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USF DISTRIBUTION 

HEARING 

BEFORE THE

COMMITTEE ON COMMERCE, 

SCIENCE, AND TRANSPORTATION 

UNITED STATES SENATE 

ONE HUNDRED NINTH CONGRESS 

SECOND SESSION 

MARCH 2, 2006 

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

( 

(II) 

SENATE COMMITTEE ON COMMERCE, SCIENCE, AND TRANSPORTATION 

ONE HUNDRED NINTH CONGRESS 

SECOND SESSION 

TED STEVENS, Alaska, Chairman 

JOHN MCCAIN, Arizona 

CONRAD BURNS, Montana 

TRENT LOTT, Mississippi 

KAY BAILEY HUTCHISON, Texas 

OLYMPIA J. SNOWE, Maine 

GORDON H. SMITH, Oregon 

JOHN ENSIGN, Nevada 

GEORGE ALLEN, Virginia 

JOHN E. SUNUNU, New Hampshire 

JIM DEMINT, South Carolina 

DAVID VITTER, Louisiana 

DANIEL K. INOUYE, Hawaii, Co-Chairman 

JOHN D. ROCKEFELLER IV, West Virginia 

JOHN F. KERRY, Massachusetts 

BYRON L. DORGAN, North Dakota 

BARBARA BOXER, California 

BILL NELSON, Florida 

MARIA CANTWELL, Washington 

FRANK R. LAUTENBERG, New Jersey 

E. BENJAMIN NELSON, Nebraska 

MARK PRYOR, Arkansas 

LISA J. SUTHERLAND, Republican Staff Director 

CHRISTINE DRAGER KURTH, Republican Deputy Staff Director 

KENNETH R. NAHIGIAN, Republican Chief Counsel 

MARGARET L. CUMMISKY, Democratic Staff Director and Chief Counsel 

SAMUEL E. WHITEHORN, Democratic Deputy Staff Director and General Counsel 

LILA HARPER HELMS, Democratic Policy Director 

(III) 

C O N T E N T S 

Page 

Hearing held on March 2, 2006 .............................................................................. 1 

Statement of Senator Burns ................................................................................... 1 

Statement of Senator DeMint ................................................................................. 4 

Statement of Senator Lott ...................................................................................... 48 

Prepared statement .......................................................................................... 49 

Statement of Senator Smith ................................................................................... 3 

Statement of Senator Snowe ................................................................................... 57 

Statement of Senator Stevens ................................................................................ 39 

Prepared statement .......................................................................................... 3 

Statement of Senator Sununu ................................................................................ 54 

WITNESSES

Bloomfield, Shirley, Vice President, Government Affairs and Association Services, National Telecommunications Cooperative Association on Behalf of 

the Coalition to Keep America Connected ......................................................... 18 

Prepared statement .......................................................................................... 20 

Clark, Hon. Tony, President, North Dakota Public Service Commission; 

Chairman, National Association of Regulatory Utility Commissioners 

(NARUC) Telecommunications Committee ........................................................ 35 

Prepared statement .......................................................................................... 36 

Hughes, Carson, CEO, Telapex, Inc.; on Behalf of Cellular South and The 

Wireless Independent Group ............................................................................... 24 

Prepared statement .......................................................................................... 25 

Mao, Jeff, Coordinator of Educational Technology, Maine Department of Education ..................................................................................................................... 5 

Prepared statement .......................................................................................... 7 

Scott, Ben, Policy Director, Free Press; on behalf of Free Press, Consumers 

Union, and Consumer Federation of America ................................................... 39 

Prepared statement .......................................................................................... 42 

APPENDIX

Inouye, Hon. Daniel K., U.S. Senator from Hawaii, prepared statement ........... 65 

Response to written questions submitted by Hon. Jim DeMint to Hon. Tony 

Clark, Shirley Bloomfield, Carson Hughes, and Ben Scott .............................. 65 

Response to written question submitted by Hon. Jim DeMint to Jeff Mao ........ 73 

(1) 

USF DISTRIBUTION 

THURSDAY, MARCH 2, 2006 

U.S. SENATE, COMMITTEE ON COMMERCE, SCIENCE, AND TRANSPORTATION, Washington, DC. 

The Committee met, pursuant to notice, at 10:02 a.m. in room 

SD–562, Dirksen Senate Office Building, Hon. Conrad Burns, 

presiding. 

OPENING STATEMENT OF HON. CONRAD BURNS, 

U.S. SENATOR FROM MONTANA 

Senator BURNS. [presiding] Could the witnesses take their place 

at the table, Senator Stevens is tied up on the floor, and Senator 

Inouye is involved out there, probably down in Armed Services, or 

something. Don’t know where he is. But you might be looking at 

the only Senator you’re going to be talking to today, and I know 

that’s sort of disappointing, but nonetheless, I was told to open this 

hearing up and they’ll be along later. I think this hearing on the 

distribution part of USF is probably the most important hearing 

that we’ll have. We looked the other day at the contributions part 

of it, making sure that that’s fair and equitable to everybody, and 

now today is the second of these two hearings that deals with the 

Universal Service Fund. 

At stake in this debate is no less than the future of rural America. For those who say that Universal Service no longer makes 

sense or that it should be repealed or scaled back I encourage them 

to visit states like Montana and Alaska and other rural areas and 

see the Fund in action. The day has not arrived when technology 

and the free market can make affordable telecommunications services available everywhere. Simply put, there’s a lot of dirt between 

light bulbs in Montana. You’ve heard me say that 1,000 times. I 

was asked the other day to explain that. Competition and technology have not changed that. Until that time arrives, Universal 

Service funds are the only alternative. As we look at revising Universal Service, we need to keep foremost in mind that without support from the Universal Service Fund phone bills in high-cost areas 

around the country would increase dramatically. For example an 

average Montanan living in a rural area would pay an additional 

$329.97 each year to receive telecommunications services. Many of 

our schools and our schoolchildren would not have access to the 

Internet; vital to help them do their homework, conduct research 

and compete in a global economy. Many people in remote communities would not have access to healthcare using the Internet—an 

important issue in Montana where many counties do not even have 

2 

a doctor. I think I’ve got 13 counties. We also have an aging population in rural areas, so we deliver healthcare in a different way 

than we did years ago. 

That is not to say that changes do not need to be made to the 

Universal Service Fund. Recently, the amount of money distributed 

by the Fund has been increasing, impacting the ability of the Fund 

to keep up with its demand. Much of the current Fund growth can 

be attributed to the rapid increase in funding provided to wireless 

carriers who have become eligible for Universal Service payments. 

Among the issues we need to address include clarifying the purpose 

of Universal Service support. It is the purpose of the Fund to promote competition in rural areas, rural service, or both. To what extent, if at all, should broadband service qualify for Universal Service support? Another issue is what types of discipline and accountability should be implemented to control the growth of the Fund 

and ensure its survival. 

These and other challenging issues have made it necessary for 

Congress to take a look at revising the way Universal Service 

funds are distributed. We must make sure the law keeps pace with 

this changing landscape. In this regard, on February 8th of this 

year, the 10th anniversary of the Telecommunications Act, I introduced S. 2256, The Internet and Universal Service Act of 2006. I 

call it NetUSA, to revise the Universal Service Fund to adapt to 

the radically changing telecommunications landscape. 

Any distribution mechanism must ensure that Universal Service 

support distributions are fair, that they are equitable, and competitively neutral. At the same time, maintaining a sustainable Universal Fund requires the recipient to be accountable for how that 

support is used. We need to not only control the growth of the 

Fund, but to make sure the funds are going where they are needed, 

and invested in advanced technology. In other words we have to 

protect the integrity of the Fund. 

My NetUSA bill will shore up the Universal Service Fund, ensuring that investment in a ubiquitous, advanced telecommunications 

infrastructure that can continue to all corners of the country. In 

general, the NetUSA bill would broaden the base of contributions 

into the Fund, and it would govern more prudently the distributions of the funds. 

With respect to distribution, the bill requires the Federal Communications Commission to ensure that companies that receive 

Universal Service Fund support invest in and deploy broadband infrastructure in rural and high-cost areas. We must ensure that 

these funds are used to accelerate the deployment of broadband so 

that the U.S. becomes a world leader in broadband deployment. 

Right now we’re a little behind. 

The NetUSA bill also controls the growth of the Fund by making 

the eligibility rules for receiving the support competitively neutral 

and targeting the Universal Service to high-cost areas. Specifically, 

to be eligible for Universal Service Fund support a carrier one, 

must offer any calling plan comparable to the incumbent local 

phone carrier. Offer services under the requirements to protect customers and promote public health, safety, and welfare applied to 

incumbent phone carriers, and offer services substantially over its 

own facilities, commit to use any Universal Service support reVerDate Nov 24 2008 13:18 Jan 25, 2011 Jkt 063764 PO 00000 Frm 00006 Fmt 6633 Sfmt 6633 S:\GPO\DOCS\63764.TXT SCOM1 PsN: JACKIE
3 

ceived to achieve coverage of the entire service area within 2 years 

of the date of designation. 

Moreover, the bill ensures the integrity of the Schools and Libraries Program. To deter waste, fraud and abuse, my bill 

strengthens the FCC’s management and oversight, including imposing sanctions on program violators. And it requires the Federal 

Communications Commission within 180 days of the enactment to 

establish rules regarding the Schools and Libraries Fund. And one, 

identifying appropriate fiscal controls and accountability standards; 

defining the role of USAC; creating performance goals and measures; establishing appropriate enforcement actions, including sanctions such as debarment for applicants or vendors who have been 

convicted of crimes or held civilly liable in connection with the program. 

This Universal Service Fund is but one of many instances where 

the rapid change of technologies and the rise of competition have 

created many challenges in the telecommunications industry. And 

I look forward to speaking with everybody at the table today. I 

think we have a broad spectrum of folks here, who represent different segments of our industry, and let me tell you it’s a pleasure 

to have you here today; we look forward to your testimony because 

right now, we have great challenges ahead and only through you 

can we solve some of these challenges. And I appreciate you coming 

today. 

[The prepared statement of Senator Stevens follows:] 

PREPARED STATEMENT OF HON. TED STEVENS, U.S. SENATOR FROM ALASKA

Earlier this week we held a hearing about the funding of the Universal Service 

program. Today, we address the way those funds are spent. This hearing will examine what Universal Service should support, and who should get money out of Universal Service relative to who pays in. 

The changing face of communications demands that we reexamine the way Universal Funds are being spent and to what purpose. There have been many successful programs supported by USF, but there have also been some programs that could 

use some fine tuning. Today, we will listen to various parties in order to learn how 

the distribution of Universal Service funds might be improved in light of new realities in the marketplace and changes in technology. 

In a competitive world we need to understand how we maintain America’s technology position in the world and what communications infrastructure we need to 

support that position, particularly in rural areas. 

I look forward to hearing how Universal Service funds can be used to encourage 

the deployment of broadband and other advanced services to all Americans as quickly as possible. 

Senator BURNS. Senator Smith, from Oregon do you have an 

opening statement and welcome. 

STATEMENT OF HON. GORDON H. SMITH, 

U.S. SENATOR FROM OREGON 

Senator SMITH. I do Senator, thank you. I guess we’ve both got 

bills trying to do much of the same thing, but as I noted in our 

hearing earlier this week, it’s become increasingly clear that major 

reforms are imperative if the Universal Service Fund is to meet the 

evolving communication needs of the American people. To this end 

I have introduced the Universal Services for 21st Century Act with 

Senators Dorgan and Senator Pryor, a bill that will stabilize and 

broaden the basic contributions to the Fund and bring the benefits 

4 

of high-speed Internet networks to unserved areas of our country. 

Presently the Universal Service System provides no direct funding 

for broadband networks except to schools and libraries. As Members of this Committee are very well aware, Americans increasingly 

rely on their high-speed Internet connections to communicate and 

conduct business. Many rural and high-cost areas of the country, 

however have limited or no access to these broadband networks. So 

to ensure that all Americans have access to the most advanced 

communications networks in the world, my bill allocates $500 million annually to fund construction of broadband infrastructure. 

This new broadband for unserved areas account will be capped at 

$500 million each year, and made available to one facilities-based 

provider in unserved areas on a merit based and competitive basis. 

The focus is rightly placed on infrastructure, efficiency and discipline and spending. Universal Services for the 21st Century Act 

will bring broadband to more Americans, spur economic development in rural and high-cost areas, and make America more competitive globally. In the most recent international telecommunications union study, the United States fell from 13th to 16th in the 

global broadband penetration. This investment in broadband infrastructure is the solution to this disturbing trend. By reaffirming 

and stabilizing Universal Service, and using the Fund to spur the 

development of broadband networks, our legislation will ensure 

that our Nation’s communication infrastructure will continue to 

grow and be the robust and connected network that Americans expect and that Americans deserve. Thank you. 

Senator BURNS. Thank you, we’ve been joined by Senator DeMint 

from South Carolina, who has an interest in this and rural telecommunications, and I look forward to hearing your statement. 

STATEMENT OF HON. JIM DEMINT, 

U.S. SENATOR FROM SOUTH CAROLINA 

Senator DEMINT. Thank you, Senator. And I want to thank the 

witnesses too. I appreciate you being here. I know you represent 

a lot of interests that are benefiting from the Universal Service 

Fund. It was interesting this week—I was talking to a friend from 

back home, we had a conversation and he finally mentioned that 

he wasn’t going to be home for a week. And I said: ‘‘Where are 

you?’’ He was on a remote river bank in Chile, looking at a development opportunity, and talking on a satellite phone. And as I approach this hearing I guess the thing that strikes me, is that he 

was getting good service and in fact I think we’re in a position with 

the technology we have today, he could have high-speed broadband 

service on a remote river bank in Chile. And with the opening of 

the whole video analog spectrum, the technology changes in the 

next few years will be dramatic. 

But there were no Universal Service funds to provide that service 

in Chile. The fact is the Fund was built on a lot of assumptions, 

the assumption that we had to have a lot of hardlines and other 

things to serve rural America. A lot of these things are changing. 

And the challenge I’d like to give to you today, is that the current 

Universal Service Fund is unsustainable. Over the next 10 years, 

$500 billion, an incredible amount of money, will be spent—particularly considering the other things that we need to deal with as 

5 

a nation of health care and Social Security, that are also 

unsustainable. There’s no question that the Universal Service Fund 

has played an important function that we need to get service to 

rural areas. But at this time, when we realize that this Fund is 

unsustainable, it’s very important that we prioritize where these 

funds are needed. We know the Chairman of this Committee is 

looking out for Alaska, and the vast open spaces there, and that 

we’re going to continue to need additional funds to make sure people are served. But I know there are places even in my state within 

only a few miles of a major metropolitan area, where there are a 

number of rural communication companies being sustained by the 

Universal Service Fund, that really don’t need it. With all of the 

opportunities around we have to make some hard choices. So if 

your purpose of being here today is to defend the status quo, frankly it’s not going to do this Committee much good, because we have 

to make hard decisions. If your purpose of being here today is to 

defend the current basis of how we reimburse or pay out the Universal Service Fund, which is cost-based. And we’ve seen what 

that’s done in year’s past to health care and other services where 

it runs up the cost, it discourages competition, it does not encourage efficiencies and productivity. If you’re here today to defend 

that, it won’t help us, because this Committee needs to make some 

hard decisions. We need to get control of the cost of Universal Service funds, we need to make sure that rural areas are served but 

we need a lot of new thinking. Because the Fund will not continue 

to grow at its current rate, it will just not, it cannot. 

The Nation’s priorities are going to have to rearrange how that 

money is spent. So I appreciate your being willing to come here 

today; but I’m listening for ideas on how we can make less money 

go further and meet the needs of rural areas whether they are in 

Montana or Alaska, but I am looking forward to your testimony 

and I yield back, Senator. 

Senator BURNS. Thank you very much, Senator. We’ll just start 

off this morning, and we have Jeff Mao, Coordinator of Educational 

Technology, Maine Department of Education from Augusta, Maine. 

We got an Augusta, Montana you know. 

STATEMENT OF JEFF MAO, COORDINATOR OF EDUCATIONAL 

TECHNOLOGY, MAINE DEPARTMENT OF EDUCATION 

Mr. MAO. Thank you. Good morning, Senator Burns, Senator 

Smith, Senator DeMint, Members of the Committee, thank you for 

the opportunity to testify today. My name is Jeff Mao; I am the Coordinator of Educational Technology for the Maine Department of 

Education. My responsibility for the Department is the implementation of Maine’s 1 to 1 laptop program, the Maine Learning Technology Initiative that provides wireless laptop computers for all 7th 

and 8th grade students and their teachers in the State of Maine. 

I appreciate the opportunity to share with the Committee how 

Maine has leveraged the support that E-Rate provides our schools 

and libraries to improve both the equitable distribution of universal 

broadband and the resources available to schools and libraries in 

our State. 

The E-Rate program provides the foundation on which Maine’s 

innovative technology programs are built. In order to sustain these 

6 

programs, it is critical that the E-Rate program continue to exist 

and to provide secure funding to support the continued deployment 

and maintenance of broadband services statewide. If the E-Rate 

program were to cease to exist, it would undoubtedly lead to significant setbacks in the progress of these innovative programs as 

well as the deployment and availability of broadband services 

throughout the State. 

Maine established the Maine School and Library Network in 

order to ensure universal broadband access for all of Maine’s 

schools and libraries. In order to ensure stability and longevity of 

the Maine School and Library Network, Maine’s Legislature established the Maine Telecommunications Education Access Fund in 

2001. In addition, the legislation established that all schools and 

libraries receiving services from the Maine School and Library Network would be required to apply for Federal assistance through the 

E-Rate program. All Maine citizens and businesses contribute to 

the Maine Telecommunications Education Access Fund, matching 

the Federal assistance Maine receives from E-Rate. Today, 

broadband services in schools and libraries are funded by E-Rate 

and the Maine Telecommunications Education Access Fund. The 

Maine School and Library Network is available to all schools and 

libraries, providing universal broadband services to over 900 

schools and libraries in all corners of Maine. 

The Maine School and Library Network is both technically and 

figuratively the backbone of educational technology efforts in the 

State of Maine. I’d like to outline three of our education technology 

programs. In March of 2000, Governor Angus King announced 

plans to create a statewide 1 to 1 learning initiative. Maine has invested over $38 million in the Maine Learning Technology Initiative. Over the past 4 years the program has provided 1 to 1 wireless laptop computers to approximately 68,000 students in 7th and 

8th grade, and over 3,000 teachers statewide. This includes the 

large urban schools of Lewiston, Portland, and Auburn, and the 

small schools in rural areas like Eastport, Madawaska, and 

Monhegan Island. 

The State also provides ongoing professional development for 

teachers, principals, and technology coordinators throughout the 

year, and installed wireless networks in all 236 middle schools. 

Every day teachers and students utilize digital tools and resources 

now available to them at school from their broadband connection. 

The Maine Learning Technology Initiative is equitably and universally deployed to all Maine schools, regardless of rurality or economics. 

In 1998, Maine established the Maine Distance Learning Program. It was established to provide the geographically dispersed 

population of Maine students and teachers a way to connect and 

share. The State of Maine invested $15 million to create interactive 

video conferencing classrooms. Today, 91 classrooms connect over 

broadband with high quality audio and video feeds. 

This year, 28 high school course offerings are being taught over 

the system including high-need courses such as AP Physics and AP 

Calculus. These are hard-to-find classes in small rural schools. In 

addition, courses like Japanese and American Sign Language are 

7 

taught over the system. These courses are rarely available in small 

rural schools and sometimes not even in our larger schools. 

One example, in North Anson, a small rural town in Central 

Maine, 50 percent of the adult population in this town does not 

have a high school degree. Their high school has less than 300 students and yet Carrabec High School has increased its AP course offerings through the use of the system from two to eight. Today, the 

school’s ‘‘College Hall of Fame’’ celebrates graduates now attending 

schools like the University of Michigan, Columbia University, and 

MIT. 

Finally, Maine began its virtual library in 2000. MARVEL! provides every resident of Maine with access to a collection of full text 

and abstracts from magazines, newspapers and reference books. 

Any one public library or school could spend over $500,000 to purchase the content available through MARVEL!. Now even the 

smallest school or local library has access to vast collections of information. Without the Internet access supported by E-Rate, MARVEL! would not be universally available to all Maine students from 

school and to all Maine citizens from their public libraries. 

These opportunities would not be possible were it not for the ERate. These investments all grew from the E-Rate funding, which 

provided the ability to leverage state funds for the creation of the 

Maine School and Library Network, which provides broadband 

Internet connectivity to Maine’s schools and libraries. These programs are key components in Maine’s strategy to ensure that 

Maine students meet and exceed local, state, and Federal requirements including No Child Left Behind. Maine is preparing its students for the 21st century, and the E-Rate program has formed the 

foundation. Without the E-Rate program, the future of all of these 

innovative programs would be put in jeopardy. The continuation of 

the E-Rate program is critical to Maine’s students and Maine’s future. 

Thank you again, for the opportunity to share with you the positive impact that the E-Rate program has had on the students and 

citizens of Maine. 

[The prepared statement of Mr. Mao follows:] 

PREPARED STATEMENT OF JEFF MAO, COORDINATOR OF EDUCATIONAL TECHNOLOGY, MAINE DEPARTMENT OF EDUCATION

Chairman Stevens, Ranking Member Inouye and members of the Committee, 

thank you for the opportunity to testify today. I am Jeff Mao, Coordinator of Educational Technology for the Maine Department of Education. My primary responsibility is the implementation of Maine’s 1 to 1 laptop program, the Maine Learning 

Technology Initiative that provides wireless laptop computers for all 7th and 8th 

grade students and their teachers, teacher and technical training, and support to 

all of Maine’s middle schools. In addition I provide direct support to schools for their 

local educational technology efforts. 

I appreciate the opportunity to share with the Committee how Maine has leveraged the support that E-Rate provides our schools and libraries to improve both the 

equitable distribution of universal broadband and the resources available to students, teachers, and our public libraries. 

Maine has a long tradition of innovation in, and support for, education. In recent 

years, Maine has embraced the use of technology to improve the quality and scope 

of educational resources available to students and lifelong learners throughout the 

state. Thanks to the E-Rate program, Maine has been able to leverage state funds 

to make broadband service available to schools and libraries statewide. The E-Rate 

program provides the foundation on which Maine’s innovative technology programs 

are built. In order to sustain these programs, it is critical that the E-Rate program 

8 

1 ‘‘The Impact of the Maine Learning Technology Initiative on Teachers, Students, and Learning. Maine’s Middle School 1-to-1 Laptop Program’’, Dr. David Silvernail, Ph.D., February 2006. 

Report was presented to the Joint Standing Committee on Education and Cultural Affairs, 

Maine State Legislature. Copies of relevant slides from the presentation are included as Appendix A. 

continue to exist and to provide secure funding to support the continued deployment 

and maintenance of broadband services statewide. If the E-Rate program were to 

cease to exist, it would undoubtedly lead to significant setbacks in the progress of 

these innovative programs as well as the deployment and availability of broadband 

services throughout the state. The continuation of the E-Rate program is critical to 

Maine’s students and Maine’s future. 

E-Rate and the Maine School and Library Network (MSLN) 

Maine established the Maine School and Library Network in order to ensure universal broadband access for all of Maine’s schools and libraries. In 2001, Maine’s 

Legislature established the Maine Telecommunications Education Access Fund 

(MTEAF, 35–A M.R.S.A. Section 7104–B) that required all telecommunications providers in Maine to contribute to a fund, which would be used to support the Maine 

School and Library Network. In addition, it established that all schools and libraries 

receiving services from the Maine School and Library Network would be required 

to apply for Federal assistance through the E-Rate program. All Maine citizens and 

businesses invest in the Maine Telecommunications Education Access Fund, matching the Federal assistance Maine receives from E-Rate. Today, broadband services 

in schools and libraries are funded by E-Rate and the Maine Telecommunications 

Education Access Fund. The Maine School and Library Network is available to all 

schools and libraries, providing universal broadband services to over 900 schools 

and libraries in all corners of Maine. 

The Maine School and Library Network is both technically and figuratively the 

backbone of educational technology efforts in the State of Maine. 

Maine Statewide Educational Technology Programs 

Maine Learning Technology Initiative (MLTI) 

In March of 2000, Governor Angus King announced plans to create a statewide 

1 to 1 learning initiative that would provide every student in grades 7 and 8 with 

a digital learning device. Today, the Maine Learning Technology Initiative program 

is in its fourth full year and is known around the world as the leading educational 

technology innovation. The program has provided 1 to 1 wireless laptop computers 

to approximately 68,000 students and over 3,000 teachers since the fall of 2002. The 

program installed wireless networks in every middle school in Maine, and provides 

on-going teacher and technical training throughout the school year. Teachers and 

students utilize digital tools and resources both on the laptops and on the Internet 

from Fort Kent to Kittery. Every middle school in Maine, from the small rural 

schools of Aroostook County to the coastal fishing communities in Washington County to the more urban cities of Lewiston and Portland are accessing online resources 

via State-funded wireless laptop computers. Teachers have invested countless hours 

at professional development workshops learning to leverage the resources now available to all of their students at school from their broadband connection. Teachers report that their teaching has been revitalized by the infusion of technology and new 

teaching methods, and students report they are more engaged and invested in their 

learning. The Maine Learning Technology Initiative follows in the footsteps of the 

Maine School and Library Network as the second major educational program that 

is equitably and universally distributed to all Maine students and schools regardless 

of rurality or economics. 

Roughly 60 percent of schools allow their students to take their MLTI laptops 

home. While many families have purchased Internet access at home, not all do. 

While no total solution has been applied, the issue has been mitigated by two important programs. First, 68 public libraries have identified local funding sources to install wireless networks, allowing both students and patrons in general to visit the 

library and utilize the broadband service. The number of libraries offering wireless 

access is expected to continue to grow. Second, the Maine Learning Technology 

Foundation, founded by former Governor Angus King has raised private funds 

which are being used to pay for dial-up Internet access for students with a Maine 

Learning Technology Initiative laptop and who qualify for the Federal Free and Reduced lunch program. 

Data from studies performed by the Maine Education Policy Research Institute 

(MEPRI) at the University of Southern Maine illustrate the impact of both the program, and it’s reliance on broadband connectivity. A recent report 1 from MEPRI by 

9 

2 ‘‘Finding Proof of Learning in a One-to-One Computing Classroom’’, Dr. Anne Davies, Ph.D., 

April 2004. Copies of the full report are available from http://www.connect2learning.com. 

the chief researcher, David Silvernail, Ph.D., included data from a recent survey 

done in the spring of 2005 of just over 1,100 teachers: 

• 94 percent responded that having a laptop helped them access more up-to-date 

information. 

• 93 percent responded that they could access more diverse teaching materials 

and resources. 

• 90 percent responded that they could explore topics in greater depth with students. 

• 89 percent responded that students were more engaged when using laptops. 

• 89 percent responded that students were better able to study real-life issues/ 

problems using laptops than without them. 

• 87 percent reported that laptops facilitated students’ ability to integrate information from multiple resources. 

• 80 percent responded that data indicates technology is positively affecting student achievement. 

In the same report, a survey of over 16,500 7th and 8th grade students in the 

program given in the spring of 2005 revealed similar findings: 

• 96.2 percent responded that they were capable of effectively utilizing a search 

engine. 

• 85 percent responded that they were more likely to edit their work when using 

a laptop. 

• 73 percent responded that they were capable of effectively utilizing a spreadsheet to create graphs. 

• 72 percent responded that they were more interested in school when using the 

laptops. 

Also included in the report, a survey of 200 middle school principals showed that 

89 percent saw the laptop program positively impacted improved student achievement in their schools. 

Researcher Anne Davies, Ph.D. studied the affects of the MLTI program in a 

small rural school in downeast Maine. Her report, ‘‘Finding Proof of Learning in a 

One-to-One Computing Classroom’’ found that, ‘‘Students apply, analyze, synthesize, 

and evaluate information and knowledge more often.’’ She also concluded, ‘‘Being a 

student in a one-to-one, high-speed, wireless computing classroom makes a difference for learning.’’ 2

The impact of the Maine Learning Technology Initiative for Maine has been significant. The implications of the project are far reaching. With ready access to wireless laptop computers that have broadband connectivity, teachers are enriching 

their curricula. Textbooks are becoming less important as current, varied, and often 

interactive resources and content can be gathered and accessed from the Internet. 

Not only could this yield future fiscal savings, but it means that teachers are given 

more flexibility to create and present content to their students. This allows teachers 

to individualize instruction as well as craft curriculum that best meets the needs 

of the students. Ultimately, this flexibility means that teachers will be able to better 

help students achieve and meet local, state, and Federal standards including No 

Child Left Behind. 

The Maine Learning Technology Initiative is a successful innovation that continues to prove itself. It has been carefully designed and implemented based upon 

a few simple but powerful ideas, (1) One laptop, one student, equity for all, (2) Wireless access to broadband services in all instructional areas in every school provides 

access to boundless resources and provides a robust communications network, and 

(3) Teachers must be provided with the necessary training to leverage these newly 

available resources. These three ideas are like the legs of a stool, remove any one, 

and the stool will fall. E-Rate provides the broadband access. The State of Maine 

has invested over $38 million over the last four years to provide the computers, 

wireless networks, and the necessary teacher training. 

Maine Distance Learning Project (MDLP) 

In 1998, the Maine Distance Learning Project (MDLP) was established to provide 

the geographically dispersed population of Maine students and teachers a way to 

connect and share. The State of Maine invested $15 million to create interactive 

video conferencing rooms. Today, 91 classrooms and 11 sites funded by the Marine 

10 

Science and Biotech Initiative connect over broadband connections with high quality 

audio and video feeds. Up to 4 sites may connect in a fully interactive mode allowing 

schools to share resources. 

This year, 28 high school course offerings are being taught over the system including high-need courses such as AP Calculus, AP Calculus AB, AP Statistics, AP 

Physics, and AP U.S. History. These courses would not typically be available to 

small rural schools which do not have the staffing or resources to provide these offerings. In addition, courses like Japanese language (first and second year), Environmental Science, and American Sign Language (first, second, and third year) are 

taught to students through the system. 

Newsweek’s article, May 16, 2005, ‘‘Other Winning Equations’’ by Dan Berrett and 

Dan Brillman featured one of Maine’s schools in the Maine Distance Learning Program. Carrabec High School in North Anson is a small rural high school of fewer 

than 300 students serving a community where only 50 percent of the adults in the 

community have a high school degree. Carrabec High School expanded its AP course 

offerings from two to eight by utilizing both the Maine Distance Learning Program 

system as well as online course offerings. Carrabec High School’s students are not 

the only students to benefit as they also provide coursework to other rural schools 

using the Maine Distance Learning Program system like Brendan Murphy’s AP Calculus and AP Statistics courses. On Murphy’s wall, a ‘‘College Hall of Fame’’ celebrates his students’ achievements noting that this school year, among his graduated 

students, are some attending higher education institutions including MIT, Columbia 

University, and the University of Michigan. 

Many regions have collaborated to a level not often seen. Not only do they share 

coursework over the system, they aligned their school bell schedules and vacation 

schedules so that all students from all of the schools would have equal opportunity 

to take advantage of the Maine Distance Learning Project course offerings. School 

consortiums in the most rural and remote northern and eastern areas of Washington, Aroostook, and Penobscot counties have worked together to facilitate collaboration and resource sharing. 

The Maine Distance Learning Project system is used for more than course delivery. It also serves as a portal to the world allowing students to interact with people 

from different parts of the United States and the world. For example, students from 

Jonesport Beals, a small rural downeast coastal community use the Maine Distance 

Learning Project system to meet and talk with other students from Ireland who also 

live in a small rural fishing community. Students from Skowhegan interviewed 

World War II veterans living in Hawaii who were present at the Pearl Harbor attack. Many schools use the Maine Distance Learning Project system to provide job 

fair interviews with professionals in fields that do not exist in their own rural communities. 

Maine Distance Learning Project is also used for virtual field trips allowing 

schools to expose students to new and exciting resources without having to lose valuable instructional time traveling or spend limited local funds on transportation expenses. Maine Distance Learning Project in conjunction with the Maine State Library, the Maine Department of Education, and the Mitchell Institute’s Great Maine 

Schools Project have recently been awarded a grant from the Verizon Community 

Foundation to fund the creation of more virtual field trips related to Maine’s Native 

American populations. Other organizations are also creating virtual field trips including the Penobscot Marine Museum (http://www.penobscotmarinemuseum.org) 

and PCA Great Performances (http://www.pcagreatperformances.org). 

Maine’s Virtual Library, MARVEL! 

Maine began its virtual library in 2000. MARVEL! provides every resident of 

Maine with access to a collection of full text and abstracts from magazines, newspapers and reference books that are credible, reputable resources. MARVEL! also 

provides students, business people, public library patrons, and higher education students and educators the ability to search a number of resources at one time for 

needed information. The print value of the resources provided in these databases 

would be in excess of $500,000 per library. One example of cost savings is as follows: 

• Maine has 214 schools (public and private) that contain grades 9–12. 

• If one of these schools were to purchase just the EBSCO resources contained 

in MARVEL!, it would cost that school $16,800. 

• If all of these 214 Maine schools purchased just the EBSCO materials on their 

own, the total cost would be $3,595,200. 

The collaboration between the Maine State Library, the University of Maine, the 

Maine State Legislature, and the Maine Telecommunications Education Access 

Fund that funds the statewide licensing of these resources for every library and 

11 

resident of Maine is a truly cost-effective service that can benefit every Maine citizen. Without the Internet access supported by E-Rate, MARVEL! would not be universally available to all Maine students from school, and to all Maine citizens from 

their public libraries. 

Conclusion 

In keeping with its long history of innovation in education, Maine has embraced 

the E-Rate program and has used it to leverage millions of dollars in state and local 

funding for a wide range of technology programs. These programs are directly improving the learning opportunities available to students, teachers, and citizens 

throughout the state of Maine by making high-speed Internet access, distance learning, and innovative courseware available throughout the state. These learning opportunities are a critical part of Maine’s efforts to catapult its students, businesses, 

and citizens into the 21st Century. 

These opportunities would not be possible were it not for the E-Rate program. 

Maine’s citizens, businesses, and State government have invested in the Maine Telecommunications Education Access Fund (including the Maine School and Library 

Network and MARVEL!), the Maine Learning Technology Initiative, and the Maine 

Distance Learning Project to provide unique and innovative opportunities for not 

only Maine students, but for all of Maine’s citizens. These investments all grew from 

the E-Rate funding, which provided the ability to leverage state funds for the creation of the Maine School and Library Network, which provides broadband Internet 

connectivity to Maine’s schools and libraries. These programs are key components 

in Maine’s strategy to ensure that Maine students are ready for the 21st Century, 

and the E-Rate program has formed the foundation, which has allowed the State 

of Maine to build these innovative educational technology programs. Without the ERate program, the future of all of these innovative programs would be put in jeopardy. The continuation of the E-Rate program is critical to Maine’s students and 

Maine’s future. 

Thank you again, Chairman Stevens, Ranking Member Inouye and Members of 

the Committee for allowing me this opportunity to share with you the positive impact that the E-Rate program has had on Maine’s schools and libraries. 

12 


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18 

Senator BURNS. Thank you very much, Mr. Mao. We have Shirley Bloomfield, Vice President, Government Affairs and Association 

Services, National Telecommunications Cooperative Association, 

the Voice of Rural Telecommunications. 

STATEMENT OF SHIRLEY BLOOMFIELD, VICE PRESIDENT, 

GOVERNMENT AFFAIRS AND ASSOCIATION SERVICES, 

NATIONAL TELECOMMUNICATIONS COOPERATIVE 

ASSOCIATION ON BEHALF OF THE COALITION 

TO KEEP AMERICA CONNECTED 

Ms. BLOOMFIELD. Well, thank you for the introduction. I think 

I’ll skip that part. But I’m also here today to testify on behalf of 

the Coalition to Keep America Connected. And we thank you greatly for the Committee’s leadership on Universal Service issues, particularly the legislation that some of you have introduced already. 

The Coalition to Keep America Connected is organized by ITTA, 

NTCA, WTA, and OPASTCO and collectively our membership represents about 700 small and midsize communications providers. We 

serve seven million customers in rural America and we cover about 

40 percent of the landmass. The coalition also has a vast number 

of folks who are members of it, including consumers, small business owners and local policymakers. 

Universal Service has remained the cornerstone of our Nation’s 

telecommunications policy for more than six decades, ensuring that 

we all enjoy the benefits of a nationwide integrated communications network. 

Today, the program emphasizes an assurance that necessary cost 

recovery is available to those that make the commitment to serve 

the Nation’s most economically challenging markets as is essential 

in this time of national and economic security. 

The coalition has come up with four main principles that we 

would like to see, and put out on the table for future consideration. 

Support must be used to construct, maintain and upgrade networks 

to benefit all consumers and must not be voucher, auction, or block 

grant based. Support must be based upon a provider’s actual cost 

of service. Support must not be used to artificially incite competition. On the first point, Universal support is for the deployment, 

maintenance and upgrading of telecommunication networks. 

Telecommunications providers do not build networks one connection at a time. But rather, networks require substantial financial 

investment and are built to be scaleable and expandable to meet 

future consumer demands for new services and new technologies. 

Policies that would force carriers to build and maintain networks 

one connection at a time, ignore real-world economics and will create vast inefficiencies and increased costs to all consumers. 

Today cost recovery support from the Universal Service program 

has a direct correlation to the carrier’s actual investment and the 

cost of providing that service. This cost-based system has proven to 

work efficiently and effectively for over six decades. We believe this 

framework is the same framework that is going to get broadband 

out, to increase the penetration rates out all across America that 

we have seen in traditional voice service as well. 

19 

Our second principle requires that all Universal Service Fund recipients receive support based on their own costs. This will increase 

program accountability as well as reduce the demand for funds. 

The vast majority of growth that has already been noted this 

morning in Universal Service is due to competitive eligible telecommunications carriers or ETCs. Universal Service support to 

competitive ETCs grew by over 115 percent in the last year. During 

this same period ILEC support grew by just less than .7 percent. 

As a percentage of the overall fund, CETCs accounted for approximately 1 percent of all Universal Service funds in 2000. At the end 

of 2005, the distributions have skyrocketed to about 18 percent of 

the high-cost portion of the Fund. This may seem like a very small 

percentage, but if left unchecked the Fund will become insolvent. 

Finally many rural areas in our Nation can’t support more than 

one gas station, grocery store or other commodity service let alone 

multiple communications providers. While rural carriers welcome 

competition in areas that can support it, Universal Service should 

not be used to artificially incite competition in areas it would otherwise not occur. In fact little competition is actually from 214(e). 

Most of the new funding for the existing wireless carriers are carriers who were already providing service in these markets. Tightening of the ETC requirements will ensure that Universal Service 

monies support the intended goal that this committee envisioned in 

1996 of guaranteeing all Americans have access to comparable 

services at rates comparable to those in urban areas. 

When deciding to grant ETC status the following qualifications 

should be met: The designation must ensure ubiquitous comparable 

rates and services and cover the entire ILEC market area; the benefits of the designation must not outweigh the burdens on the Fund 

and have the same quality of service, safety and other standards. 

The ETC must demonstrate the actual costs, and the funds should 

not be used to incite unnecessary artificial competition. 

I would be remiss to not point out that our thoughts on Universal Service distribution are dependent upon some very key 

changes in the contribution side as well. The coalition believes the 

following steps need to be taken to bring contributions in line with 

the realities of today’s communications marketplace. The base of 

contributors must be expanded to include all providers and using 

the underlying infrastructure, including but not limited to all providers of two-way communications regardless of technology. 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. And 

regulatory authority should be allowed to mold and change as technology evolves and must be clarified and strengthened. 

If the policy recommendations we’ve outlined were implemented, 

Universal Service would be on a sound footing and continue to play 

a key role in ensuring all Americans are connected to a high quality communications network. 

Thank you very much and I look forward to your questions. 

[The prepared statement of Ms. Bloomfield follows:] 

20 

PREPARED STATEMENT OF SHIRLEY BLOOMFIELD, VICE PRESIDENT, GOVERNMENT

AFFAIRS AND ASSOCIATION SERVICES, NATIONAL TELECOMMUNICATIONS

COOPERATIVE ASSOCIATION ON BEHALF OF THE COALITION TO KEEP AMERICA

CONNECTED

Good afternoon. I am Shirley Bloomfield, Vice President of Government Affairs 

and Association Services for the National Telecommunications Cooperative Association. I am here today to testify on behalf of the Coalition to Keep America Connected. We thank you for the opportunity to testify before you. 

The Coalition to Keep America Connected effort is organized by The Independent 

Telephone & Telecommunications Alliance, the National Telecommunications Cooperative Association, the Organization for the Promotion and Advancement of Small 

Telecommunications Companies and the Western Telecommunications Alliance, 

whose memberships include more than 700 small and midsize communications companies. Together these companies serve millions of consumers and 40 percent of the 

landmass across America. 

Our Mission is dedicated to ensuring 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 affordable 

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. 

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. The Universal Service Fund is an 

essential element to ensure the fairness, affordability, and access I just described. 

In addition, the Nation’s economic and national security insists that this policy be 

preserved. 

Today, the program emphasizes an assurance that necessary cost recovery is 

available to those that make the commitment to serve the Nation’s most economically challenging markets. Policymakers must understand that this is the key to 

building the nationwide network that has guaranteed all Americans the ability to 

enjoy an unprecedented era of access to information. 

The Coalition has come up with four main principles that we feel should guide 

future policy on the distribution side of Universal Service. They are: 

1. Support must be used to construct, maintain and upgrade networks to benefit 

all consumers and must not be voucher, auction, or block grant based. 

2. Support must be based upon a provider’s actual cost of service. 

3. Support must not be used to artificially incite competition. 

4. The rural and non-rural fund distinctions must be maintained. 

Support Must Be Used to Construct, Maintain and Upgrade Networks To 

Benefit All Consumers and Must Not Be Voucher, Auction, or Block 

Grant Based 

In the infancy of the telephone industry large monopoly companies realized it was 

not economically feasible to serve much of rural America due to low population density, relatively isolated and often rugged terrain. Thus, they did not build networks 

serving rural America. As a nation, we quickly realized the economic burdens of 

serving rural and high-cost areas with vital telecommunications services. As a result, the Nation stood behind the idea of Universal Service bringing comparable 

services and comparable rates to all Americans no matter where they live. Due to 

this highly successful policy, over 1,000 small, community-based telecom providers 

prospered in rural America to serve the telecommunications needs of their communities. Without the national commitment to Universal Service, these networks would 

not have been built. 

Policymakers must understand that Universal Service support is for the deployment, maintenance, and upgrading of communication networks. Communications 

providers do not build networks one connection at a time. Rather, networks require 

substantial financial investment and are built to be scaleable and expandable to 

meet future consumer demands for new technologies and services. Regulations that 

force carriers to build and maintain networks one connection at a time ignore realworld economics and will create vast inefficiencies and increased costs to all consumers. Voucher, auction, and block grant based Universal Service support will 

never work. 

21 

1Wireless Communications and Universal Service by Bob Rowe, Senior Partner, Balhoff & 

Rowe, LLC @ Columbia Institute for Tele-Information. Slide 12. 

These alternatives do not take into account the capital-intensive nature of the 

telecommunications industry. Network deployment is only the beginning. Continual 

investment in network maintenance and upgrades must be done to remain competitive and these alternatives do not meet the long-term business planning needs of 

community based providers. Support must be predicable, stable and long-term to encourage necessary investment to meet the communications needs of our nation. The 

current industry funded mechanism that we have in place today can continue to 

meet the needs of the industry so long as a few glaring FCC regulations are modified to assure these funds are put to the best use. 

Let me clarify that today, support from the Universal Service Fund has a direct 

correlation to a particular carriers network investment and the cost of providing 

that service. This cost-based system has proven to work efficiently and effectively 

for over six decades. We believe this framework generally can help us to achieve 

the same successful penetration and adoption rates in broadband services that we 

have seen in traditional voice service. Policymakers must keep in mind the purpose 

of Universal Service is to help alleviate the burdens of building networks in highcost areas. 

Support Must Be Based Upon a Provider’s Actual Cost of Service 

Requiring all Universal Service Fund recipients to receive support based on their 

own costs will increase program accountability as well as reduce demand for funds. 

Currently, a competitive carrier entering an ILEC territory receives support based 

on the incumbents cost. Requiring each Universal Service recipient to document its 

cost will greatly improve program accountability and ensure that funds are being 

used for their intended purpose. 

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 percent in the last year. During this same period ILEC support 

grew by only 0.6 percent. As a percentage of the overall fund, CETCs accounted for 

approximately 0 percent of all Universal Service funds in 2000. 1 At the end of 2005, 

their distributions have skyrocketed to more than 18 percent of the total Fund. This 

may seem like a small percentage, but if left unchecked the Fund will become insolvent. 

Support Must Not Be Used to Artificially Incite Competition 

Many rural areas in our Nation can’t support more than one gas station, grocery 

store, or other commodity service let alone multiple communications providers. 

While rural carriers welcome competition in areas that can support it, Universal 

Service should not be used to artificially incite competition in areas it would otherwise not occur. Tightening of the ETC requirements will help ensure that Universal 

Service monies support the intended goal of guaranteeing all Americans have access 

to comparable services at rates comparable to those in urban areas. 

When deciding to grant ETC status the following qualifications must be met: (1) 

the designation must ensure ubiquitous comparable rates and services, (2) the designee must actually serve the entire ILEC market area, (3) the benefits of the designation must not outweigh the burdens on the Funds, (4) the designee must demonstrate its actual costs, (5) the designation must not cause excessive market support, (6) the designee must agree to quality-of-service and other standards, and (7) 

the funds must not incite unnecessary artificial competition. 

The Rural and Non-Rural Fund Distinctions Must Be Maintained 

Separate funds allow the FCC to specifically tailor rural high-cost support mechanisms to fit the conditions of rural local exchange carriers serving high-cost areas 

in rural America. Many rural carriers lack population density, serve smaller exchanges and lack the economies of scale of larger urban-centric carriers. 

In the 1996 Act, Congress wisely established a definition of a ‘‘rural telephone 

company’’ and included special provisions, including ones related to Universal Service, that recognize the unique characteristics of these carriers. Requiring separate 

high-cost support mechanisms for rural and non-rural carriers would ensure that 

the FCC continues to recognize the significant differences between small rural carriers and large, urban carriers and ensure that the support rural carriers receive 

is sufficient to achieve the goals of Universal Service. Clearly, the amount of support 

needed for a huge carrier with millions of lines and serving primarily metro areas 

to adequately serve their rural territories would not at all be sufficient for a rural 

22 

telephone company, with no low-cost metro areas, to continue to achieve Universal 

Service and bring advanced services to their communities. 

Conclusion 

I would be remiss to not point out that our thoughts on Universal Service distribution are dependant upon some key changes to the contribution side of Universal Service. The coalition believes the following steps need to be taken to bring 

contributions in line with the realities of today’s communications marketplace. 

• The base of contributors must be expanded to include all providers utilizing the 

underlying infrastructure, including, but not limited to, all providers of two-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. 

• The regulatory authority to modify the scope of contribution obligations as technology evolves must be clarified and strengthened. 

If the policy recommendations we’ve outlined were implemented, Universal Service would be on a sound footing and continue to play a key role in ensuring all 

Americans are connected to a high quality communications network. 

23 

Senator BURNS. Thank you. We appreciate that. Now we have 

Carson Hughes, Chief Executive Officer, Telapex, Inc., Jackson, 

Mississippi. Thank you for coming. 


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24 

STATEMENT OF CARSON HUGHES, CEO, TELAPEX, INC.; 

ON BEHALF OF CELLULAR SOUTH AND THE WIRELESS 

INDEPENDENT GROUP 

Mr. HUGHES. Thank you, Senator Burns. And I would like to 

thank the Committee for allowing me to appear here before this 

Committee. I am appearing on behalf of Cellular South, and I’m 

also appearing on behalf of a coalition which includes Chinook 

Wireless, Midwest Wireless, Rural Cellular Corporation. Our members serve approximately 1.7 million customers, and consumers, 

the overwhelming majority of whom use their phones in rural communities across the United States, and approximately 20 states. 

Let me get right to the point. A central goal of Universal Service 

is to provide rural consumers with comparable choices in advanced 

telecommunications services to those that are available in the 

urban areas. Now does anybody in this room, does anyone here in 

their heart of hearts believe that any consumer living in a rural 

area, where the cost is high to serve, would agree that reasonable 

comparability is met by a single line to the home or the office, carrying only voice. Or would it be met if the rural consumer did not 

have access to wireless mobile, voice, and data transmission just as 

is enjoyed by their competing urban fellow citizens? Who in this 

room has not benefited in the last 24 hours from use of a wireless 

communications device? I would dare say no one. But let me tell 

you from experience, folks in the country like Blackberries, and cell 

phones too, and need them for the very reason that they’re needed 

here. And I dare say, so do each of the Members of this Committee 

when they’re in the rural areas of their home state. Your rural constituents need to be able to contact emergency services in the event 

of accident or a fire, carry on their daily business by mobile communications, and they need to be able to contact their families all 

over the area and the Nation. And they need to be able to do this 

all over the area where they work, live, and play. You have my testimony and you know that I favor wireless being allowed among 

the USF support groups. The more important question is why 

should you be in favor of such service or even Universal Service at 

all. Cutting to the chase. What do people expect from the application of USF? In line with my understanding of the 1996 Act, rural 

residents expect the same quality of telecommunications enjoyed by 

city dwellers. In fact without comparable services at all levels, the 

rural Americans are not as safe and not able to compete with 

urban counterparts. And rural areas are unable to attract business, 

medical and educational facilities. 

First let me focus on how Universal Service had a large, huge 

impact on our citizenry during the recent hurricane season. Four 

years ago we at Cellular South started an aggressive investment 

of Federal Universal Service support in developing a high quality 

network. As a result of our prudent investment of Universal Service support, our wireless network was operating for first responders 

within hours after the storm made landfall, and we returned to full 

capacity throughout Mississippi in less than 2 weeks after Katrina 

swept the region. In the immediate aftermath of the storm, we 

often provided the sole means of communications as wireline infrastructure lay under the rubble of the hurricane. Wireless carried 

safety messages, reunited families, ordered food and other needed 

25 

supplies, enabled evacuation and evaluations to be made. It was 

the link that saved. It was the link that tied together the people. 

And you made that possible by your support here before for USF 

for rural wireless. We’re a competitive world where many nations 

have modern telecommunications systems nearly equal to the ones 

we have here in the United States, some say even better. If rural 

parts of our Nation are to effectively compete, those areas must 

have the necessary modern communications infrastructure. You 

started that by allowing Universal Service to apply to wireless, now 

even considering the good wireline infrastructure in most of our 

rural areas, failure to adequately support multiple carrier wireless 

in high-cost rural areas will make those rural areas be equivalent 

to a Third World country within our own national borders, when 

we talk about competitiveness. We think it’s very important that 

all carriers use high-cost support for its intended purpose. Today, 

wireless carriers generally have more stringent reporting requirements than do any other carriers. In Mississippi, for example, we 

file quarterly reports within the state, describing what we’re doing, 

when we’re doing it, and then when we get through we have to file 

a report to tell them what we did. As I mentioned in my file testimony we support a portion of S. 2256 and commend both Senator 

Burns and Senator Smith, for their acknowledgement of the fact 

that broadband is important. We do have some differences with 

that bill in other aspects and I mention that in my testimony. We 

believe that possibly the most important thing that you can do is 

make it absolutely clear to the FCC that any rules that they adopt 

for Universal Service must be competitively neutral and not favor 

any class of carrier. In sum, we urge the Congress to see wireless 

as a part of the solution in rural America. Thank you. 

[The prepared statement of Mr. Hughes follows:] 

PREPARED STATEMENT OF CARSON HUGHES, CEO, TELAPEX, INC.; ON BEHALF OF

CELLULAR SOUTH AND THE WIRELESS INDEPENDENT GROUP

Introduction to Cellular South and the Wireless Independent Group 

Chairman Stevens, Co-Chairman Inouye and Members of the Committee, I am 

Carson Hughes, Chief Executive Officer of Telapex, Inc., the parent company of Cellular South. I am pleased to be here today to discuss issues involving the Universal 

Service Fund. 

I am testifying on behalf of a coalition of independent wireless carriers called the 

Wireless Independent Group (WIG). Members of the coalition include Cellular 

South, Chinook Wireless, Midwest Wireless, and Rural Cellular Corporation. 

WIG members serve approximately 1.7 million consumers, the overwhelming majority of whom use their phones in rural communities in Alabama, Arkansas, Iowa, 

Florida, Kansas, Maine, Massachusetts, Minnesota, Mississippi, Montana, New 

Hampshire, New York, North Dakota, Oregon, South Dakota, Tennessee, Vermont, 

Washington, and Wisconsin. 

We applaud the Committee for your willingness to explore the difficult issues surrounding Universal Service Fund distributions. Like all of you, WIG members are 

committed to the long-term sustainability of the Fund. We have seen first hand how 

Universal Service support helps the lives of those living in rural and underserved 

communities. As a company that has participated in the Universal Service program 

for well over four years, I hope our experience can shed light on the immense benefits and services that are enjoyed by the rural communities we serve because of our 

access to these funds. 

Let me provide you with a brief description of how Universal Service support has 

helped rural Mississippi consumers enjoy the benefits of advanced telecommunications services. In 1988, Cellular South began offering service on the Mississippi 

Gulf Coast. By 1992, we expanded out to 8 other Rural Service Areas (RSAs) covering most of the state. We were the first to provide analog cellular service to many 

26 

parts of rural Mississippi. By 1999, we had become the first to offer near statewide 

DIGITAL wireless communications to Mississippi. By the end of 2001, we had expanded our service into parts of 4 other southeastern states. 

In 2002, primarily because of Universal Service support, we became the first wireless company to offer a more efficient, next generation digital service, providing consumers with unlimited voice and text messaging products at a flat rate throughout 

our entire service footprint. Many of these areas are designated as high-cost areas 

and would not have received these services without USF support. 

Cellular South customers average 1,300 minutes of use per month, nearly double 

the industry average of 700 minutes per month. This high usage phenomenon is a 

direct result of our ability to deploy Universal Service support to construct and improve wireless infrastructure in the high-cost areas of the state. But, more importantly, this data point reflects the NEED and DEMAND for mobile communications 

in rural areas. Rural businesses and consumers deserve the same benefits that 

urban areas have with mobility. The Future of Broadband is mobility. 

The health and safety benefits of a modern wireless communication infrastructure 

to rural America may be the most important benefit. There is no more powerful 

safety tool than a cell phone, provided there is a signal available to place an emergency call. Cellular South was recently commended by the Mississippi State legislature for our ‘‘exemplary’’ efforts during the aftermath of Hurricane Katrina. While 

wireline networks and even some other wireless providers on the Mississippi Gulf 

Coast took months to recover from Katrina, Cellular South’s wireless network returned to full capacity throughout Mississippi less than two weeks after the hurricane’s landfall. 

There is no doubt in our mind that Universal Service support, prudently deployed 

in recent years, was key to developing a robust network that provided much needed 

coverage, redundancy, and ancillary back-up facilities that enabled our employees 

to respond effectively. We are proud of our employees and thankful to the Congress 

for its foresight in authorizing wireless carriers to draw Universal Service funds to 

improve their networks. 

Congress recognized in the Telecommunications Act of 1996 (1996 Act) that the 

future of rural America depends largely on deployment of modern telecommunications infrastructure that allows consumers to have choices in advanced services 

that are similar to those available in urban areas. By permitting wireless carriers 

access to 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 

available through wireless service that are critical to bridge the technology gap between urban and rural America. We urge Congress that in any subsequent reform 

of the 1996 Act, Congress will keep the door open for rural consumers to continue 

to enjoy the wireless services of today and the advanced telecommunication services 

we can only dream of for tomorrow. 

This testimony will examine the benefits rural consumers enjoy from the current 

USF distribution system while dispelling some of the outstanding myths concerning 

the USF high-cost fund. This document will also make policy recommendations 

about Universal Service we believe will best benefit rural communities. 

Overview 

1. Under the Current System, Rural Wireless Consumers Who Contribute to the Fund 

Are Not Seeing the Degree of Benefits That They Need and 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 (‘‘CETCs’’) have drawn just over $1 BILLION IN THE AGGREGATE SINCE 1996, and in 2005 they drew roughly 10 percent of the total fund 

($700 Million). 

• 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 number of customers served. 

• In the aggregate, we believe that consumers nationwide have spent roughly $19 

BILLION since 1996 to finance wireline networks. In areas where wireless competitive ETCs have not been designated, rural wireless consumers see little benefit from the vast majority of the dollars they contribute. 

Bottom line: Congress must make it a priority to provide Federal high-cost support to fund wireless infrastructure development for rural consumers who desperately need and deserve high-quality wireless networks. The health, safety, and 

27 

1 ‘‘The Wireless Purchasing Study: Measuring Satisfaction and Loyalty’’, Steve Koenig, Senior 

Manager, CEA. 

economic development benefits that flow from investing in mobile wireless communications infrastructure are precisely what Universal Service should be funding in 

rural America. 

2. CETCs Are Demonstrating to the States That Support Is Being Used To Build 

Infrastructure in Areas That Would Not Otherwise See Investment 

• Even with the advances that have been made in rural wireless coverage, anybody who uses a wireless phone while moving across rural America understands 

the huge difference in service availability and service quality compared to urban 

areas. 

• WIG members understand how important it is for consumers to have access to 

mobile wireless services. 

• WIG members have constructed new cell sites serving unserved and underserved communities in their ETC service areas that would not have been constructed without Federal high-cost support authorized by Congress. 

• The vast majority of states now require CETCs to report how support is being 

used. These reports provide accountability that is not present for wireline carriers. Vermont, West Virginia, Mississippi and now Minnesota provide good examples of states that have gotten the reporting requirement right. 

Bottom line: Wireless carriers are today providing written proof that the support 

is being used to drive infrastructure investment in rural areas that would not otherwise receive such investments. We would be pleased to deliver to the Committee on 

a confidential basis copies of reports of what Cellular South has done. 

3. The Current System of Providing Support Necessitates Wireless Carriers To Make 

Efficient Investments but Allows Wireline Carriers To Make Inefficient 

Investments 

• Wireless carriers can only get support after, (1) we build facilities, and (2) we 

get a customer. 

• Wireless carriers are not guaranteed a return, so if we make a poor investment 

and only get a few customers, we bear the risk of such investment. 

• Support to wireless carriers in all areas is currently capped by the number of 

available customers in a particular area. 

• In states like Mississippi and Washington, where support has been targeted to 

rural areas, the system works properly: Several wireless carriers are fighting 

for a limited pool of support dollars in rural areas, but receive no support for 

serving urban areas. 

• I am advised that wireline carriers operate on a ‘‘cost-plus’’ system that pays 

more as they spend more and thus can cause extreme inefficiencies. I am also 

advised that in many states and at the Federal level, wireline carriers only report what has been spent, not whether it is needed to provide service. 

Bottom line: Wireless carriers are concerned that ALL carriers be accountable. 

Moreover, consumers should only fund efficient investments. 

4. Rural Consumers Are Increasingly Demanding (and Certainly Deserve) High 

Quality Advanced Wireless Services, Including Data and Broadband, Enjoyed in 

the Urban Areas and They Need Access Throughout the Area Where They Live, 

Work, and Play 

• In 2006, businesses will spend more on wireless services than on wireline according to a study released in January by In-Stat. It is estimated that the demand for wireless data will grow an average of 18 percent per year, through 

2009. 

Bottom line: Congress should consider policies that guarantee rural communities 

an opportunity to keep pace with urban areas in the technology race. 

Testimony 

Recently, the Consumer Electronics Association released a study showing that 17 

percent of consumers who purchased their wireless phone within the past 90 days 

are relying solely on their wireless phones for voice service. 1 This is a significant 

jump from earlier reports that wireless substitution was roughly 9 percent. We believe that wireless is the future for voice and data communications throughout the 

28 

Nation and that sound Universal Service policy that has ‘‘jump started’’ infrastructure development of advanced wireless networks in rural areas must be continued. 

There is no sound public interest reason to deny rural consumers the technology 

they need to compete with our Nation’s urban areas. In reality, I can’t think of anything that will widen the gap between rural and urban areas, and accelerate the 

brain drain out of rural areas more than attempting to control growth of the Fund 

by limiting wireless carrier access to Universal Service funds. Urban areas of our 

Nation benefit from the availability of advanced wireless and wireline telecommunication systems in the rural areas since it allows businesses to extend their reach. 

Universal Service, in part, has helped wireline carriers deploy a ubiquitous outstanding network in rural America over many decades. The public now requires a 

similarly ubiquitous outstanding wireless network. 

It is a simple fact that wireless carriers cannot effectively compete in high-cost 

areas if only the wireline carrier receives support. Wireless carriers need Universal 

Service support to construct networks in areas that would not otherwise receive the 

level of investment needed to deliver high-quality advanced services. Every time we 

construct a new cell site in an underserved area, consumers in roughly 144 square 

miles of land area have access to 911, E–911, and all of the service offerings that 

mobile wireless can provide. 

Universal Service must grow with the reality that consumers are best served by 

competition. The best thing Congress can do is insist that the FCC adopt rules for 

distributing Federal Universal Service support that are competitively and technologically neutral. In short, Universal Service rules must not disadvantage any class 

of carrier or technology. In addition, the FCC must develop mechanisms for 

verifying that carriers are using support for building and maintaining networks. 

Unfortunately, we cannot support a portion of Senate Bill 2256 proffered by Senator Burns, but we do applaud the inclusion of broadband as a supported service. 

Today, we are seeing the proliferation of uses for mobile broadband services and 

rural consumers need these tools to compete with their counterparts in urban areas. 

We are concerned however about anti-competitive proposals that would stall or 

prevent expansion of advanced wireless services in rural areas by requiring carriers 

to build out an entire high-cost area before they receive ETC designation. Such a 

requirement turns the whole theory of universal support on its ear, ignoring the economic reality that without support, expansion by wireless into many rural areas 

would be impossible. Had this requirement been imposed upon wireline companies 

in years gone by, we would no doubt be looking at large areas of the country that 

would not be enjoying the benefits of the modern telecommunication systems that 

now exist. 

Wireline carriers spent decades building out their networks, all the while receiving some form of Universal Service support to assist in their construction efforts. 

Wireless is no different in this regard—we cannot build an entire network before 

receiving any support. The current system which only provides support when we get 

a customer naturally requires us to build first, but properly provides support incrementally, as we grow. Moreover, disaggregating, or targeting support to high-cost 

areas prevents competitors from receiving support when constructing network facilities in urban areas. 

We are also concerned about the proposal in S. 2256 that would eliminate the 

‘‘identical support’’ rule. After much careful consideration, the FCC rejected this proposal years ago, and for good reason. Paying each ETC on its own costs would require a larger USF and would not control growth of the Fund as some would suggest. Wireless ETCs under the present system receive the same ‘‘per-line’’ support 

as the landline carriers, but nowhere near the same amount of total support because 

wireless ETCs are paid only after they construct facilities and gain a customer. 

For example, under the current system, supporting three ETCs that serve the 

same area does not triple the burden on the Fund because, in our experience, customers do not carry three wireless phones. In effect, support is capped in an area 

by the number of people living there and all wireless competitors must fight for a 

fixed amount of customers and support. Each carrier is paid the same ‘‘per line’’ 

support on a ‘‘per line’’ basis, rather than each wireless ETC being paid on its own 

costs to construct an entire network. We support this because it requires efficiency 

on the part of the wireless company and it does not place regulators in the position 

of selecting which company should be selected to build a network and which company should be left out. 

We are also concerned about a provision that would allow rate regulation by 

states. This provision is anti-competitive and bad for rural communities because it 

would eliminate the ability of a wireless provider to lower rates if it so chose. We 

note that many states are moving away for most rate regulations of wireline carriers today. 

29 

2Source: Universal Service Administrative Company Annual Report, 2004. Available at 

http://www.universalservice.org/l3res/documents/about/pdf/2004-annual-report.pdf. 3See id. 

We are of the opinion that the better course is to permit consumers to choose the 

service they value most and focus on making each carrier accountable for the funds 

they get—to drive the infrastructure needed to provide benefits and eventually minimize the amount of support needed to serve rural consumers. 

In order to clear the record, we review below several myths that have been proffered to date, and our response to each. 

MYTH: Wireless carriers that are CETCs are responsible for ‘‘ballooning’’ or ‘‘exploding’’ the high-cost Fund. 

FACT: A close examination of the facts about the high-cost Fund shows nothing 

could be further from the truth. 

We have heard that Universal Service and in particular, the ‘‘high-cost Fund’’ is 

going bankrupt because of the increase in the number of CETCs. More alarming 

perhaps is the allegation that soon there will be no money left in the Fund to sustain telephone services in rural areas, again as a result of CETC Designations. 

The most recent figures available to me show the high-cost Fund provided $3.4 

billion in 2004. Of the roughly $3.4 billion in Federal high-cost support distributed 

in 2004, wireless CETCs received approximately $333 million, or around 10 percent 

of the total. 2 Final figures for support provided in 2005 are not yet available, however I am advised that an good estimate of the amount of support to CETCs to be 

approximately $700 million. Without a doubt, support to new entrants has risen significantly on a percentage basis, notably because it began at zero. 

Since 1999, support to ILECs, which operate mature networks that typically are 

not growing, has gone from approximately $1.7 billion per year to approximately 

$3.15 billion per year, a total increase of roughly $1.4 billion per year.3 Of that increase, roughly $620 million per year represents a real dollar increase in funding. 

The rest represents support that the FCC has transferred from carrier rates into 

the Universal Service program. 

The following two tables illustrate ILEC and CETC draws: 


302hugh1.eps
30 

Table 19.5—High-Cost Support Received by ILECs and CETCs 

(in millions of dollars) 

ILECs CETCs Total Percent CETCs 

1996 $1,188 $0 $1,188 0.0 

1997 1,263 0 1,263 0.0 

1998 1,690 0 1,690 0.0 

1999 1,717 1 1,718 0.0 

2000 2,233 1 2,235 0.1 

2001 2,575 17 2,592 0.7 

2002 2,889 46 2,935 1.6 

2003 3,142 131 3,273 4.0 

2004 3,155 333 3,488 9.5 

Notes: ILECs is an abbreviation for incumbent local exchange carriers. CETCs is an abbreviation for competitive eligible telecommunications carriers. CETCs include both wireless and wireline carriers. 

Source: National Exchange Carrier Association (1996–1997). Universal Service Administrative Company 

(1998–2004). 

While CETCs have collected a total of approximately $529 million in high-cost 

support through 2004, ILECs have received roughly $19 billion in Federal Universal 

Service support during the same time period. In many states, rural ILECs receive 

substantial support from state Universal Service programs as well. 

Funding to new competitors has increased—it is a predictable outcome of sensible 

Universal Service policy. Congress must continue to permit competitive entry into 

rural areas and get beyond short-run ‘‘growing pains’’ in order to achieve the maximum benefits to rural consumers. By continuing to provide appropriate incentives 

for new telecommunications providers to invest in high-cost areas, rural customers 

will receive increased quality and quantity of services at lower prices. 

MYTH: Wireless carriers don’t pay their fair share into the high cost Fund. 

FACT: Wireless consumers, who draw just over 10 percent of the total fund (approximately $330 million) now contribute over 34 percent of the total Fund, or 

roughly $2.6 BILLION per year. Rural wireline carriers, who draw 50 percent 

of the total fund (approx. $3 Billion) contribute only 3.8 percent of the total 

Fund. 

Rural wireless consumers are entitled to receive service quality and service 

choices that are reasonably comparable to those that are available in urban areas— 

as promised by Section 254 of the 1996 Act. 

With over 200 million wireless consumers, each of whom pays in roughly $1.00 

per month, wireless now contributes roughly $2.5 billion each year and that number 

is rising steadily. Yet, wireless CETCs only draw approximately 10 percent of those 

funds to assist with deploying and expanding wireless service in rural areas. 


302hugh2.eps
31 

While the large wireline carriers such as Verizon, BellSouth, and AT&T contribute 22.7 percent of the total funding, other ILECs, which include rural wireline 

carriers, contribute only 3.8 percent. The table below illustrates each class of carriers’ contributions to Universal Service: 

We can think of no better use for Federal high-cost support than the investment 

in new infrastructure by carriers willing to demonstrate that support is being properly invested, to provide rural consumers with high-quality service and service 

choices that are comparable to those in urban areas. Any legislation must accelerate 

wireless infrastructure development in rural areas—not impede it. 

MYTH: Supporting wireline and wireless carriers on their own separate costs 

will curb Fund growth. 

FACT: Supporting each class of carrier on its own costs will retard or prevent 

competitive entry, will be extraordinarily expensive to implement, will require 

regulators to pick winners, and will ultimately cost the Fund more than the current system. 

While supporting carriers on their own costs is a catchy mantra, the FCC rejected 

it after years of rulemaking proceedings. The FCC’s files contain testimony of reputable economists who have also rejected this approach. 

Under the bill’s proposal to fund each carrier on its own costs, wireless competitors, in the short term, are going to draw substantially more from the Universal 

Service Fund than they do today. A ‘‘build it and we’ll pay for it’’ approach was fine 

when simply connecting houses to the network was the goal, but if the goal of providing rural consumers with modern technology is to be realized, we have to find 

ways also to support efficient providers of services. 

We think the better approach is the one the FCC selected. Pay competitors only 

the same ‘‘per line’’ support as the incumbent, and only pay after they first build 

facilities and get a customer. Under the balancing act of this mechanism, support 

to all competitive carriers is capped by the number of available customers and competitors must fight for customers and support dollars. My discussion on 

disaggregation below explains how newcomers can be encouraged to invest in highcost areas while at the same time incumbents can be protected. 

We also note the administrative costs of paying each carrier on its own costs. As 

new technologies such as satellite, WiMax, and unlicensed spectrum providers line 

up to enter rural areas, presumably the FCC would have to develop a cost model 

for each to determine the appropriate level of support. The cost of doing so would 

be enormous and would not deliver the benefits that the current system does. 

MYTH: You can control growth in the Fund by limiting the number of competitors in a service area. 

FACT: Limiting the number of carriers in a service area robs rural communities 

of the benefits of competition. Multiple carriers in a service area competing for 

customers results in cheaper, higher quality voice and broadband services. 

Policies that limit the number of carriers who may receive USF support in a given 

area are contrary to the goal of allowing Americans to receive wireless voice and 


302hugh3.eps
32 

broadband services in rural areas. The Universal Service program already has protections in place to cap growth and expenditures in a service area: 

• The current distribution system caps the amount of Federal support available 

to wireless carriers serving an area, while NOT capping support to rural incumbent landline carriers. 

• The amount of funds available in any high-cost area is capped by the number 

of customers. In other words, wireless competitors can only receive support if 

they are successful in getting a customer. When more than one wireless competitor is designated in an area, they must fight for consumer revenue and support. 

• Moreover, since the FCC’s rules prohibit support to be paid when a customer 

is served via resale, wireless CETCs must first construct facilities in high-cost 

areas before getting any support. 

The current system, when combined with disaggregation of support, discussed 

below, are key elements in achieving the dual goals of advancing Universal Service 

and promoting competition in rural areas. 

MYTH: Wireless providers ‘‘cream skim’’ areas where it is financially beneficial 

to operate. 

FACT: Current high-cost Fund regulations prevent cream skimming. 

We have heard this concern expressed in many forms. The most common is the 

‘‘pole in the tent’’ analogy, that is, if wireless carriers are allowed to skim off the 

most lucrative customers, who represent the tent pole, then incumbent wireline carriers could go out of business having to serve the remaining low-margin customers, 

and the tent will collapse. 

My personal experience teaches that a wireless carrier, indeed any newcomer, is 

going to chase the cream—the high-end customers, the low-cost areas, and the most 

lucrative markets irrespective whether they are designated as ETCs. In fact, without 

ETC designation, a newcomer is free, in fact encouraged by the economics, to do just 

that without any obligation to extend service to low-margin or high-cost areas. The 

only reasonable conclusion that can be drawn is that cream skimming can only be 

minimized by placing newcomers on a level playing field with incumbents and 

adopting rules to stop newcomers from getting Universal Service support in those 

areas that are low-cost for incumbents, such as population centers in rural areas. 

Fortunately, the FCC set up rules five years ago to protect ILECs from financed 

competition in their most lucrative areas. Wireline carriers participated in and approved of such rules, which permit them to redirect support outward to their highest-cost areas and remove it from their ‘‘cream’’ areas. That process, known as 

disaggregation, is working in many areas. 

We Recommend Congress Consider Washington State as an Example of How To Reform USF 

In Washington, all rural ILECs have targeted or ‘‘disaggregated’’ Universal Service funds to the highest-cost areas within the State. As a result, those designated 

in low-cost areas receive no support and those designated in high-cost areas receive 

a predictable amount of support. Targeting funds in this manner has kept growth 

in the Fund down while delivering services where they are needed most. 

In Washington, wireless competitors draw only 32 percent of the total support in 

the State, compared with 68 percent drawn by wireline carriers. Wireless carriers 

are drawing less despite the fact their networks require significant capital expenditures to serve throughout the State. They are only rewarded when they get a customer in high-cost areas, which means they have to build facilities in the outlying 

area in order to get their first dollar of support. 

Disaggregation also solves the problem of defining service area boundaries for 

newcomers. When an area is disaggregated, regulators have more flexibility, because if a newcomer serves predominantly low-cost areas, it will receive a lesser 

amount of support. If it serves higher-cost areas, it will receive higher levels commensurate with the type of area being served. 

Finally, it is important to note that under the current system, when more than 

one wireless competitor is designated in an area, they must fight for consumer revenue and support and sparsely populated areas will not yield enough ‘‘per line’’ support to allow multiple carriers to construct facilities. 

We urge Congress to recognize that the FCC has already developed very useful 

tools to permit wireline carriers to more accurately target support to high-cost areas 

so as to properly reward competitors willing to invest in areas that need it most, 

while protecting wireline carriers from subsidized competition in low-cost areas. 

33 

MYTH: Wireless carriers are not using funds to improve service to rural America and more oversight is required. 

FACT: Wireless carriers are not only using support to improve their networks 

but in many, if not most states, they are much more accountable than are 

wireline carriers. 

My experience at Cellular South is typical of other WIG members. When we first 

obtained CETC status, we knew that the spotlight would shine on us, and that we 

would be expected to demonstrate that support is going to improve our networks in 

ways that would not otherwise have happened without support. We expected State 

commissions to examine our use of support, and we have been more than willing 

to provide reports as to our activities each year prior to the State recertification to 

the FCC each October 1. 

Each state handles the process differently. Most require one annual report showing funds received over the past year, how they were used, along with a projection 

of support for the coming year and how such funds will be used. A few, like Mississippi, require quarterly reports, and Cellular South provides those regularly. Although the information in such reports as to how future support will be used is kept 

confidential, we are pleased to provide examples of what has been done with support. 

Some examples of small communities in Mississippi that now have service include 

Pittsboro, Bassfield, Prentiss, Tylertown, Columbia, Byhalia, Houston, Bruce, Banner, Perkinsville, Gore Springs, Pyland, Sabougla, Slate Springs, Vardaman, and 

Woodland. Many of these communities are very small and our service to them includes significant farm lands that permit the use of our devices in the truck and 

on the tractor. To anyone who understands the risks agricultural workers take on 

every day this new coverage is no small matter. 

Another WIG member, Rural Cellular Corporation, has heard from the Maine 

Sheriffs Association that they depend on cellular phones to do their jobs properly, 

and to protect both citizens and themselves. To cite just one example, when a sheriff 

gets a domestic disturbance call, he instructs the dispatcher to provide the phone 

number at the residence. He then calls while on his way to get a sense of the situation, for example whether there is alcohol or firearms involved. This gives him a 

better understanding as to what to expect when he knocks on that door. 

Our experience is just a small portion of what other WIG members can report. 

To use the example of Rural Cellular Corporation in Maine, they have built new 

cell sites that would not have been constructed in towns such as China, Rumford, 

Bethel, Fort Kent, and Strong. If anyone gives the impression that wireless carriers 

are not using support in the manner it was intended, they have not looked at our 

company or the other WIG members that are CETCs. 

In sum, wireless carriers are using support to drive infrastructure development 

in rural areas. Given that wireless consumers contribute so much to the Fund, we 

share concerns that support be used properly, and urge Congress to look carefully 

at all carriers. As we understand it, over 400 ILECs report no costs and the accountability for fund use as ‘‘average schedule’’ companies is far more limited than that 

which exists for wireless carriers. We believe that none of the ILECs provide specific 

explanations as to how USF support is used for the benefit of consumers, as we in 

the wireless community are doing today. We urge the Congress to shine the same 

degree of light on all carriers who are stewards of the Fund to ensure that consumers receive the benefits that they deserve. 

Benefits of USF to Rural America 

High-Cost Support for Wireless Consumers Provides Vital Health and Safety Benefits 

to Rural Areas 

In closing, I again note that in urban areas, it is taken for granted that one can 

complete a wireless call in an emergency. In a very short time, urban consumers’ 

expectations for wireless have risen enormously, to the point where the failure to 

complete an important health or safety call is newsworthy. 

In many rural areas, expectations are often very different. Consumers living in 

these areas understand that wireless phones work in larger towns and on major 

roads, but might not work as well in all rural terrain. Although wireless networks 

are improving, many rural consumers still see mobile phones more as ancillary communications tools, rather than devices that can be counted on to provide primary 

telephone service. An example of the changing expectations for rural coverage is the 

introduction of a well meaning bill recently introduced in our State legislature that 

would require wireless carriers to provide service statewide (Federal license boundaries notwithstanding) and proposing hefty fines for failure to comply. 

34 

The best thing the FCC and Congress can do to promote the health and safety 

benefits of mobile wireless communications in rural America is to ensure that critical wireless infrastructure continues to be built out in rural areas. The high-cost 

Fund has provided the incentive to invest in better technologies and services that ultimately result in improved emergency communications. 

We can think of few achievable goals more important than driving investment 

into rural areas. Encouraging wireless carriers to become CETCs and ensuring that 

funds are spent on network construction is critical to delivering this vital benefit 

to rural America. 

High-Cost Support in Rural Areas Drives Economic Development 

As a rule, our Nation’s rural areas have long trailed cities in terms of economic 

development. Use of high-cost support to improve infrastructure has a significant 

economic impact on small communities and is a key to closing that gap. Today, 

many companies consider rural areas as more attractive places to locate and one 

of the major factors involved in selecting a community is the quality of its telecommunications infrastructure. 

Wireless service is a very important factor in the equation. More and more companies and people today rely on wireless phones to improve efficiencies and manage 

their businesses. The examples we’ve cited above are just the tip of a much larger 

story. As economies around the world become more interdependent, our rural areas 

have to compete not only with American business, but with foreign business as well. 

Universal Service funds, used properly to improve our infrastructure, will enable 

America to compete better on the world stage, with countries like Japan and South 

Korea, who today are far ahead of us in both broadband and mobile wireless service 

development. We can think of no better use for Federal high-cost support than to 

provide the tools necessary for our rural areas to compete. 

WIG Policy Recommendations 

Rural communities benefit the most from policies that encourage competition and 

improvements to existing telecommunications services. Any policy that attempts to 

stall the entry of new providers in rural areas retards the development of needed 

wireless infrastructure and ultimately will widen the gap between rural and urban 

areas. Consumers living in and traveling through rural areas deserve the same 

kinds of health, safety, and economic development benefits that flow from having 

access to advanced wireless and broadband telecommunications services such as are 

available in urban areas. 

Therefore we urge Congress to include the following principles in any USF reform 

measure: 

• Universal Service should not guarantee a market outcome for any carrier or 

class of carrier. 

• All Federal and State Universal Service rules must be competitively neutral— 

that is—Universal Service rules must not disadvantage any class of carrier or 

technology. 

• All carriers who receive Universal Service support must demonstrate that support is actually being invested as required by the Act and the FCC’s rules. 

• Support should be distributed equitably among all technologies and carriers 

without continuing a historical preference for ILECs. 

• Support should be targeted to the neediest of areas. If ILECs believe ‘‘cream 

skimming’’ is a problem, ILECs are currently permitted to ‘‘disaggregate’’ or target Universal Service support to the highest-cost areas so that competitors do 

not receive funds in areas that are low-cost to ILECs. Thus, there is no need 

to require new competitors to serve throughout an ILEC study area. 

Most important, wireless consumers pay into the Fund and are thus entitled to the 

benefits that Congress intended to deliver when it passed the 1996 Act—to ensure 

that rural areas have choices in services that are comparable to urban areas. Therefore, Congress and the FCC should continue to allow rural wireless carriers who 

have CETC status to receive high-cost support from the Universal Service Fund in 

a competitively neutral fashion. Doing so will open rural markets to competition, 

rein in Universal Service Fund growth, and drive voice and broadband services to 

rural Americans. 

Senator BURNS. Thank you very much, Mr. Hughes. Now we 

have the Honorable Tony Clark, who comes from my neighbor 

State of North Dakota. He’s the Chairman of the Public Service 

35 

Commission. And Commissioner Clark, welcome today, we’re looking forward to your testimony. 

STATEMENT OF THE HON. TONY CLARK, PRESIDENT, 

NORTH DAKOTA PUBLIC SERVICE COMMISSION; 

CHAIRMAN, NATIONAL ASSOCIATION OF 

REGULATORY UTILITY COMMISSIONERS 

(NARUC) TELECOMMUNICATIONS COMMITTEE 

Mr. CLARK. Thank you, Senator Burns, and members of the Committee. I am Tony Clark, President of the North Dakota Public 

Service Commission and Chairman of the National Association of 

Regulatory Utility Commissioners (NARUC) Telecommunications 

Committee, which represents commissions in all 50 States, the District of Columbia, U.S. territories, with jurisdiction over telecommunications, electricity, gas, water, and other utilities. 

This series of hearings 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 innovative services, but all of those technologies require 

underlying infrastructure: wireline, or wireless—and those require 

real investment to build and maintain, especially in rural markets. 

We read daily about how intertwined the global economies of New 

York, and Los Angeles are to those of Tokyo and London. In North 

Dakota, we like the idea of Fargo, Valley City, and even tiny 

Mandaree, population 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. 

Beyond their economic value, telecommunications networks are 

also critical infrastructure, a point driven home during last year’s 

natural disasters on the Gulf Coast. 

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 those that interconnect to the network that are supported by it. On the distribution side, the Universal Service Fund has grown tremendously in 

the last 5 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. Questions like: Should it explicitly fund 

broadband infrastructure? How many carriers should be able to 

serve high-cost areas? On what cost basis should carriers be reimbursed? How many access lines per customer should be funded? Is 

it intended for networks or is it intended for individuals? 

Each choice carries both costs and opportunities, and to be perfectly frank with you, the cost and benefits of different options are 

going to vary from State to State, as will the advice that each of 

you will get from each of your individual State commissions, but 

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

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. We commend you for securing this year’s exVerDate Nov 24 2008 13:18 Jan 25, 2011 Jkt 063764 PO 00000 Frm 00039 Fmt 6633 Sfmt 6601 S:\GPO\DOCS\63764.TXT SCOM1 PsN: JACKIE
36 

emption and we look forward to working with you to make that exemption permanent beyond 2006. 

Under Section 214(e) of the Act, State commissions are delegated 

to help administer the Federal Universal Service Fund by designating eligible telecommunications carriers 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 permissive 

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

in response to the growing role and prominence of competitive 

ETCs. At this writing, at least 24 State commissions, including 

mine, have either implemented the guidelines or initiated 

rulemakings to incorporate some or part of these suggested guidelines. NARUC’s members are available to talk about our individual 

experiences if Congress intends to reexamine this process. 

NARUC supports efforts to more equitably distribute the funding 

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

manner, although we believe such efforts 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 dollars. This joint 

approach benefits both ‘‘net donor’’ and ‘‘net recipient’’ States. 

We are concerned, however, that efforts to expand the Federal 

contribution base without a complementary clarification of State 

authority could inadvertently create tremendous funding gaps for 

State funds. Specifically, there is a danger that if the Federal Fund 

were expanded to draw against intrastate revenues, as several bills 

have proposed, Section 254(f) of the Act could be interpreted to prevent State programs from collecting any assessments, an issue already addressed by the Fifth Circuit. 

We believe the ultimate 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, regardless of which contribution approach is ultimately chosen. 

Ultimately, NARUC’s members share each of your concerns 

about delivering the best, most efficient, advanced, and affordable 

communications services to your constituents because they are also 

ours. 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. 

Thank you, Mr. Chairman, Committee Members, I look forward 

to any questions you might have. 

[The prepared statement of Mr. Clark follows:] 

PREPARED STATEMENT OF HON. TONY CLARK, PRESIDENT, NORTH DAKOTA PUBLIC

SERVICE COMMISSION; CHAIRMAN, NATIONAL ASSOCIATION OF REGULATORY UTILITY

COMMISSIONERS (NARUC) TELECOMMUNICATIONS COMMITTEE

Mr. Chairman, Co-Chairman Inouye and Members of the Committee, 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 U.S. terVerDate Nov 24 2008 13:18 Jan 25, 2011 Jkt 063764 PO 00000 Frm 00040 Fmt 6633 Sfmt 6621 S:\GPO\DOCS\63764.TXT SCOM1 PsN: JACKIE
37 

ritories, with jurisdiction over telecommunications, electricity, gas, water, and other 

utilities. 

This series of hearings 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, IPTV, wireless broadband and 

other innovative services, but 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. We read daily about how intertwined the global information economies of Silicon Valley, New York, Los Angeles, 

and Seattle are to those of Singapore, Tokyo, London and Bonn. In North Dakota, 

we like the idea of Fargo, Valley City and even tiny Mandaree (population 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. One of the most valuable lessons we learned when Hurricane Katrina 

struck the Gulf Coast last year was how the importance of reliable communications 

networks is magnified tenfold when disaster strikes—natural or manmade—and 

first responders and relief organizations must coordinate thousands of workers and 

volunteers in real-time efforts where each minute can be measured in lives lost or 

saved. 

USF at an Existential Crossroads 

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 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 toll 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: 

• Should it explicitly fund broadband infrastructure and services? 

• What is the optimal size of the Fund and does it need to be capped? 

• Should it fund competition in high-cost markets? 

• How many networks should it be used to fund in high-cost markets? 

• On what cost basis should carriers be reimbursed? 

• How many access lines per customer should be funded? 

• Is it intended for networks or for individuals? 

• Should contributions be pegged to network usage, use of numbers, connections 

or some other methodology? 

• 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. 

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. We commend you for securing this year’s exemption 

and we look forward to working with you to make that exemption permanent beyond 2006. 

Eligible Telecommunications Carrier Designations 

Under Section 214(e) of the Act, State commissions are delegated to help administer the Federal Universal Service Fund by designating eligible telecommunications 

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

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

38 

service area, either using its own facilities or 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) denied ETC status to a competitive 

ETC 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 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 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 a requirement for each carrier seeking ETC status to: 

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 ‘‘cream skimming’’ 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. NARUC’s members are available to talk about our individual experiences if 

Congress intends to reexamine this process. 

USF Contributions and State Programs 

NARUC supports efforts to more equitably distribute the funding base of the Federal Universal Service Fund (USF) in a technology-neutral manner, although we believe such efforts 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. 

We are concerned, however, that efforts to expand the Federal contribution base 

without a complementary clarification of co-extensive State authority could create 

tremendous funding gaps. Specifically, there is a danger that if the Federal Fund 

were expanded to draw against intrastate revenues, as several bills have proposed, 

Section 254(f) of the Act could be interpreted to prevent State programs from collecting any assessments, an issue already addressed by the addressed by the U.S. 

Circuit Court for the Fifth Circuit in AT&T v. Public Utility Commission of Texas, 

373 F.3d 641 (5th Cir., 2004). 

39 

Endangering State Universal Service funds would also raise issues of fairness in 

the Federal distribution formula. The 1996 Act explicitly contemplated the creation 

of State Universal Service funds and State funds have been generally created to 

meet needs not met by the Federal distribution formula. For example, many States 

used their funds to address the impact on carriers of lowering intrastate access 

charges, while others used State funds to address implicit subsidies that still exist 

between urban and rural areas within their States, or to increase broadband deployment. 

We believe the ultimate 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, using numbers, connections, total revenues, or whichever approach is 

ultimately chosen. 

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 the impact of 

national policies on each individual State. I appreciate the Chairman’s recent appearance before NARUC and this Committee’s desire to tap the expertise of our 

State commissions as Congress moves to resolve Universal Service and other important communications issues. 

Senator BURNS. Thank you very much Mr. Commissioner, we appreciate that very much. Mr. Scott, we’ve just been joined by the 

Chairman of the full Committee, and boy that has its priorities. 

Senator Stevens. 

STATEMENT OF HON. TED STEVENS, 

U.S. SENATOR FROM ALASKA 

The CHAIRMAN. Let’s proceed. I appreciate you starting the hearing. 

Senator BURNS. Well, all right. Mr. Scott, you may proceed. Mr. 

Scott is Policy Director of the Free Press here in Washington. 

STATEMENT OF BEN SCOTT, POLICY DIRECTOR, FREE PRESS; 

ON BEHALF OF FREE PRESS, CONSUMERS UNION, AND 

CONSUMER FEDERATION OF AMERICA 

Mr. SCOTT. Good morning. Mr. Chairman, and Members of the 

Committee, I thank you very much for the opportunity to testify 

today. I am the Policy Director for Free Press; we are a young organization. We’re about 3 years old. We’re a nonprofit, nonpartisan 

public interest group dedicated exclusively to communications policy. We are both consumer advocates here in Washington as well 

as grassroots organizers out in the country where we have, I’m 

pleased to say, over 225,000 individual members. Our members are 

just regular citizens who care about communications issues and 

want to know what’s going on in the Congress. Like most Americans our members don’t investigate the policies that bring them 

telephone service. They just expect it to be there. And as technology changes, and their lives change with it, so will their expectations change. 

40 

The focus of my testimony this morning will be on these changing expectations and the expansion of Universal Service to 

broadband. It is no longer debatable in my opinion whether 

broadband will be the dominant form of communications in the 

21st century. It is simply a fact. In this light, the public policy commitment that you have made to ubiquitous communications has 

never been more important. That said, as we have heard this 

morning, Universal Service is not without its problems, some of 

them quite severe. And yet we view the Universal Service predicament as both a threat and an opportunity. We believe that as communications technologies evolve USF must evolve with them, and 

to that end, we support the expansion of Universal Service to 

broadband as the organizing principle for reform. 

We applaud this Committee and the legislative work of Senators 

Burns, Smith, Dorgan, and Pryor for beginning this important 

transition. On Tuesday morning, Senator at the first session of this 

hearing I listened with great appreciation to Senators on this Committee express their wish that USF had not been tied to telecommunications alone, that we’d just drop the tele off the front 

end. So I went back to my Communications Act and I looked at 

Section 254 and I found that you did exactly that in 1996 by instructing the FCC to base its USF programs on advanced telecommunications services and information services. 

Now, there’s little doubt in my mind that Congress intended to 

capture in this definition the evolving modes of 21st century communications, certainly including broadband. That the FCC did not 

use its discretion to follow this principle does not detract from the 

spirit of the statute. And in my view this Committee and this Congress had it right in 1996, and you’ve got it right now. USF should 

be flexible, technology-neutral, and evolve over time to meet the 

needs of consumers. 

I’d like to move along and bring to the Committee’s attention the 

consequences of not taking swift action to expand broadband penetration. As this Committee has heard many times in hearing after 

hearing this year the United States has fallen from five to number 

16 in the world in broadband penetration since 2001, and yet we 

have never heard a satisfactory answer as to why that is. So we 

set out to find one and we did a study based on the OECD’s examination of global broadband penetration and you’ll find the study as 

an appendix to my testimony. 

The conclusions of this new research directly tie our global 

broadband competitiveness to Universal Service policy. I’d like to 

briefly highlight two of the findings. First, contrary to conventional 

wisdom our low population density compared to other nations such 

as Japan, South Korea, and Sweden does not account for our global 

broadband rank. In fact we found that population density explains 

very little of the performance relative to other nations. And I believe this suggests we can no longer accept the myth that being 

rural means accepting poor broadband performance. Our research 

indicated that the most important factor retarding our broadband 

penetration rates is poverty. The simple reality is that in areas 

with high poverty rates and high infrastructure costs we often lack 

services that meet the needs of low-income and fixed-income households. According to a Pew study released just early this week, 

41 

broadband penetration rates in urban areas are 39 percent and in 

rural areas they are 24 percent. And I’m sorry to say that that gap 

has held constant for several years. The key issue here in my mind 

is affordability, and the USF program is uniquely suited to address 

this problem if we can apply its support to broadband. If we fail 

to do this successfully we can be sure that jobs and investments 

will flow out of our communities rather than into them. 

I’d like to conclude by offering a set of forward looking principles 

for USF reform. First, I believe we should explicitly expand USF 

to broadband in a technology-neutral manner. Second, I believe we 

should broaden the base of USF contributions, equitably assessed 

and technology neutral, to stabilize the future finances of the Fund. 

Third, we should begin a transitional phase leading to a point 

where all USF-eligible networks are broadband compatible. Fourth, 

we should tighten oversight of the Funds in order to track how distributions are spent, who qualifies to spend them, and what the results of that spending will yield. 

And finally, I believe we should implement USF reform in conjunction with a comprehensive set of broadband policies including 

opening up more of the public airwaves for wireless broadband. We 

strongly support the bill put forward by Senator Stevens as well as 

Senators Allen, Kerry, Sununu, and Boxer that open the empty television channels for wireless broadband. I think we should also enhance and protect competition by opening the market to any 

broadband service provider, public or private, and advance an enforceable policy of network neutrality. 

And, finally, I think we should improve the strategic investment 

in broadband infrastructure through more effective use of the RUS 

grants and by reinstating the technology opportunities program at 

the NTIA. 

There are no easy solutions to correcting the problems of Universal Service but they must be addressed based on ubiquitous, affordable access to broadband. Without that commitment we cannot 

hope to correct the problems that have plunged us down the ranks 

of global competitiveness. We urge the Committee to act prudently, 

swiftly, and in the spirit of the Communications Act. I thank you 

for your time and attention and I look forward to your questions. 

[The prepared statement of Mr. Scott follows:] 

42 

1Free Press is a national, nonpartisan organization with over 225,000 members working to 

increase informed public participation in crucial media and communications policy debates. 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 

goods, 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 copies in 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. 3The 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. 

PREPARED STATEMENT OF BEN SCOTT, POLICY DIRECTOR, FREE PRESS; ON BEHALF

OF FREE PRESS, CONSUMERS UNION, AND CONSUMER FEDERATION OF AMERICA

Summary 

Free Press, 1 Consumers Union, 2 and Consumer Federation of America 3 appreciate the opportunity to testify on the issue of distributions from the Universal Service Fund. As consumer advocates, we strongly support the USF 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 

USF’s present predicament as both a threat and an opportunity. We believe that 

as communications technologies evolve, USF must evolve with it. We support the 

expansion of USF support to broadband as the organizing principle to overhaul its 

contribution and distribution systems. 

The debate over USF reform is complex, and there is a danger that in the quest 

to iron out the details of implementation, the Congress will lose sight of the principles driving this policy. There are dozens of difficult questions to resolve, but we 

urge the Committee to stand firmly on the ideals articulated in the Communications 

Act of 1934 and reaffirmed in 1996. The cornerstone of this legislation is the commitment to providing communications services to every American household, without regard to geography or income, at an affordable rate and a robust quality of 

service. The legislative history of USF indicates that Congress has already committed itself to expanding Universal Service support to broadband networks. Not 

only should we do this, we cannot afford to delay. 

The urgency of the ‘‘broadband problem’’ in the U.S. is severe. The Committee is 

now familiar with the statistics of America’s swift decline in the global ranks of 

broadband penetration. This testimony provides new evidence to understand why. 

The results of our study have critical implications for USF policy. Contrary to conventional wisdom, America’s low population density does not account for our poor 

broadband performance. The key factors explaining our difficulties are high prices 

for service and a substantial low-income population that cannot afford them. Other 

nations have solved these problems with strategic investment and comprehensive 

broadband policies to deliver affordable service. USF is uniquely suited to reverse 

our broadband fortunes, bringing affordable service and new investment where we 

need it most—to low-income and rural areas that have heretofore been trapped on 

the wrong side of the digital divide. 

There is no magic formula for solving the Fund’s problems. To begin, we must 

agree upon shared goals. To that end, we offer a set of principles for implementing 

a 21st Century Universal Service Fund. We support extending USF to broadband 

by expanding the base of contributions in a technologically- and competitively-neutral manner. After a transition period, USF eligible carriers should be broadband 

compatible. We believe the size of the Fund must be disciplined through careful 

oversight and accountability, market incentives, and strategic investment in infrastructure. We should support carriers without regard to technology, provided that 

each can meet standards for affordable broadband and telephone service at a robust 

quality of service. Finally, we should approach USF reform as one piece in a larger 

set of broadband policies that includes opening up the spectrum for innovative wireless technologies and protecting competition in Internet services. 

We strongly encourage this Committee to uphold the remarkable and progressive 

commitment to Universal Service that is the foundation of our communications policy. Expanding USF to broadband is an essential step on our path to reforming the 

system by maximizing the return on public investment and regaining our position 

as a global leader in technology and communications. 

43 

4 Communications Act of 1934, 47 U.S.C. 151. 5See 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. 6Mark Cooper, ‘‘Universal Service: A Historical Perspective and Policies for the Twenty-First 

Century,’’ Consumer Federation of America and the Benton Foundation, 1996. 

Starting From Principle 

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

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 in 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 bringing affordable service to average citizens. At 

the time of the Communications Act of 1934, telephone penetration rates were 

around 40 percent—very similar to where we currently stand with broadband.6 The 

vision that inspired a policy that brought that telephone penetration rate above 90 

percent must now be applied to high-speed Internet access. 

There is much debate about whether it is appropriate to expand USF to cover 

broadband. However, a close look at the 1996 Act makes it quite clear that Congress 

has already decided on this question. Many of the Senators on this Committee 

fought for a broad, progressive definition of the communications services that would 

be guaranteed to all Americans. They had it right a decade ago. They still have it 

right today. 

In Section 254 of the 1996 Act, Congress instructed the FCC to define the services 

that would be supported by USF; and the Commission did not include broadband. 

However, Congress also instructed the FCC to base its policies on a set of explicit 

principles in Section 254(b). The first called for making quality communications 

services available at reasonable rates. The second read: ‘‘Access to advanced telecommunications and information service should be provided in all regions of the Nation.’’ If that statement lacks full clarity, we have the third principle as a further 

44 

7 Communications Act of 1934, 47 U.S.C. 254. 8See for example, FCC Chairman Kevin Martin, ‘‘United States of Broadband,’’ Wall Street 

Journal, July 7, 2005. 

guide. It read: ‘‘Consumers in all regions of the Nation . . . should have access to 

telecommunications and information services, including interexchangc services and 

advanced telecommunications and information services, that are reasonably comparable to those services provided in urban areas.’’ There is little doubt that Congress intended to capture in this definition the evolving modes of 21st century technologies—certainly including broadband.7

Some would argue that we cannot apply USF to broadband because a ‘‘substantial 

majority’’ of the public does not subscribe—a condition for applying USF support to 

a new service under Section 254(c). However, this misreads the statute. The ‘‘substantial majority’’ clause is subsequent to the Congressional commitment to covering 

advanced telecommunications and information services in Section 254(b). The conditions in Section 254(c) are not meant to modify the previously defined set of services 

that already fall under the principles of USF support (‘‘telecommunications and information services, including interexchange services and advanced telecommunications and information services’’), but rather the next generation of services, such 

as wireless telephony. In this analysis, the FCC may use its discretion to expand 

the scope of USF to broadband in ways it has not chosen to do in the past. 

But we need not get bogged down in statutory disputes about whether broadband 

should be appropriately supported by USF. Broadband capable networks are already 

supported by USF. Many of the Local Exchange Carriers (LECs) in rural areas have 

built converged networks that carry both voice and broadband data. This is a sensible investment, as a converged platform is a more efficient and forward-looking 

infrastructure. Many rural LECs receive resources from the Rural Utility Service, 

a fund that has made broadband compatible plant a requirement for grants and 

loans for many years. The E-Rate program has explicitly invested USF resources 

into Internet access for schools and libraries. This is sound policy based in the clear 

principles articulated by Congress in 1996—and it should be formally adopted in 

USF reform. 

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 U.S. 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 

U.S. economy. As this Committee has heard ad nauseum in hearing after hearing 

this year, the U.S. 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.8 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 to build rural infrastructure, which 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. 

45 

9See 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/reportldisplay.asp. 10 Yankee Group Research, Inc. February 2006, cited at http://www.emarketer.com/article.aspx?1003833. 11See 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/reportldisplay.asp. 

These conclusions comport with the findings of a study by the Pew Internet and 

American Life Project.9 Our research also confirms a recent survey showing that 

over 45 percent of broadband non-subscribers in the U.S. do not subscribe because 

of high prices. A further 10 percent report that service is unavailable.10 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 percent of the adult population does not 

use the Internet—a figure that held steady for the first half of 2005.11 But our problem is not only with adults, it is also children. Of the 30 nations in the OECD study, 

the U.S. 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 lowincome 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 

46 

success stories with broadband provision by carriers of all kinds—we should 

identify those blueprints and duplicate them. 

• 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 

Fund. 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. 

The article submitted with this prepared statement titled, Broadband Penetration 

in the Member Nations of The Organization for Economic Cooperation and Development—Why Does the U.S. Lag Behind? has been retained in Committee files. The 

article is also available at www.freepress.net/docs/usllag.pdf. 

Senator BURNS. Mr. Scott, thank you very much, and you raise 

some very, very interesting points in your testimony and I appreciate that. Senator Stevens. 

The CHAIRMAN. Thank you very much, Mr. Chairman. I’m participating in another hearing, in a markup, and also an item on the 

floor so I’m going to be in and out. Just want to ask you to put 

my opening statement in the record and to congratulate you for 

these witnesses. Before I go, I’ve got about 5 minutes. Mr. Scott, 

what’s your background? 

Mr. SCOTT. I did a Ph.D. at the University of Illinois in communications and worked on the House side for a little while before I 

went into the nonprofit world. 

The CHAIRMAN. Is your group bipartisan as well as nonpartisan? 

Mr. SCOTT. We try not to get involved in party politics. 

The CHAIRMAN. That means you can be all one-sided. 

[Laughter.] 

Mr. SCOTT. We’re goal-oriented, sir. 

47 

The CHAIRMAN. I like what you say and I like what you’re doing. 

How would you suggest we find a way for that coverage of 

broadband you asked us to make? 

Mr. SCOTT. Well, I think the contribution side is a complex problem that the Commission is considering. I think the approaches 

that have been put forward by Members of this Committee as well 

as outside researchers to apply contributions to numbers or connections or capacity are interesting ideas. I’d like to see more research 

to show what is the most efficient system. My own preference is for 

a capacity approach that recognizes that low-volume users should 

contribute less than high-volume users. 

The CHAIRMAN. Do you know what they call Universal Service 

out in the villages of Alaska? POTS, plain old telephone service. 

Mr. SCOTT. Sure. 

The CHAIRMAN. Now, I would like to pursue your objective but 

I understand you have some questions about that though, about expanding broadband through Universal Service payments, is that 

right? No? 

Ms. BLOOMFIELD. Actually, one of the things that I think is important, Mr. Chairman, is that NTCA does a broadband study 

every year and our last study for 2005 showed that 95 percent of 

our telephone companies are providing broadband to a vast majority of their service markets. One of the questions for this Committee becomes a big issue about pushing those take rates. Our 

take rates are still hovering below 20 percent, so in a lot of cases 

the infrastructure is there. The question is what kind of policies 

can be implemented to actually create opportunities and incentives 

for people living in these markets when some of them are lower incomes to actually take the service.JLW 

The CHAIRMAN. It’s my understanding that there’s a question 

here about block grants of whether we should use block grants or 

use Universal Service funds in the very high-cost areas. Didn’t you 

raise that question? 

Ms. BLOOMFIELD. I would be happy to answer that question. 

The CHAIRMAN. Did you raise it though? 

Ms. BLOOMFIELD. We submitted something to that effect to the 

record. If I could say, I think if you look at the Federal Fund as 

it exists, you have 95 percent penetration in all markets across the 

country, and, with all due respect, in terms of block grants there 

is something to be said for a Federal distribution system as opposed to states kind of creating winners and losers among themselves. And I think that when you allow states to create winners 

or losers you may have carriers in states where the state has no 

incentive to actually fight for some of the funding. I think you also 

add more layers, you add 50 different layers and different processes 

as we’ve seen in states that create their own ETC designation. So 

when it comes to things like block grants we feel very strongly in 

terms of actually using USF federally to build the infrastructure 

and that there are going to be some states, some carriers and some 

consumers in those states who will lose through that process. 

The CHAIRMAN. Thank you. In most instances the people who get 

the Universal Service payments in rural areas are the carriers of 

last resort. I think we’d agree to that, wouldn’t you, just generally? 

Who would like to answer the question whether competitors, new 

48 

competitors, should get the same Universal Service, should we duplicate payments on the same rural area in order to stimulate competition? 

Mr. HUGHES. I’m sorry, I didn’t understand the question. 

The CHAIRMAN. You have a carrier that’s taking Universal Service into a rural area? 

Mr. HUGHES. Yes, sir. 

The CHAIRMAN. You have some that are coming in now that want 

to bring another technology base and provide service in that area. 

Mr. HUGHES. Yes, sir. 

The CHAIRMAN. They’re asking for Universal Service payments, 

too. Do you believe we should duplicate Universal Service areas to 

the same high-cost area? 

Mr. HUGHES. Well, currently, it’s my understanding of the way 

it’s done it’s not duplication. Cellular South is authorized to provide service in a USF area in Mississippi and we do have that requirement. The same requirement that the RBAC or the incumbent 

ILEC has, and we thought we had it all along, we’ve tried to reach 

it and to approach with the same methods and the same requirements that it be something that can reasonably be done as is put 

upon the ILEC. So we’re experiencing that right now so we’re not 

having a problem with that. 

The CHAIRMAN. Thank you. I’ll be back, Mr. Chairman. Thank 

you all for—— 

Senator LOTT. Can I get in here at some point, too? 

Senator BURNS. Yes, sir. Senator Lott, you’ve been kept silent 

here for—— 

STATEMENT OF HON TRENT LOTT, 

U.S. SENATOR FROM MISSISSIPPI 

Senator LOTT. Well, I was a little late in arriving and I apologize 

to my colleagues and I’ll ask consent that my statement be put in 

the record. 

Senator BURNS. Without objection. 

Senator LOTT. I do want to thank the panel. I didn’t get to hear 

the first two witnesses but I was impressed with the ones I did 

hear. Mr. Scott, you lived up to your self-described billing, soft-spoken but powerful statement and an interesting one. 

As you know, I was very much involved in the writing of the 

1996 Telecommunications Act and we established a lot of rules and 

regulations which the industry has been dealing with. Obviously 

technology has changed. Even in 1996 we were still thinking primarily, about hardlines and how you get more competition. We had 

no idea the explosions or options and opportunities and technologies that have taken place and we clearly need to have a telecommunications reform act this year to get up to speed with what’s 

going on. So I’m hoping that this Committee—we’ve been having a 

lot of listening sessions, a lot of hearings, we need to mark up a 

bill here in the next couple of months. A critical part of that is 

going to be, how do we deal with the Universal Service Fund and 

who contributes, as you pointed out, and who benefits. My state is 

a big beneficiary. Out of the 66 entities that get these funds we’re 

number six. And there’s good reason for that. We have a lot of 

rural areas, we have a lot of poverty, and we want to make sure 

49 

that the best possible service reaches out to those rural areas. And 

I think some good progress has been made in my state. I’m particularly proud of our testimony here from Carson Hughes with Cellular South. He did a good job today even though I missed the very 

beginning of it, but I had an idea of what he was going to say and 

how he was going to say it because he and I have been exchanging 

pleasantries since the 1960s when we were college friends and fraternity brothers. He sends me Internet messages all the time which 

I can’t even get off the Internet but my staff gives them to me. 

But I do think that you’re right. Several of you have said—well, 

before I come back to Mr. Scott I want to acknowledge what Carson 

Hughes said in his testimony. After the hurricane, Cellular South 

really was very good, their service was better than just about anybody else. How do I know? Because I was down there trying to use 

hardlines which were all down. Intercommunication between the 

disaster area and the rescue groups was almost nonexistent. I had 

two cell phones, one which worked, and one which did not. And the 

one that worked was Cellular South. They were very good in the 

aftermath of the hurricane throughout the region. A lot of the region is not just the coastal developed area. You get 10 miles off the 

Gulf Coast and you’re in some pretty rural areas, so I want to 

thank the company for the job they did after the hurricane. 

Mr. Scott, you’re right in your testimony. There’s no real excuse 

for the United States dropping to 16th in the world in terms of provision and adoption of broadband. We’ve got to do a better job. And 

we’re going to try to find a way to do it. There’s no question we 

gave the FCC authority in the Act. You referred to that Section. 

But, the FCC has had a lot on them, and I think they’ve been trying to deal with a lot of advancing technology. They’ve done a good 

job, in some areas more than in others, and I’ve been very critical 

of them. I think we need to do more. I want to make sure that we 

get this good service to New York City as well as Nitta Yuma, Mississippi. And so we’re going to work with you and all sides of this 

debate to make sure that we have a good way to collect the money 

and a fair system of distributing it, and it has got to be fair on both 

ends. 

So your testimony will be helpful and I’ll review it all very carefully. While I don’t always jump out and co-sponsor legislation immediately, I keep my powder dry as long as I can so that I can then 

maybe be helpful in the end to help produce a good product. Good 

work has been done and we look forward to working with you over 

the next 3 months as we move this legislation forward. Thank you. 

[The prepared statement of Senator Lott follows:] 

PREPARED STATEMENT OF HON. TRENT LOTT, U.S. SENATOR FROM MISSISSIPPI

When the Telecommunications Act of 1996 was passed, we established a lot of the 

rules and regulations under which the industry plays. Technology has changed the 

industry, so we must adapt legislation to make sure that every American has the 

resources they need. 

Getting Internet, telephone, and cable to all rural areas is a challenge. This Committee must take it upon itself to make sure that the Universal Service Fund provides telecommunication services to ALL rural areas. 

There is no excuse for the United States to be Number 16 in the provision and 

adoption of broadband in the World. America is the most powerful Nation in the 

world, but most importantly, it is the land of opportunity and it is our job to make 

50 

sure that every American has the telecommunication services they require to fulfill 

their dreams through that opportunity. 

This Committee and the FCC both have an obligation to ensure that every citizen 

receives affordable and quality broadband, cable and telephone service whether they 

live in New York City or Nitta Yuma, Mississippi. 

Senator BURNS. Mr. Sununu, you just joined the Committee. Do 

you have a statement, sir? 

Senator SUNUNU. I don’t have a statement, no, and I have a few 

questions that maybe I’ll phrase in the form of a statement. But 

I’ll be happy to have some of the other members—— 

[Laughter.] 

Senator BURNS. Thank you very much. Mr. Scott I was interested 

in your statement. Are you suggesting in your testimony that the 

USF fund, the use of those funds be based not on the cost, but also 

the economic or the economy scale of the areas they serve? 

Mr. SCOTT. Well, you’re pressing my level of expertise on the criteria requirements for certifying a study area. But I definitely 

think that there’s good reason as we move from a dial-tone world 

to a broadband world to look very carefully at what the criteria 

should be for eligibility and what the most efficient methods to invest public resources in that area are to deliver the services at the 

lowest possible cost to every household in that area. 

Senator BURNS. Well, there are a lot of us here that have gone 

from this business of business-learning in healthcare and when you 

go into healthcare, and you have corresponding hospitals and clinics and everything else talking to each other, that requires 

broadband and we can’t get around that. And so I was interested 

in that. 

Mr. Clark, Commissioner Clark, you might tell us just for the 

record the Antideficiency Act, how important that is, why it is necessary, could you do that for the Committee just for the record? 

Mr. CLARK. Sure. 

Senator BURNS. Because you deal with it as a State Commissioner. 

Mr. CLARK. You bet. I have not heard anyone suggest that a permanent exemption, or that an exemption from the ADA is something that’s not warranted in this particular case, and it helps with 

the efficiency of the Fund itself in helping to keep whatever methodology is chosen as minimal as possible. NARUC as an association 

is very supportive of a permanent exemption from the ADA. We do 

not see the uncertainty that’s caused by a year-to-year exemption 

as a positive thing. 

Senator LOTT. Don’t you think though, if you’ll yield, that we 

should come up with a system where that permanent exemption is 

not necessary? 

Mr. SCOTT. Mr. Chairman, Senator, the contribution side is clearly a very key question in supporting the Fund. Hopefully, yes, 

whatever fixes it is great and it will probably create, a statutory 

fix will probably be needed, could at that time make that unnecessary. 

Senator LOTT. Can I infringe on your time just a minute more 

because this is—— 

Senator BURNS. I have a feeling you’re going to do it anyway. 

[Laughter.] 

51 

Senator LOTT. My buddy here. You all are right and this is very 

helpful as you point out, yes this is the crux of the conundrum. 

What we need though is some ideas. You’re saying good luck; we 

hope you can find a good fix. And, you know we’re going to have 

to take the flak for what we decide and we don’t like that. We 

would like to be able to blame it on your recommendations. 

[Laughter.] 

Senator LOTT. Now, Mr. Scott, you’re brilliant. You got a Ph.D. 

in telecommunications from a university up there in Illinois. You’ve 

got to give us some suggestions here how we may do this thing and 

do it in a fair way. Thank you, Mr. Chairman. Would you like to 

respond to that? 

Mr. CLARK. Well, as elected commissioner I certainly appreciate 

your perspective. Senator, this is just speaking for myself and not 

necessarily the association. The FCC has suggested and appears to 

be leaning toward a numbers-based type contribution methodology. 

And from my own perspective, I think that may be acceptable in 

the short-term but pegging it too closely to numbers in the longterm, I don’t think probably works. Because what we’re talking 

about I think is a fund that’s evolving to supporting networks as 

opposed to a particular service, such as voice, which is what it’s 

currently pegged at; and so I think it’s an interim solution, but 

frankly, probably something more connections based or total company revenue based is a longer term solution. 

Senator LOTT. I don’t think you got in too much trouble with 

that. 

Senator BURNS. No, I think you did good. 

[Laughter.] 

Ms. Bloomfield, let me ask you, are there areas that we serve in 

rural America and where USF has met a point of diminishing returns, where, in other words, subsidy is not necessary because of 

competition and other factors? Have we got carriers collecting Universal Service funds now that probably do not need them? 

Ms. BLOOMFIELD. I think the important distinction Senator, is 

that Universal Services are a cost-recovering mechanism. So in reality the carriers are getting reimbursed for investments that have 

already been made into the infrastructure. And I think—I know 

sometimes people like to kind of present incumbents as these ancient carriers, but in reality they created the most efficient networks that they could, and I think as we see technology evolving, 

we see the interest in VoIP and IPTV and broadband services. I 

think that infrastructure needs to be maintained. 

I think the other key component; we’ve talked a lot about where 

wireless fits in. I think we’ve seen since 9/11 there is a value in 

some redundant networks and I think that there is something to 

be said for rural residents having access to both networks. And at 

some point you’ve got to judge what makes sense. For example, in 

the State of Wisconsin there’s a study area that has six ETCs. Do 

you need six ETCs that are actually all getting the incumbent’s 

cost? At some point you hit some inefficiencies. But I think there 

are ways to take a look at some of these things as a way to ensure 

that if things are done correctly and where carriers are kind of assessed either, certainly the incumbents have their costs. What I 

was curious looking at was a more efficient way of doing it whether 

52 

it was a proxy model of some sort; it can keep the Fund sustainable. But I think as Congress and policymakers look toward that 

goal of making sure that all Americans have access to broadband, 

I would say in all honesty, networks continue to need to evolve. 

Senator BURNS. Tell me in rural settings and you’d be on a 

wireline and now I’ve got a cell phone, do we see those customers 

dropping their wired service? 

Ms. BLOOMFIELD. There certainly has been a drop in wireline 

services. The one component I think people don’t fully understand, 

is that wireless services need wirelines as well because what happens is there’s a backhaul issue where you’re on your cell phone, 

you’re placing a call, it’s going to the mobile switching center. And 

in a majority of the cases those calls are going over a backhaul system over a wired network. So in reality there is some relationship 

between the two networks. So you can’t simply do away with the 

wireline network and assume that those wireless phones will actually work. 

Senator BURNS. Senator DeMint. 

Senator DEMINT. Thank you. 

Senator BURNS. I’ve taken up too much time here already. 

Senator DEMINT. Sure have taken a lot of time, Mister. 

[Laughter.] 

Senator DEMINT. I’d first like to start by correcting the record in 

my opening statement. I used some figures that were incorrect. The 

current USF fund is $7.1 billion a year and 10 years estimate’s 

around $50 billion. I think I mentioned around $500 billion. I 

added an extra zero but that’s a real difference even in Washington, so I think when you get up that high you are talking about 

a real difference. 

Senator LOTT. That’s talking about a real difference. 

Senator DEMINT. I think when you get up that high you are. 

Just a couple of points. I do appreciate the testimony and Mr. 

Scott; I’d like to just add one thought to your thinking, the poverty 

problem is important. It’s also important to recognize that poverty 

is heavily correlated with illiteracy in this country and no amount 

of technology or connectivity is going to overcome that. Communication could be part of the solution in rural areas as far as overcoming illiteracy, but subsidies to connect with an illiterate population is maybe getting the cart before the horse. I hope you’ll include that in your substance. 

Just a couple of thoughts, I know a little bit about living in the 

country and I think a lot of the kind of presumption of our testimony today has been that we need to make living in the country 

the same as living in the city. So we need to have the same services, and I think all of you know on the surface we can’t do that. 

I mean, when you live in the country you might not have a sewer 

line, you have a septic tank but you have service. You might not 

have city water, you have wells, but you have service. There’s no 

bus service and taxi service, probably not an interstate highway 

close by, the trash pickups you might actually have to take it yourself, schools are a little longer drive. The Federal Government cannot make living in the country the same as living in the city and 

we shouldn’t. But I think if we use some common sense, particularly when it comes to communication, we can still make sure that 

53 

folks living in the rural areas of America have the best in the 

world. But I think it requires some new thinking, and I think Senator Lott was pleading for some suggestions here, and I know when 

Senator Stevens was here a while ago he asked the question about 

whether we should duplicate the cost if we have a primary carrier 

there receiving USF funds. Should we also fund the competitors as 

they come in, will that help? And I kind of want to just ask a question of the panel, maybe some of you will volunteer to this, I believe the whole cost recovery method of reimbursement is a flawed 

system at this point. Perhaps it was needed in the beginning but 

it creates a lot of perverse incentives and certainly does not encourage efficient delivery. My question to you, and I think this would 

get at the concerns about duplication as we have more competitors, 

is there anything wrong with a system where the carriers are reimbursed based on their numbers of customers that are served and 

the types of services that they get and the performance or the quality that is delivered? So it wouldn’t matter necessarily how many 

carriers came in if one replaced a hardline with a cell phone then 

the hard line loses reimbursement and the cell phone may get that 

additional reimbursement. I’m just looking for ways to fund this 

that might become sustainable over time so that we can actually 

provide the services to the rural area, but not necessarily just subsidize the various technologies. So would anyone like to volunteer? 

Mr. HUGHES. Let me first of all maybe correct what I may have 

left as a false impression that when a competitive ILEC comes in 

and is an ETC and is allowed to have USF service under the current configuration, they don’t get money until they have customers. 

They get paid based on the customers they have so that may address part of your question. 

Senator DEMINT. Do they not have a cost recovery type of payment system? 

Mr. HUGHES. No, sir. Their current, and we think it’s a good 

plan, now it’s based upon some sort of a mark that’s in the ground 

that in this case that mark is the cost per line that is used by the 

incumbent ILEC in that particular area. Now—— 

Senator DEMINT. So even if the new carrier comes in with something that is more efficient and cost effective, they’re paid based on 

the cost of the existing carrier lines? 

Mr. HUGHES. Well, you have to remember the quick answer is on 

a per line basis, that is correct. You have to remember that no 

money flows through to that competitor until he has a customer 

within that area, then that particular competitor has to make an 

accounting for the monies that flow to him to—in our case—— 

Senator DEMINT. Based on how much he spends? 

Mr. HUGHES. Every bit of USF funds he gets he has to put back 

in the high-cost area. In an effort to meet this criteria, you try to 

give them reasonably comparable services to what’s enjoyed in the 

urban area. So, whatever dollars we get we turn around and put 

them back in that rural—— 

Senator DEMINT. Which is based on how much you can spend? 

Mr. HUGHES. No sir, it’s not based on how much you can spend. 

It’s if you can get enough customers, the more customers you get 

the more money you get, but if you spend a billion dollars out 

there, it has no impact on the amount of money you recover diVerDate Nov 24 2008 13:18 Jan 25, 2011 Jkt 063764 PO 00000 Frm 00057 Fmt 6633 Sfmt 6601 S:\GPO\DOCS\63764.TXT SCOM1 PsN: JACKIE
54 

rectly. It might give you more customers which in turn may give 

you more money. 

Senator DEMINT. But if you’ve got a telephone, a hardline service 

to the home, that carrier gets money for that, and if that same customer gets a cell phone, that cell phone company gets money for 

that. And then we want to get some additional broadband service, 

that carrier’s going to get service for that, so we’re going to subsidize three or four different technologies in one home. 

Mr. HUGHES. Currently the wireless system is a competitive system, were it feasible to just go out there without any support whatsoever, they’d be there now. They’d be there now. So the places 

that have the lack of service, that is an indication that they need 

some support. Some support allows them to go out there, and let 

me just say this, in Mississippi, the Congress has allowed USF to 

be used by wireless. We’re able to have a CDMA system which is 

a step toward broadband. And we’re currently testing in a community the delivery of broadband by wireless. But back to your question, we would get no money unless we had a customer in that 

area, and then that money we do get we have to put back in the 

area. Or if in fact we’re going to allow competitors to have some 

support, as long as we’re going to have competitors that are getting 

support, we think this is a good way. Because it allows the—no 

matter how many you have (competitors) in the area, only those 

that have customers get money and they don’t get a full cost recovery. 

Senator DEMINT. Well I want to be on record, supporting, making sure that rural customers have service. But we need to figure 

out how to stop subsidizing both a sewer line and septic tank in 

homes in the country and that’s what we’re doing now. So I yield 

back. 

Senator LOTT [presiding]. Thank you, Senator DeMint. Senator 

Burns had to go make an introduction, he’ll be back in a few minutes. Senator Sununu. 

STATEMENT OF HON. JOHN E. SUNUNU, 

U.S. SENATOR FROM NEW HAMPSHIRE 

Senator SUNUNU. Thank you, Mr. Subcommittee Chairman. Well 

I’m a little disappointed in the makeup of the panel. I very much 

appreciate all of your work, your commitment to your respective 

companies or associations. I believe everyone on this panel does 

good work, tries to do the best with the resources they get from 

Universal Service. Try to be good regulators, try to be good association members, so I don’t criticize your effort. But the fact remains 

that with the exception of Mr. Scott, you all have a vested interest 

in the existing system the way it’s designed. You have absolutely 

no interest from what I can discern at making any modifications, 

any changes from the status quo. You benefit from the protection 

of the status quo. And there’s nothing—it’s not your fault. But it’s 

just a fact of the way the system is structured, and what you do. 

And I just don’t think it serves us especially well to only visit with, 

talk with people who are currently benefiting by the status quo. 

We’re here to talk about the distribution system. And I think it’s 

at least worthwhile to discuss real options for modifying the distribution system in a way that might better accomplish the goals 

55 

of this very important program. The fact is what Senator DeMint 

just described, is full cost recovery, in fact it’s more than cost recovery. It’s just not accurate to say the new entrant will get cost recovery, but not full cost recovery, what they get is cost recovery of the 

cost of the incumbent. Which in almost all cases, at least on a moving forward basis, a marginal basis is greater than their cost. Now 

that’s not necessarily good or bad, we can argue that it encourages 

at least a few additional entrants. But of course we heard that we 

don’t want too many entrants, we don’t want too much competition 

because that undermines the status quo. But it’s not rational in my 

mind to have a system that automatically awards someone the cost 

of another competitor. That is not necessarily a rational system. 

More importantly, it’s not the hallmark of a fair and efficient system. Senator Lott talked about the importance of this system being 

fair. It absolutely must be fair. It also should be efficient. And in 

order to be efficient you have to have, I think, better incentives 

than we have today. At least overall at the moment, we have a system that discourages competition, it discourages innovation. You 

have a system where participants specifically design products on 

the basis of their eligibility to qualify for Universal Service reimbursement; you cannot argue that that’s an efficient system. You 

can’t argue that that’s doing a good job of encouraging innovation 

and new technology deployment. And I think overall it really hasn’t 

encouraged the deployment of broadband services, in particular for 

the reason I just described. It was suggested by a panelist that 

companies have, or have incentive to install the most efficient networks that they can. This is simply not the case. If you’re being reimbursed on a cost basis you don’t have any incentive, at least 

through this system to improve efficiency, because you don’t benefit 

economically through this system by improvements in efficiency. 

That’s the nature of a cost recovery system. And those are the 

things that I think Senator DeMint and I believe others on both 

sides of the aisle would like to see improved in Universal Service. 

Greater incentive for efficiency, greater incentive for deployment of 

broadband, and refocusing of the program on its essential mission 

which is serving those in high-cost areas, rural areas, and those 

with the greatest economic need. 

I would—now having said all that, maybe you believe I’m wrong 

on all those points. But I’ll give you a chance to answer a specific 

question related to the points I made, and that is, is there a specific recommendation that the panel, any of the panelists would 

like to make to change the system of distribution of Universal 

Service; we’re not talking about adding more money. We’re not 

talking about collecting; we had a hearing, a good hearing, an excellent hearing on methodologies of collection, numbers of connections, or throughput that Mr. Scott was talking about. Let’s talk 

about distribution, that’s what we’re here for today. Are there any 

changes that you would recommend for the system of distributing 

funds? We’ll start with Mr. Mao and go right down the list. 

Mr. MAO. I’d have to say that the complexities of how the distributions system works are well beyond my expertise. I’m here as 

an educator, and generally speaking, an end-user of the system 

itself. So I’d be happy to go back to our folks back at the state who 

56 

deal more with how the funds are distributed, and get back to your 

staff, but I can’t do that personally. 

Senator SUNUNU. I’ll interrupt there, then we’ll continue, but I 

see this as one of the problems. That in representing the education 

system, you see a bunch of money coming in, which if you’re in the 

education system you’re for that. Because it’s good. More money 

coming into the system. Less money that you have to provide locally. And instead of you or those that you represent looking at the 

system and deciding if this in an efficient allocation of resources in 

this particular case within the education system, your natural reaction is to defend the status quo. And I think there are many—let 

us just say very wealthy school districts across America, getting a 

lot of money from the E-Rate system, and that means less money 

for those at the lowest end of the economic spectrum, and those in 

rural areas that have the toughest time getting the services that 

Senator DeMint described. And I would encourage you to do what 

you described. Talk to people, have an honest assessment about 

where this system of distributing funds within your realm of concern is really effective. Yes. Ms. Bloomfield. 

Ms. BLOOMFIELD. Thank you. First of all, I’d like to note that I 

think the ultimate beneficiaries are truly the rural consumers. And 

the one suggestion I would throw out regarding the Identical Support Rule, which you noted about the multiple ETCs coming in and 

getting identical support from the incumbent, I think there are a 

couple of different things that could be looked at. First, I think that 

competitive ETCs could come in and choose to go through a similar 

separations process that is ongoing from the incumbent, where you 

figure out what your regulated and your unregulated costs are and, 

are reimbursed accordingly, which would get down to the actual 

costs. Or second, you take a look at creating some type of a tiered 

wireless proxy model. That is something that will more accurately 

kind of assess, but maybe be a little bit bureaucratically easier for 

wireless carriers to figure out what their actual costs might be. 

And third, there are frankly some competitive ETCs in the Fund 

who are regional and nationwide carriers, and I think that for the 

sake of efficiency in the Fund, to take some look at whether those 

companies should even be in the rural high-cost portion of the 

Fund, should they be in the non-rural portion of the Fund? Should 

they be assessed on a different basis to ensure that the funds are 

targeted very specifically? 

Senator SUNUNU. But that last point is a case of defining a particular carrier a particular way, not making any change to the distribution system. 

Ms. BLOOMFIELD. I would assume that for the most case, those 

costs will be lower. And again, you know, the less money you get 

going out on the distribution side because you’re targeting it specifically, I think it creates a more efficient use of the funds. 

Senator SUNUNU. And although you believe that ultimately, the 

purpose of Universal Service is to support the consumer, you oppose any discussion of proposals to give any money to the consumer 

directly. 

Ms. BLOOMFIELD. Again, it goes back to the network. I represent 

small telephone companies who build networks. I don’t know how 

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57 

down in some of the network deployment that they’re doing because of the uncertainty that’s out there in the regulatory market. 

Inter-carrier comping of what? Some of the FCC rulings on Universal Service, those will slow down some of the network supports. 

So again, yes, I say that you’ve got to think about building the network. 

Senator SUNUNU. Yes? 

Mr. HUGHES. Senator, if I understood, that’s also what I might 

call a voucher system where you give the voucher to the consumer? 

Senator SUNUNU. Yes. 

Mr. HUGHES. Yes. We’re in the business of competing for customers. Send our customer the voucher. We’re probably the best 

suited of all of the folks that are out there now to go compete for 

that voucher. Now, having said that, you know, that’d be a great 

world as far as us personally, but there has to be something said 

for maintaining that underlying infrastructure that’s used, the 

wireline. If our goal is to ultimately have reasonably comparable 

services to those available in the urban areas, a factory coming into 

town is going to want to see a wireline telephone. He’s going to 

want to be able to pick it up, but he’s going to want to be able to 

use his wireless device, and it may be the one he prefers, it may 

be the one he uses the most. If we come to a head-to-head fight 

about it, we think we’re in good shape. But I think if our goal is 

to have that reasonable comparability, we’ve got to do something 

to make sure that the underlying wireline infrastructure is there. 

But vouchers—listen, we compete every day. We have eight— 

seven—eight competitors out there. That’s our business. We’re in 

the competition business. We believe in it. Bring them on. 

Senator SUNUNU. Excellent. 

Senator BURNS. Senator Snowe. 

STATEMENT OF HON. OLYMPIA J. SNOWE, 

U.S. SENATOR FROM MAINE 

Senator SNOWE. Thank you, Mr. Chairman. I want to welcome 

Mr. Mao here today, who has been a great leader at the Department of Education in Maine, on issues related to education and 

technology. His statement is illustrative of the value that the ERate program has brought to Maine schools as well as schools 

across this country. As one of the authors of the E-Rate program, 

along with my colleague, Senator Rockefeller, I am really encouraged and heartened by the value and benefits that it has brought 

to many schools and classrooms that otherwise would not be able 

to afford Internet access. Frequently in this debate, we overlook the 

benefits that have been brought by E-Rate program. I hope that we 

build upon the status quo and build upon who receives support 

from the Universal Service Fund. The purpose of the Universal 

Service Fund was to close the gap in America by ensuring that 

rural areas, underserved areas and poor areas in America have access to the benefits of telecommunications and technology. This is 

also the purpose of establishing the E-Rate program for schools and 

libraries. The success of the program is demonstrated by the fact 

that when we were re-writing the Telecommunications Act in 1996, 

only about 14 percent of the classrooms were wired. Today, that 

level has reached 95 percent. More than $14 billion in funding has 

58 

been distributed from the E-Rate program to schools and libraries 

across this country, and most of the E-Rate funds went to schools 

where over 50 percent of the students in the district qualify for the 

National School Lunch Program. This is a real benefit to the low 

income and the disadvantaged. I hesitate to think where our 

schools and libraries would be today if we did not have the E-Rate 

program and the ability to distribute those funds to schools across 

America so that classrooms can be connected. I doubt that the Federal Government and the Congress would have provided the more 

than $14 billion for that purpose in any budget. We clearly have 

underfunded education in many categories, so I doubt that we 

would have been providing funds in this area. When you look at 

broadband deployment, we’re not even there yet. We rank 16th in 

the world with respect to broadband deployment. Therefore, connecting our classrooms and schools would probably have been well 

behind too. Starting from that point, Mr. Mao, I would like to hear 

from you. What do you think we should do in the future to expand 

on the E-Rate program in providing technology to classrooms? 

What do you think we ought to be doing now? 

Mr. MAO. Thank you. I think the key for schools and for the ERate program is to make sure that the system itself, regardless of 

the complexities of paperwork and distribution channels and so on 

and so forth, that the funding maintain itself and is responsive to 

the growing needs. I think what we’ve seen in Maine, particularly 

because of our laptop program, which I think many of you may 

start to see in some of your states, I know we’ve been talking to 

lots of them about this, and they are all looking to try and do something similar, that the need in schools continues to increase. And 

so, the amount of broadband bandwidth that any particular school 

may see today is less than what they’re going to need tomorrow. 

And, to speak to something that Senator DeMint mentioned before, 

that it’s important to remember that literacy and numeracy can be 

addressed by the Federal Government by supporting E-Rate because that connectivity that we provide to our schools is exactly the 

primary source for all of our rural schools to get to content. Information is the key to education. I think we know that we are in an 

informational society today, and access to information is where all 

of the power is, so to speak. And as an educator, you need to have 

access to information in order to educate your students. And so, by 

providing that universal broadband access to all of our schools so 

that they all have the same access on the same playing field, we 

guarantee that everybody has the same opportunity because you 

never really know where the next Bill Gates may come from. He 

could be living in Fort Kent today. And because he has broadband 

access, he will be able to develop those skills as a student today 

to become the Bill Gates of tomorrow. 

Senator SNOWE. Thank you. Ms. Bloomfield? 

Ms. BLOOMFIELD. One of the things that I would say with our 

rural carriers and their markets is encouraging the partnership. I 

think that the dialogue—the communities where we’ve seen the ERate being used most effectively is where the local companies are 

talking to their school districts and working together to ensure that 

the schools have the technology that they need, and I would just 

59 

encourage that continued dialogue and support from the E-Rate 

program. 

Senator SNOWE. Would it be possible to have that kind of support 

without the E-Rate program? What would happen with our school 

systems if we didn’t have the E-Rate program going forward? 

Ms. BLOOMFIELD. Well, I date myself in saying I remember the 

days without the E-Rate program, and I will tell you that it was 

very hard for rural carriers because they tried to do a lot of very 

creative things with their schools. They tried to dedicate dark fiber. 

They tried to give away the service, which is very hard when you’re 

a regulated industry, because the schools in rural America can’t afford some of these programs and access. So, I think the advent of 

the E-Rate program has really been a boon for these rural communities in terms of creating a system where their schools can go to 

get these resources. So again, I see the need to continue to educate 

the school districts about working with their telephone companies 

to get access to the infrastructure they need to provide these services. 

Senator SNOWE. Thank you. 

Senator BURNS. I will tell you that the rural telephones and the 

cooperatives did a great job from the outset of hooking schools together in this type thing before we had E-Rate. They were doing 

a lot of work. Senator Stevens. 

The CHAIRMAN. Thank you very much. You know, I want to get 

back on the track I was on before. There are now about 150 villages in Alaska that don’t have dial-up Internet. They get Internet, 

but they have to dial long distance, and they get charged for the 

long-distance call. We don’t have cable in most of our state, and 

many of the rural telephone companies don’t offer DSL service. I 

think that’s available by satellite, but it’s expensive, and it’s not 

supported by USF. So, I really think we’ve got to take a look at 

this from my point of view of what happens to USF and what it 

covers. I agree to some extent with my friend from New Hampshire. The problem is the costs are stated by the recipient, and 

there is no leverage as far as keeping down the cost. And Senator 

Snowe, it applies to schools and libraries and health facilities too. 

We pay their costs. There’s no standard out there for how much 

cost. There is still the rumor that one school was almost torn down 

in order that it could be rewired to take Internet, and what we 

really did was rebuild a school rather than provide access. Now, I 

think we have to find some way to deal with it. We also have the 

situation I’ve tried to cover with Ms. Bloomfield, where you have 

an existing carrier, and that carrier is probably the older carrier. 

It’s got fixed costs, okay, and it’s getting USF now. You have a new 

carrier that comes in, and it’s going to use a different technology, 

its costs are very low. But you know what it gets from the USF, 

it gets costs based on the original provider, not the costs based 

upon its own system. Now, that’s what’s causing this Fund to be 

attacked, I think. You know, I hope that we can find some way to 

create competition and lower prices and meet needs, and we have 

to call on all of you to get us some suggestions on how to do that, 

and I would urge you to give us some suggestions. And that’s why, 

Mr. Scott, I’m coming back at you. You’ve got a think tank about 

60 

this. And I think that nonpartisan group, as long as it stays nonpartisan, we’ll rely on it a lot. 

Senator BURNS. In this town? 

The CHAIRMAN. You are a misnomer in this town, but we all look 

for a real backboard to bounce things off in a way that we don’t 

get a political answer. And I’m not saying you give us political answers because you give answers based upon situations that you 

deal with yourself. Which we honor, but still, we’ve got to transcend the broadband. I come back to broadband again now. If we’re 

going to keep up with the world, Alaskans in rural Alaska need 

broadband. And as a matter of fact, the Federal agencies in Alaska 

are on broadband. And I do think we have to find some way to get 

the same to the villages, to people who operate businesses in rural 

Alaska, just like we would get them to people who operate businesses in rural Mississippi or Tennessee. They get them, but we 

don’t. Now, anyone got any suggestions? How can broadband go 

into very distant rural service without increasing costs? Anyone 

know? Mr. Scott? 

Mr. SCOTT. Well, I’ll take a stab at that one. I think we have to 

recognize in the Universal Service process that there are different 

kinds of rural areas. It’s a different process to drag a local loop out 

to a remote ranch than it is to provide broadband to a village that 

just happens to be 500 miles from the nearest fiber line. And I 

think we have to be flexible and forward looking in our ability to 

recognize that technologies like wireless Internet may be the most 

efficient, least-costly solution to bring the highest quality of service 

to that area. And if so, we need to be prepared to put USF funds 

behind that technology. And if the Commission apparently does 

not—— 

The CHAIRMAN. We being the Universal Service funds? 

Mr. SCOTT. Yes, sir. 

The CHAIRMAN. Do you agree with that? The others, that they’ve 

mis—— 

Mr. CLARK. Mr. Chairman, I’ll take a stab at it as well, and 

hopefully this will answer some of Senator Sununu’s questions as 

well, speaking for myself and not necessarily the association. My 

answer would be to both; we have to change support to networks 

as opposed to a particular service. And perhaps we do a lot better 

job of targeting to truly rural areas, and we support say one 

wireline network, and perhaps one wireless network, but not multiple, multiple competitive carriers and then try to rationalize the 

distribution so that we end things like the identical support rule. 

And things like carriers getting reimbursed on every handset that 

is handed out in a particular family, things like that which would 

help control the growth of the Fund while continuing to target support to truly rural areas. 

The CHAIRMAN. But if broadband’s going out there should we 

support satellite delivery to rural areas with the Universal Service 

funds? 

Mr. CLARK. Mr. Chairman, perhaps if that’s the most efficient 

way of pressing that broadband out to that particular area, it may 

be. 

The CHAIRMAN. That would be my answer too. I would hope that 

we get to the point where the bill says, the FCC or whoever is adVerDate Nov 24 2008 13:18 Jan 25, 2011 Jkt 063764 PO 00000 Frm 00064 Fmt 6633 Sfmt 6601 S:\GPO\DOCS\63764.TXT SCOM1 PsN: JACKIE
61 

ministering this fund is going to look for the most efficient system 

available. And as technology develops it’s going to have to shift. If 

it costs less but provides the same service, it’s going to have to 

shift and save the Fund as we go along. Would you agree with 

that? 

Mr. SCOTT. Mr. Chairman I would say yes, if that’s the most efficient way. 

The CHAIRMAN. Mr. Hughes. 

Mr. HUGHES. I think there’s a lot to be said. First of all we need 

to probably—I heard a distinguished Senator the other day say 

that we ought to be talking about communications. And we ought 

to be talking about your right to communications. And I thought 

that was great. We pay people to come up with stuff like that. And 

here I got it free, and I’d—— 

The CHAIRMAN. I seem to remember that. 

[Laughter.] 

Mr. HUGHES. I believe I remember him too. But I would add to 

that, this Southwest Airline, you’re free to move about the country, 

you have the right to communications and you’re free to move 

about the country. I’m—I think we ought to allow the competitive 

entities to compete and to limit it to one entity, one wireless, and 

if it were up to me, you know that would be the greatest thing 

since sliced bread for my company. But it would not be good for the 

rural areas there served. There may be some exceptions and it may 

be that there’s—and it may be that only one entity would want to 

go in somewhere and get that support. But I would urge that the 

Universal Service Fund remain on a competitive basis and in essence, the competitive LECs are on just about a voucher system. 

They don’t get any money, unless they get a customer. You know 

they have to have a customer there. 

The CHAIRMAN. Well what do you do about the cost situation? 

You have a current provider and along comes new technology and 

its cost base is literally less than half the original provider. How 

do you handle that in terms of being fair about Universal Service? 

Mr. HUGHES. That’s a good point and it makes you think. And 

on its face, it’s almost a straw man when you think about it 

though. The current system allows an entity to recover based upon 

a mark on the ground. And that particular mark has been set in 

this case as being the cost per line. Now again, you can have as 

many competitors as you want, it’s the number of customers that 

you get that determines what you have there. 

You know clearly you could have cost studies; you could go to 

these other methods that are proposed. The problem with that is 

this isn’t the last rodeo. This is technology, there are going to be 

other technologies. So each and every time we do that, we’re going 

to have to have new cost studies, we’re going to have to have new 

methods of determining what is included, new methods of accounting for it. It has taken years to get in place what is in place now. 

We believe that the—that’s something to be said for knowing 

what’s going to happen and to base it upon the incumbent costs 

given that there is a limited number that you can have in the area, 

it’s capped. There’s a cap on the amount of money that can be 

spent over there, it’s not spiraling out. That’s another kind of a 

straw man, it’s not spiraling out of sight because of competitive 

62 

LECs, it’s capped. You’ve got to have the customer. Yes you could, 

to answer your question. You could do a cost study for every sort 

of technology that’s out there, and as we get more you could do 

each one, but one of the problems that people seem to have now 

with the programs is the complexity. Imagine the complexity if you 

had eight different technologies, each one of them based on their 

own cost studies, each one of them based on their own method of 

determining what’s out there, what’s to be done. It could become 

much more of an administrative nightmare. 

The CHAIRMAN. Thank you, Mr. Chairman, one last thing, a 

setup. I’ve been listening to Senator Sununu, and I think he makes 

some points. I’ve been thinking about asking the Committee to put 

in this bill a sort of random audit of costs, of all recipients of Universal Service funds. Sort of a little GAO if you will, to decide what 

part of the country to look at, and not auditing everybody, but a 

random audit to see the fairness of the costs and determine whether or not there is anything we can do to reduce the costs that are 

so automatically paid by Universal Service funds. We can’t audit 

everybody, but I do think a random audit concept, sometimes, some 

libraries, this place, schools, and other places, the health facilities, 

and the providers. Everyone that gets Universal Service funds 

would know that there’s a possibility that someone’s going to come 

knock on your door and say prove those costs, what do you think 

about that? Mr. Scott, do you think I’m on the right track? 

Mr. SCOTT. Yes sir, I think that’s a good idea. I think I’d be remiss as a consumer advocate if I didn’t say that we need to make 

sure that the consumer contribution to the Universal Service 

achieves a commensurate consumer benefit on the other end from 

the distribution. 

The CHAIRMAN. Mr. Hughes, and then I’m finished. 

Mr. HUGHES. We certainly want sunshine on that—that’s why we 

file all the reports. We get the money, the USF money; we want 

the people to know what we do with it. In our particular case we 

receive Universal Service funds but there has never been a situation since we’ve been receiving it that we have not exceeded the 

amount that was spent in that high-cost area, from the USF funds 

that were received. Our own money is going in there also. So we’ve 

got a nickel in the game also, but it—but were it not for the USF 

fund we could not have expanded. We would not have CDMA service all over the state of Mississippi today; were it not for the Universal Service Fund. Because of it, it makes it something that we 

can put a pencil to it and make it work. 

The CHAIRMAN. Well I’ll yield to the Chairman. In the final analysis Senator Burns has been my guru, I went out and visited his 

place there in Montana. If you haven’t visited that laboratory 

they’ve got out there to explore how this whole system works you 

ought to do that. But he and I have talked long and hard, and I 

think we’ll be able to get together here and get a provision in this 

bill that will assure a continuation of the Universal Service in a 

way that most people want to see it done. Thank you, Mr. Chairman. 

Senator BURNS. Along with that, I think something has to be 

done along those lines just to protect the integrity of the Fund and 

that it does what it’s designed to do. Mr. Mao, we’ve heard of 

63 

abuses in E-Rate, misuses of money. And we’ve heard all kinds of 

stories. From your standpoint is that a problem for E-Rate? 

Mr. MAO. I think from a public perception perspective it’s always 

a problem. But I think typical of most programs of any sort; any 

instances of fraud or abuse are always highlighted and get 50 million times more press than those events where things are working 

well. Which is why I was so grateful for the opportunity to talk 

to—— 

Senator BURNS. It’s the same in politics too, I’ll guarantee you. 

[Laughter.] 

Mr. MAO. Absolutely. So I think it’s important that we continue 

to make sure that the public and the Members of the Committee, 

and others are aware of the fact that E-Rate is a successful program for schools. And it has enabled incredible things to occur in 

schools and to speak to Senator Sununu’s discussion about innovation. It is E-Rate that allowed Maine to innovate to a point where 

we have deployed a one-to-one laptop program that has not only inspired our own teachers and students; but inspired at least six or 

eight other states to look at that kind of an educational program, 

as well as the folks at the MIT media lab, to develop new technologies, to build a device for less money, to deploy across the 

world, and to change the nature of education. So it’s exactly that 

kind of program that created those kinds of innovations. 

Senator BURNS. Could we, going back to the conversation I had 

with Mr. Scott, are there economies of scale and should there be 

a means test? We have some schools that are very wealthy. And 

they have a tax base that allows them to do great things. Maybe 

they don’t have a school equalization program like we do in Montana, that sometimes works and sometimes it doesn’t. But should 

we take a look at that in order to make these dollars work in 

places where we really need the E-Rate? 

Mr. MAO. I think that the E-Rate program already does that. 

Right now funding to schools and libraries is based on populations 

of free and reduced-income students within your population, within 

your district. So the system already has those checks and balances 

built in so that schools that are high-need that do have higher percentages of students who qualify for the Federal free and reduced 

program, do receive more funding than those districts which are 

very wealthy and do not have those populations. In which case, 

those districts sometimes don’t even qualify for any dollars. So I 

think the system does have those checks and balances in place already and I think it does an effective job. I think to speak to economies of scale. Maine is a very rural state, and very dispersed. 

Maine has done things that helped our schools to organize themselves into what we have with the Maine School and Library Network, where they are able to, as a conglomerate, seek service and 

create efficiencies to lower costs, because while some may feel that 

by having a cost-driven system, as some people have characterized 

it, schools still don’t get a free ride. You know none of this is free, 

so it’s always in the school’s best interest to reduce the cost of that 

service because they’re still going to be paying for some portion of 

it. And in a school every dollar makes a difference. So I don’t think 

that the system is anticompetitive in that sense. 

64 

Senator BURNS. Well as far as guesstimating and doing things 

like that, I could remember the 1996 Act, all of us were involved 

in writing that Act you know, I remember the estimates we had on 

cell phone usage by the year 2000. We couldn’t have been further 

off. But basically the driving force in 1996 started in about 1990, 

1991 whenever we were dealing with the telecommunications industry that new technologies were coming onboard, and we were 

trying to deal with them with a law, regulatory law, that was written in 1934. And so that had to change, now technologies have a 

habit of speeding up, accelerating. And here we are back only 10 

years later, re-examining that Act and making some changes that 

reflect the technologies of today and a changing landscape on how 

we communicate. This has been a very good hearing today, do you 

have any more questions? 

This has been a very good hearing today, all your testimony was 

very good and it will have an effect on how we write this Universal 

Service bill I will tell you that, weighing all things. So I appreciate 

your being very candid with us because it is not easy to write a 

bill that one size fits all. And our demands in Montana are different than yours in Maine, and in Mississippi, and of course in 

North Dakota we talk the same language up there. And you are a 

native of Illinois, Mr. Scott. 

Mr. SCOTT. No sir, I grew up in Texas. 

Senator BURNS. Did you? And you tell people that and everything? 

Mr. SCOTT. I do. 

[Laughter.] 

Senator BURNS. That’s good. 

Mr. SCOTT. I claim it. 

Senator BURNS. I thought maybe the way you talked would be 

all right in southern Illinois but I’m not quite sure around Chicago. 

Senator Stevens. 

The CHAIRMAN. But we just want a bill that fits all sizes though 

right, not one size. But I do want to thank you, and I want to make 

sure we put in the record all of the statements that you prepared. 

They’ll be in the printed in the record and all the statements of the 

Members of the Committee that submitted. One or two of them 

from time to time ask that you respond to a question. We have at 

least five full committees meeting this morning, so it’s possible that 

some that were not here will want to ask a question, and we would 

appreciate it if you would respond to them as quickly as you can. 

We will get around to this bill sometime at the end of the month 

or earlier next month. But we do thank you very much. Mr. Scott, 

it’s nice to know you’re in business; we’re going to keep you busy. 

Thank you very much. 

Senator BURNS. We will leave the record open, and like Senator 

Stevens said there will be some inquiries, if you could respond to 

the individual Senator and to the Committee it would help us quite 

a lot. Thank you very much. We’re adjourned. 

[Whereupon, at 11:49 p.m., the hearing was adjourned.] 

(65) 

A P P E N D I X 

PREPARED STATEMENT OF HON. DANIEL K. INOUYE, U.S. SENATOR FROM HAWAII

If we want to ensure that our citizens have the best communications capabilities 

and are able to compete in the global economy, we must preserve the sufficiency, 

stability, and viability of the Universal Service Fund. Since the enactment of the 

Communications Act of 1934, Congress has long supported the core belief that basic 

telecommunications services should be available to all Americans at reasonable 

rates. 

Through the Telecommunications Act of 1996, we reaffirmed our commitment to 

the principle of Universal Service. We ensured that the definition of Universal Service would capture ‘‘an evolving level of telecommunications services.’’ We did not 

want to leave behind rural and low-income areas as technology continued to march 

ahead. 

Additionally, Congress expanded the Universal Service commitment to include 

schools, libraries, and rural health care providers, as well as other eligible telecommunications carriers. Congress recognized that as telecommunications services 

reach more and more individuals, all Americans benefit. 

On Tuesday, we examined the pressures on the current Universal Service funding 

mechanism, and today, we consider how best to distribute the Universal Service 

funds that are collected. 

For instance, the 1996 Act expanded the Universal Service Fund to support rural 

health services. Yet, while this fund is capped at $400 million per year, only $25.57 

million was distributed in 2005. 

This program has the potential to improve the health of millions of Americans 

who otherwise would not have access to adequate health care services. In rural and 

remote states like Hawaii and Alaska, tele-health services have provided significant 

benefits to people on remote islands and in isolated areas who otherwise would not 

have access to doctors and specialists. We must take steps to improve the efficacy 

of this program. 

Issues surrounding application of the Antideficiency Act threaten to, once again, 

disrupt Universal Service funding. We must make certain this does not happen. 

Congress has twice instituted an exemption to prevent disruptions. It is time we 

take permanent action. The programs that face the greatest jeopardy include the 

schools and libraries and rural health funds. We should not risk education and 

health programs while debating technicalities in Washington. 

As we discussed on Tuesday, the current funding mechanism is under increasing 

pressure as new Internet technologies and bundled wireless and competitive service 

offerings steadily diminish the funding base. At the same time, total Universal Service disbursements have increased from $1.8 billion in 1997 to $6.5 billion in 2005. 

The rapid increase in the size of the Fund coupled with the decline in interstate 

revenues has prompted the FCC to institute stopgap measures to temporarily stabilize the collection mechanism. Unfortunately, neither the FCC nor Congress has 

made the difficult choices to ensure the future stability of the collection mechanism. 

Finally, we must consider the effect of emerging competition on the Universal 

Service Fund. In the 1996 Act, Congress plainly sought to further the co-equal goals 

of preserving Universal Service and fostering local competition. The fulfillment of 

one goal should not, and need not come at the expense of the other. 

RESPONSE TO WRITTEN QUESTIONS SUBMITTED BY HON. JIM DEMINT TO

HON. TONY CLARK, SHIRLEY BLOOMFIELD, CARSON HUGHES, AND BEN SCOTT

Question 1. We have seen a great deal of consolidation in the telecommunications 

marketplace lately, but little, if any, in the rural phone industry. Why do you think 

that there has been so little consolidation among Rural ILECs? Does the current 

USF system discourage consolidation, and thereby encourage duplication and inefficient use of Federal monies? Should a subsidy system in the 21st century perpetuate 

66 

this unnatural phenomenon, especially in areas where we are seeing more and more 

inter-platform competition? 

Answer from Mr. Scott. The lack of consolidation in the rural telecommunications 

market results from a variety of factors. There may be some cases where the USF 

distribution system inhibits natural market acquisitions—because larger carriers 

are reluctant to take on high-cost areas under price cap regulation. But in other 

cases, there are social and economic reasons that these carriers remain independent. 

Many rural LECs are small, family owned businesses. For these people, there are 

social reasons not to sell. Other rural LECs operate in truly remote areas with very 

high costs—making them an unattractive prospect to potential buyers. 

In the case of service areas that are economically unattractive to major carriers, 

the subsidy system for small LECs has produced positive results. Many of these 

small LECs, according to NTCA data, have been more aggressive deploying 

broadband than their larger counterparts. They have put the higher subsidy levels 

from rate of return regulation to good use. If a large ILEC were to buy the smaller 

carrier, the regulations that apply to large ILECS, such as a price cap regime, would 

then apply. Though this subsidy might be smaller and more efficient in terms of resources spent from the USF, the resulting quality of service in that service area 

would also likely be lessened. 

The question of consolidation may not be relevant to the problem of inefficiencies 

in USF distributions, especially when we consider inter-platform competition among 

ETCs. We should carefully explore the manner in which competitive ETCs are subsidized. On the one hand, competition can be a major benefit to rural consumers— 

bringing new services to the area. ETCs can include both wireless and CLECs, who 

can ultimately compete head-to-head with the ILEC’s for customers. However, this 

attempt to encourage competition in local markets comes with a trade-off. An increase in competition translates into the need for funds to subsidize the CETC and 

reimburse the ILEC for its revenue loss. This is because as the ILEC’s customer 

base shrinks in the face of competition, it must recover its fixed costs from fewer 

lines. This increases the overall per line cost. In turn, this translates into a higher 

per-line subsidy, which is also available to the ETC competitor (because its subsidy 

is based on the incumbents cost structure, a practice which should be the subject 

of considerable scrutiny and reform). Cost calculation and distribution of funds to 

competitive carriers is the real issue that Congress, the FCC, and state PUCs must 

investigate to determine how to promote efficient use of funds without relegating 

rural areas to a substandard quality of service. It’s a delicate balance that clearly 

will require great care to achieve as we move into a broadband environment. 

We need a system that deploys subsidies to effectively bring telecommunications 

services—including broadband—to as many homes as possible. In some cases, this 

goal may justify changes in CETC and cost calculation processes. In others, the essential services delivered by rural LECs should be maintained and supported at current levels. If there is a different market structure and distribution mechanism that 

would better achieve this goal, we would support it. 

Answer from Ms. Bloomfield. First, we need to clarify that Universal Service 

funds are not Federal monies as you allude in your question. Universal Service is 

an industry funded mechanism that is administered by the Universal Service Administrative Company (USAC). USAC is an independent, not-for-profit corporation 

designated as the administrator of the Universal Service Fund by the Federal Communications Commission (FCC). We do not believe that anyone in Congress thinks 

it is a good idea to take this industry funded mechanism and turn it into a Federal 

tax-based system. 

Second, Universal Service is not a subsidy. It offsets the higher network costs of 

rural carriers so that Americans living in rural and insular areas can afford to connect to basic communications services. As we all know, the more people connected 

to the network the more value it has. If Universal Service funds weren’t available 

to maintain and upgrade the networks of South Carolina’s high-cost companies, over 

650,000 of your constituents would see their phone bills increase by as much as 

$600.00 per year. 

Rural LECs were formed to serve high-cost rural communities that were bypassed 

by the industry’s large carriers that had no economic incentive to serve such markets. Merging two high-cost companies does not create the same types of efficiencies 

as combining two corporate goliaths. We would like to bring to your attention the 

excerpt below taken from telecommunications expert and economist, Dale Lehman 

from his paper titled, False Premises, False Conclusions: A Response to an Attack 

on Universal Service, NTCA White Paper, August 2004. 

A number of considerations make forced consolidation of RLECs bad for rural 

America. Among these: 

67 

1See, for example, D.E. Lehman, Who Will Serve Rural America?, NTCA White Paper, July 

2000. 2OPASTCO’s membership survey released May 10, 2004, finds that 88 percent of the responding RLECs’ customers have advanced services available to them (with an estimated subscription 

rate of 12.8 percent). NTCA’s 2004 Broadband/Internet Availability Study, released June 29, 

2004, finds that 92 percent of the surveyed companies offer broadband services and that these 

services are available to 74 percent of their customers (with a subscription rate of 10 percent). 

These numbers compare favorably with the latest FCC data (‘‘High-Speed Services for Internet 

Access: Status as of December 31, 2003,’’ FCC, issued June 2004) which finds that 93.2 percent 

of the Zip Codes nationwide have at least one broadband subscriber, but only 73.5 percent of 

the more sparsely populated zip codes (<6 persons/mi 2) and 82.7 percent of the somewhat more 

densely populated rural Zip Codes (6–15 persons/mi 2). The FCC and OPASTCO/NTCA data are 

not directly comparable since the FCC reports Zip Codes where there is at least one broadband 

subscriber and not how many of the subscribers in those Zip Codes are capable of receiving 

broadband services. Since the coverage data appears similar in magnitude in all these sources, 

it is almost surely the case that RLECs have deployed broadband services more widely than 

their large company counterparts. 3The literature on rural economic development is voluminous. One study of particular interest 

comes from the UK: Teleworking and Rural Development, by Huws, Honey, and Morris, Rural 

Development Commission, 1997. This study investigates the determinants of business and employment location, finding that proximity to other high-tech businesses and labor pools is a 

prime determinant of where a high-tech firm will decide to locate. The study points to good development potential for rural areas close to urban areas, but is much more pessimistic about 

isolated rural areas. 4 USDA, 2001, Nonmetro Jobs and Earnings, [ers.usda.gov/Emphases/Rural/Gallery/ 

EarningsTable.htm] A case in point: the Kerrville exchange in Texas was purchased by Valor 

Telecom. Previous local managerial positions moved to Irving, Texas. 

• Costs are only half the equation. Quality of service also matters. There is no 

evidence that consolidation would improve service quality. In fact, the evidence 

points in the other direction.1 For example, the evidence shows that the RLECs 

have deployed state of the art facilities and services to rural areas fairly ubiquitously.2

• The same logic that advocates sharing of overhead costs could be applied to 

sharing of other costs. Universal Service costs could be drastically reduced if 

rural residents would share their lines, thereby saving on the large outside 

plant costs of serving sparsely populated regions. In fact, we had such a system—it was called party lines and Universal Service policy was largely responsible for its deserved eradication. 

• Community-based rural telephone companies keep jobs in rural areas and promote the national interest in maintaining economically viable rural communities. Managerial positions in these community-based companies are among 

the best in rural areas. Economic development depends on both physical and 

human infrastructures.3 Keeping these skilled jobs in rural areas provides reasons for skilled people to stay or move to this community which, in turn, helps 

attract businesses that depend on a skilled labor force, thereby creating a virtuous cycle. The U.S. Department of Agriculture reports that the average annual earnings per utilities job was $66,631, more than $20,000 higher than any 

other job category. While these jobs are relatively small in number (0.5 percent 

of the nonmetro total), they are among the most skilled jobs in rural areas.4

• Consolidation means less local management, less local customer support, and a 

decreased ability to tailor strategy to each particular rural community. This 

may make sense in some cases, but should not be forced on all rural areas. 

Community-based RLECs already merge, acquire, sell their exchanges, and 

share resources, but these decisions are dictated by local market conditions. It 

makes no sense to demand that a company share management when there may 

be no other carriers with which to share. (Border to Border, Scott County, and 

South Park were created to provide service to areas that were unserved—who 

would these companies share management with?) 

The impetus to consolidate rural service areas is misguided. It will further isolate rural communities, robbing them of access to local educational institutions, 

vital jobs and expertise, and relegating them to a one-size-fits-all mentality that 

is bad for rural people and businesses. 

The potential savings through consolidation are largely illusory. Larger service 

areas would result in de facto decreases in Universal Service funding but not 

because the costs are reduced. Larger service areas simply average out relatively high-cost communities and subscribers with relatively low-cost ones. In 

the extreme, all USF would disappear if we were to consolidate the entire ILEC 

industry into a single service area (by definition, this company would have the 

68 

5The current USF would increase by an order of magnitude if each wire center were designated as the study area. Essentially, companies serving larger study areas provide support 

for their higher-cost customers by charging more to their lower-cost customers. This is not sustainable in a competitive environment. 1 In my home state most of the rural area is covered by BellSouth, which has consolidated 

into its system at least one rural LEC since the Bell divestiture in 1984. In the areas covered 

by non-Bell entities, some are owned by larger companies such as Alltel, Frontier, and TDS and 

there has been some consolidation and transfers over the years among the others. I am not familiar with the reason behind each of the ownership changes, nor if the rate of charge in ownership or consolidation has increased or decreased since the current Universal Service system was 

put in place. 

national average cost of provision). This was largely the situation prior to 

AT&T’s divestiture. Nonrural carriers already have this problem. They are either ineligible to receive USF or receive inadequate support for their highestcost subscribers due to this averaging effect.5 [ . . . ] We should not broaden 

the scope of this problem by extending such a policy to rural telephone companies. RLECs do not have the urban cores of non-rural carriers that might enable 

them to ‘‘internally average’’ their support amounts. This is true regardless of 

whether or not the RLEC is affiliated with a holding company. 

However, there is one rule within Universal Service that does discourage RLEC 

acquisition of RBOC exchanges and it is called the parent-trap rule. The parent-trap 

rule discourages RLECs from purchasing rural exchanges from RBOCs by limiting 

Universal Service support to the amount of support received by the RBOC for the 

same exchange. This is insufficient and far below cost. Because RBOC support is 

determined by average cost using a proxy model that includes all of their low cost 

areas, which also happens to be 90 percent of their customers. Policies should encourage rural carriers to purchase these exchanges by allowing them to receive support based upon the costs to provide service for those exchanges. 

We do, however, feel that there is one inefficiency in the Universal Service system 

called the identical support rule. This is where competitive providers receive their 

support based on the wireline incumbent’s costs. Universal Service is a cost-based 

system and all carriers should receive support based on their own support. If public 

policy dictates that more than one provider in an area should receive Universal 

Service support (for example, one wireline and one wireless) then those providers 

should have to demonstrate their costs. Currently, wireless providers receive support based on the incumbent wireline company’s costs creating a windfall of support 

for the wireless carrier. 

An example of how the identical support rule is an inappropriate use of funds is 

that wireless carriers such as Alltel/Western Wireless, which operate in approximately 19 states, would be considered a non-rural carrier if it were a landline carrier and ineligible to receive rural high-cost support under the current rural highcost USF support rules. However, due to the identical support rule they qualify and 

receive report based on the incumbent carrier’s cost. The current identical support 

rule allows not only windfalls for large wireless carries to pad their bottom lines, 

but also is a major contributor to the waste in the current USF distribution system. 

Another inefficiency in the industry not related to Universal Service is that traditional voice telecommunications carriers are still subject to a Federal excise while 

the remainder of the industry faces nothing like this. Telecommunications carriers 

should no longer be forced to pay this tax. 

Answer from Mr. Hughes. I do not closely follow consolidation transactions among 

rural ILECs and am not able to put a figure on the number of consolidations among 

rural ILECs to support or reject the statement that there has been ‘‘so little consolidation.’’ 1 I can only reply anecdotally but would suggest that some of the rural 

ILECs not owned by larger companies may be closely held, co-operatives or family 

held and the desire to remain owned by those in the area being served (i.e., serving 

their neighbors, or remaining in the family, or owned by those being served) may 

be very strong. 

In my view, as a general matter, a 21st century Universal Service system should 

continue to improve upon the 1996 Act. As I understand the Act, it promised deregulatory policies that encourage competition throughout the country and a Universal Service policy that allows competitors to access Universal Service support so 

they can enter high-cost areas. A Universal Service system should not provide highcost support in low-cost areas where inter-platform competition is now present because consumers in such areas can switch to a carrier that can provide high-quality 

service. 

One way to make the high-cost system more efficient is to target support to the 

areas where it is truly high-cost to serve. Many rural ILECs serve both low-cost and 

69 

high-cost areas, yet they receive support averaged over the entire area. When a competitive ETC is designated, it may receive Universal Service support when serving 

in a low-cost area. In 2001, the FCC adopted rules to deal with this problem, allowing rural ILECs to ‘‘disaggregate’’ their support away from their low-cost areas out 

to their high-cost areas. Disaggregation causes competitors to get no support for networks they may have already constructed in low-cost areas, and the entering competitors are forced to construct in high-cost areas to get support thus furthering the 

purpose of the USF while reducing cost. It is my understanding that all of the Universal Service support in areas served by the former Bell companies is 

disaggregated, including BellSouth’s areas in my State of Mississippi. We believe 

that requiring rural ILECs of any real size to disaggregate their support when a 

competitive ETC enters an area removes any economic incentive to the ETC to focus 

on the lower-cost areas, thus, help to minimize fund growth and ensures that the 

highest-cost areas that need investment the most receive it. 

Further, where appropriate, a timely move away from providing support based on 

embedded historical costs to forward-looking costs would also reduce the amounts 

required for the high-cost areas. 

As addressed in our replies to other questions below, all carriers receiving highcost support must be accountable to regulators to ensure funds are being used for 

approved purposes. We know it can be done because we are doing it now. Such a 

requirement will help remove the temptation for waste and abuse that might exist. 

Question 2. I would like to turn the focus for a minute on the lack of ‘‘performance 

measures’’ in the current USF program. It is no secret that effective program management requires the implementation of meaningful performance measures. It is 

very tempting to equate ‘‘accountability’’ in programs with the mere prevention of 

‘‘waste, fraud and abuse,’’ no one can hold a program truly accountable without 

clearly articulated goals and reliable performance data that enable program managers to assess the effectiveness of any program and determine whether changes are 

needed. What performance measures would you like to see implemented in the USF 

program? 

Answer from Mr. Clark. I believe that a number of strides have been made recently with regard to implementing more meaningful performance standards for eligible telecommunications carriers (ETCs). In March of 2005, the FCC provided 

states guidance towards implementing stricter ETC certification standards and requirements. Among the suggestions that ‘‘tighten-up’’ the certification process are 

standards that should help ensure the performance of ETCs. Build-out plans, ability 

to remain functional in emergency situations, outage reports, and complaint data 

are all parts of the suggested performance standards. In response to the FCC action, 

over half the states have already completed them, and are in the process of finalizing ETC rules that are substantially similar to the FCC lead. North Dakota is one 

of them. I believe the core standards that have been articulated by the FCC address 

most of the glaring concerns regarding necessary performance standards. While 

similar performance standards could certainly be spelled out in statute, it would appear that the FCC and states have adequate authority to address these issues as 

needed under the current construct. 

Answer from Mr. Scott. The starting point for USF reform must include more regular auditing and more rigorous accountability. The concept of a mini-GAO for USF, 

raised in the hearing by Senator Stevens, moves us in the right direction. We also 

support many of the concepts advanced by the FCC in its 2005 proposed rule making on the Comprehensive Review of Universal Service Fund Management, Administration, and Oversight (Docket 05–124, ¶ 24–31). 

These include specific measures to determine the outcomes achieved in the application of USF resources in each of the supported programs. Of course, each program 

will require its own specific measures in order to track progress and calculate efficiency. The Commission outlines different types of measures: outcome, output, and 

efficiency. Outcome measures would require a model of the intended results of the 

program. Output measures would take into account the number of households, 

schools, health clinics, etc., that are served by the USF programs. Efficiency measures would assess whether the program brings the desired outcome to the recipient 

base using a reasonable expenditure of resources. Naturally, efficiency measures 

would have to be tied to the strategic policy goal of bringing communications services to households that otherwise would be left behind by the marketplace. 

To meet these goals, service providers will have to meet strict reporting requirements on the location of lines, number of subscribers served, and the quality of service provided. The Commission will be able to determine the cost to the program for 

each recipient, the type of service provided, and the percentage of eligible recipients 

that take advantage of the program. The Commission will also have to substantially 

70 

revise its definition of ‘‘broadband’’ upward to meet a higher standard than 200 

kbps. 

Answer from Ms. Bloomfield. First, it is important to know that RLECs must justify the use of Universal Service to the State commission as part of the annual certification of eligibility to receive Universal Service funds. This ensures accountability of the high-cost portion of the Universal Service Fund. There are no such reporting requirements in place for competitive eligible communications carriers. Having all carriers who receive Universal Service funds adhere to the same reporting 

requirements would be a good first step. 

If performance measures do become a part of eligibility to receive Universal Service funds, certainly maintaining a high level of quality of service should be the hallmark. Quality of service standards should include: percentage of calls completed, 

ability to remain functioning during an electric outage, percentage of calls dropped, 

access to emergency services, and high customer satisfaction. 

Should public policy dictate that Universal Service funds may be used to cover 

broadband, which is essential to fulfill the President’s goal of ubiquitous broadband 

deployment by 2007, certain performance measures should be enacted such as percentage of customers with access to the evolving level of broadband at speeds defined by the FCC. 

Answer from Mr. Hughes. All ETCs must be required to demonstrate how the 

support they receive is being used for the benefit of consumers. As I understand Section 254(e) of the Act, a carrier that receives support is required to use that support 

only for the provision, maintenance, and upgrading of facilities and services for 

which the support is intended. In Mississippi, we submit our annual plans and then 

very specific quarterly reports to the State commission explaining exactly what we 

are doing with the funds. While we believe quarterly reporting to be somewhat burdensome and reports on a semi-annual or yearly basis would be as meaningful, we 

are happy to comply if our regulatory authority believes quarterly reports to be in 

the public interest. All carriers should be required to file similar reports and submit 

to meaningful audits, upon request, that examine whether funds are being used as 

required by law. It is not enough for some carriers to simply file reports with the 

National Exchange Carrier Association that demonstrate that expenditures were 

made. Reports must explain the specific projects and demonstrate how support is 

being used to build, maintain, or upgrade facilities within the requirements of the 

intended uses of USF. The comparison of the use of the funds to the statutorily stated goals would provide a management guide and a tool for regulatory review. The 

filed reports could provide both cumulative and current period information together 

with such other information regarding USF usage as the regulatory authority might 

deem helpful in its evaluation process. Periodic and meaningful audits would complete the picture. 

Wireless carriers have come under criticism for not being accountable for their use 

of Universal Service funds. We believe these suggestions of lack of accountability are 

not generally founded on fact. I am unaware of any wireless carrier that is not using 

support properly and know that many members of our WIGs coalition are demonstrating their use of support in a fashion that is much more detailed than that 

required by wireline carriers. 

It is my understanding that there are approximately 400 wireline carriers that 

operate on an ‘‘average schedule’’ basis for USF purposes, which means they do not 

report their own costs to get support. I am advised that they receive support 

through a formula, irrespective whether they need support, or whether they actually 

invest the support they receive as required. I am advised that many, average schedule companies do not file detailed reports similar to those that wireless carriers are 

required to file in Mississippi. It would seem to be only wise that a meaningful accounting of such use should be filed with an appropriate oversight authority. 

Question 3. I have a question about companies operating on rate-of-return regulations. Under current regulations, ‘‘Rate-of-return carriers’’ recoup all of their operating and capital costs, plus a net profit of 11.25 percent from the government. So, 

this means the more a rate-of-return carrier spends, the more profit they get from 

the government. This provides a strong disincentive for these carriers to drive down 

their costs. It seems to me that this regulation provides perverse incentives. Why 

should we continue with rate of return regulation? Is there a better way? 

Answer from Mr. Clark. The concern you have raised with regard to rate of return 

regulation is valid and is one that is often cited as a drawback to traditional rate 

regulation, and not just in the context of the telephone industry. Clearly, one of the 

disadvantages to rate of return regulation generally is that it creates an incentive 

to over-invest. In response, regulators have looked to other alternative forms of regulation, such as price caps. However, no regulatory construct is perfect. The disVerDate Nov 24 2008 13:18 Jan 25, 2011 Jkt 063764 PO 00000 Frm 00074 Fmt 6601 Sfmt 6621 S:\GPO\DOCS\63764.TXT SCOM1 PsN: JACKIE
71 

advantage of price caps can be an incentive to disinvest in the network, and to cut 

corners on things like customer service. Frankly, there is no perfect solution. It is 

a dilemma that has existed from the first days of regulation, and is an outgrowth 

of the realization that regulation is a second-best option to a competitive market. 

However, there are situations where a competitive market does not exist, and we 

are left to cope as best we can with the imperfect tools of regulation. One of the 

places where a competitive market does not exist is the terminating monopoly. To 

the extent that intercarrier compensation (access charges) continues to exist there 

really is no option but to have some form of rate regulation. (It should be noted that 

access charges are somewhat interrelated with, but not the same as the Federal 

Universal Fund program.) The best regulators can do in such situations is to try 

and set clear rules and regulations that, at the very least, prevent gaming the system, and on the balance, leave consumers better off than they would otherwise be 

with firms that could otherwise exercise market power. 

Answer from Mr. Scott. This is an important question, but we should begin considering it with the knowledge that the vast majority of lines nationwide are served 

by large carriers with price caps. Less than 10 percent of lines are served by carriers operating under rate of return regulations. On the question of incentives and 

efficiency, the answer has two sides. There are quite likely some rate of return carriers that might better be subject to price caps to improve efficiency. However, there 

are other rate of return carriers that couldn’t deliver service without that level of 

subsidy. To meet our policy goal of an efficient USF distribution system, we need 

to account for both. 

On the one hand, price caps can promote efficiency. Rate ceilings lead carriers to 

establish prices below the cap so that they can make profits up to the ceiling. There 

is doubtless a firm incentive to maximize profit by being more efficient in service 

provision. 

On the other hand, there are real questions about whether small carriers (in very 

rural areas) can generate the scope and scale necessary to make price caps a workable system for them. Topography may demand long local loops that are unfeasible 

to build under price caps. The economics of the market may simply determine that 

a particular LEC is a public interest communications provider. Subjecting them to 

price caps may undermine their ability to get access to capital at reasonable rates, 

maintain and upgrade their networks, and attain the long term stability to serve 

a high-cost area. 

There may be an optimal number of lines that would trigger a shift from rate of 

return regulation to price caps—and the shift to broadband will almost certainly impact this calculation. There may also be a method to determine different levels of 

price caps using models that take into account the particular local circumstances of 

a service area. This is a question the FCC should consider very carefully. 

Answer from Ms. Bloomfield. First we need to again clarify your misunderstanding in believing that any money for rate-of-return carriers is transferred from 

the government. The United States Government in no way funds telecommunications carriers whether they are cooperatives or stock companies so they in no way 

profit from the government. 

Additionally, there is zero evidence to prove the worn-out argument that non rateof-return related companies are any more efficient than those under rate-of-return 

regulation or that rate of return regulation leads to inflated deployment and cost 

recovery. The reality is that it is a key element to fulfilling your national policy objective of Universal Service. The rate-of-return operational approach is absolutely 

essential to the recipe for ensuring high-cost regions of the country are well served. 

All one needs to do is to compare the services that are available for rural Americans 

in a high-cost market served by a rural carrier and a non-rural carrier to see the 

deficiencies that would result if rate-of-return operations were not permitted. Small 

systems that are dedicated to their communities could never effectively provide 

quality services under a price cap operational approach. The economies of scale do 

not exist to do so, and they would be disincented from providing the quality services 

they are able to under rate-of-return regulation. 

With regard to the current ‘‘rate’’ that Federal regulations permit, it is critical to 

recognize that the rate has been allowed to stand by the FCC in recognition of the 

significant decrease in intercarrier compensation that has, and will, continue to take 

place over the proceeding and subsequent months and years. 

Answer from Mr. Hughes. In urban markets where more than one high-quality 

network provides competition, ILEC rates can be deregulated and the market can 

determine what a carrier can charge. I understand that some states have at least 

partially deregulated the rates of all but basic local exchange service for the ILEC. 

Such changes are in fact often touted by ILECs as being the wave of the future. 

72 

We at Cellular South believe that, with competition, consumers will receive affordable telephone service without rate regulation and the overall need for Universal 

Service support will lessen over time as more efficient and competitive networks are 

constructed. 

I do not know whether price cap regulation now in effect for large ILECs can be 

effectively imposed on small rural ILECs. There are many technical questions surrounding this issue that are beyond my expertise, and better directed toward experts in the field of telephone regulation. 

We do support providing Universal Service support to all ILECs based on the forward-looking cost of providing an efficient network. We believe that consumers who 

pay into the system should not pay more than what is necessary to deliver services 

efficiently and ensure that rural consumers have choices in services and service providers that are reasonably comparable to that which is available in urban areas. 

Question 4. I have a USA TODAY article, from November 17, 2004, which documents that XIT Rural Telephone Cooperative paid each of it’s 1,500 ranchers in the 

Texas Panhandle a $375 dividend—which was more than the mere $206 each rancher paid in local phone fees for the year. In the meantime, XIT took $2.6 million in 

Federal Universal Service fees that year. How and why did this happen and should 

this practice be allowed to continue? 

Answer from Mr. Scott. This is very troubling example. It demonstrates the danger that carriers will exploit the rate of return regulatory system. It points to the 

need for greater accountability, performance measures, and enforcement practices to 

ensure that public subsidies are not used to reap excessive returns. 

Answer from Ms. Bloomfield. The allocation of the excess of operating revenues 

over costs is one of the hallmarks of the cooperative operating model. The concept 

is integral to the idea that cooperatives are structured for the economic benefit of 

their members and thus pay capital credits to members in proportion to their participation in the enterprise. Stock companies, on the other hand, pay dividends to 

their owners on the basis of their contribution to equity. In both cases, the law recognizes that it is legitimate for the company to pay out a portion of its margins (in 

the case of a cooperative) or dividends (in the case of a stock company) as an incentive to keep the enterprise operational. The criticism of capital credit payouts overlooks this basic fact. Yes, cooperative members receive capital credits, but stockholders in stock companies, large and small alike, that may be receiving research 

and development funding or other forms of tax credits or Universal Service, etc. also 

receive economic rewards in the form of dividends or other returns on their investment. 

The fact that individual capital credits for any one cooperative in any one year 

may exceed local rates is purely coincidental and that fact should not undermine 

the economic structure of a cooperative model that still works in rural areas. 

Additionally, capital credits are typically paid on a seven to ten year delay so that 

in the meantime the cooperative has ready access to reserves in the event of a natural disaster, emergencies such as floods, ice storms, hurricanes, or national security events such as September 11, 2001, when a small community-based provider 

in South Dakota was called upon to quickly upgrade a remote facility to temporarily 

accommodate the Vice President of the United States who was being kept out of 

harm’s way. 

Answer from Mr. Hughes. The obvious and direct answer is that no wrongful use 

of Universal Service support should be allowed to continue. I assume that any 

knowingly wrongful use of Universal Service funds carries appropriate penalties. I 

have no personal knowledge of the XIT case. It is unclear from the news article 

whether the payout was a special dividend due to a one-time transaction such as 

the sale of an asset, or a regular dividend. If it is a regular dividend, with the business generating excess funds for payment to shareholders, then the question should 

be asked whether those excess revenues are coming from their regulated business 

that is receiving Universal Service support, or if it is coming from other lines of 

business. For example, the company may be providing Internet access, video service, 

or have other revenue streams. 

If excess dividends are generated as a result of their regulated business, then this 

is a problem that could be and should be reviewed under an appropriate system of 

accountability with timely full reporting requirements. I am advised by counsel that 

XIT is a company that reports its costs (a Cost Company as opposed to an Average 

Schedule Company), however I do not know whether the applicable Texas regulatory 

commission reviews what XIT is doing with USF support it receives in the same 

way that the Mississippi Public Service Commission reviews our investments before 

certifying us to receive further USF funds. If XIT is generating excessive profits on 

its regulated business, then the Texas commission would appear to have a duty to 

73 

take appropriate action to correct any abuses of the system they might find upon 

a review of all of the facts in the case. I assume any irregular use of USF funds 

would also be addressed at the time of the annual certification to the FCC by the 

Texas authority. 

Question 5. Mr. Hughes, how does rate-of-return regulation affect your company? 

Answer from Mr. Hughes. In the vast majority of the area where Cellular South 

provides service, our ILEC competition is BellSouth. BellSouth is a large ILEC that 

I understand is now Price Cap regulated by the Mississippi Public Service Commission and other regulatory authorities to the extent its prices/rates are regulated. I 

understanding that recent legislation will allow further deregulation of its rates. 

The remaining portion of our service area is served by a number of rural ILECs. 

We compete in both areas the same way—that is—we focus on investing support, 

getting consumers, and building our business in the rural ILEC areas just the same 

as in the BellSouth areas. Our rates are uniform in the rural and urban areas serviced and without regard to how the underlying ILEC is regulated. 

RESPONSE TO WRITTEN QUESTION SUBMITTED BY HON. JIM DEMINT TO

JEFF MAO

Question. What do you think about requiring performance measures for the ERate program? Do you think that would enable the Fund to be fine-tuned to maximize the benefit to learning? Do you think that can be best achieved through the 

FCC or do you think the E-Rate program could be better administered toward meeting educational goals, as some have suggested, at the Department of Education or 

elsewhere? 

Answer from Mr. Mao. The E-Rate program should have performance measures. 

It is important to keep these measures focused on the goals of the program, to allow 

schools and libraries access to advanced telecommunications. Therefore, I think it 

would be both reasonable and appropriate for the E-Rate program to be measured 

on its success at assisting schools and libraries access to advanced telecommunications services like broadband services. 

Further, it is important to look beyond simple Internet connectivity, but to consider bandwidth needs of the schools and libraries, so that the program can be finetuned to ensure that it continues to provide support for the growth and advancement in available and necessary broadband services. 

It is also important to recognize how broadband connectivity and the E-Rate program in general support education. Broadband connectivity is one of many critical 

inputs that schools and libraries need to provide a quality education and services 

to all learners and patrons. However, it is not one that should be administered by 

the Department of Education. To do so, would be like asking the Department of 

Education to administer the roads on which their school buses travel. Broadband 

connectivity and E-Rate should remain in the realm of the FCC as they are the experts in the field. 

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