UNIVERSAL SERVICE: WHAT ARE 

WE SUBSIDIZING AND WHY? 

PART 1: THE HIGH-COST FUND 

HEARING 

BEFORE THE 

SUBCOMMITTEE ON TELECOMMUNICATIONS 

AND THE INTERNET 

OF THE 

COMMITTEE ON ENERGY AND 

COMMERCE 

HOUSE OF REPRESENTATIVES 

ONE HUNDRED NINTH CONGRESS 

SECOND SESSION 

JUNE 21, 2006 

Serial No. 109-109 

Printed for the use of the Committee on Energy and Commerce 

Available via the World Wide Web: http://www.access.gpo.gov/congress/house 

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WASHINGTON : 2006 

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COMMITTEE ON ENERGY AND COMMERCE 

JOE BARTON, Texas, Chairman 

RALPH M. HALL, Texas 

MICHAEL BILIRAKIS, Florida 

 Vice Chairman 

FRED UPTON, Michigan 

CLIFF STEARNS, Florida 

PAUL E. GILLMOR, Ohio 

NATHAN DEAL, Georgia 

ED WHITFIELD, Kentucky 

CHARLIE NORWOOD, Georgia 

BARBARA CUBIN, Wyoming 

JOHN SHIMKUS, Illinois 

HEATHER WILSON, New Mexico 

JOHN B. SHADEGG, Arizona 

CHARLES W. “CHIP” PICKERING, Mississippi 

 Vice Chairman

VITO FOSSELLA, New York 

ROY BLUNT, Missouri

STEVE BUYER, Indiana 

GEORGE RADANOVICH, California 

CHARLES F. BASS, New Hampshire 

JOSEPH R. PITTS, Pennsylvania 

MARY BONO, California 

GREG WALDEN, Oregon 

LEE TERRY, Nebraska 

MIKE FERGUSON, New Jersey 

MIKE ROGERS, Michigan 

C.L. “BUTCH” OTTER, Idaho 

SUE MYRICK, North Carolina 

JOHN SULLIVAN, Oklahoma 

TIM MURPHY, Pennsylvania 

MICHAEL C. BURGESS, Texas 

MARSHA BLACKBURN, Tennessee 

JOHN D. DINGELL, Michigan 

 Ranking Member 

HENRY A. WAXMAN, California 

EDWARD J. MARKEY, Massachusetts 

RICK BOUCHER, Virginia 

EDOLPHUS TOWNS, New York 

FRANK PALLONE, JR., New Jersey 

SHERROD BROWN, Ohio 

BART GORDON, Tennessee 

BOBBY L. RUSH, Illinois 

ANNA G. ESHOO, California 

BART STUPAK, Michigan 

ELIOT L. ENGEL, New York 

ALBERT R. WYNN, Maryland 

GENE GREEN, Texas 

TED STRICKLAND, Ohio 

DIANA DEGETTE, Colorado 

LOIS CAPPS, California 

MIKE DOYLE, Pennsylvania 

TOM ALLEN, Maine 

JIM DAVIS, Florida 

JAN SCHAKOWSKY, Illinois 

HILDA L. SOLIS, California 

CHARLES A. GONZALEZ, Texas 

JAY INSLEE, Washington 

TAMMY BALDWIN, Wisconsin 

MIKE ROSS, Arkansas 

BUD ALBRIGHT, Staff Director 

DAVID CAVICKE, General Counsel

REID P. F. STUNTZ, Minority Staff Director and Chief Counsel

SUBCOMMITTEE ON TELECOMMUNICATIONS AND THE INTERNET 

FRED UPTON, Michigan, Chairman 

MICHAEL BILIRAKIS, Florida 

CLIFF STEARNS, Florida 

PAUL E. GILLMOR, Ohio 

ED WHITFIELD, Kentucky 

BARBARA CUBIN, Wyoming 

JOHN SHIMKUS, Illinois 

HEATHER WILSON, New Mexico 

CHARLES W. “CHIP” PICKERING, Mississippi 

VITO FOSSELLA, New York 

GEORGE RADANOVICH, California 

CHARLES F. BASS, New Hampshire 

GREG WALDEN, Oregon 

LEE TERRY, Nebraska 

MIKE FERGUSON, New Jersey 

JOHN SULLIVAN, Oklahoma 

MARSHA BLACKBURN, Tennessee 

JOE BARTON, Texas 

 (EX OFFICIO)

EDWARD J. MARKEY, Massachusetts 

 Ranking Member 

ELIOT L. ENGEL, New York 

ALBERT R. WYNN, Maryland 

MIKE DOYLE, Pennsylvania 

CHARLES A. GONZALEZ, Texas 

JAY INSLEE, Washington 

RICK BOUCHER, Virginia 

EDOLPHUS TOWNS, New York 

FRANK PALLONE, JR., New Jersey 

SHERROD BROWN, Ohio 

BART GORDON, Tennessee 

BOBBY L. RUSH, Illinois 

ANNA G. ESHOO, California 

BART STUPAK, Michigan 

JOHN D. DINGELL, Michigan 

 (EX OFFICIO)

(II)
CONTENTS 

Page 

Testimony of: 

Marron, Dr. Donald B., Acting Director, Congressional Budget Office........................... 18 

Navin, Tom, Chief, Wireline Competition Bureau, Federal Communications 

Commission.................................................................................................................... 32 

Clark, Tony, President, North Dakota Public Service Commission, on behalf of 

National Association of Regulatory Utility Commissioners ......................................... 39 

Frantz, Skip, Chairman, United States Telecom Association............................................. 44 

Cimerman, Richard, Vice President, State Government Affairs, National Cable and 

Telecommunications Association .................................................................................. 49 

Crothers, David, Executive Vice President, North Dakota Association of Telephone 

Cooperatives, on behalf of National Telecommunications Cooperative Association... 54 

Garnett, Paul, Director, Regulatory Affairs, CTIA – The Wireless Association............... 58 

Pies, Staci, Vice President, PointOne Communications, on behalf of Voice on the Net 

(VON) Coalition............................................................................................................. 65 

Feiss, Geoff, General Manager, Montana Telecommunications Association.................... 72 

Cooper, Dr. Mark, Director of Research, Consumer Federation of America .................... 81 

Additional material submitted for the record: 

Marron, Dr. Donald B., Acting Director, Congressional Budget Office, response for 

the record........................................................................................................................ 109 

Navin, Tom, Chief, Wireline Competition Bureau, Federal Communications 

Commission, response for the record............................................................................. 112 

Clark, Tony, President, North Dakota Public Service Commission, on behalf of 

National Association of Regulatory Utility Commissioners, response for the record.. 114 

Frantz, Skip, Chairman, United States Telecom Association, response for the record ..... 116 

Cimerman, Richard, Vice President, State Government Affairs, National Cable and 

Telecommunications Association, response for the record........................................... 119 

Crothers, David, Executive Vice President, North Dakota Association of Telephone 

Cooperatives, on behalf of National Telecommunications Cooperative Association, 

response for the record ................................................................................................... 122 

Garnett, Paul, Director, Regulatory Affairs, CTIA – The Wireless Association, 

response for the record ................................................................................................... 128 

Pies, Staci, Vice President, PointOne Communications, on behalf of Voice on the Net 

(VON) Coalition, response for the record...................................................................... 135 

Feiss, Geoff, General Manager, Montana Telecommunications Association, response 

for the record .................................................................................................................. 139 

Cooper, Dr. Mark, Director of Research, Consumer Federation of America, response 

for the record .................................................................................................................. 149 

(III) 

(1) 

UNIVERSAL SERVICE: WHAT ARE WE 

SUBSIDIZING AND WHY? 

PART 1: THE HIGH-COST FUND 

WEDNESDAY, JUNE 21, 2006 

HOUSE OF REPRESENTATIVES, 

COMMITTEE ON ENERGY AND COMMERCE, 

SUBCOMMITTEE ON TELECOMMUNICATIONS AND THE INTERNET, 

Washington, DC. 

The subcommittee met, pursuant to notice, at 2:03 p.m., in Room 

2123 of the Rayburn House Office Building, Hon. Fred Upton 

(Chairman) presiding. 

 Members present: Representatives Stearns, Gillmor, Cubin, 

Shimkus, Wilson, Pickering, Radanovich, Bass, Walden, Terry, Sullivan, 

Blackburn, Barton (ex officio), Wynn, Gonzalez, Inslee, Boucher, 

Stupak, and Dingell (ex officio). 

 Staff present: Howard Waltzman, Chief Counsel for 

Telecommunications; Anh Nguyen, Legislative Clerk; Jaylyn Jensen, 

Senior Legislative Analyst; Will Nordwind, Policy Coordinator; Johanna 

Shelton, Minority Counsel; David Vogel, Minority Research Assistant; 

and Chris Treanor, Minority Staff Assistant. 

 MR. UPTON. Good afternoon. 

 Thank you all for being prompt. We are expecting votes at about 

2:30, so I am hoping that we can finish the Members’ opening statements 

and get into our large panel’s opening statements, or at least get into 

them before we have the votes. And then it is my understanding that 

these will be the last votes of the day, so hopefully the hearing will 

proceed well. 

 And I would like to say that with ten witnesses, I am going to be 

brief with my opening statement. 

 Today’s hearing is focused on the High-Cost Program of the 

Universal Service Fund. The High-Cost Program makes payments to 

eligible local telephone companies that serve customers in rural areas 

where the cost of providing service comparable to that available in urban 

areas is substantially greater than the national average. 

As a member who represents a number of rural communities in 

southwest Michigan, I have seen the tremendous upside of the universal 

service funding by way of the affordable telecommunications services 
2

provided in those rural communities by companies like the Bloomingdale 

Telephone Company in Bloomingdale, Michigan. 

 But, as we all know, the High-Cost Program and the Universal 

Service Fund is paid for, in large part, by mandatory payments from all 

providers of interstate and international telecommunication services, and 

those providers pass those costs on to their consumers, all of our 

constituents. 

 Today, we will hear from CBO about its recent report which 

highlights that outlays and receipts flowing through USF have grown 

substantially in recent years. The CBO suggests that disbursements for 

the High-Cost Program have doubled since 2000, from $1.9 billion to 

$3.8 billion. CBO estimates that such spending could continue to 

increase rapidly depending upon legislative and regulatory decisions. To 

the extent that all of this cost gets passed along to the consumer--that is a 

grave warning sign that we can no longer ignore as legislative and 

regulatory decisions get made here in Washington, D.C. 

 This is the first, and perhaps, not the last hearing which the 

subcommittee will hold on the Universal Fund. I look forward to hearing 

from today’s witnesses, and I thank them for their participation, 

particularly in sending their statements up last night so we could take 

them home. 

 And I would yield, at this point, to the gentleman from Virginia, Mr. 

Boucher, for an opening statement. 

 [The prepared statement of Hon. Fred Upton follows:] 

THE PREPARED STATEMENT OF THE HON. FRED UPTON, CHAIRMAN, SUBCOMMITTEE ON 

TELECOMMUNICATIONS AND THE INTERNET

With 10 witnesses, I will be brief with my opening statement. Today's hearing is 

focused on the High Cost Program of the Universal Service Fund. The High Cost 

Program makes payments to eligible local telephone companies that serve customers in 

rural areas where the cost of providing service comparable to that available in urban areas 

is substantially greater than the national average. 

As a Member who represents a number of rural communities, I have seen the 

tremendous upside of Universal Service funding by way of the affordable 

telecommunications services provided in those rural communities by companies like the 

Bloomingdale Telephone Company. 

But, as we all know, the High Cost Program of the Universal Service Fund is paid 

for, in large part, by mandatory payments from all providers of interstate and 

international telecommunications services, and those providers pass these costs on to 

their customers - all of our constituents. 

Today, we will hear from CBO about its recent report which highlights that outlays 

and receipts flowing through USF have grown substantially in recent years. The CBO 

suggests that disbursements for the High Cost Program have doubled since 2000, from 

$1.9 billion to $3.8 billion. CBO estimates that such spending could continue to increase 

rapidly depending on legislative and regulatory decisions. To the extent that all of this 

cost gets passed along to the consumer -- this is a grave warning sign that we can no 

longer ignore as legislative and regulatory decisions get made here in Washington. 
3

This is the first, and not the last, hearing which the Subcommittee will hold on the 

Universal Fund. I look forward to hearing from today's witnesses, and I thank them for 

their participation. 

 MR. BOUCHER. Well, thank you very much, Mr. Chairman. I 

appreciate your scheduling this very important hearing on a subject on 

which it is my hope that the Congress will act before the end of this year. 

 Universal service support is more needed now than ever before. In 

an era when electronic communications are at the heart of the national 

economy, it is more essential than ever before that all Americans remain 

connected. Affordable telephone service not only benefits the individual 

users of the service, but at a time when electronic commerce is central to 

national economic growth, affordable telephone service for all is 

essential for our national economic success. And so all of us, urban, 

suburban, and rural residents alike, have a stake in assuring that everyone 

can afford basic telephone service. 

 Now the importance of affordable rural service has increased. The 

Universal Service Fund that assures it has come under increasing 

pressure, and reform of that fund across a broad basis is now necessary. 

New technologies and new business plans are combining to diminish the 

long-distance revenues that have been relied upon historically for the 

Universal Service Fund’s support. In reforming the Universal Service 

Fund, other funding sources must now be tapped and new controls must 

be placed on distributions from the fund. 

 In an effort to achieve these goals in a manner that is fair to both the 

rural telephone companies who are the major beneficiaries of Universal 

Service Fund financing and to the large regional telephone companies 

who are the net contributors into the fund, my colleague from Nebraska, 

Mr. Terry, and I have engaged in a long consultative process with dozens 

of interested parties and have introduced, following that long series of 

conversations, H.R. 5072, which we believe reflects a consensus among 

the various competing interests. No one will agree with all of the bill’s 

many provisions, but most will agree that it meets the principal needs of 

virtually all of the parties. For those who are looking for a middle line 

between the Bell companies and the rural carriers, H.R. 5072 occupies 

that middle ground. For those who seek a sensible modernization of the 

Universal Service Fund to account for the dramatic changes that have 

transformed telecommunications during the past decade, we offer H.R. 

5072 for your consideration. 

 It will promote broadband deployment, helping to lift our Nation’s 

currently unenviable international ranking. It expands the revenue base 

to Voice over Internet Protocol, to a connection to the Internet and to, for 

the first time, intrastate revenues. But it also imposes strict limitations 

on Universal Service Fund growth, assuring that the only growth is in 
4

accordance with an inflationary growth factor. We fixed the phantom 

traffic problem. We make rural exchanges more marketable for 

telephone companies who may desire to sell them. And we base 

payments from the fund on the carrier’s actual cost, rather than upon the 

cost of the incumbent telecommunications provider in that region, which 

inevitably will be higher than those of the new entrant. 

 I would like to thank Mr. Terry for his excellent work in the 

partnership that we have embarked upon to reform universal service, and 

I hope that members will consider our bill as the subcommittee looks for 

practical answers to the challenges that we currently face. 

 Thank you, Mr. Chairman. 

 MR. UPTON. Mr. Gillmor. 

 MR. GILLMOR. Thank you, Mr. Chairman. 

 And I am glad to see that we are moving forward on looking into this 

important subject. Over the last several months, the debate over the 

Universal Service Fund has greatly intensified, and many different 

reform proposals have been proposed. And I am in agreement with those 

that say the system needs to be fixed; however, it is more difficult to say 

exactly what reforms are best to employ in order to assure that districts 

like my rural northwest Ohio district, receive the best telecommunication 

service possible. 

 These funds are an important part in helping rural Americans gain 

access to mainstream telecommunication services that they might 

otherwise not have due to the high costs associated with reaching these 

areas of the country. 

 Additionally, the USF funding is an important part in spurring 

economic development in rural areas, especially in the global economy 

that is relying on telecommunications technology to rapidly share 

information to meet consumer demands. Just as the telecommunications 

industry continues to evolve, so too should the Universal Service Fund. 

And before measures are discussed and debated, it would be wise to take 

into account the fact that traditional telephony service is becoming less 

and less the service of choice. As Americans continue to migrate to 

more advanced telecommunication services, we need to take a hard look 

at the stated function of the USF and if it still serves its intended purpose 

or if we have to adapt it to meet future telecommunication needs and 

technologies. Access to advanced telecommunication services is a key 

component to a strong economy to the effect of sharing of ideas and 

increased access to essential information. 

 I look forward to legislation to assure that the telecommunication 

needs of rural America are met in order to prevent the divide from 

rapidly increasing, and I appreciate all of the expert knowledge and 

testimony that we have before the subcommittee. 
5

 Thank you, Mr. Chairman. 

 MR. UPTON. Thank you. 

 Mr. Dingell. 

 MR. DINGELL. I thank the Chairman for this series of hearings. 

 This committee has a vital responsibility to ensure that proper 

implementation and ongoing integrity and sustainability are there for 

Universal Service Programs. Providing high quality telecommunication 

services affordable for all Americans, regardless of geographic 

differences or income, has long been a cornerstone of our Nation’s 

telecommunications policies. But universal service imposes a significant 

and growing cost on consumers and also on the economy. It has grown 

by 50 percent in the past 5 years and now exceeds $7 billion. The main 

source of growth is the High-Cost Program, which we are examining 

today. 

 Much has changed in the telecommunications landscape since 1996. 

The revenue, subject to universal service fees has declined. This has 

caused the assessment on consumer bills to rise from less than 6 percent 

in 2000 to more than 10 percent now. Indeed, the Federal 

Communication Commission’s, FCC’s, decision that could drop 

telephone broadband revenue out of the funding pool in August leaves 

consumers paying more or at least looking at the prospect of doing so. 

 Given the increasing consumer costs, we are appropriately focusing 

on ways to restructure and to improve the program. There are a number 

of questions that we need to focus on, and amongst them, Mr. Chairman, 

first, who should contribute to the Universal Service Fund? All 

companies who offer telephone services, whether over the Internet or 

through a traditional network should carry the same obligation to support 

universal service. The FCC took an interim step this morning to broaden 

the base by requiring VoIP providers to pay and raising the safe harbor 

for wireless carriers. 

 But let me be clear. Even with the debate over the proper 

percentages, the FCC has done only the easy part. The true test will be 

whether the FCC could muster the will to require questions amongst 

industry participants who have benefited handsomely, and to do so 

without finding consumers’ pockets easy prey. 

 Second, who should be subject to the Universal Service Fund and 

who should be subsidized by it? The hefty increase in the High-Cost 

Fund is attributable to the competitive eligible telecommunications 

carriers, typically wireless companies. Federal and State regulatories 

have grappled with the proper mechanisms and the eligibility 

requirements to fund carriers who enter rural areas to compete against 

incumbent providers. 
6

 With multiple providers, how can we ensure that the program is 

properly disciplined or that the monies are properly spent? With 

different technologies, how can we guarantee that providers offer the 

service quality and the coverage that the American public should expect 

of those it is funding? Another important question is whether to 

subsidize broadband service. Broadband networks are integral to a 

company’s economic development. But funding broadband would 

represent a massive new commitment of resources, and we are not sure 

whether those resources are or can be made available there. Can the 

program support broadband without skyrocketing consumer 

contributions or jeopardizing the affordability of basic telephone services 

for rural or working poor Americans? 

 Third, how can we best protect the integrity of the High-Cost Fund? 

As with other Universal Service Programs, the High-Cost Fund must be 

rooted in rigorous accountability. We have seen clear examples of abuse 

and goal-cutting of businesses across rural American. To remain worthy 

of the taxpayers’ trust, universal service expenditures must have tough 

accountability measures, including regular audits, detailed reporting 

requirements, and other things showing that the American public is 

having their support used for its proper and intended purposes. Universal 

telecommunication service has been fundamental to this country’s 

economic and social development and growth. It will be equally 

important in the coming decades. 

 Again, Mr. Chairman, I thank you for this hearing today. I thank the 

witnesses for their testimony. And I hope we will get to some answers to 

the questions that concern me in this committee. 

 Thank you, Mr. Chairman. 

 MR. UPTON. Mr. Barton. 

 CHAIRMAN BARTON. Thank you, Mr. Chairman, for holding this 

very important hearing. I have looked forward to this for several months 

now, and I am glad that we have our expert panel of witnesses here 

today. 

 The Universal Service Fund, as we know it today, consumes more 

than $7 billion, “b,” as in boy. In 1996, when we passed the 

Telecommunications Act, that same fund spent less than $1 billion, so it 

has grown 7,000 percent, or something seeming like that, in the last 10 

years. 

 In just one aspect of the program, the E-Rate Program, we have held 

numerous hearings in this committee and our Oversight an Investigations 

Subcommittee where they detailed the waste, fraud, and abuse of that 

particular party, the Universal Service Fund, and that is only a $2 billion 

program. The E-Rate Program is probably the one program in Universal 

Service that is in most need of reform, but it is not the only one. 
7

 The High-Cost Fund has swollen considerably since the passage of 

the 1996 Telecommunications Act. In 1998, the fund distributed 

approximately $1.5 billion. This year, it is expected to distribute $4.2 

billion, and that is almost a $3 billion increase in less than 8 years. We 

are probably going to hear from the Congressional Budget Office today 

that that particular fund is in jeopardy of growing even larger unless 

effective reforms are put into place. 

 More importantly, reforms are necessary to rein in the High-Cost 

Fund. In my opinion, only one connection per household or business 

should be eligible for Universal Service Fund support. There is no 

reason that telephone users who pay into the fund should have to 

subsidize extra phone lines in the house or a mobile phone in addition to 

a wireline connection. 

 Second, communications providers should receive support, if at all, 

based upon the cost of the lowest cost provider of telephone service in a 

particular area. Wireless carriers should receive universal service 

support, but they should do so based on the cost of putting up towers in 

rural areas and getting connections back, not based on the cost to the 

existing wireline provider who has no incentive to control their costs. 

There is a perverse incentive today that exists in the High-Cost Program 

in which wireless carriers gets as much money as the wireline carriers to 

provide telephone service, even though their cost of service is 

considerably less. 

In my opinion, this policy should be reversed. No provider should 

receive more support than what is necessary for the lowest-cost provider 

in an area to provide basic, voice-grade service. This should be about 

making certain that anyone in rural America can have at least one 

telephone. It shouldn’t be about making sure that they have a goldplated system and multiple subsidies on that one system. It is not about 

providing every house with cell phones, computer hookups, and the 

opportunity to chat on two or three lines at once. 

 What has occurred in the High-Cost Fund is unacceptable, 

unsustainable, and unnecessary. With the right reforms, that particular 

program could be brought under control. This would ensure that the 

program can continue to do what it is supposed to do: provide people in 

rural areas with affordable voice-grade telephone service over one 

telephone line. 

 I look forward to working with the Chairman and the rest of my 

colleagues to determine the best way to reform this program. 

 Before I yield back, Mr. Chairman, let me give you some examples 

from my State of Texas. Sometimes I am accused that I don’t pick on 

the hometown team too much, so I asked the staff to research Universal 

Service Funds in Texas. 
8

 Let me give you some examples. 

 Big Bend, Texas. Big Bend is out in West Texas. It is in Alpine, 

Texas. One of my former football players from Waco High School has a 

ranch out there. Big Bend Telephone has 6,000 customers. Last year, 

Big Bend Telephone Company, with 6,000 customers, got $9.6 million in 

Federal Universal Service Funds, $3.3 million in State Universal Service 

Funds, and $18 million in access fees. That is $28 million dollars. Less 

than 5 percent of their revenue came from the local 6,000 subscribers. 

That utility posted a 12.8 percent return on equity last year. It paid its 

shareholders a $3 million dividend. That is a pretty good dividend. 

However, in 2002, it shelled out $13 million in dividends that also runs a 

hunting ranch to entertain rural phone lobbyists at the cost of $80,000 a 

year. 

 That is in West Texas. Let us go up to the panhandle of Texas where 

we have XIT, a rural telephone cooperative. It serves 1,500 ranchers, 

farmers, and others in the Texas panhandle. And I am sure it does an 

excellent job. It did so well last year that it paid back in dividends more 

than the cost it charged its phone subscribers. And it got by on only $2.6 

million in Federal subsidies last year. 

 I could go down to Houston, Texas. There is a subdivision out near 

Katy, Texas, which is one of the most affluent areas of West Houston. 

The subdivision set up its own telephone company so that they qualify 

for rural telephone subsidies in a high-cost area. These are homes that go 

between $250,000 and $1 million, and they have their own cooperative 

there. They are getting huge Federal and State subsidies. That is in my 

home State. Now I am not saying that we shouldn’t have some Universal 

Service Fund, but the current system is game-able. It is not fair. It is out 

of date. If we can’t kill it, we ought to really, really work together on a 

bipartisan basis to seriously reform it. 

 With that, Mr. Chairman, I yield back. 

 [The prepared statement of Hon. Joe Barton follows:] 

THE PREPARED STATEMENT OF THE HON. JOE BARTON, CHAIRMAN, COMMITTEE ON 

ENERGY AND COMMERCE

Mr. Chairman, thank you for holding this hearing today. The federal universal 

service support system now consumes more than $7 billion. This system is bloated, it is 

growing, and it is not sustainable. 

The Energy and Commerce Committee has held multiple hearings on the waste, 

fraud, and abuse that permeate the $2.25 billion e-rate program, which is part of the 

federal universal service support system. While the e-rate program is also in need of 

reform, today’s hearing will focus on the federal high-cost fund. 

 The high-cost fund has swollen considerably since the passage of the 1996 

Telecommunications Act. In 1998, the fund distributed approximately $1.5 billion. In 

2006, the fund is projected to distribute $4.2 billion. As we will hear from the 
9

Congressional Budget Office today, the high-cost fund is in jeopardy of growing even 

larger unless effective reforms are put in place. 

 There are important reforms that are necessary to rein in the high-cost fund. First, 

only one connection per household or business should be eligible for support. There is no 

reason that the telephone users who pay into the fund should have to subsidize extra 

phone lines in the house or a mobile phone in addition to a wireline connection. 

 Second, communications providers should receive support, if at all, based upon the 

costs of the lowest-cost provider of telephone service in a particular area. Wireless 

carriers should receive universal service support. But they should do so based on the 

costs of putting up towers in rural areas and getting connections back to the local loop. 

There is a perverse incentive that exists today in the high-cost program in which wireless 

carriers get as much money as wireline carriers to provide telephone service in a rural 

area. 

 This policy should be reversed. No provider should receive more support than what 

is necessary for the lowest-cost provider in an area to provide basic, voice-grade service. 

This is about making certain that anyone in rural America can call the doctor when 

they’re sick. It’s not about providing every house with cell phones, computer hookups, 

and the opportunity to chat on two or three lines at once. 

 The growth that has occurred in the high-cost fund is unacceptable, unsustainable, 

and unnecessary. With the right reforms, the program can be brought under control. This 

would ensure that the program can continue to do what it is supposed to do: provide 

people in rural areas with affordable voice-grade telephone service. 

I look forward to working with the Chairman and the rest of my colleagues to 

determine the best way to reform the universal service system. I yield back. 

 MR. UPTON. Mr. Wynn. 

 MR. WYNN. I waive my opening. 

 MR. UPTON. Mr. Gonzalez. 

 MR. GONZALEZ. I waive opening. 

 MR. UPTON. Mr. Terry. 

 MR. TERRY. Thank you, Mr. Chairman. 

 I appreciate you holding today’s hearing on the Universal Service 

Fund. I especially appreciate that you have limited it to one panel. I just 

hope that we have more members than panelists today. 

 But for our full committee Chairman, my friend, Mr. Barton, let me 

just say, that as you outlined through your opening statement, you 

actually gave me room to be enthusiastic about our bill for the first time, 

because many of the reforms that you suggest by principle are actually 

part of the bill that Mr. Boucher and I have been working on. And I will 

also just state that I have talked with probably literally 100 different rural 

telephone companies, and I have yet to run across one example as 

egregious as that in West Texas, in the Texas panhandle, so perhaps it is 

just a Texas thing. 

 Sorry, Mr. Chairman. 

 But certainly, none of us would agree, on the surface of the report 

that Mr. Barton wrote, that we would, in any way agree with that: 

shareholders getting millions of dollars back in their dividends. I would 
10

say that that is the rare exception, but certainly one that we should look 

at reforming. 

 But let us talk about this in the general sense, and in today’s 

economy, geographic boundaries for business are limitless. A smart 

business owner in western Nebraska can do business with a person 

across town as easily as doing business with someone in Kalamazoo, 

Michigan or India. The only obstacle preventing them from opening new 

markets is the lack of broadband access. 

 Broadband is as important today as the rail lines and roads through 

the western half of America from the 1800s to 1950s that opened up 

commerce. A failure to deliver broadband to rural America is like 

holding out the promise of opportunities for economic growth and 

prosperity but instead denying them the ability to succeed. As elected 

officials, we have the public duty to make sure that all of our constituents 

are given every tool to participate and succeed in this 21st Century global 

economy. 

 The Universal Service Fund is the answer to ensuring that broadband 

is delivered to rural America. USF has provided universal telephone 

service to all Americans in all the corners of our Nation for the past 80 

years. Now it is time to revisit that program and modernize it for the 21st

Century. 

 My bill, or what is H.R. 5072, the Universal Service Reform Act of 

2006, which I think has been more eloquently dubbed the Terry-Boucher 

bill, which we introduced, does not discriminate against platforms that 

makes broadband an eventual requirement for receiving USF monies. In 

addition, this bill demonstrates the fiscal constraint mentioned by our 

good chairman by capping the fund to not exceed the current level. This 

bill has been carefully vetted with the industry for well over a year. Mr. 

Boucher and I have worked very hard to take all interested parties’ 

comments into consideration. Much of the feedback has been 

incorporated into this final version. 

 I am also pleased that Chairman Stevens has used H.R. 5072 as the 

base for his USF legislation in the Senate rewrite bill now being 

considered by the Senate Commerce Committee this week. It is my hope 

that the committee will also act promptly on H.R. 5072. 

 I look forward to hearing from today’s witnesses and want to 

especially thank our Chairman, Mr. Upton, for moving this process 

forward. 

 MR. UPTON. Thank you. 

 Mr. Stearns. 

 MR. STEARNS. Thank you, Mr. Chairman. 

 There are ten witnesses here, and I hope to hear a lot of information 

this afternoon. 
11

 You know, in light of this program not being sustainable, and I think 

we all realize that this is not a program that is costing the taxpayers, so to 

speak, in terms of us voting on it. It does not increase the Federal budget 

deficit, but it imposes costs on consumers, on the economy. It creates 

rising charges to telephone companies, which, in turn, are reflected to the 

customers, and these costs continue to go forward. And as Chairman 

Barton has pointed out, we have egregious examples where people are 

gaming the system. And the system is unsustainable in terms of its 

funds, so the question is what are we going to do. And that is why we 

are having this hearing. 

 In light of the recent FCC actions, they adopted two modifications to 

assessing contributions which are going to make more costs. First of all, 

the Commission raised existing wireless safe harbor percentage from 

28.5 percent to 37.1 percent. The second, the Commission expanded the 

base of the Universal Service Fund by extending universal service 

contribution obligations to providers of interconnected VoIP service. 

Now here we have VoIP providers that are now going to be involved. 

Their safe harbor percentage of interstate revenue is at 65 percent of total 

VoIP service revenue. So this is a program that is going to cost the 

consumers more money, whether they are going to be through the 

Internet or not. 

 And we all know what the universal service originally was designed 

for: to establish and help the people in the rural areas that were difficult 

to get these services so that people who were providing it would go into 

those areas. There would be some incentives. But again, over the years, 

this has just continued to get more and more expensive, and now it is no 

longer sustainable. 

 You know, I have partial rural Florida, north central Florida in my 

district, and I am sensitive to this, but we need to examine, frankly, how 

this service is currently defined, how the policies are funded, who should 

receive the funding. Again, go back and look at it to ensure our proper 

management and oversight of the fund. The FCC has taken these two 

actions. We need to understand the ramifications of those. 

 So I think, Mr. Chairman, it is appropriate that we have this hearing. 

And I commend you for having it. 

 Thank you. 

 MR. UPTON. Thank you. 

 Mrs. Blackburn. 

 MRS. BLACKBURN. Thank you, Mr. Chairman. 

 I did want to thank you for holding the hearing today and allowing us 

the opportunity to look at the USF, and I thank our witnesses for being 

with us. 
12

 You know, I have heard from a lot of the stakeholders in this 

situation. Our rural providers are telling me about the necessity for a 

fund. They want more of it for enhanced services and broadband. Our 

wireless service providers believe that they contribute far more than they 

receive, so they want to be able to access funds and enhance their 

wireless capabilities in underserved areas. Then I hear from consumers 

who want to know exactly what is the universal service line item on their 

telephone bill. They want to get rid of it just like they are getting rid of 

the excise tax. They are waiting for this to disappear. And they do not 

see enhanced telephone systems, enhanced telecommunications as a 

right. And they don’t think that it is something that should be paid for in 

their tax dollars. 

 Now you will have some who want to scrap the program altogether 

and start over while others want to put a disbursement cap on overall 

expenditures and shift the funding to a numbers-based system. There are 

those who have asked us to even expand the contribution base. So as 

you can see, the people that are talking with me all have opinions, and 

there are more opinions to go around than there probably are solutions 

and ways to use this fund, but that is normal when you have got the pot 

of money that we have before us, and anything that grows from $955 

million annually to $7 billion in 10 years is a big pot of money, and that 

is why people are fussing about it. A 633 percent increase over 10 years 

is pretty healthy, even by Federal government standards. 

 This coupled with the FCC’s Office of Inspector General and the 

GAO reports stating the difficulty associated with auditing the program, 

the waste, fraud, and abuse, the mismanagement of E-Rate, as our 

Chairman said, I think that it could be time to stop, to do a very good 

inventory, to get someone to help them audit their books, and then to 

start over with a clean slate when it comes to this program. 

 So thank you for your input. 

 Mr. Chairman, thank you for the hearing. 

 [The prepared statement of Hon. Marsha Blackburn follows:] 

PREPARED STATEMENT OF THE HON. MARSHA BLACKBURN, A REPRESENTATIVE IN 

CONGRESS FROM THE STATE OF TENNESSEe 

Mr. Chairman, I want to thank you for holding this hearing today about the future of 

the Universal Service Fund. I've heard from many of the stakeholders in this debate. 

 Our rural ILECs are telling me about the necessity of the fund. 

 Our wireless service providers believe they contribute far more than they receive. 

 Consumers want to know what exactly the Universal Service line item 

on their telephone bill is for. 

 Some want to scrap this program all together and start over, while others want to put 

a disbursement cap on overall expenditures and shift the funding to a numbers based 

system. There are those who have asked us to expand the contribution base. 
13

 I know there are concerns that the funds growth has increased from $955 million 

annually to $7 billion in ten years. 

 A 633% increase over ten years is pretty healthy even by federal government 

standards. 

 When I see this coupled with the FCC's Office of Inspector General and GAO 

reports stating the difficulty associated with auditing the program and the waste, fraud 

and abuse -- I think it could be time to with a clean slate when it comes to this program. 

 MR. UPTON. Thank you. 

 Mr. Shimkus. 

 MR. SHIMKUS. I will waive. 

 MR. UPTON. Mr. Sullivan. Mr. Bass. 

 MR. BASS. Mr. Chairman, I have a 15-minute opening statement, 

but in the interest of time, I will submit it for the record. 

 MR. UPTON. Good. 

 I would ask unanimous consent that all members have the right to 

put into the record an opening statement. 

 [Additional statements submitted for the record follow:] 

PREPARED STATEMENT OF THE HON. BARBARA CUBIN, A REPRESENTATIVE IN CONGRESS 

FROM THE STATE OF WYOMING

Thank you, Mr. Chairman. 

I am pleased that you have scheduled this important hearing on an issue that so 

directly affects my constituents. That the Universal Service Fund is facing a financial 

crisis is not in dispute, and neither is the need for some type of reform that would bring 

financial solvency back to this important program. It is the goal of this subcommittee to 

improve the Universal Service Program. 

Improvement, however, should not mean the abandonment of the original intent of 

Congress regarding Universal Service – that every American should have access to 

telecommunication services at reasonable prices. We have decided that the policy of 

universal service only serves to benefit the entire nation as a national network of telecom 

services is desirable for every citizen. Fundamentally altering the program to the 

detriment of rural communities in my home state of Wyoming and elsewhere would 

erode that intent. 

As technologies continue to advance at a breathtaking pace, America has entered 

into a new era of telecommunications that includes much more than just picking up a 

phone attached to the kitchen wall when it rings. Communities of every size must 

embrace this information age to remain vibrant, and we should renew our commitment to 

a truly national network by ensuring universal access to these new technologies at a 

reasonable price. The entire nation is served by such a policy as it encourages 

community improvement and allows for the freedom of living in a sparsely populated 

state without being unduly punished with high rates or no service at all. 

I look forward to hearing the opinions of the witnesses today on how best to 

improve the Universal Service Fund. I am particularly interested to hear any proposals 

offered by the advanced telecom industry about how, if they continue to receive USF 

dollars, they plan to ensure those funds are used to improve service to rural America. 

Secondly, I am interested to know what contribution level the advanced telecom industry 

feels is appropriate to pay into the USF. 

I am hopeful that today’s hearing will bring us to at least a few points of common 

ground so we can begin the difficult task of reforming this critical program. Again, thank 
14

you Mr. Chairman for holding this important hearing. I yield back the balance of my 

time. 

PREPARED STATEMENT OF THE HON. ANNA G. ESHOO, A REPRESENTATIVE IN CONGRESS 

FROM THE STATE OF CALIFORNIA

Thank you Mr. Chairman for holding this hearing. 

I welcome the Subcommittee embarking on an effort to examine the Universal 

Service Fund and look for ways to improve the program and make it more responsive to 

the modern telecommunications marketplace. 

The questions before us are fairly simple: 

1. Who should pay? 

2. Who should benefit? 

3. How do we assure accountability in the program? 

There is a wide range of ideas about the answers to these questions, however, and 

I’m eager to hear from the witnesses today about their views on these issues, as well as in 

the weeks ahead as we hold additional hearings. 

I think the key issue will be what policies we can adopt that will promote the 

adoption of advanced telecommunications nationwide. 

This is exactly what our predecessors did in the 1934 Communications Act when the 

adopted the concept of universal service and made it a priority for our country. 

Their vision and their commitment helped us develop the most advanced, expansive 

communications infrastructure in the 20th Century. 

In the 21st Century, however, we’ve fallen behind and the U.S. is now 16th in the 

world in broadband penetration. 

As the country that has led the world in innovation for the past century, invented the 

telephone and developed the Internet, this is a sad state of affairs. 

Telecommunications is the “central nervous system” of the Information Age 

economy, and high-speed, always-on broadband Internet communications will enable a 

vast array of advanced Internet applications and services including Voice over IP, video 

on-demand, electronic health, and distance education. 

The United States’ ability to deploy this advanced communications infrastructure is 

crucial to our future productivity and will in large part determine our ability to succeed in 

the global information economy. 

We need to change course drastically. We have to develop policies that will keep us 

competitive and ensure that our telecommunications system is on the same level as our 

economic competitors. 

Universal service policies could play a significant role in ensuring broadband access 

and adoption in areas that are not now being served. 

I look forward to the witnesses’ testimony and I’m eager to work with my 

colleagues on the Committee to create effective universal service policies for the 21st

Century. 

 This now concludes the opening statements. As we all heard the 

many buzzers, votes have occurred, and I think, at this point, we will 

adjourn and come back in about 20 minutes. We have two votes. This is 

a 15-minute, so we will be able to vote, vote quickly on the second vote, 

and then come back and we will start with Dr. Marron at that point. 

 We stand adjourned. 

 [Recess.] 
15

 MR. UPTON. Just for the record, I note 13 members were here for 

opening statements, so we beat Mr. Terry’s number of members on the 

panel. 

 We are done voting on the House floor for the day, so we shouldn’t 

be interrupted, and I know Members have a number of different things. I 

walked back with a couple of them who are doing a quick little errand 

here or there and many of them will be back. But I will note that we are 

joined on our panel by: Dr. Donald Marron, Acting Director of CBO; 

Mr. Tom Navin, Chief of the Wireline Competition Bureau from the 

FCC; Mr. Tony Clark, President of the North Dakota Public Service 

Commission; Mr. Skip Frantz, Chairman of the USTelecom Association; 

Mr. Richard Cimerman, Vice President, State Government Affairs of the 

NCTA; Mr. David Crothers, Executive VP of North Dakota Association 

of Telephone Cooperatives, North Dakota is well represented today; Mr. 

Paul Garnett, Director of Regulatory Affairs of the CTIA; Ms. Staci Pies, 

Vice President of PointOne Communications in Austin, Texas on behalf 

of the Voice on the Net Coalition; Mr. Geoff Feiss, former member of 

the Great State of Michigan team, the General Manager now for the 

Montana Telecommunications Association; and Dr. Mark Cooper, 

Director of Research for Consumer Federation of America. 

 Ladies and gentlemen, your statements were made part of the record 

in their entirety, and we would like it if you could take no more than 5 

minutes to summarize those, and then we will go to questions of 

members of the panel. 

 Dr. Marron, please start. 

STATEMENTS OF DR. DONALD B. MARRON, ACTING 

DIRECTOR, CONGRESSIONAL BUDGET OFFICE; TOM 

NAVIN, CHIEF, WIRELINE COMPETITION BUREAU, 

FEDERAL COMMUNICATIONS COMMISSION; TONY 

CLARK, PRESIDENT, NORTH DAKOTA PUBLIC SERVICE 

COMMISSION, ON BEHALF OF NATIONAL 

ASSOCIATION OF REGULATORY UTILITY 

COMMISSIONERS; SKIP FRANTZ, CHAIRMAN, UNITED 

STATES TELECOM ASSOCIATION; RICHARD 

CIMERMAN, VICE PRESIDENT, STATE GOVERNMENT 

AFFAIRS, NATIONAL CABLE AND 

TELECOMMUNICATIONS ASSOCIATION; DAVID 

CROTHERS, EXECUTIVE VICE PRESIDENT, NORTH 

DAKOTA ASSOCIATION OF TELEPHONE 

COOPERATIVES, ON BEHALF OF NATIONAL 

TELECOMMUNICATION COOPERATIVE ASSOCIATION; 

PAUL GARNETT, DIRECTOR, REGULATORY AFFAIRS, 
16

CTIA - THE WIRELESS ASSOCIATION; STACI PIES, VICE 

PRESIDENT, POINTONE COMMUNICATIONS, ON 

BEHALF OF VOICE ON THE NET (VON) COALITION; 

GEOFF FEISS, GENERAL MANAGER, MONTANA 

TELECOMMUNICATIONS ASSOCIATION; AND DR. 

MARK COOPER, DIRECTOR OF RESEARCH, CONSUMER 

FEDERATION OF AMERICA 

 DR. MARRON. Thank you, Mr. Chairman, members of the 

subcommittee. 

 It is a pleasure to be here today to discuss CBO’s recent report on the 

Universal Service Fund. 

 Mr. Chairman, as you mentioned in your opening statement, 

spending by the High-Cost Program has increased rapidly in recent 

years. Outlays in the program grew from $1.9 billion fiscal year 2000 to 

$3.8 billion in fiscal year 2005. That doubling of High-Cost support 

accounted for more than 80 percent of the overall USF spending growth 

during that period. 

 Looking backward, two main factors have accounted for most of the 

spending growth that we have seen in the High-Cost Program in recent 

years. There has been a rapid increase in the number of carriers, 

particularly wireless carriers that are eligible for High-Cost subsidies, 

and there was also a regulatory change that transformed some subsidies 

that were previously implicit in telecommunications prices into explicit 

subsidies that are now paid through the High-Cost Program. 

 Looking ahead are a variety of forces: growth of competitive 

providers, possible regulatory changes, and possible legislative changes 

could cause High-Cost spending to continue to grow rapidly in the 

future. One key factor is the potential for further increases in the number 

of competitive telephone carriers that are eligible through a sea of 

universal service subsidies in high-cost areas. Funding for incumbent 

service providers has been nearly constant in the past 3 years while 

funding for competitive entrants has more than quadrupled, rising from 

$130 million in 2003 to about $640 million in 2005. That growth has 

been driven by a rapid increase in the number of competitive 

telecommunications carriers, primarily wireless ones. 

 That growth appears likely to continue. In the absence of policy 

changes, more cellular providers in rural areas may choose to become 

eligible for High-Cost support and, at the same time, the number of 

wireless customers in those areas is likely to increase. Taken together, 

these factors suggest that under current policies, payments to competitive 

providers could double or triple in coming years, raising annual costs by 

$600 million to $1.2 billion per year by 2011. 
17

 Regulatory changes may also increase USF spending. The FCC is 

considering proposals to reduce payments for intercarrier compensation, 

the rates telephone companies charge one another for the interconnection 

and transferring of calls. Such rates are currently set above the cost of 

providing those services. In practice, this provides a significant subsidy 

for local telephone companies for whom intercarrier compensation is an 

important source of revenue. If the FCC lowers intercarrier 

compensation, the impacts on rural telephone companies could be offset 

to some degree by increasing support through the USF. This is exactly 

what happened when a previous regulatory change reduced long distance 

access charges, another important revenue source for local telephone 

companies. The cost of such compensation would depend on the size of 

the new support. Based on a review of several proposals by industry 

groups and State regulators, it appears that the costs could be in the range 

of $800 million to $2.9 billion per year. 

 And thirdly, legislative changes may also increase USF spending. 

Most notable in this regard are legislative proposals to add broadband to 

the list of services covered by the Universal Service Fund. CBO has not 

estimated the potential cost of adding broadband to the High-Cost 

Program at this time. The potential cost would ultimately depend on the 

specifics of any such legislation. 

 As a final point, it is important to note that even though the USF 

does not increase the Federal budget deficit, revenues are aligned with 

costs over time, it does impose costs on the economy. The benefits 

provided by the Universal Service Fund come at the cost of higher 

charges to telephone companies which are then reflected in higher 

charges to consumers for some services. Such costs will continue to 

increase if the funding needs of the USF continue to grow. 

 Thank you. I would be happy to answer any questions. 

 [The prepared statement of Dr. Donald B. Marron follows:] 
18

PREPARED STATEMENT OF DR. DONALD B. MARRON, ACTING DIRECTOR, CONGRESSIONAL 

BUDGET OFFICE
19
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25
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27
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29

 MR. UPTON. Thank you. 

 Mr. Navin. 
30

MR. NAVIN. Good afternoon, Chairman Upton and members of the 

subcommittee. 

 Thank you for the opportunity to speak about the Universal Service 

High-Cost Program. 

 As you know, in Section 254 of the Communications Act, Congress 

directed the Commission to promote universal service to ensure that all 

Americans have access to affordable, quality telecommunications 

services. In particular, in Section 254, Congress articulated a national 

goal that consumers in all regions of the Nation, including consumers in 

rural, insular, and high-cost areas, shall have access to 

telecommunication services at rates that are affordable and reasonably 

comparable to those provided to consumers in more urban areas. 

 Today, I will provide a brief overview of the Commission’s actions 

implementing the Universal Service High-Cost Support Program in 

response to Section 254 of the Act and pending proceedings in which the 

Commission is examining ways to improve the High-Cost Program. 

 In implementing the Universal Service High-Cost Support Program, 

the Commission has taken into consideration the differences between 

large, price-cap regulated non-rural carriers and small, rate-of-return 

rural carriers. Universal service support is provided today to defray both 

the intrastate and interstate network costs through the following five 

mechanisms: high-cost loop support, local switching support, high-cost 

non-rural support, interstate access support, and interstate common line 

support. 

 Consistent with Section 254 of the Act, the rural and non-rural 

support mechanisms support the intrastate network costs of carriers to 

ensure that those in high-cost and rural areas have access to 

telecommunication services at rates that are affordable and reasonably 

comparable to those customers in urban areas. Although incumbent local 

exchange carriers may qualify as rural carriers based on other criteria, a 

carrier generally is eligible for high-cost loop support if it serves less 

than 100,000 lines in a service area. 

 The rural high-cost loop support mechanism, which was last 

modified by the Commission in 2001, provides support for embedded 

intrastate network costs to rural incumbent local exchange carriers in 

service areas where the cost to provide service exceeds 115 percent of 

the national average cost per line. The Commission has recognized that 

rural carriers serve more sparsely populated areas, serve fewer 

subscribers, and do not typically benefit from economies of scale and 

scope. In addition to high-cost loop support, carriers with 50,000 or 

fewer access lines are also eligible to receive local switching support, 

which provides intrastate support for switching costs. In 2005, 
31

approximately $1.2 billion was distributed in rural high-cost loop support 

and $445 million was distributed in local switching support. 

 The non-rural high-cost mechanism was established by the 

Commission in 1999 to support intrastate network costs for non-rural 

carriers based on forward-looking economic costs. The non-rural 

mechanism determines the amount of Federal High-Cost support to be 

provided to non-rural carriers by comparing the statewide average nonrural, forward-looking cost per line to a nationwide cost benchmark. In 

2005, approximately $292 million was distributed in the non-rural, HighCost support program. 

 Consistent with Congress’s directive that universal service support 

be explicit, in July 2000, the Commission adopted the interstate access 

support mechanism to provide explicit universal service support to pricecap carriers to replace implicit subsidies that were eliminated from the 

access charge rate structure. The precise amount of interstate access 

support provided each year may vary but is targeted to be $650 million 

for all carriers, both incumbents and competitors. In 2005, 

approximately $691 million was distributed in interstate access support. 

 The interstate common line support mechanism, which was 

implemented beginning July 1, 2002, provides explicit universal service 

support to rate-of-return carriers in exchange for removing implicit 

subsidies from access charges. Each rate-of-return carrier receives 

enough support to ensure that it can recover its interstate loop costs while 

charging subscriber line charges no higher than the cap, which is $6.50 

for residential customers and $9.20 for multi-line business customers. In 

2005, approximately $1.18 billion was distributed in interstate common 

line support. 

 As a final matter, I would like to note that the Commission has 

initiated various proceedings to consider potential reform of the HighCost Program. For example, the Commission is examining rural highcost reform, changes to the non-rural high-cost mechanism, and changes 

to the administration and oversight of the entire Universal Service Fund, 

including the High-Cost Program. 

 Again, thank you for the opportunity to discuss Universal Service 

High-Cost issues. I look forward to working with this subcommittee, 

other Members of Congress, Chairman Barton, and the Commission as 

further reform to the High-Cost Program is considered. 

 [The prepared statement of Thomas J. Navin follows:] 
32

PREPARED STATEMENT OF THOMAS J. NAVIN, CHIEF, WIRELINE COMPETITION BUREAU,

FEDERAL COMMUNICATIONS COMMISSION
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36

 MR. UPTON. Thank you. 

 Mr. Clark. 

MR. CLARK. Thank you, Mr. Chairman and subcommittee members. 

It is a pleasure to testify before you today. 
37

 I am Tony Clark, President of the North Dakota Public Service 

Commission and Chairman of the Telecommunications Committee of the 

National Association of Regulatory Utility Commissioners. NARUC 

represents state commissions in all 50 States, the District of Columbia, 

U.S. Territories with jurisdiction over telecommunications, electricity, 

natural gas, water, and other utilities. 

 This particular hearing is especially important to me because of the 

impact that Universal Service Programs have on rural States like mine. 

North Dakotans are eager to embrace the power and promise of VoIP, 

new video services, wireless, broadband, and other innovative products, 

but we know that all of these technologies require underlying 

infrastructure, wires, switches, towers, and routers, and those require real 

investments to build and maintain, especially in rural markets. 

 We are here today because universal service is at a crossroads. On 

the contribution side, there is a growing chasm between the services and 

carriers that sustain the fund and those who interconnect to the network 

supported by it. The end result is that the contribution requirement is 

falling ever more heavily and unfairly on a shrinking number of carriers. 

This means that the charge the end user has to pay on interstate and 

international toll calls has risen to close to 11 percent recently, which is a 

result of the growing demands on a shrinking revenue base of interstate 

and international calls. On the distribution side, Universal Service Fund 

has grown tremendously in the past few years, and these two trends are 

on a crash course, making the status quo unsustainable. 

 On both sides, the Universal Service Funds faces a number of 

existential questions, and I have outlined a number of those in my written 

testimony. Perhaps we can get into that during the question-and-answer 

period. 

 Each of these choices carries both costs and opportunities, and a 

decision on any one of them will have a ripple effect on all others. To be 

perfectly frank, the costs and benefits of different options will vary from 

State to State, as will the individual State Commissions’ advice that they 

give you. But at the end of the day, we must all find common ground. 

Each of your home State Commissions is an excellent resource for you 

and your staff to utilize in researching the impact of Universal Service 

Funds on your districts. It is a contact that is well worth making. 

 On a practical level, NARUC believes that whatever the Federal 

Universal Service Fund is intended to accomplish, it should be done as 

efficiently as possible, and to that end, we support a permanent 

exemption of the Federal Universal Service Programs from the 

Antideficiency Act. 

 Under Section 214(e) of the Act, State Commissions help the FCC 

administer the Federal Universal Service Fund by designating eligible 
38

telecommunications carriers, ETCs, in each State that receives support. 

In March 2005, acting on a recommendation of the Federal-State Joint 

Board on Universal Service, the FCC issued a set of permissive 

guidelines for the States to use in their ETC designations, partially in 

response to the growing role and prominence of competitive ETCs. A 

major policy goal of those guidelines was to ensure that all ETCs used 

any Universal Service disbursements to invest in infrastructure and 

defray consumer costs in the appropriate service area. 

 At this writing, at least 24 State Commissions have either 

implemented the new guidelines or initiated rulemakings to incorporate 

some or part of these suggested guidelines. There are, of course, some 

natural tensions to work through. One such potential major tension is 

currently contained within Chairman Stevens’ Senate draft of the 

telecom bill, which, in its current iteration, would preempt all State 

oversight of terms and conditions of wireless carriers. 

 Many State Commissioners are asking how a State can possibly 

certify compliance with service quality and consumer protection 

standards for wireless competitive ETCs if Federal legislation ultimately 

puts jurisdiction over the terms and conditions of these carriers beyond 

our reach. Put another way, if wireless carriers want to be treated like all 

other carriers when receiving Universal Service Fund money, then they 

should not expect to receive special exemptions from consumer 

protection laws that all other ETCs follow. 

 NARUC supports efforts to more equitably distribute the funding 

base of the Federal Universal Service Fund in a technology-neutral 

manner, and we appreciate the provisions in H.R. 5072, the Universal 

Service Reform Act of 2006, that would empower the FCC to do so. 

Broadening the contribution base for universal service is not a question 

of how much is collected but rather fairness in how it is collected. We 

also believe that such efforts at the Federal level must be accommodated 

by similar efforts to ensure the long-term sustainability of State 

programs. 

 Today, universal service is a jointly-shared responsibility between 

States and the Federal government. This joint approach benefits both net 

donor and net recipient States because it lessens the burden on an already 

sizeable Federal program and permits another option when Federal 

disbursement programs do not work in a particular State or community. 

 Ultimately, we believe the best solution is to stabilize the 

contribution base of the State Universal Service Programs at the same 

time that the base is stabilized for the Federal program. 

 Finally, I would be remiss if I didn’t say just a few words about 

intercarrier compensation, an issue that is joined at the hip with universal 

service. 
39

 NARUC’s leaders have been brokering a dialogue among every 

segment of the industry for almost 2 years designed to produce an 

approach with as much consensus support as is possible, especially since 

this plan governs largely how these carriers will relate economically to 

each other. For today, my only caution to members of this subcommittee 

is to be aware that whatever approach is ultimately adopted by the FCC 

or Congress, it is likely to, once again, have a big impact on universal 

service. 

 Thank you. 

 [The prepared statement of Tony Clark follows:] 

PREPARED STATEMENT OF TONY CLARK, PRESIDENT, NORTH DAKOTA PUBLIC SERVICE 

COMMISSION, ON BEHALF OF NATIONAL ASSOCIATION OF REGULATORY UTILITY 

COMMISSIONERS

Chairman Upton, Ranking Member Markey and members of the Subcommittee, 

thank you for the opportunity to testify today. I am Tony Clark, President of the North 

Dakota Public Service Commission and Chairman of the Telecommunications 

Committee of the National Association of Regulatory Utility Commissioners (NARUC). 

NARUC represents State commissions in all 50 States, the District of Columbia and US 

territories, with jurisdiction over telecommunications, electricity, natural gas, water and 

other utilities. 

This particular hearing is especially important to me because of the impact that 

Universal Service programs have on rural States like mine. North Dakotans are eager to 

embrace the power and promise of VoIP, new video services, wireless broadband and 

other innovative products, but we know that all of those technologies require underlying 

infrastructure: wires, switches, towers and routers – and those require real investment to 

build and maintain, especially in rural markets. 

In his recent book, “The World is Flat,” author Thomas Friedman writes about how 

an interlocking network of undersea optical fiber cables and global satellite connections 

has, for business purposes, erased the distance between New York, Los Angeles, 

Bangalore and Beijing, creating new types of both collaboration and competition among 

professionals in every part of the globe. In North Dakota, we like the idea of Fargo, 

Valley City and even tiny Mandaree (pop. 558, on the Fort Berthold Indian Reservation) 

being part of that global information economy too – a concept that would be unthinkable 

without a first class communications infrastructure. So the Telecommunications Act’s 

promise of reasonably comparable rates and services for high cost areas means a lot to 

States like mine. 

Beyond their economic value, telecommunications networks are also critical 

infrastructure. As telephone companies in the Gulf Coast region issue press releases now 

about their readiness for the 2006 hurricane season, we are reminded of how the 

importance of reliable communications was magnified during past disasters, when first 

responders and relief organizations had to coordinate thousands of volunteers in real 

time. 

An existential question for USF. 

The title of this hearing, “What are we subsidizing and why?” raises a good point, 

which is that a national dialogue about the purpose and scope of universal service is 

appropriate as Congress seeks to update many of its communications laws. 

We’re here today because Universal Service is at a crossroads. On the contribution 

side, there is a growing chasm between the services and carriers that sustain the fund, and 
40

those that interconnect to the network supported by it. The end result is that the 

contribution requirement is falling ever more heavily, and unfairly, on a shrinking 

number of carriers. This means that the charge the end user has to pay on interstate and 

international toll calls has risen to close to 11 percent recently, which is a result of the 

growing demands on a shrinking revenue base of interstate and international calls. On 

the distribution side, the Universal Service Fund has grown tremendously in the past few 

years. These two trends are on a crash course, making the status quo unsustainable. 

On both sides, the Universal Service Fund faces a number of existential questions: 

3⁄4 Should it explicitly fund broadband infrastructure and services? 

3⁄4 What is the optimal size of the fund and does it need to be capped? 

3⁄4 Should it fund competition in high cost markets? 

3⁄4 How many networks should it be used to fund in high cost markets? 

3⁄4 On what cost basis should carriers be reimbursed? 

3⁄4 How many access lines per customer should be funded? 

3⁄4 Is it intended for networks or for individuals? 

3⁄4 Should contributions be pegged to network usage, use of numbers, 

connections or some other methodology? 

3⁄4 Should Universal Service continue to be a shared Federal-State 

responsibility, or should the federal government take on the entire burden? 

Each choice carries both costs and opportunities, and a decision on any one of them 

will have a ripple effect on all the others. In addition, Universal Service programs are 

inextricably intertwined with intercarrier compensation and larger impacts on the entire 

communications market. To be perfectly frank, the costs and benefits of different options 

will vary from State to State, as will the advice of your individual State commissions, but 

at the end of the day, we must all find common ground. Each of your home State 

commissions is an excellent resource for you and your staffs to utilize in researching the 

impact of universal service on your districts. It is a contact that is well worth making. 

 On a practical level, NARUC believes that whatever the federal Universal Service 

Fund is intended to accomplish, it should be done as efficiently as possible. That is why 

we support a permanent exemption of federal Universal Service programs from the 

Antideficiency Act. 

State designation of Eligible Telecommunications Carriers

 Under Section 214(e) of the Act, State commissions help the FCC administer the 

federal Universal Service Fund by designating eligible telecommunications carriers 

(ETCs) in each State that receives support. The Act requires a finding that each 

designated carrier will offer the services supported by Universal Service throughout the 

service area, through its own facilities or with a combination of its own facilities and 

resale of another carrier’s facilities, and that it will advertise the availability of those 

services using media of general distribution. 

The Act also requires an ETC designation to be consistent with the public interest, 

convenience and necessity, but did not set forth specific criteria to be applied under the 

public interest tests in Sections 214 and 254 of the Act. For service areas already served 

by a rural telephone company, the Act specifically requires a public interest 

determination to be made before a State commission designates a competitive ETC for 

that service area. 

In some States, standards were interpreted to allow a degree of latitude in ETC 

designations. Our experience in North Dakota allowed for very little. Prior to my tenure, 

the Public Service Commission (PSC) once denied ETC status to a competitive applicant, 

citing the public interest standard and a number of policy concerns, including impact on 

the federal fund. The carrier sued the PSC, and the court ruled that questions of federal 

fund sufficiency were outside the scope of any State PSC inquiry. Lacking the ability to 
41

take into consideration this factor, the public interest standard became a relatively easy 

burden for a competitive ETC to meet. 

In March 2005, acting on a recommendation of the Federal-State Joint Board on 

Universal Service, the FCC issued a set of permissive guidelines for the States to use in 

their ETC designations, partially in response to the growing role and prominence of 

competitive ETCs. A major policy goal of those guidelines was to ensure that all ETCs 

used any Universal Service disbursements to invest in infrastructure and defray consumer 

costs in the appropriate service area. Specifically, the guidelines call for each carrier 

seeking ETC status to do the following: 

a. Provide a five-year plan demonstrating how high-cost Universal Service 

support will be used to improve its coverage, service quality or capacity in 

every wire center for which it seeks designation and expects to receive 

Universal Service support; 

b. Demonstrate its ability to remain functional in emergency situations; 

c. Demonstrate that it will satisfy consumer protection and service quality 

standards; 

d. Offer local usage plans comparable to those offered by the incumbent local 

exchange carrier (ILEC) in areas for which it seeks designation; and 

e. Acknowledge that it may be required to provide equal access if all other ETCs 

in the designated area relinquish their designations pursuant to Section 

214(e)(4) of the Act. 

The Order also encouraged States to apply a public interest standard, including 

consideration of a cost-benefit analysis and potential “creamskimming” effects in 

instances where an ETC applicant seeks designation below the study area level of a rural 

incumbent LEC. And to make sure the guidelines were applied uniformly, the FCC 

encouraged States to require annual certifications from all ETCs, even those previously 

designated, including progress reports on coverage and service quality improvements. 

 At this writing, at least 24 State commissions have either implemented the 

guidelines or initiated rulemakings to incorporate some or part of these suggested 

guidelines. There are, of course, some natural tensions to work through, such as how a 

State can certify compliance with service quality and consumer protection standards for 

some competitive ETCs if federal legislation ultimately puts jurisdiction over the terms 

and conditions for some carriers beyond our reach. 

Contributions to Federal and State universal service. 

NARUC supports efforts to more equitably distribute the funding base of the federal 

Universal Service Fund (USF) in a technology-neutral manner, and we appreciate 

provisions in HR 5072, the Universal Service Reform Act of 2006, that would empower 

the FCC to do so. Broadening the contribution base for universal service is not a 

question of how much is collected, but rather of fairness in how it is collected. 

We also believe such efforts at the federal level must be accommodated by similar 

efforts to ensure the long-term sustainability of State programs. Today, Universal 

Service is a jointly shared responsibility between the States and the federal government, 

with 26 State programs distributing about $1.3 billion, or nearly 20 percent of the overall 

national commitment to Universal Service. This joint approach benefits both “net donor” 

and “net recipient” States because it lessens the burden on an already sizable federal 

program and permits another option when federal disbursement formulas that “work” in 

the aggregate do not adequately serve a particular State or community. 

Unfortunately, State universal service funds face the same structural funding 

challenges as the federal program, with many new services that rely on a ubiquitous 

network (and exchange traffic with the PSTN) failing to contribute equitably to either 

one. For this reason, we believe that any efforts to expand the federal contribution base, 
42

especially to include intrastate revenues, must also clarify State authority to assess 

against the same broad base, including total revenues for subscribers within a State. 

Preserving State programs is also a question of fairness between the states. The 1996 Act 

explicitly contemplated that universal needs would be met by both State and federal 

programs and, for this reason, did not attempt to accomplish everything through the 

federal program. For that reason, I suspect that if Congress ever chose not to preserve 

State programs, those 26 States would expect to be made whole in the federal distribution 

formula, creating even more upward pressure on the fund, especially on “net donor” 

states. 

Ultimately, we believe the best solution is to stabilize the contribution base of State 

universal service programs at the same time the base is stabilized for the federal program, 

by making State USF assessment authority co-extensive with that of the federal program, 

allowing for the use of numbers, connections, total revenues or whichever approach is 

ultimately chosen. We appreciate the provisions in HR 5072 that would hold State 

programs harmless when the federal fund is expanded to include intrastate revenues and 

we look forward to working with all the members of this Subcommittee on those issues. 

Intercarrier compensation: Inseparable from USF. 

Finally, I’d be remiss if I didn’t say a few words about intercarrier compensation, an 

issue that is joined at the hip with universal service and one that some people call the 

“elephant in the room.” As the members of this Subcommittee know, the federal 

Universal Service Fund was created as a vehicle to eliminate implicit subsidies in the 

telecommunications industry and make at least some of them into explicit subsidies that 

could be sustained in a competitive environment. Perhaps the single largest source of 

those subsidies was above-cost charges to originate and terminate calls – intercarrier 

compensation. 

Many of the accounts within Universal Service were created as part of past plans to 

lower access charges, such as the “CALLS” plans and the “MAG” plan, and many State 

universal service funds were created to reduce or eliminate implicit subsidies in intrastate 

access charges. Even today, the collective amount of funds received from intercarrier 

compensation is estimated to be around $10 billion, more than State and federal universal 

service programs combined. 

NARUC’s leaders have been brokering a dialogue among every segment of industry 

for almost two years, designed to produce an approach with as much consensus support 

as possible, especially since this is a plan that governs largely how these carriers will 

relate to each other economically. For today, my only caution to members of this 

Subcommittee is to be aware that whatever approach is ultimately adopted by the FCC or 

Congress, it is likely to once again have a big impact on universal service. 

Conclusion: 

Beyond universal service programs, States have also taken numerous measures to 

encourage expeditious availability of broadband and telephonic infrastructure, including 

numerous bills that deregulated incumbent phone companies in return for promises to 

offer broadband, cooperative agreements to purchase broadband services in return for 

commitments to build out to surrounding business and residential areas, and in some 

cases, public builds of broadband infrastructure. 

 Ultimately, NARUC’s members share each of your concerns about delivering the 

best, most efficient, advanced and affordable communications services to each of your 

communities. As you consider changes to Universal Service, both State and federal, we 

offer ourselves as partners, especially when it comes to impact of national policies on 

each individual State. 

 MR. UPTON. Thank you. 
43

 Mr. Frantz. 

MR. FRANTZ. Good afternoon, Mr. Chairman and members of the 

committee. 

 My name is Skip Frantz. I am the chairman of the newly-formed 

Windstream Corporation. This company is the result of the pending 

spin-off by Alltel Corporation of its wireline, voice, data, and video 

business and the concurrent merger of that business with Texas-based 

Valor Communications Group. Upon completion of this transaction, 

Windstream will be the largest telecommunications provider focused on 

delivering voice, data, and entertainment services to rural America. 

 I am proud of this new company. I appear before you today, 

however, as Chairman of USTelecom. USTelecom represents more than 

1,000 companies, from small, rural phone companies to some of the 

largest communications providers in the world. 

 I appreciate the opportunity to speak with you today on behalf of 

USTelecom about the continuing importance of universal service. 

 Allow me to begin by thanking this committee, particularly 

Chairman Barton, Subcommittee Chairman Upton, and Congressmen 

Pickering and Rush for your efforts toward updating the Nation’s 

communications laws. 

 Our members’ companies and our customers appreciate your efforts 

to advance video choice legislation. Real video choice will deliver 

billions of dollars in consumer savings and incentivize vigorous 

investment in the Nation’s broadband infrastructure. 

 As this committee well understands, the communications landscape 

is undergoing rapid and dramatic change as previously distinct 

technologies evolve and platforms come into direct competition. 

 In this environment, our members are unified in their commitment to 

two legislative principles: first, market-based competition that ensures 

that consumer choices, rather than outdated government policies, 

determine marketplace success; and second, universal service reform to 

ensure affordable, reliable telecommunications for all Americans in the 

21st Century. 

 This hearing is significant. USTelecom is unique in its diverse 

membership. We represent providers of all sizes, including companies 

utilizing multiple technology platforms and companies serving urban, 

suburban, and rural America. Our members have differences, but we 

share a commitment to working with Congress to advance video choice 

and a secure future for universal service. 

 Universal service ensures that all Americans, regardless of 

geography or income, have access to affordable, reliable 

communications. The High-Cost Fund is essential to this vision because 

it makes possible the availability of affordable service in sparsely 
44

populated areas. Rural markets have much lower population densities 

than urban markets, which creates a straightforward challenge: the 

significant expense of building, maintaining, and upgrading a large 

geographic network and few customers from which to recover costs. The 

result, in the absence of universal service support, would be phone bills 

that are anything but reasonable and affordable. In a very real sense, 

universal service is more important today than ever before, given the 

information age in which we now live. 

 In spite of its urgent importance, however, universal service is in 

peril. The historic core of funding, long-distance revenues, is shrinking 

as consumers reap the benefits of low-cost nationwide calling plans, not 

to mention free alternatives, like e-mail, instant messaging, and PC-toPC calling. 

 At the same time, demand on the High-Cost Fund is rising as a result 

of needed reform of intercarrier compensation as well as increased use 

by many States of universal service to subsidize not only service but 

competition in areas where just one company would struggle to exist in 

the absence of subsidies. 

 USTelecom believes that the current system needs immediate 

reform. Our suggestions are: first, broaden the base of contributors; 

second, carefully target recipients; and third, cap government resources 

to speed broadband deployment. Overall, both the Boucher-Terry 

legislation and the universal service provisions in Senator Stevens’ 

legislation are consistent with USTelecom principles. 

 Mr. Chairman, we appreciate your time and attention today. We are 

grateful for the hard work of the committee and staff. We believe 

universal service has a vital ongoing role advancing rural America, and 

we look forward to working with you on sound policies that ensure that 

all Americans have access to affordable and reliable communication 

services. 

 Thank you very much. 

 [The prepared statement of Skip Frantz follows:] 

PREPARED STATEMENT OF SKIP FRANTZ, CHAIRMAN, UNITED STATES TELECOM 

ASSOCIATION

USTelecom thanks the committee, particularly Chairman Barton, Subcommittee 

Chairman Upton and Congressman Rush, for its efforts toward updating the nation’s 

communications laws. Real video choice in America would deliver more than $8 billion 

in consumer savings in the first year alone. Removing barriers to competition in this area 

also would incent further vigorous investment in the nation’s broadband infrastructure. 

The communications landscape is undergoing rapid change. In this competitive 

environment, our diverse membership is united behind two guiding legislative principles: 

(1) Market-based competition that ensures consumer choices, rather than 

outdated government policies, dictate marketplace success; and 

 
45

(2) Universal service reform to ensure affordable, reliable telecommunications 

for all Americans in the 21st century. 

Universal service is a shared commitment to ensuring that all Americans—

regardless of geography or income—have access to affordable, reliable communications. 

High-cost support offsets the exceptional expense of serving sparsely-populated 

areas. Rural markets have much lower population densities than urban markets. The 

challenge: The expense of building, maintaining and upgrading a large geographic 

network—and few customers from which to recover costs. The result, in the absence of 

universal service support, would be phone bills that are anything but “reasonable and 

affordable.” 

Universal service is more important today than ever before given the information 

age in which we now live. However, it is in significant peril. The historic core funding 

base—long-distance revenues—is rapidly shrinking. At the same time, demand on the 

high-cost fund has increased both from needed reform of intercarrier compensation and 

rising use of the fund to subsidize not only service, but competition. 

The increasingly precarious revenue base and the concurrent rising demand for 

resources have combined to drive the USF contribution factor from 5.9% in the first 

quarter of 2000 to 10.9% in the first quarter of this year. USTelecom has long believed 

that the current system needs immediate reform. Our primary suggestions include: (1) 

broadening the base of contributors; (2) carefully targeting recipients; and (3) tapping 

government resources to speed broadband deployment. 

Overall, both the Boucher-Terry legislation and universal service provisions in Sen. 

Stevens’ communications legislation are consistent with the principles embraced by the 

USTelecom Board. We also thank Chairman Barton for accepting the Gutknecht/Stupak 

amendment to the COPE Act and express our appreciation for this acknowledgement of 

the broad support in the House for sustaining universal service. 

Good afternoon, Mr. Chairman, members of the committee. My name is Skip 

Frantz. I am Chairman of the newly-formed Windstream Corporation. This company is 

the result of the pending spin-off by Alltel Corporation of its wireline voice, data and 

video business and the concurrent merger of that business with Texas-based Valor 

Communications Group. Upon completion of this transaction, which is scheduled to 

occur in mid-July, Windstream will be the largest telecommunications provider in the 

U.S. focused on delivering voice, data and entertainment services to rural America. I am 

proud of the new company, its mission and its plans to deliver innovative services to 

customers across our market areas in 16 states. 

But I appear before this committee today in a different capacity—as Chairman of the 

USTelecom Association. USTelecom represents more than 1,000 communications 

companies—from the smallest rural telephone cooperatives in America to some of the 

largest communications service providers in the world. I feel privileged to appear in that 

capacity on behalf of our industry trade association and to have this opportunity to speak 

with you today about the future of communications in our country and the ongoing value 

of universal service. 

Allow me to begin by thanking the members of this committee, particularly 

Chairman Barton, Subcommittee Chairman Upton and Congressman Rush, for your 

efforts toward updating the nation’s communications laws. Our companies, our 

customers—and, I suspect, even many of the cable companies, as well—appreciate your 

efforts to advance video choice legislation. The House floor vote two weeks ago was a 

beneficial, bipartisan vote in favor of competition and consumer choice and has helped 

generate real momentum, particularly in the Senate, where a mark-up now appears likely 

on video choice legislation this month. 
46

It is estimated that real video choice in America would deliver more than $8 billion 

in consumer savings in the first year alone. Removing barriers to competition in this area 

also would incent further vigorous investment in the nation’s broadband infrastructure. 

As this committee well understands, the communications landscape is undergoing 

rapid and dramatic change as previously distinct technologies evolve and platforms come 

into direct competition. In this competitive environment, our member companies are 

united in our commitment to two guiding legislative principles: 

(1) We believe in reforms that advance market-based competition to ensure 

consumer choices, rather than outdated government policies, dictate which 

technologies and companies succeed in the marketplace; and 

(2) We believe the time has come to reform universal service to ensure 

affordable, reliable telecommunications for all Americans in the 21st

century. 

Mr. Chairman, this unity is significant and, I believe, noteworthy in terms of your 

efforts today. USTelecom is unique in the breadth and diversity of its membership. We 

are the industry’s central forum, representing small, mid-sized and large communications 

providers, including companies utilizing multiple technology platforms and companies 

serving urban, suburban and rural America. Although our member companies have 

differences, we stand united in our commitment to working with Congress to achieve 

these two objectives of delivering video choice to consumers and ensuring a stable, 

sustainable future for universal service. 

Mr. Chairman, your hearing today asks a central and timely question: What are we 

subsidizing and why? In its purest form, universal service is a shared commitment to 

ensuring that all Americans—regardless of geography or income—have access to 

affordable, reliable communications. As our transition into an information-based society 

accelerates, this basic access becomes more and more important to the nation’s economy 

and the opportunities it affords to our citizens. 

The high-cost fund is essential to this vision of a ubiquitous network across a 

landscape as vast as the United States. It is a pact between the government and the 

private sector: Telecommunications companies provide essential communications 

services at reasonable and affordable rates...and high-cost support makes that possible by 

offsetting the exceptional costs of serving sparsely-populated areas. 

In targeting sparsely-populated rural areas, high-cost support advances the goal of 

universal service in communities with costs that are significantly above the national 

average. Rural markets have much lower population densities than urban markets, often 

as little as 13 phone lines per square mile. This, of course, creates a straightforward 

economic challenge: The significant expense of building, maintaining and upgrading a 

large geographic network—and very few customers from which to recover its costs. The 

result, in the absence of universal service support, would be phone bills that are anything 

but “reasonable and affordable.” Prices in many parts of rural America would skyrocket 

and in a number of areas, service would be cost-prohibitive. 

So if you believe in the goal of keeping the country connected through affordable, 

essential communications services, then universal service is, in a very real sense, more 

important today than ever before given the information age in which we now live. In spite 

of its urgent importance, however, it is in significant peril. Traditional sources of 

revenue are in steep decline. The historic core base of funding—long-distance 

revenues—is rapidly shrinking as consumers reap the benefits of much lower national 

and international calling plans—not to mention free alternatives, such as email, instant 

messaging and PC-to-PC calling. From 2000-2004 alone, long-distance revenues 

declined by $5 billion in the U.S. 

At the same time, demands on the high-cost fund have increased. These demands 

result from needed reform of intercarrier compensation as well as the more expansive 
47

view taken by many states in recent years that universal service should subsidize not only 

service in remote areas—but competition. This latter view has often left the fund to 

subsidize not one provider, but two or more competing providers in areas where one 

provider would struggle to exist in the absence of subsidies. 

The increasingly precarious revenue base of universal service and the concurrent 

rising demand for resources have combined to drive the USF contribution factor from 

5.9% in the first quarter of 2000 to 10.9% in the first quarter of this year. USTelecom, 

alongside many on Capitol Hill, has grown increasingly concerned with the fund’s 

diminished financial stability. We have long believed that the current system needs 

immediate reform. Our primary suggestions include: (1) broadening the base of 

contributors; (2) carefully targeting recipients; and (3) tapping government resources to 

speed broadband deployment. 

Overall, both the Boucher-Terry legislation and universal service provisions in Sen. 

Stevens’ communications legislation are consistent with the principles embraced by the 

USTelecom Board. And, Chairman Barton, we also thank you for accepting the 

Gutknecht/Stupak amendment to the COPE Act and express our appreciation for this 

acknowledgement of the broad support in the House for sustaining universal service. 

The amendment, as you know, preserves the FCC’s authority to require VoIP 

providers to contribute to universal service alongside their other voice competitors. Just a 

few years ago, very few people had even heard the acronym VoIP. Today in North 

America, there are more than 1,100 VoIP providers offering service and more than 7.4 

million VoIP subscribers. It is important that all providers contribute in the same way to 

this shared national commitment to universal service. 

Mr. Chairman, we appreciate your time and attention today. We appreciate the hard 

work of the committee and the staff on updating the nation’s communications laws. We 

believe universal service has a vital, ongoing role to play ensuring that rural America has 

every opportunity to reap the full benefits of this new world of communications, and we 

look forward to working with you on sound policies that will ensure all Americans have 

access to affordable and reliable communications services. 

 MR. UPTON. Thank you. 

 Mr. Cimerman. 

MR. CIMERMAN. Thank you. 

 Mr. Chairman, members of the committee, thank you for inviting me 

to testify here today. 

 My name is Rick Cimerman. I am the Vice President of State 

Government Affairs for the National Cable and Telecommunications 

Association, NCTA, which is the principal trade association representing 

the cable industry in the United States. Our members include cable 

operators serving more than 90 percent of the Nation’s cable television 

subscribers as well as more than 200 programming networks. Our 

members also include suppliers of equipment and services to the cable 

industry. We are, as an industry, the Nation’s largest broadband provider 

of high-speed Internet access after investing $100 billion of private risk 

capital over the last 10 years to build out a two-way interactive network 

with fiber optic technology. We also provide state-of-the-art digital 

telephone service to millions of American consumers. 

 We appreciate your giving the cable industry the opportunity to share 

our views. We strongly support the goals and purposes of the Universal 
48

Service Fund, but at the same time, we share the concerns of 

policymakers, industry stakeholders, and the public that, in its current 

form, the Universal Service Program is not sustainable. There appears to 

be a general consensus that all aspects of the system, including 

contributions, eligibility, and level of support are in need of reform. 

 But at the outset, I want to be clear that cable operators that offer 

VoIP services pay millions of dollars into the current Universal Service 

Fund and we support making that obligation clear in the law. In 

addition, cable companies that offer traditional circuit switched service 

pay into the fund exactly the same as all other incumbent and 

competitive local exchange carriers that offer circuit switched service. 

 So in discussing High-Cost Universal Service reform today, I want to 

make three main points. First, we believe that a telephone number-based 

contribution mechanism should be adopted for Universal Service 

assessments. Broadband services, however, should not be assessed for 

universal service purposes. And all Universal Service distributions 

should be competitively and technologically neutral and encourage 

efficiency. 

 So as for a number-based system, we understand that the current 

contribution mechanism, which relies on the assessment of interstate 

telecommunications revenues only, virtually guarantees that the fund will 

continue to shrink. To address that problem, we have long advocated a 

telephone number-based system, a simple yet effective reform that we 

believe will sustain the long-term health of the fund while adapting to the 

evolving technology and economics of voice telephony. Using phone 

numbers would be a relatively simple means of determining who should 

contribute as well as when contributions were owed and in what amount. 

There will be no need to apportion provider revenues into interstate 

versus intrastate or determine which portion of a bundled offering 

represents interstate telecommunications or telecommunication services 

versus information services or which portion of the bundle is 

telecommunications versus video versus data. So it would make no 

difference which way these services were defined. Also, under a 

telephone number-based system, all that would matter is whether the 

service uses a phone number or not. It would be simple to understand for 

consumers, unlike today’s system. 

 We don’t believe, however, that universal service fees should be 

imposed on broadband service, particularly at the same time as 

policymakers seek to encourage more widespread deployment and 

service penetration. We believe such a fee would be counterproductive 

and would raise the price of high-speed Internet services for current and 

potential broadband customers. An appropriately crafted number-based 

plan would raise the revenue necessary to put the Universal Service Fund 
49

on solid and stable ground. According to the FCC, there are now 565 

million telephone numbers in use. If each number were assessed $1 a 

month, we would raise $6.8 billion a year, an amount that exceeds the 

2005 expenditures of $6.3 billion. But all of the various number-based 

proposals before the FCC also call for retaining an appropriate 

contribution from non-number-based services, most particularly special 

access and private line services used by businesses. Now there are 

various proposals on how to assess those services: capacity base, 

connections base, revenue base. In any case, as long as those 

contributions were retained, the revenue raised would reduce the required 

number-based assessment below $1 per month. So the assessment of 

broadband service is unnecessary to the goal of a stable, sufficient, and 

predictable fund. 

 Finally, I want to say just a few words about USF distributions. We 

believe that any reform must address disbursements as well as 

contributions, and that disbursements ought to be fair, equitable, and 

efficient. So in terms of the eligibility to receive funds, we believe that 

VoIP service providers ought to be eligible to receive funds, even if the 

service is classified as an information service. There are additional 

restrictions on ETC, or eligible telecommunications carrier, eligibility. 

For example, offering local usage plans comparable to those offered by 

the incumbent, or matching the service area of the incumbent local 

exchange area. We don’t believe that competitors should have to mimic 

the service offerings of an ILEC in order to receive funds. 

 Finally, Congress should consider the possibility of promoting more 

efficient use of universal service funds by establishing a cost benchmark 

and supporting no more than one line per household. 

 So, Mr. Chairman, thank you for inviting me here to testify, and I 

will be happy to answer any questions. 

 [The prepared statement of Richard Cimerman follows:] 

PREPARED STATEMENT OF RICHARD CIMERMAN, VICE PRESIDENT, STATE GOVERNMENT 

AFFAIRS, NATIONAL CABLE AND TELECOMMUNICATIONS ASSOCIATION

Chairman Barton and members of the committee thank you for inviting me to testify 

today. My name is Rick Cimerman and I am the Vice President of State Government 

Affairs for the National Cable & Telecommunications Association (NCTA), which is the 

principal trade association representing the cable industry in the United States. Its 

members include cable operators serving more than 90% of the nation’s cable television 

subscribers, as well as more than 200 cable programming networks. NCTA’s members 

also include suppliers of equipment and services to the cable industry. The cable industry 

is the nation’s largest broadband provider of high speed Internet access after investing 

$100 billion over ten years to build out a two-way interactive network with fiber optic 

technology. Cable companies also provide state-of-the-art digital telephone service to 

millions of American consumers. 
50

The Cable Industry Supports Universal Service 

Thank you for inviting me to comment on universal service issues. We appreciate 

your giving the cable industry the opportunity to share its views. The cable industry 

strongly supports the goals and purposes of the universal service fund (USF). Universal 

service is a longstanding component of national telecommunications policy and we share 

the concerns of policymakers, industry stakeholders and the public that, in its current 

form, the universal service program is not sustainable. While there is general consensus 

that all aspects of the system, including contributions, eligibility and level of support are 

in need of reform, there are a wide range of views as to how the program should be 

restructured. 

At the outset I want to be clear that cable operators that offer VoIP services pay 

millions of dollars into the current universal service fund and we support making that 

obligation clear in law. In addition, cable companies that offer traditional circuit 

switched service pay into the fund exactly the same as all other incumbent and 

competitive local exchange carriers that offer circuit switched service. 

In discussing high cost universal service reform today I will make three main points: 

• a telephone number-based contribution mechanism should be adopted; 

• broadband services should not be assessed for universal service purposes; 

• all universal service distributions should be competitively and technologically 

neutral and encourage efficiency. 

A Number-Based Assessment Mechanism Should Be Adopted 

 The current USF contribution mechanism, which relies on the assessment of 

interstate telecommunications revenues only, virtually guarantees that the fund will 

continue to shrink. There are several reasons for this. An increasing number of 

companies offer consumers voice telephone service for a fixed monthly rate that does not 

differentiate between local or long distance calls. Companies also offer bundled 

packages of digital services that include voice telephony. Most consumer VoIP services 

are offered without regard to intrastate or interstate distinctions. The fact is that interstate 

telecommunications revenues have been declining and are predicted to continue declining 

for the foreseeable future. As the line between what is a local and long distance call 

continues to blur, the existing USF contribution mechanism will become increasingly 

obsolete which threatens the viability of the program itself. 

 To address this problem, the cable industry has long advocated the adoption of a 

telephone numbers-based contribution mechanism, a simple yet effective reform that will 

sustain the long-term health of this fund while adapting to the evolving technology and 

economics of voice telephony. Using telephone numbers would be a relatively simple 

means of determining who should contribute as well as when contributions were owed 

and in what amount. There would be no need to apportion provider revenues into 

interstate versus intrastate or to determine which portion of a bundled offering represents 

interstate telecommunications. It would also make no difference whether a service was 

defined as a telecommunications service or as an information service. Under a telephone 

number-based system, all that matters is whether or not the service uses a phone number. 

Adoption of this approach would promote competitive neutrality among all voice 

telephone providers – those who offer their services as a replacement for plain old 

telephone service (POTS) – and would avoid assessments on services that only include a 

voice component but are not a substitute for POTS. Few would argue, for example, that 

applications, or devices, where voice functionality is ancillary to the actual purpose of the 

service or device—such as voice enabled gaming—should be assessed for USF purposes. 

 Some have expressed concern that a numbers-based system would collapse as 

proposals to map telephone numbers to Internet addresses, such as ENUM, become a 

reality. However, ENUM requires that a subscriber have an active telephone line. If 

someday in the distant future a non-number based system were developed and widely 
51

implemented, the telephone number- based contribution mechanism could easily be 

adapted, as some form of unique identifier or address will always be necessary to route 

various types of voice communications. 

 Mr. Chairman, the reality is that interstate telecommunications revenues are 

declining and will continue to decline. Conversely, an FCC staff analysis shows that the 

number of active telephone numbers is expected to grow for the foreseeable future, from 

554 million numbers in use in 2004 to nearly 600 million numbers in use in 2007. 

Moving to a numbers-based USF contribution mechanism embraces this reality and will 

ensure the universal service fund remains solvent well into the future. Furthermore, it 

would create a more predictable and equitable split between assessments collected by 

providers of local and long distance telephone services, and between residential and 

business subscribers. Residential telephone subscribers would generally pay less under a 

numbers-based plan. Assuming an appropriate assessment amount, even most one-line 

households with low long distance usage would pay the same or less under a numbersbased system than they do under the existing interstate revenue model. 

This is a particularly important point. Some who oppose a numbers-based 

assessment mechanism, because it’s in their business interest to do so, claim that lowincome and low volume long distance users will be unfairly burdened by a numbersbased system. They fail to note that proponents of such a system have proposed that lowincome users be exempt from USF assessment. And, perhaps more misleadingly, they 

fail to note that even local telephone subscribers that make no long distance calls pay at 

least $.54 per month into USF based on assessments on the interstate federal subscriber 

line charge. Given that the various proposals before the FCC call for at most an 

assessment of $1.01 per number per month, and other proposals call for something less 

than $1.00, arguments that low volume users will be unduly burdened ring hollow. 

New Government Fees Should Not Be Imposed on Broadband Service 

The imposition of new fees on broadband service at the same time policymakers 

seek to encourage more widespread deployment and service penetration would be 

counter-productive and would raise the price of high-speed Internet services for current 

and potential broadband customers. An appropriately crafted numbers-based assessment 

plan that avoids assessing broadband service will raise the revenue necessary to put the 

universal service fund on solid and stable ground. According to the FCC there are now 

565 million telephone numbers in use. If each telephone number were assessed a 

universal service contribution of $1.00 per month then $6.8 billon per year would be 

raised – an amount that exceeds the 2005 expenditure of $6.5 billion. But the various 

number-based proposals before the FCC also call for retaining an appropriate 

contribution from non-number based services, most particularly special access and 

private line services used by businesses. Whether such services are assessed on a 

capacity-based connections basis, or a revenue basis, the revenue raised would reduce the 

required number-based assessment well below $1.00 per month. Thus, the assessment of 

broadband service is unnecessary to the goal of a stable, sufficient and predictable fund. 

USF Distributions Should Be Competitively and Technologically Neutral and 

Encourage Efficiency 

It is essential that any high cost universal service reform address disbursements as 

well as contributions. The goals of reform should be to ensure that contributions are 

assessed fairly, eligibility and distributions are determined equitably, efficiently, and 

support is targeted to the appropriate services. 

Eligibility to Receive Funds. Existing statutory requirements impede the eligibility 

of new entrants to receive universal service funds, even if they are the most efficient 

provider of basic services. For instance, current law requires that a recipient must be an 

“eligible telecommunications carrier” (ETC), potentially excluding VOIP service 
52

providers if VOIP is classified as information service. The FCC imposes additional 

restrictions on ETC eligibility, including the requirement to offer local usage plans 

comparable to those offered by incumbent local exchange carrier (ILEC) in the area and 

to provide equal access to long distance carriers if all other ETCs in area relinquish their 

designations. 

 Competitors should not have to mimic ILEC service offerings or network 

architecture or geographic coverage to qualify for universal service support. Cable 

telephony providers should be eligible if they offer supported services throughout their 

cable franchise areas, without regard to the historical ILEC study area or technology. 

Promoting Efficiency. High cost universal service reform should attempt to 

introduce more efficiency into the rural and high-cost support mechanisms. As 

competitive options become available to rural consumers, it may be possible to cap the 

existing funds or even reduce them. Congress should also consider the possibility of 

promoting more efficient use of universal service funds by establishing a cost benchmark 

for awarding support and limiting support to one line per household. 

 Finally, while we agree that it is critically important to ensure that providers of 

supported services to consumers in rural and high-cost areas have adequate funding, as 

universal service contributors we also believe that funding must be subject to reasonable 

and regular oversight including assurances that universal service funds are being spent for 

their intended purpose. 

Mr. Chairman, thank you for inviting me to testify today. I would be happy to 

answer any questions you or the members of the committee may have. 

 MR. UPTON. Thank you. 

 Mr. Crothers. 

 MR. CROTHERS. Good afternoon, Mr. Chairman. 

 My name is David Crothers. I am here today to testify on behalf of 

the National Telecommunications Cooperative Association. We thank 

you for the opportunity to appear before you today. 

 Universal service has remained the cornerstone of our Nation’s 

telecommunications policy for more than 6 decades. It ensures that we 

enjoy the benefits of a nationwide integrated communications network. 

It is arguably one of the most successful programs in American history 

and has played a key role in our Nation attaining a near ubiquitous 

telephone subscribership level of 94 percent. 

 Mr. Chairman, the subject of this hearing is USF, what we are 

subsidizing and why. Let me begin my testimony by saying what USF is 

not. It is not a subsidy, and it is not a tax. USF is an industry-funded, 

cost-recovery mechanism that offsets the higher cost to build and 

maintain a vital communications network in rural, sparsely populated 

areas. No Federal monies are appropriated to this fund. Carriers that 

made the commitment to invest and deploy networks in high-cost areas 

receive support, which in turn allows them to offer service to rural 

consumers at a rate comparable to that offered to customers in lower cost 

urban areas. 

 As to the question why, Mr. Chairman, we believe the answer is 

evident. It is in the national and public interest for all Americans to have 
53

affordable access to communication services. Some question the 

continued need for universal service. To those that doubt, I would invite 

you to visit my State of North Dakota and see the incredible 

accomplishments of this program for yourself. I can assure this 

committee that universal service is still needed and is even more 

essential now as the Nation transitions to a digital and broadband world. 

Likewise, this does not alter the fact that the cost to serve rural areas is, 

always has been, and always will be more expensive than in urban and 

suburban areas. 

 For ILECs, the High-Cost Universal Program is a highly 

accountable, cost-based program. Rural carriers with costs exceeding 

115 percent of this national average cost per line receive support from 

the fund to offset these elevated costs. Incumbents file immense 

amounts of data that is reviewed and vetted at many levels, including the 

fund administrator, the Universal Service Administrative Company, and 

the FCC. 

 H.R. 5072, the Universal Service Reform Act introduced by 

Representatives Terry and Boucher contains provisions that meet the 

policy goals of NTCA. It has two goals: spur deployment of broadband 

services, and control growth in the Universal Service Fund. Broadband 

is an integral part of the commercial, economic, and social viability of 

any community. A community that lacks access to broadband and 

advanced services will not have pride and may not even survive. 

 While there are concerns that adding broadband to the Universal 

Service Program will cause the size of the fund to increase, this bill takes 

several steps to limit potential growth. We believe several of the costsaving provisions in the bill will be extremely effective and may offset 

much of the additional cost of deploying broadband. In particular, 

NTCA supports the expansion of the pool of providers and services that 

pay into the fund. The bill would require all providers that use telephone 

number, IP addresses, or offer a network connection for a fee to the 

public to contribute to the fund. This is long overdue. Changes in 

technology have created loopholes that have allowed many new 

providers to abate contributing even though they benefit from the 

resulting network upgrades and investment. 

 We fully understand and appreciate the political realities of 

compromise in this legislative process, Mr. Chairman, and the need to 

control expenditures and growth of USF. If a cap is necessary to secure 

House passage, we stand willing to work with you to ensure that rural 

carriers are not negatively affected. NTCA is very pleased that 

Congressmen Lee Terry and Rick Boucher have taken a leadership role 

through their legislation to ensure the vital policy of universal service 

remains solvent and forward-looking. The Universal Service Fund is 
54

critical in reaching the near ubiquitous telephone subscriber rate 

currently in the United States. This bill will put the Universal Service 

Fund on course to bring the same level of broadband subscribership to all 

Americans. We urge the committee to continue with the process and 

push for the passage of H.R. 5072 by the full House this year. NTCA 

stands ready and committed to working with Representatives Terry, 

Boucher, and the Energy and Commerce Committee to see that America 

takes this crucial step forward towards a broadband America. 

 Thank you. 

 [The prepared statement of David Crothers follows:] 

PREPARED STATEMENT OF DAVID CROTHERS, EXECUTIVE VICE PRESIDENT, NORTH 

DAKOTA ASSOCIATION OF TELEPHONE COOPERATIVES, ON BEHALF OF NATIONAL 

TELECOMMUNICATIONS COOPERATIVE ASSOCIATION

Good afternoon. I am David Crothers, Executive Vice President of the North 

Dakota Association of Telephone Cooperatives. I am here today to testify on behalf of 

the National Telecommunications Cooperative Association. We thank you for the 

opportunity to testify before you today. My comments today will focus primarily on the 

high-cost program within the universal service fund. 

Universal Service has remained the cornerstone of our nation’s telecommunications 

policy for more than six decades, ensuring that we enjoy the benefits of a nationwide 

integrated communications network. It is arguably one of the most successful programs 

in American history playing a key role in our nation attaining a near ubiquitous telephone 

subscribership level of 94%. 

Mr. Chairman, the subject of this hearing is "USF, what are we subsidizing and 

why?". Let me begin my testimony by telling you what USF is not. It is NOT a subsidy 

and it is NOT a tax. USF is an industry funded cost recovery mechanism that offsets the 

higher cost to build and maintain vital communications networks in rural, sparsely 

populated and insular portions of our Nation. No federal monies are appropriated to this 

fund what so ever. Carriers that made the commitment to invest and deploy networks in 

high-cost areas receive support which in turn allows them to offer service to rural 

consumers at a rate comparable to that offered to consumers in lower cost urban areas. 

As to the question “why”, Mr. Chairman my answer is simple: it is in the national 

and public interest for all Americans to have affordable access to communications 

services. Some question the continued need for universal service. To these doubters I 

invite you to visit my state of North Dakota and see the incredible accomplishments of 

this program for yourself. I can assure this committee that the universal service fund is 

still needed and I believe that it is even more essential now as the nation transitions to a 

digital and broadband world. While it is true that advances in technology may in some 

cases bring down the cost of providing communications services this is an over 

generalization. Likewise, this does not alter the fact that the cost to serve rural areas is, 

and always will be, more expensive than in urban and suburban areas. That, Mr. 

Chairman, is a fact that no one will dispute. 

For ILECs, the high-cost universal service program is a highly accountable costbased program. Support out of the fund is based on a national average cost per line 

calculated by the FCC. Rural carriers with costs exceeding 115% of this national average 

may receive support from the fund to offset these elevated costs. Incumbents file 

immense amounts of data outlining their costs and network investments to receive cost 

recovery support from the fund. This data is reviewed and vetted at many levels, 
55

including by the fund administrator, the Universal Service Administrative Company 

(USAC), and the FCC. 

However, new competitive carriers are treated differently. Under the guise of 

competitive neutrality the FCC unwittingly undermined the accountability of the fund by 

allowing new competitive carriers to receive support from the universal service fund 

without the same stringent reporting and accounting requirements mandated of the 

incumbents. Instead of filing their own cost and investment data, these new competitive 

entrants receive support based on incumbents costs. The vast majority of growth in 

universal service is due to competitive eligible telecommunications carriers (ETCs). 

Universal service support to competitive ETCs grew by over 115% in 20041

. During this 

same period ILEC support grew by only 0.6%. Requiring all universal service fund 

recipients to receive support based on their own costs will increase program 

accountability, reduce demand for funds and ensure that funds are being used for their 

intended purpose. 

NTCA’s Communications Act Re-write Policy Course is attached to my testimony. 

In the interest of time I will not go over it but I would like to briefly go over its key 

universal service policy positions. NTCA strongly believes: 

• The universal service fund must continue to be an industry-funded mechanism, 

and neither supported through general tax revenues nor subjected to the federal 

Anti-Deficiency Act. 

• The base of contributors must be expanded to include all providers utilizing the 

underlying infrastructure, including but not limited to all providers of 2-way 

communications regardless of technology used. 

• Support shall be made available for the cost recovery needs of carriers 

deploying broadband capable infrastructure. 

• The contribution methodology must be assessed on all revenues or a revenues 

hybrid that ensures equitable and nondiscriminatory participation. 

• Support must be based upon a provider’s actual cost of service and must not be 

used to artificially incite competition. 

If enacted, these policies will ensure the long term sustainability of the universal 

service fund, bring it in line with technological and market realities of today and position 

the fund to meet the communications needs of the future. The Universal Service Reform 

Act of 2006 (H.R. 5072) introduced by Representatives Terry and Boucher, contains 

provisions that meet the policy goals of NTCA. H.R. 5072 has two goals: spur 

deployment of broadband services and control growth in the universal service fund. 

In regard to expanding the universal service program to cover deployment of 

broadband networks, I don’t think anyone would dispute the growing importance of 

broadband. Broadband is an integral part of the commercial, economic and social 

viability of any community. A community that lacks access to broadband and advanced 

services will not thrive and may not even survive. It is simply that important. 

While there are concerns that adding broadband to the universal service program 

will cause the size of the fund to increase, this bill takes several steps to limit potential 

growth. We believe several of the cost saving provisions in the bill will be extremely 

effective and may offset much of the additional cost of covering broadband. In 

particular, NTCA supports expansion of the pool of providers and services that pay into 

the fund. The bill would require all providers that use telephone numbers, IP addresses 

or offer a network connection for a fee to the public to contribute to the fund. This is 

long overdue. Changes in technology have created loopholes that have allowed many 

 

1

 Wireless Communications and Universal Service by Bob Rowe, Senior Partner, Balhoff & Rowe, 

LLC @ Columbia Institute for Tele-Information. Slide 12.
56

new providers to evade contributing into the fund even though they benefit from the 

resulting network upgrades and investment. 

NTCA however, does not support provisions contained in the bill that would 

institute a statutory cap on the universal service fund. A cap by its very nature means a 

carrier will not receive the support it is due and thus is antithetical to the very goal of 

universal service. A cap is a disincentive to network investment. The FCC has 

maintained a regulatory cap on the fund for a number of years, and while we are not 

supportive of it, it is evidence to this committee that the Commission takes its role as 

steward of universal service monies seriously. In addition, a regulatory cap allows for 

flexibility to adjust in the future should circumstances change. We believe the many other 

positive provisions in H.R. 5072 discussed here go a long way towards achieving the goal 

of limiting growth in the universal service fund and thus make the proposed statutory cap 

unnecessary. 

NTCA is very pleased that Congressmen Lee Terry and Rick Boucher have taken 

such a leadership role through their legislation in working to ensure the vital policy of 

universal service remains solvent and forward looking. H.R. 5072 contains many 

provisions recommended by NTCA that would continue and expand upon the highly 

successful universal service program. 

The universal service fund was integral to reaching the near ubiquitous telephone 

subscriber ship rate that currently exists in the United States. This bill will put the 

universal service fund on course to bring the same level of broadband subscriber ship to 

all Americans. 

America stands at a crossroads between a narrowband and broadband world. The 

choice is clear. We must move forward aggressively with a national plan to bring 

broadband to all Americans, as envisioned by President Bush in his goal of ubiquitous 

broadband by 2007. To NOT move forward would imperil the global economic 

competitiveness of the United States. We urge the committee to adopt H.R. 5072 and 

push for its passage by the full House of Representatives this year. 

NTCA stands ready and committed to working with the Energy and Commerce 

Committee, and the entire congress, to see that America takes this crucial leap forward 

towards a broadband America. Thank you. 

 MR. UPTON. Thank you. 

 Mr. Garnett. 

MR. GARNETT. Good afternoon, Chairman Upton and members of 

the subcommittee. I want to thank you for focusing your attention on the 

important and timely issue of High-Cost Universal Service reform. 

CTIA is grateful for the opportunity to present its views in this important 

area on behalf of more than 200 million wireless subscribers. 

 Over the last decade, wireless industry contributions to universal 

service have been steadily rising while Universal Service distributions 

remain primarily directed to wireline carriers. Wireless carriers and their 

customers are responsible for about one-third of contributions to 

Universal Service. The wireless industry’s payment into the Universal 

Service Program will likely exceed $2.5 billion this year. 

 Meanwhile, the vast majority of universal service subsidies are 

directed to wireline carriers. Wireless carriers continue to receive only 

about 13 percent of universal service funding overall and less than 20 

percent of the High-Cost Universal Service support. And to add a little 
57

clarity to some comments made earlier about growth in the size of the 

fund, from 2000 through 2005, incumbent carriers accounted for roughly 

two-thirds the growth in the size of the High-Cost Universal Service 

mechanisms. Since 1997, of $22 billion spent on High-Cost Universal 

Service subsidies, $20.9 billion has gone to incumbent wireline carriers 

and only $1.1 billion has gone to wireless carriers and other competitors. 

This inequity exists even as consumers are demanding more and more 

wireless services. In fact, there are now more mobile wireless service 

subscribers than wireline switched access lines in the United States. 

 As Congress considers the important question of how to reform the 

Universal Service system, we believe there are important lessons that can 

be learned from the incredible growth of the wireless industry over the 

last decade. In December of 1995, there were approximately 34 million 

mobile wireless subscribers in the United States. By December of 2005, 

there were over 200 million mobile wireless subscribers, and that number 

continues to grow. That growth has occurred even as consumers have 

received lower monthly bills, cheaper minutes, and new and innovative 

services. This result is due, in large part, to an environment of regulatory 

constraint that rewards efficiency and innovation. 

 Although most of the wireless industry’s growth has occurred with 

the benefit of universal service subsidies, universal service can and does 

play a critical role in improving wireless services in high-cost, rural 

areas. For example, on the Pine Ridge Indian Reservation in South 

Dakota, Alltel has used universal service to increase telephone 

penetration rates from only 27 percent to 92 percent in 5 years. 

Centennial Wireless has used support to bring mobile wireless services to 

communities like Shaw and Blackhawk, Louisiana that previously had no 

telephone service at all, wireless or wireline. The public safety benefits 

of wireless deployment to these and other areas became obvious in the 

wake of Hurricanes Katrina and Rita last year when wireless services 

often were up and running long before wireline services were. We are 

proud of that track record, but we really do believe the best is yet to 

come. 

 As I mentioned to you before, efficiency and innovation have been 

the hallmarks of the wireless industry’s success. We believe universal 

service distribution policy should replicate those values as much as 

possible. Unfortunately, the current High-Cost Universal Service 

mechanisms are frozen in a time of guaranteed profits for monopoly 

providers of wireline services. And I lament the very examples that 

Congressman Barton gave us earlier are not limited to Texas and are 

probably not even limited to three pockets in Texas. So unlike the 

competitive market in which wireless carriers operate, the High-Cost 
58

Universal Service mechanisms and intercarrier compensation actually 

reward incumbent carrier inefficiency. 

 In practice, the FCC’s High-Cost mechanisms compound incentives 

for inefficiency, inherent in any kind of actual cost support mechanism. 

For example, the High-Cost mechanisms discourage carriers from taking 

advantage of economies of scale normally associated with combining 

operations. The High-Cost mechanisms also are designed to guarantee a 

prescribed level of profit for incumbent wireline carriers. Taken 

together, these problems have resulted in the bloated fund that disserves 

consumers. 

 At the FCC, CTIA has put forth detailed market-oriented proposals 

to address these problems. CTIA has supported efforts to reduce demand 

for universal service while ensuring that support continues to be 

available to both incumbent and competitive ETCs, or eligible 

telecommunications carriers, on a non-discriminatory basis. Specifically, 

CTIA has proposed transitioning over a number of years from the current 

five High-Cost Universal Service mechanisms to one that calculates 

support based on the most efficient technology for a particular 

geographic area. CTIA is open to other market-driven proposals such as 

reverse auctions that would reward those carriers that bid down the price 

of universal service. 

 We also think that there are changes that can occur within the 

existing system as well. For example, CTIA supports eliminating profits 

in high-cost mechanisms. We think carriers should get their profits from 

their own customers, not from other carriers through universal service 

payments and certainly not from other carriers’ customers. Increased 

accountability also has to be central to any reform. CTIA supports a 

“carrier of last resort” obligation for both incumbents and competitors. 

ETCs also need to show that the money that they spend is money well 

spent, and we support stringent reporting requirements for ETCs to show 

that that has happened. 

 We are open to other proposals, and we look forward to a continuing 

dialogue with the committee and Congress on these important issues. 

 Again, thank you for the opportunity to share our views on the 

universal service reform, and I welcome your questions. 

 [The prepared statement of Paul W. Garnett follows:] 

PREPARED STATEMENT OF PAUL W. GARNETT, DIRECTOR, REGULATORY AFFAIRS, CTIA –

THE WIRELESS ASSOCIATION

• CTIA is grateful for the opportunity to present its views on high-cost universal 

service reform on behalf of the more than 200 million wireless consumers. 

Efficiency and innovation have been hallmarks of the wireless industry’s incredible 

growth. Universal service distribution policies should replicate those values as 

much as possible. 
59

• The wireless industry is a significant net payer into the universal service system. 

Wireless carriers contribute one-third to the overall fund, while receiving only about 

13% of payments. Since 1997, of the $22 billion spent on high-cost universal 

service subsidies, $20.9 billion has gone to incumbent wireline carriers and only 

$1.1 billion has gone to wireless carriers and other competitors. Wireless carriers 

continue to receive less than 20% of high-cost payments. 

• Universal service plays a critical role in improving access to wireless services in 

high-cost, rural areas. In a few short years, wireless carriers have developed an 

incredible track record of using support to improve service quality and coverage in 

rural areas. In some cases, wireless carriers have brought services to communities 

that previously had no telephone service at all. We are proud of that track record. 

But, we believe the best is yet to come. 

• The wireless industry shares Congress’s commitment to the goals of universal 

service and its concerns about growth in the size of the universal service fund. 

Wireless carriers have strong incentives to ensure that the universal service fund is 

no larger than necessary, while ensuring that support is available to committed 

eligible telecommunications carriers (ETCs) on a non-discriminatory basis. 

• There are numerous problems with the high-cost universal services mechanisms: (1) 

incentives for incumbent carrier inefficiency; (2) enrichment of incumbent carrier 

profits; and (3) a lack of accountability. Any reforms must address these issues. For 

the sake of consumers, who are the intended beneficiaries of and ultimately fund 

universal service, the high cost universal service mechanisms must demand more 

efficiency and accountability from fund recipients. In many instances, that would 

mean less “per-line” support for both incumbents and competitors. 

• CTIA has proposed combining the current five high-cost universal service 

mechanisms into one mechanism that calculates support based on the most efficient 

technology – whether wireline or wireless – in a small geographic area. CTIA is 

open to other market-driven proposals (such as reverse auctions) that would reward 

more efficient carriers that compete away the cost of universal service. CTIA also 

has proposed shorter term reforms within the context of the current mechanisms that 

would reduce support for carriers that do not need it and potentially increase support 

to those carriers with legitimate needs. 

• Incumbent and competitive ETCs also must be held accountable for the universal 

service funds they receive. CTIA has supported technology neutral “carrier of last 

resort” obligations for both incumbent and competitive ETCs. CTIA also has 

supported requirements that both incumbent and competitive ETCs achieve 

measurable results – for example, showing how universal service dollars have been 

used to improve service quality and coverage. 

Chairman Upton, Ranking Member Markey and Members of the Subcommittee, on 

behalf of CTIA-The Wireless Association®, I want to thank the House Subcommittee on 

Telecommunications and the Internet for focusing its attention on the important and 

timely issue of high-cost universal service reform. CTIA is grateful for the opportunity 

to present its views in this important area on behalf of the more than 200 million wireless 

consumers. As a significant net payer into the universal service system, the wireless 

industry is uniquely positioned to comment on proposals to reform the universal service 

system. 

Over the last decade, wireless industry contributions to universal service have been 

steadily rising, while universal service distributions remain primarily directed to wireline 

carriers. Wireless carriers and their customers are responsible for about one-third of 

contributions to universal service. The wireless industry’s payment into the federal 

universal service programs may exceed $2.5 billion this year. 
60

Meanwhile, the vast majority of universal service subsidies are directed to our 

competitors – wireline carriers. Wireless carriers receive only about 13% of universal 

service support overall and less than 20% of high-cost universal service support. Since 

1997, of the $22 billion spent on high-cost universal service subsidies, $20.9 billion has 

gone to incumbent wireline carriers and only $1.1 billion has gone to wireless carriers 

and other competitors. So, to answer the Committee’s threshold question, the universal 

service mechanisms are primarily subsidizing wireline carriers. This inequity exists even 

as consumers – the only intended beneficiaries of universal service – are demanding more 

and higher quality wireless services in high-cost areas. 

The wireless industry shares Congress’s commitment to the goals of universal 

service and its concerns about growth in the size of the universal service fund. Wireless 

carriers have strong incentives to ensure that the universal service fund is no larger than 

necessary, while ensuring that support is available to committed eligible 

telecommunications carriers (ETCs) on a non-discriminatory basis. Non-discrimination 

is a critical element of our universal service proposals. Consumers never benefit from 

regulations that distort the competitive market. Both incumbents and competitors should 

have the same opportunities to obtain universal service support. 

Although we believe that a greater share high-cost universal service support clearly 

should be directed to deployment of more efficient wireless networks, the universal 

service reform debate must be more than about whether wireless or wireline carriers get 

the support. Policy-makers must address the more difficult question of how that support 

should be calculated. Otherwise, consumers will be faced with ever-increasing universal 

service costs. CTIA supports reforms that will ensure both incumbents and competitors 

receive no more support than is necessary to achieve the goals of universal service. As I 

will discuss, any reforms to the high cost universal service mechanisms must demand 

more efficiency and accountability from fund recipients. In practice, that would mean 

less “per-line” support for both incumbents and competitors. 

Lessons Learned from the Wireless Industry Experience. 

As Congress considers the important question of how to reform the universal service 

system, there are important lessons that can be learned from the incredible growth of the 

mobile wireless industry over the last decade. In December 1995, there were 34 million 

mobile wireless subscribers in the United States. As of December 2005, there were over 

200 million mobile wireless subscribers. There are now more mobile wireless 

subscribers than wireline switched access lines. 

Mobile wireless customers are in both rural and non-rural areas. According to the 

Bureau of Labor Statistics, the household wireless penetration rate in urban areas is 

53.9%. The wireless household penetration rate in rural areas is not far behind – at 

50.5%. The FCC has found that 97% of wireless customers live in counties with a choice 

of three or more wireless carriers and 87% of wireless customers live in counties with a 

choice of five or more wireless carriers. 

Wireless carriers have been so successful, in part, because they have operated in an 

environment of regulatory constraint that rewards efficiency and innovation. The result 

has been lower monthly bills, cheaper minutes, and new and innovative service offerings. 

The average cost of wireless services has declined over time – even as wireless service 

offerings have expanded. In June 2002, before the Omnibus Budget Reconciliation Act 

of 1993, the average wireless bill was $68.51 per month. As of June 2005, the average 

wireless bill was less than $50 per month. In fact, in 1992 dollars, the average wireless 

bill in 2005 was equal to $35.57 – slightly more than half the earlier bill. For many 

customers, nationwide bucket of minute plans have made wireless the service of choice 

for making local and long-distance calls. In 1995, the average wireless customer had 

about 115 minutes of use per month. In 2005, the average wireless customer had almost 

700 minutes of use per month. In 1995, there were 37 billion minutes of use on wireless 
61

networks. In 2005, there were approximately 1.5 trillion minutes of use on wireless 

networks. 

Now, wireless carriers are in the midst of rolling out mobile broadband services. An 

alphabet soup of wireless broadband technologies is being deployed: Wi-Fi, Wi-Max, 

EV-DO, WCDMA, UMTS, to name just a few. Verizon Wireless has launched a 

broadband network based on evolution data only (“EV-DO”) technology available in 171 

metropolitan markets covering more than 140 million people. Sprint Nextel began to roll 

out its EV-DO technology in mid-2005 and now offers wireless broadband services in 

208 markets. In December, Cingular Wireless announced that subscribers could access 

its BroadbandConnect service through Cingular’s new 3G network. Alltel offers its 

Axcess Broadband service, which provides data rates comparable to wireline broadband, 

in nine metropolitan areas. In addition to its extensive network of wireless hotspots, TMobile offers mobile Internet access through its GPRS service. Deployment is not 

limited to the nationwide wireless providers. U.S. Cellular, Alaska Communications 

Systems, Cellular South, Cellular One of Amarillo, Dobson Cellular, First Cellular of 

Southern Illinois, Midwest Wireless, and many others are rolling out mobile wireless 

broadband services. 

Although most of the wireless industry’s growth has occurred without the benefit of 

universal service subsidies, universal service can and does play a critical role in 

improving access to wireless services in high-cost, rural areas. Deployment of wireless 

services in rural markets is more costly on a per-customer basis than serving a more 

densely populated area. As with wireline networks, factors such as lower population 

densities, topography, and geographic isolation make the average cost of providing 

mobile wireless services in rural areas significantly higher than in urban areas. 

Wireless deployment in some rural areas has occurred because of wireless carrier 

access to universal service support. In a few short years, wireless ETCs have achieved a 

great deal. In many cases, wireless ETCs have used universal service dollars to bring 

service to rural and insular areas. For example, on the Pine Ridge Indian Reservation in 

South Dakota, Alltel has used universal service to increase telephone penetration rates 

from 27% to 92% in only five years. Cellular South serves 380,000 square miles of rural 

territory in Mississippi and is using high-cost support to significantly expand its network 

capacity. Centennial Wireless has brought mobile wireless services to communities, such 

as Shaw and Blackhawk, Louisiana, that previously had no telephone service at all, 

wireline or wireless. These are areas where the incumbent carrier – the “carrier of last 

resort” – was unwilling or unable to serve all customers. The public safety benefits of 

wireless deployment to these and other customers became obvious in the wake of 

Hurricanes Katrina and Rita when wireless services were often available long before 

wireline services. We are proud of this track record. But, we believe the best is yet to 

come. 

Market-Based Universal Service Reform. 

As I mentioned before, efficiency and innovation have been hallmarks of the 

wireless industry. Universal service distribution policies should replicate those values as 

much as possible. Policy-makers should not repeat the mistakes of the past by supporting 

universal service policies that distort the competitive market or create incentives for both 

incumbents and competitors to develop business models premised on receipt of greater 

and greater subsidies. If the experience of the wireless industry can be any guide, 

simplified regulations that encourage and reward efficiency will best benefit consumers 

by ensuring that universal service is targeted only to where it is most needed and is no 

more than is necessary. To turn the tables on a popular wireline carrier analogy, instead 

of guaranteeing a “three-legged stool” of universal service, access charges, and end-user 

revenues in perpetuity, universal service laws and regulations should be designed to 
62

enable carriers serving high-cost areas to eventually stand on their own two feet and 

compete in the marketplace. 

Unfortunately, the current high-cost universal service mechanisms are frozen in a 

time of guaranteed profits for monopoly providers of wireline services. Unlike the 

competitive market in which wireless carriers operate, the high-cost universal service 

mechanisms (and intercarrier compensation) actually reward incumbent carrier 

inefficiency. They also allow incumbent carriers to keep support even as they lose 

customers. Absurdly, the high-cost mechanisms subsidize incumbent carriers based on 

what they spend (i.e., their “actual” or “embedded” costs), not necessarily based on 

whether they actually serve customers located in a rural, high-cost area. 

In practice, the FCC’s high-cost support mechanisms compound incentives for 

inefficiency inherent in actual cost support mechanisms. For example, the high-cost 

support mechanisms discourage carriers from taking advantage of economies of scale 

normally associated with combining operations. The high-cost universal service 

mechanisms also are designed to guarantee a prescribed level of profit for incumbent 

wireline carriers. Based on an estimated average cost of debt of only 5.46%, the average 

rural incumbent carrier earns a 15.06% return on equity from the universal service 

mechanisms. To make matters worse, many incumbent wireline carriers have reported to 

the FCC that they had profits far in excess of the prescribed rate-of-return. These 

elevated universal service profits do not translate to improved telecommunications 

services in high-cost areas. Instead, they simply enrich carriers, while increasing the 

overall size of the fund to the detriment of other carriers and consumers who end up 

paying higher universal service pass through charges. 

Taken together, these problems result in a bloated fund that does not effectively 

target the appropriate levels of support to different high-cost areas. As a result, the highcost support mechanisms do a poor job of ensuring that all Americans have access to 

high-quality, affordable telecommunications and information services. Moreover, the 

high-cost support mechanisms undermine the efficient development of competition as 

envisioned by the Congress in the Telecommunications Act. 

 At the FCC, CTIA has put forth market-oriented proposals to address these 

problems. CTIA has supported efforts to reduce demand for universal service, while 

ensuring that support is available to both incumbent and competitive ETCs on a nondiscriminatory basis. Specifically, CTIA has proposed combining the current five highcost universal service mechanisms into one mechanism that calculates support based on 

the most efficient technology – whether wireline or wireless – in a small geographic area. 

Under this proposal, incumbent and competitive ETCs would receive the same level of 

“per-line” support based on the most efficient wireline or wireless technology for a given 

area. As in the competitive market, ETCs would only receive support to the extent that 

they win customers. More customers would equate to more support. At the same time, 

incumbents and competitors that lose customers would lose support (a novel concept 

under the current mechanisms). 

Although CTIA has suggested that a cost model could be used to calculate support, 

CTIA is open to other market-driven proposals (such as reverse auctions) that would 

reward more efficient carriers that compete away the cost of universal service. CTIA 

also has proposed shorter term reforms within the context of the current mechanisms that 

would reduce support for carriers that do not need it and potentially increase support to 

those carriers with legitimate needs. For example, CTIA has supported: 

(1) Eliminating profit guarantees in high-cost mechanisms (We think carriers should 

get their profits from their own customers, not through the universal service 

mechanisms); 

(2) Requiring carriers to combine study areas in a given state (The current rules 

allow large, low-cost incumbents to appear small and high-cost by balkanizing their 

operations within a state); and 
63

(3) Transitioning larger rural incumbent carriers to the non-rural high-cost 

mechanisms. 

Increased accountability must be central to any universal service reforms. That’s 

why CTIA has supported technology neutral “carrier of last resort” obligations for both 

incumbent and competitive ETCs. CTIA also has supported requirements that both 

incumbent and competitive ETCs achieve measurable results – for example, showing 

how universal service dollars have been used to improve service quality and coverage. 

We are open to other proposals and look forward to a continuing dialogue with this 

Committee and Congress on these important issues. Again, thank you for the opportunity 

to share the wireless industry’s views on universal service reform. I welcome your 

questions. 

 MR. UPTON. Thank you. 

 Ms. Pies. 

MS. PIES. Thank you, Chairman Upton, Ranking Member Markey, 

and members of the subcommittee. 

 My name is Staci Pies. I am Vice President of PointOne, a VoIP 

provider, and President of Voice on the Net, or VON, Coalition, the 

voice of the VoIP industry. 

 On behalf of the VON Coalition, I thank the subcommittee for the 

opportunity to testify about this important issue. 

 We are pleased to be here today to encourage you to ensure that 

every American can benefit from broadband communications choices. 

With the right policy framework, VoIP has the potential to revolutionize 

the way all Americans communicate. Consumers throughout the country 

will be able to use VoIP to do things never thought possible. Businesses 

may increase efficiency and productivity and transform the way they 

operate. Importantly, VoIP can ensure that rural and low-income 

Americans have access to a vast array of exciting communications 

choices at prices that are more economical than plain old telephone 

services. 

 America’s universal service system has been a cornerstone of our 

telecommunications policy, we say 70 years, I have now heard 60 and 

80, we will go with 70, enhancing the value of the network and 

increasing our quality of life in immeasurable ways. 

 Yet for all its past success, USF today is at a crossroads. I wish to 

make three points today about reform of our universal service system. 

First, the VON Coalition supports modernizing USF and encourages you 

to establish a contribution approach that is based on a measurement of 

network connections that is equitable and non-discriminatory. Such a 

system would explicitly assess interconnected VoIP providers. Second, 

Congress should adopt distribution policies that create incentives rather 

than disincentives for efficient network deployment. And third, 

Congress should adopt forward-looking approaches that empower 

consumers and extend VoIP-driven benefits to rural Americans. This 
64

means reforming both USF and the polices that determine the cost and 

availability of exchanging traffic between Internet networks and the 

legacy phone network. 

 First, to accelerate the benefits of broadband-enabled voice services 

to all Americans, we have long supported adoption of a USF contribution 

methodology that broadens the base to ensure the sustainability of the 

funds and reduces price distortions caused by the current system. As 

articulated in H.R. 5072, new technologies and all-distance pricing have 

rendered regulatory distinctions based on geography irrelevant and 

unsustainable. Therefore, we recommend that Congress require the FCC 

to adopt expeditiously a contribution methodology that is based on a 

measurement of end-user connections rather than the arbitrary and 

irrelevant approach of attempting to assess interstate revenues. 

Assessment of VoIP provider revenues leaves open the possibility that 

USF could be assessed on all applications, including instant messaging, 

e-mail, and other IP addresses. It could lead to double payments for the 

same service, enable broadband blocking, and it would be difficult, if not 

impossible, to ascertain the appropriate contribution amount with any 

certainty. We believe a numbers- and/or connections-based approach 

would best meet the objectives of effectively sustaining the Universal 

Service Fund while ensuring that assessments are equitable and nondiscriminatory. 

 Second, in addition to lowering the cost of communication services 

through direct subsidies, Congress should focus on accelerating VoIPdriven benefits to consumers and businesses by establishing incentives 

for carriers to make cost-effective investment decisions while increasing 

the availability of broadband services. We agree that all Americans 

benefit from the fact that residents of rural areas have access to high 

quality communication services. However, the incentives for providers 

to improve economic efficiency by deploying IP-based networks are 

adversely impacted by the manner in which the Fund is currently 

administered. With the advent of more efficient, lower-cost 

technologies, such as VoIP, the cost of providing service in rural and 

high-cost areas can decrease significantly. Not only does VoIP enable 

robust, innovative communications experiences for all Americans, it 

significantly lowers the cost of network deployment and the provision of 

services to enterprises and residential consumers for a cost savings of 40 

to 60 percent. 

 And third, as this subcommittee has recognized, reforming USF is 

only part of the solution for ensuring that consumers have access to 

innovative and affordable communication services. Universal service 

reform must go hand-in-hand with comprehensive intercarrier 

compensation reform. Piecemeal fixes that address only a small subset 
65

of compensation issues actually undermine the potential for 

comprehensive reform. For example, the “phantom traffic” solution in 

H.R. 5072 perpetuates implicit subsidies rather than directly resolving 

USF funding issues. We do not support onerous “phantom traffic” 

legislation at this time, especially legislation that would apply retroactive 

compensation on providers as well as have the unintended consequence 

of giving network operators explicit authority to block an Internet user’s 

ability to use the Internet communications application of their choice. 

Legislation must help accelerate the transition to IP networks by 

eliminating implicit subsidies, removing interconnection barriers, and 

modernizing old policies for the new world. 

 In summary, reform of universal services should focus on bringing 

all consumers affordable and innovative communication services. The 

VON Coalition respectfully recommends that Congress reform the USF 

contribution mechanism towards an equitable, technologically-neutral, 

and easy-to-administer system that will ensure the sustainability of the 

Fund. The distribution process must also be reformed to make support 

explicit, funding fair, and provide the proper economic incentives for 

efficient network deployment. And finally, Congress should be 

conscious about harming innovation and address only those VoIP 

services that are substitutes for existing telephone services. 

 The VON Coalition would again like to thank the subcommittee for 

its leadership on VoIP, and with your continued leadership, we believe 

VoIP is positioned to make innovative communicating more affordable 

for all Americans. 

 Thank you, and I am happy to answer any questions. 

 [The prepared statement of Staci L. Pies follows:] 

PREPARED STATEMENT OF STACI L. PIES, VICE PRESIDENT, POINTONE COMMUNICATIONS,

ON BEHALF OF VOICE ON THE NET (VON) COALITION

Thank you, Chairman Upton, Ranking Member Markey, and members of the 

Subcommittee. My name is Staci Pies. I am Vice President, Governmental and 

Regulatory Affairs, of Point One, a VoIP provider, and President of the Voice on The Net 

or VON Coalition - the leading U.S. organization representing the VoIP industry on 

critical legal and regulatory issues. On behalf of the VON Coalition, I thank the 

Subcommittee for the opportunity to testify about the important issue of the Federal 

Universal Service Fund and subsidizing high cost areas. 

This Subcommittee has led in facilitating the deployment of VoIP in recent years. 

Your actions to tread lightly when it comes to Internet regulation have helped enable the 

timely delivery of innovative, competitively priced, voice services to Americans all over 

the country. 

We are pleased to be here today to encourage this Subcommittee to ensure that every 

American can benefit from broadband communications choices. With the right policy 

framework, VoIP has the potential to transform the way all Americans communicate. 

Consumers throughout the country will be able to use VoIP to do things never thought 

possible, businesses may increase efficiency and productivity and transform the way they 
66

operate. Importantly, VoIP can ensure that rural and low income Americans have access 

to a vast array of exciting communications choices at prices that are more economical 

than plain old telephone services. 

Congress has an unparalleled opportunity to help launch a new era of broadbandenabled benefits. You can facilitate transformative improvements in the way we 

communicate that harness the power of the Internet. VoIP is not just another flavor of 

telephone service. In contrast to traditional plain old telephone service (“POTS”), VoIP 

voice is an application, just like e-mail, streaming audio, streaming video, and web 

browsing and can occur over any packet data network, including the Internet. 

Accelerating VoIP adoption can mean cost savings for consumers and businesses, 

reduced operational costs for providers, advanced features unavailable with traditional 

phones, increased competition among network and service providers, increased 

infrastructure investment, accelerated broadband deployment, improvements in 

emergency services, lower cost communications for rural and government users, 

increased access for persons with disabilities, and increased worker productivity. 

To, to ensure that every American can benefit from broadband communications 

choices, I wish to make four points today about reform of our Universal Service system. 

• First, the VON Coalition supports modernizing our Universal Service system 

and encourages the Subcommittee to establish a contribution approach that will 

be equitable, technologically neutral, understandable, easy to administer and 

will ensure the sustainability of the fund. 

• Second, to help accelerate the transition to a nationwide broadband network, 

Congress should adopt policies that create incentives rather than disincentives 

for efficient network deployment and exchanging traffic between Internet 

networks and the legacy phone network -- thus geometrically increasing the 

value of both of America’s communications networks. 

• Third, rather than automatically applying yesterday’s rules to tomorrow’s 

technologies, the Subcommittee should adopt forward looking approaches to 

Universal Service and intercarrier compensation that empower consumers, 

extend VoIP driven benefits to rural Americans, and boost productivity in the 

economy. This means strengthening and reforming both the Federal Universal 

Service system and policies that determine the cost and availability of 

interconnection, regardless of the underlying technology. 

• And fourth, to the extent that the Subcommittee acts, it should take a light 

regulatory approach to VoIP and address only those services that are substitutes 

for existing telephone service. 

America’s Universal Service system has been a cornerstone of our 

telecommunications policy for over 70 years – enhancing the value of the network and 

increasing our quality of life in immeasurable ways. Yet for all its past success, Universal 

Service support today is at a crossroads. The VON Coalition shares the concerns of this 

Subcommittee, industry stakeholders, and rural consumers that the current contribution 

mechanism is inadequate, the funding mechanisms may not provide network operators 

with proper economic incentives, and the system does not ensure a sustainable USF. 

First, the VON Coalition believes that every American should have the opportunity 

to benefit from broadband enabled voice services. We have long supported 

modernization of the Universal Service fund contribution methodology to move away 

from yesterday’s revenue based system, to a broader connections or working telephone 

number based contribution mechanism that is competitively and technologically neutral. 

As articulated in The Universal Service Reform Act of 2006, H.R. 5072, new 

technologies and all-distance pricing have rendered regulatory distinctions based on 

geography irrelevant and unsustainable. There is a growing consensus that a revenuebased contribution methodology will not be sufficiently durable to withstand the broad 

transition to VoIP and other technological change. Moreover, a revenue-based 
67

contribution methodology is inconsistent with the goals of ensuring that universal service 

support be sufficient and predictable. 

This Subcommittee should focus on legislation that ensures the contribution 

mechanism is simple enough for the average consumer to understand, and to minimize 

transaction costs for consumers. Therefore, we recommend that Congress require the 

FCC to adopt immediately a Universal Service contribution methodology that is based on 

a measurement of end user connections such as working phone numbers rather than the 

arbitrary approach of attempting to assess revenues or identifier protocols other than 

working phone numbers. Assessment of VoIP provider revenues leaves open the 

possibility that USF could be assessed on all applications including every Instant 

Message, E-mail, or other IP address. It could lead to double payments for the same 

service, enable broadband blocking, and would be difficult if not impossible to ascertain 

the appropriate contribution amount with any certainty. We believe a numbers and/or 

connections-based approach would best meet the objectives of effectively sustaining the 

Universal Service Fund while ensuring that assessments are equitable and nondiscriminatory. 

Second, in addition to lowering the cost of communications services through direct 

USF subsidies, Congress should focus on accelerating VoIP driven benefits to 

consumers, businesses, and the economy by establishing incentives for carriers to make 

cost-effective investment decisions while improving service to consumers in their areas 

by increasing the availability of broadband services. The VON Coalition agrees that all 

Americans benefit from the fact that residents of rural areas have access to high quality 

telephone service. However, the incentives for providers to improve economic efficiency 

by deploying IP-based networks and services are adversely impacted by the manner in 

which the fund is currently administered given that high cost carriers generally receive 

subsidies based on their costs. 

High-cost support provides subsidies to make carriers whole, regardless of their 

investment decisions or business models by guaranteeing ‘reasonable’ rates of return. 

Utilizing traditional, circuit switched technology, it is generally agreed that in those 

areas, basing end-user retail prices strictly on the cost of service would likely create a 

barrier to subscription and frustrate the achievement of Universal Service goals. 

However, with the advent of more efficient, lower cost technologies such as VoIP, the 

cost of providing service in rural and high cost areas can decrease significantly. Not only 

does VoIP enable robust, innovative communications experiences for all Americans, it 

significantly lowers the cost of network deployment and the provision of services to 

enterprises and residential consumers. Consumers and businesses are flocking to VoIP 

because it can do what plain old telephone service can – and much, much more – at a 

competitive price. Indeed, VoIP is cutting phone bills by as much as 40 percent and 

enabling the kind of voice competition that this Committee envisioned when it passed the 

1996 Telecom Act. In some cases VoIP can replace a home or business phone system, in 

many other cases it is integrated into existing software applications, and voice 

recognition systems. In the workplace, businesses, small and large, are tapping into 

VoIP for cost savings of 40 to 60 percent, and at the same time boosting productivity by 

as much as 15 percent through smarter communications systems. VoIP provides 

breakthrough new features that enable businesses to function more efficiently and 

respond more effectively to the needs of consumers. 

Third, reforming the federal Universal Service system is only part of the solution for 

ensuring that consumers have access to innovative and affordable communications 

services. Despite minor steps towards access charge reform, a significant portion of nontraffic sensitive costs of the local network are still assigned to interstate calls. This cross 

subsidy exists today despite the fact that the 1996 Act called for elimination of implicit 

subsidies in part because these costs do not vary with minutes of calling in any 

jurisdiction. Legislation enacted by Congress must help accelerate the transition to IP-
68

enabled networks by reforming intercarrier compensation to eliminate implicit subsidies, 

removing interconnection barriers and modernizing old polices for the new world. We 

commend this Subcommittee for ensuring that VoIP providers can interconnect with the 

public switched telephone network (“PSTN”) to provide consumers with new voice 

alternatives. 

As this Subcommittee has recognized, Universal Service reform must go hand-inhand with comprehensive intercarrier compensation reform. To ensure that consumers 

and businesses can take advantage of this global medium that spans geographic 

boundaries, intercarrier compensation reform must speed the transition to broadbandenabled communications. IP networks and the gateways that enable the transition 

between broadband communications and the PSTN are critical links for empowering 

consumers and driving economic benefits. By focusing on overall, complete reform, in a 

timely fashion, you will ensure continued investment in IP-enabled networks, and avoid 

piecemeal decisions that can stifle innovation, technology investment, and slow the 

transition to broadband communications. 

Piecemeal fixes and stand-alone decisions that only address a small subset of 

intercarrier compensation issues actually undermine the potential for comprehensive 

reform. For example, the “phantom traffic” solutions in H.R. 5072 perpetuate implicit 

subsidies rather than directly resolving USF funding issues. The VON Coalition would 

support the need to ensure that, where technically feasible, all providers that interconnect 

with the PSTN pass the call identifying information they receive without alteration, if 

Congress finds it necessary to impose such a requirement; however, we do not support 

onerous phantom traffic legislation at this time, especially where such legislation would 

apply retroactive intercarrier compensation on providers as well as have the unintended 

consequence of giving network operators explicit authority to “block” an Internet users’ 

ability to use the Internet communication applications of their choice. 

A broad range of parties have recognized that there is a difference between 

identifying traffic and reforming Universal Service and intercarrier compensation. 

Addressing traffic identification by itself is only a half-measure. The only real solution is 

comprehensive Universal Service and intercarrier compensation reform that eliminates 

today’s artificial distinctions between different types of traffic, and puts Universal 

Service on a more stable footing than does implicit subsidies through access charges. 

Accordingly, we recommend that rather than attempt to resolve USF through the 

continuation of implicit subsidies inherent in the phantom traffic solutions of H.R. 5072, 

you provide the FCC a 180-day deadline by which to complete their long-pending 

Universal Service and intercarrier compensation proceedings, consistent with Section 254 

of the Communications Act. 

And fourth, the VON Coalition urges the Subcommittee to recognize the distinction 

between innovative IP-based services that do not connect to the public network and those 

services that are substitutes for existing telephone service. For example, VoIP services 

that offer consumers the ability to make and receive calls from the traditional phone 

network could be subject to traditional social regulation such as Universal Service 

contributions. These are the types of voice services that may rely on the public phone 

network and which consumers may consider substitutes for traditional phone service. 

One example of a web-based service that does not constitute telephone replacement 

services is the innovative help line available on the Gerber baby food web site 

(https://www.gerber.com/contactus). If a new mother has an urgent question at 3am, she 

can today click on the web site using a click-to-dial, one-way VoIP service that 

immediately connects the parent to an infant care specialist 24/7. However, if legislation 

imposing Universal Service obligations would apply to innovative, one-way VoIP 

services, this potentially life-saving service for new moms would presumably have to be 

shut down because it would not be able to sustain the economic cost of contributing. 
69

In summary, reform of Universal Service should focus on bringing consumers 

affordable communications services. The VON Coalition respectfully recommends that 

Congress reform the Universal Service contribution mechanism towards an equitable, 

technologically neutral, understandable, easy to administer system that will ensure the 

sustainability of the fund. The distribution processes must also be reformed to make 

support explicit, funding fair and provide the proper incentives for efficient network 

deployment. To do this, Universal Service support should be distributed in ways that 

reward providers for economic efficiencies. Moreover, Universal Service and 

interconnection costs and policies must be reformed to ensure that implicit subsidies are 

eliminated and support is distributed in a competitively and technologically neutral 

manner so that consumers are able to make purchasing decisions based on economically 

rational pricing signals and their communications needs rather than having government 

pick technological winners and losers. Finally, Congress should be cautious about 

harming innovation and continue to maintain a hands-off approach to the delivery of IPenabled services, especially those that are not substitutes for traditional voice services. 

The VON Coalition would again like to thank this Subcommittee for its leadership 

on VoIP. With continued leadership, we believe VoIP is positioned to help make 

innovative communicating more affordable for all Americans, businesses more 

productive, jobs more plentiful, the Internet more valuable, and Americans more safe and 

secure. 

Thank you very much. I am happy to answer questions. 

 MR. UPTON. Thank you. 

 Mr. Feiss. 

MR. FEISS. Mr. Chairman and members of the committee, it is an 

honor to be here. I remember fondly my years as a resident of Michigan, 

and I only moved to Montana-- 

 MR. UPTON. Just remember, it is the great State of Michigan. 

 MR. FEISS. The great State. And I only moved to Montana because 

it started with an “M” as well. 

 It is an honor for me to be here to discuss what universal service is 

and the benefits it provides to all Americans, no matter where they live. 

 First, to answer the title of this hearing, what are we subsidizing? 

Simply put, all Americans should have access to quality, affordable, 

advanced telecommunications services. Much in the same way that the 

National Highway System has enabled transportation of goods from one 

coast to another and all points in between, so has our Nation’s 

telecommunications infrastructure enabled the transportation of 

information to all corners of the Nation and, indeed, to the world. 

Without universal service, investment in this infrastructure in high-cost 

parts of the Nation, in particular, may not be possible. And rates in 

Montana, for example, would increase by $330 to $600 a year. That is 

real money in a State like Montana whose per capita income ranks near 

the bottom of the Nation. 

 Montana provides an excellent illustration of why we have universal 

service. Our State is the fourth largest, in terms of geography, in the 
70

country, yet our population is less than one million people. In telecom 

terms, we average only three access lines per mile. 

 Congress and the President have called for broadband deployment 

throughout the United States as an important means by which to advance 

our country’s worldwide economic competitiveness. Here is a sampling 

of what we have done in Montana. Over 250 rural Montana 

communities have access to broadband. When the largest city is 100,000 

people, we are talking about scores of towns with populations of less 

than 1,000. Montana’s rural telcos have deployed broadband access to 

between 80 percent and nearly 100 percent of their service areas. That is 

better than what is repeated often to be the number one connected 

country in the world, South Korea. We have deployed videoconference, 

telemedicine, and distance learning access sites to over 130 rural 

Montana communities, including sites on all of the Native American 

reservations in the State. 

 As a result of the investment that Montana’s rural telecos have made 

in advanced telecommunications infrastructure, a nationally-certified 

software engineer can live in Canyon Creek, Montana and serve her 

clients anywhere in the world. A programmer from Los Angeles who 

designs video graphics for national professional exams directs plays in 

the summer from Virginia City, Montana. He continues to operate his 

graphic design business from Virginia City, thanks to a DSL connection 

that he has in that town. I should point out that I had a board meeting in 

Virginia City recently, and there was a 4-H Club there, and a bunch of 

fourth and fifth grade children were there from the metropolis of Twin 

Bridges, Montana, and they didn’t know who their phone company was, 

but they did know who their Internet provider was. At the Great Divide 

Ranch near Philipsburg, Montana, the suburbs of Philipsburg, the nonprofit Project Vote Smart provides online access to information on about 

40,000 political candidates in every State. Project Vote Smart’s access 

to advanced broadband services makes the non-profit’s databases 

available to 45,000 members and voters nationwide. And the list goes 

on. 

 Investment in the national information infrastructure enables a 

panoply of telecommunications-related applications, services, and 

businesses that rely on advanced underlying telecommunications 

infrastructure. For example, we have heard today from wireless 

providers. Wireless capabilities depend on a reliable, wireline 

infrastructure. Indeed, wireless communication are wireless only from 

the consumers handsets to the nearest point of presence on the wireline 

network. Similarly VoIP, Voice over Internet Protocol, relies on a 

broadband connection. The VoIP service itself is a software program. 
71

That broadband connection is dependent on a broadband connection to 

the underlying telecommunications infrastructure. 

 Additionally, we have heard about efficiencies. A continual 

investment in the national telecommunications network creates 

efficiencies that save universal service outlays in the long run. For 

example, modern fiber optic backbone technology and soft switches have 

resulted in carriers receiving less universal service support today than 

they have in the past. For example, Blackfoot Telephone Cooperative in 

Missoula, Montana is deploying an Ethernet backbone, and it receives 

$500,000 less in universal service from the efficiencies it has created. 

Similarly, Three Rivers Telephone Cooperative in Fairfield, Montana is 

receiving $1.5 million less in universal service support than it did in 

2004 versus 2005. And meanwhile, these technologies are deploying 

more robust services, faster speeds, out to the edges of these 

telecommunications networks and creating efficiencies and saving the 

Universal Service Fund. 

 However, reasons for universal service are as valid today, if not 

more, than they were 70 years ago. The number is about 70, by the way. 

The Universal Service Funding mechanism is facing a financial squeeze, 

as you have heard. Designation of wireless and newly-eligible 

telecommunications carriers, or ETCs, has grown the distribution side of 

the fund exponentially. The growth of the fund, as you have heard from 

CBO, is mostly from transfers of revenues or revenue streams that 

existed in one place, and they have been shifted over. But the new 

growth of the fund is in wireless ETCs, which have gone from zero to 

nearly $1 billion in 5 years. Some question whether universal service is 

supposed to subsidize competition by awarding financial windfalls to 

new ETCs. 

 Finally, H.R. 5072 introduced by Congressmen Terry and Boucher 

addresses these financial pressures on the Universal Service Fund by 

broadening the base of contributions to include all voice communications 

and by more rationally governing the designation of newly eligible 

telecommunications carriers. We support H.R. 5072 and encourage this 

committee to pass it and use that as a benchmark with which to guide its 

deliberations with the Senate should they pass a bill, too. 

 I appreciate very much this committee’s attention to universal 

service and look forward to any questions you may have. 

 [The prepared statement of Geoff Feiss follows:] 
72

PREPARED STATEMENT OF GEOFF FEISS, GENERAL MANAGER, MONTANA 

TELECOMMUNICATIONS ASSOCIATION

Rural telcos have met the goals of universal service: to preserve and promote access 

by all Americans to affordable, quality, advanced telecommunications capabilities on 

which our economy increasingly depends. 

Congress and the President have called for broadband deployment throughout the 

United Sates as an important means by which to promote and preserve our country’s 

worldwide economic competitiveness. Despite significant distance and density challenges 

(Montana’s rural carriers average less than 3 access lines per mile) Montana’s rural 

independent telcos are meeting the broadband challenge: 

• Over 250 rural Montana communities have access to broadband 

• Montana’s rural telcos have deployed broadband access to between 80% and 

nearly 100% of their service areas (better than S. Korea!) 

• Videoconference, telemedicine and distance learning access in 130 rural 

Montana communities 

Continual investment in upgrading underlying telephone networks enables advanced 

capabilities to be deployed on a modern telecommunications platform. Like the federal 

highway system, universal service provides for ubiquitous transfer of information from 

coast to coast and all points between. Modern automobiles and trucks would be of little 

use today if the underlying highway system built in the 1950s weren’t able to support 

modern vehicular traffic. 

Investment in a national information network infrastructure enables a panoply of 

telecommunications-related applications, services, and businesses: 

• Wireless capabilities depend on a reliable, redundant, quality underlying 

wireline (or fiber) infrastructure; 

• Similarly, VOIP relies on a broadband connection; 

• Examples abound regarding economic development opportunities enabled by 

advanced telecommunications infrastructure. 

Continual investment in national telecommunications infrastructure creates 

efficiencies that save universal service outlays in the long run; e.g., modern fiber optic 

backbone technology and softswitches, have resulted in carriers receiving less universal 

service support today than they have in the past. 

Telcos rely on rates, intercarrier compensation (access) charges and universal 

service support (the “3-legged stool”) to recover their significant network investment 

costs. Universal service and access comprise as much as 50% or more of rural telcos' 

revenues. Rates in Montana (with one of the lowest per capita incomes in the U.S.) 

would be between $330 and $600 more without universal service support. 

The federal Universal Service Fund is being squeezed by the dual problem of 

insufficient, and diminishing revenues and increasing distributions. Designation of newly 

eligible carriers (mostly wireless) has grown the distribution side of the fund 

exponentially. Some question whether universal service is supposed to subsidize 

competition with windfall to new ETCs. 

HR 5072 (Terry-Boucher) addresses the financial pressures on the Fund by 

broadening the base of contributions to the Fund to include all voice communications and 

by more rationally governing the designation of newly eligible carriers (ETCs) to receive 

support from the Fund. 

Mr. Chairman and distinguished members of the Committee, my name is Geoff 

Feiss, General Manager of the Montana Telecommunications Association. It is an honor 
73

to be invited to share with you my perspectives on the reasons why we have universal 

service and the benefits it provides to all Americans, no matter where they may live. 

 I will address what universal service means to residential and business consumers 

particularly from a Montana perspective, and how universal service is integral to 

deploying a national infrastructure on which all Americans derive direct economic 

benefits. I’ll close by addressing some of the deficiencies that have evolved in the 

universal service program today and discussing some more common criticisms of 

universal service, and—hopefully—I’ll mitigate those concerns. 

In brief, universal service is vital for ubiquitous access to affordable, quality, 

telecommunications capabilities on which our economy increasingly is dependent. That 

is not to say that problems don’t exist. They do. And it’s encouraging to see this 

Committee address the problems—and the substantial, tangible benefits—of universal 

service at this hearing. 

Universal Service in Montana

 Montana is the nation’s fourth largest state. If you were to superimpose 

Montana over the eastern part of the United States, the northwest corner of the state 

would overlie the suburbs of Chicago, and the southeastern corner would touch the 

suburbs of Washington D.C. Yet, we have fewer than one million residents. Our largest 

city is Billings, with a population of about 100,000. We also rank somewhere between 

45th and 49th in per capita income, depending on whose statistics you use. 

 From a telecommunications network point of view, Montana’s independent rural 

telecommunications providers serve about one-third of the telecom consumers of 

Montana, but our networks cover roughly 80% of the state’s geography: about 120,000 

square miles. On average we serve three access lines per mile. Western Montana is 

relatively more populated than Eastern Montana, where the average access line per mile 

is less than one. 

 Despite the significant barriers to development posed by tremendous distances 

between very few customers, commonly referred to as the “distance and density” 

dilemma,1

 Montana’s independent rural telcos are key drivers for economic development 

throughout the state. With an annual payroll of over $50 million, these companies 

employ over 1,000 Montanans with well paying jobs and competitive benefits. They 

often are the largest taxpayer in counties where they operate. 

 As important, Montana’s rural telcos have deployed modern, efficient, affordable, 

advanced telecommunications capabilities throughout the state for the direct benefit of 

Montana’s residential and business consumers. They are doing exactly what Congress 

intended universal service to do, as outlined in the principles of universal service under 

Sec. 254(b).2

 (See below.) The quality of these networks is unquestioned. Consumers 

simply assume calls will go through, 911 will work, etc. 

 Montana’s rural telcos have deployed well over 5,000 miles of fiber optic backbone 

facilities throughout the state. They have pushed high-quality, secure broadband 

capabilities out to the edges of their networks so that between 80% and nearly 100% of 

Montana’s rural telco consumers have access to broadband service. That’s better than 

South Korea, the world’s most connected country by some accounts. Broadband service 

is available to over 250 Montana communities, and that’s saying something when the 

largest city in our state has a population of 100,000. The vast majority of Montana’s 

 

1

 For a thorough discussion of the challenges associated with deploying rural telecommunications 

networks, see White Paper #2 of the Rural Task force, an independent advisory panel appointed by 

the Federal-State Joint Board on Universal Service to provide guidance on universal service issues 

affecting the telecom industry. The panel comprised experts from all facets of the industry, 

including local, long distance, wireline, wireless, etc. 

http://www.wutc.wa.gov/rtf/old/RTFPub_Backup20051020.nsf/?OpenDatabase. January, 2000. 2

 47 U.S.C. 254(b). 
74

broadband-capable towns has fewer than 1,000 residents. (It’s interesting to note that 

broadband’s popular support continues to grow: many Montana rural telcos report that 

over 50% of their Internet customers subscribe to broadband service.) 

 Montana’s rural telcos also have formed consortia, to leverage resources and better 

serve their markets. One such consortium is VisionNet, which provides advanced 

videoconference and Internet access services. Over 130 video conference sites are 

deployed throughout the state. There is at least one, and often more than one, VisionNet 

site on each of Montana’s Native American reservations. On an average school day, 60 

to 80 hours of K-12 classes are taught using VisionNet’s videoconferencing network. 

VisionNet also facilitates Telemedicine applications connecting rural health clinics to 

urban medical centers on a real time basis. Vital health care services now are reaching 

rural consumers as a result of broadband applications made possible by rural telcos. 

 As a result of the investment that Montana’s rural telcos have made in advanced 

telecommunications infrastructure, a Cisco software engineer can live in Canyon Creek, 

Montana, and serve clients anywhere in the world, thanks to investment made by her 

local telecom provider, Lincoln Telephone Company. A programmer from Los Angeles 

who designs video graphics for national professional exams, directs plays in the summer 

from Virginia City, Montana. He continues to operate his graphic design business from 

Virginia City, thanks to access to DSL technology provided by 3 Rivers Telephone 

Cooperative. At the remote Great Divide Ranch near Philipsburg, Montana, the nonprofit Project Vote Smart provides online access to factual and unbiased information 

about 40,000 political candidates in every state. Project Vote Smart’s access to advanced 

broadband telecommunications services from Blackfoot Telephone Cooperative makes 

the non-profit’s databases available to its 45,000 members and voters nationwide. And 

Pixar Entertainment, the movie company responsible for Toy Story and other hits, is 

putting a studio in Kalispell, Montana, thanks to the combination of an unbeatable quality 

of life, and the quality of telecommunications facilities provided by CenturyTel. 

National Telecommunications Infrastructure

 Much as the national highway system makes it possible for goods to get from one 

place to another efficiently, the national telecommunications infrastructure enables 

information to get from one place to another. While the volume of traffic may be greater 

in Los Angeles or New York than in Forsyth, Montana, it is still essential that our 

nation’s information highways reach from one coast to another, and all points between. 

Ubiquitous access to telecommunications is essential so that the rancher in Montana can 

sell beef on a real time basis on the Chicago Board of Trade so that diners in Boston can 

benefit from efficiencies realized in the distribution of the steak they purchase at their 

supermarket. Similarly, consumers and businesses benefit from products and services 

from other states. Amazon.com and E-bay are just to examples of how information 

technology has influenced our economic lives. 

 It is an economic policy given that ubiquitous deployment of advanced 

telecommunications capabilities is essential to national competitiveness. Policy-makers 

frequently have noted the less-than-enviable position of the United States in relation to its 

international trading partners regarding deployment of broadband capability.3

 The 

President and members of Congress on both sides of the aisle have called for nationwide 

deployment of broadband capabilities; and as noted above, Montana’s rural telcos are 

committed to such broadband deployment throughout their service areas. 

 The investment made by rural telecom providers into a national information network 

infrastructure enables a panoply of telecommunications-related applications, services, and 

 

3

 See Organisation for Economic Cooperation and Development (OECD). Broadband Statistics, 

December, 2005. 

http://www.oecd.org/document/39/0,2340,en_2649_34223_36459431_1_1_1_1,00.html. 
75

businesses—the network isn’t just for telephone calls anymore. For example, much 

attention is paid to wireless capabilities. The fact remains, however, that wireless 

capabilities are wireless only for the “last mile” connection from a network point of 

interconnection to the end-user. In other words, “wireless” traffic relies on an underlying 

wireline (or fiber) infrastructure. 

 Similarly, the newest kid on the block, voice over Internet protocol, or VOIP, is 

nothing more than a software application that is installed on a computer that acts as a 

telephone. VOIP relies on a broadband connection, which itself relies on an underlying 

advanced telecommunications infrastructure. 

In short, telecommunications is the foundation of modern economies. Universal service 

supports the nation’s investment in ubiquitously-accessible underlying 

telecommunications infrastructure. Does universal service pay for broadband assets, per 

se? No; not directly. But continual investment in upgrading underlying telephone 

networks enables advanced capabilities to be deployed on a modern telecommunications 

platform. 

 Returning to the highway analogy, modern automobiles and trucks would be of little 

use today if the underlying highway system built in the 1950s weren’t able to support 

modern vehicular traffic. 

Three-Legged Stool

 How is investment in advanced telecommunications infrastructure possible? All 

local exchange carriers rely on three main sources of revenue from which to recover their 

substantial investments in telecommunications plant: revenues from 

ratepayers/customers; revenues from intercarrier compensation (what telecom networks 

charge one another for access to their networks by other carriers completing calls to or 

from one another); and universal service, designed to ensure that consumers have access 

to affordable, quality telecommunications service. All providers of interstate 

telecommunications are supposed to contribute to the universal service support 

mechanism, and companies whose costs exceed a benchmark cost are able to receive 

support from the Universal Service Fund in order to maintain access by consumers to 

affordable, quality service. Access (intercarrier compensation) revenues and universal 

service together comprise between 50% and as much as 80% of rural telcos’ revenues. In 

contrast, urban carriers rely far less on either access or universal service since their 

networks in general are lower cost and serve more densely populated areas. Moreover, 

the larger carriers rely less on access payments since they effectively pay themselves 

access to originate and terminate long distance traffic on their own networks; so access 

revenue does not constitute as significant a revenue stream as it does for rural carriers, 

who rely on other carriers to complete long distance traffic. 

 Without universal service, Montanans would pay an additional $330 per year on 

average. Nearly 100,000 Montanans (10% of our population) would face increases of 

between $300 and $600 annually.4

 Given the fact that we are one of the nation’s lowest 

per capita income states, this is real money. Moreover, it is entirely likely that even with 

tremendous rate increases, rural telcos’ ability to maintain adequate investment in 

advanced telecommunications networks capable of supporting modern applications, 

services and features, would be severely threatened. 

 In other words, the “three-legged” stool must remain standing if Americans are to 

continue to benefit from a ubiquitously available, affordable, quality telecommunications 

infrastructure. 

 

4

 Universal Service Administrative Corporation (USAC): 3Q 2005; Appendices HC 01 and HC 05. 
76

What’s Wrong with Universal Service Today?

 The reasons for, and benefits of, universal service are as valid today as they were 

when Congress passed the Telecommunications Act of 1934, and codified universal 

service policy in 1996. As provided in Section 254(b) of the Telecommunications Act of 

1996, universal service is based on the following principles: 

1. quality services available at just, reasonable and affordable rates; 

2. access to advanced services; 

3. access in rural and high cost areas; 

4. equitable and non-discriminatory contributions; 

5. specific and predictable support; 

6. Such other principles that may be determined appropriate for the protection of 

the public interest. 

So why is universal service attracting such negative attention lately? Briefly, it’s 

getting squeezed from both ends. More and more voice communications traffic is 

circumventing universal service contributions mechanisms, while more and more 

companies (mostly wireless carriers) are being designated as eligible telecommunications 

carriers (ETCs), eligible to receive universal service support. And to make matters 

worse, it is apparent that current policy provides a windfall to most new ETCs by 

allowing the new ETCs to receive the same level of universal service support as 

incumbent ETCs, regardless of the new ETC’s costs of providing service. This policy is 

referred to as the “identical support” rule.5 Part of the incumbent’s universal service 

support which a new ETC “inherits” is “new money” to the new ETC resulting from 

previous regulatory policies that replaced a portion of access revenues for incumbent 

telcos. Thus, universal service support to wireless carriers is growing substantially and 

dramatically, while support to incumbent wireline companies has remained essentially 

constant. 

The following chart illustrates the shrinking universal service contribution base. 

 

5

 See Reply Comments of the Montana Public Service Commission. In the Matter of the FederalState Joint Board on Universal Service, Request for Comments on Certain of the Commission’s 

Rules Relating to High-cost Universal Service Support. CC Docket No. 96-45. December 14, 2004. 

“To further illustrate the need to eliminate the identical support rule we offer the following 

information. Western Wireless' CEO, John Stanton, in his presentation to this fall’s Qwest Regional 

Oversight Committee (ROC) meeting of September 12 and 13, [2004] Missoula, Montana, presented 

estimates of relative wireline and wireless investment costs. Those costs are as follows: (1) national 

wireline carriers’ cost is $2,492; (2) national wireless carriers’ cost is $920; (3) rural wireline 

carriers’ cost is $7,195; and (4) rural wireless carriers’ cost is $1,734. It is apparent from the 

presentation that to base support to wireless carriers upon the cost of the ILEC would bequeath an 

extraordinary subsidy to the wireless industry.” [Emphasis added.] 
77

Source: FCC 

Meanwhile, universal service distributions are accelerating, mostly as a result of 

designation of additional wireless ETCs. In 2000, non-incumbent ETCs received $1.5 

million in universal service support. By 2006, funding to competitive wireless ETCs is 

expected to approach $1billion. 

The following chart shows the relative growth of the universal service fund by 

competitive ETCs (CETCs), while incumbent local exchange carriers (ILECs) support 

has remained relatively stable, with the exception of access revenue replacement rulings 

which simply moved existing ILEC revenues from access to universal service. 

In summary, ninety-seven percent of new ETCs are wireless carriers. They receive 

100% of the incumbent carriers’ universal service support, even though part of the 

incumbent’s support is due to regulatory policies which shifted implicit support from 

access payments to universal service support. Wireless carriers never received access 

payments, but they receive access replacement through universal service. Further, to the 

extent that new ETCs’ costs are lower than incumbents’, receipt of incumbent universal 

service support constitutes a windfall, as noted above. The identical support rule, in other 

words, needs to be eliminated. 

As FCC Chairman Kevin Martin noted last October at a meeting of USTelecom, 

The current fund totals nearly $7 billion dollars and a lot the fund’s 

growth in recent years is attributable to new competitive eligible 

telecommunications carriers (or CETCs), particularly wireless CETCs, that 

have begun to receive funding. 

Funding in $millions % of USF Growth in funding

CETC ILEC Total CETC ILEC CETC ILEC ILEC w/o (2) Incremental ILEC funding (2)

1998 . 1,696.6 1,696.6 0% 100% - -

1999 .5 1,723.1 1,723.7 0% 100% - 1.6% 1.6%

2000 1.5 2,515.3 2,516.8 0% 100% 179.1% 46.0% 17.0% $500M from reg. chngs., including IAS

2001 20.2 2,583.2 2,603.4 1% 99% 1251.1% 2.7% 2.7%

2002 47.5 2,934.5 2,982. 2% 98% 135.3% 13.6% 5.5% $210M from reg. chngs., including ICLS

2003 131.5 3,141.8 3,273.2 4% 96% 176.8% 7.1% 2.6% $130M from reg. chngs., including ICLS/IAS

2004 333.1 3,154.5 3,487.7 10% 90% 153.4% 0.4% 0.4%

2005E 719.4 3,174.2 3,893.5 18% 82% 115.9% 0.6% 0.6%

Source: USAC; projections by Balhoff & Rowe and are based on USAC's 2Q05 estimates for full year

$10

$15

$20

$25

1Q022Q023Q024Q021Q032Q033Q034Q031Q042Q043Q044Q041Q052Q05

$s in Billions

-6.7% compound annual growth rate
78

The number of CETCs is increasing dramatically and is one of the 

primary drivers of fund growth. Since 2000, CETC high cost payments have 

grown from about $1.5 million annually to about $333 million annually. 

Over the past few years, I have repeatedly expressed my concerns with the 

Commission’s policies of using universal service support as a means of 

creating competition in high cost areas.

I do not believe it is viable in the long term to continue subsidizing 

multiple competitors to serve areas in which costs are prohibitively expensive 

for even one carrier...--Kevin Martin, Chairman, FCC. Speech to USTelecom. 

10/26/05. [Emphasis added.] 

 Clearly, while the intent and benefits of universal service remain valid, universal 

service funding is threatened by the dual problems of: 1) diminishing contributions to the 

Universal Service Fund by voice communications providers who should be, but are not 

necessarily, contributing their share to the Fund; and, 2) distribution of support to an 

ever-growing number of new ETCs—as exacerbated by the identical support rule. 

 As FCC Chairman Martin and many others have noted, when designating additional 

ETCs, it is important to distinguish between promoting and advancing access to 

affordable, advanced telecommunications capabilities (i.e. universal service), on the one 

hand; and subsidizing competition, particularly in areas where even the existence of a 

single telecommunications provider requires support. Returning to the highway analogy, 

we do not need to build parallel, redundant highways, especially in areas where 

infrastructure is sufficient to carry all traffic. 

How to Put the Universal Service Fund Back on Track

 Universal service, like the highway system, works; and it works well. It should not 

be considered a rural subsidy, any more than the national highway system is a rural 

subsidy. In fact, most of the largest beneficiary states in terms of universal service 

dollars are not necessarily commonly identified as rural states.6 All Americans, no matter 

where they live, depend on an interconnected, robust interstate communications 

infrastructure. 

 That said, the squeeze on revenues and disbursements needs to be addressed. 

Broadening the base of contributions not only will enhance the Fund’s revenues, but will 

address regulatory arbitrage issues in which some carriers seek to avoid contributing to 

the Universal Service Fund. 

 On the distribution side, requiring greater scrutiny of the ETC designation process, 

and eliminating the identical support rule will go along way toward returning the Fund to 

balance without burdening telecommunications consumers. 

 H.R. 5072, introduced by Energy and Commerce Committee members Lee Terry 

(R-NE) and Rick Boucher (D-VA) proposes a series of remedies for the contribution and 

distribution pressures faced by the Universal Service Fund. Briefly, the bill expands the 

base of contributors to the fund to include all providers of voice communications; and it 

rationalizes distribution of funds by providing for more scrutiny over the designation of 

ETCs. MTA endorses H.R.5072 and encourages this Committee to pass and report this 

important legislation expeditiously so that the House can use H.R.5072 as a benchmark 

going into conference with the Senate which planning to mark up S.2686 this week 

amending universal service statutes among other things. 

 

6

 For example, Texas, Mississippi, and Kansas are the largest recipients respectively of universal 

service high cost support. Universal Service Administrative Corporation (USAC). HC02, High Cost 

Support by State, 1st Qtr., 2006. http://www.universalservice.org/about/governance/fccfilings/2006/Q1/HC02%20-%20High%20Cost%20Support%20Projected%20by%20State%20-

%201Q2006.xls. 
79

Universal Service Promotes Network Efficiencies

Some critics of universal service allege that telecom providers “gold plate” their 

networks, and lack incentives to invest efficiently in their networks. Such accusations are 

not borne out in reality. Rural telcos are exemplary in their commitment to service, 

investment, and support of their local communities. Rural communities, and likely all 

business managers, know the value of a dollar. Moreover, contrary to the allegations, 

their continual investment in modernization of their networks is creating efficiencies that 

reduce the distributions from the universal service Fund. For example, a digital switch, 

traditionally the principal brains of a telecommunications network cost somewhere in the 

$1 million range. Modern Internet protocol (IP) based “softswitches” can deliver the 

same functionality—and more—for a fraction of the cost. Similarly, fiber optics provide 

far more capacity and are easier to maintain (once installed—at considerable expense), 

thereby creating long term efficiencies and cost savings over the life of the asset. 

Consequently, Blackfoot Telephone Cooperative of Missoula, Montana, for 

example, is investing in an Ethernet broadband backbone which will enable it to push 

faster, more robust service options to the edges of its network. Simultaneously, the 

company is drawing $500,000 less in universal service support. 3 Rivers Telephone 

Cooperative of Fairfield, Montana, received $1.5 million less in universal service support 

in 2005 than the year-earlier period for similar reasons. 

Conclusion

Universal service continues to contribute substantially to on-going investment in 

America’s affordable, quality telecommunications infrastructure which enables 

consumers and businesses to expand their economic and social horizons through access to 

world wide information. Congress has an opportunity this year to preserve and advance 

universal service while addressing stresses, strains and abuses that have developed since 

1996. A healthy, balanced universal service program will ensure that Americans will 

benefit from access to a quality, affordable, advanced telecommunications network that 

supports America’s worldwide competitiveness for years to come. 

MTA looks forward to working with the Energy and Commerce Committee and 

other interested parties in developing policies that can preserve universal service’s 

laudable goals while mitigating deficiencies in the program. 

Suggested Reading

“Universal Service: Rural Infrastructure at Risk.” Release 2.0. McLean & Brown. 

April, 2006. http://www.mcleanbrown.com/usf_406.pdf 

“The Rural Difference.” White Paper #2. Rural Task Force. January, 2000. 

http://www.wutc.wa.gov/rtf/old/RTFPub_Backup20051020.nsf/?OpenDatabase. 

 Findings include: 

• RLECs serve 8% of nation’s access lines; 38% of U.S. geography 

– [In Montana, RLECs serve 32% of lines; 80% of land.] 

• Ave. urban density = 134 customers/sq. mi. 

– National rural average is 10.5/square mile 

– [Montana average is less than 3 per mile.] 

• Ave. urban customers per switch: 13,314 

– National rural average: 2,201 

• Ave. cost to serve urban customer: $240/yr. 

– National rural average cost/customer: $337/yr. 

• Rural carriers lack economies of scale and density 

– Fewer customers, and fewer high-volume customers 

• Rates recover less investment cost for rural providers than urban providers 

– 50% to 75%+ of all rural providers’ revenues come from “access” fees 

and universal service (i.e., NOT rates) 
80

About the Montana Telecommunications Association

The Montana Telecommunications Association (MTA) represents independent 

telecommunications service providers throughout Montana, offering local and long 

distance residential and business phone services, as well as a full spectrum of other 

services including broadband and dial-up Internet; satellite TV, and competitive local 

exchange services. 

 MR. UPTON. Thank you. 

 Dr. Cooper. 

DR. COOPER. Thank you, Mr. Chairman and members of the 

committee. I greatly appreciate the opportunity to testify on universal 

service. 

 Although the questions posed in the title of this hearing are what are 

we subsidizing and why, in an era of technology change, the real 

questions facing the Congress are what should we be subsidizing and 

how. The answers are clearly the Communications Act and its history. 

 The cornerstones of communication policy in America for the past 

three-quarters of a century is stated clearly in the first sentence of the 

Act: “to make available, so far as possible, to all people of the United 

States, without discrimination on the basis of race, color, religion, 

national origin, or sex, a rapid, efficient, nationwide, and worldwide wire 

and radio communication service with adequate facilities at reasonable 

charges.” 

 In 1934, when this goal was adopted, two-thirds of the households in 

America did not have telephone service. It was a progressive, forwardlooking policy. 

 In 1996, when over 90 percent of households in America had 

telephone service, the Congress wisely sought to give specificity to this 

goal for the information age and reaffirm our national commitment to 

progressive universal service policy by articulating universal service 

principles, two of which are of paramount importance: quality services 

should be available at just, reasonable, and affordable rates; and 

consumers in all regions of the Nation, including low-income consumers 

and those in rural, insular, and high-cost areas, should have access to 

telecommunication and information services, including interexchange 

and advanced telecommunication and information services that are 

reasonably comparable to those services in urban areas that are available 

at rates that are reasonably comparable to rates charged for similar 

services in urban areas. 

 Reasonably comparable services available at reasonable comparable 

rates for all Americans is the right goal. It remains the right goal. 

Broadband facilities, wire or wireless, are the facilities that must be 

defined as adequate in the 21st Century. By that standard, today, the 

1996 Act has failed miserably. Rural, high-cost areas and low-income 
81

consumers do not have broadband services available at affordable rates, 

and as a Nation, we are falling behind other advanced economies in the 

adoption of broadband. 

 Now is the time to reaffirm our commitment to universal service and 

declare broadband to be the dial tone of the 21st Century. The 

competitive telecommunications market will not lead us to that goal. It 

needs help. Congress should begin a transition plan leading to a phase-in 

where universal service eligible carriers must be offering a full 

broadband-compatible platform to convert Internet protocol platform that 

carries voice and data is more efficient, more robust, and not 

substantially more expensive than a dial-up world. We have to transition 

to that world. The FCC’s definition of broadband at 200k is 

unacceptable and backward-looking. It must be revised to ensure 

appropriate levels of service, and that level must continuously be 

expanded, as the 1996 Act said, an evolving level of service over time. 

 Universal Service Fund should be available to the most efficient 

technologies to meet the needs of the uniquely underserved groups in our 

society. Thereby, we will be investing in technology that promotes the 

least cost-efficient system. We must broaden the base of universal 

service support, as we advocated in the very first proceeding. We said 

include all of the revenues in the system. And the court said, “No, 

Congress needs to fix that.” We should tighten the reins of oversight to 

be sure. We should increase data collection to be sure. We should 

discipline the size of the growth with rigorous oversight. But let us not 

let the foibles of the current USF system be used to undermine and 

abandon our commitment to what is a fundamental and correct 

commitment in our society, very traditional value embodied in the 

Communications Act that has served our society well: available service 

for all Americans at affordable rates. Now is the time to reaffirm that 

commitment and look forward to our 21st Century communications 

network. 

 Thank you. 

 [The prepared statement of Dr. Mark Cooper follows:] 

PREPARED STATEMENT OF DR. MARK COOPER, DIRECTOR OF RESEARCH, CONSUMER 

FEDERATION OF AMERICA

Mr. Chairman and Members of the Committee 

My name is Mark Cooper. I am Director of Research of the Consumer Federation of 

America. I appear to on behalf of the Consumer Federation of America, Consumers 

Union and Free Press. 
82

 The Consumer Federation of America,1 Consumers Union,2 and Free Press3

appreciate the opportunity to testify on the issue of universal service. As consumer 

advocates, we strongly support the Universal Service programs that have delivered 

essential communications services to low-income households, rural areas, schools, 

libraries, and rural health clinics. We recognize the fiscal crisis of falling receipts and 

expanding expenses in the program demands reform. Yet we view the current 

predicament as both a threat and an opportunity. We believe that as communications 

technologies evolve, universal service must evolve with it. We support the expansion of 

the Universal Service Fund (USF) support to broadband as the organizing principle to 

overhaul its contribution and distribution systems. 

As Congress looks to resolve the thorny problems of reforming the Universal 

Service system, we urge Members to start with the principles that lie at the base of the 

Communications Act. The purpose of the Act was to regulate communications networks 

“so as to make available, so far as possible, to all the people of the United States, without 

discrimination on the basis of race, color, religion, national origin, or sex, a rapid, 

efficient, Nationwide, and world-wide wire and radio communications service with 

adequate facilities at reasonable charges.”4

The goal of the Communications Act of 1934, as amended by the 

Telecommunications Act 1996 is “to make available, so far as possible, to all the people 

of the United States, without discrimination on the basis of race, color, religion, national 

origin, or sex, a rapid efficient, nationwide and world-wide wire and radio 

communications service with adequate facilities at reasonable charges. 

The Act goes on in Section 254 to specify this Universal Service Principles as 

follows: 

• Quality services should be available at just, reasonable an affordable rates. 

• Access to advanced telecommunications and information services should be 

provided in all regions of the country. 

• 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 interexchange and 

advanced telecommunications and information services that are reasonably 

comparable to those services in urban areas and that are available at rates that 

are reasonably comparable to rates charged for similar services in urban areas. 

Reasonably comparable services available at reasonably comparable rates for all 

Americans are the right goals. Broadband facilities are the facilities that must be the goal 

of universal service in the 21st century. By that standard, the 1996 Act has failed 

 

1

 The Consumer Federation of America is the nation’s largest consumer advocacy group, composed 

of over 280 state and local affiliates representing consumer, senior, citizen, low-income, labor, farm, 

public power and cooperative organizations, with more than 50 million individual members. 2

 Consumers Union is a nonprofit membership organization chartered in 1936 under the laws of the 

state of New York to provide consumers with information, education and counsel about good, 

services, health and personal finance, and to initiate and cooperate with individual and group efforts 

to maintain and enhance the quality of life for consumers. Consumers Union's income is solely 

derived from the sale of Consumer Reports, its other publications and from noncommercial 

contributions, grants and fees. In addition to reports on Consumers Union's own product testing, 

Consumer Reports with more than 5 million paid circulation, regularly, carries articles on health, 

product safety, marketplace economics and legislative, judicial and regulatory actions which affect 

consumer welfare. Consumers Union's publications carry no advertising and receive no commercial 

support. 

3

 Free Press is a national, nonpartisan organization with over 225,000 members working to increase 

informed public participation in crucial media and communications policy debates. 4 Communications Ac of 1934, 47 USC 151. 
83

miserably. Moreover, if enacted into law, the COPE Act, which was recently passed by 

the House of Representative would make matters worse. 

Instead of reaffirming that commitment to universal service, the COPE Act turned 

its back on low-income consumers, and consumers in rural and high cost areas by 

excusing network operators from their obligation to provide universal service and 

allowing them to redline high cost areas. By allowing network operators to discriminate 

against applications, service and content providers, it opens the door to anti-competitive 

bundling that raises the threshold of prices far beyond the affordable level for low income 

Americans. Earlier this week AT&T announced a brutally anti-competitive, anticonsumer price for stand alone DSL, which it agreed to offer as a merger condition. 

AT&T charges $29.85 for DSL and required customers to have local service for about 

$16 per month. The mandatory bundled cost is $46 per month. Forced to break the 

bundle, AT&T announced that it will charge $44.95 for stand alone DSL service. Giving 

network operators the freedom to exercise their market power will increase the threshold 

costs for gaining access to the broadband network. 

This principle—strongly reaffirmed in 1996—is the simple, powerful, and 

fundamentally progressive commitment to universal, affordable access to 

communications services for all Americans. It is this policy that has brought 

telecommunications to schools, libraries, rural health facilities, low-income households, 

and rural areas at reasonable rates and adequate quality of service. The vital importance 

of this program is clear to anyone who has ever lived rural America or struggled to make 

ends meet. The economic case for affordable access is clear, and research produced by 

consumer groups has been documenting it for many years.5

The public policy commitment to ubiquitous communications has never been more 

important than now. Standing at the threshold of an information technology revolution, 

we cannot and should not abandon or weaken our guarantee of universal, affordable 

access. Granted, the communications marketplace has changed substantially since 

1996—the last time USF was comprehensively addressed. The needs of our society and 

economy have evolved, and USF must evolve with them. The labyrinthine complexity of 

USF distribution—with both its successes and shortcomings—must not be allowed to 

blind us from the bottom line: Broadband is now, undeniably, the essential 

communications medium of the 21st Century. Broadband networks are the “adequate 

facilities” that we must provide to all Americans at “reasonable charges.” 

Yet, as in past technological paradigms shifts, rural communities and low-income 

groups have been left behind. The economic costs of this digital divide are severe—

curtailing the educational, economic, and social opportunities for a significant sector of 

our society. It is no secret to this Committee that the United States lags badly behind 

other nations in broadband penetration. The longer we wait for universal deployment of 

broadband to every region of the country, the further behind our global competitors we 

will fall. Not only should we apply USF to broadband, we can’t afford not to. This is the 

only way to get back on track toward the President’s stated goal of universal affordable 

broadband by 2007. 

The current financial crisis in the USF programs and the difficulty in ensuring USF 

support delivers a strong return on investment have been readily identified as threats to a 

successful policy. But needed reform is equally an opportunity. We should look to reform 

USF both to address its long term stability and to use it to bridge the broadband digital 

divide. The cornerstone of this policy historically, and now, must be a commitment to 

 

5

 See for example the work of Mark Cooper: “Disconnected, Disadvantaged, Disenfranchised: 

Explorations in the Digital Divide,” Consumer Federation of America and Consumers Union, 

October 2000, http://www.consumersunion.org/pdf/disconnect.pdf; “Expanding the Digital Divide 

and Falling Behind on Broadband,” Consumer Federation of America and Consumers Union, 

October 2004, http://www.consumersunion.org/pub/ddnewbook.pdf. 
84

bringing affordable service to average citizens. At the time of the Communications Act of 

1934, telephone penetration rates were around 40%—very similar to where we currently 

stand with broadband.6 The vision that inspired a policy that brought that telephone 

penetration rate above 90% must now be applied to high-speed Internet access. 

The USF system does have a checkered track record and some serious problems. 

There is virtual consensus that we need reform. The program faces a financial crisis at 

present because of declining receipts and expanding outlays. If broadband becomes an 

explicit part of USF, these issues must be immediately addressed. To do this, there will 

be a significant number of tough questions this committee will face in an effort to 

overhaul the system of contributions and distributions. But this is no time to turn from 

the principles that have proven so successful. Nor is it time to lose sight of the real 

problems that USF is meant to solve—our communications inequalities. 

Diagnosing the US Broadband Problem 

The crisis in USF is severe, but the crisis it is intended to address is arguably much 

worse, and certainly portends more dire consequences to the health of the US economy. 

As this Committee has heard ad nauseum in hearing after hearing this year, the US has 

fallen out of the top 15 nations in broadband penetration. It bears repeating here because 

this testimony will bring new data to the question. This new research directly ties our 

global broadband rank to the issue of Universal Service. 

Defenders of current broadband policy have argued that America’s low global 

ranking is misleading because our population density is so low compared to smaller 

nations such as Japan, South Korea, and Sweden.7

 Noting that Canada outperforms us in 

broadband penetration despite its size and population density, we investigated this 

question. We analyzed the data from the OECD study of broadband in 30 nations and 

specifically controlled for population density. The results are striking. [See Appendix.] 

Population density turns out to have very little impact on our relative broadband 

performance compared to other nations. Far more important are median household 

income, the poverty rate, and exposure to Internet technologies inside and outside the 

home. 

Rural areas are indeed underserved—broadband penetration rates in urban areas are 

nearly double those of rural areas. Yet, our research indicates that geography is a factor in 

depressed broadband penetration because of two higher order causes that are 

characteristic of rural areas—the price of service and the low income levels of potential 

subscribers. It costs more (per customer served) to build rural infrastructure, which limits 

competition and raises prices, and the disposable income of the average rural family is 

lower than average. Additionally, rural areas tend to have a disproportionate number of 

retired Americans on fixed incomes. These factors result in depressed broadband 

penetration. These conclusions comport with the findings of a study by the Pew Internet 

and American Life Project.8

 Our research also confirms a recent survey showing that over 

45% of broadband non-subscribers in the US do not subscribe because of high prices. A 

further 10% report that service is unavailable.9 The combination of high prices and poor 

people results in lower technology exposure and adoption in rural America. 

On the question of exposure to the Internet, another key factor in promoting 

broadband penetration, Pew found that 32% of the adult population does not use the 

 

6

 Mark Cooper, “Universal Service: A Historical Perspective and Policies for the Twenty-First 

Century,” Consumer Federation of America and the Benton Foundation, 1996. 7

 See for example, FCC Chairman Kevin Martin, “United States of Broadband,” Wall Street Journal, 

July 7, 2005. 

8

 See Peter Bell, Pavani Reddy, and Lee Rainie, “Rural Areas and the Internet,” Pew Internet and 

American Life Project, February 17, 2004, http://www.pewinternet.org/PPF/r/112/report_display.asp 9

 Yankee Group Research, Inc. February 2006, cited at 

http://www.emarketer.com/article.aspx?1003833 
85

Internet—a figure that held steady for the first half of 2005.10 But our problem is not only 

with adults, it is also children. Of the 30 nations in the OECD study, the US ranked 26th

(ahead of only Mexico, Turkey, and Slovakia) in the percentage of 15-year olds that have 

used a computer. Other nations are winning the broadband race because they are bringing 

technology and services to low-income areas. 

The USF program is specifically designed to address these problems and is uniquely 

suited to do so if we apply its support to broadband. There are plenty of rural 

communications providers. The issue is finding the right balance of subsidies to incent 

investment and to make their products affordable to low-income Americans. Expanding 

USF support to broadband is a logical step to correcting the negative trends in our 

broadband markets. First, USF brings service to rural and low-income areas at affordable 

rates. Perhaps no other single policy is more important to our long term broadband 

prospects. Second, USF supports discounted Internet access in schools and libraries, 

which frees resources to buy PCs for the computer labs that connect to these lines. These 

public institutions serve to expose our young people to technology and catalyze the 

residential market for home computers and broadband services. 

Other nations have used strategic direct investment in broadband infrastructure in 

low-income and rural areas to outperform us across the board. We should take note and 

plan accordingly. Policies that stimulate low-income consumer demand will improve the 

U.S.’s broadband situation. Universal Service policy applied to the broadband market 

will play a positive role in bridging the economic and rural digital divides. This in turn 

will significantly improve U.S. broadband performance relative to other leading nations. 

General Principles of Implementation for USF Reform 

As consumer representatives, we look to USF reform as an opportunity to extend the 

burden of contributions more equitably and to broaden the scope of distributions more 

effectively. The principles for implementing USF reform in 2006 must carry the same 

spirit as the principles for implementing USF in 1996. The functions, however, must be 

more forward looking. USF reform should: 

• Explicitly expand USF to broadband and set a level of service and a target price 

comparable to dominant technology in urban areas. The FCC’s broadband 

definition of 200 kbps is unacceptable and backward-looking. It must be 

revised to ensure appropriate levels of service. 

• Broaden the base of USF contributions, equitably assessed and technology 

neutral, to stabilize the financial future of the Fund. 

• Tighten the reigns of oversight and control that ensure disclosure of how the 

Fund’s distributions are spent, who qualifies to spend them, and what the 

results of that spending yield. Increased data collection to make these 

assessments, including determining the capacity of lines in service areas, will 

be a key component to understanding how and where to make strategic 

investments in infrastructure. 

• Find the right balance for USF subsidy. If the subsidy is too big, investment 

does not flow to the most efficient provider and rate paying consumers are 

overly burdened without a commensurate benefit. The inter-industry wrestling 

over revenue must be exposed to scrutiny and untangled fairly. Consumer 

contributions to the Fund must produce a tangible social and economic benefit 

in the form of a more robust network and catalyzed economic growth. We 

have real success stories with broadband provision by carriers of all kinds—we 

should identify those blueprints and duplicate them. 

 

10 See John Horrigan, “Broadband in the United States: Growing but Slowing,” Pew Internet and 

American Life Project, September 21, 2005, 

http://www.pewinternet.org/PPF/r/164/report_display.asp 
86

• Invest in a technology neutral manner that promotes the least costly, most 

efficient systems that meet robust quality of service standards. 

• Begin a transitional phase leading to a point when all USF eligible carriers 

offer broadband compatible networks. The converged IP platform that carries 

both voice and data is more efficient, more robust, and not substantially more 

expensive than PSTN upgrades. As the PSTN equipment depreciates and 

requires replacement, it should be replaced with an IP platform. 

• Discipline the size of the fund through rigorous oversight, realistic maximum 

allocations, forward-looking cost assessments where appropriate, and sliding 

scales of eligibility and reimbursement. The FCC and state utility commissions 

should work in tandem to develop new protocols that make sense for a USF 

that supports 21st Century communications services. 

• Reform USF in conjunction with a comprehensive set of broadband policies. 

These should include: 

• Opening more of the spectrum for unlicensed wireless broadband, 

• Focusing on competition inducing policies that counterbalance mergers, 

• Strategic direct investment in rural broadband infrastructure, 

• Reinstatement of the Technology Opportunities Program at NTIA, 

• Encourage community development programs as broadband partners in 

order to expand access to low-cost equipment and technology training. 

Conclusion 

There are no easy solutions to correcting to the problems of the Universal Service. 

But they must be addressed based on the same principles that have always guided 

progressive communications policy—a commitment to ubiquitous, affordable access to 

the most important technologies of the era. Broadband unquestionably qualifies as the 

dominant communications service of the 21st century. The benefits of applying USF to 

broadband outweigh the costs by a wide margin. Without a strong, comprehensive policy 

commitment to developing our broadband markets, we cannot hope to correct the 

problems that have plunged us down the ranks of global competitiveness. We need 

policies that give the “green light” to investment in communications infrastructure in 

rural and low-income America with a strong commitment to accountability, efficiency, 

and oversight. We strongly encourage this Committee to uphold the remarkable and 

progressive commitment to Universal Service that is the foundation of our 

communications policy. 

 MR. UPTON. Well, thank you all very much. I appreciate your 

testimony, that is for sure. And I have to say that as I listened and read 

your testimony and have been thinking about this issue for a long time, 

particularly as we begin to engage with the Senate on the COPE Act, 

which we passed by a broad margin 2 weeks ago in the House and look 

forward to the Senate’s action in full committee this week. I am one that, 

at least as it relates to USF, believes that the status quo is simply not 

acceptable because of the continued increasing cost, even though it is 

neutral as it relates to the government budget. Doubling the cost every 

couple of years is not a trend that I, certainly as a fiscal conservative, 

want to continue to see. So I am looking for ways that we can reform the 

system, not one for eliminating USF. I realize the importance, 

particularly in rural areas, and my State is one of those that has a pretty 
87

good balance of urban and rural. I know the importance of connections, 

certainly in our district and the good work that they do. But simply times 

two every 3 or 4 years is not the course that I want to be on. 

 And I guess my first question is for Dr. Marron, and I noted that in 

your testimony, you noted that the growth in the High-Cost Fund has 

come largely because of the dramatic increase in the wireless carriers, 

which have become eligible, of course, to receive the High-Cost support. 

And I would note concerns that stress that the wireless carriers receive 

such support based on the wireline carriers’ costs, which are often 

higher, I believe, than the wireless. If we are to change the program to 

limit wireless carriers’ support to their own costs rather than wireline 

costs, what do you think the savings would be within a few years? 

 DR. MARRON. I am sorry, Mr. Chairman; that is not an analysis that 

we have had an opportunity to attempt. As you know-- 

 MR. UPTON. Well, I mean you do everything else. 

 DR. MARRON. Well, yes, we analyze many, many, many questions, 

as you know. On that one, one of the key issues is that, as you know, in 

the current structure of the program, the program is structured to generate 

very good data about the cost of the incumbents and so that that can be 

tracked for purposes of implementing the program, but similar data are 

not collected for the entrants since, as you said, they are paid based on 

the incumbents’ costs. And so the first data that you would want to go to 

to answer that question isn’t immediately available. We want-- 

 MR. UPTON. And yet--go ahead. 

 DR. MARRON. I was just going to say that we would be happy to go 

back and take a look and see what we could find, but I am not entirely 

sure what we would find there. 

 MR. UPTON. That might be available for us to look at. And I want 

others to comment on that as we go. 

 The other question that I have relates to something that Ms. Pies 

indicated and that would be that to limit it to one connection and one 

telephone line. Have you done an analysis in that regard? 

 DR. MARRON. Sir, we haven’t yet done that specific analysis, but we 

do, as I mentioned earlier, have one number, which is a good starting 

point for thinking about that, which you mentioned for fiscal year 2005, 

the entrants, the competitive providers, their compensation in the system 

was about $640 million. And that is going to be an upper bound, but if 

you adjust that down so whatever customer base has two lines, it would 

seem that that would be kind of the right order of magnitude for what the 

effect would be of going to one line. 

 MR. UPTON. And the comment that it would limit it to about $1 a 

month per line, do those numbers equate with you in terms of where we 
88

are today that was indicated in the testimony? I think it was Mr. 

Cimerman. 

 DR. MARRON. Yes. Yes. 

 MR. UPTON. Does anybody else on the panel want to comment on 

either of those questions that I posed? 

 Okay. Mr. Clark. 

 MR. CLARK. Yes. Mr. Chairman, I would just add that something to 

understand also about the identical support rule, it actually has even a 

little bit more harmful effect than has been presented today, because 

remember that it is based on the incumbents’ costs, but it is based on 

their average per-line cost, so to the extent that you have two ETCs in an 

area and the wireline company may be losing customers to the wireless 

company, their average per-line costs go up at the same time, so both 

carriers end up receiving more money because they are both eligible for 

that money. So when we talk about sometimes the “death spiral” of 

universal service, because of the way that identical support rule operates, 

that is what people are referring to. 

 MR. UPTON. Well, are you not concerned about the level of the Fund 

as we have seen these costs double over the last 4 or 5 years? 

 MR. CLARK. I certainly am. Speaking for myself and not 

necessarily the Association, I mean, to me, the identical support rule is 

probably the largest single problem that we have. I am not as enamored 

with the primary line restriction for a number of reasons that we can get 

into later, but I think that the identical support rule would certainly be 

something worth looking at. 

 MR. UPTON. Okay. My time has expired. 

 MR. GARNETT. Can I just quickly dovetail off of what 

Commissioner Clark was saying? 

 I think the problem is not the identical support rule. The problem is 

that we are subsidizing carriers based on their actual costs plus profit. 

We don’t think either the incumbent or the competitor should get support 

based on actual costs plus profit. We need to get to a system where both 

incumbents and competitors are rewarded for being efficient just as 

wireless carriers and other competitors are rewarded in the competitive 

marketplace. 

 MR. UPTON. But we would do that if we went to one money, would 

we not? 

 MR. GARNETT. We may. 

 MR. UPTON. Dr. Cooper. 

 DR. COOPER. Chairman Upton, I want to offer an observation. All 

of this talk about numbers and lines is very backward-looking. We are in 

a world where some people won’t have numbers; they will go to ISPs. 

And we have heard a lot about the growth of the size of the Fund, but 
89

think about the volume of traffic that has been flowing over those lines. 

It has been exploding. Even if you did revenue in the sector, it is 

growing, not as fast as the Universal Service Fund, but pretty darn fast 

over that 10-year period. So I would encourage that we think about this 

as a connection and the capacity that is being used, because if we 

understand, as I have suggested, that broadband is the adequate facility 

for the 21st Century, it gives us a different perspective on the one-line 

issue. It is a one-connection issue. And that connection will be doing 

lots of things. It will be supporting voice, video, and data, and I think 

that that is the way we need to think about it rather than comparing it to 

this line and numbers context, which is last century’s framework. 

 MR. UPTON. Mr. Stupak. Oh, excuse me. I didn’t see Mr. Boucher 

come back. 

 Mr. Boucher. 

 MR. BOUCHER. Go ahead, Bart. 

 MR. UPTON. Mr. Stupak. 

 MR. STUPAK. Well, thank you. And thanks for holding this hearing, 

Mr. Chairman. 

 You know, we are investing in a first rate telecommunications 

network that is affordable for all Americans and without universal 

service, my constituents would pay anywhere between $100 and $700 

more per year for basic phone service. So as we look for ways to reform 

the Fund, we have to make sure that the end goals of affordable universal 

service are not compromised. I look forward to working with you, Mr. 

Dingell, Mr. Boucher, Mr. Terry, and others on the committee for this 

endeavor. And Chairman Barton said today that if we can’t get rid of it, 

and I assure you we do not want to get rid of it, we need to reform it, and 

so I stand ready with you guys ready to work with you to try to reform 

and modernize it, because as I said, I assure you, we cannot get rid of it. 

 Mr. Cimerman, I appreciate the investment that cable companies that 

serve rural areas are making in VoIP technology. In fact, I am a VoIP 

customer myself through a cable company. Are you aware of any cable 

company that does not pay in the USF today? 

 MR. CIMERMAN. No, my understanding is that all cable companies 

that are offering VoIP service, as well as those that offer traditional 

circuit-switched service, do pay into Universal Service. 

 MR. STUPAK. Well, we note today the FCC just came out with their 

ruling saying that VoIP providers or cable companies should pay in, that 

VoIP providers must pay in. Why were they paying in before required to 

do so? 

 MR. CIMERMAN. Well, back in February of 2004, we issued a white 

paper with a rights and responsibilities framework. That is the same 

framework that we have advocated on the video side, that, as providers 
90

providing whatever service, on the one hand, they seek certain rights, for 

example the right to interconnect. On the other hand, there are certain 

social obligations, e-911, working with law enforcement, paying into 

Universal Service that, from the beginning, we felt was an important part 

of offering our service to pay into Universal Service. 

 MR. STUPAK. We are getting to Mr. Cooper’s statement there at the 

end that we should be looking at each connection and capacity as a 

different way of looking at paying into USF. 

 MR. CIMERMAN. Well, I appreciate the opportunity to respond, 

because we actually have several concerns. The first, the connections, is 

how you measure a connection. There are still a number of people that 

don’t have, for example, a broadband service today. They choose not to 

subscribe. It is available to them. But if you do have broadband service 

and you have a phone line and you have, let us say, a wireless phone, 

how are we measuring connections? Are people double paying, triple 

paying? It is unclear exactly how a connections-based plan would work. 

And on a capacity-based plan, we have an even bigger concern, because 

generally we give the most capacity bang for the buck, but Verizon and 

others are rolling out new services. As we are increasing speeds, 

increasing capacity, the idea that you would pay more into Universal 

Service just because you are getting increased capacity doesn’t 

necessarily seem to make sense. We think the number-based plan, as Dr. 

Marron, I think, agreed in the question from Chairman Upton, would 

provide a sufficient revenue basis for universal service because there are 

so many numbers in use. And we don’t think that people are moving 

away from numbers. We have advocated that if people were to get into 

some regime to numbers, that the FCC ought to have the authority to use 

that addressing system. But we are always going to need some kind of a 

unique addressing system to figure out who is who, and so we think a 

number-based plan would be quite robust. 

 MR. STUPAK. Okay. Mr. Crothers, thanks for your testimony today. 

As a representative of the North Dakota Telecommunications 

Association, can you tell me how much more North Dakotans would pay 

without Universal Service Fund and why? 

 MR. CROTHERS. Mr. Chairman, Mr. Stupak, I do not have the 

specific number. We have an average rate in North Dakota of $18 for 

local service. It is generally acknowledged that it will be $25, $35, $45, 

$50, $150 a month in some instances to provide service. So it is 

extremely costly to serve rural North Dakota. It is one of the least dense 

areas of our country. The State is 350 miles from east to west. One-third 

of our population lives in the six counties adjacent to the Minnesota 

border, so we have a density of less than two subscribers per square mile 
91

in North Dakota. It is phenomenally expensive to serve. Sir, I can get 

the specific number for you for an average family, if you wish. 

 MR. STUPAK. How about quality of service? Would you be able to 

afford wireless service in North Dakota, especially in that western part 

without universal service? 

 MR. CROTHERS. Mr. Chairman, Mr. Stupak, there is wireless service 

in western North Dakota. That low density in the southwestern portion 

of the State of North Dakota is about 0.6 of an individual per square 

mile. But the wireless service is very, very spotty. You can literally go 

the majority of counties and not have any service. You can drive 10 

miles south of Bismarck, North Dakota, the capital of North Dakota, and 

not have service. It is a very difficult area to serve with wireless. 

 MR. STUPAK. One more, if I may, and the Chairman has been 

generous with his time, but there seems to be this myth that rural 

customers do not pay as much as their urban customers for phone 

service. Isn’t it true that on an average, rural consumers pay on average 

more for their phone service than urban customers? Let us see. From 

1994 to 2002, it was increased, in the urban rates, about 145 percent to 

$22.65 while the rural areas had only gone up 36 percent, but that is still 

$28.08, so we still paid more in rural areas than we do in urban, is that 

true? 

 MR. CROTHERS. Mr. Chairman, if I may, Mr. Upton, that makes 

exact sense to me, tremendous sense to me. In rural areas, especially 

these very low density areas, you find that individuals make an 

increasing number of long-distance calls, of toll calls. They need 

additional connections. They do their business, whether it be education, 

their business, their entertainment, it is frequently a toll call. We believe 

the costs are much higher. Yes, sir. 

 MR. STUPAK. Thank you. 

 MR. UPTON. Mr. Barton. 

 CHAIRMAN BARTON. Thank you, Mr. Chairman. 

 So many questions, so little time. 

 Let us see. Mr. Frantz, do you think a subdivision in suburban Katy, 

Texas, where the medium home price is over $400,000 and there are four 

or five homes per block on half-acre to acre lots with lakefront property 

qualifies as a high-cost, low-density area for Universal Service Fund 

applications? 

 MR. FRANTZ. That is difficult to answer that question, because I 

don’t know really much about that area. I think I understand. 

 CHAIRMAN BARTON. Well, I am not exaggerating. 

 MR. FRANTZ. I think I understand your point, and I guess I would 

respond this way. Any complex compensation system is susceptible to 
92

gaming in some manner to some degree, and I think that is the challenge, 

really, that we are discussing today. 

 CHAIRMAN BARTON. But in any reauthorization of the Universal 

Service Fund, would your association support a reform that excluded 

those types of communities from the Universal Service Fund program? 

 MR. FRANTZ. Again, it is difficult for me to conceptualize how that 

would be designed or structured, Congressman. 

 CHAIRMAN BARTON. Well, it is a true example. I mean, I am not 

making these things up. 

 Let me go to my friend from CBO, who I always have an interesting 

dialogue with. 

 If we were to pass a bill that reduced the outlays for the Universal 

Service Fund, how would that be scored, if at all, in a budget 

reconciliation package? 

 DR. MARRON. Sir, the budgetary treatment of the USF program, as 

you know, is that both the revenues to it and the spending of it are both 

considered being part of the budget. The revenues show up on the 

revenue side and the spending shows up on the spending side, so if you 

do reduce the spending, it would show up as a spending reduction. 

 CHAIRMAN BARTON. So it would score? 

 DR. MARRON. Yes. 

 CHAIRMAN BARTON. All right. And can I quote you on that to the 

Speaker? 

 DR. MARRON. Oh, well, let me check to make sure I haven’t-- 

 CHAIRMAN BARTON. That is the answer I wanted, but I just want to 

make sure. 

 DR. MARRON. I just want to make clear, as you know, I have been 

Acting Director only for 6 months and occasionally there are nuances of 

scoring that confuses even me. 

 CHAIRMAN BARTON. Okay. 

 DR. MARRON. I mean, I should emphasize that the way USF is 

structured is that the spending and the revenues are such that they tend to 

track one another, and so whatever spending change there would be 

would automatically, in essence, be offset possibly by some-- 

 CHAIRMAN BARTON. At least for today’s hearing, if we were to 

reform the program and have less outlays, that would score as a positive, 

a revenue savings for reconciliation purposes? 

 DR. MARRON. I am sorry. It would be a savings on the spending 

side, and it would, under the current construction result in a revenue 

reduction. 

 CHAIRMAN BARTON. Yes, sir. Okay. Well, I am going to quit while 

I am ahead with that one. 
93

 The gentlelady from Texas, Ms. Pies, the FCC today, I think, did 

something that taxes at 64 percent of revenues. What is your group’s 

position on that particular decision by the FCC? I am not sure they have 

the authority to do it, but besides that, do you think your group is going 

to be happy to hear they are going to get their revenues taxed at 64 

percent? 

 MS. PIES. Well, we haven’t seen the details of the order yet. I am 

sure that the Commissioner and the General Counsel’s Office have done 

a good job supporting the jurisdictional authority. The one-- 

 CHAIRMAN BARTON. I am not so sure as you are of that, but-- 

 MS. PIES. Well, I have a friend who worked there, so I think there 

are some quality employees there. 

 CHAIRMAN BARTON. Well, I will admit there used to be at least one. 

 MS. PIES. Thank you. 

 CHAIRMAN BARTON. No, I believe there are quality employees at 

the FCC. They are good people. 

 MS. PIES. We actually support, very strongly, the goals of the 

Universal Service Fund and have long supported changing the 

contribution methodology so that VoIP providers do contribute on an 

equitable, non-discriminatory basis. Our concerns about the FCC’s 

action today are probably three-fold. 

 First, there is going to be a tremendous funding gap when DSL stops 

contributing at the end of July. We have not taken a position on whether 

or not broadband should continue to contribute, but that was the basis of 

the FCC’s actions today. Estimates have been close to $350 million. 

 CHAIRMAN BARTON. But should you set a percentage based on 

expected revenue gap from another medium? 

 MS. PIES. I don’t believe that would be consistent with the goals of 

Section 254. We are also concerned that a tremendous number of VoIP 

providers and users are small businesses and are anxious to see the 

FCC’s analysis of the impact on the small businesses of this 

tremendously high percentage. It is almost twice of what wireless 

carriers are required to contribute. And we are also concerned because a 

large number of VoIP users are low-income users and dramatically 

increasing their phone bills, even for the interim, hurts the very 

consumers that the FCC is supposed to be protecting. 

 CHAIRMAN BARTON. Okay. Mr. Chairman, if I could, I have got 

two more questions. I know my time has expired. 

 I want to ask Mr. Cooper, who is one of our more frequent visitors 

here to testify, does your group support a reform in Universal Service 

Fund that whatever it is and however it is distributed, it should be based 

on the least cost alternative as opposed to the existing cost model 

regardless of what the costs are? 
94

 DR. COOPER. Absolutely, we have since the Act was passed. 

 CHAIRMAN BARTON. Okay. Thank you. 

 DR. COOPER. It should be the broad base. We were the first people 

to argue that. The People’s Council in Texas was one of the vigorous 

supporters of that and unfortunately lost that. 

 CHAIRMAN BARTON. I tried to look hard to find an answer that you 

and I would agree on, and I am glad that I got that. 

 My last question is, again, to Mr. Frantz. 

 In my opening statement, I eluded to several rural telephone 

cooperatives that paid more out in dividends than their subscribers paid 

in charges. Again, as part of any Universal Service Fund reform, should 

one of the reforms be that we subtract dividends paid out from the costs 

reported in? 

 MR. FRANTZ. Conceptually, the USF subsidizes networks. The 

companies that receive the subsidies can have varying financial effects or 

results from the receipt of those subsidies, depending on many factors, 

including their cap structure, et cetera. So again, it would be difficult for 

me to really be able to venture a thought on that without really further 

analysis. 

 CHAIRMAN BARTON. Well, does it seem fair that apparently, and I 

have to say apparently because I have evidence of specific companies, 

but I don’t know to what depth it is. I don’t know if that is 10 percent or 

5 percent or 100 percent, but there are a number of these smaller 

telephone companies. There is one in particular that prides itself for so 

many consecutive years paying out more in dividends every year than the 

subscribers have paid in line charges. And conceptually, should the 

general telephone interstate users that are paying an average of 11 

percent tax subsidize a telephone company that is routinely paying more 

out in dividends than it charges its subscribers in service charges, line 

charges? 

 MR. FRANTZ. I understand the thrust of your question, I believe, but 

your question implies that the source of the dividends distributed is either 

predominantly or totally attributable to the subsidies-- 

 CHAIRMAN BARTON. Well, in the specific instance that I mentioned 

on the record in Alpine, Texas, that record shows that they get 5 percent 

of their revenues from subscriber charges and yet last year they got $28 

million in subsidies from the Federal system and the State system. And I 

don’t know their dividend stream every year, but in 2003, they paid out 

$12 million and in 2004 they paid out, I think, $3 million. So in that 

case, 95 percent of their revenue is coming from subsidies, and yet they 

are paying these huge dividends. I am out for dividends. I don’t think 

dividends are bad. I think they are good, but when 95 percent of your 

dividend structure is coming from a Federal or State subsidy, it would 
95

seem to me to be a fair reform to limit. If you are paying that much out 

in dividends, you should subtract that from the costs that are used to 

calculate the rate of return it is guaranteeing under the Universal Service 

Fund. That is all. 

 MR. FRANTZ. Well, clearly it doesn’t seem right nor is it consistent 

with the purposes of the program for that type of excessive situation to 

occur. And I think I can safely venture the view that the trade 

association would not support any situation where the system could be 

gamed to that extent. 

 CHAIRMAN BARTON. I appreciate that answer. I yield back, Mr. 

Chairman. 

 MR. UPTON. Mr. Boucher. 

 MR. BOUCHER. Thank you very much, Mr. Chairman. 

 And I want to thank our witnesses today for spending time with us 

here and for their patience. This has been a long hearing. Your 

information has been very enlightening to us. 

 Mr. Frantz, Mr. Crothers, and Mr. Feiss, let me give you an 

opportunity to talk a little bit about why universal service is so important. 

And let me just kind of paint a picture, and tell me what would happen 

were this picture real. 

 Let us suppose that the worst occurs and that Congress perhaps is not 

capable or not able or doesn’t have the will to stabilize the Universal 

Service Fund and that it meets its demise, so we really no longer have the 

Universal Service Fund available for the rural companies that are using 

that funding today. What would happen to that rural service? Could 

those companies continue to survive? And as an adjunct to that question, 

how would you rank the importance of universal service today as 

compared to its importance historically? Is it more important today, less 

important? Is it of diminishing importance over time or of growing 

importance over time? 

 Who would like to begin? Mr. Frantz? 

 MR. FRANTZ. Although it is difficult to generalize because there are 

enormous variations among the various companies comprising the 

USTelecom membership, I think it is fair to say that the companies that 

predominantly serve the low density areas are very significantly 

dependent upon subsidies. Would they go out of business? I think, in 

some cases, they clearly would; in other cases, they would hold on. But I 

think the consequence, the effect, in the case of many of the companies 

that serve low density areas, Congressman, would be very adverse. 

 In terms of the relative importance, in my comments, I ventured the 

point of view that this program is more important today than ever, 

mainly because we, in this country, as I think we all know, are competing 

not just against various of the other segments or parts of the country, but 
96

in a very real sense, we are competing against the world. And without a 

very robust telecommunications infrastructure, we are going to be very 

hard pressed to compete. 

 MR. BOUCHER. So stated another way, if we lose universal service, 

we lose connectivity in a lot of rural America, and if that happens, that 

injures the national economy, which depends upon the entire country 

being connected to drive economic progress. Is that a fair statement? 

 MR. FRANTZ. Yes, sir; it is. 

 MR. BOUCHER. Okay. Would you like to comment, Mr. Feiss or 

Mr. Crothers? Mr. Crothers, I see you reaching for the microphone. 

 MR. CROTHERS. Mr. Boucher, thank you. In response to your 

question, what if the worst occurs, it would be devastating for North 

Dakota, the overwhelming majority of which is rural. In North Dakota, 

we have approximately 290 communities. The 12 largest of those 

communities may be 5,000 people. The rest are far below that. The 

exchanges are tremendously large. We serve a tremendous amount of 

communities where there are literally 200 and 300 people, but the 

exchange that that encompasses goes 25, 35, 40, 50 miles in some 

instances. So the rates would be phenomenal for those that are served by 

those rural companies. And because of those high rates, in the 

affordability, it would be very helpful, to the very last point that was 

made, that an individual could participate in what we refer to as today’s 

economy or a 21st Century economy. There are educational 

opportunities. We use that tremendously in North Dakota: long-distance 

learning opportunities to our universities. Our hospitals and technicians 

are frequently trained through long-distance technologies. That robust 

infrastructure is absolutely critical, and not for just some or some in the 

highest density areas, but also our elderly in our rural areas, which the 

elderly are disproportionately large residents of, have the opportunity to 

be in their homes. So if that infrastructure is so critical, that is what the 

universal service dollars have done in rural North Dakota. It is also 

critically needed for VoIP services and cellular services. If they are to 

exist in these rural areas, the capacity they need to deliver their services, 

it is absolutely essential that this USF program be as healthy and robust 

as possible. 

 MR. BOUCHER. And let us hit those, Mr. Crothers and Mr. Feiss. 

And I think Mr. Feiss actually may have had a number answering this 

question in his testimony. But let us suppose the Fund goes away and 

the rural subscriber has to pay the entire cost of delivering the service to 

him. What would that mean in dollar terms, do you think, perhaps on a 

monthly bill or an annual bill, in terms of the addition to that bill for the 

typical rural subscriber having to carry the entire cost of delivery of the 

service to him? 
97

 Mr. Feiss, I think you had a number. 

 MR. FEISS. Yes, Mr. Boucher, I do. I did have in my testimony a 

$330 additional annual cost if just the universal service were to be 

eliminated for the average Montana consumer and as much as, for 10 

percent of the consumers, $600 additional cost. In combination with the 

low per capita income in Montana, it could be devastating for numbers of 

residents. And as Mr. Crothers pointed out, it is the infrastructure which, 

as Dr. Cooper points out, is migrating toward a totally IP Internet-based 

platform. And it is that platform that enables the people I have cited in 

my testimony, and there are hundreds and thousands more who are living 

and working in rural America who have access to the world now because 

of an advanced infrastructure. And if that infrastructure were to become 

dramatically more costly, there are people who would drop off the 

network and network investment would be more difficult and even 

questionable in large parts of the country. 

 MR. BOUCHER. I am going to say thank you to these witnesses. My 

time has expired. I appreciate your answers. 

 MR. UPTON. Mr. Terry. 

 MR. TERRY. Thank you, Mr. Chairman. 

 And I do want to say that I respect and appreciate Chairman Barton’s 

position. I don’t think anyone, no matter whether you have a rural 

telecom business or you are a State regulator, wants to support anyone 

who is gaming the system. And certainly the intent of universal service 

is not to provide free but simply, as Dr. Cooper stated, that it is 

reasonable. I forget the term right off hand, but that they are paying, 

essentially, the same rate, and not 300 percent or up to 600 percent more. 

But on the cost aspect of the overall Fund, what we are talking about, at 

least with the Terry-Boucher bill, is the high-cost rural aspect, not E-Rate 

or some of the other categories. So I guess this will be to our CBO 

friend, but a couple of questions here. Under our bill, we have capped 

the Fund at its current rate. Then the FCC has a specific telephone 

inflationary formula, what we then adapt. But we also then regulate, and 

a good portion of the new costs for this Fund have been on the ETC, or 

the new entrant, side. And we control that more. Have you, in your 

testimony here today, looked at how this formula would work or, i.e., 

score when it is capped and you now controlling new entries? 

 DR. MARRON. Yeah. No, we haven’t looked at that. 

 MR. TERRY. All right. Thank you. 

 In regard to whether or not it reduces spending or not, my view is 

that how the FCC works it is they determine what they have to send out 

by way of the dollars to the entities receiving USF and then they send out 

a bill to the payers. Isn’t that generally the way it works, Mr. Feiss? 

 MR. FEISS. Pardon me. 
98

 MR. TERRY. Well, we are trying to go through the scoring of this, 

and I am helping our people from CBO. Understand that the FCC bills 

out to the payers the amount that is needed by the FCC. Is that generally 

accurate? 

 MR. FEISS. The way I understand how it works is that the revenue 

requirements by high-cost companies are submitted, actually, to, I think, 

NECA, the National Exchange Carriers Association. And they have a 

figure of how much Universal Service Fund is needed. And then the 

FCC quarterly adjusts. 

 MR. TERRY. Yes. Then they adjust and the FCC then notifies the 

companies that pay. 

 MR. FEISS. Right. And there is actually a 2-year lag in this process, 

so the revenues that a company in 2006 receives is, at least in the 

wireline business, different in the wireless business, 2004 cost 

reimbursement. 

 MR. TERRY. No, I appreciate that because it is a really unique way 

in which they derive both the revenue and then the disbursements which 

is why the antideficiency aspects are so important. 

 I have a thought or a question, Ms. Pies. And I really appreciate 

your statement. I think it shows why we need a bill like the TerryBoucher bill so that these rural telephone companies can upgrade their 

systems as we move toward VoIP or an Internet-based exchange. Which 

I think then once we get all of rural Montana and Iowa and Nebraska and 

Wyoming with access to broadband and they can then use VoIP. So I 

think that enhances your position. 

 MS. PIES. Yes. 

 MR. TERRY. Then the issue of paying in, you mentioned something 

about the “phantom traffic,” and that is actually part of our bill because 

we only want to make sure that those that are using voice are the ones 

that are paying in and not ones that are doing data transfers or gaming or 

something like that, which is why we think it is necessary to identify the 

traffic, so if a VoIP user, when they are providing a voice service that 

they are paying in. Do you think then identifying that traffic is injurious? 

Because it sounded like you say that if we try to identify the traffic, then 

that is going to cause all of the problems. But I think it eliminates the 

problem. 

 MS. PIES. With respect, Mr. Terry, the VON Coalition views the 

“phantom traffic” issue not as a universal service issue but as an 

intercarrier compensation issue. We recognize that the two go hand-inhand; when one goes up, the other tends to go down and vice-versa. 

 MR. TERRY. So on the universal service side, you would support 

“phantom traffic” in our bill, the language? 
99

 MS. PIES. We do support requirements that providers pass the call 

identifying information that they receive. We would support any 

requirements that would prohibit the alteration of call identifying 

information. What we don’t support are provisions that require an 

originating carrier to generate some type of artificial designation. By 

doing so, what you are doing is adding costs solely for the purpose of 

beating some sort of arbitrary regulatory goal. In addition, the way that 

the “phantom traffic” solution is addressed in your bill, it also allows the 

terminating carrier, at their discretion, to block the traffic because they 

have the ability to determine whether or not that type of labeling is 

accurate. I believe that is the word. And it is their choice whether or not 

it is accurate. If a call originates IP, it is not naturally going to originate 

with a traditional phone number, and the terminating carrier may decide 

that that is not accurate and block the call. And certainly we would be 

opposed to anything that would enable terminating carriers to block 

traffic, whether it is a VoIP call that is 911 or a VoIP call to a friend or 

loved one. 

 MR. TERRY. Constructive. I appreciate that. 

 MR. UPTON. Mrs. Blackburn. 

 MRS. BLACKBURN. Thank you, Mr. Chairman, and thank you all for 

your patience today. 

 I have got a few simple questions, and I am going to tell you what 

they are, and then I am going to let you vote by raising your hands so 

that we can finish this up and get you all on your way. You have been 

mighty patient. 

 And we do have concerns, and we want to look at this. We are very 

concerned. One of you mentioned a couple of times concerns about 

individuals or companies that game the system. When you are looking at 

a pool of money this large, as I said in my opening remarks, that is 

something that is of incredible concern to us. And while we have been 

sitting in this hearing, I got a Blackberry where some folks in one part of 

the country, my part of the country, don’t want to be subsidizing Amtrak. 

And then, just as I said in my opening remarks, there are folks maybe on 

this side of the country or in urban areas that say, you know, “Why 

should I be subsidizing broadband? Why should I be subsidizing more 

than one connection to a household?” This is a tax that has outlived its 

usefulness. And Ronald Reagan said it well when he said, “There is 

nothing so close to eternal life on earth as a Federal government 

program.” And our constituents believe that. I do, too. And once you 

get attacks against something, maybe it has outlived its usefulness, you 

can’t get rid of it. 

 So I am going to give you all the questions and then we will come 

back and vote. These are the things I am going to want to know. Do you 
100

support subsidizing more than one connection per household? Question 

number two: how many of you are for expanding or increasing the USF? 

How many of you are for reducing the USF is number three? And 

number four, how many of you would like to completely eliminate the 

USF? How many favor disbursement caps would be number five? And 

number six, and your last question, short test, how many think broadband 

deployment should be left to the private sector? 

 Okay. Real short test, and there are no grades except my answers are 

all right and whoever agrees with me makes 100, so here we go. 

 Okay. How many of you are for subsidizing more than one 

connection per household? Let me see your hands. 

 DR. MARRON. Well, for the record, I have to, given my job, abstain 

from all of the votes. 

 MRS. BLACKBURN. Spoken like a true bureaucrat. 

 MR. FEISS. Are we allowed to put footnotes on our hands? 

 MRS. BLACKBURN. Only if you want to submit them in writing. 

And I will take any footnotes submitted in writing. How about that? 

 MR. FEISS. I appreciate that. Yes. 

 MRS. BLACKBURN. I know Dr. Cooper is going to give me a lot of 

footnotes in writing. Dr. Cooper is good at that. 

 Okay. Let me see those hands again for subsidizing more than one 

connection per household. One, two, three, four. 

 MR. FEISS. My left hand is a footnote. 

 MRS. BLACKBURN. So submit it in writing. We are moving for 

speed. 

 How many would like to expand the USF? Two. 

 Okay. How many would like to see the USF reduced? One. 

 How many would like to eliminate the USF? Zero. 

 How many favor disbursement caps? Two. 

 Ms. Pies, you have no opinions? 

 MS. PIES. Not really. My opinions on-- 

 MRS. BLACKBURN. You have to submit it in writing. 

 Okay. How many think broadband deployment should be left to the 

private sector? Three. 

 None of you made 100, I can tell you that, because not any of you 

are in complete agreement with me. Is that a hand up for being in 

agreement? Okay. Four. Or a comment? In agreement? Leaving it to 

the private sector? All right. So we got a four on that one. 

 Thank you all very much for your time, for your patience, for your 

interest in the issue, and I yield back, Mr. Chairman. Thank you. 

 [Response for the record follows:] 
101

July 12, 2006 

The Honorable Marsha Blackburn 

509 Cannon House Office Building 

Washington, D.C. 20515 

Dear Congresswoman Blackburn, 

I want to thank you for taking such an active interest the hearing on universal service in 

the Telecom and the Internet Subcommittee on June 21. I was honored to testify and 

pleased to respond to Members’ questions and comments. 

In this regard, as promised, I’d like to provide you with greater detail on the “footnotes” I 

attached to the six questions you asked the panel at the end of the hearing. (I also 

apologize for the delay in responding to you. I had a long-scheduled vacation planned 

immediately after the hearing and wasn’t able to attend to this letter until my return.) 

1. Should universal service support more than one connection? 

My answer was “yes—with a footnote.” There is widespread opposition to a “primary 

line restriction” for universal service support. In fact, Congress twice has enacted oneyear moratoria on imposition of any primary line restriction, and rural companies support 

a permanent moratorium/prohibition on the primary line restriction. One problem with a 

primary line restriction lies in its practical (or should I say “impractical) implementation. 

First, it would be very difficult to determine which line is “primary,” and which one(s) is 

(are) not. There would be tremendous opportunity to game the system; to slam, cram, or 

otherwise attempt to characterize line(s) as primary. If one of the intentions for universal 

service reform is to reduce arbitrage and “gaming,” this potential reform may go in the 

opposite direction. For example, wireless companies offer each member of a household a 

separate phone and number—each of which receives universal service support if the 

wireless carrier is an ETC. (This is one reason why the primary line concept is 

attractive.) Wireline households may have multiple phones but only one universal 

service-supported line, but wireless carriers provide separate lines per individual in a 

household. If there were a primary line restriction, would each member of the family 

choose a “primary” line, or would one “household” choose a primary line? And then 

how would you determine what a household is, and who in the household gets to chose 

the primary line? And so on. 

A second problem with the primary line restriction is if only the primary line receives 

universal service support, then all other lines would be priced according to their actual 

costs. (Remember, wireless carriers do not even account for their actual costs today.) 

Presumably, non-primary lines would then be more expensive. In Montana, they could 

be hundreds of dollars more expensive. This would be a significant deterrent to small 

business (i.e., multi-line commercial enterprises) development in rural areas, and I do not 

believe Congress intends to thwart rural economic development. 

2. Should we expand universal service? 

I think my answer was “yes—with a footnote.” I believe that the approach taken by 

H.R.5072 is a reasonable, conservative approach to “expanding” universal service to 

include investment in broadband technology. On the one hand, it is widely 

acknowledged that access to affordable, ubiquitous broadband capabilities will expand 
102

economic opportunity for Americans throughout the nation, and enhance America’s 

worldwide competitiveness. This is why the President and Members of Congress on both 

sides of the aisle have endorsed nationwide broadband deployment. On the other hand, 

Members of Congress appear concerned about the cost of such a policy. Indeed, it’s 

obvious that to accelerate deployment faster than the market allows requires “incentives,” 

e.g. money. Depending on how fast you want to accelerate beyond normal market forces, 

and how fast you want “broadband” to be defined, the cost can vary. If we want gigabit 

speeds to be delivered by the end of 2006, it likely would cost billions. If we seek 

megabit speeds in 5 years, it’ll cost less. In fact, at the current rate of network investment 

and technology advancement, most networks may be able to deliver megabit bandwidth 

to most of their customers in 5 years without significant “new” support from universal 

service. H.R.5072 allows broadband investment costs to be supported by universal 

service, but authorizes the FCC to determine the level of broadband that can be 

supported, thereby providing a reasoned, incremental approach to broadband support. 

Second, while allowing broadband to be supported by universal service “expands” 

universal service, it does not necessarily increase the cost to the Universal Service Fund 

if other reforms, such as a broadened contribution base and more disciplined distribution 

(e.g., elimination if identical support), are implemented. 

Finally, as noted above, universal service already is providing support for network 

investments which facilitate deployment of advanced services without directly supporting 

specific broadband facilities. That is, universal service supports underlying investment in 

network upgrades like replacing copper with fiber backbones. Once fiber is deployed, 

bringing broadband service to residential and business consumers is more cost effective. 

So it’s a matter of timing: if you support bringing ubiquitous broadband capacity to 

America’s consumers sooner, you may want to consider including the provisions 

contained in H.R.5072 as a rational, incremental approach to such a policy. If you want 

to wait for the market and normal investment in modernization of our nation’s 

telecommunications markets to bring broadband to America’s consumers, then you may 

not support “expanding” universal service specifically to include broadband investment. 

3. Should we reduce universal service? 

My answer was “no—with a footnote.” Currently the size of the high-cost Universal 

Service Fund is determined by the level of investment in supported services by high cost 

carriers. As I noted in my testimony, incumbent wireline carriers are actually reducing

their universal service support by investing in more efficient, modern network 

technologies. (Also, as noted above, investment in fiber technologies facilitates more 

efficient broadband deployment, enabling greater efficiencies for the Fund.) Two 

Montana companies alone received $2 million less in 2005 than in 2004. In this regard, 

the Universal Service Fund is self regulating, and demand on the Fund from certain 

carriers is diminishing. 

However, consumers’ line items on their phone bills now are in the 10% range, which is 

historically high. (That’s 10% of the interstate-revenues portion of a phone bill, not of 

the entire telecom bill.) I should note, too, that this quarter’s contribution assessment 

went down from 10.9% to 10.5%, further indicating the “self-governing” aspect of the 

Fund and its contribution mechanism. But as noted during the hearing, new ETCs—

mostly wireless carriers—are receiving universal service windfalls as they receive 

universal service support based on incumbent ETCs’ support, and not on their own costs, 

which generally are considered less because they don’t have the level of infrastructure 
103

investment, quality, ubiquity, etc. that the incumbent has. (Wireless facilities need only 

reach from the end user to the nearest point of presence on the wireline network, thus 

saving them considerable expense; yet, wireless carriers receive the wireline carriers’ 

same level of universal service support.) 

So to return to your question, should we reduce universal service? It’s possible that as 

carriers invest in more efficient technologies and with the right reforms (e.g., elimination 

of identical support), we can “reduce” universal service distribution costs, while not 

reducing the effectiveness of universal service or the legitimate services and investments 

which universal service is intended to support. 

4. Should we eliminate universal service? 

No. Ubiquitous access to affordable, quality advanced telecommunications capabilities is 

as valid today, as it has ever been. Indeed, it is more valid in today’s worldwide 

economy, with the importance of Internet connectivity to our economic competitiveness. 

Again, I return to the highway analogy in my testimony. We continue to invest in our 

nation’s transportation system as a vital national economic infrastructure. Continual 

investment in our nation’s ubiquitous information “transportation” system is equally, if 

not more important. 

5. Should we cap universal service? 

No—with a footnote. Obviously a cap, by definition, will mean that certain legitimate 

investment is not recovered. The current regulatory cap already negatively affects 

investment decisions as well as prices. Remember, as CBO points out, most of the socalled growth in the Universal Service Fund has resulted from regulatory cost shifting, as 

directed by Congress, from “implicit” support mechanisms (i.e., intercarrier 

compensation or access revenues) to “explicit” support (i.e., universal service). 

Economically speaking, consumers are paying no more to support investment in 

ubiquitous, affordable, advanced telecommunications infrastructure. (This is not so, 

however, with regard to “new” support created by designation of new, mostly wireless, 

ETCs.) While the Fund (explicit support) has grown, intercarrier compensation (implicit 

support) has shrunk, and the next intercarrier compensation reform proposal in the 

pipeline will bring more of the same shift from implicit support to explicit support. 

Capping universal service without taking into account the regulatory cost shift from 

implicit to explicit support would significantly harm investment in our national 

telecommunications infrastructure. 

Moreover, the Telecommunications Act requires affordable rates, quality and advanced 

capabilities, and predictable and sufficient support. A cap violates these statutory 

principles. 

6. Should broadband deployment be left to the private sector? 

Yes. The only reason I hesitated to raise my hand was that I was not certain I understood 

the intent of the question. I inferred, perhaps mistakenly, that the question may have 

implied whether universal service should support (private) investment in broadband 

deployment. I’ve discussed the merits of H.R.5072’s treatment of universal services 

support for broadband above in question #2. 
104

If the question meant whether we support municipal or other government broadband 

network deployment, our answer is almost unequivocally no. The private sector under 

nearly all circumstances is a superior investor of scarce resources. 

I hope this addresses adequately your questions and I hope I have not burdened you with 

my lengthy “footnotes.” Please do not hesitate to contact me if you have any questions or 

if you’d like further elaboration. 

Again, it was an honor to testify before the Telecom and the Internet Subcommittee, and I 

look forward to working with you in the future. 

Best regards, 

/s/ 

Geoffrey A. Feiss, General Manager 

gfeiss@telecomassn.org 

406.442.4316 

 MR. UPTON. Mr. Bass. 

 MR. BASS. Thank you, Mr. Chairman. And I want to thank you for 

holding this hearing. I think it is a very important issue in the overall 

debate as to how we update and modernize telecommunications in this 

country. 

 To some extent, the debate that we are having today is reminiscent of 

the kinds of debates that we have had on other issues in the recent past 

on larger issues throughout the modern history of this country. The 

reality of it is that we are a United States, and the taxpayers of this 

country have subsidized, to a great extent, economic development in all 

sections of the country, be it the power marketing associations, the 

Tennessee Valley Authority or out in the far West to develop electricity 

at very, very low cost for people, be it the subsidized mass transit 

systems for urban areas in the northeast corridor with Amtrak in order to 

provide for a more diverse and strong economy there, be it the excise 

taxes, the Federal excise tax that everybody pays on gasoline that was a 

State contribution, but there are some States that donate more money and 

there are some States that don’t. In the case of telecommunications, it is 

really no different. 

 Now we passed a telecommunications bill a few weeks ago that had, 

in my opinion, two of the three principal components of a good, balanced 

telecommunications reform act. It has a national franchise that would 

create a lot more competition and availability for telecommunications in 

rural areas, and everywhere, for that matter. It also contained a 

municipal broadband provision, which would allow the municipalities to 

get together and provide services in areas where the traditional carriers 

weren’t willing to do so. And thirdly, I think we have to retain and 

maintain a fund that could be used to meet the needs of rural areas where 
105

competition simply can’t exist. I opposed amendments that were 

opposed to the telecom bill that would have required a build-out 

requirement because I see that it would have the exact opposite effect of 

what its original intent was. But without universal service and without 

build-out, in my opinion, you will never have good, high-quality, 

broadband service in rural parts of America, and America will not be as 

strong as it could be if people living in small towns and in rural areas can 

not get the same access to market as have people who live in suburban 

and urban areas in this country. This is a debate that has been going on 

in America ever since it was created. 

 And I guess my only question to the panel here is if there were a 

critical change that we could make to the Universal Service Fund that is 

outside of either expansion or limitation but to make it work better and to 

make it work fairer, what would that be? And I am not requiring 

everybody to answer that question. A single change to the Fund, what 

would we do? 

 Yes, go ahead. There is no order here. 

 MR. GARNETT. The single change that I would propose would be to 

go from the current system that calculates support based on the costs of 

the most efficient technology for a particular geographic area. 

 MR. BASS. Fair enough. 

 Anybody else? Dr. Cooper. 

 DR. COOPER. I would second that with one additional observation, 

that we really do need to make broadband the dial tone of the 21st

Century. So we have to look at least-cost, forward-looking technology 

and stop looking backward at numbers and lines and so forth. But 

clearly, the least-cost, most-efficient broadband technology is what this 

Congress ought to be shooting at. 

 MR. FEISS. Again, since I seem to be liking footnotes today, I think 

that one of the issues that is both on the distribution side and the 

contribution side of universal service is the disparate treatment of similar 

voice services. So if I could, in one sweep sort of comprehensively say 

what we need to do is ensure that voice communications are treated 

similarly, whether they are wireless or wireline. That would mean that I 

am actually not too far away from the wireless group in that the costs of 

any voice provider should be taken into account in what they receive. 

And then similar voice communication services should all contribute. So 

that is kind of a regulatory arbitrage, the elimination of different 

treatment of similar services. 

 MR. CROTHERS. Sir, the NTCA would recommend a provision that 

is actually found in the Boucher-Terry bill and that is that all 

connections, all telephone numbers, all IP addresses be included as 

contributors to the fund. There is too much arbitrage today, and that is 
106

the system of universal service, who can game the system the most in 

either the contribution or the distribution side. And so that contribution 

side, which is actually found in the bill, is tremendously helpful and will 

go a long way towards making it equitable. 

 MR. BASS. Anybody else? I know we are running out of time, but 

one more. 

 MR. CIMERMAN. Just, I think, reasonable and regular oversight, 

including assurances that Universal Service Funds are being spent for 

their intended purpose, because I am not sure that on the High-Cost side 

of the Fund that that oversight has really taken place. 

 MR. BASS. Thank you. And I note we don’t have any time for any 

more response, so I just want to just thank the Chairman for this hearing 

and hope that we can move forward with legislation. This isn’t the end 

of it. 

 Thank you. I yield back. 

 MR. UPTON. Mr. Gillmor. 

 MR. GILLMOR. Thank you, Mr. Chairman. 

 I had a question for Mr. Garnett. One of the major points of 

contention with the USF is its method for administrating funding. In 

your opinion, is the current system fair to all eligible telecommunication 

providers who receive funding, and if not, why not? 

 MR. GARNETT. As Commissioner Clark mentioned earlier, the FCC 

adopted very specific guidelines two years ago for ETCs’ designations, 

requirements for both incumbent and competitive carriers. And a 

requirement that those carriers, whether they are incumbent or 

competitive, prove that the dollars that are being given to them are being 

spent wisely. We think that that is the fairest way to do it. We think that 

is happening, and we would hope that that continues. 

 MR. GILLMOR. Thank you. I yield back. 

 MR. UPTON. Mrs. Cubin. 

 MRS. CUBIN. Thank you, Mr. Chairman. I am glad I am the last 

questioner, and I know you are, too. 

 I just have two quick questions. Mr. Navin, could you explain to me 

why the FCC has not chosen to base support from USF on a carrier’s 

own costs rather than on the incumbent costs? I am most interested in 

seeing that Wyoming citizens have access to a full array of 

telecommunication services at a reasonable price, as everyone is, but we 

are here today to analyze where the growth in USF is coming from. And 

it seems clear to me, from Mr. Marron’s testimony, that the growth is 

primarily coming from the entrants of wireless companies that don’t 

share the same obligations and they don’t share the same expenses of the 

incumbents. So can you explain the rationale for me? 
107

 MR. NAVIN. What I can tell you is that you are correct that the 

growth in the Fund, at least the High-Cost Fund, has been, in large part, 

as result of wireless ETC access to funding based upon the incumbents’ 

costs. In 2000, I believe that the Fund distributed approximately $1.5 

million to competitive ETCs, and in 2005, that number had grown to 

approximately $500 million. I also know that that issue has been teed up 

for the Federal-State Joint Board. They are looking into this issue today, 

and the Commission recently extended that referral past the end of June, 

so those deliberations continue, and we look forward to getting the 

recommendations from the Federal-State Joint Board on this issue. I 

know that the Chairman, in the past, has questioned whether it was 

Congress’s intent to use the Universal Service Program to subsidize 

multiple competitors in an area that may not economically support a 

single provider. I believe in the Virginia Cellular case, when he was a 

commissioner, he laid out his thinking, and he was of the belief then, and 

I believe it to be true today, that the primary purpose of the Universal 

Service Program, was to make sure that all consumers in rural areas of 

the country were able to obtain services, communication services, at 

affordable rates. 

 MRS. CUBIN. Okay. That was going to be my next question. Should 

we be subsidizing competitors as well? Well, would you agree that the 

cost for the incumbents is higher than it is for the new entrants? 

 MR. NAVIN. They use different technology. 

 MRS. CUBIN. Well, of course they do. 

 MR. NAVIN. The wireless carriers coming in to the market today 

have completely different network architecture. The incumbents are 

oftentimes required to provide a wireline service to areas that are very 

sparsely populated so they have extremely long loops. 

 MRS. CUBIN. And they are required to provide one to everyone. 

 MR. NAVIN. Yes, they have the “carrier of last resort” obligation. 

So that is something else that the Joint Board is currently considering 

right now as it relates to support for wireless ETCs is whether the 

support should be based upon the incumbents’ costs or the wireless 

carriers’ own costs and whether or not there should be some sort of cap 

on the amount of support available once there is competitive entry into 

the particular service area. 

 MRS. CUBIN. Well, it seems to me if the wireless cost isn’t as much 

as the incumbents’ cost and yet they either receive money based on the 

incumbents’ costs, that that is a real advantage for them. But you think 

those will be decided soon? 

 MR. NAVIN. We are hopeful. I know they just met down in Red 

Boiling Springs to talk about these very issues, so I am looking forward 
108

to getting a report with regard to the progress they made down in 

Tennessee, and we are hopeful. 

 MRS. CUBIN. Thank you. 

 MR. TERRY. Would the gentlelady yield? 

 MRS. CUBIN. Sure. 

 MR. TERRY. In our bill, we don’t leave it up to the FCC. It will be 

on actual costs, not incumbent costs, and that is another way that we 

control cost. 

 MRS. CUBIN. I see that my time has expired. 

 Thank you, Mr. Chairman, and thank all of you for being here. 

 MR. UPTON. I want to thank the panel for being here as well. Based 

on the questions, you can see that I don’t think anybody is happy with 

the status quo. We need some changes here that are going to be made. I 

look forward to working on a bipartisan basis toward constructive, 

positive changes. And we appreciate your extensive testimony today. 

 Thank you very much. 

 [Whereupon, at 4:58 p.m., the Subcommittee was adjourned.] 
109

RESPONSE FOR THE RECORD OF DR. DONALD B. MARRON, ACTING DIRECTOR,

CONGRESSIONAL BUDGET OFFICE

Question 1. In his testimony, Director Marron states that “[s]pending for [the highcost] program could be curbed by limiting high-cost support to one connection per 

household, by basing support on each carrier’s own costs rather than on a cost standard 

set by the incumbent carrier, or both.” Please comment on whether you agree or disagree 

with these two reform proposals and explain your answer. 

Answer. The Congressional Budget Office’s (CBO’s) recent analysis indicates that 

limiting high-cost support to one connection per household could have reduced spending 

from the high-cost program by over $600 million in 2006 and, if other elements of 

current policy remained in place, would reduce spending by between $1.2 billion and 

$1.8 billion annually by 2011. Those estimates assume that all support for competing 

eligible telecommunications carriers is for second connections. That assumption is 

supported by the observation that about 95 percent of high cost support for new entrants 

is paid to wireless providers and that a very large percentage of consumers who purchase 

wireless service continue to purchase wireline service. Regarding basing each carrier’s 

support on its own costs, many analysts have pointed out that new entrants have lower 

costs than incumbent carriers. But current regulations do not require those entrants to file 

cost data, so that claim cannot be verified with currently available data. Nevertheless, 

either reform proposal by itself or both in combination would probably reduce future 

spending from the Universal Service Fund (and revenues collected by the fund) below the 

level it would otherwise be. 

Question 2a. In February 2004, the Federal-State Joint Board on Universal Service 

recommended supporting a single connection per household, as a means of reducing 

excessive growth in the fund: “We believe that limiting the scope of high-cost support to 

a single connection to the public telephone network would be more consistent with the 

goals of section 254 than the present system.” Please comment on whether you agree or 

disagree with this statement and explain your answer. 

Answer. Section 254 establishes the Joint Board and specifies its role in 

determining the services covered by the Universal Service Fund. The board has explored 

in detail the question of whether support for a single connection or for multiple 

connections is consistent with the legislation. CBO is unable to comment on this 

legal/policy issue. 

Question 2b. The Joint Board also determined “Section 254(b)(3) encourages 

access to connectivity, however, not unlimited connections at supported rates. Advanced 

services increasingly are being provided along with voice services over a single 

connection. Nothing in the Act supports the argument that multiple connections should be 

supported for access to dial-up Internet access or fax services, neither of which is a 

supported service.” Please comment on whether you agree or disagree with this statement 

and explain your answer. 

Answer. The board has explored in detail the issue of the advanced services that can 

be provided over a single connection and the question of whether support for a single 

connection or for multiple connections is consistent with the legislation. CBO is unable to 

comment on this legal/policy issue. 
110

Question 2c. The Joint Board also concluded “We believe that further growth due to 

supporting multiple connections presents a significant threat to fund sustainability.” 

Please comment on whether you agree or disagree with this statement and explain your 

answer. 

Answer. CBO projects that funding for multiple connections is likely to increase 

spending from the Universal Service Fund by between $600 million and $1.2 billion 

annually by 2011. The fund has sustained such increases in the past by increasing 

collections from telecommunications providers. In 2004, the most recent year for which 

the Federal Communications Commission (FCC) has published data, the fund’s revenue 

base was $77.8 billion. To finance $600 million in additional spending with the 2004 

revenue base would have required an increase in the contribution rate of 0.8 percentage 

points from its 2004 annual average level of 8.8 percent. A $1.2 billion increase in 

spending would have required a rise of 1.6 percentage points in the contribution rate. (In 

recent quarters, the contribution rate has been as high as 10.9 percent.) 

CBO’s report Factors That May Increase Future Spending from the Universal 

Service Fund stated that “Further increases in spending by the USF would drive up the 

fee percentage even higher, unless either a different revenue mechanism was devised or 

the base of telecommunications services subject to the fees was broadened. Higher fee 

levels might cause consumers to shift more of their spending to telecommunications 

services that are not subject to USF fees—such as e-mail and instant messaging—thus 

reducing receipts for the fund.” 

The FCC has recently taken actions to expand the revenue base by raising the 

payments required by cellular telephone providers and including revenues based on 

Internet telephony. Those actions would decrease the payments made by traditional 

wireline carriers necessary to finance the fund. However, funding multiple connections 

would further increase budgetary pressure on the fund and divert resources from other 

economic activity to support the purposes of the fund. 

Question 3a. Should only one provider receive universal service support in any 

given area? Please explain your answer. 

Question 3b. Should only the provider that can serve the area at the lowest possible 

cost receive the universal service support? Please explain your answer. 

Answer. The answers to those questions are policy judgments. CBO’s mandate to 

provide impartial analysis precludes making such policy recommendations. 

Question 4a. In his testimony, Mr Garnett asserts that “the high-cost mechanisms 

subsidize incumbent carriers based on what they spend...not necessarily based on whether 

they actually serve customers located in a rural, high-cost area.” Do you agree with the 

accuracy of this statement? Please explain your answer. 

Answer. For a carrier that serves both rural and nonrural areas, support of the highcost fund is based on an economic-engineering model that estimates what an efficient 

entrant would need to spend to provide service in the areas served by the carrier, rather 

than the carrier’s reported costs. Included in that model is a count of the number of lines 

the carrier actually serves. 

A rural carrier receives high-cost loop support according to a formula that relates its 

allowable cost to the number of lines that it serves. Under that calculation, if the number 

of lines served by an incumbent rural carrier declines, its per-line support will rise, 
111

because many of the carrier’s costs are fixed and therefore do not vary with the number 

of lines served. 

An incumbent carrier also often has an obligation as the “carrier of last resort” that 

requires it to provide service to virtually any customer in its service region. State 

regulators usually place some limits on the obligation, for example, exempting extremely 

remote sites. The regulations also allow an incumbent to shift much of the cost of serving 

such sites to the customers who desire service. 

Question 4b. Do you believe that subsiding incumbent carriers (or any carriers) 

based on what they spend rather than who they actually serve is the right policy outcome? 

Please explain your answer. 

Answer. CBO cannot comment on whether one policy or another produces a desired 

policy result. However, approaches to providing universal service that provide the 

targeted population with the means to purchase services, rather than subsidizing the 

providers of those services on the basis of their costs, will probably provide a specified 

level of service at a lower total cost to the economy. 

Question 5. As Mr Garnett points out in his testimony, “CTIA has proposed 

combining the current five high-cost universal service mechanisms into one mechanism 

that calculates support based on the most efficient technology—whether wireline or 

wireless—in a small geographic area.” Please comment on whether you support or 

oppose such a proposal and why? 

Answer. CBO has not studied that issue. 
112

RESPONSE FOR THE RECORD OF THOMAS J. NAVIN, CHIEF, WIRELINE COMPETITION 

BUREAU, FEDERAL COMMUNICATIONS COMMISSION

1. In February 2004, the Federal-State Joint Board on Universal Service (Joint 

Board) recommended that the Commission limit the scope of high-cost support to a 

single connection that provides access to the public switched telephone network 

(February 2004 Recommended Decision (FCC 04J-1)). The Joint Board expressed its 

belief that such an approach would curb growth of the fund. Indeed, in comments filed in 

June 2003 in the record in that proceeding, the National Association of State Utility 

Consumer Advocates had estimated that making non-primary lines ineligible for support 

would reduce the size of the high-cost fund by $336 million annually. Congress 

subsequently passed the FY2005 Consolidated Appropriations Act, which included a 

provision prohibiting the Commission from using appropriated funds to modify, amend, 

or change its rules or regulations to implement the Joint Board’s recommendation 

regarding single connection or primary line restrictions on universal service support 

payments. On November 22, 2005, Congress extended this ban through this fiscal year. 

Thus, the Commission is prohibited from limiting high-cost support to one connection 

per household. 

The Commission is now focused on other possible ways to limit universal service 

fund growth. One way to limit growth would be to consider whether high-cost universal 

service support should be based on a particular provider’s actual costs. Specifically, in 

the ongoing Rural Review Proceeding (FCC 04-125), the Joint Board is considering 

alternatives that may better reflect a wireless competitive eligible telecommunications 

carrier’s (ETC’s) cost of serving high-cost areas that receive universal service support. 

Once the Joint Board makes a recommendation in that proceeding, the Commission will 

carefully consider the record and weigh any alternatives to the current approach. 

2a. In its February 2004 Recommended Decision, the Joint Board found that limiting 

high-cost support to a single connection would be consistent with the goals of section 254 

before Congress prohibited the Commission from using appropriated funds to implement 

such a policy. Although this primary line policy restriction remains in place (see answer 

to question 1), in the Rural Review Proceeding, the Joint Board is considering other 

means of reducing excessive growth in the fund and whether they are consistent with the 

goals of section 254. Once the Joint Board makes a recommendation in that proceeding, 

the Commission will carefully consider the record and weigh any alternatives to the 

current approach. 

2b. & 2c. As the Joint Board notes, dial-up Internet access and fax services are not 

supported services under the Commission’s rules. Moreover, the Joint Board found that 

nothing in the Act requires supporting multiple connections. As stated in the response to 

question 1, however, Congress prohibited the Commission from using appropriated funds 

to modify, amend, or change its rules or regulations to implement the Joint Board’s 

recommendation regarding single connection or primary line restrictions on universal 

service support payments. 

3a. Chairman Martin has expressed his concerns over policies that use universal 

service support as a means of creating “competition” in high cost areas in which costs are 

prohibitively high for even one carrier. Subsidizing duplicative networks in high-cost 

areas has increased the demand on the universal service fund. 
113

In the Rural Review Proceeding, commenters proposed requiring more stringent 

criteria for designating ETCs or otherwise limiting the number of supported carriers in 

rural areas. Once the Joint Board makes a recommendation in that proceeding, the 

Commission will carefully consider the record and weigh any alternatives to the current 

approach. 

3b. Chairman Martin has expressed interest in a reverse auction approach to highcost fund disbursement in which carriers compete for the least amount of universal 

service funds needed to operate a network. Such an approach has the potential to 

promote efficient investment by encouraging the deployment of the most cost-effective 

technology. 

4a. & 4b. The high-cost support mechanisms for incumbent rural and rate-of-return 

carriers are based on those carriers’ embedded, or actual, costs for the areas they serve. 

In the Rural Review Proceeding, the Joint Board sought comment on what carrier 

characteristics, in addition to company size, the Commission should consider for 

purposes of determining how high-cost loop support should be calculated. The Joint 

Board specifically asked: “[s]hould the Commission try to target support more 

effectively to the highest cost rural areas by considering whether the area served is rural, 

as defined in some fashion?” The Joint Board is considering the comments it received. 

Once the Joint Board makes a recommendation in that proceeding, the Commission will 

carefully consider the record and weigh any alternatives to the current approach. 

5. In the Rural Review Proceeding, the Joint Board is considering several proposals, 

including CTIA’s proposal, that would combine the high-cost universal service 

mechanisms into one mechanism. Once the Joint Board makes a recommendation in that 

proceeding, the Commission will carefully consider the record and weigh any alternatives 

to the current approach. 
114

RESPONSE FOR THE RECORD OF TONY CLARK, PRESIDENT, NORTH DAKOTA PUBLIC SERVICE 

COMMISSION, ON BEHALF OF NATIONAL ASSOCIATION OF REGULATORY UTILITY 

COMMISSIONERS

July 21, 2006 

The Honorable Fred Upton 

Chairman, Subcommittee on 

 Telecommunications and the Internet 

Committee on Energy and Commerce 

2125 Rayburn House Office Building 

Washington, DC 20515 

Dear Chairman Upton: 

Thank you for the opportunity to respond to the committee’s written questions. I should 

note that my responses are representative of my own views, and not necessarily those of 

the National Association of Regulatory Utility Commissioners, which has not adopted 

specific policy positions on the detailed questions you have asked. 

As for your specific questions: 

1. I do not support the idea of limiting support to one connection per household, 

though I do believe that eliminating the identical support rule carries merit. 

Connections-based limitations are almost always flawed from the onset because 

they ignore the reality of the telecommunications business, namely, that high 

cost areas are served by networks. Therefore, it is networks that must be the 

focus of support. A voucher-type system (which is encompassed in many of 

the connections-based proposals) would also be an administrative disaster in 

the making. I do, however, believe there is a need to revisit the notion that 

many multiple competitive carriers should be funded in areas that may be 

unable to support even one if not for the subsidy. Rather than a flawed and 

administratively prohibitive single connection limitation, I believe a reasonable 

compromise would be to: 

a. better define truly high cost areas 

b. target support to networks in those areas, regardless of who that 

carrier happens to be (i.e. “rural” or “non-rural”) 

c. limit support to one wireline and one wireless carrier in high cost 

areas, and reimburse those carriers based on their own cost models, 

rather than on the incumbent’s per line average. 

2a. I disagree with that statement for the reasons stated in my answer to question 1. 

2b. While I generally agree with the statement, I would note that second lines for faxes 

and dial-up Internet access is not a large cost driver for the fund. To the extent there has 

been in increase in fund expenditures, it is primarily because of competitive ETC’s, 

related to wireless. 

2c. I believe that the policy of supporting unlimited numbers of carriers is a significant 

threat to fund stability. As I mentioned earlier, I believe as reasonable step would be to 

instead support up to one wireline and one wireless provider in high cost areas. 
115

3a. Please see my responses to questions 1 and 2c. I will expound a bit on them by 

explaining why I would support both one wireline and one wireless network. For most 

people the wireline and wireless phones are complements to each other. For voice 

quality and reliability, wireline service is the gold standard. But it lacks what wireless 

provides, mobility. For economic development, for public safety and for quality of life, I 

argue that availability to both networks is needed for communities. Yet I readily 

understand the concern that the fund is unsustainable if current growth patterns continue. 

One wireline and one wireless provider would achieve a balance between these 

competing interests. 

3b. Because the telecommunications industry is very capital intensive, it is highly 

unlikely any provider would realistically be able to duplicate an incumbent’s existing 

network and underbid it. Therefore, a low-cost provider regime (which would probably 

be based on bids or auctions) would likely not be of much benefit. However, for the sake 

of argument, if any such model ever was adopted, I would strongly urge the following: 

a. Wireline providers would only bid against other wireline providers and 

wirless providers would only bid against other wireless providers (this is 

in keeping with my belief that one network of each type should be 

supported) and; 

b. There must be very stringent and ongoing oversight of quality of service 

and requirements for deployment of advanced services. A low cost bid 

process might be a disaster for quality of service and the deployment of 

advanced services if this oversight is not included. 

4a. I disagree in part, and agree in part. Carriers (whether incumbent or competitive) 

receive support based on the incumbent’s average per line embedded costs. There is 

however, some truth to the fact that support itself is often not targeted to truly high cost 

rural areas. For example, in my home state of North Dakota, there are very rural, highcost exchanges served by Qwest that receive no support simply because they are served 

by Qwest. If they happened to be served by a rural LEC, however, they would be 

eligible. Frankly, this is unfair to both the non-rural LEC and to the consumers living in 

those areas. 

4b. While perhaps not perfect, I believe that an embedded cost model for incumbent 

LECs in rural areas is the best approach to use. Low-bid models have the problems I 

referred to in my answer to question 3b. Theoretical models (like TELRIC) might be a 

second-best option, but I do have some concerns that TELRIC may not be an appropriate 

reflection of costs in high-cost areas. Embedded cost models do have the advantage of 

being verifiable and accountable to regulatory bodies. As I said in my answer to 4a, I do 

not believe it is fair to exclude support for certain high-cost areas simply because of the 

characteristics of the provider that serves there. 

5. I am not familiar enough with the CTIA proposal to indicate my thoughts on it. 

I would however, direct readers to my response to question 3a and b, which 

highlights some of the concerns I have with any pure “low-cost” model being 

able to take into account the varying quality, reliability and mobility 

characteristics of different technologies. 

Sincerely, 

Tony Clark, President 

North Dakota Public Service Commission 
116

RESPONSE FOR THE RECORD OF SKIP FRANTZ, CHAIRMAN, UNITED STATES TELECOM 

ASSOCIATION

1. In his testimony, Director Marron states that “[s]pending for the [high-cost] 

program could be curbed by limiting high-cost support to one connection per 

household, by basing support on each carrier’s own costs rather than on a cost 

standard set by the incumbent carrier, or both.” Please comment on whether you 

agree or disagree with these two reform proposals and explain your answer. 

The first reform proposal asserts that spending for the high cost program could be 

limited by limiting high-cost support to one connection per household. Proposals for 

restructuring universal service support must be measured on a variety of criteria. While 

cost is certainly important, effectiveness and ease of administration also must be taken 

into account. One connection per household ignores the high fixed cost nature of telecom 

infrastructure. When a wireline provider loses a customer to wireless the phone pole is 

not chopped down. The wireline provider is obligated to provide service to everyone 

who requests it. Under a primary line regime, a wireline provider could, for example, 

split residential households in a service area with a wireless provider. The high cost 

funding associated with those households would be cut in half to each company, 

providing an inadequate amount of assistance toward fulfilling the goal of providing 

quality service at affordable rates. Furthermore, the amount of support would be 

unpredictable, discouraging each from investing in facilities. 

Moreover, such a system would be very difficult to administer. For example, if 

three students shared an apartment would each be a separate household, or would it be 

considered only one household? How about a house with an “in-law suite”? 

Furthermore there would be tremendous potential for abuse by listing phone lines in 

various names. Finally, the proposal ignores business users for whom universal service 

support of high cost rural telecom infrastructure is key to their success and thus rural 

economic development. Congress has rejected this “primary line” proposal numerous 

times and should continue to do so on solid public policy grounds. 

The second reform proposal asserts that spending for the high cost program could be 

curbed by basing support on each carrier’s own costs rather than on a cost standard set by 

the incumbent carrier. This assumes that CETC costs are necessarily lower than the costs 

of the incumbent ETC. There is no objective evidence on the record supporting this 

assertion. Furthermore, such a system would require a regulatory costing approach for 

CETCs, many of whom are relatively lightly regulated today. 

2a. In February 2004, the Federal-State Joint Board on Universal Service 

recommended supporting a single connection per household, as a means of reducing 

excessive growth in the fund: “We believe that limiting the scope of high-cost 

support to a single connection to the public telephone network would be more 

consistent with the goals of section 254 than the present system.” Please comment 

on whether you agree or disagree with this statement and explain your answer. 

See first paragraph of response to question 1. 

2b. The Joint Board also determined “Section 254(b)(3) encourages access to 

connectivity, however, not unlimited connections at supported rates. Advanced 

services increasingly are being provided along with voice services over a single 

connection. Nothing in the Act supports the argument that multiple connections 

should be supported for access to dial-up Internet access or fax services, neither of 
117

which is a supported service.” Please comment on whether you agree or disagree 

with this statement and explain your answer. 

First, the question supposes that multiple connections are being used for dial-up 

Internet services or fax services. As we know, dial-up Internet services are quickly being 

supplanted by broadband services, so the number of connections used for dial-up is 

rapidly diminishing. This is one of the factors accounting for the well-documented 

reduction in ILEC access lines. Second, many fax services do not use a dedicated line – 

often they are structured so that the caller can select the voice or fax option on a single 

line. Third, dial-up Internet services and fax services are far from being “advanced 

services.” High speed broadband is an advanced service – dial-up Internet and fax 

services are provided over an ordinary Public Switched Telecommunications Network 

(PSTN) voice connection which is a supported service. Finally, Section 254(b)(2) states 

that “Access to advanced telecommunications and information services should be 

provided in all regions of the Nation.” 

2c. The Joint Board also concluded “We believe that further growth due to 

supporting multiple connections presents a significant threat to fund sustainability.” 

Please comment on whether you agree with this statement and explain your answer. 

Further growth can and should be mitigated by ensuring that rigorous standards for 

designation of and performance by CETCs are developed and enforced. Currently states 

view CETC designation as a “reverse unfunded mandate” – that is, the more CETCs 

states designate, the more funds flow to a particular state. FCC “guidelines” for CETC 

designation should be made more robust, supplemented with further standards, and 

should be enacted into law. 

3a. Should only one provider receive universal service support in any given area? 

Please explain your answer. 

The Telecommunications Act of 1996 currently provides for states to take public 

policy considerations into account in the designation of multiple ETCs in areas served by 

rural telephone carriers. States should take that responsibility seriously and operate under 

strict standards for designation of multiple ETCs. 

3b. Should only the provider that can serve the area at the lowest possible cost 

receive the universal service support? Please explain your answer. 

This question assumes that such provider can be conclusively identified. First, such 

a system would require a strict regulatory costing approach. Second, it assumes that the 

technology mix and therefore the cost of each provider remains static. And third, it 

assumes that the relative cost of technology used by each provider would be unchanged. 

A provider initially determined to be the low cost provider could end up being the highest 

cost provider if technology allows competitive providers to serve high cost areas more 

efficiently. 

4a. In his testimony, Mr. Garnett asserts that “the high-cost mechanisms subsidize 

incumbent carriers based on what they spend...not necessarily based on whether 
118

they actually serve customers located in a rural, high-cost area.” Do you agree with 

the accuracy of this statement? Please explain your answer. 

The high-cost mechanisms are designed to support infrastructure that assures the 

availability of service to all customers in a rural, high-cost area, as mandated by the 

carrier of last resort (COLR) responsibilities imposed by many state laws and regulatory 

bodies and the Rural Utilities Service telecommunications lending programs. 

4b. Do you believe that subsidizing incumbent carriers (or any carriers) based on 

what they spend rather than who they actually serve is the right policy outcome? 

Please explain your answer.

Universal service funding must support the availability of network infrastructure in 

high cost rural areas, not particular services or customers. Telecommunications is a 

business which is characterized by high fixed costs and long term investments. 

Efficiently constructed telecommunications networks are designed to serve present 

customers and anticipate future growth. When a telecommunications provider loses 

customers it is generally not possible to reduce costs proportionately, as most of the costs 

are sunk. Although ideally the amount of telecommunications infrastructure would 

always exactly match the number and service requirements of customers in a rural area, 

this is an unrealistic expectation. 

5. As Mr. Garnett points out in his testimony, “CTIA has proposed combining the 

current five high-cost universal service mechanisms into one mechanism that 

calculates support based on the most efficient technology – whether wireline or 

wireless – in a small geographic area.” Please comment on whether you support or 

oppose such a proposal and why? 

We cannot properly evaluate this proposal based on the description. However, as 

noted in the response to question 3b above, it is difficult to define the lowest cost 

provider let alone the “most efficient technology.” That definition could change over 

time as technology changes and as the definition of universal service changes. For 

example, the “most efficient technology” could be very different for narrowband versus 

broadband services. Second, the definition of “a small geographic area” could bias the 

result as to which technology could serve it most efficiently. It would be easy to envision 

scenarios in which gerrymandering could change the result. 
119

RESPONSE FOR THE RECORD OF RICHARD CIMERMAN, VICE PRESIDENT, STATE 

GOVERNMENT AFFAIRS, NATIONAL CABLE AND TELECOMMUNICATIONS ASSOCIATION

1. In his testimony, Director Marron states that “[s]pending for [the high-cost] program 

could be curbed by limiting high-cost support to one connection per household, by basing 

support on each carrier’s own costs rather than on a cost standard set by the incumbent 

carrier, or both.” Please comment on whether you agree or disagree with these two 

reform proposals and explain your answer. 

The cable industry agrees that high-cost support should be limited to one 

connection per household. While we have not examined data on the number of 

multiple connections that are currently supported, a limitation on the number of 

supported connections would necessarily limit spending. 

We do not agree that support should be based on a carrier’s own costs rather 

than a cost standard set by the incumbent carrier. Support should be the same for 

all carriers, whether based on the incumbent’s costs or the costs of the lowest cost 

carrier. In this way the universal service support mechanism can drive higher cost 

carriers to become more efficient. 

2a. In February 2004, the Federal-State Joint Board on Universal Service recommended 

supporting a single connection per household, as a means of reducing excessive growth in 

the fund: “We believe that limiting the scope of high-cost support to a single connection 

to the public telephone network would be more consistent with the goals of section 254 

than the present system.” Please comment on whether you agree or disagree with this 

statement and explain your answer. 

The cable industry agrees that limiting the scope of high-cost support to a 

single connection to the public telephone network would be more consistent with the 

goals of Section 254 than the present system. Section 254 specifically calls for 

“access” to telecommunications services. A single connection is sufficient to balance 

the twin goals of ensuring access while also ensuring that contributors to the fund 

(ultimately the end users of telecommunications services) are not unduly burdened 

by the size of their contributions. 

2b. The Joint Board also determined “Section 254(b)(3) encourages access to 

connectivity, however, not unlimited connections at supported rates. Advanced services 

increasingly are being provided along with voice services over a single connection. 

Nothing in the Act supports the argument that multiple connections should be supported 

for access to dial-up Internet access or fax services, neither of which is a supported 

service.” Please comment on whether you agree or disagree with this statement and 

explain your answer. 

The cable industry does believe that the statutory language of Section 254(b)(3) 

requires support for multiple connections. 

2c. The Joint Board also concluded “We believe further growth due to supporting 

multiple connections presents a significant threat to fund sustainability.” Please comment 

on whether you agree or disagree with this statement and explain your answer. 
120

The cable industry has not sufficiently examined data on the level to which 

multiple connections are supported to determine the extent to which they pose a 

“significant threat to fund sustainability.” Nonetheless, as explained above multiple 

connections should not be supported. 

3a. Should only one provider receive universal service support in any given area? Please 

explain your answer. 

Universal service support should be portable. Any eligible provider should 

receive universal service support for the customers they serve in a rural high cost 

area. A provider in a rural high-cost area that loses a customer should lose support 

for that customer. A provider that wins a customer in a rural high-cost area in 

which support is available should receive support for that customer. 

3b. Should only the provider that can serve the area at the lowest possible cost receive the 

universal service support? Please explain your answer. 

As long as the subsidy in a given area is based on the costs of the lowest cost 

provider then the subsidy should be available to any provider willing to serve the 

area. Limiting support to one carrier would limit the efficiencies and cost savings 

that competition can bring. 

4a. In his testimony, Mr. Garnett asserts that “the high-cost mechanisms subsidize 

incumbent carriers based on what they spend ... not necessarily on whether they actually 

serve customers located in a rural, high-cost area.” Do you agree with the accuracy of 

this statement? Please explain your answer. 

Generally, yes. Under the current system an area is largely determined to be a 

high-cost area if the incumbent carrier’s self-reported costs of serving customers are 

sufficiently greater than the national average cost of serving customers. Incumbent 

carriers operating under a rate-of-return based regulatory scheme have little 

incentive to be efficient. So the fact that a carrier may have spent more than the 

national average to serve customers, does not mean that it is actually more costly 

than the national average for those customers to be served, and an efficient carrier 

may be able to serve them at a lower cost. 

4b. Do you believe that subsidizing incumbent carriers (or any carriers) based on what 

they spend rather than who they actually serve is the right policy outcome? Please 

explain your answer. 

No. Subsidies should be targeted to carriers serving those rural areas that are 

determined to be high-cost areas based on what an efficient carrier would spend and 

as described above the subsidies should be portable. 

5. As Mr. Garnett points out in his testimony, “CTIA has proposed combining the 

current five high-cost universal service mechanisms into one mechanism that calculates 

support based on the most efficient technology – whether wireline or wireless – in a small 
121

geographic area.” Please comment on whether you support or oppose such a proposal 

and why? 

While this proposal seemingly has merit we would need additional information 

on how the new mechanism would operate to determine whether we support or 

oppose it.
122

RESPONSE FOR THE RECORD OF DAVID CROTHERS, EXECUTIVE VICE PRESIDENT, NORTH 

DAKOTA ASSOCIATION OF TELEPHONE COOPERATIVES, ON BEHALF OF NATIONAL 

TELECOMMUNICATIONS COOPERATIVE ASSOCIATION

Question 1: In his testimony, Director Marron states that “[s]pending for [the highcost] program could be curbed by limiting high-cost support to one connection per 

household, by basing support on each carrier’s own costs rather than on a cost standard 

set by the incumbent carrier, or both.” Please comment on whether you agree or disagree 

with these two reform proposals and explain your answer. 

Answer 1: Director Marron offered two recommendations for curbing growth in 

the universal service fund. First, limit high-cost support to one connection per 

household. Second, base support on each carrier’s own cost rather than on a cost 

standard set by the incumbent carrier. I agree with Director Marron’s conclusion that 

basing the support from the universal service fund on a carrier’s own cost would curb 

spending but would disagree with his recommendation of limiting support to one 

connection. 

Limiting support to one line while may have been a cost saver in years past, isn’t 

much of a cost saver now and will be even less so in the future due to increased 

broadband subscriptions. The driving force behind second lines in households was 

primarily for a dial-up Internet connection, with higher broadband adoption rates this is 

increasingly less of a factor. Multiple lines are much more a factor for our nation’s 

small businesses. Limiting support to one line would harm this sector of our economy 

greatly and will put rural businesses at an extreme disadvantage. 

Regarding the recommendation that recipients of USF receive support based upon 

their own cost and not that of the incumbent, I and NTCA could not agree more. This is 

long overdue and a position that rural carriers have advocated since its inception. For 

ILECs, the high-cost universal service program is a highly accountable cost-based 

program. Support out of the fund is based on a national average cost per line calculated 

by the FCC. Rural carriers with costs exceeding 115% of this national average receive 

support from the fund to offset these elevated costs to keep local rates affordable. 

Wireline incumbents file immense amounts of data outlining their costs and network 

investments to receive cost recovery support from the fund. This data is reviewed, vetted 

and approved at many levels, including by the fund administrator, the Universal Service 

Administrative Company (USAC), and the FCC. 

However, new competitive carriers are treated differently. Under the guise of 

competitive neutrality the FCC unwittingly undermined the accountability of the fund by 

allowing new competitive carriers to receive support from the USF without the same 

stringent reporting and accounting requirements mandated of the incumbents. Instead of 

filing their own cost and investment data, these new competitive entrants receive support 

based on the incumbents’ cost. All the competitive carriers’ are required to file is a 

count of the number of customers they serve. In many cases, especially if the competitive 

carrier is a wireless provider, their cost is well below that of the incumbent potentially 

giving wireless carriers a windfall of support. This situation has perpetuated and 

encouraged abuse of the USF by wireless carriers, which account for 97% for 

competitive ETCs. 

Elimination of this identical support rule is a necessity if Congress is serious about 

controlling growth and increasing accountability of the USF. Experts from the CBO and 

FCC on the panel stated the irrefutable fact that the vast majority of growth in universal 

service is due to competitive eligible telecommunications carriers (ETCs). Universal 
123

service support to competitive ETCs grew by over 115% in 20041. During this same 

period ILEC support grew by only 0.6%. The numbers speak for themselves. Requiring 

all universal service fund recipients to receive support based on their own costs will 

increase program accountability, reduce demand for funds and ensure that funds are 

being used for their intended purpose. 

Question 2a: In February 2004, the Federal-State Joint Board on Universal Service 

recommended supporting a single connection per household, as a means of reducing 

excessive growth in the fund: “We believe that limiting the scope of high-cost support to 

a single connection to the public telephone network would be more consistent with the 

goals of section 254 than the present system.” Please comment on whether you agree or 

disagree with this statement and explain your answer. 

Answer 2a: I and NTCA disagree with the Federal-State Joint Board’s assessment 

of the goals of section 254. It is clear that the purpose and goal of section 254 is to 

ensure comparable services at comparable rates to all Americans, regardless of how 

many lines they have in their home or business. Limiting support to one connection per 

household is antithetical to the goal of universal service and would drastically raise the 

cost of additional lines for rural consumers. Limiting support to one connection is not in 

line with the comparability clause and therefore would be illegal under current law in my 

opinion. Why should rural families or small businesses be forced to pay two, three or 

even four times what urban consumers and businesses pay for additional lines? The 

answer is they should not. Such a limitation would greatly diminish the competitiveness 

of rural businesses due to their location and would likely rely more heavily upon 

telecommunications to sell and market their services. 

Question 2b: The Joint Board also determined “Section 254(b)(3) encourages 

access to connectivity, however, not unlimited connections at supported rates. Advanced 

services increasingly are being provided along with voice services over a single 

connection. Nothing in the Act supports the argument that multiple connections should 

be supported for access to dial-up Internet access or fax services, neither of which is a 

supported service.” Please comment on whether you agree or disagree with this 

statement and explain your answer. 

Answer 2b: Your statement that advanced services increasingly are being provided 

along with voice services over a single connection is true as noted above in Answer 1. 

Therefore, limiting support to a single or primary line is not a cost saver for the universal 

service fund. However, to your point that section 254 (b)(3) does not specifically allow 

support for multiple connections, it certainly does not preclude this, and further my 

interpretation is that multiple lines should be supported to be in compliance with the 

comparability clause. 

Question 2c: The Joint Board also concluded, “We believe that further growth due 

to supporting multiple connections presents a significant threat to fund sustainability.” 

Please comment on whether you agree or disagree with this statement and explain your 

answer. 

 

1

 Wireless Communications and Universal Service by Bob Rowe, Senior Partner, Balhoff & Rowe, 

LLC @ Columbia Institute for Tele-Information. Slide 12.
124

Answer 2c: I and NTCA would disagree with this statement and it would appear 

that you do as well based on your statement in question 2b where you state, “Advanced 

services increasingly are being provided along with voice services over a single 

connection.” Again, due to the decrease in second lines in homes, limiting support to a 

primary or single connection would not be a significant cost saver for the universal 

service fund moving forward. 

Question 3a: Should only one provider receive universal service support in any 

given area? Please explain your answer. 

Answer 3a: In some high-cost, sparsely populated, economically depressed rural 

areas, yes. As FCC Chairman Kevin Martin previously stated “I am hesitant to subsidize 

multiple competitors to serve areas in which the costs are prohibitively expensive for 

even one carrier. This policy may make it difficult for any one carrier to achieve the 

economies of scale necessary to serve all of the customers in a rural area leading to 

inefficient and/or stranded investment and a ballooning universal service fund.”2

 In a 

case like this with a high-cost, sparsely populated area the provider that should receive 

support is the wireline provider since without the wired infrastructure, the residents will 

not have comparable services [to urban areas] as the wired infrastructure is necessary 

for voice, video and data including wireless voice services.

Question 3b: Should only the provider that can serve the area at the lowest possible 

cost receive the universal support? Please explain your answer. 

Answer 3b: The idea of providing universal service support to the lowest possible 

cost carrier is contradictory to the goal of universal service – to ensure that consumers 

living in rural and high-cost areas have access to comparable communications services 

at rates comparable to consumers residing in urban and suburban areas. 

Consumers in rural communities must not be relegated to a substandard level of 

service or technology in order to save a few dollars. Less expensive services are often not 

built to the same high standards as the ILEC wireline network. For instance, wireless 

and VoIP calls are less expensive than traditional wireline service and is reflected in the 

lower call quality. Anyone who has used these new technologies can attest to the lower 

call quality, often dropped calls or being disconnected from the network for periods of 

time. Rural consumers would be forced to rely solely on these services with lower quality 

by those in Washington, DC if USF support were limited to the lowest cost provider. 

Additionally, it is important to remember that these “lower cost carriers” such as 

wireless and VoIP are dependant upon the wired infrastructure of the ILEC for their 

services to work. Contrary to public perception, a wireless network does not stand alone. 

The only portion of a wireless call that is actually wireless is from a consumer’s handset 

to the nearest cell tower. It may be more appropriate to think of a wireless network as a 

large number of gateways to the interconnected network that makes up the national and 

global telecommunications infrastructure. Truly, much of what makes up the nation’s 

wireless networks is provided by the wireline LEC and interexchange carriers (IXCs) that 

 

2

 In the Matter of the Multi-Group (MAG) Plan for Regulation of Interstate Services of Non-Price 

Cap Incumbent Local Exchange Carriers and Interexchange Carriers CC Docket 00-256, FederalState Joint Board on Universal service CC Docket 96-45, Access Charge Reform for Incumbent 

Local Exchange Carriers Subject to Rate of Return Regulation CC Docket No. 98-77, and 

Prescribing the Authorized Rate of Return for Interstate Services for Local Exchange Carriers CC 

98-166, FCC 01-304, ¶142 (rel. November 8, 2001) (MAG Order), Separate Statement of 

Commissioner Kevin J. Martin. (MAG Order), Separate Statement of Commissioner Kevin J. Martin.
125

make up the public switched telephone network (PSTN). It is essential to note that the 

viability of wireless networks is entirely dependent upon the ongoing availability of the 

wireline networks that actually serve as the backbone. Similarly, VoIP calls are entirely 

dependant upon the broadband network, a majority of which was built by our nations 

wireline providers. 

In addition, how will “low cost” be determined and measured? Providing support 

to only the carrier with the lowest upfront deployment cost may seem efficient but in 

actuality may turn out to be short sighted and more expensive in the long run. Certain 

technologies, including wireless and even traditional cable modem, may be unable to 

increase capacity as consumer demand and requirements rise. Experts agree that 

running a fiber line may be the most costly upfront but due to its long life and potentially 

unlimited capacity may, in the long run, be the least expensive and efficient for all 

American’s communications needs. Short term cost is only one factor that must be 

considered. 

Other factors that should be considered when determining ETC status are the ability 

to serve an entire service area, long term commitment to serve rural communities in 

question, bandwidth/capacity of the service at current time and in the future, quality of 

service to consumers, ability to remain functional during an emergency, financial 

viability of a communications company, and interoperability. 

If law requires the FCC to continually abandon existing ETC recipients in favor of 

new lower cost providers the result will be devastating to rural communities. USF 

recipient churn and instability in the market would be a disincentive to invest in networks 

to improve and upgrade service by the existing ETC receiving support. 

Furthermore, if a carrier’s ability to receive USF support is not secure they will be 

unable to obtain long term public (RUS) and private financing necessary to build 

networks. Communications is a capital intensive industry which requires long term 

network planning and continual upgrading. This would not be possible if support could 

be pulled from the ETC and given to a new lower cost provider at any time or even within 

a few years. 

Question 4a: In his testimony, Mr. Garnett asserts that “high-cost mechanisms 

subsidize incumbent carriers based on what they spend...not necessarily based on 

whether they actually serve customers located in a rural, high-cost area.” Do you agree 

 with the accuracy of this statement? Please explain your answer. 

Answer 4a: No. In his statement Mr. Garnett refers to ILEC support being tied to 

investment and not on who an ILEC serves. The statement is incorrect and Mr. Garnett 

appears to be confusing two separate issues – basis of support and definition of rural. 

To receive support from the high-cost fund for rural carriers, an ILEC must meet the 

definition of a rural carrier and the service territory must meet the definition of a rural 

service area. These definitions are established by the FCC. Therefore, an ILEC’s 

eligibility to receive support under the rural USF program is directly tied to its customers 

and service territory. 

Once a carrier and its service area are deemed to have met these requirements then 

the question as to the level of support comes into play. The money rural carriers 

“spend” is the actual, embedded cost to provide regulated telecommunications service to 

consumers throughout their rural service areas, as defined by the FCC. This data is 

what the FCC and the fund administrator, USAC, use to calculate the level of support an 

ILEC is eligible to receive. The rural high-cost universal service support mechanisms 

are therefore based on the actual cost to provide affordable telephone service to 

consumers throughout their specific rural service areas. These costs are reviewed and 

approved by both state and federal regulatory agencies. 
126

Since the early 20th century, AT&T, the Bell Operating Companies and GTE chose 

not to invest in facilities to provide basic telephone service to nearly 40 percent of the 

geographic area of the United States. This territory consisted primarily of the most 

rural, insular, and sparsely populated areas in the Nation. Thin populations and difficult 

landscapes made these vicinities too costly for large carriers to invest in and the risk of 

not recovering their investment was too high. Many Americans living in these areas 

therefore had to invest their own time, labor and money to form small subscriber-owned 

telephone cooperatives and community-based commercial telephone companies in order 

to bring service to their homes and communities. 

Today, there are over 1,000 rural telephone companies serving rural America. 

These companies were the first and often the only companies willing to bring the latest 

telecommunications technology to Americans living in the remote areas of our country. 

This cooperative spirit that brought telephone service to rural America is the same spirit 

that Congress embraced when it enacted the Communications Act of 1934 so that all 

people of the United States, rural and urban, can have access to affordable and 

comparable telecommunications services. 

Question 4b: Do you believe that subsidizing incumbent carriers (or any carriers) 

based on what they spend rather than who they actually serve is the right policy outcome? 

Please explain your answer. 

Answer 4b: Carriers are not reimbursed based on what they spend. As stated in 

answer 4a ILEC support is directly tied to the customers they serve and their actual cost 

of providing that service. And again, all relevant data is filed, reviewed, vetted and 

approved on the state and federal level. On the contrary, CETCs are not required to 

meet the FCC definition of a rural carrier as does an ILEC nor are they required to 

demonstrate their cost of providing service. This lack of accountability has detrimentally 

impacted the universal service fund and must not be allowed to continue.

Question 5: As Mr. Garnett points out in his testimony, “CTIA has proposed 

combining the current five high-cost universal service mechanisms into one mechanism 

that calculates support based on the most efficient technology – whether wireline or 

wireless – in a small geographic area.” Please comment on whether you support or 

oppose such a proposal and why? 

Answer 5: The five funds within high cost are designed specifically to calculate 

more accurately appropriate distributions from the fund to recipients. For instance, the 

separate rural and non-rural distinctions are made to ensure accountability and are 

specifically needed to meet the goals of universal service taking into account the 

difference between the RBOCs and the smaller independent carriers. The FCC has 

considered combining the rural and non-rural funds on more than one occasion and each 

time the conclusion of FCC experts is that doing so would reduce accountability and lead 

to waste in the fund. 

USF support from the non-rural fund is based on a forward-looking cost model and 

support from the rural fund is based on the embedded cost of small independent carriers. 

While such cost models may enhance incentives for cost-reducing innovation relative to 

embedding cost mechanism, such models can’t guarantee that support will be either 

predictable or sufficient as required by the Telecommunications Act of 1934. 

Independent carriers vary vastly in size, scope, geography and population distribution. 

No cost-model can accurately account for these vast differences. 
127

In the several years the FCC worked on developing the forward-looking cost model 

that is currently used for non-rural carriers, many attempts were made to adapt this 

model to rural independent carriers. All attempts were deemed a failure. During the 

testing of the cost-model it was found that support levels for some rural carriers were too 

low and for some carriers way too high. Therefore support was unpredictable and did 

not provide the required sufficient level of support to some carriers while providing a 

windfall of support to other ILECS. Thus, it was unanimously determined that applying 

a cost model to the rural fund would not meet the policy goals of universal service and 

would reduce fund accountability. 

In addition, the FCC sought and received input from many industry experts such as 

the Rural Task Force. The Rural Task Force studied this very question and found this 

idea to be un-workable. Please see Rural Task Force paper, "A Review of the FCC's 

Non-Rural Universal Service Fund Method and the Synthesis Model for Rural Telephone 

Companies" for further information [http://www.wutc.wa.gov/rtf]. 
128

RESPONSE FOR THE RECORD OF PAUL W. GARNETT, DIRECTOR, REGULATORY AFFAIRS,

CTIA – THE WIRELESS ASSOCIATION

1. In his testimony, Director Marron states that “[s]pending for [the high-cost] 

program could be curbed by limiting high-cost support to one connection per 

household, by basing support on each carrier’s own costs rather than on a cost 

standard set by the incumbent carrier, or both.” Please comment on whether you 

agree or disagree with these two reform proposals and explain your answer. 

While CTIA supports proposals to curb growth in the size of the universal service 

fund, we oppose each of the proposals described by Director Marron, because they would 

disserve consumers. Consumers in both rural and non-rural areas benefit from highquality, competitively priced, and innovative services that result when multiple 

competitors are in a marketplace. In adopting section 254(b)(3) of the Act, Congress 

recognized the importance of providing consumers in high-cost rural areas access to the 

same types of telecommunications service offerings that are available to consumers in 

urban areas. At the same time, Congress recognized the importance of competition. As 

noted by the United States Court of Appeals for the Fifth Circuit in Alenco 

Communications, Inc. v. FCC, 201 F.3d 608, 616 (5th Cir 2000), “[t]he FCC must see to it 

that both universal service and local competition are realized; one cannot be sacrificed in 

favor of the other.” The Fifth Circuit therefore concluded that “protection from 

competition” is “the very antithesis of the Act.” See 201 F.3d at 622. 

There is little doubt that consumers in urban, low-cost areas see the benefits of 

having multiple points of access to the network. While some consumers limit themselves 

to one wireless or wireline connection to the network, it is clear that a larger group of 

consumers prefer to maintain both wireline and wireless connectivity to the network. The 

proliferation of wireless “family plans” also exposes a flaw in the idea of limiting 

consumers to one connection “per household.” Under the “family plan” model, multiple 

individuals in a household have points of access to the network – and this is becoming the 

norm, not the exception. Therefore, in practice, limiting support to one connection per 

household would deny consumers in rural high-cost areas the quality and variety of 

services available to consumers in non-rural, low-cost areas. 

The Federal-State Joint Board on Universal Service’s “primary line” proposals also 

would have distorted the competitive marketplace. The Joint Board conceded that its 

proposals were meant to prevent or mitigate reductions in support available to rural 

incumbent carriers resulting from competitive entry. See ETC Recommended Decision, 

19 FCC Rcd 4257, 4289, para. 76 (Jt. Bd. 2004). Even accounting for loss of customers 

as a result of healthy competition, none of the Joint Board’s proposals would have 

resulted in any overall loss of revenues (even in the long run) for the vast majority of 

rural incumbent LECs that are guaranteed profits under rate-of-return regulation. 

Designing high-cost mechanisms to insulate incumbent carriers from the rigors of the 

competitive marketplace by guaranteeing them support disregards the fact that the Act 

demands “sufficient funding for customers, not providers.” See Alenco v. FCC, 201 F.3d 

at 622. 

CTIA also opposes Director Marron’s proposal to base support on each carrier’s 

own costs. While this proposal clearly is an attempt to curb spending on high-cost 

support, it would have the opposite effect. Under this proposal, both the incumbent and 

competitive eligible telecommunications carriers would have incentives to increase costs 

to receive more high-cost universal service support. This proposal also would distort the 

marketplace by giving unequal per-line support to competing eligible 

telecommunications carriers. The incumbent and competitors should not receive unequal 

high-cost universal service support. Unequal support will distort markets by creating 

artificial incentives for consumers to purchase certain services and dissuading market 
129

entry by more efficient and innovative competitive alternatives. Importantly, giving less 

per-line support to one set of competitors puts policy-makers, not consumers, in the 

position of deciding which provider wins and loses in the competitive marketplace. 

Consumers lose out when policy-makers second guess the competitive market. 

Policy-makers should not repeat the mistakes of the past by supporting universal 

service policies that distort the competitive market or create incentives for both 

incumbents and competitors to develop business models premised on receipt of greater 

and greater subsidies. If the experience of the wireless industry can be any guide, 

simplified regulations that encourage and reward efficiency will best benefit consumers 

by ensuring that universal service is targeted only to where it is most needed and is no 

more than is necessary. At the FCC, CTIA has proposed combining the current five 

high-cost universal service mechanisms into one mechanism that calculates support based 

on the most efficient technology – whether wireline or wireless – in a small geographic 

area. CTIA also has supported other efforts to reduce demand for universal service, 

while ensuring that support is available to both incumbent and competitive eligible 

telecommunications carriers on a non-discriminatory basis. 

2a. In February 2004, the Federal-State Joint Board on Universal Service 

recommended supporting a single connection per household, as a means of reducing 

excessive growth in the fund: “We believe that limiting the scope of high-cost 

support to a single connection to the public telephone network would be more 

consistent with the goals of section 254 than the present system.” Please comment 

on whether you agree or disagree with this statement and explain you answer. 

[See response to 1.] 

2b. The Joint Board also determined “Section 254(b)(3) encourages access to 

connectivity, however, not unlimited connections at supported rates. Advanced 

services increasingly are being provided along with voice services over a single 

connection. Nothing in the Act supports the argument that multiple connections 

should be supported for access to dial-up Internet access or fax services, neither of 

which is a supported service.” Please comment on whether you agree or disagree 

with this statement and explain your answer. 

Section 254(b)(3) of the Act demands that consumers in high-cost, rural areas have 

access to comparable telecommunications and information services without reference to a 

single connection or multiple connections. Under the Act, comparability must be 

measured by what services are available to consumers in urban areas. Consumers in 

urban areas clearly have access to services that include single and multiple connections, 

provided over a variety of technology platforms. At the same time, supporting unlimited 

customer connections may inflate the size of the universal service fund. It also is fair to 

question support for forms of connectivity that are not widely utilized by residential 

customers in low-cost, urban areas. CTIA is open to further discussions on how best to 

address this tension. 

2c. The Joint Board also concluded “We believe that further growth due to 

supporting multiple connections presents a significant threat to fund sustainability.” 

Please comment on whether you agree or disagree with this statement and explain 

your answer. 
130

Continuing to calculate high-cost support based on an incumbent carrier’s embedded 

costs poses a far greater threat to the sustainability of the universal service fund than 

growth in support for multiple connections. Over the last five years, incumbent carriers 

have received greater levels of high-cost universal service support even though they 

continue to lose customers. From 2000 through 2005, incumbent carriers accounted for 

roughly two-thirds of the growth in the size of the high-cost universal service 

mechanisms. Since 1997, of the $22 billion spent on high-cost universal service 

subsidies, $20.9 billion has gone to incumbent LECs and only $1.1 billion has gone to 

wireless carriers and other competitors. This inequity exists even as consumers are 

demanding more and more wireless services. In fact, there are now more mobile wireless 

subscribers than wireline switched access lines. 

3a. Should only one provider receive universal service support in any given 

area? Please explain your answer. 

CTIA opposes artificial limits on the number of eligible telecommunications carriers 

in a given area. While limiting fund growth is a worthwhile goal, limiting support to one 

provider in a given area would deny consumers the benefits of competition in terms of 

lower-priced, higher-quality, and new and innovative services. One proposal before the 

FCC in the recent eligible telecommunication carrier proceeding was to limit the number 

of eligible telecommunications carriers in those areas in which the incumbent receives 

more than a prescribed level of high-cost universal service support. Such a limitation 

would create powerful and perverse incentives for incumbent carriers to drive up the cost 

of universal service in order to avoid competitive entry. Incumbent carrier inefficiencies 

should be a reason to encourage, not discourage, entry by more efficient competitors. 

The better answer is to make same per-line support available to both the incumbent 

and competitors based on the most efficient technology for a given market. That way, 

consumers, not regulators, would decide whether a particular market can sustain 

competition. Using universal service support to indefinitely maintain monopolies will 

never be good for consumers. 

3b. Should only the provider that can serve the area at the lowest possible cost 

receive the universal service support? Please explain your answer. 

Although CTIA has suggested that a cost model could be used to calculate high-cost 

universal service support, CTIA is open to a variety of market-driven proposals that 

would reward more efficient carriers that compete away the cost of universal service. 

CTIA has proposed combining the current five high-cost universal service mechanisms 

into one mechanism that calculates support based on the most efficient technology – 

whether wireline or wireless – in a small geographic area. CTIA also has expressed 

interest in other proposals, such as the use of reverse auctions to determine support 

amounts. A proposal to limit support to the lowest cost provider in a particular 

geographic areas is similar to a version of reverse auctions under with the lowest bidder 

would receive all universal service support. While limiting support to the lowest cost 

provider in a particular geographic could drive down the cost of high-cost universal 

service support, it does run the risk of distorting the competitive market. Similar to a 

“winner takes all” reverse auction, it also is not entirely clear what economic incentive an 

eligible telecommunications carriers would have to drive down the cost of universal 

service, knowing that it runs the risk of bidding away support amounts. The length of the 

winning eligible telecommunications carrier’s period of exclusivity also may impact a 

carrier’s costs levels and may factor into the decision of competitors to enter that market. 
131

4a. In his testimony, Mr. Garnett asserts that “the high-cost mechanisms 

subsidize incumbent carriers based on what they spend and not necessarily based on 

whether they actually serve customers located in a rural, high-cost area.” Do you 

agree with the accuracy of this statement? Please explain your answer. 

Unlike the competitive market in which wireless carriers operate, the high-cost 

universal service mechanisms (and intercarrier compensation) actually reward rural 

incumbent local exchange carrier inefficiency (and encourage competitive carriers to seek 

universal service support in those markets served by inefficient incumbents). Absurdly, 

the high-cost mechanisms subsidize rural incumbent local exchange carriers based on 

what they spend, not necessarily based on whether they actually serve customers located 

in a rural, high-cost area. Specifically, the high-cost loop support, interstate common line 

support, and local switching support mechanisms determine support based on an 

incumbent carrier’s “actual” or embedded costs plus a prescribed 11.25% rate-of-return. 

In contrast, the high-cost support mechanism for so-called “non-rural” carriers calculates 

support based on the forward-looking economic costs – a measure of what it would cost 

an efficient wireline carrier to serve a particular geographic area. Because support for 

rural incumbent local exchange carriers is based on costs averaged over an incumbent 

carrier’s total costs, these mechanisms allow rural incumbent local exchange carriers to 

keep support even as they lose customers. 

In a recent report entitled “Universal Service” Telephone Subsidies: What Does $7 

Billion Buy?, Professor Thomas W. Hazlett documents how the high-cost universal 

service works in practice. A full copy of the report is available at 

http://www.senior.org/Documents/USF.Master.6.13.06.pdf. According to Professor 

Hazlett, under the current high-cost support mechanisms, “[t]he more service costs, the 

more money the phone carrier receives – a clear incentive to avoid cost savings.” Under 

the current high-cost support mechanisms, “there appears to be no way to distinguish 

between ‘high costs’ and obsolete and inefficient ways of doing things.” 

In his report, Professor Hazlett lists 16 incumbent carriers that receive over $1,000 

per line per year in so-called “corporate operations expenses,” an array of expenditures 

unrelated to installing and maintaining plant and equipment. As the FCC has noted, such 

costs “may be discretionary” and include, for example, “travel, lodging, and other 

expenses associated with attending industry conventions and corporate meetings.” See

Rural Task Force Order, 16 FCC Rcd 11244, para. 63. According to Professor Hazlett, 

the average rural incumbent LEC corporate overhead expense is about $99 per year per 

line and the average non-rural incumbent LEC corporate overhead expense is about $75 

per year per line. Professor Hazlett also lists the top 12 high-cost support per line 

recipients of high-cost support – with one carrier receiving an astonishing $13,345 per 

line per year. 

Accipiter Communications, Inc. (Accipiter), a rural incumbent local exchange 

carrier on both of these lists, receives $6,927 per line per year in high-cost universal 

service support to serve 219 access lines. Accipiter has annual corporate operation 

expenses of $2,113 per line. Accipiter recently filed a petition with the FCC to enable it 

to receive high-cost universal service support to defray the costs of serving potential 

customers in the Vistancia development, located in Peoria, Arizona. A copy of the 

petition is available at 

http://gullfoss2.fcc.gov/prod/ecfs/retrieve.cgi?native_or_pdf=pdf&id_document=651836

5842. Peoria, Arizona is a suburban community located just 25 miles from Phoenix. 

Maricopa County, in which Peoria is located, has the fourth highest number of 

millionaires of any county in the United States. For additional information, go to 

http://moneycentral.msn.com/content/invest/extra/P148783.asp. Vistancia includes two 

golf courses and 4,000 square foot homes costing over $1 million. Vistancia advertises 

itself as “an innovative urban commercial and residential village.” 
132

http://www.vistancia.com/news/20060612.shtml (emphasis on urban added). One of the 

two golf courses describes the community in this way: 

In the peaceful hills of Peoria, Arizona – tucked within the friendly confines of 

Vistancia – a private country club community is taking shape. Home to a Jim 

Engh-designed golf course, a fully appointed clubhouse, and a superb selection 

of residences and homesites, Blackstone honors what we cherish most: family, 

fine living, and a world of new experiences. 

Go to http://www.blackstonecountryclub.com/index_flash.html. For additional 

information on Vistancia’s many amenities, go to www.vistancia.com. 

With customers like these, it is little wonder that Accipitier is interested in extending 

its network into the Vistancia development. But, should universal service support be 

used to fund that expansion? Cox Communications, which already serves customers in 

Vistancia, neither receives nor has asked for universal service subsidies. The area also is 

served by a long list of at least six wireless carrier competitors, which also do not receive 

high-cost universal service support to serve that area. Now Accipiter is asking for highcost universal service support so it can “compete” with all of these unsubsidized 

competitors. 

Given how the current universal service system is structured, this type of behavior is 

not surprising. According to Professor Hazlett, “there appears to be no mechanism in 

place to . . . rein in even the most egregious inefficiencies.” Professor Hazlett concludes 

that “incentives created by these subsidies encourage widespread inefficiency and block 

adoption of advanced technologies – such as wireless, satellite, and Internet-based 

services – that could provide superior voice and data links at a fraction of the cost of 

traditional fixed-line networks.” 

4b. Do you believe that subsidizing incumbent carriers (or any carriers) based 

on what they spend rather than who they actually serve is the right policy outcome? 

Please explain your answer. 

For the reasons detailed in my response to 4a., absolutely not. 

5. As Mr. Garnett points out in his testimony, “CTIA has proposed combining 

the current five high-cost universal service mechanisms into one mechanism that 

calculates support based on the most efficient technology – whether wireline or 

wireless – in a small geographic area.” Please comment on whether you support or 

oppose such a proposal and why? 

The best way to answer this question is to first look at all that is wrong with the 

current high-cost universal service mechanisms – which represent an increasing majority 

of the overall universal service fund. There are numerous problems with the high-cost 

mechanisms, such as: (1) incentives for inefficiency; (2) enrichment of incumbent LEC 

profits; and (3) impenetrable administrative complexity. Taken together, these problems 

result in a bloated fund that does not effectively target the appropriate levels of support to 

different high-cost areas. As a result, the high-cost support mechanisms do a poor job of 

ensuring that all Americans have access to high-quality, affordable telecommunications 

and information services. Moreover, the high-cost support mechanisms undermine the 

efficient development of competition as envisioned by the Act. 
133

Incentives for Inefficiency. Embedded, cost-based, high-cost universal service 

mechanisms reward inefficiency by creating incentives and opportunities for carriers to 

engineer higher embedded costs to receive more support. Despite industry-wide 

efficiency gains, advances in technology, and amortization of depreciated equipment, 

high-cost universal service subsidies continue to increase rather than decrease over time. 

To debunk one frequently repeated myth, it is new support for incumbents, not 

competitors, that has been the primary cause of fund growth. Since competitive eligible 

telecommunications carriers receive high-cost support based on the incumbent carrier’s 

costs, increased incumbent LEC costs mean more support for both incumbents and 

competitors. 

In practice, the FCC’s high-cost support mechanisms compound incentives for 

inefficiency inherent in embedded cost support mechanisms. For example, the high-cost 

support mechanisms discourage carriers from taking advantage of economies of scale 

normally associated with combining operations. Under the high-cost mechanisms, 

smaller rural incumbent LECs are eligible for more support than larger carriers. 

Incumbent LECs that increase their customer base risk reducing or eliminating their 

qualification for high-cost support. The embedded high-cost mechanisms’ preference for 

small carriers also creates incentives for carriers to appear small when, in fact, they are 

much larger. Incumbent LECs do this by operating numerous “study areas” in a given 

state or by balkanizing their operations among the various states. One incumbent LEC, 

for example, operates in 18 study areas in Wisconsin. 

Guaranteeing Universal Service Profits. In addition to reimbursing incumbent 

LECs for their service-related costs, the high-cost universal service mechanisms also are 

designed to guarantee a prescribed level of profits for incumbent LECs. For example, the 

federal high-cost support mechanisms for rural and rate-of-return incumbent LECs 

include a guaranteed rate of return of 11.25%. This rate-of-return is based on the cost of 

capital for Regional Bell Operating Companies in 1991. The 11.25% return was based on 

the RBOCs’ 8.8% cost of debt in 1991. We estimate that today rural incumbent LECs 

have an average cost of debt of only 5.46%. This would allow rural carriers to earn a 

15.06% return on equity from the universal service mechanisms. To make matters worse, 

many incumbent LECs have reported to the FCC that they had profits far in excess of the 

prescribed rate-of-return. These elevated universal service profits do not translate to 

improved telecommunications services in high-cost areas. Instead, they simply enrich 

carriers, while increasing the overall size of the fund to the detriment of other carriers and 

consumers who end up paying higher universal service pass through charges. 

Impenetrable Administrative Complexity. The five separate high-cost support 

mechanisms, in conjunction with the waivers and other loopholes carriers use to receive 

additional high cost support, make the system an administrative and enforcement 

nightmare. Also, support calculations under the various federal high-cost support 

mechanisms rely on archaic and complicated cost accounting, jurisdictional separations, 

and reporting rules that have existed in one form or another since 1984. This 

administrative complexity makes it exceedingly difficult for the Universal Service 

Administrative Company (“USAC”), the FCC’s independent universal service fund 

administrator, to audit incumbent LEC cost data submitted for purposes of calculating 

high-cost support. These wasteful administrative costs are paid by consumers through 

higher rates for service, as well as higher universal service pass-through charges. 

At the FCC, CTIA has put forth market-oriented proposals to address these 

problems. CTIA has supported efforts to reduce demand for universal service, while 

ensuring that support is available to both incumbent and competitive eligible 

telecommunications carriers on a non-discriminatory basis. Specifically, CTIA has 

proposed calculating support based on the most efficient technology – whether wireline 

or wireless – in a small geographic area. Under this proposal, incumbent and competitive 

eligible telecommunications carriers would receive the same level of “per-line” support 
134

based on the most efficient wireline or wireless technology for a given area. As in the 

competitive market, eligible telecommunications carriers would only receive support to 

the extent that they win customers. More customers would equate to more support. At 

the same time, incumbents and competitors that lose customers would lose support (a 

novel concept under the current mechanisms). 

Although CTIA has suggested that a cost model could be used to calculate support, 

as noted previously, CTIA is open to other market-driven proposals (such as reverse 

auctions) that would reward more efficient carriers that compete away the cost of 

universal service. CTIA also has proposed shorter term reforms within the context of the 

current mechanisms that would reduce support for carriers that do not need it and 

potentially increase support to those carriers with legitimate needs. For example, CTIA 

has supported: 

(1) Eliminating profit guarantees in high-cost mechanisms (We think carriers 

should get their profits from their own customers, not through the universal 

service mechanisms); 

(2) Requiring carriers to combine study areas in a given state (The current rules 

allow large, low-cost incumbents to appear small and high-cost by balkanizing 

their operations within a state); and 

(3) Transitioning larger rural incumbent carriers to the non-rural high-cost 

mechanisms. 

Increased accountability must be central to any universal service reforms. That’s 

why CTIA has supported technology neutral “carrier of last resort” obligations for both 

incumbent and competitive eligible telecommunications carriers. CTIA also has 

supported requirements that both incumbent and competitive eligible telecommunications 

carriers achieve measurable results – for example, showing how universal service dollars 

have been used to improve service quality and coverage. We are open to other proposals 

and look forward to a continuing dialogue on these important issues. 
135

RESPONSE FOR THE RECORD OF STACI L. PIES, VICE PRESIDENT, POINTONE 

COMMUNICATIONS, ON BEHALF OF VOICE ON THE NET (VON) COALITION

1. In his testimony, Director Marron states that “spending for the [high-cost] 

program could be curbed by limiting high-cost support to one connection per 

household, by basing supporting on each carrier’s own costs rather than on a cost 

standard set by the incumbent carrier, or both.” Please comment on whether you 

agree or disagree with these two reform proposals and explain your answer. 

As Congress and the FCC examine whether and how the nation’s Universal Service 

system should be reformed, the focus should always be delivering competitive, 

innovative and robust services to all consumers nationwide, at just, reasonable, affordable 

and reasonably comparable rates. For too long, the primary beneficiaries of USF have 

been the companies that receive the funds rather than the consumers that may or may not 

benefit from USF policies. 

In keeping with the principle that consumer impact should drive USF policy 

implementation, the VON Coalition supports reforms that recognize that competition 

creates additional pressure for USF recipients to operate efficiently thereby minimizing 

the need for subsidies. As the Coalition stated in its testimony, to help accelerate the 

transition to a nationwide broadband network, Congress should adopt policies that create 

incentives rather than disincentives for efficient network deployment and exchanging 

traffic between Internet networks and the legacy phone network -- thus geometrically 

increasing the value of both of America’s communications networks. 

As the Fifth Circuit explained, “The Act does not guarantee all local telephone 

service providers a sufficient return on investment; quite to the contrary, it is intended to 

introduce competition into the market. Competition necessarily brings the risk that some 

telephone service providers will be unable to compete.”1

 Thus, “[t]he Act only promises 

universal service, and that is a goal that requires sufficient funding of customers, not 

providers.”

2

 As the Fifth Circuit recognized, “So long as there is sufficient and 

competitively-neutral funding to enable all customers to receive basic 

telecommunications services, the FCC has satisfied the Act and is not further required to 

ensure sufficient funding of every local telephone provider as well.”3

 

2.a. In February 2004, the Federal State Joint Board on Universal Service 

recommended supporting a single connection per household, as a means of reducing 

excessive growth in the fund: “We believe that limiting the scope of high-cost 

support to a single connection to the public telephone network would be more 

consistent with the goals of section 254 than the present system.” Please comment 

on whether you agree or disagree with this statement and explain your answer. 

As stated in response to question 1, the VON Coalition urges Congress to focus on 

the benefits to consumers of any particular proposal as well as ensuring that USF policies 

create incentives for efficient network deployment and the utilization of the most efficient 

technologies. Moreover, USF reforms should ensure that all providers of a substitute 

service to the same customer receive the same amount of support, regardless of the 

identity of the provider or the underlying technology. 

 

1 Alenco Communications, Inc. v. FCC, 201 F.3d 608, 620 (5th Cir. 2000). 2 Id. (emphasis in original). 3 Id. 
136

2.b. The Joint Board also determined “Section 254(b)(3) encourages access to 

connectivity, however, not unlimited connections at supported rates. Advanced 

services increasingly are being provided along with voice services over a single 

connection. Nothing in the Act supports the argument that multiple connections 

should be supported for access to dial-up Internet access or fax services, neither of 

which is a supported service.” Please comment on whether you agree or disagree 

with this statement and explain your answer. 

The VON Coalition believes that Congress and the FCC should view the Universal 

Service subsidy system in a new light. While the Joint Board’s focus on “services’ may 

be useful in the circuit switched world, as the Joint Board also recognized, in a broadband 

world, multiple services are provided over the same network. In focusing on the types of 

services that qualify for subsidies, the USF regime emphasizes voice services to the 

detriment of data and Internet services and ensures that most money stays or flows 

exclusively to incumbent carriers. The USF fund should not constrain us to the confines 

of the 100 year old analog voice regime when the world is moving to broadband based 

voice. 

A shift away from the focus on services or application and instead towards a focus 

on the transmission when determining whether a connection should be subsidized will 

provide appropriate incentives for broadband buildout. Broadband enabled networks and 

VoIP are facilitating transformative improvements in the way we communicate that 

harness the power of the Internet. VoIP is not just another flavor of telephone service. In 

contrast to traditional plain old telephone service (“POTS”), VoIP voice is an application, 

just like e-mail, streaming audio, streaming video, and web browsing and can occur over 

any packet data network, including the Internet. VoIP has the ability to decouple voice 

from the legacy copper telephone network, so that innovation can happen on Internet 

time, and consumers can connect from any broadband network. By transforming voice 

communications into a software application, VoIP can integrate communications and data 

in entirely new ways. Soon a voice component can be added to any type of device, 

application or service that uses a microprocessor or touches the Internet. Accelerating 

VoIP adoption can mean cost savings for consumers and businesses, reduced operational 

costs for providers, advanced features unavailable with traditional phones, increased 

competition among network and service providers, increased infrastructure investment, 

accelerated broadband deployment, improvements in emergency services, lower cost 

communications for rural and government users, increased access for persons with 

disabilities, and increased worker productivity. 

2.c. The Joint Board also concluded “We believe that further growth due to 

supporting multiple connections presents a significant threat to fund sustainability.” 

Please comment on whether you agree or disagree with this statement and explain 

your answer. 

The VON Coalition agrees with the reasoning articulated by the Fifth Circuit in the 

Alenco v. FCC. In that decision, the Court pointed out, “excessive funding may itself 

violate the sufficiency requirements of the Act.” 4 The reason is that “universal service is 

funded by a general pool subsidized by all telecommunications providers--and thus 

indirectly by the customers.”5

 In other words, because customers bear the ultimate cost 

of supporting universal service, “excess subsidization in some cases may detract from 

 

4 Alenco, 201 F.3d at 620. 5 Id.
137

universal service by causing rates unnecessarily to rise, thereby pricing some consumers 

out of the market.”6

3.a. Should only one provider receive universal service in any given area? 

Please explain your answer. 

The VON Coalition suggests that limiting support in a given area to one provider 

eliminates incentives for that provider to deploy the most advanced and economically 

efficient technologies, thus harming the very consumers that the Universal Service Fund 

is intended to benefit. Congress should ensure that even with USF subsidies, the market 

behaves as must like a competitive market as possible. Accordingly, federal USF 

policies must not discriminate between providers of substitute services to the same 

customers. All providers in a given area must be eligible to receive the same amount of 

support, regardless of the identity of the provider or the underlying technology. 

Importantly, such a support basis mimics the risks and rewards of an unsubsidized market 

and benefits consumers by enabling companies to deliver competitive, innovative and 

robust services to all consumers nationwide, at just, reasonable, affordable and 

reasonably comparable rates. 

3.b. Should only the provider that can serve the area at the lowest possible cost 

receive the universal service support? Please explain your answer. 

Rather than requiring the government to identify and select the least-cost supplier of 

services, a solution that would be fraught with problems, the VON Coalition believes that 

a better approach to lowering the costs of universal service and ensuring sustainability of 

the fund is to focus on accelerating VoIP driven benefits to consumers, businesses, and 

the economy by establishing incentives for carriers to make cost-effective investment 

decisions while improving service to consumers in their areas by increasing the 

availability of broadband services. The VON Coalition agrees that all Americans benefit 

from the fact that residents of rural areas have access to high quality telephone service. 

However, the incentives for providers to improve economic efficiency by deploying IPbased networks and services are adversely impacted by the manner in which the fund is 

currently administered given that high cost carriers generally receive subsidies based on 

their costs. 

4.a. In his testimony, Mr. Garnett asserts that “the high-cost mechanisms 

subsidize incumbent carriers based on what they spend . . . not necessarily based on 

whether they actually service customer located in a rural, high cost area.” Do you 

agree with the accuracy of this statement? Please explain your answer. 

As stated in 3.b. above, the VON Coalition is equally concerned that the current 

distribution system does not provide the proper incentives for deploying economically 

efficient technology. High-cost support provides subsidies to make carriers whole, 

regardless of their investment decisions or business models by guaranteeing ‘reasonable’ 

rates of return. Utilizing traditional, circuit switched technology, it is generally agreed 

that in those areas, basing end-user retail prices strictly on the cost of service would likely 

create a barrier to subscription and frustrate the achievement of Universal Service goals. 

However, with the advent of more efficient, lower cost technologies such as VoIP, the 

 

6 Id.
138

cost of providing service in rural and high cost areas can decrease significantly. Not only 

does VoIP enable robust, innovative communications experiences for all Americans, it 

significantly lowers the cost of network deployment and the provision of services to 

enterprises and residential consumers. 

4.b. Do you believe that subsidizing incumbent carriers or any carriers based 

on what they spend rather than who they actually serve is the right policy outcome? 

Please explain your answer. 

Subsidizing any provider based on the actual costs without appropriate auditing and 

oversight increases significantly the burden on the Fund. Moreover, such a policy 

outcome is detrimental to consumers because providers have no incentives to operate 

more efficiently or deploy new technologies that might offer lower costs. 

5. As Mr. Garnett points out in his testimony, “CTIA has proposed 

combining the current five high-cost universal service mechanisms into one 

mechanism that calculates support based on the most efficient technology – whether 

wireline or wireless – in a small geographic area.” Please comment on whether you 

support oppose such a proposal and why. 

The VON Coalition supports Universal Service reforms that eliminate the current 

incentives for carriers to ignore technological innovations that would reduce their 

dependency on or qualifications for subsidies. A single mechanism that calculates 

support based on the most efficient technology would provide appropriate, market driven 

incentives for high cost telephone companies to deploy less expensive, more robust and 

feature rich broadband technologies thereby benefiting consumers with lower cost service 

and less expensive universal service payments. The current USF subsidies mechanism 

assures a regular and predictable revenue flow with little to no risk and significant 

rewards. 
139

RESPONSE FOR THE RECORD OF GEOFF FEISS, GENERAL MANAGER, MONTANA 

TELECOMMUNICATIONS ASSOCIATION

1. In his testimony, Director Marron states that “[s]pending for the [high-cost] 

program could be curbed by limiting high-cost support to one connection per household, 

by basing support on each carrier’s own costs rather than on a cost standard set by the 

incumbent carrier, or both.” Please comment on whether you agree or disagree with 

these two reform proposals and explain your answer. 

I disagree in large part with Director Marron’s suggestion that high-cost support can 

be limited in any practical manner to one connection per household. This suggestion is 

commonly referred to as a “primary line restriction.” I agree with his suggestion that 

support should be based on each carrier’s own costs rather than on a cost standard set by 

the incumbent carrier. This suggestion is commonly referred to as the “identical support 

rule.” I’ll address each suggestion separately. 

First, I should point out that as Director Marron’s testimony attests, most of the socalled growth in the Universal Service Fund (USF) has resulted from regulatory cost 

shifting, as directed by Congress, from “implicit” support mechanisms (i.e., intercarrier 

compensation or access revenues) to “explicit” support (i.e., universal service). 

Economically speaking, consumers are paying no more to support investment in 

ubiquitous, affordable, advanced telecommunications infrastructure. Instead of paying 

implicit support through intercarrier compensation for maintaining investment in a 

national telecommunications infrastructure, they’re paying the same amount explicitly 

through universal service support. As my testimony shows, the amount of support 

received by incumbent ETCs has remained essentially the same. 

This is not so, however, with regard to “new” support created by recent and growing 

designation of new, mostly wireless, eligible telecommunications carriers (ETCs). CBO 

notes that designation of new ETCs is where the “new” growth of universal service 

funding is found. FCC Chairman Kevin Martin also has noted this phenomenon in a 

speech to USTelecom in October, 2006. 

...a lot of the Fund’s growth in recent years is attributable to new competitive 

eligible telecommunications carriers (or CETCs), particularly wireless CETCs that 

have begun to receive funding. The number of CETCs is increasing dramatically 

and is one of the primary drivers of fund growth. Since 2000, CETC high cost 

payments have grown from about $1.5 million annually to about $333 million 

annually. (FCC Chairman Kevin Martin, speech to USTelecom, 10/26/05) 

CBO points out in its testimony that “[f]urther growth in the number of wireless 

telephone carriers that become eligible to receive USF support for providing service in 

rural areas could increase spending for the High-Cost Program by between $0.6 billion 

and $1.2 billion.” 

So, while the Fund (explicit support) has grown, intercarrier compensation (implicit 

support) has shrunk. As CBO notes, the next intercarrier compensation reform proposal 

in the pipeline will bring more of the same regulatory shift from implicit support to 

explicit support, notwithstanding the “new” support obligations resulting from continuing 

designation of additional ETCs. In fact, it is the designation of additional, multiple ETCs 

serving the same area that has led to recommendations aimed at curbing the growth of the 

USF. Among those recommendations is the so-called primary line restriction. 

Primary line restriction. Conceptually, there are attractive arguments in favor of a 

primary line restriction. As indicated in following questions below (e.g., 2a.), the 

Federal-State Joint Board on Universal Service in 2004 enumerated a number of 
140

rationales justifying adoption a primary line restriction. Among them: it is necessary to 

protect the sustainability of the Fund and to mitigate “uncontrolled” growth as more and 

more new ETCs are designated in high-cost areas; restrictions should be considered that 

would curtail artificial inducements for competitive entry; and, preventing automatic 

support of multiple connections might curtail incentives by states to designate ETCs to 

attract more universal service funding to their states. I do not disagree with any of these 

observations. However, I do disagree with the proposed solution and believe that fund 

growth can be addressed through alternative means that do not harm rural economic 

development and that preserve the integrity of the universal service program. (See 

below.) 

Indeed, there is widespread opposition to a “primary line restriction.” In fact, 

Congress twice has enacted one-year moratoria on imposition of any primary line 

restriction, and rural telecom companies support a permanent moratorium/prohibition on 

the primary line restriction. One problem with a primary line restriction lies in its 

practical (or should I say “impractical”) implementation. First, it would be very difficult 

to determine which line is “primary,” and which one(s) is (are) not. There would be 

tremendous opportunity to game the system; to slam, cram, or otherwise attempt to 

(mis)characterize line(s) as “primary.” If one of the intentions for universal service 

reform is to reduce arbitrage and “gaming,” this potential reform may go in the opposite 

direction. For example, wireless companies offer each member of a household a separate 

phone and number—each of which receives universal service support if the wireless 

carrier is an ETC. Wireline households may have multiple phones but only one universal 

service-supported line. Thus, where universal service supports one wireline to a 

household, it now supports five “lines” for a household of four, if all members of the 

household each have a wireless phone, plus a supported wireline. (This is one reason 

why the primary line concept is attractive.) If there were a primary line restriction, would 

each member of the family choose a “primary” line, or would one “household” choose a 

single primary line? And then how would you determine what a household is, and who 

in the household gets to chose the primary line? How would you police such a system, 

even if you could devise a system which accurately determines what a primary line is? 

And so on. 

A second problem with the primary line restriction is if only the primary line 

receives universal service support, then all other lines would be priced according to their 

actual costs. (Remember, wireless carriers do not even account for their actual costs 

today.) Presumably, non-primary lines would then be more expensive. (if they weren’t, 

they wouldn’t need universal service support.) In Montana, unsupported lines could be 

hundreds of dollars more expensive. (My testimony indicated that Montanans would pay 

between $330 and $600 more.) This would be a significant deterrent to small business 

(i.e., multi-line commercial enterprises) development in rural areas, and I do not believe 

Congress intends to thwart rural economic development. To the extent that consumers 

would purchase less telecommunications capability, carriers would be left with less 

revenue with which to recover their substantial investment in services and infrastructure, 

leaving rural America with less investment in basic as well as advanced investment 

incentives. Moreover, businesses would be left with fewer telecommunications assets 

with which to maintain and grow their operations. 

In short, any potential advantages of a primary line restriction would be far 

outweighed in the form of diminished investment incentives, impossible administrative 

burden, and reduced economic development potential in rural America. Furthermore, it 

is questionable whether a primary line restriction would comply with the 

Telecommunications Act’s universal service principles, particularly that universal service 

is “specific, predictable, and sufficient.” 47 U.S.C. 254 (b)(5). If consumers could 

chose, and switch among supported lines, then carriers would have a difficult time at best 

determining what lines are supported, and predicting investment accordingly. 
141

Identical support rule. As noted above, there are practical alternatives to a primary 

line restriction, the most effective of which is the elimination of the “identical support 

rule.” The identical support rule effectively says that any new ETC receives the same 

level of universal service support as the incumbent. For example, say a wireless carrier is 

designated as an ETC in the service area of an incumbent carrier. The new wireless ETC 

uses a combination of its own facilities and those of the incumbent. It provides a 

different level of service quality, does not have carrier-of-last-resort or other state or 

federal obligations imposed on the incumbent, deploys a different type of network 

architecture, and generally has a different cost structure than the incumbent. As a result, 

its costs are significantly less than the incumbent’s. Yet, under the identical support rule, 

the wireless ETC receives the same level of universal service support as the incumbent. 

The identical support rule effectively becomes a windfall rule for the new ETC. 

This effect has been illustrated on numerous occasions. For example, FCC 

Chairman Martin noted in the same October, 2005, speech to USTelecom, 

I have also expressed concern over how CETC support is calculated. For 

example, even if [new ETCs’] costs are lower, they receive support based on [the 

incumbent’s] higher costs. 

The Montana Public Service Commission (MTPSC) recognized the windfall effects 

of the identical support rule in comments the MTPSC filed with the FCC in 2004: 

To further illustrate the need to eliminate the identical support rule we offer the 

following information. Western Wireless' CEO, John Stanton, in his presentation 

to this fall’s Qwest Regional Oversight Committee (ROC) meeting of September 

12 and 13, [2004] Missoula, Montana, presented estimates of relative wireline 

and wireless investment costs. Those costs are as follows: (1) national wireline 

carriers’ cost is $2,492; (2) national wireless carriers’ cost is $920; (3) rural 

wireline carriers’ cost is $7,195; and (4) rural wireless carriers’ cost is $1,734. It 

is apparent from the presentation that to base support to wireless carriers upon 

the cost of the ILEC would bequeath an extraordinary subsidy to the wireless 

industry. As OPASTCO comments, and the Montana PSC agrees, the “identical 

support” rule must be eliminated. Reply Comments of the Montana Public 

Service Commission. In the Matter of the Federal-State Joint Board on 

Universal Service, Request for Comments on Certain of the Commission’s Rules 

Relating to High-cost Universal Service Support. CC Docket No. 96-45. 

December 14, 2004. [Note: Western Wireless has been acquired by Alltel since 

these comments were filed.] 

It should be noted that wireless facilities need only reach from the end user to the 

nearest point of presence on the wireline network, thus saving the wireless carriers 

considerable expense. Indeed, wireless carriers (and VOIP providers, for that matter) 

rely on quality, ubiquitous wireline infrastructure to complete their calls. Yet, wireless 

ETCs are receiving universal service windfalls as they receive universal service support 

based on incumbent ETCs’ support, and not on their own costs, which generally are 

considered less because they don’t have the level of infrastructure investment, quality, 

ubiquity, etc. that the incumbent has. 

Does it make sense effectively to subsidize competitors with windfalls at the 

expense of universal service support? Emphatically not. Elimination of the identical 

support rule is an effective means by which to reduce the gaming of the universal service 

program and to mitigate uncontrolled growth of the Universal Service Fund. 
142

2a. In February, 2004, the Federal-State Joint Board on Universal Service 

recommended supporting a single connection per household, as a means of reducing 

excessive growth in the fund: “We believe that limiting the scope of high-cost support to 

a single connection to the public telephone network would be more consistent with the 

goals of section 254 than the present system.” Please comment on whether you agree or 

disagree with this statement and explain your answer. 

As I noted above, the Joint Board observed that the Universal Service Fund is 

growing primarily as a result of the designation of new, mostly wireless ETCs. It 

recommended, on a 5-3 vote, to adopt a primary line restriction as a means by which to 

protect the sustainability of the Fund. While the symptoms were properly diagnosed, the 

remedy remains contentious; and even the slim majority recognized that a number of 

conditions and caveats needed to be present if a primary line restriction were to be 

considered seriously by the FCC. (It should also be noted that the Joint Board’s 

recommendation was just that: a recommendation for further consideration by the FCC. 

Moreover, as additional and dissenting comments pointed out, the Joint Board did not 

address such central issues regarding the growth of the Fund as subsidization of 

competition, appropriate controls over designation of ETCs, or determination of an 

appropriate basis of support—e.g., the identical support rule. These more central issues 

could more effectively accomplish the same objective as an identical support rule without 

threatening economic development, investment in a national infrastructure, or imposition 

of insurmountable administrative burden which could result in more—not less—gaming 

of the universal service program.) 

The Joint Board acknowledged that a primary line restriction could have significant 

negative effects on investment in rural telecommunications infrastructure. For example, 

it requested the FCC to examine the effect of its recommendations on businesses with 

multiple connections. As I noted in my response to the previous question, a primary line 

restriction would likely increase significantly the cost/price of additional lines. Most 

“multiline” businesses in rural America are small. In Montana, the overwhelming 

majority of businesses have fewer than 5 lines, if they are multiline at all. Significantly 

increasing the price of these few additional lines would impose a tremendous burden on 

these small businesses, and would negatively affect their ability to maintain multiple 

lines, thereby affecting not only the businesses’ ability to retain and grow their 

operations, but negatively affecting telecom carriers’ return on investment. 

The Joint Board advanced options to “avoid or mitigate reductions in the amount of 

high-cost support flowing to rural areas as a result of implementing a primary line 

restriction.” Among the options was a hold harmless proposal that recognizes the 

substantial investment that rural carriers have made in infrastructure and thus would hold 

these carriers harmless from lost of universal service support. 

Further, the Joint Board recommendations were conditioned on the FCC’s ability to 

develop competitively neutral rules and procedures that do not create undue 

administrative burdens on carriers. As noted above, this condition may well be 

impossible to meet. Not only is a primary line restriction difficult to administer, but it 

likely would result in more, not less, manipulation (gaming) of the system, which 

Congress, the FCC and industry alike would prefer to eliminate rather than foster. Given 

more effective and more efficient solutions (elimination of identical support) the Joint 

Board’s recommendation likely does not meet its own conditions. 

2b. The Joint Board also determined “Section 254(b)(3) encourages access to 

connectivity, however, not unlimited connections at supported rates. Advanced services 

increasingly are being provided along with voice services over a single connection. 

Nothing in the Act supports the argument that multiple connections should be supported 
143

for access to dial-up Internet access or fax services, neither of which is a supported 

service.” Please comment on whether you agree or disagree with this statement and 

explain your answer. 

I disagree with the implication of this statement that connections to the nation’s 

telecommunications infrastructure should somehow limit consumers’ access to advanced 

telecommunications capabilities. In fact, we should be, and are, encouraging precisely 

the opposite policy as a matter of national economic competitiveness and domestic 

economic development. In Montana, rural telecommunications providers have pushed 

broadband access to between 80% and often as much as 100% of their service areas. 

Over 250 rural Montana communities have access to DSL, starting at 256Kbps, and often 

reaching well over megabit speeds. In a state where the largest city has a population of 

100,000, reaching 250 communities often means that towns of 100 residents or less have 

access to DSL technology. Many Montana rural telcos report that over 50% of their 

Internet customers subscribe to broadband services rather than dial-up Internet. 

Businesses are sprouting up in remote communities across the nation as a result of 

consumers’ and entrepreneurs’ access to advanced telecommunications capabilities. 

Economic opportunity no longer exists only in our nation’s cities. Anyone anywhere can 

start a business and instantly gain access to world markets. Access to advanced 

telecommunications infrastructure is critical to this economic vibrancy. And universal 

service is in no small degree contributing to this economic growth and vitality. I 

seriously doubt that Congress intends to curtail investment in the telecommunications 

platform that provides the foundation of economic growth. 

 Section 254(b)(3), as referenced by the Joint Board, states 

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 interexchange 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 comparable to rates charged for similar services in urban 

areas. [Emphasis added.] 

The Joint Board statement appears to imply that access to advanced 

telecommunications and information service is OK for one line, but not for any other 

line(s). I don’t know how that’s possible. If a family or business has two lines, should 

only one be used for Internet access or fax capabilities even though both lines—and the 

network they’re attached to—are perfectly capable of providing advanced services? And 

I certainly don’t think that’s a desirable policy for the United States. For more than 70 

years, universal service has supported carriers’ investment in networks “for the provision, 

maintenance and upgrading of facilities and services for which the support is intended. 

Any such support should be explicit and sufficient to achieve the purposes of this 

section.” 47 U.S.C. 254(e). [Emphasis added.] The rural telecommunications providers 

of Montana and the nation have been investing in and upgrading their networks to bring 

supported services to consumers in all corners of the nation. 

Continual investment in telecommunications infrastructure including facilities for 

which universal service support is intended has brought a number of additional benefits 

to rural consumers. For example, by investing in advanced, high capacity fiber 

backbones and digital “softswitches,” telecom providers have been able to increase 

network efficiency, enhance cost effectiveness of network investment, and 

simultaneously deliver more robust services and applications for consumers’ personal and 

commercial benefit. Two companies alone in Montana are drawing $2 million less in 

universal service support today than in 2004. Meanwhile, their investment in advanced 
144

telecommunications capabilities has meant that more of their customers have access to 

more advanced telecommunications applications choices than ever before. Universal 

service support facilitates investment in networks for the purpose of providing supported 

services. Such investment also facilitates the delivery of advanced communications 

capabilities. Investing in a fiber backbone, for example, facilitates delivery of supported 

services, and enables more bandwidth to be deployed throughout the network. 

The question implies that universal service is static, and that it is preferable that we 

provide only dial tone, without the capability of supporting advanced services, 

notwithstanding the principles set forth by Sections 254 and Sec. 706, which encourage 

an evolving definition of universal including support for advanced services. The Act 

defines universal service as 

an evolving level of telecommunications services that the Commission shall 

establish periodically [taking into account] the extent to which such 

telecommunications services—(A) are essential to education, public health, or 

public safety; (B) have, through the operation of market choices by customers, 

been subscribed to by a substantial majority of residential customers; (C) are 

being deployed in public telecommunications networks by telecommunications 

carriers; and (D) are consistent with the public interest, convenience and 

necessity. 47 U.S.C. 254(c)(1). 

Moreover, as I pointed out in my testimony, members of Congress on both sides of 

the aisle and the President are calling for more—not less-investment in broadband 

capabilities as a means of maintaining our nation’s international economic 

competitiveness. Dial-up Internet access and fax services hardly qualify as advanced 

telecommunications capabilities which will ensure our nation’s international economic 

competitiveness. 

2c. The Joint Board also concluded “We believe that further growth due to supporting 

multiple connections presents a significant threat to fund sustainability.” Please 

comment on whether you agree or disagree with this statement and explain your answer. 

I do not disagree with the statement, inasmuch as it indicates that growth of the Fund 

due to the designation of multiple ETCs threatens the Fund’s long term sustainability. As 

FCC Chairman Martin said in the aforementioned speech to USTelecom, 

I do not think it is viable in the long term to continue subsidizing multiple 

competitors to serve areas in which costs are prohibitively expensive for even 

one carrier. 

Then-Commissioner Martin made the same point in additional comments dissenting 

in part, and concurring in part to the Joint Board’s recommendation. He noted that the 

Joint Board’s recommendations may continue to make it difficult for any one carrier to 

achieve the economies of scale necessary to serve all of the customers in rural areas. 

For reasons cited above, however, I do not agree with the statement that multiple 

“connections” to the network are the culprit, especially considering the negative 

economic effects of implementing a primary line restriction, as discussed above. 

 

3a. Should only one provider receive universal service support in any given area? 

Please explain your answer. 
145

From the perspective maintaining the sustainability of the Fund, the question is 

valid. As noted above, we should consider whether it is good policy to subsidize 

competition rather than to promote universal service. 

However, a “single-carrier” approach may in fact result in unintended, negative 

consequences, much as a primary line restriction could result in negative investment and 

economic development consequences. How would states or the FCC determine which 

single provider would qualify for universal service support? (Suggestions regarding a 

“least-cost-provider,” or “most-efficient-technology” approach are discussed below.) As 

noted earlier, wireless calls (and VOIP services) rely on an underlying wired 

infrastructure. But if a wireless provider, for example, were chosen as the single provider 

eligible for universal service support, investment in the underlying network upon which 

the wireless provider depends, may cease as the underlying carrier would be unable to 

sustain an adequate (e.g., sufficient, specific and predictable) level of investment in its 

network. 

A more effective way to curtail growth in the Universal Service Fund is to 

implement current law more strictly by applying appropriate public interest standards 

prior to the designation of additional ETCs and by controlling the distribution of funds by 

eliminating the identical support rule. If it appears that designating a second ETC to 

serve an area already served by an ETC merely subsidizes the second carrier at the 

expense of unnecessary growth of the Fund, then a state Commission or the FCC should 

deny designating the second carrier as an ETC in that area. If other public interest 

standards are not met by designating a second carrier, then the second ETC should not be 

designated. I am not aware of any ETC applications having been denied anywhere in the 

nation. It can be argued that current law has not been implemented as strictly as it 

should. 

I should note that H.R.5072 accomplishes the very solutions that are designed 

effectively to limit the growth of the Universal Service Fund while preserving the valid 

intent of universal service to support ubiquitous access to advanced, quality 

telecommunications. For example, H.R.5072 clearly states that state commissions shall 

conduct thorough reviews of ETC applications prior to designating additional ETCs. The 

bill further eliminates the identical support rule as an effective means of curtailing the 

growth of the Fund. 

3b. Should only the provider that can serve the area at the lowest possible cost receive 

universal service support? Please explain your answer. 

As noted above, a single-provider approach to universal service may result in 

negative repercussions for investment in underlying network infrastructure. As Western 

Wireless’ Chairman John Stanton was quoted in the MTPSC December, 2004, reply 

comments to the FCC (above), his company’s investment costs were substantially lower 

than incumbents’ costs. However, I doubt whether the figures cited by Mr. Stanton 

compared actual consumer value on an apples-to-apples basis. For example, did the data 

cited by Mr. Stanton include comparable quality of service, network redundancy, 

backbone infrastructure, bandwidth and advanced service capability, ubiquitous carrierof-last-resort obligations throughout the comparable service area, equal access, 

emergency service capabilities, compliance with other federal and state requirements, 

etc.? My suspicion is that the wireless carrier’s costs were “less,” because the wireless 

carrier did not account for many of the investments and obligations that it counts on the 

wireline network to make in its behalf. 

A least-cost-provider approach to universal service may result in a race to the 

lowest-common-denominator of network investment. The company that can invest the 

least would receive universal service, despite what services may or may not be available 
146

as a result of such minimal investment. If the least-cost provider happens to have little, if 

any, backbone infrastructure then consumers will have little effective access to 

“universal” communications capabilities because the “more expensive” infrastructure 

provider would not be able to recover its investment. 

Again, as noted above, continual investment in access to ubiquitous, quality, 

advanced telecommunications networks facilitates all applications and services that are 

dependent on such an underlying infrastructure, including quality wireless services and 

new Internet-based services. 

Finally, a least-cost provider approach relies on an affirmative showing of providers’ 

actual costs of providing service (however "costs" and "service" are defined.) Wireless 

carriers do not provide any sort of cost data and at least to date have strongly resisted 

revealing any cost information for public scrutiny. 

4a. In his testimony, Mr. Garnett asserts that “the high-cost mechanisms subsidize 

incumbent carriers based on what they spend...not necessarily based on whether they 

actually serve customers located in a rural, high-cost area.” Do you agree with the 

accuracy of this statement? Please explain your answer. 

I disagree with Mr. Garnett’s statement. Rural carriers by definition serve customers 

located in rural, high-cost areas. As I noted in my testimony, Montana’s rural telcos 

serve on average fewer than three access lines per mile. Moreover, only expenditures 

“for the provision, maintenance and upgrading of facilities and services for which the 

support is intended” are permitted. Incumbent ETCs must file revenue requirements, 

comply with extremely detailed cost accounting standards and be subject to audits by the 

National Exchange Carriers Association (NECA) as well as the Universal Service 

Administrative Corporation (USAC). (Wireless ETCs, on the other hand, have no cost 

accounting standards, since they automatically receive the incumbent’s level of universal 

service support under the identical support rule.) 

As noted earlier, universal service supports network investment, not per customer 

investment. (See also discussion of a voucher system, below.) Mr. Garnett also implies 

that rural, high-cost incumbent carriers receive more universal service support the more 

they need. This is the “gold plating” allegation. However, as noted above, rural carriers 

are actually creating efficiencies and drawing less support from the Fund while providing 

more services through their continual investment in advanced more efficient and effective 

technologies. Moreover, rural carriers’ investments are fully accounted for, contrary to 

the windfalls that wireless ETCs receive as a result of the identical support rule. Rural 

telcos’ investment in rural, high-cost areas, supported in part by universal service, have 

resulted in tangible, significant benefits to rural American consumers and to the nation’s 

economy in general. Economic opportunity is not limited to a single geographic area. 

Total economic activity is enhanced by continual investment in the nation’s 

telecommunications infrastructure and by access to this investment by all consumers, no 

matter where they live. 

Therefore, I disagree with the assertion that such investment fails to benefit 

consumers located in rural, high cost areas—as well as consumers in urban areas who in 

turn benefit from ubiquitous access to consumers and businesses anywhere in the nation 

or the world. 

4b. Do you believe that subsidizing incumbent carriers (or any carriers) based on what 

they spend rather than who they actually serve is the right policy outcome? Please 

explain your answer. 
147

I believe that universal service support should be based on an ETC’s own verifiable 

costs associated with the provision of supported services. Rural telecom providers have 

demonstrated clearly that universal service support is money invested in supported 

services and has resulted in deployment of affordable, quality, advanced 

telecommunications capabilities to Americans living in high-cost rural areas. 

I do not believe that universal service should support individuals rather than 

networks. This concept often is referred to as a “voucher system.” First, ETCs must by 

law (47 U.S.C 214(e)) serve an entire study area (unless granted a smaller, re-defined 

service area, a concept with which MTA does not necessarily concur as it invites gaming, 

arbitrage and creamskimming). Universal service therefore supports network investment. 

It cannot support costs associated with providing access to telecommunications services 

to one consumer and not a different consumer next door. Much like a primary line 

restriction, implementation of a customer-specific voucher system would be nearly 

impossible. How would you determine which customer receives universal service and 

who does not? What sort of information would be required to be divulged by consumers 

to what government entities? How would a voucher mechanism, if one could be devised, 

be policed? Would telephone companies be expected to investigate whether consumers 

are eligible or ineligible for universal service? What enforcement mechanisms would be 

required? What if the “ineligible” consumer moves and an “eligible consumer” moves 

into the same residence using the same, previously unsupported line? 

In short, a voucher system ignores network/infrastructure costs. The network needs 

to be built, operated, maintained and upgraded regardless of who is on the end of the line 

placing and receiving communications. 

5. As Mr. Garnett points out in his testimony, “CTIA has proposed combining the 

current five high-cost universal service mechanisms into one mechanism that calculates 

support based on the most efficient technology—whether wireline or wireless—in a small 

geographic area.” Please comment on whether you support or oppose such a proposal 

and why? 

In my response to question 3b, I explained that supporting the least-cost provider 

may not result in sufficient investment in telecommunications infrastructure upon which 

a variety of telecommunications applications, including wireless and VOIP, depend. 

Similarly, supporting the most “efficient” technology could lead to similar 

consequences. Also, comparing apples to apples again would be problematic. How 

would one compare the efficiency of a portion of high frequency spectrum to the 

efficiency of fiber optics? I might argue, for example, that nothing beats the unlimited 

bandwidth and therefore efficiently of fiber optics, as measured on a cost-per-byte basis 

since there is practically no limit to the amount of data one can push down fiber. 

However a spectrum advocate might argue that transmitting data through the air is more 

efficient than transmitting it through glass (notwithstanding the fact that the 

communications eventually end up being transmitted through wired—most likely fiber—

infrastructure.) Further does, or should, an efficiency analysis include such factors as 

quality, redundancy, reliability, bandwidth, etc? Does support for an efficient technology

limit consideration to other network factors? As noted above, rural telcos are investing in 

more efficient technologies and thereby providing more robust service options for 

consumers while simultaneously drawing less universal service support. Would support 

be directed at one “technology” at the expense of investment in a network? 

Mr. Garnett suggests a cost model could be used to calculate support. 

Unfortunately, no cost model has yet been devised that accurately depicts the actual costs 

of investing in and operating a telecommunications network. In fact, existing cost 

models are so complicated that only a few carriers have been able to run them on their 
148

systems. And those that have have found interesting anomalies. For example, some rural 

carriers would receive more, not less, universal service support if they used existing cost 

models. 

In conclusion, MTA does not contest the assertion that the Universal Service Fund is 

threatened by the dual problem of diminishing revenues combined with uncontrolled, 

increasing distribution growth. MTA believes that universal service is as valid today as it 

has ever been. Perhaps it is even more important than ever before, as advanced 

telecommunications capabilities are essential to our nation’s economic vitality and 

competitiveness. The revenues side of universal service funding can be addressed by 

broadening the base of contributions to include all communications providers (who, after 

all, rely on a robust, ubiquitous, advanced telecommunications network infrastructure). 

And the uncontrolled growth on distribution side of the universal service funding 

equation can be addressed effectively by controlling the designation of new ETCs and 

eliminating the automatic portability of incumbent support levels regardless of a carrier’s 

own costs. More radical recommendations such as a primary line restriction, a voucher 

system, or a least-cost/most-efficient-technology approach are untested, highly 

problematic approaches which very likely could result in less investment in our nation’s 

telecommunications infrastructure at a time when we should be promoting ubiquitous, 

affordable access to the most advanced telecommunications capabilities we can deploy. 

H.R.5072 incorporates many of the suggestions I have made herein regarding 

reasonable approaches to resolving the current contribution and distribution deficiencies 

facing the Universal Service Fund. As I mentioned in my testimony, MTA endorses 

H.R.5072 and strongly urges the Energy and Commerce Committee to adopt the 

provisions of this legislation. 

Finally, I should note that while my responses reflect my views and those of the 

Montana Telecommunications Association, these responses encompass the views of 

hundreds U.S. rural telecommunications providers and others nationwide. 

It is an honor to have this opportunity to respond to the Subcommittee’s interest in 

universal service. Please do not hesitate to contact me if I can be of any further 

assistance. 

Respectfully submitted, 

/s/ 

Geoff Feiss, General Manager 

Montana Telecommunications Association 

208 North Montana Avenue, Suite 105 

Helena, Montana 59601 

gfeiss@telecomassn.org 

406.442.4316 
149

RESPONSE FOR THE RECORD OF DR. MARK COOPER, DIRECTOR OF RESEARCH, CONSUMER 

FEDERATION OF AMERICA

1) In his testimony, Director Marron states that “[s]pending for [the high cost] 

program could be curbed by limiting high-cost support to one connection per 

household, by basing support on each carriers own costs rather than on a cost 

standard set by the incumbent carrier, or both. Please comment on whether you 

agree with these two reform proposals and explain your answer. 

The designation of a single USF line explicitly violates the language of section 254 

of the Act, which states: 

“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 interexchange access services and advanced 

telecommunication and information services that are reasonably comparable to those 

services provided in urban area and that are available at rates that are reasonably 

comparable to rates charged for similar services in urban areas.” I believe that this broad 

commitment to universal service should not be abandoned. Second lines in rural areas 

are telecommunications service that would no longer be available at reasonable rates. 

The designation of a single USF eligible line would likely discourage investment in 

rural areas, as well as be administratively difficult to implement. How is a household 

defined? Who in each dwelling gets the authority to make the designation of primary 

line? A possible compromise that would reign in the growth of ETC cost is the 

implementation of so-called “reverse auctions” that does not restrict the services to be 

provided. The Commission could design a process that would award subsidies to the 

lowest provider bidder plus all other bidders within a certain range of that figure. This 

built-in ex ante competition comes with a trade-off: the benefits of in-market competition 

and the costs associated with giving subsidies to less efficient bidders. However, if the 

auction is designed well, consumers will still enjoy the benefits of competition — 

particularly on vertically integrated services — while overall program costs are kept in 

check. 

I agree that USF distributions should be based on each carrier's own forward looking 

cost, and not the cost of the incumbent. There is a perverse outcome to the current 

system — as ETC’s capture incumbent customers, the incumbent’s per line costs 

increases, which in turn increases the total subsidy to both the incumbent and the 

competitor. Engineering models have advanced to the point where accurately 

determining own-forward looking costs is completely feasible, and there is no good 

reason to continue with the status quo. 

2a) In February 2004, the Federal-State Joint Board on Universal Service 

recommended supporting a single connection per household as a means of reducing 

excessive growth in the fund; “We believe that limiting the scope of high-cost 

support to a single connection the public telephone network would be more 

consistent with the goals of section 254 than the present system.” Please comment 

on whether you agree or disagree with this statement and explain your answer. 

It is simply impossible to read the Act and reach that conclusion. The designation of 

a single USF line explicitly violates the language of section 254 of the Act, which states: 

“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 interexchange access services, that are reasonably 

comparable to those services provided in urban area and that are available at rates that are 
150

reasonably comparable to rates charged for similar services in urban areas.” I believe 

that this broad commitment to universal service should not be abandoned. 

In 2004, the Federal-State Joint Board proposed limiting USF support to just a single 

customer-designated primary line. However, the FCC never acted on this 

recommendation. The Joint Board members who dissented in the 2004 decision were 

concerned that the designation of a single USF eligible line would discourage investment 

in rural areas, as well as be administratively difficult to implement. Prior to issuing the 

recommendation, the Joint-Board received a letter from Senators of both parties stating 

that a primary line designation policy would be “a major step backward that would thwart 

the essential purpose of universal service”. 

Limiting service to a single line would harm consumers by limiting competition and 

raising prices. Carriers would be unwilling to invest in network upgrades in rural areas 

due to uncertainty, which in light of the current problems with the digital divide is 

unacceptable. Reverse auctions are a better way of addressing the concerns with the 

growth of ETC distributions while maintaining maximum consumer benefits. 

2b) The Joint Board also determined “Section 254(b)(3) encourages access to 

connectivity, however, not unlimited connects at supported rates. Advanced 

services increasingly are being provided along with voice services over a single 

connection. Nothing in the Act supported the argument that multiple connections 

should be supported for access to dial-up Internet access or fax services, neither of 

which is a supported service.” Please comment on whether you agree or disagree 

with this statement and explain your answer. 

Disagree. Section 254(b)(3) of the statute directs the FCC to make reasonably 

comparable services available to consumers nationwide at reasonably comparable rates. 

“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 interexchange services and advanced telecommunications 

and information services, that are reasonably comparable to those services provided in 

urban areas and are available at rates that are reasonably comparable to rates charged for 

similar services in urban areas.” The section gives a long list of services that covers all 

of the services which the Joint board would like to cut out. Dial-tone is a 

telecommunications services. Fax and Internet are applications that flow over a 

telecommunications service. They are information services or advanced information 

services that are directly covered by the section as well. Notice the emphasis on access in 

addition to rates. Also notice how the Act covers advanced telecommunications services 

and information services in addition to basic services. Limiting support to a single dial 

tone line would deny rural households access to 21st century critical advanced services. 

2c) The Joint Board also concluded “We believe that further growth due to 

supporting multiple connections presents a significant threat to fund sustainability.” 

Please comment on whether you agree or disagree with this statement and explain 

you answer. 

 

The growth in ETC support is a part of the concern about the stability of the Fund. 

 However, the real problem is with how rural incumbent carriers are supported (historical 

costs versus forward looking costs) and how ETC’s are supported (based on the 

incumbents cost, not their own cost). Addressing these flaws in the Fund will strengthen 

the long-term viability of the program, without harming consumers or running counter to 

the purpose of the Act. 
151

3a) Should only one provider receive universal service support in any given area? 

Please explain your answer. 

Universal support should be administered in a manner that fulfills the purpose of 

section 254 of the Act: providing reasonably comparable telecommunications and 

advanced information services to all Americans. If the Commission implements a well 

designed reverse auction program, and only one carrier bids for support, then that carrier 

will be the sole recipient of support. However, it runs counter to the purpose of the Act 

to arbitrarily limit support to one carrier. 

3b) Should only the provider that can serve the area at the lowest possible cost 

receive the universal service support? Please explain your answer. 

The purpose of the universal service fund is to ensure reasonably comparable 

services at reasonably comparable rates for consumers. One carrier in an area could be 

designated as the sole recipient of universal service support only if that carrier stood 

ready to serve al consumers in the area at reasonably comparable rates. The reverse 

auction is the way to accomplish this. Other approaches that cut off support to a carrier 

might leave customers unable to obtain reasonably comparable services at reasonably 

comparable rates. 

4a) In his testimony, Mr. Garnett asserts that “high-cost mechanisms subsidize 

incumbent carriers based on what they spend...not necessarily based on whether 

they actually serve customers in a rural, high cost area.” Do you agree with the 

accuracy of this statement? Please explain your answer. 

This statement is not wholly accurate. Small rural incumbent carriers (as designated 

by the Commission, not “rural” per se in a geographic sense) receive high-cost support 

based on their historic embedded costs, and not their forward looking long-run 

incremental costs. In addition, many of these carriers are subject to rate-of-return 

regulation and not price-cap regulation. Thus, they do not have much incentive to hold 

down costs. This could be easily remedied by moving these carriers in line with the 

regulatory treatment of RBOC and other non-rural carriers. 

4b) Do you believe that subsidizing incumbent carriers (or any carriers) based on 

what they spend rather than who they actually serve is the right policy? Please 

explain you answer. 

Carriers should be subsidized for delivering high cost services to consumers at rates 

that are reasonably comparable to the rates for urban customers. Given that consumers 

have the freedom to join and leave a network as they wish; it is not the right framework 

to think of support exclusively based on customers “actually served”. Providers have to 

make decisions about rolling out and maintaining infrastructure. Since many rural and 

high cost areas lack competition, rates in those areas are and must remain regulated. 

Regulation should ensure that what carriers spend to serve customers should be the 

efficient, forward looking cost of serving those customers. 

5) As Mr. Garnett point out in his testimony, “CTIA has proposed combining the 

current five high-cost universal service mechanisms into one mechanism that 
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calculates support based on the most efficient technology – whether wireline or 

wireless – in a small geographic area.” Please comment on whether you support or 

oppose such a policy proposal and why? 

If the goal of the Act is to ensure “access to telecommunications and information 

services, including interexchange services and advanced telecommunications and 

information services, that are reasonably comparable to those services provided in urban 

areas and are available at rates that are reasonably comparable to rates charged for similar 

services in urban areas”, then basing costs on a single technologies own-cost is bad 

public policy. It will leave consumers unserved. Moreover, it is important not to allow 

inferior services to set an artificially low figure for support. If a given technology cannot 

deliver the full range of telecommunications and advanced telecommunications, 

information and advanced information services, but it were used to set the subsidy, it 

would undermine access to the services contemplated by the Act. That said, regulators 

should drive costs to the level of forward looking economic cost. A better way is to base 

it on each carriers own-cost, and pick a host of carriers through a system of reverse 

auctions. 

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