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THE FUTURE OF RURAL TELECOMMUNICATIONS:

IS UNIVERSAL SERVICE REFORM NEEDED?

HEARING

BEFORE THE

SUBCOMMITTEE ON RURAL ENTERPRISES, 

AGRICULTURE & TECHNOLOGY

OF THE

COMMITTEE ON SMALL BUSINESS 

HOUSE OF REPRESENTATIVES

ONE HUNDRED NINTH CONGRESS

SECOND SESSION

WASHINGTON, DC, MAY 3, 2006

Serial No. 109–50

Printed for the use of the Committee on Small Business

(

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

COMMITTEE ON SMALL BUSINESS 

DONALD A. MANZULLO, Illinois, Chairman 

ROSCOE BARTLETT, Maryland, Vice 

Chairman 

SUE KELLY, New York 

STEVE CHABOT, Ohio 

SAM GRAVES, Missouri 

TODD AKIN, Missouri 

BILL SHUSTER, Pennsylvania 

MARILYN MUSGRAVE, Colorado 

JEB BRADLEY, New Hampshire 

STEVE KING, Iowa 

THADDEUS MCCOTTER, Michigan 

RIC KELLER, Florida 

TED POE, Texas 

MICHAEL SODREL, Indiana 

JEFF FORTENBERRY, Nebraska 

MICHAEL FITZPATRICK, Pennsylvania 

LYNN WESTMORELAND, Georgia 

LOUIE GOHMERT, Texas 

NYDIA VELA ́ ZQUEZ, New York 

JUANITA MILLENDER-MCDONALD, 

California 

TOM UDALL, New Mexico 

DANIEL LIPINSKI, Illinois 

ENI FALEOMAVAEGA, American Samoa 

DONNA CHRISTENSEN, Virgin Islands 

DANNY DAVIS, Illinois 

ED CASE, Hawaii 

MADELEINE BORDALLO, Guam 

RAU ́ L GRIJALVA, Arizona 

MICHAEL MICHAUD, Maine 

LINDA SA ́ NCHEZ, California 

JOHN BARROW, Georgia 

MELISSA BEAN, Illinois 

GWEN MOORE, Wisconsin 

J. MATTHEW SZYMANSKI, Chief of Staff 

PHIL ESKELAND, Deputy Chief of Staff/Policy Director 

MICHAEL DAY, Minority Staff Director

SUBCOMMITTEE ON RURAL ENTERPRISES, AGRICULTURE AND 

TECHNOLOGY 

SAM GRAVES, Missouri, Chairman 

STEVE KING, Iowa 

ROSCOE BARTLETT, Maryland 

MICHAEL SODREL, Indiana 

JEFF FORTENBERRY, Nebraska 

MARILYN MUSGRAVE, Colorado 

JOHN BARROW, Georgia 

TOM UDALL, New Mexico 

MICHAEL MICHAUD, Maine 

ED CASE, Hawaii 

RAU ́ L GRIJALVA, Arizona

PIPER LARGENT, Professional Staff

(II) 

C O N T E N T S 

WITNESSES

Page 

Terry, Honorable Lee (NE-2), Congressman, U.S. House of Representatives .... 3

Williams, Mr. Robert, OPASTCO, Owner, Oregon Farmers Mutual Telephone 

Company ............................................................................................................... 5

Johnson, Mr. Johnie, Chief Executive Officer/GM, Nex-Tech Wireless .............. 7

Merlis, Mr. Edward, Senior Vice President, Government and Regulatory Affairs, U.S. Telecom Association ........................................................................... 9

Henagan, Mr. Raymond, CEO/Manager, Rock Port Telephone ........................... 11

Schulte, Mr. Don, Missouri NEA ............................................................................ 12

Black, Mr. Ed, President & CEO, Computer and Communications Industry 

Association ............................................................................................................ 14

APPENDIX

Opening statements: 

Graves, Hon. Sam ............................................................................................. 26

Barrow, Hon. John ........................................................................................... 28

Prepared statements: 

Williams, Mr. Robert, OPASTCO, Owner, Oregon Farmers Mutual Telephone Company ............................................................................................. 30

Johnson, Mr. Johnie, Chief Executive Officer/GM, Nex-Tech Wireless ....... 35

Merlis, Mr. Edward, Senior Vice President, Government and Regulatory 

Affairs, U.S. Telecom Association ................................................................ 49

Henagan, Mr. Raymond, CEO/Manager, Rock Port Telephone .................... 52

Schulte, Mr. Don, Missouri NEA .................................................................... 57

Black, Mr. Ed, President & CEO, Computer and Communications Industry Association ............................................................................................... 59

(III) 

(1)

THE FUTURE OF RURAL TELECOMMUNICATIONS: IS UNIVERSAL SERVICE REFORM 

NEEDED? 

WEDNESDAY, MAY 3, 2006

HOUSE OF REPRESENTATIVES

SUBCOMMITTEE ON RURAL ENTERPRISES, AGRICULTURE

AND TECHNOLOGY

COMMITTEE ON SMALL BUSINESS

Washington, DC 

The Subcommittee met, pursuant to call, at 10:00 a.m., in Room 

2360 Rayburn House Office Building, Hon. Sam Graves [Chairman 

of the Subcommittee] presiding. 

Present: Representatives Graves, Sodrel, and Barrow. 

Chairman. GRAVES. We will call this hearing to order. Good 

morning, everyone, and welcome to the Small Business Subcommittee on Rural Enterprises, Agriculture and Technology. 

Today we are going to be examining the sustainability of the Universal Service Fund and whether reform of this program is needed. 

The bedrock of rural telecommunications was a commitment by 

the federal government to provide universal service to all parts of 

America, including areas that are scarcely populated and expensive 

to serve. 

The ultimate goal of the Universal Service policy is to ensure 

that every citizen, regardless of location, has affordable high-quality access to the public telecommunications network. The government planned to accomplish this by enacting a cost recovery mechanism for providers that invested in network expansion in rural 

communities. 

In 1996, when our nation’s telecommunication laws were overhauled, the Universal Service Fund was expanded to provide a cost 

recovery service to low-income families, rural hospitals, schools, 

and libraries. Providing service comparable to urban centers was a 

major objective of the program. 

For rural telecommunications companies, the Universal Service 

Fund support is a critical means of cost recovery, but, more importantly, it has afforded rural America the same technology and service as urban centers. 

Additionally, its contributions have helped ensure that schools 

and libraries have access to affordable telecommunications and information services. This allows our children in rural communities 

access to resources important to their education. It further encourVerDate 0ct 09 2002 18:12 Nov 14, 2006 Jkt 000000 PO 00000 Frm 00005 Fmt 6633 Sfmt 6633 G:\HEARINGS\28600.TXT MIKE
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ages folks to stay in rural communities, further helping spur economic growth in these areas. That’s very important. 

After a decade, Congress is again looking at rewriting the nation’s telecommunications law. I think it is very appropriate to look 

at reforming the Universal Service Fund. New services have been 

introduced, including broadband and voice-over internet protocol. 

Broadening the base of contributors and encompassing new technologies is important to the long-term sustainability to the Universal Service Fund. 

My district is very much a rural district, and the Universal Service Fund is extremely important to so many of my constituents. I 

am going to work to ensure that all of our citizens have the same 

access to telecommunications options. 

I applaud Representative Terry for introducing his legislation, 

H.R. 5072, the Universal Service Reform Act of 2006, and feel this 

discussion is important to have considering the recent developments on telecommunications matters. 

Hopefully, with continued conversations about the Universal 

Service Program, we can encourage others to take a closer look into 

this matter and help make the necessary reforms to continue its 

contributions in our rural communities. 

Now I am going to turn to Representative Barrows. I know he 

has an opening statement. And then we’ll let Representative Terry 

give his testimony. 

[Chairman Graves’ opening statement may be found in the appendix.] 

Mr. BARROW. Thank you, Mr. Chairman. 

It’s critical folks in rural areas have full access to telecom services, and I’m glad and I appreciate your calling this hearing to 

make sure that these services are both fair and effective and can 

reach everybody that we serve. 

Americans need access to phone and internet services at an affordable rate, and this access needs to include both rural and 

urban areas. The Universal Service Fund has been critical in 

achieving these goals. 

Unfortunately, it appears that we’ve reached a point where the 

Universal Service Fund is paying out more than it’s taking in. We 

need to make sure that the fund remains solvent and continues to 

allow rural telephone companies to do their job. The fund, the businesses, and the consumers are all critical factors in the continued 

economic development of America’s rural areas. 

I want to thank all of the witnesses for coming in today. I want 

to apologize because I am not able to stay, but don’t worry. We get 

to read all of your testimonies very carefully. And my staff makes 

sure that I do just that. 

Working together, we need to identify the problems and the solutions related to the Universal Service Fund and make sure that 

we’re taking care of rural consumers without placing an unnecessary burden on the backs of small providers. 

Mr. Chairman, once again I thank you for calling this hearing. 

And I look forward to the results. Thank you. 

[Ranking Member Barrow’s opening statement may be found in 

the appendix.] 

3

Chairman. GRAVES. Thanks, Mr. Barrow. All the statements of 

the witnesses and members will be placed in the record in their entirety. 

Representative Terry, glad you came over, looking forward to 

hearing about your legislation. Please go on. 

Mr. TERRY. Thank you, Chairman Graves. 

STATEMENT OF THE HONORABLE LEE TERRY (NE-2), U.S. 

HOUSE OF REPRESENTATIVES 

Mr. TERRY. I want to thank you for not only holding this hearing 

on universal service has been making me feel at home with the 

great Midwestern presence here. Ranking Member Barrow, I appreciate your interest in this bill. 

I will stick to the text, but I do want to say that the beauty of 

this reform bill is that it is a true bipartisan bill. Rick Boucher and 

I have worked on this bill for nearly two years. Rick has been involved in this for the last year, all the way from our meetings to 

the drafting and improvements. And so this is truly an example of 

bipartisan effort. In fact, in our Committee, it will be a great bipartisan bill, mostly breaking down on urban/rural more than Republican/Democrat. 

Now, nobody knows the importance of the Universal Service 

Fund better than those of us who represent rural America. Some 

of our colleagues believe that the marketplace will deliver new telecommunication technology to rural areas without the need of Universal Service Fund, but the Universal Service Fund is so important to the future of our rural districts and our states it is critical 

that Congress take the initiative and reform the current Universal 

Service Fund before rural America is left with no broadband deployment. 

Reform of the fund is necessary. And I have drafted along with 

Rick Boucher of Virginia H.R. 5072, the Universal Service Reform 

Act of 2006, that will guarantee the future of the Universal Service 

Fund while delivering more broadband services to rural America. 

America is in the midst of a technology transition that is critical 

to our nation staying competitive in a high-speed global economy. 

As telephony migrates to internet protocol and wireless systems, 

many areas of our country, especially in rural areas, could be left 

without access to new broadband technologies. 

The Universal Service Reform Act of 2006 will keep rural America competitive with the rest of the country, and it will meet the 

needs of our rapidly changing telecommunication environment. 

H.R.5072 is technology-neutral, which means it does not discriminate between platforms. It doesn’t matter if you’re using fiber, 

wire, or a digital internet platform. 

Being technologically neutral will ensure continued investment 

by all participants in the telecommunication infrastructure that 

will benefit rural America. What we say is if you are primarily 

voice, then you will pay into the system. 

This bill seeks to broaden the base of contributors to the fund 

and change the current system, where more providers are offering 

broadband services but not paying into the fund. 

This bill will make it explicit that if you provide access to the 

public switch, regardless of your technology, you will pay under the 

4

fund or if you offer a service in which voice is your primary component, you will pay into it. This is just simply a fair concept of if 

you’re playing in the voice market, you will pay under universal 

service. 

Now, this failure to not broaden the base will lead to the eventual bankruptcy, as referenced by Ranking Member Barrow, of the 

fund and will create a technology gap across our country, making 

it impossible to complete a call or even deliver a data packet. 

These are just a few of the reasons why H.R. 5072 is necessary 

to restore the financial future of the Universal Service Fund. The 

legislation Mr. Boucher and I drafted provides fair remedies to the 

inequalities that now exist and will meet the challenges of today’s 

new technologies. 

With the last few seconds, I have referenced broadband. What we 

do in this bill is not only reform Universal Service Fund to make 

sure that it survives in this new generation and new pressures but 

also explicitly say for the next five years that you can use your universal service dollars for the rollout of broadband in your area. 

Then after five years, it is actually a requirement. So this is how 

we get a ubiquitous rollout of broadband throughout rural America 

and all of America. 

With that, again I want to thank your Committee for looking into 

what I think is one of the crucial issues of how we are going to 

compete in a Twenty-First Century global economy. 

Chairman. GRAVES. What do you think the chances are that we 

are going to see comprehensive Universal Service Fund policy this 

year? 

Mr. TERRY. Well, a couple of months ago I would have said it was 

near certain, but the reality in our Committee is that our chairman 

is looking in other directions right now and is not a supporter of 

Universal Service Fund. We will have hearings but no promises 

now of an actual markup. 

So we need to educate some of our members yet in how important Universal Service Fund is to rural America, that there isn’t 

a competitive market yet that exists to the point that we can do 

away with Universal Service Fund. 

It is I think as relevant today as it was in 1930, in 1935. So, you 

know, we’re continuing to pressure, and we will have hearings like 

you’re holding. 

Chairman. GRAVES. Thank you, Mr. Terry. I appreciate it. We 

normally don’t question members, but I appreciate that. And I appreciate you coming in. I know that I know what the ramifications 

are going to be for rural America if we don’t do something, if we 

don’t expand it. 

And you’re right. It’s just as important now as it ever was. And 

we’re going to get left behind if we don’t move forward. It’s hard 

to keep up. 

Mr. TERRY. Yes. 

Chairman. GRAVES. Thank you very much. 

Mr. TERRY. Thank you. 

Chairman. GRAVES. We’ll go ahead and seat the second panel. If 

everyone will come up and get started on that. And I will introduce 

everybody, and then we will get started. 

5

We have got a fantastic second panel and kind of looking at a 

broad range, obviously, of interests in the Universal Service Fund. 

For starters, we have Bob Williams, who is with the Oregon Farmers Mutual Telephone Company in Oregon, Missouri, which is in 

northwest Missouri; Johnie Johnson, who is with the Cellular Telecommunications Industry Association. He’s the Chief Executive Officer from Hays, Kansas. Edward Merlis, US Telecom Association, 

Senior Vice President. He obviously does government and regulatory affairs here in Washington, D.C. Ray Henagan with the National Telecommunications Cooperative Association. He’s also CEO 

and Manager of the Rock Port Telephone Company in Rock Port, 

Missouri. Don Schulte with the Missouri NEA from St. Louis, Missouri, obviously very interested in the educational aspects of the 

Universal Service Fund. Mr. Ed Black, President and CEO, Computer and Communications Industry Association here in Washington, D.C. Thank you all for being here, looking forward to this. 

Bob, we are going to start with you if that is all right. And what 

we will do is go through all of the witnesses, and then we’ll have 

questions after that. 

The timer system, the way it works is it’s five minutes on the 

testimony. There is a yellow light after one minute, but don’t worry 

about that so much. If you have got something to say, I want you 

to say it. I don’t pay a whole lot of attention to the lights. 

So we’ll go ahead and start. Bob? 

Mr. WILLIAMS. Thank you, Chairman Graves—and Ranking 

Member Barrow is not here—and members of the Committee. 

STATEMENT OF ROBERT WILLIAMS, OREGON FARMERS 

MUTUAL TELEPHONE COMPANY 

Mr. WILLIAMS. I am Bob Williams, President of Oregon Farmers 

Mutual Telephone Company in Oregon, Missouri and Vice President of External Affairs for American Broadband of Charlotte, 

North Carolina. I am also the immediate past Chairman of the Organization for the Promotion and Advancement of Small Telecommunications Companies, OPASTCO. I am here today to testify 

today on behalf of the Coalition to Keep America Connected. I 

thank you for the opportunity to testify before you. 

The Coalition to Keep America Connected effort is organized by 

Independent Telecommunications and Telephone Alliance, the National Telecommunications Cooperative Association, the Western 

Telecommunications Alliance, and OPASTCO, whose memberships 

include more than 700 small and mid-sized communications companies. Together, these companies serve millions of consumers and 40 

percent of the landmass across America. The coalition also includes 

a vast number of rural consumers, small businesses, and local policy-makers. 

The coalition’s mission is to ensure that all consumers have access to affordable telecommunications services and the latest technologies, no matter where they live. 

We are guided by three main principles. They are: fairness, affordability and access. Fairness means that urban, suburban, and 

rural consumers alike deserve to stay connected to their families, 

friends, and the world through communications technologies. Affordability means that technology is only useful when it’s affordVerDate 0ct 09 2002 18:12 Nov 14, 2006 Jkt 000000 PO 00000 Frm 00009 Fmt 6633 Sfmt 6633 G:\HEARINGS\28600.TXT MIKE
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able to consumers. Congress must ensure that all Americans can 

receive communications technologies at affordable prices. Lastly, 

access means that every American should have access to the latest 

modern technologies, no matter where they live. 

The Coalition has developed several universal service principles 

that we believe must be incorporated into universal service legislation. Those priorities are: the Universal Service Fund must continue to be an industry-funded mechanism and neither supported 

through general tax revenues—and I want to emphasize 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 broadband connections and all providers 

of voice communications, regardless of the 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 used to construct, support, and maintain networks to benefit all consumers and must not be a voucher, auction, 

or block grant-based. Support must be based upon a provider’s actual cost of service. And support must not be used to artificially 

promote competition. 

The coalition is very pleased that Congressmen Lee Terry, who 

was just here, and Rick Boucher have taken such a bipartisan leadership role through their legislation, H.R. 5072, which contains 

many provisions endorsed by the coalition that would modernize 

the highly successful Universal Service Program. 

In particular, the coalition supports the 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 new providers to evade contributing into the fund, even though they benefit from the resulting 

network upgrades and investment. 

Second, the coalition supports the provision to eliminate the Federal Communications rule that allows competitors to receive support based on the incumbent carrier’s costs. Requiring all Universal 

Service Fund recipients to receive support based on their own costs 

will increase program accountability as well as reduce the demand 

for funds. 

Third, the bill would implement stricter ETC designation requirements, such as demonstrating the ability to remain functional 

in emergency situations, satisfying customer service quality standards, offering local usage comparable to other telecommunications 

service providers in that service territory, and meeting the newly 

required broadband speed requirements. 

The coalition, however, does not support the provisions contained 

in the Terry/Boucher bill that would cap the high-cost Universal 

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 and is a disincentive to network investment. The cap 

will inhibit the bill’s goal of 100 percent broadband deployment. 

7

We believe the principles discussed here go a long way towards 

meeting Congressmen Terry’s and Boucher’s goal of limiting growth 

in the Universal Service Fund and make the proposed caps unnecessary. But we also feel as though there is a way that we can work 

to maybe find a cap that is acceptable. 

The Coalition to Keep America Connected stands ready and committed to working with all of you on these issues so critical to rural 

consumers. Thank you for the opportunity to testify today. And I 

will be happy to address any questions. 

[Mr. Williams’ testimony may be found in the appendix.] 

Chairman. GRAVES. Thank you, Mr. Williams. 

Mr. Johnson. 

STATEMENT OF JOHNIE JOHNSON, NEX-TECH WIRELESS 

Mr. JOHNSON. Good morning. I appreciate the fact, Chairman 

Graves and honorable Chairman Barrow, that I am here as a rural 

telecom provider and also a rural small business person that I am 

here today in front of the Small Business Committee talking about 

something that is very important to the long-term sustainability of 

our business. 

I am Johnie Johnson. I am CEO and General Manager of NexTech Wireless, which is a wireless service provider providing wireless coverage in rural Kansas. We’re based in Hays, Kansas and 

owned by a group of independent local exchange carriers. 

Nex-Tech Wireless launched its wireless services in October 2005 

and now serves approximately 9,000 wireless customers throughout 

western and central Kansas and eastern Colorado. And we currently employ about 50 people in the central and western Kansas 

area. The vast majority of our service area is rural and very 

sparsely populated. Some of those cities included in that area are 

Hays; Hoxie, Kansas; Rexford; Colby; Victoria, just to name a few. 

In the Telecommunications Act of 1996, Congress recognized that 

the future of rural America depends largely on deployment of wireless telecommunications infrastructure that allows consumers to 

have choices in advanced services that are similar to those available in urban areas. 

By permitting wireless carriers to access Universal Service Funding to construct network infrastructure in areas that would not 

otherwise support the investment, Congress has opened the door to 

rural consumers having the health, safety, and economic development opportunities that are critical to bridge the technology gap 

between urban and rural America. 

As a member of CTIA and the Rural Cellular Association, we 

welcome the opportunity to provide comments on the draft bill by 

Congressmen Lee Terry and Rick Boucher. This testimony will examine the current USF system and explore ways in which it can 

be improved. In particular, Nex-Tech Wireless’ ability to participate 

in the Universal Service Fund high-cost program will bring overwhelming benefits to the rural residents we serve. My testimony 

today will highlight some of those benefits, dispel some of the outstanding myths concerning the USF high-cost fund, and make policy recommendations about universal service we believe will benefit 

rural communities. 

8

One point is under the current system, rural wireless consumers 

who contribute to the fund are not seeing the benefits that they 

want and they deserve. Wireless consumers now contribute roughly 

$2.5 billion per year to the federal universal service system, or 34 

percent of the total fund. Wireless carriers that are designated as 

competitive eligible telecommunications carriers, or CETCs, have 

drawn approximately $1 billion in aggregate since 1996. 

Incumbent local exchange carriers, ILECs, draw roughly $3 billion per year, or roughly 50 percent of the total fund, to maintain 

networks that are not growing. In the aggregate, we believe that 

the consumers have spent roughly $19 billion since 1996 to subsidize high cost support to wireline networks. Consumers served by 

rural wire line carriers pay in only 3.8 percent of the total fund. 

Bottom line, Congress must make it a priority to provide federal 

high-cost support to fund wireless infrastructure development for 

rural consumers who desperately want high-quality networks. The 

health, safety, and economic development benefits that flow from 

investing in mobile wireless communications infrastructure are 

precisely what universal service should be funding in rural America. Wireless is truly the answer, not the problem. 

CETCs are demonstrating to the states that support is being 

used to build infrastructure in areas that would not otherwise see 

investment. Anybody who uses a wireless phone services in rural 

America understands the huge difference in service availability and 

service quality compared in urban areas. 

I know many of you as you are out visiting your constituents, you 

like the convenience of your Blackberry and having mobile access 

to your internet and staying in contact with your offices. And you 

understand that a lot of rural areas that, Chairman Graves, you 

serve don’t have that same luxury as you would have here in D.C. 

or St. Louis or Kansas City. With the Universal Service Fund, we 

are able to bring that technology out to the far most rural areas. 

CTIA and RCA members understand how important it is for consumers to have access to mobile wireless services. CTIA members 

and RCA members have constructed new cell sites serving underserved and unserved communities in their ETC service areas that 

would not have been constructed without support. 

Nex-Tech Wireless is a great example of that. We are a green 

field bill. As I mentioned earlier, we launched our company October 

of this past year and have approximately 9,000 total subscribers in 

just a short 6-month time frame. 

The vast majority of our states now require CETCs to report how 

support is being used. Vermont, West Virginia, and now Minnesota 

provide good examples of states that have gotten the reporting requirement right. 

Bottom line is wireless carriers are demonstrating that their support is being used to drive infrastructure investments in rural 

areas that would not otherwise receive such investment. Again, 

wireless is the answer, not the problem. 

The third point, the current system of providing support requires 

wireless carriers to make efficient investments. Wireless carriers 

can only get support after two factors: one, we build facilities; and, 

number two, we get customers. Wireless carriers are not guaranVerDate 0ct 09 2002 18:12 Nov 14, 2006 Jkt 000000 PO 00000 Frm 00012 Fmt 6633 Sfmt 6633 G:\HEARINGS\28600.TXT MIKE
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teed a return. So if we make a poor investment and only get a few 

customers, we are punished. 

Support to wireless carriers in all areas is currently capped by 

the number of available customers in a particular area. In states 

like Washington that have targeted support to rural areas, several 

wireless carriers are fighting for a limited pool of support dollars 

in rural wire centers but receive no support for serving urban wire 

centers. 

The bottom line is wireless carriers are concerned that all carriers be accountable. Moreover, consumers should only subsidize efficient investments. Again, wireless is the answer, not the problem. 

Our last and final point is consumers are increasingly demanding 

wireless services and deserve access to the services they have paid 

for. In 2006, businesses will spend more on wireless services than 

on other wire line according to a study released in January by InStat. It is estimated that the demand for wireless data will grow 

at an average of 18 percent per year through 2009. 

The bottom line is Congress should consider policies that guarantee rural communities keep pace with urban areas in the technology race, much like the example I gave with the Blackberry, 

being able to use that in the rural areas. Again, wireless is the answer, not the problem. 

That concludes my testimony. I would be happy to take any questions. 

[Mr. Johnson’s testimony may be found in the appendix.] 

Chairman. GRAVES. Thanks, Mr. Johnson. 

Mr. Merlis. 

Mr. MERLIS. Thank you, Mr. Chairman. 

STATEMENT OF EDWARD MERLIS, U.S. TELECOM 

ASSOCIATION 

Mr. MERLIS. I am Edward Merlis, Senior Vice President, Government and Regulatory Affairs, of the United States Telecom Association. On behalf of our more than 1,200 innovative member companies, ranging from the smallest rural telecoms to some of the largest corporations in the U.S. economy, I want to thank you for this 

opportunity to discuss the need for universal service reform. 

Our member companies offer a wide range of services across the 

communications landscape, including voice, video, and data over 

local exchange, long distance, wireless internet, and cable networks. We are united in our belief that it is time to update the nation’s communications laws to reflect the dramatic technological 

and marketplace changes all consumers have witnessed in recent 

years. 

In late 2004, our board unanimously adopted twin principles that 

we believe should serve as the foundation for updating our nation’s 

telecom laws: one, ensuring a strong and sustainable universal 

service system to provide affordable, reliable telecommunications 

for all Americans in the Twenty-First Century; and, two, establishing consumer-controlled, market-based competitive environment 

by eliminating government-managed competition. 

The current universal service funding system is eroding at a 

rapid pace and must be reformed. These key steps will help 

strengthen and preserve universal service: broaden the base of conVerDate 0ct 09 2002 18:12 Nov 14, 2006 Jkt 000000 PO 00000 Frm 00013 Fmt 6633 Sfmt 6633 G:\HEARINGS\28600.TXT MIKE
10

tributors; target recipients carefully; and provide universal service 

support to networks in order to speed broadband deployment, without placing an undue burden on fund contributors. 

In your letter of invitation, you asked that we comment on several questions addressed in legislation recently introduced by Representatives Terry and Boucher. And I am pleased to do so. 

First let me say that USTelecom applauds the comprehensive approach to universal service taken in H.R. 5072. On the contributions side of the ledger, the bill has sound policies that should improve the stability of universal service funds by: assessing intrastate revenues; allowing the FCC flexibility to assess numbers, revenues, or both; assessing VoIP; and assessing broadband. 

Broadening the base of contributors to include intrastate services, cable modem, and VoIP will help to ensure that Universal 

Service Funds are available to meet the important goal of making 

voice service available to all Americans. 

On the distribution side of the ledger, the bill takes a number 

of prudent steps to ensure universal service support is better targeted. These include: utilizing actual costs as the basis for universal service support; increasing support for high cost areas for 

non-rural companies; imposing greater accountability for use of 

funds; making broadband eligible for Universal Service Funds; and 

requiring communications providers that originate traffic to provide 

sufficient identification in order to stop phantom traffic. 

The bill also fixes a problem with the application of the Anti-Deficiency Act. Another provision that should be of particular interest 

to this Committee would prohibit the FCC from restricting universal service support to a single, primary connection to the public 

telephone network. 

Our companies construct and maintain networks in some of the 

most expensive service areas in the country, characterized by low 

population densities and difficult terrain. A primary line restriction 

would undermine their ability to sustain and to modernize these 

communication networks. And the cost of doing business in those 

areas would skyrocket, particularly for small businesses. 

Mr. Chairman, we believe offering video over our broadband networks will be a key driver for broadband deployment across the nation. As local telecom companies deploy video services, broadband 

penetration rates will grow and, thus, provide the benefits of 

broadband deployment to ever-increasing numbers of citizens and 

small businesses across the country. 

That is why USTelecom is committed to establishing a consumercontrolled competitive marketplace for video and eliminating unnecessary and burdensome government barriers to advanced services. 

As Congress moves toward updating our nation’s telecom laws, 

no segment of our country has more to gain and more at stake in 

this debate than rural America. It is critical that we have policies 

that encourage investment and head-to-head competition throughout the country, policies that speed new services, choices, and value 

to consumers while upholding vital social objectives that remain 

important to the nation, chief among them our commitment to ensuring affordable, reliable access to a dial tone for all Americans, 

11

an objective that is met through a sustainable universal service 

program. 

Again, Mr. Chairman, thank you for the opportunity to appear 

today. I would be pleased to respond to any questions you may 

have. 

[Mr. Merlis’ testimony may be found in the appendix.] 

Chairman. GRAVES. Thank you, Mr. Merlis. 

Raymond Henagan. Thanks, Ray, for coming in. 

Mr. HENAGAN. Thank you, Mr. Chairman. 

STATEMENT OF RAYMOND HENAGAN, ROCK PORT 

TELEPHONE 

Mr. HENAGAN. Good morning. I am Raymond Henagan, CEO and 

Manager of Rock Port Telephone Company in Rock Port, Missouri. 

I am here today to testify on behalf of the National Telecommunications Cooperative Association. We thank you for this opportunity 

to testify. 

Rock Port Telephone serves three exchanges in northwest Missouri, 189 square miles. It’s 1,823 access lines, or about 9.6 customers per square mile. In 2005, we lost over 7 percent of our access lines. This is the first time in the history of Rock Port our local 

service actually went down this much. We have been losing access 

lines but not at the rate of seven percent. In contrast, to Washington, D.C., there are approximately 16,000 access lines per 

square mile. There are vast differences between the numbers of 

subscriber that we service. 

Rock Port Telephone is a full-service provider. We provide local, 

long distance, dial-up, and broadband internet. I am proud to say 

that as of the end of 2005, we serve 72 percent of our territory with 

the DSL services. 

Mr. Chairman, to answer your question directly, we believe universal service needs to be reformed. There are many elements in 

the H.R. 5072, the Universal Service Reform Act of 2006, that are 

the exact steps that need to be taken to ensure the sustainability 

of the critical fund. 

Let me take a moment to mention some of the most critical elements that the policy-makers must keep in mind to reform the Universal Service Fund. The Universal Service Fund to construct, 

maintain, and upgrade the network to benefit all consumers. 

In the infancy structure of telecommunication that larger companies decided they didn’t want to serve the partially populated 

areas, the rugged terrain, they went ahead and served only the 

larger. It left the rural companies or the independent companies to 

serve out there in the high-cost areas. 

Universal service was set up to help us serve these areas. And 

we have built networks out there today to sustain that and give 

them good voice-grade services. 

The second thing is the base of the contributors must be expanded to include all providers who benefit from the network. 

Broadening the base of contributors to include all communications 

providers is vitally important to sustainability of the Universal 

Service Fund. The Universal Service Fund is wholly funded 

through the telecommunications industry. No federal appropriated 

money is used in this. 

12

All service providers must benefit from the robust national network infrastructure. The current structure of the Universal Service 

Fund enabled us to achieve an impressive 94 percent penetration 

rate as of today. In order to achieve those same penetration rates 

with broadband or for whatever new technology will be offered 

after broadband, we need to modify the existing regime to broaden 

the base and expand the fund to include broadband services. Support must be based upon the provider’s actual cost and not to be 

used to artificially incite competition. 

Requiring all Universal Service Fund recipients to receive support based on their actual costs will increase the program’s accountability. Rock Port, as small as we are, we pay into the fund. 

Everybody that is using the service should pay into the fund. 

Additionally, many rural areas in our nation can’t support more 

than one gas station, grocery store, or other commodities, let alone 

multiple communications providers out there. 

The Universal Service Fund must not be capped. Unfortunately, 

this is something that is not in the House 5072. We believe that 

is very vital and very important on that. 

Again, I would like to restate my support and NTCA’s support 

for the Terry/Boucher bill. We believe it is an excellent start to reform our nation’s universal service policy. We very much agree 

with many of the provisions in the bill, such as: expanding the 

scope of the Universal Service Fund to include broadband, broadening the base of contributors to the fund, tightening up the ETC 

status process, eliminating the identical support rule, permanently 

exempting the fund from the Anti-Deficiency Act, and eliminating 

the parent trap rule. We would like to work with the Representatives Terry and Boucher and members of the Committee to remove 

the cap on the fund. 

Thank you again for allowing me to testify. 

[Mr. Henagan’s testimony may be found in the appendix.] 

Chairman. GRAVES. Thank you, Mr. Henagan. 

Don Schulte. 

STATEMENT OF DON SCHULTE, MISSOURI NEA 

Mr. SCHULTE. Good Morning, Chairman Graves. Thank you and 

the other members of the Subcommittee for allowing me to testify 

today about the benefits of the e-rate program and the need to ensure that it remains vital and stable. 

My name is Don Schulte. I am currently a high school social 

studies teacher at Pattonville High School in Maryland Heights, 

Missouri. I have been a teacher for 19 years. And in that time, I’ve 

seen enormous changes in the technology infrastructure of our 

schools and the ways in which we use technology to teach, enhance 

curriculum offerings, strengthen parental involvement, and improve administrative efficiency. 

Back in the dim ages, when I began teaching, there was not a 

single computer lab in the school. In 1992, we established our first 

lab with 12 computers. The students had to sit two students per 

computer, two students per computer. There was one AOL account 

that I could use to show students what the internet looked like. 

Now every classroom has at least one computer in it, and every 

computer is wired to the internet. We have five computer labs for 

13

technology-related courses. More and more content is Web-based 

these days, which makes the maintenance of connectivity not a luxury but a necessity in today’s schools. 

Thankfully, we are beginning to see more and more textbooks 

placed online. This helps combat a significant trend of back and hip 

injuries in our young people caused by carrying overweight 

backpacks full of books. My students have offered, by the way, not 

to carry those books. Anyway, that’s different. We incorporate 

internet-based research skills into our lesson plans and homework 

assignments. 

My school district is a suburban district with many course offerings. However, there are places in our state, in Missouri, that can 

only, only, offer a rich, well-rounded curriculum by using distance 

learning and internet connectivity. In fact, one of the first distance 

learning courses I remember was a Japanese course being offered 

online. 

Currently, for instance, there are four school districts in southwest Missouri can only offer physics via distance learning. With the 

recent push in the business community and by the administration 

to place more emphasis on math and science, this simply will not 

be possible in many rural areas without internet connectivity. And 

I know that this is typical of rural areas across Missouri and across 

the country. 

Parents have more ways to get involved in their children’s education due to the e-rate program and what it has allowed our 

school districts to do. For instance, in Pattonville, parents can log 

onto a secure database to check their children’s grades on assignments, check whether they attended a class, check whether they 

turned in their homework, and what the current class assignments 

are. 

Routine, administrative functions are also made more efficient by 

the power of the e-rate program. Library card catalogs are now all 

electronic, as is the rest of the inventory of the library. So I can 

sit in my classroom and find out whether a particular book or resource material is currently in the library or whether it’s been 

checked out. 

My school district receives roughly $71,000 per year in e-rate 

funds. These funds help us pay for our T-1 lines, our emergency 

and alarm lines, and our long distance. Our superintendent’s office 

indicates that without the e-rate funds, we would also likely loose 

access to library and media services offered through a company 

called MoreNet. 

Given the importance of this funding, I am concerned, however, 

about the viability of the Universal Service Fund, which funds the 

e-rate program. As you know, the Telecommunications Act of 1996 

requires traditional long-distance carriers to pay into the fund. But 

as other types of service increases, such as wireless and voice-over 

internet protocol, the stability and long-term viability of the fund 

is jeopardized. 

That’s why I along with the 2.8 million members of the National 

Education Association, support the Terry-Boucher bill, H.R. 5072, 

to ensure that e-rate funding continues to flow to schools and libraries across the country. 

14

As I have indicated, internet connectivity is no longer a luxury. 

It is an absolute necessity if we’re going to adequately prepare our 

young people to compete in the Twenty-First Century workforce. 

Thank you very much for allowing me to provide an educator’s 

viewpoint today. 

[Mr. Schulte’s testimony may be found in the appendix.] 

Chairman. GRAVES. Thanks, Mr. Schulte. 

Mr. Black. 

STATEMENT OF ED BLACK, COMPUTER AND 

COMMUNICATIONS INDUSTRY ASSOCIATION 

Mr. BLACK. Good morning, Chairman Graves, members of the 

Subcommittee. I am pleased to come before you today to discuss 

the pressing issue of universal service reform and Congressmen 

Terry’s and Boucher’s Universal Service Reform Act of 2006. 

I am President and CEO of the Computer and Communications 

Industry Association. We’re an association that represents a very 

wide range of hardware, software services, computer, telecom, 

internet companies, total revenues about $250 billion. So while 

we’re involved in the building process, we’re usually involved in the 

use of broadband in this country as well. 

The century-old concept of universal service reflects a very noble 

and economically legitimate goal of promoting ubiquitous access to 

affordable communication service for all Americans, regardless of 

their geographic location. This commitment helped establish a communications network on which a social and economic fabric of the 

Twentieth Century was know. 

However, in the Twenty-First Century, we’re now witnessing increasingly swift and exciting changes in the technology of communications. The ’96 Telecommunications Act sought to codify, preserve, and expand universal service. However, technological convergence has shattered the underlying assumptions of the act. Cable 

companies now offer voice. Phone companies are ready to roll out 

video services. 

The telecommunications landscape has been dramatically altered, but the Universal Service Fund has not been changed. It has 

not adapted to encourage the more efficient, higher-quality technologies that could provide an exciting array of new services. It remains, instead, focused on promoting old copper wire telephone 

networks. 

Traditional telecommunications services are migrating from old 

circuit switch networks to new and advanced internet protocol networks. This new technology can reduce the cost of providing services, especially in high-cost areas, and provide more advanced services, such as high-speed internet access. Access to advanced information services is essential for sustained economic development. 

A small business in rural Missouri, Georgia, Oklahoma, or Alaska with access to a reliable high-speed internet connection can 

market and distribute their products globally as easily as a competitor in a large city. 

The industrial revolution concentrated economic growth and expansion in large urban areas, but the information revolution makes 

physical location much less relevant. A correctly reformed Universal Service Program can help usher in a new age of prosperity 

15

and growth for small businesses everywhere, especially rural America. 

Universal service reform proposals tend to fall into two camps. 

One side sees universal service as a legacy system whose time has 

passed and seeks to gradually reduce the size and scope of the fund 

over time with an ultimate goal of its eventual termination. The 

other wishes to expand contribution base to a variety of new way 

communication services and provide new subsidies targeted at advanced services. 

We believe we can both modernize the distribution mechanism 

and subsidize new technologies, not legacy ones, while carefully expanding the contribution base in a completely neutral manner 

while limiting the unchecked growth of the fund. 

The perverse market distortions created by the current fund need 

to be corrected. Universal Service Funds were designed to support 

basic telephone service provided over a twisted-pair networks and 

exclude advanced services and networks, such as fiber optics and 

broadband internet access. 

For decades, well over 90 percent of U.S. households have had 

basic telephone service. Thus, the fundamental goal of basic service 

has been met and been met for a while. Only about 20 percent of 

U.S. households, however, have broadband internet access. And the 

U.S. ranks about 12th or lower in the world in terms of broadband 

penetration. 

To the extent the USF funds can be applied to support the development of rural broadband services, they are poorly targeted and 

inefficient. Many rural carriers actually realize a reduction in USF 

funding when their customers take broadband service. USF subsidies have lost their focus and have been morphed into a set of entitlement payments to a large or to a small group of largely rural 

income and telephone companies. 

The application of other USF funds has created certain bizarre 

market distortions, one we call the Vail effect, where the largest 

portion of USF subsidies service the high-cost, typically rural 

areas. This means towns such as Vail, with very high real estate 

prices and some of our wealthiest citizens, is subsidized at the 

same rate as a poor Appalachian community or poor rural farm 

towns in Kansas. 

We have also seen what we call the Nevada effect, in which the 

high-cost support funds are distributed according to total population on a statewide basis. So for a state like Nevada, which is extremely rural in most of its area but has two large urban areas, 

the statewide averaging means little or no support is assigned. As 

a result, a rancher in a very rural part of Arizona or other state 

would not be subsidized by USF but in the same type of geographic 

area in Montana would be. 

We strongly applauds Congressmen Terry’s and Boucher’s legislation. It’s a comprehensive bill designed to reform USF. Specifically, it updates the fund to promote broadband services, attempts 

to cap the fund to at least limit unchecked growth, and imposes a 

greater accountability for the use of fund monies. As the House 

moves forward in crafting the universal service reform, this bill 

could serve as a good framework for more extensive reform. 

16

We do have a few specific concerns I would want to mention. One, the current fund is running a $700 million surplus from 2004. 

Any metric used to cap the fund should employ the amount of 

funds used in the previous year, not funds collected. 

An eligible telecommunications carrier can only be a carrier that 

uses its own facilities. The vast majority of support from the fund 

will, therefore, be directed only at ILECs. We think some flexibility 

to experiment with other distribution mechanisms is worth doing 

at the state level. 

We need information on the costs of building and maintaining a 

network in order to curb the growth of the fund and target the 

funds properly. That information for anyone who cares about efficient government spending is essential. And, yet, we don’t have any 

requirement to gather that kind of information right now. 

Finally, the targeting in the bill by wire centers is a very good 

approach to dealing with what we call the Nevada effect, but the 

Vail effect still is not actually addressed adequately in the bill. And 

we think you need to add, in addition to the wire center approach, 

some kind of a means test. 

In conclusion, we want to stress that we care deeply about the 

important issues of communications ubiquity and economic competitiveness, both domestically and internationally, but unless restructured in the new context of today’s rapidly evolving telecommunications and technology markets, universal service in 

America threatens to retard the very objectives it has traditionally 

served. We think correcting the disconnect between universal service policy and economic imperative to create a ubiquitous American 

broadband infrastructure is a major policy and legislative challenge 

that we cannot afford to not meet. 

Thank you very much for the chance to testify and for your leadership in this area. 

[Mr. Black’s testimony may be found in the appendix.] 

Chairman. GRAVES. Thank you. 

I’ve heard mention the cap now three times, Mr. Williams, Mr. 

Henagan, and Mr. Black. You have all mentioned it. Can you talk 

to me a little bit more about that? You mentioned the cap is obviously designed to keep the fund from growing too much, but we 

also had testimony about removing the cap. In fact, Mr. Williams 

said we might be able to find a cap that is accessible. Could you 

explain that a little bit more and what would be acceptable? 

Mr. WILLIAMS. Let me take a shot at that. And I think what I 

said was that the cap is antithetical to the scope of the bill that 

says we want to get a ubiquitous broadband network out there. 

And if there’s a cap on the fund, there may not be enough dollars 

there to get the broadband network out there. 

What I was referring to—and we have been working with Congressman Terry and Congressman Boucher trying to come up with 

some type of a cap that understanding that due to the politics involved, there may need to be a cap in whatever the House comes 

up with because of Chairman Bardin’s opposition to USF. 

And a couple of things we thought about as the fund, Universal 

Service Fund, as you know, now is capped. And as costs have 

grown and in some cases in the base of people receiving those monies has expanded companies are no longer receiving their actual 

17

costs based on that they should be receiving because of the cap. So, 

in other words, in some cases, the monies they’re receiving have 

been going down, maybe a reindexing of the fund to make sure that 

everyone is receiving the dollars that they should be, including the 

CETCs. 

The wireless carriers, et cetera, who are in the fund, as I said 

in my testimony, if they receive dollars based on their own costs—

and I think we can go along with that. 

So that is just a couple of the ideas that we had when we were 

talking about it. 

Mr. HENAGAN. What I was talking about was capping of the 

fund. I believe that if we take the right accountability of the fund 

today, it will seek its own level. If everybody reports on their own 

cost and we have some type of accountability of it, it will have adequate costs into the fund without a cap on it. 

Mr. BLACK. I guess I would point out that the percentage, if you 

will, the fund is, in essence, a tax on providers. It has gone from 

its inception, I think, of about 4 percent up to about 12 percent. 

And some people are predicting that it may go in a few years up 

to about 17 percent of revenues of people inputting. 

We want the fund. We want it to be used. We want it to be directed properly. But it is dangerous to have something which is 

just always expanding and taking more. The telecommunications 

industry at this point is at least close to being, if not the most, tax 

segment of the economy. And, yet, it has such dynamic potential. 

So we’re nervous about we’re much better when we put good cost 

accounting, when we’re making sure it’s being well-used, but at 

some point the level of tax, in essence, is high enough. If we need 

extra money, frankly, we would be willing to have general revenues 

go into supplement if you need more. 

The industry itself, the core industry, here should not be bearing 

a burden beyond a certain reasonable level. And I think we’re concerned that it has seemed to have just been able to grow, mushroom its growth. And some kind of cap makes sense 

Chairman. GRAVES. Let’s talk about expanding it more, paying 

into it. And I’ll just direct this to everybody. Can somebody give me 

an idea who at this point is not paying in? Obviously I think everybody has kind of mentioned expanding the folks that ought to be 

paying into it. And that is going to have an effect on the fund. But 

I will kind of throw that out there. 

Give me an idea of who isn’t at this point and how much it could 

be expanded. Bob? 

Mr. WILLIAMS. Well, I mean, just a few that come to mind right 

now are VoIP providers, cable providers, broadband providers in 

some cases depending on what type of broadband. Those are three 

or four that come to mind, anybody that uses the network. And all 

those people use the network. 

I might say here one of the things that concerned me about what 

Mr. Black had to say was he was talking about how we have no 

more need for this wired infrastructure out there because of the 

internet and the broadband that is available in these areas. Well, 

I don’t know how it gets there if we don’t have a network to take 

it over. 

18

Mr. JOHNSON. And, Chairman Graves, one thing that I would 

like to clarify is that wireless carriers don’t pay their fair share 

into the high-cost fund. Wireless consumers drew just over 10 percent of the total fund, approximately 330 million, but we now contribute over 34 percent to the total fund, or about $2.6 billion per 

year. 

Mr. WILLIAMS. And, if you’ll notice, I didn’t mention wireless carriers. 

Mr. JOHNSON. Okay. I just wanted to clarify any myth, though, 

that may be out there. 

Chairman. GRAVES. We’re kind of moving through, but you might 

expand it. How much could the fund be expanded if we opened it 

up? What is it going to do to the fund? Anybody can answer again. 

Mr. WILLIAMS. Well, I think if you put it on—a couple of things 

that it does in this bill is it talks about when Mr. Black again is 

talking about the contribution level going to 17 percent, that is on 

interexchange carriers a percentage of their revenue—it’s 17 percent—because that revenue base continues to shrink as long distance and interexchange carrier traffic goes down. And this network is used for all of these other means of communications that 

are not being there. 

So I think part of the thing—and in the bill, it says, ‘‘Connections: IP Addresses,’’ et cetera. If you take the amount of all of 

those — and I’m talking off the top of my head now, and don’t hold 

me to this. But I think if you fully funded today’s fun on a per-connection, per-IP address, per-number basis, it may be a dollar per 

number or per connection. 

So when you put it in those things and you talk about all the 

connections to our network out there, I think it becomes a much 

more manageable way of doing it. 

Chairman. GRAVES. Mr. Henagan? 

Mr. HENAGAN. Mr. Chairman, one thing I would like to mention 

on paying into the fund is phantom traffic. Today Rock Port Telephone gets 17 percent today coming in as phantom traffic. I cannot 

track that. 

Chairman. GRAVES. Expand on that. Talk to me about phantom 

traffic. 

Mr. HENAGAN. Okay. Phantom traffic is—and I’m going to use 

towns in Missouri as how it gets into. Today people out of Rock 

Port, we get our traffic from Kansas City, goes into Stanberry. It 

goes into Maryville, Missouri. 

My tandem is Maryville. Out of Maryville, I have what we call 

common trunks, which means all of my traffic goes together, twoway trunks. Everything that goes in and out of Rock Port is on 

common trunks. I have 117 common trunks. Out of that, the only 

way I can record it is that I get sufficient information to know 

what carrier it is over these common trunks. 

Somebody is today stripping off what we call kit codes or how I 

know who to bill for it. They strip off the kit codes or strip off the 

billing data off of it where I cannot get it. So whenever I get the 

traffic and I record it in my switch, 17 percent my traffic for terminating in Rock Port, I cannot bill to anybody. 

So we have to have accountability out there today so that we 

know who we need to bill. If we could keep on expanding and keep 

19

on doing things as far as bringing more traffic in and opening this 

up without the right accountability, still it’s going to be expanding 

up to a greater where we will have what we call phantom traffic, 

where there is no accountability to it. Does that— 

Chairman. GRAVES. How widespread is that? You talked about in 

your particular area, but how widespread is that, phantom traffic? 

Is it happening everywhere? 

Mr. HENAGAN. In Missouri. I have talked to other companies in 

Missouri, and it is happening in Missouri for sure because today 

we are getting traffic in without the right accountability on it to 

be able to do it. 

Mr. WILLIAMS. I think it is an issue throughout the country. I 

know Mr. Merlis has probably got something to say about this. 

Mr. MERLIS. Mr. Chairman, if I may, we have filed a petition 

with the Federal Communications Commission calling upon the 

commission to impose a rigorous tracking methodology in order to 

ensure that this phantom traffic is no longer phantom traffic. 

The telecom carrier receives revenues from three sources: the end 

user; inter-carrier; that is, the traffic which needs to be tracked 

and billed; and universal service. If the traffic is not properly identified and the phone company cannot bill the phone company that 

sent the traffic, then the costs have to be borne by someone else 

in order to remain whole. 

It is essential that the phantom traffic problem be resolved. Otherwise, increased demands will be placed on the Universal Service 

Funds, demands which at the current rate in the current environment further erode its long-term sustainability. 

Mr. BLACK. Mr. Chairman, if I could, we agree that having accounting and costs in tracking this and we recognize phantom traffic is a problem, but I should point out it is really not. It’s an intercarrier issue. 

What we are fundamentally talking about is the amount taxed 

to the Universal Service Fund itself. And, frankly, from one angle 

or perspective, what happens inter-carrier is very important to 

companies, but it is not that important in what amount of service 

is delivered to citizens and does not affect how much money goes 

into the fund. 

I think those are really the core issues still that are out there: 

who pays into the fund, for whom does it go, what formula is used. 

Mr. HENAGAN. Mr. Chairman, I believe that if we have everybody 

paying into the fund, the percent on the fund is going to go down, 

which I’m at the percent going up to 17 percent, but then if we 

have everybody paying with accountability or phantom traffic for 

the VoIP, for the cable, for all the others, that percent is going to 

go down. So out of this, if we get everybody paying in the right 

amount, it will seek its own level. And it will have a level that everybody will be pleased with, I believe. 

Chairman. GRAVES. I don’t want to completely dominate. Mr. 

Sodrel, do you have questions? 

Mr. SODREL. Thank you, Mr. Chairman. I guess first I would just 

like to say there was a 100-year-old gentleman in our neighborhood. On his birthday—he lived in a rural area. And they asked 

him what was the most important thing that happened in his lifetime that made life better in the rural area. And he said highways, 

20

the fact that they could get to market and the markets could get 

to them. I think being on the super highway, the information super 

highway, is going to be important for rural America in the coming 

century. 

This really is interesting to me, Mr. Henagan, about this phantom traffic. I was in a bus business and trucking business before 

I got here. Obviously I wasn’t in the communications business. If 

somebody used one of my vehicles or my facility and didn’t pay me, 

I would really be upset. As a matter of fact, I look at that as theft, 

at the very least trespassing. 

What is the penalty for somebody? If somebody sent phantom 

traffic on your trunk line and you knew who the person was, what 

is the penalty? 

Mr. HENAGAN. Today because we have common trunks, I do not 

have a tandem and I have no direct connections with me, I cannot 

do anything with that traffic today. I cannot cut them off. I can’t 

do anything. They can send phantom traffic to me today, and I 

have to accept it because it’s coming over common trunks as they 

can send it in and I cannot put it in my switch to deny it because 

it is already in me and it’s part of the system, the public switch 

network. 

So somebody at Kansas City or somebody in Dallas can take it 

out, strip it out. And immediately it goes on the public switch network. And it gets delivered to me, and there is nothing I can do 

about it. 

Every morning we record all the minutes that we have first 

thing. 8:00 o’clock every morning, we record every minute from the 

last 24 hours. We have been doing this since 1999. 

I have all of the records involved of all of the phantom traffic. 

And we look at what we are losing on a daily basis and a monthly 

basis whenever we sum it up to see what we are losing. 

And out of that, there is nothing I can really do. The theft is 

there. There’s no doubt. But because it’s common trunks, unless I 

go in and put a tandem in where I can have direct trunks come 

in to me and each carrier come in—and it’s not feasible to do that 

because I have 1,800 access lines. Tremendous costs would go into 

the fund to do it. 

Mr. SODREL. So, even if you knew somebody was doing this to 

you, you don’t really have any recourse? 

Mr. HENAGAN. That’s correct. I cannot cut them off. 

Mr. SODREL. You know, that not only affects the Universal Service Fund. I mean, that affects the prices people are paying in the 

rural area for the service. If you had 17 percent more traffic, obviously you wouldn’t have to charge as much per minute for the existing customers. 

Now, we a little earlier talked about the subsidies distorting 

markets. And, frankly, subsidies always distort markets. I mean, 

by their nature, they distort markets. So the question is, how do 

we want to distort the market? In what direction do we want to 

distort the market? 

And I have always had an attitude the companies are not taxpayers or tax collectors. The ultimate payer is the customer of the 

company that’s paying the tax. I mean, if you follow the string back 

to the end, it’s actually the customer who pays the tax. So everyVerDate 0ct 09 2002 18:12 Nov 14, 2006 Jkt 000000 PO 00000 Frm 00024 Fmt 6633 Sfmt 6633 G:\HEARINGS\28600.TXT MIKE
21

body who uses the communications network anyplace is paying a 

tax for this Universal Service Fund. 

So it seems to me that trying to find the common ground here, 

the goal being to keep rural people on the information super highway, the goal being to make sure they have access to markets and 

markets have access to them. And in doing that in a fashion that 

they can afford ought to be the goal, it seems to me. We ought to 

be able to get all of the parties together and figure out how we are 

going to do that. 

Mr. Chairman, I was just amazed that somebody could basically 

steal your service and there’s no recourse. You know, it’s mind-boggling to me. 

And I understand. See, I was in the service business as well. 

Sometimes people get the attitude when they steal service they’re 

not really stealing because it’s intangible. They can’t put their 

hand on it. You know, if you go in the grocery store and you come 

out with 12 apples and you only paid for 6, it’s tangible. People 

know they stole six apples. When you’re in the service business, it’s 

a little more difficult to convince people they stole something. 

You know, if they agreed to pay for 100 miles and they took 120 

miles, it’s kind on intangible. They really couldn’t see it, touch it, 

and feel it. But they are shoplifting. And that really troubles me. 

There ought to be some accountability in this system. 

I don’t really have any further questions, Mr. Chairman. Thank 

you. 

Chairman. GRAVES. Mr. Merlis. 

Mr. MERLIS. Thank you, Mr. Chairman. 

Congressman, just to amplify what Mr. Henagan said, this is a 

situation which is very, very grave for the industry. As technology 

advances, there could be more of this forthcoming. And, as opposed 

to being in other services business—you mentioned the trucking 

business—you know from whom you receive that truckload. 

What Mr. Henagan was describing is we don’t know from whom 

we received that call in order to bill the person. So there is no remedy at law or in any other fashion other than to put the call 

through because you’re not going to deprive the consumer of the 

call that had been made to him. And you’re stuck with the bill. 

That’s really what it comes down to. 

The commission must act, the FCC must act, in this area in 

order to impose appropriate requirements and appropriate remedies so that phantom traffic is diminished. Now, there could be inadvertent dropouts of some of this information, but clearly at this 

level it is a conscious effort by some people in this network system 

to strip out the information. 

Mr. SODREL. Thank you, Mr. Chairman. I don’t have any further 

questions. 

Chairman. GRAVES. Changing gears a little bit,—and I do want 

to ask Mr. Schulte because I can specifically deal with Missouri. 

What kind of service is there from the Universal Service Fund for, 

say, Missouri. I mean, how much do we get in terms of we have 

a state that has some very rural areas. 

And we obviously have some very urban areas, St. Louis and 

Kansas City for starters, and then, of course, some pretty affluent 

areas in some of the smaller cities around. But just how much do 

22

we get? You know, how much bang for the buck is there in a state 

like ours? 

Mr. SCHULTE. Well, I was given advice, if I were asked a question I didn’t know the answer to, to say, ‘‘We’ll get that to you in 

writing.’’ And I may just have to fall back on that. 

I can give you something other than an exact number. We use 

something called MoreNet. Most every school in this state does. 

And the money that we receive helps pay for that and helps subsidize it, especially for rural districts. 

You know how rural some of our districts are. I mean, it’s miles 

and miles before you get to a school building. And there’s no way 

they’re going to get the access they need without some kind of subsidy from somewhere. 

Chairman. GRAVES. Well, let’s expand on that just a little bit because I know in some areas, we still don’t have service. I mean, in 

my district, my Blackberry, for instance, only works in a very few 

places. 

Obviously, you know, some of my friends, some of my constituents, you know, they don’t have high-speed internet. So we’re obviously still expanding and we’re still going through the process of 

providing a lot of service to a lot of individuals. 

My question to everyone is, if we don’t expand or overhaul the 

Universal Service Fund, if we don’t continue that service, then 

what does that leave? Where does that leave some of these schools? 

Where does that leave some of these customers? 

I mean, it’s just going to, as technology continues to advance, 

they’re going to fall further and further behind. And in some cases, 

they’re still behind because we just haven’t been able to get service 

to them. 

Mr. WILLIAMS. I think that’s a good lead-in to what I wanted to 

say. So I think one of the things maybe we haven’t emphasized up 

here today—and I think it goes back to the purpose for the Coalition to Keep America Connected. And we need to focus on the consumer, consumer and the school district, so be it, if you want to 

focus on both. 

The important thing is that all of those consumers have access 

to the latest technologies, no matter where they live. And while I’m 

going to sit here and I may think that the wire line infrastructures 

to do that, my wireless friend thinks that the wireless infrastructure is the way to do that, I think at the end of the day, we have 

to have a system where the most economically efficient and the 

person best able to provide those services to everyone, no matter 

where they live, is going to need some support in rural areas and 

maybe even in urban areas because there are urban areas in your 

district that can’t get broadband service to their house because of 

the way the infrastructure is. 

So I think overall it’s important that the consumer have those access to those services. And I think economically as this thing plays 

out, we’ve got to find out which is the most economically efficient 

way to do that. 

And you’re right. The job is not done right. It’s not done yet, but 

we’re working on it. We’re working to expand it every day. And it’s 

going to take some money. And that’s why we’re here. And that’s 

why we’re talking about universal service. 

23

Mr. JOHNSON. We were talking earlier about capping the fund 

and what the impact of that would be, negative or positive. From 

my chair, I think it would be a negative impact, simply because, 

as Congressman Lee mentioned earlier, we’re in a technology transition, more so in the rural areas, where experiences, such as 

yours, Chairman Graves, where your Blackberry works in St. Louis 

and Kansas City but you go to Sedalia, Missouri or Lexington, Missouri and it’s not going to work. 

You know, capping the fund would limit and prevent people in 

the rural areas for taking advantage of these emerging technologies. You know, people demand and want the same technology 

that they have in the urban and rural areas. 

And I think a situation recently, where we’re working with the 

Ellis County Management Association, the ambulance service, 

where Ellis County Management Association is covered by the 

26,000 population area, primarily rural. Hays is a population center, but Victoria, Ellis, and some of the smaller communities are 

in that area of Kansas. 

But they are looking at our technology to be able to transfer lifesaving critical data to the hospital as they pick up a victim from 

a car accident or an industrial accident and transfer those vitals 

via a wireless network to the hospital to save minutes and possibly 

save somebody’s life. But without the fund or capping the fund, I 

think that, capping the fund, would have a negative impact on 

bringing those types of technologies and services to the rural areas. 

And those services are available in the urban areas currently. 

Mr. HENAGAN. Mr. Chairman, I would like to make a statement 

concerning what services. Currently we have six wireless carriers 

in our service area. Five of them are using what we call the traditional land line service. Either I’m feeding them with five or I’m 

feeding them with copper paired depending on what type of services they want. 

For us to bring broadband out there, either wireless or it needs 

to be under some type of land line system depending on what they 

want, and to bring economic development in rural America, for us 

we need to look at all of the technologies. We need to be able to 

provide whatever the customer wants out there at affordable price. 

The customer is the primary thing. 

We currently have a new company that is moving in to Rock 

Port, Rural Source, Incorporated, trying to bring jobs in from overseas. And we are providing them broadband access. They want to 

have at least a T-1 starting out with a DS-3 real near to the future. 

They’re talking about bringing up to 50 jobs to rural America, to 

Rock Port. I need the funds to be able to build out in fiber to that 

building and to light that fiber. 

And also providing good cellular service out there is very vital. 

We’re mobile people today in a mobile society. So we need both 

sides. But it should be on accountability work. The cellular gets 

their costs, and we get our costs along with bringing the lowest cost 

available to the subscriber. Subscriber is the main thing. 

For us to sustain northwest Missouri, that we can provide it out 

there with our loss of population, our loss of subscribers, we are 

doing economic development to bring that in. And universal service 

is very vital for us to do this. 

24

Mr. BLACK. Maybe without rehashing some of the broad points, 

I’ll mention a word that hasn’t been really used in terms of who 

pays in and pays out, which is symmetry. If we’re going to expand 

the base of who pays in, we ought to realize that companies who 

pay in and categories of companies also need to be—those categories need to be expanded on to pay out. They may be high-quality services that can be provided that will provide various benefits 

to citizens that also need to be on the receiving end to build those. 

So it’s just we really want to see universal service and see it 

strong. The cap I think is a recognition of political reality. We don’t 

believe unended entitlement programs are growing and growing. 

But I think the restructuring of it can make sure that the funds 

when they are expended are really bringing the high level of technological advantages that will make people able to compete economically. 

That’s what we’re after. We’re not just after a physical thing. 

We’re after a whole range of high technology capability that we 

want people to have at their fingertips. And I think that’s why a 

rethinking of the formulas, both in and out, is very important and 

needs to be at a good level of funding that’s tied to real cost, but 

it can’t be totally open-ended. 

Chairman. GRAVES. Mr. Sodrel. 

Mr. SODREL. I don’t have any further questions. Thank you, Mr. 

Chairman. 

Mr. SCHULTE. Could I just tell one quick story— 

Chairman. GRAVES. Yes. 

Mr. SCHULTE. —that I think applies here just to illustrate what 

this means? And I think everyone here might already agree. I am 

a speech and debate coach, done it 19 years now. I was talking 

with a coach at a tournament about five years ago, and there were 

a bunch of us. One of the other coaches said to this coach—I believe 

he teaches in McDonald County, which is about as rural as you can 

get in the mountains of the Ozarks. And they said, ‘‘Your teams 

have just been doing great these past couple of years. They have 

just gone from being also ran, canon, fodder kind of teams to winning and doing great.’’ 

And he said, ‘‘Well, about two years ago, we got the internet, like 

you all have already always had. And that has made all the difference.’’ See, when we’re teaching, we’re busy with the kids and 

the girl whose boyfriend—I spent an hour with her the other day. 

Her boyfriend broke up with her on Monday, and prom is Friday 

and all of that. 

We’re focused on other things. And we really appreciate, and we 

need you to have our backs when it comes to things like this to 

keep the internet and to keep the connectivity going so that we can 

focus on the kids. 

Thank you for all you do here. 

Chairman. GRAVES. Well, one of the main purposes for this hearing—and Representative Terry stated it—is to bring as much emphasis to this issue as possible to continue to try to push so we can 

move some legislation. 

And I do believe we need to expand the Universal Service Fund. 

I think we need to do it in such a way that it accounts for technologies in the future. You know, we don’t want to have to come 

25

back because you all have a much better idea on where things are 

going than I do. But we know for a fact that technology is going 

to continue to change. There are going to be more and different 

ways of providing service and better ways of providing service. 

And I think we need to update. I do think we need to overhaul 

the Universal Service Fund. We need to continue to provide technology to those rural areas. We have just got to figure out how to 

do that and how best to do it. 

I appreciate everybody coming in. I know many have come from 

a long distance. But this is important. This issue is important. And 

the more pressure we continue to, the more attention we continue 

to bring to this issue, the better. And you all have helped out with 

that in a great deal. And we have had some great opinions. I appreciate you coming in. 

Thank you very much. The hearing is adjourned. 

(Whereupon, at 11:29 a.m., the foregoing matter was concluded.)

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