PRESIDENT AND MANAGER, 

PUBLIC SERVICE TELEPHONE COMPANY, GEORGIA 

Mr. BOND. Mr. Chairman and Members of the Committee, I’d 

like to thank you for allowing me to testify this morning, and I’d 

certainly like to thank Senator Cleland for the help that he gave 

me in getting me here. 

I am the president of Public Service Telephone Company in Reynolds, Georgia. My grandparents began the company in 1911 by installing a magneto system. My father, in 1953, extended service to 

the rural area even further and installed a dial system with the 

help of financing from the Rural Utility Service. 

The company today serves a little over 12,000 customers in a 

thousand-square-mile area between Macon and Columbus. We continue to rely on national programs, including Federal universalservice fund support, which we are here to talk about this morning. 

In addition to wire-line service, we are also—we also provide 

wireless, Internet access, cable TV, long-distance resales—long-distance resale services. Public Service Telephone Company, like hundreds of small companies throughout the nation, links its customers into an essential communications backbone for their social 

and economic lives and the nation’s safety and security. 

That is why I’m also appearing on behalf of hundreds of other 

rural telephone companies represented by the National Rural 

Telecom Association, the National Telecommunications Cooperative 

Association, the Organization for the Promotion and Advancement 

of Small Telephone Companies, the Western Alliance, and the Independent Telephone and Telecommunications Alliance. I also bring 

to the table my experience as a director and the current chairman 

of the National Exchange Carriers Association, although I’m not 

speaking on their behalf today. 

Mr. Chairman, Judge Greene and Charlie Brown started an economic slowdown caused by uncertainty of the consent decree. If you 

believe what the Wall Street Journal publishes and Bloomburg has 

on TV, the communications industry in this nation is headed into 

a communications depression. Rural American communications system must not be forced into an economic crisis through regulatory 

and judicial actions. 

On the forefront of these actions is the national universal-service 

fund program. There are three areas that I would like to discuss 

today. First, the system allocates payment responsibilities among 

interstate carriers based on historical interstate end-user revenue. 

The inter-exchange carriers say that—those distortions are caused 

by lag between the historical revenue and assessment. Their plan, 

connections-based proposal, has a major flaw in that it is inconsistent with the requirement under Section 254(d) of the CommuVerDate 0ct 09 2002 14:41 Feb 08, 2005 Jkt 093053 PO 00000 Frm 00068 Fmt 6633 Sfmt 6601 S:\WPSHR\GPO\DOCS\93053.TXT JACK PsN: JACKF
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nications Act, which requires that all providers of the interstate 

communications service should contribute to universal service. In 

other words, the connections-based plan largely exempts the large 

inter-exchange carriers from paying into the fund. Congress should 

ensure that the inter-exchange carriers continue to contribute in a 

fair and reasonable manner. 

Also, the current safe-harbor reporting percentage for interstate 

commercial mobile service—radio service providers appears to be 

substantially understated. We should all pay our fair share. 

Second, all facility-based broadband, Internet, cable, and satellite 

providers of communication, regardless of our technology, should be 

included in the list of contributors to USF. 

The third key issue is how additional carriers qualify for universal-service-fund support and the basis on which the support—

they receive the support once they’re qualified. Some states have 

moved aggressively forward establishing the practice of making 

support available in the name of stimulating competition, but hardly taking notice to their statutory universal-service responsibilities. 

Also, the FCC has put enormous pressure on the size of the Federal support program for the high-cost rural areas by providing 

support without regard to the competing carriers’ cost in trying to 

prevent states from adopting requirements to assure the carrier 

provide value in return for the supports they receive. 

Congress should remind the FCC that to support—the purpose of 

the Federal support in high-cost areas is neither to double the cost 

of the nationwide universal service in order that the new carriers 

will receive huge profits, nor to provide service where very low—

at very low cost to the customers. 

Under the FCC rules, competitive carriers must receive universal 

service based upon the incumbent’s cost, rather than their own 

cost. The Commission rules should require that each eligible telecommunications carrier’s support payments should be based on its 

own cost of providing service and are actually put into use for statutory purposes. If the goal is to have consumers’ universal services 

to be low—as low as possible, then the carrier support amount 

should be based on their own cost. Mounting pressure on the fund 

size also comes at a time when the fund is growing because of a 

court-ordered substitution of universal service for access-cost recovery. 

In conclusion, we ask Congress today to work with us to stem the 

tide of regulatory and legal decisions that are unraveling the universal-service program, and to, once again, sustain the nation’s 

commitment to this important national policy. 

[The prepared statement of Mr. Bond follows:]

PREPARED STATEMENT OF DON BOND, PRESIDENT AND MANAGER, PUBLIC SERVICE

TELEPHONE COMPANY, GEORGIA

Executive Summary 

An unending string of Federal Communications Commission (FCC) regulations 

and court decisions may be putting our national universal service system at great 

risk. 

First, the FCC is proposing to relieve long distance carriers of the duty the Telecommunications Act of 1996 gave them to support federal universal service programs by shifting an unfair support burden onto carriers that connect end user customers to the public switched voice telephone network. It is undisputed that the 

66

FCC needs to ensure that universal service funding is sufficient and sustainable. 

While there is still controversy about how to improve the current system, it is clear 

that the FCC needs to follow the law and ensure that interstate long distance carriers continue to provide their share of support, as is mandated by statute. It is also 

clear that the FCC has to make all service providers that offer competing services 

and functions contribute to universal service funding to avoid both marketplace distortions and saddling some customers with too much of the cost of national policy. 

Second, the FCC has to make sure that support for new carriers is not excessive, 

carries real responsibilities, and provides real customer benefits. Even though Congress specifically expanded and spelled out the nation’s long-standing commitment 

to universal service in the 1996 Act, the FCC’s notion of ‘‘competitive neutrality’’ has 

led it to squander support collected from the nation’s consumers and businesses by 

guaranteeing windfall payments to ‘‘competitors.’’ The FCC has put enormous pressure on the size of the federal support program for high cost rural areas by providing ‘‘support’’ without regard to a competing carrier’s costs and trying to prevent 

states from adopting requirements to ensure that carriers provide ‘‘value’’ in return 

for the support they receive. 

It is time for Congress to remind the FCC that the purpose of federal support in 

high cost areas is neither simply to double or triple the cost of nationwide universal 

service to provide new carriers with premium profits nor to provide customers with 

subsidized choices. 

The 1996 Act recognized the delicate balance that would have to take place for 

its two-fold objective of universal service and competition/deregulation to coexist. 

Yet the regulators and the courts have routinely assigned a higher value to what 

one Commissioner has called ‘‘creating competition,’’ to the distinct disadvantage of 

both the rural markets and consumers it is designed to help and the users of the 

network that pay the tab. 

Today multiple carriers may receive universal service support based upon the incumbents’ costs, rather than their own. In addition, competitors are receiving such 

support without ‘‘capturing’’ any customer lines or serving any new lines. In other 

words, far more support is flowing through the universal service system than necessary. Such needless support adds to the pressure from the costs of the newer programs developed under the 1996 Act’s provisions for schools, libraries and health 

care discounts. Mounting pressures on fund size also come at a time when the fund 

is growing because of decisions that substitute universal service support for access 

charge cost recovery in furtherance of controversial court rulings about what constitutes ‘‘implicit support’’ that should be made ‘‘explicit.’’

The states generally have only exacerbated the situation, with many failing to 

place a high premium on the public interest when evaluating eligible telecommunications carrier (ETC) requests or determining whether to develop state universal 

service plans. States need to provide a fair share of state support for added carriers 

they designate. They also need to use their oversight duties to ensure that non-cost 

based support paid to competing carriers is used solely for valid universal service 

purposes. 

Considering the world we live in today, we believe there can be no denying the 

critical role universal service plays in ensuring the future of our nationwide integrated network—a network that has been proven again and again to be so critical 

to our national and economic security. Thus, we call on the Congress today to work 

with us to stem the stream of regulatory and legal decisions that are unraveling 

the universal service program, and to once again sustain the nation’s commitment 

to this important national policy. 

Introduction 

Mr. Chairman, Members of the Committee, my name is Don Bond, and I am the 

third-generation president of Public Service Telephone Company in Reynolds, Georgia. My grandparents Hiram Columbus Bond and Bessie Marie Bond were the first 

generation of our family to enter the telephone business. Among his many efforts 

to help our company grow, my father H. C. Bond, Jr. worked to acquire Rural Utilities Service (formerly Rural Electrification Administration) financing to upgrade 

equipment and further extend service into rural areas. Today Public Service Telephone Company serves 1,050 square miles of territory between Macon and Columbus, Georgia. 

The dream of my grandparents and parents to provide affordable voice grade service to residents and businesses in rural Georgia has been advanced as my family’s 

company has grown to provide a variety of services through Public Service Communications. Through its subsidiaries, Public Service Communications provides 

wireline and wireless telephone service, Internet access, cable television, and longdistance services in Georgia and Alabama. Like the majority of rural telephone comVerDate 0ct 09 2002 14:41 Feb 08, 2005 Jkt 093053 PO 00000 Frm 00070 Fmt 6633 Sfmt 6621 S:\WPSHR\GPO\DOCS\93053.TXT JACK PsN: JACKF
67

panies all across the nation, my company was formed to bring quality communications service to a rural market that was overlooked by the nation’s largest carriers. 

Because we are a community based telecommunications provider, we have a special 

interest in fulfilling the varied communications needs of our community. 

The challenges facing Public Service Telephone Company are representative of 

those facing rural incumbent local exchange carriers (ILECs) in markets throughout 

the nation. And for the most part, the hundreds of other rural ILECs throughout 

the nation are offering a similar array of communications services to their markets. 

That is why today I am also appearing specifically on behalf of those hundreds of 

other ILECs that are represented by the Independent Telephone and Telecommunications Alliance, the National Rural Telecom Association, the National Telecommunications Cooperative Association, the Organization for the Promotion and 

Advancement of Small Telecommunications Companies, and the Western Alliance 

which is a partnership of the Western Rural Telephone Association and the Rocky 

Mountain Telecommunications Association. 

I also bring to the table my experience as a director of the National Exchange 

Carriers Association (NECA) of which I am currently the board chairman, although 

I am not speaking on behalf of NECA today. NECA and its subsidiaries play an important role in administering the federal universal service and access charge programs that are so important to ensuring that telephone service remains available 

and affordable in all parts of the country. 

The Essence Of Our Concern 

Universal service is the cornerstone of our nation’s telecommunications policy. It 

is a social compact embracing (1) the ideal that all Americans, both urban and rural, 

are entitled to quality telecommunications services at affordable rates and (2) the 

economic fact that the value of a network to every customer is enhanced by ensuring 

that the greatest possible number of customers are connected to the network. So important is this national policy that its historic high-cost and low-income mission, 

begun under the mandate of the 1934 Communications Act, was specifically enshrined in clear, concise terms in the 1996 Act. At that time, Congress also expanded the policy, adding the new objective ensuring that schools, libraries, and 

rural health care facilities may fully access the advanced telecommunications features that are available via our nationwide, integrated network. 

Yet we continue to have ample reason for concern with the future of our nation’s 

universal service program. Generally, these concerns date to the development of the 

rural and universal service provisions of the 1996 Act. While we are grateful that 

Congress worked such strong provisions into that statute, we are, as we were then, 

nevertheless wary of several elements of the provisions—particularly, those that 

allow additional carriers to receive universal service support in a given market without adding any value for the support they receive. 

Ensuring The Stability And Sufficiency of Universal Service 

The Committee has asked for testimony on the FCC’s open proceeding considering 

a proposal to relieve the long distance carriers from almost all of their current statutory duty to contribute to federal programs that support universal service. The 

plan would assess contributions based on the number and capacity of ‘‘connections’’ 

provided to the public switched network. This is a highly controversial proposal, 

and, to be honest, the associations I represent have taken different positions on how 

to solve the current universal service dilemma. One view is that the FCC should 

continue to assess interstate revenues to fund support programs. The other is that 

the FCC should only move forward on a flat-rate, non-revenue based contribution 

assessment method if it makes significant changes in the proposal. 

The interesting thing is that these seemingly opposite recommendations are really 

the only differences between what the associations have said about the ‘‘end-user 

connection’’ scheme. Let me tell you about the points we all agree about. First, we 

all oppose the plan as proposed because the statute expressly says that all carriers 

that provide interstate telecommunications services have to contribute on an equitable and nondiscriminatory basis. While end users connect with local exchange carriers for exchange access—origination and termination of calls within the local 

area—actual interstate service requires the customer to use an interstate long distance carrier’s state-to-state service. Whether the FCC fixes the end user connections plan or stays with interstate revenues, the associations all agree that the 

interstate carriers have to be the principal contributors. 

Second, we all agree that universal service support needs to be sufficient and sustainable and should be fair to all providers and users of all kinds of networks. We 

are all aware of growth in the fund and concerns about shifts in what carriers are 

providing interstate services. These developments have created a serious issue about 

68

how to prevent erosion and evasion of support mechanisms. Thus, we all agree that 

the FCC needs to assess the broadest possible list of contributors to keep each carrier’s contribution and the amount it needs to recover from its customers as small 

as possible. The law allows the FCC to assess all providers of ‘‘telecommunications’’ 

if the public interest requires, even if they are not common carriers. We all agree 

that all providers that compete with each other and provide the same functions 

should have the same contribution responsibilities. This means that cable modem 

providers and information service providers that provide their own transmission 

should contribute, just as ILECs presently contribute for their transmission role in 

providing Internet access. This also means that wireless carriers need to be assessed 

on a fairer basis than the current ‘‘safe harbor’’ adopted as a temporary measure 

before the dawn of the new wireless era of nationwide toll and local calling plans. 

Therefore, we all oppose the plan that is the subject of this panel and want everyone in the same shoes to contribute on the same basis. The only difference is in 

whether we have urged the FCC to continue the present method with a broader contribution base or suggested ways to make a flat-rate monthly assessment method 

work. 

Universal service programs have successfully connected rural American households and businesses, schools and libraries, low-income families, and others to the 

public switched network. In addition to connecting people to the network, a strong 

universal service policy provides other economic and social benefits. For example, 

rural Americans in particular see opportunities for their communities to thrive and 

prosper through rural economic development fostered by modern telecommunications. Indeed, few would argue that the nation has already achieved many benefits from pursuing universal service as a national public policy goal. 

With this in mind, it is critically important that Congress continue to ensure a 

sustainable funding mechanism that provides stable and sufficient universal service 

funds. This is necessary because the sufficiency and the sustainability of the fund 

will be even more seriously challenged in the days ahead for two reasons: (1) an 

increasing demand for universal service funds; (2) a convergence of technology and 

growth in the Internet. 

Our concern is that the size of the universal service fund may become so large 

that the current funding mechanism can no longer provide sufficient support dollars. For example, in the year 2000 approximately $4.5 billion in universal service 

funds were needed to support all existing programs. However, given recent FCC decisions regarding access and universal service issues in the CALLS and MAG access 

orders, it is currently estimated that for the year 2003, universal service fund requirements will exceed $6 billion. 

Moreover, the number of competing carriers seeking designation as eligible to receive universal service support is growing at an ever-increasing pace. And the resultant effect on the universal service program is predictably significant. In the first 

quarter of 2001, competing carriers were receiving their redundant universal service 

support at an annualized rate totaling nearly $4.7 million. Just a little more than 

a year later, in the third quarter of 2002, such carriers are receiving duplicative 

support at an annualized rate totaling nearly $76.4 million. Truly, the growing size 

of the fund is taxing the ability of current contribution methods to generate sufficient funds. 

Moving to the second point, converging communications technologies and the 

rapid growth of the Internet pose long-term challenges to the ‘‘sufficiency’’ and sustainability of funding for Universal Service. Evolving technologies are causing the 

revenues of traditional telecommunications providers that contribute to the fund to 

dwindle as they are replaced by a new cadre of players. In addition, new technologies are creating new ways to deliver telecommunications and information services that, so far, enable the users and providers to avoid universal service contribution responsibilities. 

For example, the gradual but ever-growing use of broadband platforms and Internet Protocol (IP) networks plays a significant role in the present instability of the 

contribution base. Consumers use IP networks in a variety of ways (e.g. access to 

the World Wide Web, e-mail, instant messaging, Internet telephony) and via various 

platforms (e.g. cable, wireless, satellite) to substitute for interstate calls on the public switched network. As ‘‘Internet substitution’’ grows, traditional interstate revenues providing the funding base for universal service will diminish. And there will 

be little offsetting gain, since presently only wireline telecommunications carriers 

are required to contribute on the basis of revenues earned from Internet access service while all other Internet access providers utilizing other platforms remain exempt 

from the obligation. 

Given these threats to the fund, it is time to reassess the overall fund composition, as well as the services and service providers that should be contributing to uniVerDate 0ct 09 2002 14:41 Feb 08, 2005 Jkt 093053 PO 00000 Frm 00072 Fmt 6633 Sfmt 6621 S:\WPSHR\GPO\DOCS\93053.TXT JACK PsN: JACKF
69

versal service. Fundamentally, all facilities-based providers of telecommunications, 

regardless of technology platform, should contribute to the universal service fund. 

Contributions should be based upon interstate telecommunications activities, and 

not be tied to a narrow definition of ‘‘interstate telecommunications services.’’

Essentially, what this means is that the contribution base should be broadened 

for all purposes funded by the universal service mechanism. Broadband service providers, whether considered information service providers or telecommunications 

service providers, should be included as supporters of universal service. And all 

broadband service providers should be assessed in a similar manner. In short, there 

should be parity in the contribution methodology applied to all telecommunications 

providers. 

It is important that the funding mechanism operate in a competitively neutral 

fashion. Customers of both information and telecommunications services should not 

be driven to one provider over another based on differences in responsibility for contributing to universal service. And for the benefit of consumers and providers alike, 

an administratively simple and flexible method for assessing and collecting funds 

from interstate service providers should be implemented to ensure a sustainable 

fund. 

In reassessing the makeup of contributors to the fund, Congress should insist that 

interexchange carriers, Internet access providers, wireless carriers, bundled service 

providers, payphone providers, dial-around services, and IP telephony providers, as 

well as local exchange carriers all contribute to the universal service fund. Contribution obligations imposed on a particular telecommunications industry segment or 

consumer group, e.g., multi-line business, should be equitable, competitively and 

technologically neutral, and not so large that they drive users off the public network. For example, centrex customers have already faced an access charge hike to 

$9.20, and cannot weather steep new contributions pass-throughs. 

In sum, for the reasons outlined above that threaten the existence of the current 

universal service fund, it is important that Congress reaffirm its commitment to a 

sustainable universal service fund. Congress should direct the FCC to identify a better funding mechanism in accordance with the statute that will provide a reliable 

and sufficient source of funds. The funding mechanism chosen should be applied to 

all facilities-based interstate telecommunications or information service providers 

that provide an interstate telecommunications component as part of their end user 

services. 

Finally, the responsibility to ensure that schools, libraries and rural health care 

providers have access to telecommunications, Internet access, and internal connections is a national responsibility and should not solely be the responsibility of the 

telecommunications industry. For one thing, the schools and libraries and rural 

health care programs should be collected and administered as a separate fund. 

States Must Take ETC Responsibilities More Seriously 

Finding a better way of assessing contributions to universal service support on 

carriers is only one problem the FCC needs to resolve to make universal service support funding sustainable. Another key issue is how additional carriers qualify for 

universal service support and the basis on which they are supported once they qualify. 

We argued for tighter language at the time of the 1996 Act’s implementation, but 

the emphasis on moving to a so-called competitive deregulated environment was 

such that a more restrictive universal service section was ultimately precluded. 

Owing to misguided interpretations and implementation of the 1996 Act, today we 

are at the point where pressures on the program have grown to the degree that we 

are now very concerned about its long-term viability. 

Although we have never agreed with the concept of allowing multiple carriers in 

a market served by a rural telephone company to receive universal service support, 

we had hoped that the safeguards in the law would prevent the duplicative support 

provisions from doing unintended harm. In fact, we have always noted that the 

great majority of rural markets that are served by our members are not and may 

never be in a position to sustain more than one carrier. Artificial competition—that 

is competition that is based upon a business plan relying on duplicative universal 

service support—is not market driven competition at all and should be discouraged, 

not encouraged. Technically, the statute contemplates multiple carrier support in 

non-rural telephone company areas and even requires it in the large urban-centered 

markets. In our view, however, the provision allowing an existing support recipient 

to voluntarily relinquish its ETC designation when a new recipient qualified indicates that the congressional intent behind the provision was that new entrants into 

a market would be making a genuine, carrier of last resort-like, commitment to the 

market in order to receive universal service support. 

70

The legislative history leading to the creation of the section of the statute that 

provides the states with the responsibility of making ETC determinations shows 

that the Congress believed state authorities would be in a better position to make 

ETC determinations than the FCC. State policymakers, after all, would have the 

best information with regard to the needs of their respective rural markets and 

would have a vested interest in ensuring such markets were efficiently and well 

served. Unfortunately, to a large extent state policymakers have simply followed the 

direction and directives of the FCC, without a great deal of thought being given to 

their individual, unique circumstances. 

The FCC first tried to prevent states from adopting any additional requirements 

for carriers seeking to qualify for support. The 5th Circuit decided that the law did 

not permit this prohibition. The FCC has, since then, issued an unnecessary declaratory ruling threatening to preempt state requirements the FCC perceives as obstacles to the publicly-supported ‘‘competition’’ it wants to foster. 

Spurred by the FCC, multiple state authorities have moved aggressively forward 

to establish interconnection and universal service environments that heartily embrace competition and deregulation, but hardly take notice of their statutory universal service responsibilities. The practice of making support available in the name 

of stimulating competition has led to the granting of ETC status to new market entrants without regard to the impact on efficiency, the cost or who would pay. 

In case after case state authorities have granted ETC status to competitive carriers based on extremely loose public interest tests. In fact, for the most part ‘‘competitive neutrality’’ is often judged to be equivalent to artificially inducing competition and even such synthetic competition has been assumed to be in the public interest. Such theory has no place in the regulatory arena as it applies to rural markets. In the case of the rural markets served by my company and those of my rural 

company colleagues, the entire communities are typically already receiving high 

quality, affordable communications services and the existing provider is doing all it 

can to provide advanced capabilities. 

As noted, section 214(e)(2) of the Communications Act of 1934, as amended, requires state commissions to designate additional ETCs in areas served by non-rural 

ILECs. However, Congress had reservations as to whether the introduction of subsidized competition into the areas served by rural telephone companies would immediately or in all cases be beneficial to the provision of universal service. These concerns led Congress to require a public interest determination prior to the designation of additional ETCs in rural company service areas. It follows, then, that the 

introduction of competition in a rural service area cannot be considered, itself, a 

demonstration of serving the public interest. That is exactly the question Congress 

required the states to determine as a prerequisite for designating an additional ETC 

in a rural telephone company’s study area. 

We call upon Congress to work with us to strengthen the federal statute in a way 

that makes it clear that ETC designations are to be taken seriously and that the 

responsibilities associated with receipt of this designation must be of a carrier of 

last resort level of commitment that are demanded of incumbent carriers. Providing 

universal service support to a carrier that is unwilling to provide service within the 

evolving definition is wasteful and serves no one well. The fact of the matter is that 

we incumbents have always provided real value to our customers and to the nationwide end-user contributors in return for our ETC designations, and we would not 

have it any other way. Nevertheless, Congress should no longer sit still and watch 

others take advantage of this critical program. 

Providing Support For Multiple Carriers At The Incumbent Carrier’s Cost 

But as I alluded in my opening, the states are not the only ones running up the 

costs for the universal service program without increasing the benefits. The FCC is 

also responsible. One of the most controversial and costly FCC actions ‘‘implementing’’ Congress’s universal service requirements is its revision of the pro-consumer policy into a consumer-funded windfall for competing carriers in rural areas. 

This unjustified consumer burden came about because the FCC uses the incumbent 

local telephone company’s actual costs for providing a line to its customers to calculate the universal service support for competing carriers. 

The FCC originally said that it would use its proxy model, based on an imaginary 

state-of-the-art lowest-cost network for rural carriers’ support. However, its Rural 

Task Force, made up of representatives of consumers and all sorts of carriers, determined that the proxy model simply would not work for the extremely varied rural 

telephone companies and the differing conditions in their service areas. And we 

agree. Nevertheless, the FCC still wants to force rural companies into its misshapen 

proxy mold. Fortunately, for now it is still using actual costs, which accurately 

measure the need for support for incumbents under the current formulas. 

71

1Federal-State Joint Board on Universal Service, CC Docket No. 96–45, Access Charge Reform, 

Price Cap Performance Review for Local Exchange Carriers, Transport Rate Structure and Pricing, End User Common Line Charge, CC Docket Nos. 96–262, 94–1, 91–213, 95–72, Fourth 

Order on Reconsideration in CC Docket No. 96–45, Report and Order in CC Docket Nos. 96–

45, 96–262, 94–1, 91–213, 95–72, 13 FCC Rcd 5318, 5364–5365, para. 79 (1997) (4th Order on 

Reconsideration), citing Federal-State Joint Board on Universal Service, CC Docket No. 96–45, 

Report and Order, 12 FCC Rcd 8776, 8932–34, 8944–46 (1997) (Order). 2Order, 12 FCC Rcd 8944, para. 311. 

Fixated on the principle of ‘‘competitive neutrality’’ it had added to the list of principles Congress adopted, the FCC decided to make support ‘‘portable.’’ By this, the 

FCC meant that universal service support for high cost, rural, and insular areas 

would be shifted to a competitive ETC that ‘‘wins’’ or ‘‘captures’’ a customer from 

an ILEC. It later spoke of support for ‘‘new’’ customers, too. The idea is that the 

new eligible carrier would receive the same level of universal service support for a 

customer no longer served by the incumbent as the ILEC would have been eligible 

to receive for serving that customer. 1

The FCC’s rationale was that ‘‘paying the support to a competitive eligible telecommunications carrier that wins the customer or adds a new subscriber would aid 

the entry of competition in rural study areas.’’ 2 The FCC simply brushed aside the 

statutory language, ignoring that section 254’s requirements for ‘‘sufficient,’’ ‘‘predictable’’ and, above all, ‘‘specific’’ support are totally at odds with basing support 

on another carrier’s cost-specific support. 

The FCC has never even required new eligible carriers to show which lines they 

have ‘‘captured’’ or which lines are ‘‘new.’’ Instead, it developed rules that now provide support for whatever lines the new designated carrier serves when it is designated, including lines that it has been providing for years without the need for 

any support from the nation’s consumers. Moreover, basing support on the incumbent’s actual costs means that the competing carrier’s subsidy per line has no link 

whatever to its own costs or rates. Thus, the support is not ‘‘specific’’ and is almost 

certain to be more than ‘‘sufficient,’’ since unlike ILECs, competitors can choose 

where to serve and where to seek support. 

As a result, wireless carriers get support based on the high costs of providing a 

copper or fiber line to a remote ranch in Montana. However, the economics of how 

wireless carriers incur costs are entirely different, and they do not need to install 

lines to the customer’s premises. They also get support based on the greater costs 

per line for necessarily small switches provided by small incumbent carriers in 

areas with few subscribers, regardless of the size, location, or efficiency of their 

switches or the scope of their service areas. The mismatch between support and 

costs has become even greater now that the FCC has adopted Interstate Common 

Line Support (ICLS) to replace cost recovery that ILECs used to get via their access 

charges to long distance carriers. However, while the incumbents lowered their access charges to qualify for support, the competing subsidized carriers claim that 

they must get the additional support per line without changing their rates or services at all. 

The claim that support is necessary to bring competitors into rural areas is not 

supported by the facts. What has generally been the case, for example, is that the 

additional support is claimed by a rural cellular carrier that is already serving the 

area where it draws support. Under current FCC policies, it immediately obtains 

support at nationwide consumers’ expense for the lines it is already providing to 

paying customers. The lure of support for nothing is quickly inducing wireless carriers to cash in on the consumer-financed bonanza. 

Incumbent local phone companies serve as the so-called carrier of last resort in 

their service areas. This means that they must provide service in response to any 

reasonable demand, including, for example, when competitors cease to provide service, and cannot discontinue service without regulatory permission. These obligations 

are key safeguards against any community or consumer losing the ability to connect 

into the public switched network at just and reasonable rates. 

In contrast, the wireless carriers that are beginning to line up for the right to 

draw support are also the strongest opponents of any requirements that competing 

subsidized carriers provide proven value to consumers in return for the support they 

receive. These carriers claim that section 332(c) of the Act, which exempts them 

from state rate and entry regulation, also bars any state from requiring them to 

meet rate level requirements to justify their subsidies under universal service support programs. They expect the general public to cover some of their costs of providing service under the national policy of providing universal service in high-cost 

markets. But they refuse to recognize the difference between state regulation—setting rates or placing obstacles that prevent them from providing competing service 

72

at all—and requiring them to provide value to the nation’s ratepayers to justify the 

support they receive. These carriers even complain that it is against government 

policy to ask competing carriers to calculate their costs of service to qualify for support from nationwide users of the network. It is as if applicants for hurricane disaster assistance took the position that they could not be asked to demonstrate that 

they had been affected by hurricane damage because financial information and information about the condition of their property is private. 

Under section 253 of the Act, carriers are free to enter and provide competing 

service in markets throughout the nation without regulatory obstacles. However, it 

is not forbidden ‘‘regulation’’ to ask that they justify the need for and use of the support they draw from the network under the consumer-centered purposes for which 

universal service support has been established. Nor should the section 332 prohibition on requiring wireless carriers to provide equal access so that their customers 

can select among competing long distance providers mean that they are shielded 

from meeting that universal service requirement if they voluntarily seek high cost 

subsidies. It is absurd to equate regulatory requirements that apply as a condition 

for providing service as a carrier with conditions that attach only to carriers that 

choose of their own volition to seek support under programs designed to spread the 

cost of nationwide service at affordable rates throughout the nation. 

Indeed, section 254(e) of the Act requires that carriers that obtain federal universal service support use it only for the legitimate universal service purposes for 

which it is intended. Since the support for incumbents is based almost entirely on 

their own past actual investment and expense payments, it is clear that the support 

has been used for purposes covered by the cost-based support formulas. The use to 

which competitors will put support based on the incumbents’ actual spending record, 

cannot be discerned from the formulas or records. Their unsupported self-certification that they use the support for appropriate purposes is suspect, at best, when 

they need not capture customers, add new customers, change their rates, increase 

their investments, improve their services or make any other legitimate use of the 

windfall payments they receive. Congress owes it to the nation’s telecommunications 

customers that fund the federal universal service programs (a) to base each ETC’s 

support payments on its own cost of providing service and (b) to verify that noncost-based payments are actually put to use for the statutory purposes. 

Finally, the argument of wireless carriers that the definition of universal service 

must not be upgraded unless they can meet the new standard is a perversion of the 

pro-consumer foundation on which the national universal service policy rests. While 

competitive local exchange carriers (CLECs) have tried to provide broadband in 

their markets, wireless carriers that are entering markets on the basis of what universal service subsidy is available put their own interests ahead of the consumers 

Congress sought to benefit. To make the level of support available to particular carriers a test for whether and when consumers should be able to count on the evolving 

definition of universal service the law requires is an affront to the statutory principles of reasonably comparable urban and rural rates and services, including advanced telecommunications and information services and to the section 706 objective 

of universally available access to broadband services. Although it is too early to 

change the definition at this point in the development of the broadband marketplace, who can qualify for support will never be a reasonable standard for evolving 

the supported universal services within the definition. 

Universal Service Is Good Public Policy For America 

I noted earlier that today, the high-cost component of the universal service program handles approximately $3 billion in annual carrier-to-carrier support transactions, which represents about half the amount that is channeled through the overall fund each year. The high-cost component is a ‘‘safety-net’’ of sorts for rural markets and their subscribers, but it is also a tool to ensure that all Americans enjoy 

the benefits and security of a nationwide integrated network. Congress and successive administrations have wisely recognized the value of this component of the program and now, above all else, need to take steps to ensure its ongoing ability to 

function according to statutory intent. 

The high-cost element of the fund is used to build telecommunications ‘‘platform’’ 

infrastructure. Without a telecommunications platform, our schools and libraries, 

rural health care, and lifeline and link-up programs, and millions of rural Americans, have nothing. Modern telecommunications infrastructure in rural America enables diversity of education, and health and other social services comparable to 

those in urban areas. 

Our nation’s first priority for rural areas should be to provide a stable environment for continued telecommunications investment. Technologies and businesses, 

even the likes of MCI, come and go. But one of the most important ways rural 

73

Americans have benefited from universal service is that it has sustained a telecommunications commitment to rural communities for decades. ‘‘Rural telephone 

companies,’’ as defined in the 1996 Act, have become an integral part of rural communities throughout America and have remained economically viable in these highcost areas due, in large part, to strong universal service policy. 

In recent years, rural areas have become increasingly dependent on universal 

service funds. FCC decisions to resolve interstate access pricing have consistently 

shifted ILEC revenue requirement and the matching cost recovery to the high cost 

component of universal service. Many small and rural ILECs today rely on interstate access and universal service dollars for 45-to-70 percent of their revenue base. 

The 1996 Act promoted both competition and universal service for the telecommunications industry. However, those who focus solely on competition for the industry believe that communications should ultimately be viewed as a commodity. 

That certainly makes discussions about the benefits of competition more applicable 

to communications. But that is not reality for rural America, let alone what Congress had in mind when formulating the public policy goal of universal service. 

The commodity concept is too limiting when discussing the role of communications, especially in rural America. Certainly the first objective of universal service 

is getting people connected to the network. But there is a much broader social context and objective for rural America that is tied to universal service. How far Congress and regulators are willing, or are permitted, to go to move away from ‘‘commodity’’ thinking and discuss social outcomes has a lot to do with maximizing the 

benefits to be derived from our nation’s universal service policy. 

Commodity and competition simply mean delivering a quality widget at the lowest 

price possible. There is no consideration given to other synergies and tangential outcomes that can have a positive impact on rural communities—their economies and 

quality of life. Rural telephone companies have demonstrated their commitment to 

their communities by bringing and improving service in areas the largest companies 

were not interested in serving. Their record speaks for itself. So, demonstrably, 

rural communications is much more than a commodity. It is both a utility and an 

engine for economic development. It is a tool for local business leaders, local telephone company management, and local government officials to use in growing their 

communities, to use in improving the local economy and quality of life. 

Rural telephone companies are working hard to support rural America and promote rural economic development. The public policy provisions that will be applicable to small and rural carriers must give them assurance that they will have a reasonable opportunity to recover their infrastructure investments, which will support 

future broadband services. 

In sum, a strong universal service policy is still needed today to ensure a stable 

environment that encourages continued telecommunications investment in rural 

America. Incumbent rural telephone companies have met the challenge of deploying 

telecommunications infrastructure in high-cost rural areas. With a strong universal 

service policy, they can continue to help rural communities and rural Americans realize diversity of education, improved health and other social services, and economic 

development through modern telecommunications.

Senator INOUYE. Thank you, Mr. Bond. 

And Mr. Altschul? 

STATEMENT OF MICHAEL F. ALTSCHUL, SENIOR VICE

PRESIDENT, AND GENERAL COUNSEL, CELLULAR

TELECOMMUNICATIONS AND INTERNET ASSOCIATION 

Mr. ALTSCHUL. Thank you, Mr. Chairman and Members of the 

Subcommittee. I, too, thank you for the opportunity to appear before you today. 

My name is Michael Altschul, and I’m the senior vice president 

and general counsel of the Cellular Telecommunications and Internet Association. I think, as you know, CTIA represents all categories of commercial wireless companies in this country, including 

cellular and PCS carriers. 

I’m mindful of the hour, and I ask that my full statement be 

made a part of the record. 

Senator INOUYE. Without objection. 

74

Mr. ALTSCHUL. I have the benefit, as do you, of the prior statements, so I think I can be brief here. 

First, I can’t ignore the fact that CTIA and the wireless industry 

recognizes the role of universal service and the role that telephone 

service provides, providing a vital link to all Americans. We support the program. We also support our contributions, pursuant to 

the direction that Congress has provided in Section 254. 

We believe that Congress directed, in the 1996 act, that all carriers that provide interstate service, which includes wireless carriers, have a role in promoting the availability of nationwide telecommunications service to the Federal universal-service fund. We 

are willing to pay our fair share of the universal-service fund, as 

directed, on an equitable and nondiscriminatory basis. 

In that regard, I’d like to note that wireless carrier support payments for universal service have grown proportionally as wireless 

carriers have grown their proportion of the nation’s total telecommunications revenues. I’ve heard a lot about a proxy and a 

fixed fee, but, as our share of the overall industry has grown, so 

have our contributions into the universal-service fund. Indeed, in 

the last year for which data is available from the FCC, universalservice payment contributions from the wireless industry increased 

by 28 percent. 

As you know, the FCC is considering a proposal that will radically change the method by which funds are raised to support universal service. The immediate and most dramatic effect of this proposal would be to shift the responsibility for funding universal 

service from the nation’s long-distance carriers, who currently provide 63 percent of the payments, to customers, even those customers who make no interstate calls in a given month. We believe 

that this proposal is unlawful, unfair, and unnecessary. 

You’ve heard others talk about the reasons why the proposal is 

unlawful. It would exclude some carriers and not follow the congressional mandate that all carriers must contribute. It also will, 

as I mentioned, require payments from those customers that will 

make no calls, certainly no interstate calls, in a given month. 

Wireless is somewhat unusual in the mix of telephone service 

providers in this country, in that we have a significant percentage 

of users who subscribe for what some carriers call peace-of-mind 

service, who like to have the phone with them in case the car may 

break down. These are relatively low-cost, low-usage plans available by every carrier in every state in the country, typically for less 

than $20 a month. Many of these customers will make no interstate calls. Many—some of them will make no calls in a given 

month. 

Similarly, we have a number of prepaid subscribers in the wireless industry. These are customers that use wireless services, but 

they don’t use it on a predictable monthly basis. And assessing a 

per-month contribution based on a pre-paid customer’s usage is 

something that can’t be determined in advance. It would require 

additional assumptions and leaps to be made. 

So those are our primary objections to the proposal that you’ve 

heard. 

I also want to point out that despite the comments from others 

that the current contribution mechanism is inadequate to the task, 

75

the overall size of interstate telecommunications revenues is not 

changing that dramatically. Indeed, over the past 3 years, the nation’s interstate revenues have remained surprisingly constant, 

from $74 billion in 1998 to $79.4 billion in the year 2001. And you 

can see, over that range, that it actually increased a little bit. 

What has happened is that the allocation of these revenues has 

changed. You’ve heard, and there’s no denying that traditional 

long-distance companies’ share of this pie has been shrinking. 

Wireless carriers, I’m happy to say, have been growing their revenues. And we’ve heard about bundled plans, ILEC entry, voice over 

the Internet, services like that. So while the individual proportions 

and slices of the pie may be changing, the overall size of interstate 

revenues has not been subject to dramatic changes. 

We are paying more as our share grows, as I mentioned. There 

is a very good basis for the safe harbor you’ve heard about. This 

is a mechanism the FCC developed that creates an assumption—

a proxy, if you’d like—that the percentage of interstate revenues 

that wireless customers use is 15 percent a year—or 15 percent of 

total revenues. That is based on the FCC’s own data about the 

overall percentage of all telecommunications revenues being 15 percent. 

We have, obviously, a very mobile user group. We have licenses 

that are licensed without respect to jurisdictional separations or 

state boundaries. And wireless service uses radio waves that obviously don’t stop at a state boundary. I’m fond of pointing out Washington D.C. is the absolute best example of all of these factors, 

where carriers that provide service in this market will typically 

serve as many as four states, plus the District of Columbia. Area 

codes can be assigned to any of us from any of these regions. I can 

have a 202 area code on my mobile phone, use the phone in Northern Virginia, and have the wireless carrier switch that call to the 

public switch network from a switch in Maryland and, driving 

down the Whitehurst Freeway in Georgetown, have the call physically handled by an antennae in Rosslyn, Virginia. 

To deal with those issues, the FCC developed the proxy. It’s a 

reasonable approach. It’s based—it’s competitively neutral, because 

it puts wireless carriers on the same national overall percentage of 

interstate revenues as wire-line. We’d certainly be happy to have 

that proxy adjusted as the overall mix of—in this entire basket of 

services adjusts, but we think that it does create a fair proxy for 

both wire-line and wireless users. 

Finally, I just wanted to make two or three quick points. If there 

is a crisis, as you’ve heard, it exists by the expansion of demand, 

not by the source of supply. And it makes no sense to exclude from 

the source of support for universal service the long-distance carriers that traditionally have been the largest single contributors. 

Second, very important issues facing all of us concerning the definition of supported basic services and the expansion, or not, to 

broadband services. CTIA believes that technology neutrality and 

funding-support affordability is the best way of ensuing that competition is not precluded in rural America. 

And, finally, something that’s very important to CTIA and its 

wireless members is the determination of eligible telecommunications-carrier status, or ETC status. This is a huge challenge to 

76

1 CTIA is the international organization which represents all elements of the Commercial Mobile Radio Service (CMRS) industry, including cellular, enhanced specialized mobile radio, personal communications services and wireless data. CTIA has over 750 total members including 

domestic and international carriers, resellers, and manufacturers of wireless telecommunications 

equipment. CTIA’s members provide services in all 734 cellular markets in the United States 

and personal communications services in all 50 major trading areas, which together cover 95 

percent of the U.S. population. 

state and Federal regulators. This wireless industry supports a policy of competitive neutrality in this determination. Federal guidelines should not be biased against new entrants. We have had success. Some wireless carriers have gained ETC status in a handful 

of states and on a few Indian reservations. We believe that consumers benefit from competition. They benefit from gaining new 

services. And this competition spurs improvements to existing services. 

[The prepared statement of Mr. Altschul follows:]

PREPARED STATEMENT OF MICHAEL F. ALTSCHUL, SENIOR VICE PRESIDENT, AND

GENERAL COUNSEL, CELLULAR TELECOMMUNICATIONS AND INTERNET ASSOCIATION

Mr. Chairman and Members of the Subcommittee: 

Thank you for the opportunity to appear before you today. I am Michael F. 

Altschul, Senior Vice President and General Counsel of the Cellular Telecommunications & Internet Association (CTIA) representing all categories of commercial 

wireless telecommunications carriers, including cellular and personal communications services (PCS). 1

CTIA and the wireless industry recognize that telephone service provides a vital 

link to all Americans. We believe, as Congress directed in the 1996 Telecommunications Act, that all carriers that provide interstate service, including wireless carriers, have a role in promoting the availability of nationwide telecommunications 

service through the Federal Universal Service Fund. Wireless carriers support Universal Service and are willing to pay their fair share of the Universal Service Fund 

‘‘on an equitable and nondiscriminatory basis’’ as Congress has directed. 

Prior to the 1996 Act, only long distance companies paid fees to support the Federal Universal Service Fund. In 1996, Congress passed a law that expanded the 

types of companies contributing to Universal Service. Currently, all telecommunications companies that provide service between states, including long distance companies, local telephone companies, wireless telephone companies, paging companies, 

and payphone providers, are required to contribute to the Federal Universal Service 

Fund. Under FCC rules, telecommunications companies must pay a specific percentage of their interstate and international revenues into the Universal Service Fund. 

This percentage is called the Contribution Factor. The Contribution Factor changes 

each quarter of the year, depending on the needs of the Universal Service Fund and 

the consumers it is designed to help. Because the Contribution Factor will increase 

or decrease, depending upon the projected needs of the Universal Service Fund, the 

amount owed to the Fund by each affected telecommunications company will also 

increase or decrease accordingly. 

Recently, the Federal Communications Commission sought comment on a proposal 

that would radically change the universal service contribution mechanism by assessing contributions based on the number and capacity of connections provided by a 

carrier instead of on the basis of the carrier’s interstate revenue. Under this proposal, residential, single-line business, and mobile wireless connections (excluding 

pagers) would be assessed a flat amount of $1.00 per connection per month. Paging 

connections would be assessed $0.25 per connection, and the remaining universal 

service funding needs would be recovered through capacity-based assessments on 

multi-line business connections. 

CTIA believes that this proposal is unlawful, unfair, and unnecessary. In the alternative, CTIA supports the current revenues-based funding formula for Universal 

Service, including the ‘‘safe harbor’’ for CMRS carriers. 

The Commission is bound by the statutory mandate set forth in Section 254(d) 

of the Communications Act, as amended. The connection-based universal service 

funding proposal must be rejected by the FCC because it would exclude interexchange carriers (‘‘IXCs’’) with billions of dollars of interstate telecommunications 

activities from the obligation to fund universal service. This would violate the plain 

meaning of what Congress passed into law in Section 254(d)—which requires that:

77

2Secton 254(d) Communications Act, as amended, (emphasis added). 47 U.S.C. § 254(d). 

3Texas Office of Public Utilities Counsel v. FCC, 183 F.3d 393, 447 (5th Cir. 1999). 4 Id.

5 Id.

6 Comments filed by Consumer Union, et al. at 11. 

Every carrier that provides interstate telecommunications service shall contribute, on an equitable and non-discriminatory basis, to the specific, predictable; and sufficient mechanism established by the Commission to preserve and 

advance universal service. The Commission may exempt a carrier or class of 

carriers from this requirement if the carrier’s telecommunications activities are limited to such an extent that the level of such carrier’s contribution to the 

preservation and advancement of universal service would be de minimis. Any 

other provider of interstate telecommunications may be required to contribute 

to the preservation and advancement of universal service if the public interest 

so requires. 2

Section 254(d) imposes a universal service funding requirement on all carriers, 

and the sole exception to this mandate applies only to carriers whose interstate telecommunications activities are so limited that the carrier’s contribution to the universal service fund would be de minimis. The connection-based universal service 

funding proposal must be rejected because the exclusion of billions of dollars of 

interstate revenue generated by the telecommunications activities of interexchange 

carriers cannot be made to pass through the eye of the ‘‘de minimis’’ needle. 

The connection-based universal service funding proposal also fails the legal requirements established by the U.S. Court of Appeals for the Fifth Circuit. In Texas 

Office of Public Utilities Counsel v. FCC, the Court ruled that Section 2(b) of the 

Communications Act, read in conjunction with Section 254(d), prohibits the Commission from adopting a contribution mechanism that includes intrastate revenues in 

the calculation of universal service contributions. 3 The Fifth Circuit stated that Section 2(b) denies the FCC ‘‘jurisdiction with respect to... charges, classifications, 

practices, services, facilities, or regulations for or in connection with intrastate communications service . . . ’’ 4 In perfectly clear terms, the Court explained that ‘‘the 

inclusion of intrastate revenues in the calculation of universal service contributions 

easily constitutes a charge . . . in connection with intrastate communication service.’’ 5

A connection-based assessment is just as much of a ‘‘charge’’ as the revenue-based 

charge addressed by the Fifth Circuit. To the extent the services provided over the 

connections are intrastate, the charge is ‘‘in connection with intrastate communication service’’ and thus is subject to the jurisdictional restriction of Section 2(b). This 

would require the Commission to assume ‘‘jurisdiction over intrastate matters stemming from the agency’s plenary powers.’’ In so doing, the Commission would again 

overstep its jurisdiction and violate Section 2(b). 

The connections-based funding approach also violates the requirement in Section 

254(d) that every carrier ‘‘shall contribute, on an equitable and non-discriminatory 

basis.’’ At the present time, contributions from interexchange carriers constitute 63 

percent of the federal universal service fund assessments, reflecting the fact that the 

interexchange carriers are, by far, the largest providers of interstate telecommunications services. Excluding these carriers’ provision of interexchange services from 

the contribution base is neither equitable nor is it non-discriminatory. 

But even if Sections 2(b) and 254(d) did not present a complete bar to the connection-based funding proposal, the proposal would still have to be rejected as bad public policy. A connection-based flat-fee acts, in effect, as a regressive tax that places 

a disproportional funding burden on low-volume users (often low income individuals 

and small businesses) in order to subsidize the largest (and often richest) consumers 

of telecommunications services. CTIA agrees with the consumer advocates and state 

commissions who submitted comments to the FCC that the connections-based proposal is neither equitable nor nondiscriminatory. As Consumers Union observed in 

its Comments to the FCC, ‘‘both average-use and low-use residential customers utilizing any of the 13 calling plans of carriers studied would pay more per month 

under the Commission’s proposed connection-based fee system than they do under 

the current revenue-based system.’’ 6

The proposal is particularly problematic to prepaid wireless customers and to the 

millions of customers who subscribe to the ‘‘peace of mind’’ tier of wireless service 

offerings primarily for occasional or emergency use. These customers pay a low 

monthly fee—$19.99 per month for 400 minutes, for example—or subscribe on a prepaid basis (i.e., purchasing minutes in advance of their use.) Adding a flat-fee of 

even $1 would represent a significant addition to these bills—potentially discouraging the use of these important services. The universal service fund, a system deVerDate 0ct 09 2002 14:41 Feb 08, 2005 Jkt 093053 PO 00000 Frm 00081 Fmt 6633 Sfmt 6621 S:\WPSHR\GPO\DOCS\93053.TXT JACK PsN: JACKF
78

7See Universal Service Monitoring Report, Table 1.1. (Dec. 1999), and the Commission’s Quarterly Contributions Factor Public Notices. 

signed to advance the ubiquitous provision of telecommunications services, should 

not discourage consumers from purchasing these essential services. 

It also is clear from the comments to the Commission that the proposed connections-based funding system will create a new set of additional administrative burdens and uncertainties. Rather than simplifying the current contribution mechanism, the proposed connections-based funding system will impose a monthly reporting obligation on all carriers and require the creation of an entirely new system of 

complex allocations to implement the capacity-based charges to be recovered from 

multi-line business connections. Indeed, this portion of the proposal raises difficult 

administrative issues that may far exceed the problems the Commission has identified with a revenue-based assessment mechanism. 

The difficulty stems from the proposal to base the residual multi-line business assessment on the maximum capacity of the connections, and using bandwidth instead 

of lines to avoid the need to establish voice-grade equivalency ratios for these connections. However, rapidly evolving wireline and wireless broadband technologies 

promise to make high bandwidth applications available to all subscribers. The complexities of dealing with capacity-based or bandwidth-based assessment mechanisms 

(especially in light of section 254(d)’s command that the contribution mechanism be 

‘‘equitable and non-discriminatory’’ as technologies and services rapidly evolve) may 

far exceed the problems the Commission has identified with the current revenuebased assessment mechanism. 

Not only is the connection-based funding proposal unlawful and unfair, it is also 

unnecessary. As many of the comments to the FCC observed, the predicate for making such a dramatic change in the current universal service funding mechanism is 

lacking. Contrary to the implicit assumption that changes in the interstate telecommunications market mandate a fundamental change in the universal service 

funding mechanism, the overall size of the interstate telecommunications market 

has been remarkably stable. Indeed, interstate end-user telecommunications revenues increased 6 percent in the past three years—from $74 billion in 1998 to $79.4 

billion in 2001. 7

We note that the specific allocation of these revenues among telecommunications 

providers is changing. For example, the entry of ILECs into the interstate long distance telecommunications market has now been approved in several states. And, 

wireless interstate revenues are keeping pace with the overall growth of wireless 

revenues. In other words, the interstate telecommunications revenue ‘‘pie’’ remains 

constant, even growing, even though the ‘‘slices’’ of that pie among different telecommunications providers may be shifting. Since the universal service funding 

mechanism is dependent on the size of the interstate ‘‘pie,’’ the distribution of the 

individual slices is not particularly significant. 

I also want to note that wireless’ contribution to the universal service fund is on 

the rise. With the rise in wireless revenues, wireless universal service surcharges 

are increasing as a result, fairly and appropriately according to the existing contribution methodology. 

CTIA supports continuation of the wireless ‘‘safe harbor.’’ The FCC established 

this fifteen percent proxy for a wireless carriers’ contribution based on the Commission’s own data, and in recognition of the difficulty wireless carriers face separating 

their interstate revenues for Universal Service funding purposes. Simply put, radio 

waves do not stop at a state boundary, wireless users are very mobile customers, 

and the FCC licensed CMRS carriers without respect to state boundaries. This 

makes it impossible for a wireless carrier to precisely identify the percentage of its 

revenues that are attributable to interstate communications. Washington, DC provides a perfect example. First, the CMRS licenses serving Washington, DC include 

the District of Columbia, Virginia, Maryland, and even part of West Virginia and 

Pennsylvania. Within this market, wireless customers can be assigned phone numbers from area codes associated with any one of these jurisdictions, and can access 

the wireless network from anywhere in the market. Thus, I can have a ‘‘202’’ area 

code for my wireless phone, be in Virginia, and have my wireless carrier connect 

my call to the Public Switched Telephone Network from a switch in Maryland. 

Moreover, I can be driving along the Whitehurst Freeway in Georgetown, and if I 

use my wireless phone, the signal will be transmitted to and from an antenna located across the Potomac River in Rosslyn, Virginia. Under these circumstances, a 

proxy is required as an alternative to the jurisdictional separations performed by 

wireline carriers using the area code of the calling and called parties. While CTIA 

would not oppose review of the safe harbor percentage, to assure that it continues 

to reflect the Commission’s best data on the actual interstate usage of CMRS servVerDate 0ct 09 2002 14:41 Feb 08, 2005 Jkt 093053 PO 00000 Frm 00082 Fmt 6633 Sfmt 6621 S:\WPSHR\GPO\DOCS\93053.TXT JACK PsN: JACKF
79

8 Id., Table 3.7 (Oct. 2001). 

ice, CTIA believes that a safe harbor is still the best approach to dealing with jurisdictional complexities of CMRS traffic. 

For the foregoing reasons, CTIA believes that the connections-based proposal is 

unlawful, unfair, and unnecessary. The current system, even if not perfect, more 

closely follows the Congressional mandate to fund Universal Service on an equitable 

and nondiscriminatory basis. 

In the view of the wireless industry, there are, however, significant challenges facing the universal service fund in the immediate future. First, to the extent there 

is a funding ‘‘crisis’’ it has been triggered by the expansion of the demand for universal service funding, not by a reduction in the supply of support funds generated 

by the current system. During the past three years, while revenues remained stable, 

the federal Universal Service Fund disbursements soared from $3.6 billion in 1998 

to $5.5 billion in 2001. 8 Changing the contribution mechanism will do nothing to 

address this fundamental imbalance. Indeed, rather than proposing to exclude the 

single largest source of interstate telecommunications revenues from the obligation 

to fund its universal service programs, the Commission should be seeking to expand 

the base of contributors. 

Will the disbursements from the federal Universal Service Fund continue to grow 

at their present rate? This is the key question. If so, there may be a need for significant changes in contribution methodologies. If not, the continuing stability of the 

interstate telecommunications revenues will serve to meet funding needs. Many 

have suggested that the implementation of the ‘‘schools and libraries’’ program has 

been largely accomplished and the on-going charges for maintaining the program 

should not require significant increases in funding demands. But, this is not an area 

of expertise for CTIA and we leave this to others to provide definitive judgment. 

A second challenge is whether other carriers will contribute to the support of Universal Service, as Congress intended when it passed the 1996 Telecommunications 

Act. For example, the Commission under its discretion can extend universal service 

obligations to providers that use telecommunications who are not telecommunications carriers (who must contribute to universal service). This indicates Congress 

recognized classes of services, other than telecommunications service that may have 

to be reached by Commission discretion, rather than mandatory application under 

the statute. Similarly, the schools and libraries provisions make specific reference 

to information services as being covered by the provision, entitling schools and libraries to discounted service. The FCC now has a proceeding that is looking at these 

issues. 

Third, will the current definition of supported basic services be expanded to include broadband services. Increasing universal service funds to support deployment 

of broadband capabilities would involve government in selecting, for the first time, 

which of many possible advanced broadband services would be given preference (and 

thus depressing demand for—and investment in—other broadband services.) Technology neutrality and funding support portability will ensure that competition is not 

precluded in rural America. 

A fourth challenge involves the determination of Eligible Telecommunications 

Carrier (or, ETC) status. The wireless industry supports a policy of competitive neutrality in this determination—federal guidelines should not be biased against new 

entrants. A few wireless carriers have gained ETC status in a handful of states and 

on a few Indian Reservations. Consumers benefit from competition, gaining new 

services and improvements to existing ones. CTIA further a system that subsidizes 

a few, can only discourage competition and, ultimately, rob the consumer. 

CTIA and the wireless industry appreciate the opportunity to testify before the 

Subcommittee. I look forward to answering any questions you may have. Thank you.

Senator INOUYE. Thank you very much. 

Ms. HARKER AND MS. Greene, you have the coalition plan and 

the BellSouth plan. The average residential consumer, how much 

would he pay under your plan, Ms. Greene, and, Ms. Harker, under 

your plan? 

Ms. GREENE. Our calculation is the average residential consumer 

would pay 65 cents under our plan. According to our calculations, 

or according to their plan, the average consumer would pay a dollar. 

80

Ms. HARKER. That’s correct. And our calculations who, on average, that would be less for—on average, for all customers across all 

income types than they currently pay today. 

Senator INOUYE. How much was yours, Ms.——

Ms. HARKER. A dollar. 

Senator INOUYE. A dollar? And——

Ms. GREENE. Sixty-five cents. 

Senator INOUYE. Sixty-five cents. 

Ms. GREENE. What we’ve tried to do, Mr. Chairman, in our plan 

is make our plan modular, technology-neutral, and competitively 

neutral so that if you had a residential consumer that was not a 

long-distance subscriber, not a wireless carrier, not a broadband 

user, didn’t use an ISP, they would pay only based on one connection. But if you had a household that was a relatively affluent 

household that had a computer, had ISP connection, had 

broadband services, and was a long-distance user, that household 

would pay more than the simple residential user. 

Senator INOUYE. Mr. Bond, as you know, there’s a lot of bundling 

services packages. As a result, oftentimes, the bundled service 

would allocate less and less to interstate revenues. If that is the 

case, would a flat-rate assessment be better than a revenue-based 

assessment? 

Mr. BOND. Well, in our particular case, we do not bundle services, as such. The fee that we pay is paid by the National Exchange 

Carriers Association, and they calculate the amount and pay the 

amount of us. And then, of course, we reimburse them. So it’s 

choosing between those two plans which would—you know, would 

be the best, it puts—you know, since we don’t have that—offer that 

type service, it wouldn’t be a good thing for me to pick, sir. 

Senator INOUYE. What do you think, Mr. Altschul? 

Mr. ALTSCHUL. Well, wireless carriers do bundle. And the FCC’s 

proxy addresses this bundling. They, again, are looking at the total 

telecommunications revenues of wireless carriers and assessing—

making an assumption that the interstate percentage of those revenues is the same as with wire-line. And that’s a way of dealing 

with this bundling issue. 

Senator INOUYE. I have many other questions, but looking at the 

clock, it seems that we have other meetings going on that—may I 

submit my questions to all of you for your consideration and response? 

Mr. ALTSCHUL. Absolutely. 

Senator INOUYE. Senator Burns? 

Senator BURNS. I was going to do the same thing. It’s lunchtime. 

I’ve never missed a meal, and I don’t plan to. 

[Laughter.] 

Senator BURNS. I don’t want to start now. 

I’m interested in your testimony and what you’ve offered here 

today, and thank you for offering suggestions on how we may approach the problem and maybe solve the problem. So I’ll read some 

more of Ms. Greene’s—I was interested in your suggestions today—

and also Ms. Harker. 

I have no further questions for this panel. I just appreciate your 

coming today and offering testimony, and I want to see those projections. I want to see how this projects out, and I think all of us 

81

do, on what’s ahead of us and the direction that we’re going to have 

to change in order to address that projection. 

So thank you very much for coming today. 

Senator INOUYE. Once again, I thank you, On behalf of the Committee. Obviously, this Committee is very interested in this subject 

matter, and I can assure you that your statements will be very seriously studied, and we will be submitting questions, not just from 

the two of us, but the others have indicated an interest in doing 

so. 

So, with that, the record will be kept open for 3 weeks. If you 

wish to make changes in your statement or addendums, feel free 

to do so. 

The meeting is adjourned. 

[Whereupon, at 12:20 p.m., the hearing was adjourned.] 

(83)

APPENDIX

PREPARED STATEMENT OF SENATOR OLYMPIA J. SNOWE, U.S. SENATOR FROM MAINE

Mr. Chairman, I thank you for holding this important hearing today. 

We are here today discuss very timely issues related to the overall stability and 

sufficiency of the universal service fund. Due to a declining universal service revenue base, the FCC has expressed its intent to carefully assess the long-term viability of the universal service fund and, as a subset, the manner in which universal 

service contributions are collected from the telecommunications companies. Changes 

would be implemented by April, 2003. 

Some of the panelists will discuss in detail the various options that are before the 

Commission in relation to the implementation of a new contribution methodology, 

and I look forward to hearing their testimony and views. The time is now to start 

this process and it is critical we have a clearly delineated timetable for the completion of deliberation and action.

In the meantime, let me say I find it somewhat ironic that we are here today, 

in part to discuss how the fund to implement the E-Rate can be used to stabilize 

the overall universal service fund in the short-term, given the tooth-and-nail fight 

we had to put up to get the E-Rate in the first place. And it is the issue of the ERate I want to focus on today. 

First, I commend Commissioners Copps and Martin for their commitment to allowing undisbursed E-Rate funds from one year to be used to toward mitigating 

unmet demand in the following years. Considering that the estimated demand for 

E-Rate funds for FY2002 is $5.7 billion—more than double the level of funding afforded by the $2.25 billion per year cap—using previously undisbursed monies could 

play a vital role in realizing our goal of wiring 100 percent of America’s classrooms 

to the Internet. 

In that light, I would be deeply concerned by any effort to keep open—in perpetuity—the option of using E-Rate monies to stabilize the overall fund. Moreover—

and perhaps most importantly—taking that tack could be a serious disincentive to 

rolling up our sleeves and addressing the bigger picture of how we’re going to 

change the contribution methodology so as to ensure the long-term viability of the 

entire fund. 

In other words, we can keep taking the policy equivalent of ‘‘aspirin’’, and treat 

the symptoms while masking and ignoring the root cause...or we can actually diagnosis the problem and start treating it with a new contribution methodology that 

both reflects today’s realities with regard to telecommunications usage, and remains 

sensitive to the service line-item costs to consumers. Mr. Chairman, it is the latter 

approach that I advocate today—and that the FCC recognized in their proceeding 

last week. 

I believe that a commitment from the Commission that there is no intention to 

use E-Rate money to stabilize the overall fund after April 2003 is critical to spurring 

the kind of speedy action required to ensure that the entire universal service fund 

remains sufficiently funded. The bottom line is that, in the long term, all of the very 

important programs, including the E-Rate, encompassed under the universal service 

umbrella will be affected by any future shortfalls in the fund. A short term fix at 

the expense of a lasting solution would be a terrible abrogation of our oversight responsibilities. 

Therefore, I look forward to working closely with the FCC over the next ten 

months, and am confident that we can sure up the overall fund and end the reliance 

on unused schools and libraries money by April of next year. Again, thank you Mr. 

Chairman. 

84

1Social Service agencies, recognizing the importance of ready access to payphones by their 

constituents, have contacted the FCC to emphasize the need for Commission action in various 

payphone proceedings. 

PREPARED STATEMENT OF VINCENT R. SANDUSKY, PRESIDENT, AMERICAN PUBLIC

COMMUNICATIONS COUNCIL

The American Public Communications Council (‘‘APCC’’) is a national trade association of over 1,300 independent (non-telephone company) providers of payphone 

equipment, services and facilities. Of the approximately 1.9 million payphones deployed nationwide, about 550,000 payphones are operated by independent providers 

with the remaining 1.35 million payphones operated by the incumbent telephone 

companies. 

This statement explains the role that payphones have played to date in contributing to universal service and describes how the Federal Communications Commission’s recent proposal for a connection-based universal service assessment system, 

unless modified, would dramatically and adversely impact that role. This statement 

also offers thoughts on the future relationship between payphone service and the 

Universal Service Fund. 

The Unique Role of Payphones in our Communications Network 

Payphone service is an ‘‘on demand dial-tone/per use’’ wireline, high-quality service available to all members of the public twenty-four hours a day, seven days a 

week, 365 days a year. Users are not required to make an initial investment in 

equipment, await activation of the service or pay recurring monthly charges. Any 

member of the public can place a call anywhere at any time. Users have the option 

of paying for calls with coins or by use of calling cards, prepaid cards or other access 

code arrangements. 

In many instances, payphones provide access to the communications network at 

no cost to the consumer. For example, Emergency 911 calls are available at all the 

payphones in the country free of charge to the caller. Users can also place calls to 

800 subscribers at no charge to the caller. These numbers provide a variety of services to callers including access to public services such as: Social Security; Women, 

Infants, and Children Nutrition (WIC) programs; the Internal Revenue Service; Veterans Benefits hotlines; and domestic violence hotlines. 1 By providing all Americans, no matter what their income level, with readily available, affordable and reliable access to the telephone network, payphone service is a vital contributor to universal service. 

As Congress recognized in mandating the FCC to encourage widespread deployment of payphone service, payphones are important to all Americans regardless of 

their income or where they reside. Users of wireless service need ready access to 

payphones when their wireless phones are out of a service area (such as in many 

rural areas), lose battery power or are not otherwise available for use. Of greater 

urgency, the victims of domestic violence and abused children generally cannot use 

their home or wireless phones and must rely on payphones to make calls to shelters. 

All of these payphone users exist in every strata of society in every neighborhood 

and region of the country. They rely on widespread access to payphones to meet critical needs. In addition, payphone service is vitally important to low income Americans, particularly the more than five and a half million without a home phone. 

Payphones are also critical in rural areas where a significant number of poor Americans lack basic home telephone service. Not only is the percentage of poor rural 

Americans without phones greater than in other areas but fewer citizens in rural 

America own cellular phones, increasing the need for readily available access to 

payphones. Those without home or cellular phones need access to payphones not 

only in the communities in which they live but also in the many communities in 

which they commute to work each day. 

The value of readily available, reliable, high-quality wireline service cannot be underestimated as the events of September 11 clearly demonstrate. New Yorkers were 

lined up twenty deep to access payphones when their usual forms of communication 

were unavailable. On a typical Tuesday, many of the New Yorkers lined up might 

not have had need to use a payphone, but on September 11th they were certainly 

glad payphones were readily accessible. In the days and weeks following the tragedy, as systems providers were struggling to bring their services up to full capacity, 

payphone service providers provided free payphone service in the affected areas of 

Manhattan. 

The Current Situation: Decreasing Payphone Deployment 

Today, because of the rapid expansion of wireless, and because delays in resolving 

regulatory uncertainties have negatively affected payphone service providers’ costs 

85

and revenues, payphone deployment is eroding. The expansion of wireless services 

since 1998 has had a dramatic effect in reducing the overall volume of calls made 

at payphones. As call volume has declined, payphone service providers have been 

under pressure to remove payphones from locations where payphones are still needed by the public but no longer attract a sufficient number of calls to offset costs. 

In a 1999 order, the FCC found that a payphone with less than 439 calls a month 

was not economically viable. If a payphone with 439 calls a month is removed, callers must find some other way, or place, to connect to our communications network 

to make these calls. The announcement last year by BellSouth, which at the time 

operated 143,000 payphones throughout the southeast, that it plans to exit the 

payphone market soon and focus on its wireless business is a precursor of an even 

higher rate of decrease in 2002 and 2003. As wireless continues to grow rapidly, 

payphone call volume is almost certain to continue to decline, which will increase 

the pressure on payphone service providers to remove marginally performing 

payphones. 

In addition, delay in resolving regulatory issues has resulted in PSPs bearing excessive line costs and suffering from an inability to collect much of the dial-around 

compensation to which the Commission has found they are entitled. The Commission recently has acted to address some of these issues. However, the Commission’s 

actions, which do not fully resolve the issues, are still subject to a lengthy review 

process with the potential for years of additional delay before the issues are finally 

put to rest. While these lengthy delays are problematic for all businesses, they are 

particularly difficult for the many small businesses that comprise a significant portion of the independent payphone service provider industry. 

Current Universal Service Fund Payphone Assessments and the FCC’s Proposed Connections-Based System 

Under the current revenue-based system, payphone service providers are assessed 

by the Fund on the basis of their revenues from interstate coin calls. Although calling patterns vary from phone to phone, the average monthly payphone universal 

service assessment is significantly less than a dollar per payphone line. Given declining payphone deployment, even that amount is excessive; yet under the FCC’s 

recent proposal for a ‘‘connections-based’’ system of assessments, payphone lines 

would be improperly grouped with multi-line business lines; the result will be assessments that would be several times higher than the current level applicable to 

payphones. 

APCC is participating in the FCC’s rulemaking proceeding on the connectionsbased approach. APCC neither supports nor opposes the proposed connections-based 

system of assessments. Instead, APCC has pointed out that payphone service is a 

valuable component of universal service; that the number of payphones is rapidly 

declining; that the proposed multi-line business line rate, if applied to payphone 

lines, would greatly accelerate the removal of payphones; and that to help stabilize 

the deployment of payphones, the FCC can and should refrain altogether from burdening payphone service providers with these per-line charges. 

It has never made sense to require payphone service providers to make payments 

to the Fund. Payphones have always been a form of universal service, and payphone 

service providers simply do not fit the FCC’s mold as a payor into the Fund. Unlike 

other payors to the Fund, who pass-through their Fund-related costs by a line item 

charge on the customer’s bill, payphone service providers have no rational way of 

passing on such costs. Moreover, in the 1996 Act, Congress did not include payphone 

service providers as mandatory ‘‘telecommunications carrier’’ contributors to the 

Fund. The independent payphone service provider industry has always believed that 

the FCC overreached to find that the public interest required that payphone service 

providers be payors into the Fund. The industry believes that the FCC incorrectly 

classified LEC payphone service as service provided by telecommunications carriers 

and thus subject to mandatory universal service payments. To retain ‘‘competitive 

neutrality,’’ the FCC also required independent payphone service providers to make 

universal service payments. In short, the FCC need not—and, because of the decline 

in payphone deployment, should not—require payphone service providers to make 

payments to universal service. 

To Stabilize Payphone Deployment, Payphone Service Should Be A Universal Service Fund Recipient 

Rather than requiring payphone service providers to pay into the Fund, to help 

preserve ready, affordable access to the network through payphones, the FCC 

should use the Fund to provide support for payphones. APCC has submitted a proposal to the Joint Board that would provide both general support for all payphones 

and special support for payphones in high cost/rural areas. The total cost of APCC’s 

86

1 ACS of Anchorage, Inc., ACS of Fairbanks, Inc., ACS of Alaska, Inc., and ACS of the Northland, Inc. 

proposal would be $169 million annually, or about 3 percent of the total size of the 

Universal Service Fund. The level of support for all payphones would be equal to 

the subscriber line charge assessed on (or imputed to) payphone lines. Additionally, 

payphones located in high cost/rural areas would receive an additional $5.00 per 

payphone line per month in supplemental support (as well as current local switching and long term support) from the Commission’s High Cost Fund. Although there 

are services other than payphone service that are worthy candidates for universal 

service support (e.g., toll services, expanded area service, prepaid services, which the 

FCC has charged the Joint Board to consider), there is one characteristic of 

payphone service that distinguishes it from the others. Unlike these other services, 

where the Joint Board is being asked to support increased levels or additional services through the Fund, consumers face a diminution in the level of payphone service 

they have received until now. Universal service support is thus being asked to help 

ensure continuation of an existing service, a service that provides a vital communications link for all Americans. 

PREPARED STATEMENT OF WESLEY E. CARSON, PRESIDENT AND CHIEF OPERATING

OFFICER, ALASKA COMMUNICATIONS SYSTEMS HOLDINGS, INC. 

Introduction 

On behalf of Alaska Communications Systems Holdings, Inc. (‘‘ACS’’), I would like 

to offer the following written testimony to the Senate Commerce Committee and its 

Communications Subcommittee on the critically important topic of the future of Universal Service and the ultimate viability of the federal Universal Service Fund. ACS 

regrets that it was not invited to present this testimony in person and to respond 

directly to questions of the Subcommittee Members. I hope that these written comments will prove both valuable and provocative. ACS stands ready to respond to any 

follow up inquiry that the Subcommittee Members might have. 

ACS is a holding company with several operating units doing business in the diverse Alaska market. In addition to its wireless, Internet and long distance affiliates, ACS offers local service and exchange access services via four separate local 

exchange companies operating in the largest urban and some of the smallest rural 

communities in Alaska. 1 While new technologies and competition continue to 

prompt advances in products, services and the efficiencies of service delivery, the 

practical reality of serving rural America—and rural Alaska in particular—cannot 

be overlooked. ACS’ testimony today will focus on this reality and the need for Congress, the FCC and state policy makers to remain vigilant in protecting universal 

service objectives and resources. 

We must not lose sight of the ultimate goal of this program. The desire to enhance 

opportunities for competitive market entry may be laudable, but must never take 

precedence over the need to ensure the ongoing availability of reliable and affordable basic telecommunications services for consumers throughout the country. ACS 

has repeatedly advanced the caveat that continued growth of the federal Universal 

Service Fund (‘‘USF’’) cannot be sustained. While periodically adjusting the ‘‘cap’’ on 

the fund to reflect changes over time is sound policy, the idea that the fund can 

grow exponentially is doomed to failure. 

Recent additions of new categories of support have already stretched the limits 

of the USF to respond. These additions have generated a multiplicity of end user 

fees. Compounding this, the proliferation of new or expanded categories of support 

eligibility can be expected to immediately be translated into yet other increases in 

customer surcharges. When viewed together with other significant increases reflected on the customer’s bill, like the recent changes in the Subscriber Line Charge, 

the whole process is likely to crumble under its own weight. Sooner or later, consumers will rise up and declare, ‘‘We’re mad as hell and we’re not going take it any 

more.’’ Representatives from densely populated ‘‘payer’’ states have already drawn 

a line in the sand arguing that they can no longer shoulder the ever increasing burden. Congress, the FCC and state policy makers must recognize this reality and 

take steps to properly manage USF resources or face the dire consequences of failing 

to do so. ACS offers some specific examples and suggestions in response. 

Universal Service in Alaska 

ACS serves numerous rural communities in Alaska. USF funding is essential to 

ensure that rural subscribers have affordable telecommunications services that are 

87

2 47 U.S.C. § 254(e). 

3 47 CFR § 36.631. The Commission decided to freeze the ‘‘national average loop cost’’ for this purpose at $240 per year for the duration of the five-year plan, which became effective on July 

1, 2001. Accordingly, a rural ILEC, whose embedded loop costs exceed 115 percent of $240 (approximately $276 per line, per year, or $23 per month) generally is eligible for financial support. 4 47 C.F.R. § 54.307(a) provides, ‘‘A [CETC] shall receive universal service support to the extent that the [CETC] captures the subscriber lines of an [ILEC] or serves new subscriber lines 

in the [ILEC’s] service area.’’ Subsection (1) of this rule further provides, in pertinent part, ‘‘[a 

CETC] serving loops in the service area of a rural [ILEC] shall receive support for each line 

it serves in a particular service area based on the support the [ILEC] would receive for each 

such line, disaggregated by cost zone if disaggregation zones have been established within the 

service.’’ 5 As used in this Petition, ‘‘High-Cost Loop Support’’ or ‘‘HCLS’’ refers to: (1) high-cost loop 

support (formerly known as ‘‘universal services fund’’); (2) Long Term Support (‘‘LTS’’); and (3) 

Interstate Common Line Support (‘‘ICLS’’). 6See Petition by GCI Communications Corp. d/b/a General Communication, Inc., and d/b/

a GCI for Arbitration with PTI Communications of Alaska, Inc., under 47 U.S.C. §§ 251 and 252 

for the Purpose of Instituting Local Competition, Petition by GCI Communications Corp. d/b/

a General Communication, Inc., and d/b/a GCI for Arbitration with Telephone Utilities of Alaska, Inc., under 47 U.S.C. §§ 251 and 252 for the Purpose of Instituting Local Competition, Petition by GCI Communications Corp. d/b/a General Communication, Inc., and d/b/a GCI for Arbitration with Telephone Utilities of the Northland, Inc., under 47 U.S.C. §§ 251 and 252 for the 

Purpose of Instituting Local Competition, Docket No. U–99–141, Order No. 9 (Regulatory 

Comm’n of Alaska 2000). 7 In Fairbanks, ACS has a post-USF cost of approximately $23.50. Gd, on the other hand, will 

have a post-USF cost of approximately $9.00. This is not a competitively neutral result and it 

Continued

comparable to the services provided in urban areas. Consequently, ACS has a strong 

interest in the integrity and continued availability of USF. 

Unfortunately, existing Federal Communications Commission (‘‘FCC’’) rules allow 

USF to be distributed in ways that are inconsistent with the purposes of universal 

service support set forth in Section 254 of the Telecommunications Act of 1996. We 

believe Congress should be interested in the misuse of USF. Such improper use results in increased pressure on limited resources and creates ‘‘perverse incentives’’ 

to compete for subsidies. In addition to the direct threat to rural consumers, misuse 

of USF resources creates an impediment to investment and service improvements 

(including both basic telephone and broadband) in rural areas. 

Section 254(e) of the Telecommunications Act of 1996 requires, in pertinent part, 

that a carrier that receives federal universal service support use that support only 

for the provision, maintenance and upgrading of facilities and services for which 

that support is intended. 2 The FCC has identified the high cost carriers entitled to 

support from the High Cost Fund as those with embedded loop costs in excess of 

115 percent of the national average loop cost. In other words, eligibility for high cost 

support is directly related to the degree to which a provider’s costs per loop exceed 

the national average cost per loop. Under current rules, that means a local loop costing in excess of $23 per line per month is eligible for high cost support. 3

The misuse of funds and inefficient competition for subsidies stems from Section 

54.307(a) of the FCC rules. 4 Under 54.307(a), a competitive eligible telecommunications carrier (‘‘CETC’’), including wireline CLECs in Alaska, receives federal highcost loop support (‘‘HCLS’’) 5 for each line it serves based on the support the ILEC 

would be entitled to receive for each line regardless of the competitors’ costs for providing that service. 

The situation confronted in Fairbanks, Alaska offers a vivid example of the problem. In Fairbanks, ACS is eligible for approximately $10 per line per month of highcost loop support based on its per-line costs of $33.51 per month. Alaska’s state commission, the Regulatory Commission of Alaska (‘‘RCA’’), however, has required ACS 

to lease the same Fairbanks loop to its competitor, General Communication, Inc. 

(‘‘GCI’’), at the deeply discounted rate of $19.19 per month. 6 Despite the low cost 

of the loop to GCI, a cost substantially less than the $23 per line per month threshold otherwise required to be eligible for any cost support, current rules appear to 

entitle GCI to the same $10 per line per month support that ACS receives. 

In Alaska, then, allowing the CETC to receive the same support as the ILEC is 

a rule that can and does produce absurd and improper results. Because GCI does 

not have high cost loops, as defined by the FCC, any high cost loop support received 

by GCI will necessarily be for a purpose other than to purchase, maintain or upgrade high-cost loops as required by the Act. Furthermore, Section 54.307(a) can 

and does result in huge windfalls for CETCs, which, by definition, also means the 

funds are not being used for the purposes for which they were intended. Such misuse violates the principle of competitive neutrality 7 and rather than promote effiVerDate 0ct 09 2002 14:41 Feb 08, 2005 Jkt 093053 PO 00000 Frm 00091 Fmt 6601 Sfmt 6621 S:\WPSHR\GPO\DOCS\93053.TXT JACK PsN: JACKF
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should be no surprise that GCI can offer its services at a lower price when it has a significantly 

lower cost of goods sold than ACS strictly as a result of regulatory decisions. 8 ACS acknowledges the Joint Statement of the Independent Telephone and Telecommunications Alliance, the National Rural Telecom Association, the National Telecommunications Cooperative Association, the Organization for the Promotion and Advancement of small Telecommunications Companies and the Western Alliance. ACS believes that the entire question of 

the designation of wireless providers as CETCs needs to be closely examined. However, in those 

instances where CETC designation is genuinely in the public interest, ACS believes that the 

wireless provider’s own costs must form the basis for any support eligibility and actual high cost 

support received. 9Section 214(e)(2) of the Communications Act of 1934, as amended by the Telecommunications 

Act of 1996. 10 RCA Order U–01–90(2) dated November 13, 2001 at 6. 

cient competition instead allows inefficient carriers to enter the market and compete 

based on these unlawful subsidies. Perhaps more importantly, such misuse puts continued stress on finite USF resources, ultimately threatening the very viability of 

a program that has for many years served the interests of consumers in high cost 

rural markets. 

Congress should be concerned that its policies, as set forth in the Telecommunications Act of 1996, are not being implemented as intended. Where a CETC’s loop 

costs are known and documented, such as when the CETC purchases UNEs at a 

state-sanctioned rate, USF support should be based on the CETC’s own per-line 

costs, not on the costs of the ILEC. 8 When the CETC certifies to the state and the 

FCC that it is using the support for the purpose for which it was intended, it should 

be required to justify the level of support it receives. The CETC should be compelled 

to substantiate that its loop costs meet the threshold standard for high-cost loop 

support established by the FCC and justify the level of support it receives. 

While most of the blame for allowing USF to be used as a regulatory crutch to 

prop up an otherwise inefficient competitor lies with the FCC, state commissions, 

including the RCA, could but have failed to prevent this misguided policy. Under 

Section 214(e) of the Communications Act of 1934, state commissions are responsible for designating competing carriers as eligible to receive USF. However, the Act 

provides that, ‘‘Before designating an additional eligible telecommunications carrier 

for an area served by a rural telephone company, the State commission shall find 

that the designation is in the public interest.’’ 9 (emphasis added.) 

In the Fairbanks case, the RCA conducted no such analysis and offered no basis, 

in the record or otherwise, to support an affirmative public interest finding. Rather, 

reflecting a profound misunderstanding of the issues, the RCA summarily concluded:

We found no evidence that GCI plans to use 2002 federal universal service 

funds in an inappropriate matter [sic]. We also note that GCI’s local rates in 

competitive areas remain comparable to or lower than the incumbents’, further 

suggesting 2002 federal funds will be used appropriately. 10

Conclusion 

In conclusion, Congress should be concerned that its legislative intent is being ignored or misdirected. ACS is prepared to suggest fair and impartial remedies. Although it did not have an opportunity to interact directly with the Subcommittee 

in this instance, ACS looks forward to the continuing dialogue on this important 

matter and stands ready to assist Congress and the regulatory agencies in righting 

the course of this critical consumer support mechanism. Please let us know if you 

how we might assist you in your further pursuit of these issues. 

RESPONSE TO WRITTEN QUESTIONS SUBMITTED BY HON. MAX CLELAND TO

THE FEDERAL COMMUNICATIONS COMMISSION

Question 1. The current regulatory scheme at the FCC is one of ‘‘stovepiping,’’ or 

segregating oversight by the means by which communications services are delivered. 

As you know, there has been somewhat of a convergence in communications so that 

once separate industries are offering services of other industries. How do you see 

this convergence affecting payments into the universal service fund? 

Do you see this nation’s pricing system moving more towards a cost based system? 

Answer. Changes in the telecommunications marketplace, including the migration 

of traditional voice services to wireless and other new technologies, and the bundling of telecommunications services with equipment and information services, are 

making it increasingly difficult to identify carriers’ interstate telecommunications 

revenues, the basis upon which universal service contributions are currently asVerDate 0ct 09 2002 14:41 Feb 08, 2005 Jkt 093053 PO 00000 Frm 00092 Fmt 6601 Sfmt 6621 S:\WPSHR\GPO\DOCS\93053.TXT JACK PsN: JACKF
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sessed. These changes, coupled with increased price competition, could erode the 

universal service contribution base over time. Accordingly, the Commission has initiated a thorough review of its universal service contribution methodology. The 

Commission is currently considering whether to retain or modify the current revenues-based system or to replace it with an assessment system based on the number 

and capacity of connections to a public network. The Commission, with participation 

by the Federal-State Joint Board on Universal Service, recently held a public meeting for industry and interested parties to present various options for consideration. 

In addition, the Commission is examining in a separate proceeding whether to 

broaden the base of contributors to include facilities-based broadband Internet access providers. 

With regard to your second question, it is worth noting that the vast majority of 

consumers nationwide have access to multiple options for wireless services and, in 

some cases, for wireline services. Given the presence and expected growth of competition in the marketplace, it is expected that market forces will, over time, require 

providers to set prices for their services in an efficient, cost-based manner. In the 

meanwhile, Congress granted to the states the authority to set cost-based rates for 

the inputs that competitors use to compete. There is no reason to believe that states 

are generally moving away from setting those rates on the basis of cost as Congress 

has directed.

Question 2. As you know, companies must be deemed an eligible telecommunications carrier (ETC) to receive USF funds. Reports indicate that more people will 

use their wireless phones as their primary phone and forego a traditional home line, 

but these companies do not receive USF payments. Do you believe there should be 

changes to the means of determining who is an eligible telecommunications carrier? 

Answer. Currently, wireless carriers may be designated as eligible telecommunications carriers if they meet the statutory requirements set forth in section 214, so 

no changes to the process are necessary to ensure the availability of universal service funds for wireless carriers. In fact, there are a number of wireless carriers that 

are currently receiving universal service support. Although the states have primary 

jurisdiction to designate entities as eligible telecommunications carriers, in the absence of state jurisdiction, this Commission has designated several wireless companies as eligible telecommunications carriers.

Question 3. Universal Service reform is quite an undertaking. I do believe that 

we can achieve some type of reform of the system, but I believe any reform considered must examine the long term affects on the solvency of the system. Could you 

address the potential long term affects on the system of some of the proposals? 

Answer. As discussed above, the Commission has sought comment on ways to ensure that the universal service contribution methodology remains consistent with 

the Act as the marketplace continues to evolve. Among other things, the Commission sought comment on a proposal to assess universal service contributions based 

on the number and capacity of connections to a public network. Because the number 

of connections historically has been more stable than interstate revenues, a connection-based assessment may provide a more predictable funding source for universal 

service. A connection-based system also may eliminate the need for contributors to 

identify interstate and intrastate telecommunications revenues, distinctions that 

may become more difficult to make as the marketplace continues to change. On the 

other hand, some parties have raised concerns that a connection-based system 

would disadvantage low-volume users. 

The Commission also invited commenters to supplement the record with proposals 

to retain or modify the existing, revenue-based system. The Commission specifically 

sought comment on proposals to assess contributions on projected or current, instead of historical, revenues. These proposals would address concerns that the current methodology may provide competitive advantages to contributors with increasing interstate telecommunications revenues while disadvantaging carriers with declining revenues. Certain commenters point out, however, that neither of these proposals would eliminate the need for contributors to distinguish between interstate 

and intrastate revenues, or telecommunications and non-telecommunications services. The Commission is also concerned that these proposals also may increase administrative burdens for contributors and lead to increased fluctuations in the contribution factor, the set percentage that carriers pay to support universal service. 

The Commission is actively considering these issues, and welcomes input from all 

interested parties. Please be assured that the Commission will continue to balance 

concerns such as these as it acts to ensure the long-term sufficiency and solvency 

of the fund.

Question 4. Georgia receives a great deal of funds from the universal service fund. 

We are the largest state east of the Mississippi and has many rural areas. I need 

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to be able to tell my constituents that they will have universal service support. Can 

I, in good faith, tell my constituents that universal service support will be available 

at the same levels in Georgia as it has been in the past? 

Answer. Beginning in 1998, through the second quarter of 2002, Georgia has re- ceived more than $740 million in support from the various universal service support 

mechanisms, thereby benefiting consumers in the State of Georgia. There is no specific reason to believe that universal service support to Georgia will decrease in the 

next few years. 

RESPONSE TO WRITTEN QUESTIONS SUBMITTED BY HON. DANIEL K. INOUYE TO

THE FEDERAL COMMUNICATIONS COMMISSION

Question 1. One problem often cited by critics of the current contribution mechanism is the ‘‘lag’’ between prior reported revenues, which are six months old, and 

current revenues, which are assessed based on the contribution factor. 

Is it possible to eliminate this lag, but retain a revenue-based assessment mechanism? Are there ways to minimize the competitive distortion between carriers with 

rising revenues (such as the RBOCs) and carriers with falling revenues (such as the 

IXCs)? How would the adoption of ‘‘collect-and-remit’’ proposals advanced by some 

carriers affect the administration and stability of the fund? 

Answer. Several commenters have proposed that the Commission assess contributions on projected or current, instead of historical, revenues. Because this would 

eliminate the current six-month interval between reported revenues and assessment 

of contributions based on those revenues, commenters assert these proposals would 

eliminate the lag of the current system, thereby minimizing competitive distortions 

between carriers with rising and falling revenues. 

The Commission also sought comment on a ‘‘collect-and-remit’’ proposal. Under a 

collect-and-remit system, carriers would be required to remit to the fund administrator, Universal Service Administrative Company (USAC), only those contribution 

amounts actually collected from enduser customers. Accordingly, a collect-and-remit 

system would relieve carriers of any risk associated with the recovery of universal 

service contributions and eliminate the need for contributors to mark-up universal 

service line items to reflect uncollectibles. Some parties argue, however, that because USAC would not be able to predict with complete accuracy the amount of assessments actually collected in a given period, a collect-and-remit system would create the possibility of shortfalls in the universal service fund, which may necessitate 

directing USAC to establish a reserve funded through increases in assessment rates. 

Certain commenters note that fluctuations in uncollectible rates also could impact 

the predictability and stability of the universal service fund. 

The Commission is actively considering these issues, and welcomes input from all 

interested parties.

Question 2. One of the items currently under review by the Federal-State Joint 

Board is the effectiveness of the certain federal low income support programs (Lifeline and Link Up Programs). Often, the success of these programs varies widely 

from state to state due to differences in state eligibility requirements and in the administration of these programs. California, for example, received over half of all federal low income support dollars in 2001. 

What are the major reasons behind the relative successes or failures of these programs in certain states? Should there be more direct federal involvement in establishing eligibility requirements for these programs? Should certain minimum outreach efforts be required to ensure that low income residents have access to these 

programs? 

Answer. The federal Lifeline/Link-Up programs have yielded the highest participation rates where states have provided matching funds and engaged in proactive 

targeted efforts such as aggressive outreach and multi-agency cooperation. Certain 

states whose eligibility criteria capture fewer low-income subscribers than the federal eligibility criteria may have lower take rates. In addition, the take rate is low 

where there is lack of knowledge or information about the Lifeline and Link-Up programs. 

The FCC has initiated a proceeding to examine the Lifeline and Link-Up programs and has referred the issue to the Federal-State Joint Board on Universal 

Service. The Joint Board is currently reviewing the low-income programs. Issues 

under consideration with respect to eligibility include modification of the existing 

federal eligibility criteria, as well as whether to require all states to include the federal eligibility criteria in their respective programs. The Joint Board has also sought 

comment generally on outreach issues, including whether to adopt specific outreach 

requirements for all carriers. Thus if the record shows that either more direct FedVerDate 0ct 09 2002 14:41 Feb 08, 2005 Jkt 093053 PO 00000 Frm 00094 Fmt 6601 Sfmt 6621 S:\WPSHR\GPO\DOCS\93053.TXT JACK PsN: JACKF
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eral involvement or certain minimum outreach efforts are warranted the Commission will not hesitate to implement these proposed changes.

Question 3. As defined in the statute, ‘‘universal service’’ represents ‘‘an evolving 

level of telecommunications services.’’ One of the items currently under review by 

the Federal-State Joint Board is whether to add broadband or other items to the 

list of supported services. 

Should broadband be designated as a supported service? If not, what test should 

guide future determinations as to when broadband should be included? To the extent that the Commission defines broadband services as an ‘‘information service,’’ 

would such a ruling preclude the Joint Board and FCC from later finding that 

broadband is a ‘‘telecommunications service’’ eligible for universal service support? 

Answer. On July 10, 2002, the Federal-State Joint Board on Universal Service 

(Joint Board) issued its Recommended Decision regarding the definition of supported services. As required by statute, the Joint Board utilized the principles and 

criteria in section 254(b) and (c) to guide its recommendations, including those regarding advanced services. Those criteria include whether the service is (1) essential 

to education, public health, or public safety; (2) subscribed to by a substantial majority of residential consumers; (3) being deployed by telecommunications carriers in 

public telecommunications networks; and (4) consistent with the public interest, convenience and necessity. The Joint Board, applying these criteria, concluded that advanced or high-speed services should not be added to the definition of universal 

service at this time. The Joint Board did, however, fully support the Commission’s 

prior conclusion that universal service policies should not inadvertently create barriers to the provision of or access to advanced services and that the current universal service system does not create such barriers. The Joint Board stated in its 

Recommended Decision that if the Commission concludes that wireline broadband 

Internet access service is an ‘‘information service’’ and that the transmission component of that service is ‘‘telecommunications,’’ it believes that broadband Internet access services could not be included within the definition of supported services because section 254(c) limits the definition of supported services to telecommunications services. 

The Recommended Decision is now before the Commission. The Commission will 

address this issue, consistent with the governing statutory framework.

Question 4. Under the President’s Budget, the size of the Universal Service Fund 

is expected to grow from $5.3 Billion in 2001 to $7.1 Billion in 2007. 

Since the Schools & Libraries Fund is currently capped at $2.25 Billion per year, 

how much of this growth is attributable to expansion in the High Cost Support 

Mechanism? Are there any further pending changes to universal service programs 

that might place further upward pressure on the size of the fund? 

Answer. Most of the projected growth in the universal service fund in the President’s Budget is attributable to increased support to carriers serving customers in 

high-cost areas. It is expected that universal service will grow over time due to inflation, line growth, and increased participation, even if no major programmatic 

changes are implemented. Moreover, because the high-cost program is significantly 

larger than the low-income and rural health care programs, it would be expected 

that most of the growth is associated with the high-cost programs. 

Several proposals currently before the Commission could impact the size of the 

universal service support mechanisms. It is difficult, however, to determine at this 

time whether these decisions will increase or decrease the size of the fund. For example, the Commission, in consultation with the Joint Board, is considering whether to modify the forward-looking high-cost support mechanism for non-rural carriers 

in light of a recent ruling by the United States Court of Appeals for the 10th Circuit. In addition, the Commission is considering modifications to the rural health 

care support mechanism that could bolster the availability of telemedicine and telehealth and increase current levels of demand, subject to the existing cap. Finally, 

the Commission has indicated its intent to initiate a proceeding to evaluate the way 

portable high-cost support is calculated for competitive eligible telecommunications 

carriers.

Question 5. In Qwest v. FCC, the 10th Circuit found that the federal, statutory 

mandate stating that rural and urban rates be ‘‘reasonably comparable’’ requires the 

FCC, where necessary, to induce states to meet federal principles. 

In light of the 10th Circuit’s decision in Qwest, what ‘‘inducements’’ should the 

federal government use to ensure that the federal statutory goal of ensuring reasonably comparable rates between urban and rural areas is met? 

Answer. In response to the Qwest v. FCC decision, the Commission issued a Notice of Proposed Rulemaking seeking comment on how states should be induced to 

assist in implementing the statutory goal of reasonable comparability, and on other 

92

issues remanded by the court. The Commission asked about conditioning federal 

support on some form of state action, entering into a binding cooperative agreement 

with the states, and other possible inducements. It referred these and other issues, 

as well as the record developed in response to the Notice, to the Federal-State Joint 

Board on Universal Service for a recommended decision. The official comment period 

closed on April 25, 2002, and the Joint Board is now developing its recommendations. 

Examination of the record developed so far indicates a range of opinion as to what 

inducements the federal government should use. A number of commenters maintain 

that, based on the states’ long history of advancing universal service goals, and evidence that urban and rural rates nationwide are reasonably comparable, the Commission should monitor state policies and use inducements only where a need arises. 

Other commenters have proposed possible inducements, including requiring states 

to certify that their urban and rural rates are reasonably comparable, payment of 

additional federal support for states that take specified action, and non-payment of 

federal support for states that fail to take specified action. Some commenters also 

have proposed specific actions that states should be induced to undertake beyond 

setting reasonably comparable rates, such as establishing explicit universal service 

support mechanisms. 

The Commission is actively considering these issues, and welcomes input from all 

interested parties. Please be assured that the Commission will continue to balance 

concerns such as these as it acts to ensure the long-term sufficiency and solvency 

of the fund.

Question 6. Proponents of changing the existing universal service contribution 

mechanism often cite recent declines in total interstate telecommunications revenues as evidence that the current assessment mechanism is flawed. 

Has the FCC made any attempts to quantify how much of the decline in total 

interstate revenues is due to declining economic conditions and how much is due 

to structural changes in the marketplace. Or put another way, if economic times 

were better, would total interstate telecommunications revenues still be expected to 

decline? Is the growing use of Internet telephony having a quantifiable effect on 

interstate revenues? 

Answer. The cause of the decline in revenues is a complex matter. Declines in 

total interstate end-user telecommunications revenues began in the second half of 

1999. The record in the Commission’s ongoing contribution methodology proceeding 

suggests that the universal service contribution base is declining, in part, due to 

changes in the telecommunications marketplace, including migration of customers 

to wireless services and other new technologies that are difficult to categorize by jurisdiction, increased bundling of interstate/intrastate and telecommunications/nontelecommunications products and services, local exchange carrier entry into the long 

distance market, and related price competition. It is difficult, however, to quantify 

the precise impact of any one of these factors, or to quantify the impact of overall 

economic trends. 

Commission rules do not currently require contributors to identify Internet protocol telephony revenues when reporting revenues for purposes of calculating universal service contribution obligations. However, some commenters believe migration to Internet telephony will significantly erode the contribution base. At this 

time, migration does not appear to have greatly impacted the contribution base, but 

concerns regarding this issue may increase in the future.

Question 7. In an effort to keep universal service charges from rising, the Commission voted to borrow unused funds in the Schools and Libraries account in order 

to keep the contribution factor level for the next three quarters. In so doing, the 

Commission also stated its intention to have completed and implemented rules 

changing the current contribution methodology by April 1, 2003. 

How much will have to be borrowed from the Schools & Libraries Fund over the 

next 3 quarters? 

Answer. The Commission directed the Universal Service Administrative Company 

to apply sufficient unused funds from the schools and libraries program to maintain 

the third quarter 2002 contribution factor at 7.2805 percent. Commission calculations indicate that about $255.4 million in unused funds were necessary to stabilize 

the contribution factor for the third quarter of 2002. Should carrier interstate enduser telecommunications revenues and demand for universal service support remain 

about the same, approximately the same amount of unused funds would be necessary to keep the contribution factors stable for the fourth quarter of 2002 and the 

first quarter of 2003.

93

Question 8. To the extent that the Commission is unable to meet its April 1st 

deadline, what would be the expected effect on future contribution factors if interstate revenues continue to decline? 

Answer. The universal service contribution factor is calculated by dividing total 

quarterly program collection or demand by the quarterly contribution base. If the 

universal service contribution base declines and program demand remains constant 

or increases, the universal service contribution factor will increase. It is difficult to 

predict future contribution factors due to the large number of variables at play. 

While events may change these estimates, we project the contribution factor could 

be over 9 percent in the coming year, assuming current trends continue.

Question 9. Given that some parties have advocated expanding the base of contributors to include all broadband providers, does the Commission expect to conclude its related items regarding the regulatory classification of broadband by that 

date? 

Answer. The Commission is currently examining the complex record in this proceeding and hopes to resolve the regulatory classification of wireline, broadband 

Internet access by that date. Comments in the broadband proceeding were submitted on May 3, 2002 and reply comments on July 1, 2002. The Commission received approximately 150 comments and reply comments and over 800 e-mailed responses. 

FCC STAFF COMMENT: 

The Federal Communications Commission in partnership with our state public 

utility commissions, has had a program for auditing common carriers for several 

decades, beginning in the late 1930’s or early 1940’s. After divestiture of AT&T in 

1984, and prior to the passage of the 1996 Act, the audit work of this Commission 

largely focused on proper regulation of interstate rates charged to long distance 

companies by price cap and rate of return incumbent local exchange carriers. This 

audit program operated, and continues today pursuant to section 220 and various 

other sections of the Communications Act of 1934, as amended. See 47 U.S.C. § 220. 

More recently, with the passage of the 1996 Act and the growth of competition, 

the Commission’s audit program has correspondingly evolved. Audit staff has been 

tasked beyond its traditional regulatory accounting role, to review compliance with 

other Commission policies and requirements including, among other things, Bell Operating Company (BOC) section 272 separate affiliate rules that govern after their 

long distance entry, carrier numbering resource utilization rules, as well as carrier 

obligations in connection with universal service, which was the topic of the hearing, 

and the specific focus of your question. 

In particular, consistent with its oversight obligations over the administration of 

the universal service fund, the Common Carrier Bureau began in the fall of 2000 

a review of the universal service line items charged by the three largest long distance carriers, AT&T, WorldCom and Sprint, under our authority set forth in sections 218 and 220(c) of the Communications Act. Specifically, the review focused on 

the carriers’ support and explanation for the universal service line charge in customer bills that exceeded the contribution factor established by the Commission. 

The review was performed by audit staff, who conducted field interviews with representatives of each company, issued data requests to obtain information from these 

companies, examined tariff filings and billing records, and examined the FCC Forms 

457 and 499 filed by these companies with the Universal Service Administrative 

Company (USAC) reporting aggregate interstate end user revenues. Through this 

review, staff sought to establish the underlying components of each carrier’s universal service fee charged to consumers to determine whether those fees were consistent with the Commission’s rules and applicable law. 

This investigation, which concluded in 2001, ultimately revealed a need to consider structural reform to our existing approach to universal service assessment and 

recovery. Indeed, our review confirmed the carriers’ explanations for what composed 

the rate elements of the carriers’ universal service fee. For example, although the 

Commission set a uniform contribution percentage, carriers chose to boost this in 

order to account for a variety of market factors including, among other things, 

uncollectible revenues, a declining revenue base, overhead expense and unbilled revenues. 

What we found far more difficult to answer, however, was the question of whether 

these additional rate components violated our existing rules. The Commission does 

not prescribe specific rates or ratemaking methodology for the long distance companies, as they operate in a competitive marketplace. Nevertheless, section 201 of the 

Communications Act generally requires that charges be ‘‘just and reasonable.’’ MoreVerDate 0ct 09 2002 14:41 Feb 08, 2005 Jkt 093053 PO 00000 Frm 00097 Fmt 6601 Sfmt 6621 S:\WPSHR\GPO\DOCS\93053.TXT JACK PsN: JACKF
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over, although the Commission’s rules give carriers flexibility in how they recover 

the costs of contributing to support universal service from their customers, they also 

require that carriers not shift more than an equitable share of their contributions 

to any customer or group of customers. The Commission’s rules also require that 

bills contain a full and non-misleading description of charges on those bills. 

Under these standards, whether the carriers’ line item practices and rate components, confirmed by the audit staff in its review, were in fact unreasonable or contrary to our rules, reflected an inherently subjective judgment, and would be susceptible to differing interpretations and disputed by the carriers. This lack of clarity 

in turn would make any specific enforcement action more difficult. Thus, we concluded that a more effective long term solution was to focus on a comprehensive examination of the framework for carrier assessment and recovery of universal service 

contribution amounts. For that reason, and as an outgrowth of the line item investigation, the staff chose to direct its principal efforts toward a rulemaking examining in a comprehensive fashion how to modify the current system to ensure long 

term stability, fairness and administrative efficiency in a dynamic marketplace. The 

rulemaking commenced with a request for comments to reform the system in May 

of 2001. In that order, the Commission expressly highlighted the need for changing 

its rules. See Federal State Joint Board on Universal Service, CC Docket No. 96–

45, Notice of Proposed Rulemaking, 16 FCC Red 9892, ¶¶ 3, 5, 6 (2001). 

Since then, as you know, in February of this year, the Commission issued a further round of comments on a specific connection-based proposal that would eliminate carrier discretion altogether in the amount charged to its customers. Once 

again, the Commission made clear its concern over the existing carrier line item 

practices:

Some carriers also employ different recovery methods for different customer 

groups, imposing universal service line-item charges on certain categories for 

different customer groups, but recovering an undisclosed amount from other 

customers through per-minute service rates. For example, some carriers do not 

recover universal service contributions form certain categories of customers, 

such as dial-around customers. In addition, universal service line-item percentages for residential customers often are higher than those for business customers. Other carriers charge customers large, up-front universal service fees 

that are unrelated to their revenues from a customer. Such practices may be 

inexplicable to the casual observer, and may shift a disproportionate share of 

the cost of contributions onto certain customer classes. In this Further Notice, 

therefore, we seek comment on how to modif’ our rules to ensure that carriers 

that elect to recover their universal service obligations from their customers do 

so in a manner that is reasonable, fair and understandable.

See Federal State Joint Board on Universal Service, Further Notice of Proposed 

Rulemaking, CC Docket No. 96–45, FCC 02–43, ¶¶ 19, 20 (rel. Feb. 26, 2002) (citations omitted). 

Finally, after your hearing on universal service issues, the Commission held a 

public forum on these proposals that included the federal and state members of the 

Joint Board on Universal Service. Staff is actively working to analyze the record and 

make a recommendation to the Commission in the near future on these issues. 

The attached information provides a projection for the annualized universal service factor for calendar years 2002–2006. To develop this projection, the FCC’s 

Wireline Competition Bureau utilized the following assumptions: (1) interstate end 

user telecommunications revenues would continue to decline at the past eight quarters’ annualized rate (3.8 percent per year); (2) program demand would continue to 

grow consistent with historical growth rates, subject to existing program caps (more 

details regarding program demand projections follow below); and (3) unused funds 

from the schools and libraries program would be applied to reduce the contribution 

factor for the third quarter 2002 through the first quarter 2003. Annualized projected contribution factors were calculated by dividing total projected annual program costs by projected annual interstate end user telecommunications revenues.

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The above information is based on the following assumptions: 

1) Based on historical annual average decline (third quarter 2000-second quarter 

2002), assumed contribution base would decline 0.9 percent each quarter; 

2) Based on historical growth rates (fourth quarter 1998-third quarter 2002), assumed demand for low-income program would increase by 7 percent each year; 

3) Based on staff estimates guided by historical take rates, assumed demand for 

rural health care program would increase by 5 percent each year; 

4) The 2.6 percent growth rate per year for the high cost support mechanisms is 

a weighted average of the projected growth rates for the individual programs. Each 

program’s projected growth was based on historical growth in lines, inflation, and 

regulatory caps, where applicable. Projected growth for ICLS was based on the historical growth of the commonline revenue requirement and long term support, and 

scheduled increases in subscriber line charges. Projected growth for payments to 

competitive ETCs was based on historical growth for 2001; 

5) Assumed demand for schools and libraries program would remain at the cap 

($2.25 billion) each year; and 

6) Utilized USAC projection of unused schools and libraries funds to reduce the 

contribution factor for third quarter 2002, fourth quarter 2002 and first quarter 

2003. 


fccq1.eps
96

RESPONSE TO WRITTEN QUESTIONS SUBMITTED BY HON. MAX CLELAND TO

G. NANETTE THOMPSON

Question 1. Do you see this nation’s pricing system moving more towards a costbased system? 

Answer. Yes. The 1996 Telecommunications Act laid out a plan to transition the 

nation’s telecommunications industry from monopoly to competitive markets. As 

competitive forces come to bear in any market, prices migrate towards costs. It is 

the responsibility of state regulators and the FCC to insure that the policy goal of 

universal service is accommodated during that migration. The universal service programs are designed to insure that all Americans can remain connected to the national network by paying reasonably comparable local rates.

Question 2. As you know, companies must be deemed an eligible telecommunications carrier (ETC) to receive USF funds. Reports indicate that more people will 

use their wireless phones as their primary phone and forego a traditional home line, 

but these companies do not receive USF payments. Do you believe there should be 

changes to the means of determining who is an eligible telecommunications carrier? 

Answer. No. The current system allows cellular carriers to obtain ETC status and 

a number of cellular carriers now receive USF. I agree however that the regulatory 

scheme should keep abreast of technological changes in the telecommunications 

world, and facilitate the delivery of services to consumers in the most cost-efficient 

manner possible. Especially where consumers across the nation are supporting delivery of services to high cost areas through the universal service fund, we need to 

insure that those funds are being wisely expended. Wireless technology may provide 

service in some rural areas at lower cost than wireline technology. Whatever technology can most cost efficiently deliver services should be eligible to receive federal 

universal service support.

Question 3. Universal service reform is quite an undertaking. I do believe that we 

can achieve some type of reform of the system, but I believe any reform considered 

must examine the long-term effects on the solvency of the system. Could you address the potential long-term effects on the system of some of the proposals? 

Answer. I agree that universal service reform is quite an undertaking. I also agree 

that any reforms should be made mindful of the long-term effects. The goal should 

be a fund that accomplishes its policy objectives and is sustainable in the long term. 

That goal can be achieved only if the recent dynamic changes in the telecommunications industry are accommodated. Modifications to the contribution mechanism 

need to reflect the realities of the manner in which telecommunications services are 

delivered to consumers. The current contribution mechanism inequitably spreads 

the burden and benefits of universal service. The best long term solution is to modify the contribution mechanism to insure that all providers of telecommunications 

services contribute, and all who provide essential telecommunications services to 

customers in high cost areas are eligible for support. 

RESPONSE TO WRITTEN QUESTIONS SUBMITTED BY HON. DANIEL K. INOUYE TO

G. NANETTE THOMPSON

Question 1. One problem often cited by critics of the current contribution mechanism is the ‘‘lag’’ between prior reported revenues, which are six months old, and 

current revenues, which are assessed based on the contribution factor. Is it possible 

to eliminate this lag, but retain a revenue-based assessment mechanism? Are there 

ways to minimize the competitive distortion between carriers with rising revenues 

(such as RBOCs) and carriers with falling revenues (such as IXCs)? How would the 

adoption of ‘‘collect-and-remit’’ proposals advanced by some carriers affect the administration and stability of the fund? 

Answer. Any revenue based system will have some lag because of differences in 

market share of companies over time. It is possible, however, to accommodate that 

lag with reconciliation process. The complexity and cost of that reconciliation should 

be weighed against a contribution mechanism based on some other standard. The 

most oft debated alternative is a contribution standard based on connections. 

Any system presents inequities and opportunities for gaming. The best alternative 

is administratively simple for both the companies and USAC, clear in its application 

to eliminate incentives to distort reports, and equitable across all segments of industry that provide telecommunications services and benefit from the fund. 

The ‘‘collect and remit’’ proposal might resolve the inequities created by changes 

in carriers’ market shares, but would be more administratively complex than the 

current system. It would shift the burden of accommodating over and under collecVerDate 0ct 09 2002 14:41 Feb 08, 2005 Jkt 093053 PO 00000 Frm 00100 Fmt 6601 Sfmt 6621 S:\WPSHR\GPO\DOCS\93053.TXT JACK PsN: JACKF
97

tions to the fund itself from individual carriers. USAC would be able to best estimate the cost and administrative issues associated with that shift.

Question 2. One of the items currently under review by the Federal-State Joint 

Board is the effectiveness of certain federal low income support programs (Lifeline 

and Link-Up Programs). Often, the success of these programs varies widely from 

state to state due to differences in state eligibility requirements and in the administration of these programs. California, for example, received over half of all federal 

low income support dollars in 2001. What are the major reasons behind the relative 

successes or failures of these programs in certain states? 

Answer. The FCC referred this issue to the Federal-State Universal Service Joint 

Board and we will issue a recommended decision before the end of this year. There 

are several reasons for the differences between states. Among the most significant 

factors causing the differences between states is how they have set the eligibility 

criteria and how they perform customer outreach. More funding under these programs goes to states that allow automatic enrollment to persons receiving benefits 

under another program that supports low income consumers. How the programs are 

advertised, and the complexity of administering the programs from the perspective 

of the consumer and telecommunications provider also affect the disparate levels of 

enrollment between states. For example, United Utilities, Inc. in Alaska managed 

to substantially increase its Lifeline subscribership by going to remote villages with 

an interpreter and explaining the program to the citizens. 

To evaluate success and failure, those terms must first be defined. The programs 

are designed to allow people with low-incomes to be connected to the national network. The joint board is examining the correlation between the states that have low 

income populations, those who receive a large percentage of the funds distributed 

under this program and the programs designed by the individual states to make recommendations to the FCC on how the program should be modified to better achieve 

its policy goals and be more equitable between states. 

Question 3. Should there be more direct federal involvement in establishing eligibility requirements for these programs? Should certain minimum outreach efforts be 

required to ensure that low income residents have access to these programs? 

The balance between state and federal responsibility for eligibility needs to be 

carefully struck to insure that states retain enough flexibility to accommodate their 

unique needs. For example, national guidelines that target Native American populations based on their residency on reservations do not reach those populations in 

Alaska with only one small reservation (Metlakatla) and a large native community 

that lives throughout the state. The federal government should encourage outreach 

efforts to insure that all eligible consumers are aware of the programs.

Question 4. As defined in the statute, ‘‘universal service’’ represents ‘‘an evolving 

level of telecommunications services.’’ One of the items currently under review by 

the Federal-State Joint Board is whether to add broadband or other items to the 

list of supported services. Should broadband be designated as a supported service? 

If not, what test should guide future determinations as to when broadband should 

be included? 

Answer. The Joint Board recently released a Recommended Decision which recommended that broadband not yet be added to the list of supported services. We 

found that broadband services did not meet the criteria in the 1996 Telecommunications Act for an eligible supported service because nationally only ten percent of 

consumers now purchase broadband services. We will re-examine this issue over 

time.

Question 5. To the extent that the Commission defines broadband services as an 

‘‘information service,’’ would such a ruling preclude the Joint Board and FCC from 

later finding that broadband is a ‘‘telecommunications service’’ eligible for universal 

service support? 

Answer. The recent ruling is potentially problematic. In paragraph 19 of the Recommended Decision of July 9, 2002, the Joint Board identified the problems that 

would be created by an FCC determination that broadband is an ‘‘information service’’ rather than a ‘‘telecommunications service.’’ If broadband is determined to be 

an ‘‘information service,’’ it could not be included in the definition of universal service, which is limited to telecommunications services. It should also be noted that 

Section 254(d) only allows the FCC to require universal service contributions from 

telecommunications providers, which would exclude broadband providers if the service were deemed an information service. Broadband services could become a larger 

segment of the market with no obligations to contribute towards universal service.

Question 6. Under the President’s Budget, the size of the Universal Service Fund 

is expected to grow from $5.3 billion to $7.1 billion in 2007. Since the Schools & 

Libraries Fund is currently capped at $2.25 billion per year, how much of this 

98

growth is attributable to expansion of the High Cost Support Mechanism? Are there 

any further pending changes to universal service programs that might place further 

upward pressure on the size of the fund? 

Answer. Most of the fund’s growth in recent years is attributable to the expansion 

of the portion of the High Cost Fund associated with FCC access charge reform 

(CALLs and MAGs plans). In the future, the amount of non-access related funding 

might change as the FCC decides a case remanded last year by from the 10th circuit 

court of appeals concerning the non-rural cost support system. (Qwest v. FCC) That 

court held that the FCC’s rules for universal service program did not assure that 

consumers across the nation were paying reasonable comparable rates, nor demonstrate that the funding provided was sufficient. The court was also critical of how 

the FCC assured state involvement in the administration and achievement of the 

goals of the universal service programs. The Joint Board is now working on a recommended decision to the FCC that will detail remedies for the problems and concerns raised by the court. The Joint Board was asked to complete its recommendation by August 2002.

Question 7. In Qwest v. FCC, the 10th Circuit found that the federal, statutory 

mandate stating that rural and urban rates be ‘‘reasonably comparable’’ requires the 

FCC, where necessary, to induce states to meet federal principles. In light of the 

10th Circuit’s decision in Qwest, what ‘‘inducements’’ should the federal government 

use to ensure that the federal statutory goal of ensuring reasonably comparable 

rates between urban and rural areas is met? 

Answer. The FCC should clearly define its expectations regarding use of federal 

universal service funds and objectives states must strive towards if they desire continued support. State commissions use different methods to set rates, depending on 

how competitive the market is, the type of providers, and limitations placed on them 

by their state legislature. Even within their borders, rates are often set differently 

in different parts of the state as necessary to reflect market conditions. Therefore, 

the goal of comparable rates requires state involvement. The FCC should set standards, and require reporting of data from each state so that it can monitor national 

trends.

Question 8. In the original Senate version of the 1996 Telecommunications Act, 

universal service contributions were to be assessed on all telecommunications carriers based on an equitable and non-discriminatory basis. In the conference committee, however, this requirement was limited to telecommunications carriers providing interstate services . . . ’’

Given the shrinking contribution base for interstate revenues and the increasing 

difficulty of accounting between interstate and interstate revenues in bundled service offerings, does it make sense to change the statute and return to the broader 

language originally passed by the Senate? 

Answer. Yes. Since the Act was passed the manner in which telecommunications 

services are delivered and the way the industry is regulated has changed. The distinction between interstate and intrastate revenues is not as clear as it was in 1996. 

In the case of wireless providers whose share of the market has increased, they may 

not be able to accurately distinguish the revenues without incurring substantial administrative costs.

Question 9. What effects, if any, will changes made to the federal contribution 

mechanism have on state universal service programs. What measures, if any, should 

be made to strengthen the Federal-State partnership in ensuring that all Americans 

have access to basic telecommunications services? 

Answer. State programs are all different, so the answer to the first question depends on the state at issue. Generally, the states are likely to have increasing responsibility in the future to monitoring the use and sufficiency of the fund. The 

states best understand their own markets and the companies operating within their 

boundaries. The states can most effectively monitor the proper use of the fund and 

insure that it is achieving the national policy goals of sufficient, predictable support 

and reasonably comparable rural and urban rates. In 2001, the FCC required states 

to certify that all companies receiving universal service funds in their states were 

using the funds appropriately. The federal state partnership can be enhanced by a 

clear enumeration of the relative responsibilities of state and federal regulators. 

States need to be able to adapt programs to meet their unique needs. States can 

design their own state universal service programs to fund particular policy goals or 

supplement the federal programs. For example, in Alaska our state fund supports 

public interest payphones because keeping operable payphones in remote communities that do not otherwise generate enough revenue to justify the expense is a 

public safety issue. 

99

SUPPLEMENTAL TESTIMONY OF LILA A. JABER, CHAIRMAN, FLORIDA PUBLIC SERVICE

COMMISSION

We thought it would be helpful to provide greater detail to the Committee on a 

couple of points from my testimony. First, the Florida Public Service Commission 

(FPSC) has reason to urge that the overall Universal Service Fund grow no bigger 

than it currently is, and that the administration of the funds be subject to greater 

accountability standards. Florida has already taken steps, with state funds, to develop initiatives on funding for access to advanced services to schools and libraries. 

Second, we have additional suggestions for accountability of the disbursement of the 

funds. To the extent that Congress does not see the need to open up Section 254 

for revision, we urge Congress to use its oversight role of the FCC to direct such 

changes. If Congress does pursue revisions to Section 254, we have included suggested language to limit the size of the overall fund. 

Florida’s Efforts to Provide Access to Advanced Services 

In 1995, the Florida Legislature enacted a major overhaul of the Florida telecommunications law. That included the creation of Part II of Chapter 364, Florida 

Statutes, which created the Education Facilities Infrastructure Improvement Act. 

The Legislature found that it is in the interest of the State to assure its citizens 

access to advanced telecommunications services since such access will complement 

the provision of educational and health care services. 

The law requires that advanced telecommunications services be provided to eligible facilities. A program was set out in which eligible facilities submitted a technology-needs request to the Department of Management Services. ‘‘Eligible facilities’’ includes campuses or instructional facilities, public community colleges, area 

technical centers, public elementary schools, middle schools, and high schools, as 

well as teaching hospitals and rural public hospitals. 

Thus, a year prior to the Federal Telecommunications Act, the Florida Legislature 

enacted its own ‘‘E-rate’’ program. Florida also appropriated monies to rewire 

schools prior to its 1995 law. From 1992–1996, the Florida legislature appropriated 

$680 million for schools and library systems for technology initiatives. By the time 

the 1996 Telecommunications Act was passed, a considerable amount of the wiring 

of Florida schools had already been completed. Practically 100 percent of the classrooms in Florida today have Internet connections. 

In addition, through programs like NetDay (a public/private partnership established to connect schools to the Internet) and the Florida Information Resource Network (FIRN, an organization of education information specialists with the goal of 

networking all of Florida’s educational institutions), it is estimated that fully onehalf of the schools in Florida were already wired before the Federal Schools and Libraries program began in 1997. 

Indeed, Florida has good reason to be concerned about the size of the Federal Universal Service programs, when Florida is the largest net contributor and is almost 

‘‘penalized’’ for its early success in wiring our schools for advanced services, paid for 

by Florida citizens. As a net contributor, Florida citizens are now paying for other 

states to achieve similar access to advanced services. 

Accountability 

The second topic I would like to address is accountability. The FPSC has consistently suggested that the Universal Service Funds need to have an increased level 

of accountability in an effort to ensure that funds are being disbursed in a manner 

that truly addresses the intended goal of the statute. To that end, we would suggest 

a number of possible steps that could be taken to achieve increased accountability. 

First, the Congress, in its oversight role, might urge that the FCC conduct biennial or triennial reviews of its rules and guidelines governing each of the universal 

service programs to make sure the rules are not inadvertently creating incentives 

for gaming and abuse. 

Second, the Universal Service Administrative Company (USAC) should be directed to implement a process to increase the number of independent audits of the 

recipients of universal service funding. The audits should be conducted in proportion 

to the relative size of the programs and the relative amounts of support received 

such that more audits would be conducted on large recipients versus small, and 

more audits would be conducted on the recipients of high cost support versus recipients of Lifeline and Linkup support. If Congress opens up Section 254 of the Act 

for review, language might be added for state commissions to conduct these audits 

if necessary. In the alternative, state commissions could be required, as part of the 

annual ETC certification review, to better ensure that recipients of universal service 

funding have used the funds as intended. The FCC could establish stronger national 

criteria for that review to make sure that there is consistency from state to state. 

100

The concept is not to burden USAC, the FCC, state commissions or the industry 

with unreasonable regulatory oversight but to provide some incentive for carriers 

and states to reduce gaming and potential abuse. 

In the recent FCC Inspector General’s report, issued June 11, 2002, the Inspector 

General continued to focus on the Universal Service Fund activities because of continuing allegations of waste and fraud. According to the Inspector General, the size 

and scope of the Schools and Libraries program by itself makes it a major program 

for the FCC and a significant area for risk of fraud, waste, and abuse. ‘‘This, coupled 

with the results of various oversight activities performed to date, gives the Office 

of Inspector General a great deal of concern about this program.’’ The report says, 

‘‘It is our opinion that the scope of USAC’s program, conducting a very small number of audits in a program with in excess of 30,000 applications (for Schools and 

Libraries alone) per year, does not provide the FCC with adequate insight on program-level compliance by program beneficiaries.’’ The Inspector General also acknowledges that a systematic program of oversight has not yet been established. 

Thus, we are concerned about the lack of audit resources, but we are glad to see 

the problem recognized. Especially as a net contributor state, with our schools wired 

for access to advanced services prior to the 1996 Telecommunications Act, we have 

good reason to want greater accountability in the program. 

Revisions to Section 254

My last topic addresses possible legislative revisions to Section 254. If it is the 

Congress’ desire to proceed with revising Section 254, then the Congress should cap 

the overall Universal Service Fund for three years following the effective date of any 

revisions to the Act. A provision for a triennial review could then take place. Standards for accountability and sufficiency should be included for the purposes of the review. We suggest the following provision:

LIMITATION OF Universal Service Support. (i) Notwithstanding subsection 

254(b)(5), universal service support shall be capped for three years following the 

effective date of this Act. Every three years thereafter, the Commission shall 

review the need to lift the caps, applying standards of accountability and sufficiency. If the Commission makes a finding that additional funds are necessary 

to meet subsection 254(b)(5), then the limitation shall be lifted for the subsequent three-year period.

In conclusion, the Florida Commission urges greater accountability in the Universal Service programs and offers the above suggestions for consideration. 

RESPONSE TO WRITTEN QUESTIONS SUBMITTED BY HON. MAX CLELAND TO

LILA A. JABER

Question 1. Do you see this nation’s pricing system moving more towards a cost 

based system? 

Answer. In the context that robust competitive markets will ultimately lead to 

rates which are closely aligned with cost, I believe telecommunications pricing will 

be driven toward a more cost-based approach as time goes on. That is the end result 

that all of us are shooting for. Basic local service rates have historically been priced 

to maximize customer connectivity without total reliance on cost recovery. Aligning 

price to underlying cost for these services is not something that can be achieved 

overnight without adverse impacts on some consumers. Many states, however, are 

already considering or have considered local service rate rebalancing and UNE pricing as ways to inject a more rational pricing structure into the local service market 

The Universal Service Fund is a key factor in ensuring that segments of society are 

not left behind by the resulting price/cost relationship of a more market-based pricing regime. Without a safety net for consumers and high-cost service providers the 

results of market-based pricing may be detrimental to some consumers in some 

areas.

Question 2. As you know, companies must be deemed an eligible telecommunications carrier (ETC) to receive USF funds. Reports indicate that more people will 

use their wireless phones as their primary phone and forego a traditional home line, 

but these companies do not receive USF payments. Do you believe there should be 

changes to the means of determining who is an eligible telecommunications carrier? 

Answer. No. Wireless carriers can and have become ETCs. For example, Western 

Wireless was designated as an ETC for service to tribal members on the Pine Ridge 

Reservation in South Dakota (FCC Docket No. CC–96–45, Released 10/5/0 1). Many 

wireless carriers have chosen not to seek ETC status because of the requirements 

101

to provide certain services (such as offering Lifeline services) associated with being 

an ETC.

Question 3. Universal Service reform is quite an undertaking. I do believe that 

we can achieve some type of reform of the system, but I believe any reform considered must examine the long term effects on the solvency of the system. Could you 

address the potential long term effects on the system of some of the proposals? 

Answer. It is difficult to predict long term effects of any proposed changes; however, it appears that the current funding mechanism seems unable to cope with the 

changing marketplace dynamics in the telecommunications industry. Specifically, 

there is increasing difficulty in assessing the exact quantity of interstate services, 

and that difficulty varies according to the type of carrier. In addition, the size of 

the fund is ever changing, requiring constant adjustment in collection factors. Thus, 

it is intuitive that certain changes need to be made. The proposal put forth by 

AT&T based on the number of connections served has the benefit of simplicity, certainty, and ease of administration. However, I am concerned, that in the final analysis it will appear as yet another end-user rate increase to some customers. I do 

believe that some change is necessary in order to add some stability to the collection 

mechanism and the fund itself. I applaud the FCC for its current review of the contribution methodology. 

In addition, I believe it is appropriate to address accountability of the administration of the fund at both the federal and state level and to establish a mechanism 

for measuring the effectiveness of the fund. By that, I am really asking everyone 

involved to re-evaluate the purpose of the funds and determine whether the current 

programs, and the eligible services covered by a fund, match what we believe should 

be the goals of the fund. Then, we can more effectively answer questions such as 

sufficiency and stability. That is the primary reason I have suggested capping the 

fund for a period of time to permit that type of assessment to take place. 

RESPONSE TO WRITTEN QUESTIONS SUBMITTED BY HON. DANIEL K. INOUYE TO

LILA A. JABER

Question 1. One problem often cited by critics of the current contribution mechanism is the ‘‘lag’’ between prior reported revenues, which are six months old, and 

current revenues, which are assessed based on the contribution factor. 

Is it possible to eliminate this lag, but retain a revenue-based assessment mechanism? Are their ways to minimize the competitive distortion between carriers with 

rising revenues (such as the RBOCs) and carriers with falling revenues (such as the 

IXCs)? 

How would the adoption of ‘‘collect-and-remit’’ proposals advanced by some carriers affect the administration and stability of the fund? 

Is it possible to eliminate this lag, but retain a revenue-based assessment mechanism? 

Answer. I believe that it may be possible to eliminate the lag if forecasted or estimated revenues are used. However, this presents regulators with the problem that 

carriers may intentionally underestimate their expected interstate or international 

revenues to minimize their financial exposure. It appears there should be a penalty 

for materially underestimating revenues. In addition, a true-up mechanism could be 

developed if revenues are underestimated. I would note, however, that the FCC recently denied AT&T’s petition for waiver filed in December, to assess its contributions to universal service on projected, rather than historical, revenues (FCC Order 

DA02–1419).

Question 2. Are there ways to minimize the competitive distortion between carriers with rising revenues (such as the RBOCs) and carriers with falling revenues 

(such as the IXCs)? 

Answer. Several proposals have been suggested that purport to address these differences, such as a collect-and-remit mechanism, or moving from revenues to a per 

connection assessment mechanism.

Question 3. How would the adoption of ‘‘collect-and-remit’’ proposals advanced by 

some carriers affect the administration and stability of the fund? 

Answer. Moving to a collect-and-remit program would shift the risk of under or 

over recovery of universal service support from the carriers to the administrator of 

the fund. Specifically, under the collect-and-remit proposal, the administrator would 

have to estimate the amount of uncollectible support and factor that into the assessment. This would be true under either a revenue or a per-connection basis.

Question 4. One of the items currently under review by the Federal-State Joint 

Board is the effectiveness of certain federal low-income support programs (Lifeline 

102

and Link-Up Programs). Often, the success of these programs varies widely from 

state to state due to differences in state eligibility requirements and in the administration of these programs. California, for example, received over half of all federal 

low-income support dollars in 2001. 

What are the major reasons behind the relative successes or failures of these programs in certain states? Should there be more direct federal involvement in establishing eligibility requirements for these programs? Should certain minimum outreach efforts be required to ensure that low-income residents have access to these 

programs? 

What are the major reasons behind the relative successes or failures of these programs in certain states? 

Answer. I believe that there are a number of reasons for the relative successes 

or failures of these programs in states. Specifically, under the current federal rules, 

states that mandate state lifeline support can determine what the qualification criteria are. Hence, states can affect their pool of eligible participants. Certification 

and verification procedures, if conducted at all, also vary, not only from state to 

state, but from carrier to carrier. These differences affect participation.

Question 5. Should there be more direct federal involvement in establishing eligibility requirements for these programs? 

Answer. I believe that there should be a balance between the ability of a state 

to expand the eligibility criteria and federal oversight of the program. Specifically, 

to the extent that a state wishes to use their intrastate Lifeline criteria as eligibility 

for the federal program, the FCC should thoroughly examine the criteria to ensure 

that the program is properly providing support to consumers that need the support. 

I have also suggested that the FCC increase its audit frequency of these programs.

Question 6. Should certain minimum outreach efforts be required to ensure that 

low-income residents have access to these programs? 

Answer. Yes, we recommended increased promotion of the program through more 

frequent bill inserts and requiring all ETCs to post application information about 

their Lifeline service on the Lifeline Support website. The Florida PSC has worked 

with the FCC, other state agencies, and the Florida AARP organization to promote 

Lifeline availability. 

More recently, in fiscal year 2001—2002, the Florida Legislature approved an appropriation of $500,000 to be transferred from the Florida Public Service Commission Regulatory Trust Fund to the Department of Children and Families to fund 

that agency’s implementation of an automatic enrollment system for its clients eligible for Lifeline and Linkup. it is expected that this automatic enrollment system 

will increase participation in these programs, so that those needing assistance will 

be able to afford telephone service. We will continue to monitor efforts to develop 

and implement an automatic enrollment program for Lifeline and Linkup.

Question 7. As defined in the statute, ‘‘universal service’’ represents ‘‘an evolving 

level of telecommunications services.’’ One of the items currently under review by 

the Federal-State Joint Board is whether to add broadband or other items to the 

list of supported services. 

Should broadband be designated as a supported service? If not, what test should 

guide future determinations as to when broadband should be included? To the extent that the Commission defines broadband services as an ‘‘information service,’’ 

would such a ruling preclude the Joint Board and FCC from later finding that 

broadband is a ‘‘telecommunications service’’ eligible for universal service support? 

Should broadband be designated as a supported service? If not, what test should 

guide future determinations as to when broadband should be included? 

Answer. The Joint Board issued its recommended decision on July 10th. The Joint 

Board concluded that advanced and high-speed services currently do not meet the 

Act’s criteria for inclusion in the list of supported services. Therefore, the Joint 

Board did not recommend that the FCC expand the definition of supported services 

to include advanced or high-speed services at this time. I support this decision. 

Adding advanced or high-speed services to the list could also jeopardize support 

currently provided to some carriers. For example, some carriers, such as wireless 

carriers and some small wireline Local Exchange Carriers, would no longer be eligible for universal service support because a significant number are not now capable 

of providing advanced or high-speed services or do not do so throughout their service 

areas. This would reduce the number of providers eligible for universal service support and might reduce consumer choice in rural and high-cost areas. Accordingly, 

the Joint Board indicated that the inclusion of advanced or high-speed services in 

the list of core services could stifle competition among various types of eligible telecommunications carriers and would not serve the public interest. 

103

The Joint Board shares the FCC’s and Congress’s commitment to ensuring that 

appropriate policies are in place to encourage the successful deployment of advanced 

services. Even though advanced services are not directly supported by federal universal service, I do not believe that the FCC’s policies impede the deployment of 

modern plant capable of providing access to advanced services. I believe that such 

a policy is more appropriate than directly supporting such services at this time. As 

a result, I agree that it is appropriate to make clear that the facilities installed by 

carriers should not create barriers to the future deployment of advanced services, 

and that the actual deployment of advanced services should be monitored, along 

with possible universal service implications.

Question 8. To the extent that the Commission defines broadband services as an 

‘‘information service,’’ would such a ruling preclude the Joint Board and FCC from 

later finding that broadband is a ‘‘telecommunications service’’ eligible for universal 

service support? 

Answer. The classification of broadband services as information services by the 

FCC may result in an inconsistency if the FCC and the Joint Board sought to include broadband services as a supported service. However, it may well be that support of facilities used in the provision of broadband services could be included and 

not be contrary to the classification of an ‘‘information service.’’ In the final analysis, 

if it were the will of the Congress or the FCC to do so, I believe the list of supported 

services could ultimately be expanded to cover facilities necessary to provide highspeed data transport.

Question 9. Under the President’s Budget, the size of the Universal Service Fund 

is expected to grow from $5.3 Billion in 2001 to $7.1 Billion in 2007. 

Since the Schools & Libraries Fund is currently capped at $2.25 Billion per year, 

how much of this growth is attributable to expansion in the High Cost Support 

Mechanism? 

Are there any further pending changes to universal service programs that might 

place further upward pressure on the size of the fund? 

Since the Schools & Libraries Fund is currently capped at $2.25 Billion per year, 

how much of this growth is attributable to expansion in the High Cost Support 

Mechanism? 

Answer. I would preface my remarks to clarify that I am not intimately familiar 

with the assumptions made within the President’s Budget. Barring any changes in 

the cap on the schools and library program or the rural health care program, I believe almost all of the increases would be associated with the high cost fund and 

Lifeline/Linkup. I should note that the FPSC has not done an independent analysis 

on this question and thus we do not know the answers.

Question 10. Are there any further pending changes to universal service programs 

that might place further upward pressure on the size of the fund? 

Answer. The Joint Board is presently reviewing proposals to respond to the remand from the 10th Circuit Court of Appeals. This remand deals in part with the 

sufficiency of the fund in fulfilling the goals of the Telecommunications Act. The outcome of this proceeding could affect the size of the fund. As I have stated in my 

supplemental testimony, if Congress desires to proceed with revising Section 254, 

the Congress should cap the overall Universal Service Fund for three years following the effective date of any revisions to the Act. A provision for a triennial review could then be put in place. Standards for accountability and sufficiency should 

be included for the purposes of the review. 

Question 11. In Qwest v. FCC, the 10th Circuit found that the federal, statutory 

mandate stating that rural and urban rates be ‘‘reasonably comparable’’ requires the 

FCC, where necessary, to induce states to meet federal principles. 

In light of the 10th Circuit’s decision in Qwest, what ‘‘inducements’’ should the 

federal government use to ensure that the federal statutory goal of ensuring reasonably comparable rates between urban and rural areas is met? 

Answer. The FPSC has suggested that there is a way to induce states to take actions to alleviate the burden that particular states are causing on the federal highcost universal service support mechanism for non-rural carriers. The FCC should 

not, however, dictate the method that states take to address high-cost support. The 

FPSC does see a benefit to injecting more accountability into the program as to the 

individual states’ need for high-cost support. The FCC could require that state commissions provide notification of the steps their state has taken to achieve this rate 

comparability. States should be allowed to verify rate comparability within the state 

by showing either:

(1) that its rates in urban and rural areas are within two standard deviations 

of each other; or

104

(2) that its rates in rural areas are within two standard deviations of the nationwide average urban rate.

This information will shine a spotlight on those states that are not taking sufficient steps to address their own state needs.

Question 12. In the original Senate version of the 1996 Telecommunications Act, 

universal service contributions were to be assessed on all telecommunications carriers based on an equitable and non-discriminatory basis. In the conference committee, however, this requirement was limited to telecommunications carriers providing interstate services . . . ’’

Given the shrinking contribution base for interstate revenues and the increasing 

difficulty of accounting between interstate and intrastate revenues in bundled service offerings, does it make sense to change the statute and return to the broader 

language originally passed by the Senate? 

Answer. While I cannot speak for the other members of the FPSC on this matter, 

I believe that it may be appropriate to consider such a change at this time given 

the current market conditions. However, such changes could open-up a new round 

of major litigation. I believe that it may be beneficial to consult with the FCC regarding such a statutory change.

Question 13. What effects, if any, will changes made to the federal contribution 

mechanism have on state universal service programs? What measures, if any, 

should be made to strengthen the Federal-State partnership in ensuring that all 

Americans have access to basic telecommunications services? 

What effects, if any, will changes made to the federal contribution mechanism 

have on state universal service programs? 

Answer. I think it depends on what changes are actually adopted by the FCC. The 

biggest change that could affect the programs relates to the collect-and-remit proposal. If the program administrator can effectively estimate uncollectibles, the proposal would have no detrimental effect on the program. Under this proposal, the 

program would only be adversely impacted if the administrator underestimated 

uncollectibles in any given quarter. This burden currently falls on the carriers.

Question 14. What measures, if any, should be made to strengthen the FederalState partnership in ensuring that all Americans have access to basic telecommunications services? 

Answer. I do not believe additional programs are necessary to meet the goal of 

universal access to basic telecommunications services. I do believe, however, that 

making some clarifications and adjustments to add more accountability to the existing programs will make the programs more effective and efficient. 

The FCC has been reaching out to the state commissions in several significant 

ways. The FCC has held some Federal-State workshops on performance metrics, actively sought the input of State Commissioners on the Federal-State Joint Board on 

Universal Service and on the Section 706 Joint Conference on Advanced Services. 

We see great improvements in the Federal-State partnership and do not see the 

need for additional measures at this time. 

I hope that my answers to these questions have been responsive. If you need further explanation or additional information to any of these questions, please do not 

hesitate to contact me. 

RESPONSE TO WRITTEN QUESTIONS SUBMITTED BY HON. MAX CLELAND TO

BILLY JACK GREGG

Question 1. Do you see this nation’s pricing system moving more towards a costbased system? 

Answer. Yes. The introduction of competition into any area of economic endeavor 

always tends to drive prices toward cost. Telecommunications is no exception. Prior 

to the introduction of competition, rates in urban areas were generally above cost 

while rates in rural areas were below cost. Although competition will likely result 

in lower prices and a better variety of products and services in urban areas, the 

challenge for universal service is to ensure that the advent of competition does not 

result in rates in rural areas rising to unacceptably high levels.

Question 2. As you know, companies must be deemed an eligible telecommunications carrier (ETC) to receive USF funds. Reports indicate that more people will 

use their wireless phones as their primary phone and forego a traditional home line, 

but these companies do not receive USF payments. Do you believe there should be 

changes to the means of determining who is an eligible telecommunications carrier? 

105

1Texas Office of Public Utility Counsel et al v. FCC, 183 F.3d 393 (1999) at 418. 2 In the Matter of Federal-State Joint Board on Universal Service, CC Docket No. 96–45, Recommended Decision, FCC 02J–1(July 9, 2002) at ¶ 84. 3 An assessment system based on total revenues, both interstate and intrastate, would be 

more sustainable. However, use of intrastate revenues to support federal universal service was 

prohibited by the 5th Circuit in TOPUC v. FCC, 183 F.3d at 447–448. In addition, any revenuebased system would be subject to erosion from future migration to IP-based telephony. 

4 It has been estimated that USAC would have to carry a $500 million reserve if a collect and 

remit system was adopted. However, it should be noted that USAC was carrying a cash balance 

in excess of $2 billion at the beginning of 2002. Most of this reserve related to the schools and 

libraries fund. A portion of these excess funds were tapped by the FCC on June 13, 2002, to 

stabilize the universal service fund through the first quarter of 2003. 

Answer. No. Under the 5th Circuit’s decision in TOPUC v. FCC, 1 states have primary responsibility for determining ETC status, and may impose additional reasonable criteria beyond the minimum requirements set forth in Section 214(e) of the 

Act. Wireless carriers are achieving ETC status throughout the nation under current regulations, and are receiving an increasing share of universal service support. 

As discussed in paragraph 84 of the Joint Board’s Recommended Decision of July 

9, 2002, 2 wireless carriers in seventeen states are now receiving $64 million in annual high-cost support from the federal fund. These numbers are expected to increase over time.

Question 3. Universal service reform is quite an undertaking. I do believe that we 

can achieve some type of reform of the system, but I believe any reform considered 

must examine the long-term effects on the solvency of the system. Could you address the potential long-term effects on the system of some of the proposals? 

Answer. The two basic proposals for funding universal service are a revenue-based 

system or a connection-based system. I believe the most sustainable long-term funding will be produced by a connection-based system. A revenue-based system has the 

advantage of equitably spreading the responsibility for universal service based on 

relative usage of the telecommunications network. However, the current USF funding system based on interstate and international revenues is not sustainable over 

the long-term. Even if safe harbor provisions for wireless carriers and pagers are 

modified, the long-term trend for interstate revenues will continue downward as 

more traditional circuit-switched communications move to IP-based systems which 

are exempt from universal service contributions. 3 On the other hand, a connectionbased system based on the capacity of the connection should be sustainable over the 

long-term. A connection-based system has the advantage of being indifferent to how 

the connection is used, whether for traditional voice calls or for internet traffic. 

Moreover, it is expected that the capacity of connections to the public switched network will continue to grow even if the total number of connections stabilizes in the 

future. 

RESPONSE TO WRITTEN QUESTIONS SUBMITTED BY HON. DANIEL K. INOUYE TO

BILLY JACK GREGG

Question 1. One problem often cited by critics of the current contribution mechanism is the ‘‘lag’’ between prior reported revenues, which are six months old, and 

current revenues, which are assessed based on the contribution factor. Is it possible 

to eliminate this lag, but retain a revenue-based assessment mechanism? Are there 

ways to minimize the competitive distortion between carriers with rising revenues 

(such as RBOCs) and carriers with falling revenues (such as IXC5)? 

How would the adoption of ‘‘collect-and-remit’’ proposals advanced by some carriers affect the administration and stability of the fund? 

Answer. There are several ways to address the problem of lag in a revenue-based 

system. However, any mechanism adopted will have to deal with the fact that expected revenue and actual revenue will never exactly match. As mentioned in the 

question, one method would be a ‘‘collect and remit’’ system, whereby carriers would 

be authorized to charge customers the prescribed assessment factor and remit to 

Universal Service Administrative Company (‘‘USAC’’) whatever was collected. The 

advantage of such a system is that it would affect all carriers equally, regardless 

of whether their revenues were increasing or declining. The disadvantage of a collect 

and remit system is that USAC would have to carry a reserve fund on its books 

to guard against unexpected shortfalls in revenue. 4 Another option would be use of 

a system based on projected revenues, subject to future true-up. The disadvantage 

of such a system is that it would increase administrative intrusion and expense to 

ensure that projections revenues were reasonable and were actually trued-up. Moreover, use of projected revenues would perpetuate the current wide disparity in asVerDate 0ct 09 2002 14:41 Feb 08, 2005 Jkt 093053 PO 00000 Frm 00109 Fmt 6601 Sfmt 6621 S:\WPSHR\GPO\DOCS\93053.TXT JACK PsN: JACKF
106

5 Attachment 1 is Appendix LI0l from USAC’s Federal Universal Service Support Mechanisms 

Fund Size Projections for the Third Quarter 2002 (May 2, 2002). It should be noted that the maximum Tier 1 Basic Support was increased to $6.00 on July 1, 2002, when the cap on subscriber line charges was increased to that level. 6 Current federal Lifeline rules base eligibility on participation in any of a number of incomebased welfare programs, such as SSI, Medicaid, food stamps or TANF. With the enactment of 

welfare reform the period of time an individual can qualify for welfare benefits has been limited. 

Thus, it appears that some modification of eligibility standards will have to be made to accommodate individuals who have exhausted their welfare benefits but are nonetheless eligible for 

Lifeline based on their level of income. 

sessment factors charged to customers, while adding a new element of uncertainty 

to the universal service assessment system.

Question 2. One of the items currently under review by the Federal-State Joint 

Board is the effectiveness of certain federal low income support programs (Lifeline 

and Link-Up Programs). Often, the success of these programs varies widely from 

state to state due to differences in state eligibility requirements and in the administration of these programs. California, for example, received over half of all federal 

low income support dollars in 2001. What are the major reasons behind the relative 

successes or failures of these programs in certain states? 

Answer. The essential reason for the disparity among the states is our federal system of government. Unless the Congress decides to preempt the states and mandate 

a federal low-income support system, there will continue to be differences in the size 

and efficacy of state Lifeline and Link-Up (‘‘Lifeline’’) programs. The principal differences among states occur in the size of benefits available, in the applicability of 

benefits available, in the administrative procedures for application and certification 

of eligibility for Lifeline benefits, and in the promotion and advertising of the Lifeline program. 

First, under the current Lifeline program the FCC has established a basic month- ly federal benefit of $5.25 to $7.75 per customer, with additional federal benefits totaling $1.75 per customer per month available based on the level of state matching 

funds. As can be seen by review of Attachment 1, not all states offer the matching 

funds necessary to achieve the maximum Lifeline benefit. 5

Second, beyond the level of benefits, there are also great differences in the services to which the benefits apply. Some states place no limit on the type of service 

to which the discount applies, while others limit Lifeline to the lowest level of service available, typically a measured or message service. Since such usage-based services are generally not as popular with customers as flat-rate services, participation 

in these types of Lifeline programs is also low. 

Third, there are great disparities in state application and certification procedures. 

States with high participation rates like California have very simple self-certification procedures for Lifeline applicants, while states with low participation rates 

typically require a multi-step process to verify participation in eligible welfare programs. 6 Complicating matters, many of the roadblocks to wider participation mentioned above are enshrined in state statutes, and cannot be easily changed. 

Fourth, the attitude of different states and telecommunications companies in promoting and advertising the Lifeline program varies widely. Some companies view 

Lifeline as an effective way to keep as many customers on the network as possible, 

and actively promote the program. Other companies seem to perceive Lifeline as a 

necessary evil, and try to limit its availability. These differences in perspective obviously affect the enthusiasm with which Lifeline programs are advertised and promoted. 

Finally, increasing participation in the Lifeline program has implications for the 

overall size of the Universal Service Fund. The Low-Income Support mechanism disbursed over $600 million during 2001, with over half of that amount going to California. If every state had the same participation rate as California, the size of the 

Low-Income Support mechanism would grow by approximately $1 billion to a total 

of $1.6 billion. 

Question 3. Should there be more direct federal involvement in establishing eligibility requirements for these programs? Should certain minimum outreach efforts be 

required to ensure that low income residents have access to these programs? 

Answer. FCC regulations currently establish minimum eligibility requirements for 

the Lifeline program. A telecommunications carrier cannot maintain ETC status unless it offers Lifeline benefits in compliance with the federal standards, as certified 

by the individual states. As mentioned in the predicate to the question, the Joint 

Board is currently considering various proposals to modify the Lifeline program. An 

expansion of the eligibility criteria would have to be implemented by the individual 

states in order for the phone companies within their borders to maintain ETC status. One change that would ensure minimum outreach programs nationwide would 

107

7 7. Recommended Decision at ¶¶ 9–19. 

be to empower USAC to engage in outreach and education programs related to the 

Lifeline and Link-Up programs.

Question 4. As defined in the statute, ‘‘universal service’’ represents ‘‘an evolving 

level of telecommunications services.’’ One of the items currently under review by 

the Federal-State Joint Board is whether to add broadband or other items to the 

list of supported services. Should broadband be designated as a supported service? 

If not, what test should guide future determinations as to when broadband should 

be included? 

Answer. The Joint Board released its Recommended Decision on July 9, 2002, 

which recommended that broadband not be added to the list of supported services 

at this time. 7 I agree with that decision. Although broadband is available to the 

vast majority of residential customers (estimates vary between 70 percent and 85 

percent), only 10 percent of these customers have actually subscribed to such 

broadband services. One of the principal criteria to be considered by the Joint Board 

in determining which services should be included in the definition of universal service, is whether the service is subscribed to by a substantial majority of residential 

customers. While I believe broadband will ultimately be included in the list of supported services, such inclusion is not appropriate at this early stage of the development of the market for broadband.

Question 5. To the extent that the Commission defines broadband services as an 

‘‘information service,’’ would such as ruling preclude the Joint Board and FCC from 

later finding that broadband is a ‘‘telecommunications service’’ eligible for universal 

service support? 

Answer. In paragraph 19 of the Recommended Decision of July 9, 2002, the Joint 

Board noted the potential problems that would be created by an FCC determination 

that broadband is an ‘‘information service’’ rather than a ‘‘telecommunications service.’’ If broadband is determined to be an ‘‘information service,’’ it could not be included in the definition of universal service, which is limited to telecommunications 

services. However, it should be noted that even if broadband services were not eligible for universal service support, Section 254(d) empowers the FCC to require universal service contributions from any other telecommunications provider, including 

broadband providers, ‘‘if the public interest so requires.’’

Question 6. Under the President’s Budget, the size of the Universal Service Fund is expected to grow from $5.3 billion to $7.1 billion in 2007. Since the Schools & 

Libraries Fund is currently capped at $2.25 billion per year, how much of this 

growth is attributable to expansion of the High Cost Support Mechanism? Are there 

any further pending changes to universal service programs that might place further 

upward pressure on the size of the fund? 

Answer. Attached hereto as Attachment 2 is my estimate of growth of each of the 

support mechanisms and in the total fund through 2007. Based on my evaluation 

of known changes in each of the support mechanisms over the next five years, I estimate that the total fund will be $6.9 billion in 2007, slightly less than estimated 

by this year’s budget forecast. As can be seen on Attachment 1, the majority of the 

expected growth in the total Universal Service Fund between now and 2007 can be 

attributed to growth in the High Cost Support Mechanism. High Cost Support currently totals approximately $3 billion, with $2 billion going to rural companies and 

$1 billion going to non-rural companies. Most of the growth in High Cost Support 

through 2007 is expected to be in support for rural companies. Support for non-rural 

companies will stay at approximately $1 billion throughout this period as growth 

in High Cost Model Support is offset by the phase-out of interim Hold Harmless 

Support. Low-Income Support will continue to grow through this period as more effective advertising and easier enrollment procedures lead to increasing participation. The Schools and Libraries Fund will continue to be capped at $2.25 billion, 

while the Rural Health Fund will not grow appreciably.

Question 7. In Qwest v. FCC, the 10th Circuit found that the federal, statutory 

mandate stating that rural and urban rates be ‘‘reasonably comparable’’ requires the 

FCC, where necessary, to induce states to meet federal principles. In light of the 

10th Circuit’s decision in Qwest, what ‘‘inducements’’ should the federal government 

use to ensure that the federal statutory goal of ensuring reasonably comparable 

rates between urban and rural areas is met? 

Answer. The Joint Board is currently considering what type of state inducements 

are appropriate under the Act and 10th Circuit’s ruling. The Joint Board is also considering other elements of Court’s ruling relating to defining key terms in Section 

254: reasonable comparability of rates and sufficiency of the fund. I believe each of 

these elements is interrelated, and must be considered together in order to reach 

108

8 Because the percentage surcharges imposed by carriers are so far above the prescribed USF 

assessment rate, many have charged that some IXC’s are using the surcharges to generate additional revenues. To date, the FCC has not performed any audits of IXC recoveries of USF assessments. 

a reasonable outcome. As to state inducements, I favor an expanded state certification process under Section 254(e) to gain information on state rates, on uses of 

federal support, and on actions taken or to be taken by each state to ensure that 

rates in rural areas are comparable to those in urban areas. This expanded certification process should induce states to identify aberrant rates and use state resources to bring these rates within the range of comparability. In the limited circumstance where existing federal support and state actions are not sufficient to enable comparable rates, additional targeted federal support may be warranted. However, at this point data is simply inadequate to make any finding about the level 

of rates, state actions to support rates, or the need for additional federal support.

Question 8. Under the current revenue-based system, percentage assessments 

charged to consumers may vary widely depending on whether interstate revenues 

are declining or increasing. In your view, does the current contribution mechanism 

cause unnecessary customer confusion? Should the FCC adopt uniform ‘‘labeling’’ requirements for carriers choosing to put a universal service line-item on customer 

bills? What further action should be taken to make universal service charges more 

understandable to consumers? 

Answer. Under the current system carriers are allowed to recover their universal 

service assessment from customers in any ‘‘equitable and non-discriminatory’’ manner the carrier deems appropriate. There is no doubt that the flexibility presently 

afforded to carriers has led to widespread customer confusion and frustration. Some 

carriers recover the USF assessment by means of a percentage mark-up on customers’ bills. Even though the percentage assessment on all carriers is the same, 

the level of the percentage mark-up on customers’ bills varies wildly, and is usually 

substantially above the FCC-prescribed assessment rate. For example, the current 

FCC-mandated 7.2 percent USF assessment on carriers is recovered by AT&T using 

an 11.5 percent assessment on customers’ bills, and by MCI using a 9.9 percent assessment. 8 Other carriers, such as the RBOCs, recover the USF assessment by 

means of a monthly per line charge on local phone bills. These per line charges also 

vary greatly, from 280 to 600 per line. Other carriers do not impose a separate surcharge and simply recover the USF assessment in the cost of the service they sell. 

In addition to the variation in how the USF assessment is recovered, there is variation in how the USF surcharge is labeled. For example, different carriers call the 

charge ‘‘Federal Universal Service Surcharge,’’ ‘‘Universal Access Charge,’’ or ‘‘National Line Charge.’’ Explanations of these charges also vary by carrier. Thus, a typical residential customer with a single landline phone, $30 in long distance service, 

and a wireless phone could be charged 500 on his local bill for a ‘‘Federal Universal 

Service Surcharge,’’ $3.45 (11.5 percent) on his long distance bill for a ‘‘Universal 

Access Charge,’’ and 310 on his wireless bill for a ‘‘Universal Connectivity Charge.’’ 

The customer will likely be unaware that each of these charges is the same, and 

is based on exactly the same USF assessment rate on interstate revenues. 

Most importantly, use of varying percentage surcharges makes it virtually impossible for a customer to accurately compare rates, or to even know the actual rate 

he or she will be paying. For example, an advertised rate of 100 per minute from 

a carrier with an 11 percent USF surcharge would actually amount to an effective 

rate in excess of 110 per minute. 

I believe that regardless of the contribution methodology adopted to support universal service, the FCC should mandate uniform labeling of any USF surcharges 

and should prescribe allowable end-user surcharges under a collect and remit system. While any surcharges are distasteful, adoption of a uniform system should at 

least reduce customer confusion and eliminate any opportunity for carriers to overrecover universal service obligations from customers.

109

LOW INCOME SUPPORT AVAILABLE STATE-BY-STATE Attachment 2

STATE TIER 1 BASIC TIER 2 OPTIONAL 

TIER 3

TOTAL FEDERAL 

SUPPORT* STATE MATCHING FEDERAL MATCHING 

ALABAMA $3.50/$5.00 $1.75 $3.50 $1.75 $7.00/$8.50ALASKA $3.50/$5.00 $1.75 $3.50 $1.75 $7.00/$8.50AMERICAN SAMOA $3.50/$5.00 $1.75 No $5.25/$6.75ARIZONA $3.50/$5.00 $1.75 $3.50 $1.75 $7.00/$8.50ARKANSAS $3.50/$5.00 $1.75 No $5.25/$6.75CALIFORNIA $3.50/$5.00 $1.75 Varies By Co. By 

Exchange 

Will Vary 

COLORADO $3.50/$5.00 $1.75 Varies By Co. Will Vary CONNECTICUT $3.50/$5.00 $1.75 $1.17 $0.58 $7.00/$8.50DELAWARE $3.50/$5.00 $1.75 No $5.25/$6.75DISTRICT OF COLUMBIA $3.50/$5.00 $1.75 $3.50 $1.75 $7.00/$8.50FLORIDA $3.50/$5.00 $1.75 $3.50 $1.75 $7.00/$8.50GEORGIA $3.50/$5.00 $1.75 $3.50 (Bell South/

Alltel) 

$1.75 $7.00/$8.50

GUAM $3.50/$5.00 $1.75 $3.50 $1.75 $7.00/$8.50HAWAII $3.50/$5.00 $1.75 No $5.25/$6.75IDAHO $3.50/$5.00 $1.75 $3.50 $1.75 $7.00/$8.50ILLINOIS $3.50/$5.00 $1.75 $1.50 $0.75 $6.00/$7.50INDIANA $3.50/$5.00 $1.75 No $5.25/$6.75IOWA $3.50/$5.00 $1.75 No $5.25/$6.75KANSAS $3.50/$5.00 $1.75 $3.50 $1.75 $7.00/$8.50KENTUCKY $3.50/$5.00 $1.75 $3.50 $1.75 $7.00/$8.50LOUISIANA $3.50/$5.00 $1.75 No $5.25/$6.75MAINE $3.50/$5.00 $1.75 $3.50 $1.75 $7.00/$8.50MARYLAND $3.50/$5.00 $1.75 $3.50(Verizon) $1.75 $7.00/$8.50MASSACHUSE1TS $3.50/$5.00 $1.75 $6.00 $1.75 $7.00/$8.50MICHIGAN $3.50/$5.00 $1.75 $2.00 $1.00 $6.25/$7.75MINNESOTA $3.50/$5.00 $1.75 No $5.25/$6.75MISSISSIPPI $3.50/$5.00 $1.75 $3.50 (Bell South) $1.75 $7.00/$8.50MISSOURI $3.50/$5.00 $1.75 No $5.25/$6.75MONTANA $3.50/$5.00 $1.75 $3.50 $1.75 $7.00/$8.50NEBRASKA $3.50/$5.00 $1.75 Varies By Co. Will Vary NEVADA $3.50/$5.00 $1.75 Varies By Co. Will Vary NEW HAMPSHIRE $3.50/$5.00 $1.75 No $5.25/$6.75

110

LOW INCOME SUPPORT AVAILABLE STATE-BY-STATE Attachment 2—Continued

STATE TIER 1 BASIC TIER 2 OPTIONAL 

TIER 3

TOTAL FEDERAL 

SUPPORT* STATE MATCHING FEDERAL MATCHING 

NEW JERSEY $3.50/$5.00 $1.75 No $5.25/$6.75NEW MEXICO $3.50/$5.00 $1.75 $3.50 $1.75 $7.00/$8.50NEW YORK $3.50/$5.00 $1.75 Varies By Co. Will Vary NORTH CAROLINA $3.50/$5.00 $1.75 $3.50 $1.75 $7.00/$8.50NORTH DAKOTA $3.50/$5.00 $1.75 Varies By Co. Will Vary NORTHERN MARIANA IS. $3.50/$5.00 $1.75 No $5.25/$6.75OHIO $3.50/$5.00 $1.75 No $5.25/$6.75OKLAHOMA $3.50/$5.00 $1.75 $1.17 $0.58 $5.83/$7.33OREGON $3.50/$5.00 $1.75 $3.50 $1.75 $7.00/$8.50PENNSYLVANIA $3.50/$5.00 $1.75 $2.50 (Verizon) $1.25 $6.50/$8.00PUERTO RICO $3.50/$5.00 $1.75 No $5.25/$6.75RHODE ISLAND $3.50/$5.00 $1.75 Varies By Co. Will Vary SOUTH CAROLINA $3.50/$5.00 $1.75 $3.50 (eff.—10/1/

01) 

$1.75 $7.00/$8.50

SOUTH DAKOTA $3.50/$5.00 $1.75 No $5.25/$6.75TENNESSEE $3.50/$5.00 $1.75 $3.50 $1.75 $7.00/$8.50TEXAS $3.50/$5.00 $1.75 $3.50 $1.75 $7.00/$8.50UTAH $3.50/$5.00 $1.75 $3.50 $1.75 $7.00/$8.50VERMONT $3.50/$5.00 $1.75 $3.50 $1.75 $7.00/$8.50VIRGINIA $3.50/$5.00 $1.75 $l.75/$3.50 $.88/$1.75 $6.13/$7.00 $7.63/

$8.50

VIRGIN ISLANDS $3.50/$5.00 $1.75 $7.05 $1.75 $7.00/$8.50WASHINGTON $3.50/$5.00 $1.75 Varies By Co. Will Vary WEST VIRGINIA $3.50/$5.00 $1.75 Varies By Co. Will Vary WISCONSIN** $3.50/$5.00 $1.75 Varies By Co. Will Vary WYOMING $3.50/$5.00 $1.75 $3.50 $1.75 $7.00/$8.50

*Cap for SLC for all companies was increased to $5.00 effective 1/02 and to $6.00 on 7/02. **Low income customers in Wisconsin cannot be charged over $15.00. 

111

USF BILLINGS 1997–2007 $ Millions Attachment 2

Fund 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007

High Cost 1,614 1,691 1,746 2,115 2,741 2,900 3,200 3,300 3,400 3,500 3,600

Low Income 148 464 501 537 578 666 740 820 890 950 1,000

Schools & Libraries 0 1,250 1,698 1,865 2,139 2,250 2,250 2,250 2,250 2,250 2,250

Rural Health 0 8 0 9 11 23 24 25 25 25 25

Subtotal 1,762 3,413 3,945 4,526 5,469 5,839 6,214 6,395 6,565 6,725 6,875

Unused Funds -480 -240

TOTAL USF 1,762 3,413 3,945 4,526 5,469 5,359 5,974 6,395 6,595 6,795 6,875

Years 2003–2007 are estimates. 

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