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89–965PDF 2003

THE FUTURE OF UNIVERSAL SERVICE

HEARING

BEFORE THE

SUBCOMMITTEE ON TELECOMMUNICATIONS AND

THE INTERNET

OF THE

COMMITTEE ON ENERGY AND

COMMERCE

HOUSE OF REPRESENTATIVES

ONE HUNDRED EIGHTH CONGRESS

FIRST SESSION

SEPTEMBER 24, 2003

Serial No. 108–49

Printed for the use of the Committee on Energy and Commerce

(

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

COMMITTEE ON ENERGY AND COMMERCE

W.J. ‘‘BILLY’’ TAUZIN, Louisiana, Chairman

MICHAEL BILIRAKIS, Florida

JOE BARTON, Texas

FRED UPTON, Michigan

CLIFF STEARNS, Florida

PAUL E. GILLMOR, Ohio

JAMES C. GREENWOOD, Pennsylvania

CHRISTOPHER COX, California

NATHAN DEAL, Georgia

RICHARD BURR, North Carolina

Vice Chairman

ED WHITFIELD, Kentucky

CHARLIE NORWOOD, Georgia

BARBARA CUBIN, Wyoming

JOHN SHIMKUS, Illinois

HEATHER WILSON, New Mexico

JOHN B. SHADEGG, Arizona

CHARLES W. ‘‘CHIP’’ PICKERING,

Mississippi

VITO FOSSELLA, New York

ROY BLUNT, Missouri

STEVE BUYER, Indiana

GEORGE RADANOVICH, California

CHARLES F. BASS, New Hampshire

JOSEPH R. PITTS, Pennsylvania

MARY BONO, California

GREG WALDEN, Oregon

LEE TERRY, Nebraska

ERNIE FLETCHER, Kentucky

MIKE FERGUSON, New Jersey

MIKE ROGERS, Michigan

DARRELL E. ISSA, California

C.L. ‘‘BUTCH’’ OTTER, Idaho

JOHN D. DINGELL, Michigan

Ranking Member

HENRY A. WAXMAN, California

EDWARD J. MARKEY, Massachusetts

RALPH M. HALL, Texas

RICK BOUCHER, Virginia

EDOLPHUS TOWNS, New York

FRANK PALLONE, Jr., New Jersey

SHERROD BROWN, Ohio

BART GORDON, Tennessee

PETER DEUTSCH, Florida

BOBBY L. RUSH, Illinois

ANNA G. ESHOO, California

BART STUPAK, Michigan

ELIOT L. ENGEL, New York

ALBERT R. WYNN, Maryland

GENE GREEN, Texas

KAREN MCCARTHY, Missouri

TED STRICKLAND, Ohio

DIANA DEGETTE, Colorado

LOIS CAPPS, California

MICHAEL F. DOYLE, Pennsylvania

CHRISTOPHER JOHN, Louisiana

TOM ALLEN, Maine

JIM DAVIS, Florida

JAN SCHAKOWSKY, Illinois

HILDA L. SOLIS, California

DAN R. BROUILLETTE, Staff Director

JAMES D. BARNETTE, General Counsel

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

SUBCOMMITTEE ON TELECOMMUNICATIONS AND THE INTERNET

FRED UPTON, Michigan, Chairman

MICHAEL BILIRAKIS, Florida

JOE BARTON, Texas

CLIFF STEARNS, Florida

Vice Chairman

PAUL E. GILLMOR, Ohio

CHRISTOPHER COX, California

NATHAN DEAL, Georgia

ED WHITFIELD, Kentucky

BARBARA CUBIN, Wyoming

JOHN SHIMKUS, Illinois

HEATHER WILSON, New Mexico

CHARLES W. ‘‘CHIP’’ PICKERING,

Mississippi

VITO FOSSELLA, New York

CHARLES F. BASS, New Hampshire

MARY BONO, California

GREG WALDEN, Oregon

LEE TERRY, Nebraska

W.J. ‘‘BILLY’’ TAUZIN, Louisiana

(Ex Officio)

EDWARD J. MARKEY, Massachusetts

Ranking Member

BOBBY L. RUSH, Illinois

KAREN MCCARTHY, Missouri

MICHAEL F. DOYLE, Pennsylvania

JIM DAVIS, Florida

RICK BOUCHER, Virginia

EDOLPHUS TOWNS, New York

BART GORDON, Tennessee

PETER DEUTSCH, Florida

ANNA G. ESHOO, California

BART STUPAK, Michigan

ELIOT L. ENGEL, New York

ALBERT R. WYNN, Maryland

GENE GREEN, Texas

JOHN D. DINGELL, Michigan,

(Ex Officio)

(II)

C O N T E N T S

Page

Testimony of:

Abernathy, Kathleen Q., Commissioner, Federal Communications Commission ........................................................................................................... 13

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

BellSouth Corporation .................................................................................. 51

Gregg, Billy Jack, Director, Consumer Advocate Division, Public Service

Commission of West Virginia ....................................................................... 38

Lubin, Joel, Vice President, AT&T Corporation ............................................ 55

Post, Glen F., Chairman and Chief Executive Officer, CenturyTel, Inc ...... 59

Rowe, Bob, Chairman, Montana Public Service Commission ....................... 19

Shank, Sidney, General Manager, Bloomingdale Telephone Co .................. 64

Stanton, John W., Chairman and Chief Executive Officer, Western Wireless Corporation ............................................................................................ 70

Material submitted for the record by:

Certner, David, Diector, Federal Affairs, AARP, letter dated April 28,

2002 ................................................................................................................ 106

Cheek, John, Executive Director, National Indian Education Association,

letter dated April 18, 2003 ........................................................................... 114

Community Action Partnership, American Association of People with Disabilities, Consumer Action and Rainbow-Push Coalition, reply comments of ......................................................................................................... 108

Crawford, Charles, Executive Director, American Council of the Blind,

letter dated June 27, 2002 ........................................................................... 107

Hargraves, Dirck A., Counsel, Telecommunications Research and Action

Center, letter dated April 18, 2003 ............................................................. 116

League of United Latin American Citizens, letter dated April 18, 2003 ..... 110

Lestina, Dale, President, OCRE, letter dated July 17, 2003 ........................ 115

National Association of Development Organizations, letter dated September 2, 2003 ............................................................................................... 118

Pollak, F.J., President and CEO, TracFone Wireless, Inc., prepared statement of ........................................................................................................... 105

Shelton, Hilary O., Director, NAACP, letter dated April 18, 2003 .............. 111

Watson, Leroy, Director of Legislative Affairs, The National Grange,

reply comments of ......................................................................................... 112

(III)

(1)

THE FUTURE OF UNIVERSAL SERVICE

WEDNESDAY, SEPTEMBER 24, 2003

HOUSE OF REPRESENTATIVES,

COMMITTEE ON ENERGY AND COMMERCE,

SUBCOMMITTEE ON TELECOMMUNICATIONS

AND THE INTERNET,

Washington, DC.

The subcommittee met, pursuant to notice, at 1 p.m., in room

2123, Rayburn House Office Building, Hon. Fred Upton (chairman)

presiding.

Members present: Representatives Upton, Gillmor, Cox, Deal,

Whitfield, Shimkus, Wilson, Pickering, Bass, Bono, Walden, Terry,

Tauzin (ex officio), Markey, Rush, Boucher, Gordon, Deutsch, Stupak, Wynn, Green, and Dingell (ex officio).

Staff present: Dan Brouillette, staff director; Howard Waltzman,

majority counsel; Will Nordwind, majority counsel and policy coordinator; William Carty, legislative clerk; Greg Rothschild, minority

counsel; and Jessica McNiece, minority staff assistant.

Mr. UPTON. Sorry for the delay. We had a number of votes on

the floor. And I understand that we are going to have votes about

every hour. A couple of votes will not be able to roll this like we

are able to do from time to time.

So good afternoon. Today’s hearing is entitled ‘‘The Future of

Universal Service.’’ We have before us a very distinguished and

very large panel of witnesses. So I am going to keep my opening

remarks brief.

At the outset, I want to offer a special welcome to one of our witnesses, Sid Shank of Bloomingdale Telephone Company, which is

located in my district. Over the years, I have made many visits to

Bloomingdale and Paw Paw, where she lives, with its one four-way

blinking traffic light; yellow, by the way—I think it’s yellow anyway—and have seen what a terrific difference the nearly 100-yearold Bloomingdale Telephone Company has made in the lives of the

2,000 customers that it currently serves. As a result, I have witnessed firsthand the valuable byproduct of universal service.

Universal service is a cherished principle of our Nation’s telecommunications system, which has been and continues to be a vital

link for rural America and those most in need. However, coming

from Michigan, the auto State, I would say that while the car is

still running, the engine light has come on, suggesting that the

universal service engine needs an overhaul if we are going to keep

it running for another 100,000 miles and beyond. Today we are lifting up the hood and checking things out.

2

We know that competitive forces, which have evolved since the

Telecommunications Act of 1996, are putting great strain on the

universal service engine.

On the contribution side, trends suggest that the amount of

money coming into universal service is declining. CLECs are competing for business and urban residential customers, which is an

implicit source of universal service funding for the ILECs serving

rural customers.

Also, different technologies are competing against one another.

So, instead of making traditional land line long distance calls an

explicit source of universal service funding, people are using e-mail,

wireless phones, voice over internet protocols, which currently contribute less or nothing to the universal service relative to traditional land line long distance calls.

Meanwhile, on the demand side, trends suggest that it is increasing at a rapid pace as more and more wireless companies are seeking universal service funding in rural areas where rural ILECs

aren’t currently serving and receiving universal service. Many

rural carriers are also seeking to use universal service funds to

build the infrastructure to provide advanced services.

Of course, every one of our constituents shoulders the burden of

universal service on their phone bills. So we need to be ever mindful about our responsibility to them and their family budgets.

All of these pressures suggest that the current system is

unsustainable. And it is our job to make sure that it is fixed, not

only for today but also for whatever the telecommunications future

may bring.

Today we are going to hear about the problems and some of the

proposed solutions. I suspect that there will be some difference

with respect to the solutions, but I certainly look forward to working with every member of this subcommittee as we take stock of

today’s testimonies and answers to our questions so that we can

best prepare ourselves for the job ahead of us in the coming days.

At this point, I will remind all members that if they waive their

opening statement, they will get an extra 3 minutes on their first

round of questions. And with that inducement, that will raise to

my friend Mr. Gordon from Tennessee.

Mr. GORDON. It sounds like ‘‘Let’s Make a Deal’’ here.

Mr. UPTON. Yes.

Mr. GORDON. You are right. We have a lot of witnesses. We need

to get on with this. I will just briefly say that my district is wellrepresented by BellSouth. And, Ms. Greene, you do a good job with

that organization.

And, as you know, I represent the wealthiest part of Tennessee,

the suburbs of Nashville, and the poorest part, there in the root of

the Appalachian part of Tennessee. So it’s interesting how you are

able to serve both of these well. And I hope the panel as we go

through today will talk a little bit about whether there should be

standards and how we should go about assessing and having standards for people or for organizations that have to serve this diverse

type of groups, from the wealthiest to the poorest. I think that that

is something that we need to be looking at, and I hope that you

will address it.

Thank you.

3

Mr. UPTON. I would yield for an opening statement from Mr.

Gillmor.

Mr. GILLMOR. Thank you very much, Mr. Chairman. I have a

very profound and insightful statement that is on the way from my

office. It’s not here, but I will enter it into the record when it gets

here. I do want to commend you for going forward with these hearings.

This is a very important subject area where the changes in the

marketplace are making a significant difference in how we take

care of a universal service fund. There are also some serious questions of fairness in the way the burden is mapped. And I’m glad

that we’re taking a look at it. I hope that we will continue to do

it in even more depth.

Thank you.

[The prepared statement of Hon. Paul Gillmor follows:]

PREPARED STATEMENT OF HON. PAUL E. GILLMOR, A REPRESENTATIVE IN CONGRESS

FROM THE STATE OF OHIO

I thank the Chairman for the opportunity to address the future of Universal Service, a critical issue in states with rural, high-cost areas, such as mine. Although the

goals and performance of this program have been successful, a majority of the telecommunications sector and many Members here today recognize the fund’s current

situation, in which competition and technology have begun to wear away at the Universal Service system. More specifically, the cost of the fund continues to grow and

revenues diminish as consumers have migrated to data services such as email and

voice-over Internet.

Furthermore, the current formula has flaws that in some cases have led to unfair

results. For example, under the existing system, larger carriers that serve rural customers often shortchange millions of rural Americans, as carriers in a few states

currently receive up to 80 percent of the funding. In my home state of Ohio, residents pay almost $7 million into the fund for non-rural carriers, but none of this

funding actually reaches rural Ohio. As a consequence, rural Ohioans are subsidizing the telephone service of rural residents in other states.

While certainly a worthy issue to address, I also look forward to hearing from the

well-balanced panel of witnesses concerning a comprehensive approach to ensuring

the continued viability of Universal Service in addition to other immediate and longterm solutions.

Again, I thank the Chairman for holding this timely hearing and yield back the

remainder of my time.

Mr. UPTON. I yield to Mr. Dingell, the ranking member of the full

committee.

Mr. DINGELL. Mr. Chairman, I thank you for your courtesy and

commend you for holding these hearings. This is a great opportunity, and it is one that I hope this committee will take advantage

of.

I am pleased that we are examining this very important issue of

universal service and its future because I am becoming increasingly

concerned about the future stability of universal service support

mechanisms. Providing high-quality telecommunications services at

affordable rates to all Americans has long been a cornerstone of our

Nation’s telecommunications policy and was enacted into law in the

Telecommunications Act of 1996.

As this committee embarks on critical examination of the universal service and how to ensure that it is sustained in the future,

we must be willing to ask tough questions of those companies who

have benefited handsomely from deregulation and make sure that

the players are all asked to contribute in an equitable manner.

4

In 1996, the Congress believed that universal service programs

could be supported by assessing a charge against interstate telecommunications services.

As we all know, much has changed in the telecommunications

landscape since 1996. And these changes now demand a thorough

reexamination of the manner in which we support universal service.

The explosive growth in the use of e-mail and wireless services

has replaced traditional long distance voice service for many Americans, and has dramatically slowed the growth of wire line interstate minutes. At the same time, cost per minute has fallen. These

events have dramatically decreased the pool of revenue available to

support universal service and caused the assessment on consumers’

bills to rise to 9.5 percent.

Also important, as networks become digital and capable of offering multiple types of service, carriers have begun to bundle products to consumers in attractive commercial offerings. In many regions, the consumer can purchase local and long distance voice

service, high-speed internet service, and wireless service from a

single carrier at a single price. This is wonderful for consumers,

who are realizing the savings and convenience of real competition,

but it is beginning to wreak havoc on those who must determine

which portion of that bundled rate is for interstate service and can,

thus, be assessed for purchased purposes of universal service.

Finally, the present system also leads to several marketplace inequities. For example, though cable companies and phone companies offer comparable broadband products to consumers, only telco

DSL service offered by the phone companies must support universal service.

As the Federal Communications Commission and our committee

contemplate action to address these issues, I suggest that we begin

to adhere to certain principles. First, all providers—and I mean all,

A-L-L, providers—of telecommunications should provide equitably

for contributions to support universal service. There is absolutely

no reason to exempt certain products offered by particular industries simply because those industries have traditionally provided

video rather than common carrier services.

Next, all communications and not simply interstate communications should be assessed. In a world of packeted networks and bundled service offerings, it is simply nonsense for the FCC to determine which communications are interstate, rather than intrastate,

in nature.

Finally, as new services come on line, such as voice over the

internet protocol, we should be careful not to play favorites for the

so-called new technologies. Contrary to what some might say, we

are not stifling the growth of new services by asking them to play

by exactly the same rules as their competitors play and to confront

the same challenges and difficulties that they confront. Rather, if

we allow carriers to evade universal service requirements simply

because of the technology or type of technology of their network,

then not only will we be shortchanging universal service support

mechanisms, but we will be picking winners and the losers in the

marketplace. And, worse, we will be stacking the deck unfairly

against certain participants in the industry.

5

Mr. Chairman, I look forward to working with you and with

Chairman Tauzin on the issue. We must stand ready to make

tough choices to ensure the continued service of the telecommunications industry to our people and the continued success of that

service. I thank you for your courtesy to me.

Mr. UPTON. Thank you, Mr. Dingell.

I recognize Mr. Cox for an opening statement.

Mr. COX. Thank you, Mr. Chairman. I welcome our witnesses

here. I thank you for holding this hearing on an issue that is of

great import to many of us who are determined not to repeat the

disastrous history of overregulation in the traditional telephone

market.

When we debated in this committee the 1996 act, there was a

consideration at that time of an amendment that I proposed that

would have limited universal service to voice-grade telephony. The

truth is that we are living in a world right now where voice and

data are merging, where, indeed, what we call data is very difficult

to define. And the kinds of telecommunications services that consumers can avail themselves of are expanding very rapidly.

One of the reasons that this program is in trouble is that demand for funds has been growing while the support base has not

been growing with it. We need to look at ways to limit what might

otherwise be an inexorable expansion of a program that would at

that point be in search of a purpose.

I think the fundamental purposes that need to be maintained for

universal service include making sure that everyone, whether they

can afford it or not, has a lifeline. They ought to be able to call 911.

People should not be so shut out from the rest of society that they

can’t get an ambulance to take them to the emergency room. But

at the same time, we ought not ask most consumers to pay taxes

to subsidize people getting video conferencing or getting all of the

services that might someday be available in the form of data over

what used to be telephone lines. We certainly don’t want to be paying for movies on demand or any such thing. And I think it is time

for us to take a very, very hard look at what is it that we are trying to accomplish with this program. And I would think that the

lessons that we have learned since 1996 would be very instructive

in this respect but that now because of the financial problems of

this program would be a fine time to explicitly describe universal

service as voice-grade telephony and use it as a lifeline program.

I thank the chairman. I yield back.

Mr. UPTON. Thank you.

Mr. Stupak?

Mr. STUPAK. Thank you, Mr. Chairman.

The Federal Universal Service Program is of critical importance

to rural parts of America, including my district. Universal service

ensures that households in all parts of America have access to

basic telecommunications services, even in the most rural areas.

But the FCC’s program for non-rural carriers is no longer effectively meeting these goals. Overwhelmingly, the program benefits

carriers and customers in three States, and millions of rural customers served by non-rural carriers receive no benefit at all. The

FCC itself compiled a chart that illustrates this clearly.

6

According to the FCC, residents in Michigan pay more than $5

million into the non-rural part of USF Program. Yet, carriers and

consumers in Michigan receive no money for the program in return.

Similar cases exist in 42 other States as well.

And I would ask unanimous consent to submit this chart from

the FCC into the record.

[The chart follows:]

USF Net Dollar Flow for High-Cost Rural Areas Served by Mixed Carriers: 2001

(Annual Payments and Contributions in Millions)

High-Cost, Non-Rural Fund ONLY

State Contribs to USF* Paymts from USF Net Dollar Flow

Alabama ............................................................................................ 2,650,000.29 42,863,000.88 40,213,000.59

Alaska ............................................................................................... 497,000.70 0.00 -497,000.70

Arizona .............................................................................................. 4,074,000.18 0.00 -4,074,000.18

Arkansas ........................................................................................... 1,584,000.18 0.00 -1,584,000.18

California .......................................................................................... 19,405,000.93 0.00 -19,405,000.93

Colorado ............................................................................................ 3,997,000.10 0.00 -3,997,000.10

Connecticut ....................................................................................... 3,131,000.86 0.00 -3,131,000.86

Delaware ........................................................................................... 779,000.03 0.00 -779,000.03

Florida ............................................................................................... 13,334,000.32 0.00 -13,334,000.32

Georgia .............................................................................................. 6,483,000.90 0.00 -6,483,000.90

Hawaii ............................................................................................... 800,000.08 0.00 -800,000.08

Idaho ................................................................................................. 1,031,000.32 0.00 -1,031,000.32

Illinois ............................................................................................... 8,842,000.11 0.00 -8,842,000.11

Indiana .............................................................................................. 3,700,000.57 0.00 -3,700,000.57

Iowa ................................................................................................... 1,775,000.15 0.00 -1,775,000.15

Kansas .............................................................................................. 1,886,000.91 0.00 -1,886,000.91

Kentucky ............................................................................................ 2,468,000.49 0.00 -2,468,000.49

Louisiana ........................................................................................... 2,635,000.49 0.00 -2,635,000.49

Maine ................................................................................................ 937,000.83 6,629,000.32 5,691,000.50

Maryland ........................................................................................... 4,517,000.17 0.00 -4,517,000.17

Massachusetts .................................................................................. 5,480,000.82 0.00 -5,480,000.82

Michigan ........................................................................................... 5,674,000.50 0.00 -5,674,000.50

Minnesota .......................................................................................... 3,503,000.19 0.00 -3,503,000.19

Mississippi ........................................................................................ 1,664,000.31 103,960,000.88 102,296,000.57

Missouri ............................................................................................. 3,801,000.38 0.00 -3,801,000.38

Montana ............................................................................................ 733,000.33 4,334,000.25 3,600,000.92

Nebraska ........................................................................................... 1,184,000.37 0.00 -1,184,000.37

Nevada .............................................................................................. 1,863,000.09 0.00 -1,863,000.09

New Hampshire ................................................................................. 1,249,000.82 0.00 -1,249,000.82

New Jersey ......................................................................................... 8,371,000.35 0.00 -8,371,000.35

New Mexico ....................................................................................... 1,256,000.82 0.00 -1,256,000.82

New York ........................................................................................... 13,745,000.77 0.00 -13,745,000.77

North Carolina ................................................................................... 5,804,000.34 0.00 -5,804,000.34

North Dakota ..................................................................................... 555,000.01 0.00 -555,000.01

Ohio ................................................................................................... 6,791,000.80 0.00 -6,791,000.80

Oklahoma .......................................................................................... 2,102,000.54 0.00 -2,102,000.54

Oregon ............................................................................................... 2,592,000.57 0.00 -2,592,000.57

Pennsylvania ..................................................................................... 8,344,000.42 0.00 -8,344,000.42

Rhode Island ..................................................................................... 857,000.75 0.00 -857,000.75

South Carolina .................................................................................. 2,790,000.75 0.00 -2,790,000.75

South Dakota .................................................................................... 584,000.43 0.00 -584,000.43

Tennessee .......................................................................................... 3,721,000.83 0.00 -3,721,000.83

Texas ................................................................................................. 12,880,000.80 0.00 -12,880,000.80

Utah .................................................................................................. 1,532,000.46 0.00 -1,532,000.46

Vermont ............................................................................................. 560,000.33 10,026,000.78 9,466,000.45

Virginia .............................................................................................. 6,038,000.66 0.00 -6,038,000.66

Washington ....................................................................................... 4,434,000.74 0.00 -4,434,000.74

West Virginia ..................................................................................... 1,161,000.21 25,894,000.38 24,733,000.17

Wisconsin .......................................................................................... 3,232,000.07 0.00 -3,232,000.07

Wyoming ............................................................................................ 463,000.12 6,138,000.62 5,675,000.51

TOTAL ............................................................................................ 199,848,000.13 199,848,000.13 0.00

Source: FCC Universal Service Monitoring Report, CC Docket No. 98-202, October 2002, Table 3.17, page 3-26.

7

Notes: Figures may not add due to rounding. Support payments do not include quarterly true-ups. USF is an abbreviation for the Universal

Service Fund, which funds the high-cost support mechanisms.

* Carriers make payments into the fund based on end-user interstate telecom revenues. The estimates in this column are computed by

multiplying the state’s share of end-user revenue times the nationwide total at the bottom of this column. For the methodology used to derive

the state’s share, see the technical appendix to Chapter 1 of the source document.

Mr. UPTON. Without objection.

Mr. STUPAK. When I first learned about this, I was amazed. Apparently, the rationale that leads to this inequity is as follows: The

FCC uses the average cost of the non-rural carriers serving the

State and compares that with the National average cost of providing telephone service. If a State’s average is more than 135 percent of the National average, the State is eligible for funding. If the

State is below 135 percent, it is not eligible for funding.

On the face of it, this approach makes sense. However, it has

flaws. First, the cost of providing service in a State is skewed

downward if a non-rural carrier provides service to residents in a

city in that State.

In addition, this method ignores the intent of Congress. Congress

told the FCC to ensure comparable rates between urban and rural

areas. Universal service is designed to ensure that rural residents

in all parts of the country are afforded access to telephone service

that is comparable in price and quality to service in cities. A

scheme that sends 70 percent of the funds to two States does nothing to advance urban, rural rate compatibility in my State or most

States in the Nation.

The Universal Service Fairness Act that Representative Terry

and I have introduced would solve this problem by assessing each

rural area independently. Each telephone company wire center is

compared to a National benchmark. If the wire center is over the

benchmark, it would receive support. If the wire center is below the

benchmark, it would not. This method would enable residents,

rural residents, across America to be treated fairly. And it ensures

that lower-cost areas would not benefit.

Mr. Chairman, I share the view of many of the members of this

subcommittee that we should undertake a review of the entire USF

Program. The program has many challenges. However, I believe

that we should consider moving to fix inequities that do rural customers a great disservice while we continue to grapple with the

larger issues as well.

With that, I yield back the remaining 6 seconds of my time.

Mr. UPTON. The gentleman’s time has expired. I recognize the

gentleman from Nebraska, Mr. Terry, certainly.

Mr. TERRY. Thank you, Mr. Chairman, for holding this important

hearing.

I would like to as well focus my comments on one aspect of universal service fund. And that’s the high-cost, non-rural fund. Now,

although the FCC calls it non-rural carriers, in fact, actually, this

service serves more than 70 percent of rural Americans.

This program may be one of the most poorly targeted programs

in the Federal Government. More than half of the program, $120

million out of $234 million, benefits one single State. Nearly 85

percent of this program goes to carriers in only three States. And

only eight States receive any funding under this program. It’s interesting to note that some of the rural States that do not benefit

from this program include Texas, who donates over $12 million to

8

this program, and receives nothing; Tennessee, $3.7 million and receives nothing. Nebraska receives nothing.

Ironically, the States that do benefit from this program, although

rural and deserving of some support, are not the most rural States

in America. For example, by almost every measure, my State, Nebraska, is considered rural. According to the cost and the most recent Census data, Nebraska is one-third as densely populated as

Mississippi. Yet, carriers serving residents in Nebraska receive no

support under this program.

I am proud to partner with Mr. Stupak in a bill that would correct this, as he has outlined in his opening statement. By using a

different formula, 40 States, more than 40 States, will receive some

degree of funding, as opposed to just 8.

Now, Mr. Chairman, you and I have discussed the necessity to

review and work toward complete reform of the USF Program. And

I want you to know, as I have told you on the floor, consider me

a partner in that effort.

I do agree that we need to completely reform the Universal Service Program on the distribution, on the revenue side, but let’s also

recognize that that is going to be a very arduous, tedious, and

lengthy process. And I would respectfully request that we not punish in that time States like mine, Nebraska. And let’s resolve the

inequities while we can now.

With that, I look forward to working with you on the Universal

Service Fund and continue to plead that we at least do what we

can and move the Terry-Stupak bill.

I yield back my 9 seconds.

Mr. UPTON. The gentleman yields back the balance of his time.

We recognize Mr. Green for an opening statement.

Mr. GREEN. Thank you, Mr. Chairman. I appreciate the offer of

the extra 3 minutes, but I think I want to say what I have so it

will get into the record now. And I thank you for calling the hearing on the future of universal service.

I expect that we will hear agreement from our panelists today

and from many members that the universal service fund needs to

be preserved. We may have different reasons for that. Mine is because I believe we must have a healthy fund to improve education

through our schools and library funding known as the e-rate.

People who are talking about reducing claims on the fund should

be warned that if they try to scale back or limit e-rate funding, I

think we will see a tremendous outcry from our teachers and our

parents and our school districts across the country. I don’t want to

get into the nuts and bolts of e-rate or some of its recent publicity,

but I want to talk about what e-rate has done for the school children in my hometown in Houston. With their recent receipt of over $50 million in year 6, the Houston Independent School District, very urban district, 200,000-plus

children, has received approximately $200 million in universal

service funding through e-rate.

Between 1998 and 2001, internet access in our minority classrooms jumped from 37 percent to 81 percent. And we were successful in bridging that digital divide because of the universal service

fund. I believe these investments will be paid back many times

over when these children fully enter our society and our workforce.

9

Ninety-five percent of all of our Houston public school classrooms

are now connected, with over 90 percent using high-speed connections. Teachers are connected to their schools’ resources at their

homes. And hopefully students will also be able to connect through

their homes.

Smaller districts also benefit. I have a number of districts other

than Houston Independent School District. I have one small district

that’s 80 percent economically disadvantaged. And they received

more than $1.5 million in e-rate funding. This low-income district

is now scoring 90 percent on all their State achievement tests. And

the school administrators say that it couldn’t have happened without e-rate-provided funding from the universal service fund. So improving educational opportunities for these schools is my motivation for seeking solutions to the coming crunch for the universal

service fund.

I don’t know the solution on how to make the deposits and withdrawals on the fund match up. And I look forward to hearing from

our distinguished panelists on how this may be accomplished. But

I do know the approach should be comprehensive in considering all

aspects of the universal service, both within and without the actual

universal service fund.

Before we hear about potential solutions for universal service in

general and the fund in particular, I will make one observation. If

the FCC is going to continue to demand that the incumbent local

exchange carriers subsidize their competitors to pick off their highvalue customers through the UNE-P system and the TELRIC pricing mechanism behind it, the incumbents are going to become less

and less able to have their business models support the majority

of rural and high-cost customers, whom they now serve.

And if incumbents that do not draw much from the fund can no

longer afford to serve these rural customers, then other companies

will move in using the universal service fund dollars to serve these

customers. If we think the fund is in trouble now, it may get a lot

worse if action is not taken. It is a complicated relationship, but

if balance were restored to this industry by eliminating UNE-P or

the TELRIC pricing, we would retain the ability of the incumbents

to provide universal service without causing increased burden on

the fund.

If incumbents cannot serve their current rural customers, the

burden on the fund is going to get bigger. And soon people are talking about making more folks pay into the fund, causing a lot more

pain.

All the while, we have critical needs in our schools and our

school children and need telecommunication investments. If these

investments are hit because we would rather subsidize a few companies, I think that would be particularly a shame.

And, again, I’m glad the panel is here, Mr. Chairman. I am glad

you are holding this hearing. Thank you.

Mr. UPTON. Thank you, Mr. Green.

Mr. Walden?

Mr. WALDEN. Mr. Chairman, I will waive an opening statement.

Mr. UPTON. Good for you.

Ms. Bono?

Ms. BONO. I’ll waive also.

10

Mr. UPTON. Mr. Whitfield?

Mr. WHITFIELD. I’ll waive also.

Mr. UPTON. Mr. Bass?

Mr. BASS. I’ll waive.

Mr. UPTON. Ms. Wilson?

Mrs. WILSON. Enter it into the record.

Mr. UPTON. Without objection.

All members’ statements will be a part of the record. So do you

defer as well?

Mrs. WILSON. I’ll waive.

Mr. UPTON. Mr. Pickering?

Mr. PICKERING. I will defer as well.

Mr. UPTON. Mr. Boucher?

Mr. BOUCHER. Well, thank you, Mr. Chairman. I do have something to say.

As a representative of a rural Virginia district, I have a very

strong interest in assuring that the longstanding commitment our

Nation has made to affordable telephone service for everyone remains at the core of our Federal telecommunications policy.

We have a telephone service penetration rate in the high 90 percentile Nationwide, an achievement that few Nations can claim.

That sterling accomplishment is a consequence of and is directly

attributable to this commitment to universal service, through

which the residents of high-cost rural areas receive the basic local

telephone service at the same monthly rate as the residents of the

easier-to-serve metropolitan regions.

In the absence of our universal service policy, the high cost of

stringing telephone lines over large distances and mountainous terrain would place the cost of telephone service beyond the reach of

tens of thousands of my constituents and tens of millions of rural

Americans.

And so, as we embark on these timely hearings—and I think

they are timely—to survey the changes and the universal service

funding and delivery mechanisms, which the arrival of competition

in the telecommunications industry makes necessary, I will urge

the members to retain our core basic universal service policy: affordable local telephone service for everyone with the same basic

monthly rate for rural and urban residents alike. But changes

must come in the mechanics by which we achieve that result.

In an era of highly competitive markets for both wired and wireless telephone service, the universal service policy is still based on

the concept of a local telephone monopoly with a single wire line

provider for all voice service. To a large extent, the policy is still

based on the notion of a vertically integrated system with a single

provider for both local and long distance service, a condition which

has not prevailed in the United States for 20 years.

All universal service revenues, the system’s money end, are derived from charges on interstate services while purely intrastate

services escape any universal service charge. CLECs, who serve

business customers only, take the cream off the top, depriving the

universal service fund of much of its traditional revenue service resource, which leaving the incumbent CLEC with an even greater

universal service funding responsibility.

11

Telephony offered by cable systems through the cable modem

service in packaged switching format looks and feels exactly like

local telephone service, but it escapes any universal service payment responsibility.

These matters only scratch the surface in a complex system for

which changes must come. I want to commend the chairman for

launching the committee’s deliberations on universal service. I very

much look forward to the witnesses who have joined us here today.

And I want to join the chairman in thanking them for their participation. And I look forward to participating with the members as we

make the changes which must be made while reserving our core

principle of affordable service for everyone.

Thank you, Mr. Chairman.

Mr. UPTON. Thank you, Mr. Boucher.

Mr. Rush?

Mr. RUSH. Thank you, Mr. Chairman. Mr. Chairman, I join with

my colleagues on the committee in applauding you for holding this

hearing on universal services.

Oversight of universal service programs is critical for all parts of

the country. And it is indeed important to residents of cities and

suburbs. We contribute the lion’s share of funding for this program.

And it is important to rural America also to ensure that rural residents have access to quality affordable telephone services.

Seven years after the passage of the Telecommunications Act, the

goals of the act remain the same to both reserve and advance universal services. However, the future of the fund is now in danger.

Mr. Chairman, since we passed the 1996 Telecommunications

Act, the technological landscape has certainly drastically changed,

never to return. We are now witnessing an explosion of wireless

and internet technologies. And they’re offering a bundle of services,

which, in part, is great for the consumer but, on the other hand,

has the potential to shrink the base of revenues for the universal

service fund. This is, in part, due to the funding mechanism, which

is totally reliant on interstate and international end user telecommunication revenues, thereby increasing the difficulty of identifying interstate revenues.

As we continue to fund notable programs, like the E-rate Program and the Rural Health Care Program, reform will be necessary

to ensure the sustainability of the fund in the long term. That said,

Mr. Chairman, I look forward to hearing the testimonies of our distinguished panelists, who offer proposals on how we can best restructure the universal service fund so that we can ensure that it

is being used responsibly and fairly and that it indeed is fully funded.

Thank you, Mr. Chairman. I yield back the balance of my time.

Mr. UPTON. Thank you, Mr. Rush. I know you are rooting for the

Cubs tonight, too.

Mr. RUSH. I predict a victory, Mr. Chairman.

Mr. UPTON. For the Red Sox for Mr. Markey here. He will be

here. He’s at the health conference.

[Additional statements submitted for the record follow:]

12

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

FROM THE STATE OF WYOMING

Thank you, Mr. Chairman.

I would like to thank you for holding this hearing to examine the state of Universal Service, and jump-starting the effort to ensure the solvency of this important

fund. We must make certain that the USF continues to assist rural and high cost

communities—and low income Americans—stay connected in our modern world.

Being from a rural state, I can appreciate how difficult it is to provide ubiquitous,

affordable phone service across states like Wyoming. Those who are fortunate

enough to live in Wyoming, however, should not have the misfortune of exorbitant

telephone rates. After all, a phone in New York City is worthless if there isn’t anyone on the other end of the line.

We have come a long way from the initial concept of Universal Service, and the

means of communication hardly resemble the rotary dial phone that I grew up with.

With new and emerging technologies changing how we stay connected, there have

also emerged new questions on how the USF should operate. For this to be an effective process, we need to assess the role of telecommunications providers regarding

their obligations to the fund as well as examine who is receiving a subsidy from the

fund. Spiraling contribution rates are not the sign of a balanced program. And no

consumer wants to open his or her phone bill and see a regularly ballooning USF

contribution.

I am certain that ensuring the solvency of the USF has as many different potential solutions as the witnesses we have testifying today—if not more. Hopefully,

there are some common themes we can build upon and reach a consensus approach

that will be widely supported throughout communities, the industry and Congress.

As a result of this hearing, I would like to learn from our panel just what changes

they would propose to ensure the viability of Universal Service. I would also like

to hear everyone’s thoughts on how we arrived at this precipice... what went

wrong?

We have a unique opportunity to take today’s pending troubles with the fund and

craft a common sense, dependable solution. One that had broad support and one

that is rock-solid, so that we won’t be holding a hearing a few more years down the

road and asking, ‘‘What went wrong?’’ again.

Thank you Mr. Chairman, I yield back the balance of my time.

PREPARED STATEMENT OF HON. W.J. ‘‘BILLY’’ TAUZIN, CHAIRMAN, COMMITTEE ON

ENERGY AND COMMERCE

Mr. Chairman, thank you for calling this hearing today. Universal service is a

complicated, but important, topic, and this subcommittee needs to begin to understand its current status and what lies in its future.

Ensuring that all Americans have access to affordable telephone service has been

an important public policy goal for more than fifty years. However, competitive

forces created after the ’96 Act have made the current system unsustainable. Unless

key changes are made in the universal service regime, I fear that the fund will spiral out of control, and that many of our rural constituents, including those in my

district in Louisiana, will be without affordable telephone service.

Competition has impacted universal service in three respects. First, competition

among local exchange carriers for business and urban residential customers has

eroded a primary source of implicit universal service funding for incumbent local exchange carriers (ILECs). Competition is great for consumers, but it requires changes

in universal service policies.

Second, competition among technologies has begun to reduce the pot of money

from which universal service derives its funding. People send emails rather than

make long-distance phone calls. That drains revenues from interstate revenues. People use their wireless phones rather than wireline phones. And burgeoning technologies like Voice over Internet Protocol (VOIP) do not currently contribute to universal service funding.

Third, competition has begun among different services for universal service dollars. Wireless companies are beginning to use universal service funds to serve wireless carriers. And wireless companies are receiving universal service dollars even

though a particular customer is still being served by a wireline company that uses

universal service dollars. In addition, some people want to use universal service

money to fund broadband in rural areas. This has greatly increased the demand on

universal service money.

All of these competitive trends have put unprecedented pressure on the universal

service program. The program needs to be modernized to reflect all of these trends.

13

I look forward to hearing the testimony of our witnesses today so that we can

begin to educate members regarding different ideas for universal service reform. I

hope this committee will engage in a vigorous debate about this issue and coalesce

around a strategy for reform. I look forward to working with Chairman Upton, Mr.

Dingell, and other interested parties to ensure that we bring long-term sustainability to the universal service program.

Mr. UPTON. We are delighted to have a distinguished panel with

us this afternoon. And we are joined by Ms. Kathleen Abernathy,

a commissioner of the FCC; Mr. Bob Rowe, Chairman of the Montana Public Service Commission; Mr. Billy Jack Gregg, Director of

the Consumer Advocate Division, Public Service Commission of

West Virginia; Ms. Margaret Greene, President of the Regulatory

and External Affairs of BellSouth; Mr. Joel Lubin, Vice President

of AT&T; Mr. Glen Post, Chairman and Chief Executive Officer of

CenturyTel; Ms. Sid Shank, General Manager of Bloomingdale

Telephone Company from the greatest city of Michigan; and Mr.

John Stanton, Chairman and CEO of Western Wireless Corporation.

Ladies and gentlemen, your testimony has been made a part of

the record in its entirety. We appreciate very much that you sent

it up early so we had a chance to look at it last night, for me, my

staff, and other members of the committee. It’s made a part of the

record.

We are going to try to limit your remarks to 5 minutes.

Ms. Commissioner Abernathy, we will start with you. Welcome

back.

STATEMENTS OF KATHLEEN Q. ABERNATHY, COMMISSIONER,

FEDERAL COMMUNICATIONS COMMISSION; BOB ROWE,

CHAIRMAN, MONTANA PUBLIC SERVICE COMMISSION; BILLY

JACK GREGG, DIRECTOR, CONSUMER ADVOCATE DIVISION,

PUBLIC SERVICE COMMISSION OF WEST VIRGINIA; MARGARET H. GREENE, PRESIDENT, REGULATORY AND EXTERNAL AFFAIRS, BELLSOUTH CORPORATION; JOEL LUBIN,

VICE PRESIDENT, AT&T CORPORATION; GLEN POST, CHAIRMAN AND CHIEF EXECUTIVE OFFICER, CENTURYTEL, INC.;

SIDNEY SHANK, GENERAL MANAGER, BLOOMINGDALE TELEPHONE CO.; AND JOHN STANTON, CHAIRMAN AND CHIEF EXECUTIVE OFFICER, WESTERN WIRELESS CORPORATION

Ms. ABERNATHY. Thank you very much, Chairman Upton and

distinguished members of the subcommittee. It is a pleasure to be

here today. And I appreciate the opportunity to discuss the future

of universal service. And I also applaud you for taking the time and

energy to tackle this very difficult issue.

As pointed out by all of you, I think, the goal of providing highquality telecommunications services to all Americans at affordable

rates is a cherished principle in U.S. telecommunications policy and

one of the cornerstones of the act. All too often, we forget that in

the not too distant past, phone service was a luxury that few in

rural America could afford. Today, however, universal service funding has guaranteed citizens throughout the country the ability to

communicate at reasonable rates.

I know that every member of this subcommittee understands the

importance of universal service. And as chair of the Federal-state

joint board on universal service, I also make it a top priority.

14

My written statement provides details on the challenges confronting universal service and the various rulemaking proceedings

that we have pending at the FCC. So what I thought I would do

this afternoon is highlight two key issues identified in my written

statement; first, the contribution methodology debate; and, second,

the issues surrounding who qualifies for universal service support

in areas served by rural telephone companies. I think everyone

agrees that for universal service to remain vital, we must ensure

that sufficient funds continue to flow into the system and that the

funding burden is spread among contributors in an equitable and

a nondiscriminatory manner.

The commission took some important steps last December to stabilize the universal service contribution factor in an effort to mitigate the growing funding burden on some consumers. But the existing regime remains in jeopardy for several reasons. And I believe

that more fundamental reforms will be necessary to protect universal service in the long term.

I think, as anyone with a cell phone can attest, the telecom market has evolved away from reliance on traditional long distance

service and toward new services, like wireless and e-mail and more

recently voice over IP.

Since universal service funding comes only from interstate revenues and there is a Federal court decision that said the FCC is not

permitted under section 254 of the act to assess intrastate revenues, then this continuing decline in interstate revenue base has

forced the FCC to increase the contribution factor substantially to

meet funding demands.

Another concern arises from the increasing prevalence of bundled

service offerings. And I know a number of you mentioned that.

While these bundles are great for consumers because they’re convenient, they save us money, that’s fine, but they also make it extremely difficult to identify that part of the bundle that is the

interstate telecommunications piece.

Since the FCC’s existing rules only allow us to assess contributions on the interstate minutes, somehow we have to try and isolate those revenues from the revenues that are generated from

intrastate services or from other information services. At the same

time, however, simple economics will likely lead carriers to attempt

to minimize their contribution obligations by shifting revenues to

categories of service that are not assessed USF obligations.

So how do we respond to these marketplace and technological

changes? One option is for Congress to give the FCC the authority

to assess contributions on both interstate and intrastate revenues.

This total revenue assessment approach would be more predictable

and would make it harder for carriers to shield some of their revenues in different categories.

In addition, however, the FCC is considering whether to adopt alternative contribution methodologies under our existing authority.

So, for example, a system based on physical connections or assigned telephone numbers might be more stable than the revenue

model we currently use. And proponents note that these alternatives would eliminate the need to consider this whole debate

about interstate versus intrastate jurisdiction or telecom service

versus information service monies. But these proposals, nevertheVerDate 11-MAY-2000 11:09 Dec 08, 2003 Jkt 000000 PO 00000 Frm 00018 Fmt 6633 Sfmt 6602 89965.TXT HCOM1 PsN: HCOM1
15

less, remain controversial, in large part, because they would shift

contribution obligations away from long distance carriers and into

the pockets of the LECs and the wireless carriers.

While universal service charges, as we all know, are ultimately

passed through to consumers, industry segments, nevertheless,

strive to minimize the charges on their own bills for competitive

reasons.

Finally, the FCC has also sought comment on broadening the

contribution base to include the telecom component of all

broadband services, including both DSL and cable model services.

Spreading the contribution burden across a broader base of services

would necessarily drive down the USF charge imposed on any single service. Those are proposals that are currently in front of us.

Now, apart from the contribution methodology, the other primary

source of instability in the universal service regime is the support

mechanisms for those carriers that serve rural America. This component has grown substantially over time. And this increase in demand for funds when combined with the decreasing revenue base

is responsible for the fact that we now have a contribution factor

that is approaching double digits.

Another funding issue that has received particular attention is

the intersection of competition and universal service in rural areas.

While new competitors, including wireless providers, currently receive a very small percentage of overall USF support, their share

has been growing rapidly along with a surge in applications to become eligible telecom carriers who were entitled to support.

This trend, together with the fact that incumbent carriers do not

lose any support if a customer switches to a competitor’s service,

suggests that rule changes may be necessary to avoid placing unreasonable strains on the overall high-cost support mechanisms.

And, therefore, the FCC has asked the USF joint board to consider

a variety of issues relating to the designation of competitive ETCs

and the manner in which all ETCs receive support.

In closing, while universal service is facing a number of challenges, I am confident that with your help and your guidance and

the commitment of the FCC, that we will be able to ensure the sustainability of the various support mechanisms. We have initiated

the necessary rulemaking proceedings. Together I think we can respond to the challenges ahead.

And I want to thank you for the opportunity to testify. And I look

forward to answering any questions you may have. Thank you.

[The prepared statement of Kathleen Q. Abernathy follows:]

PREPARED STATEMENT OF HON. KATHLEEN Q. ABERNATHY, COMMISSIONER, FEDERAL

COMMUNICATIONS COMMISSION

Good afternoon, Chairman Upton and distinguished members of the Subcommittee. I appreciate the opportunity to appear before you to discuss the challenges confronting universal service and the FCC’s efforts to preserve and advance

this critical policy objective.

The goal of providing high-quality telecommunications services to all Americans

at affordable rates is a cherished principle in U.S. telecommunications policy and

one of the cornerstones of the Telecommunications Act of 1996. I know that every

member of this Subcommittee understands the importance of universal service, and,

as Chair of the Federal-State Board on Universal Service, I make it a top priority

to ensure that the federal support mechanisms fulfill their objectives.

The 1996 Act directed the FCC to promote two key goals that at times appear

to be in tension with one another: opening local markets to competition and preVerDate 11-MAY-2000 11:09 Dec 08, 2003 Jkt 000000 PO 00000 Frm 00019 Fmt 6633 Sfmt 6621 89965.TXT HCOM1 PsN: HCOM1
16

serving universal service. The prior monopoly environment enabled regulators to

promote universal service by building implicit subsidies into local and long distance

rate structures. In a competitive environment, however, these implicit subsidies cannot be sustained, since the rates that provided surplus funds—such as business

rates in urban areas—are undercut by new entrants and eventually driven down to

a cost-based level. Congress accordingly directed the FCC to adopt explicit support

mechanisms that would be sufficient to ensure that rates remain affordable and reasonably comparable throughout the nation. In response, the FCC developed several

explicit support mechanisms for carriers that provide service in high-cost areas.

High-cost support will total approximately $3.3 billion in 2003.

The 1996 Act also expanded the scope of universal service by directing the Commission to establish support mechanisms for schools and libraries and for rural

health care facilities. The schools and libraries program (often called the E-Rate program) provides up to $2.25 billion in annual support and has enabled millions of

school children and library patrons to gain access to advanced telecommunications

and Internet services. While the rural health program generally has been underutilized, the FCC is considering a variety of measures to strengthen it, as discussed

below.

In addition to the high-cost support mechanisms and the programs supporting

schools, libraries, and rural health clinics, the FCC’s Lifeline and LinkUp programs

provide discounts off monthly service charges and connection fees to ensure that

low-income consumers have access to basic telephone service. This year, these programs will provide approximately $691 million in support.

All of these programs promote the universal service goals set forth in section

254(b) of the Act, including the availability of quality services at affordable rates;

access to advanced services in all regions of the Nation; comparable access to telecommunications services for all consumers, including low-income consumers and

those living in rural, insular, and other high-cost areas; and access to advanced

services for schools, libraries, and rural health care facilities. Shortly after

Congress’s enactment of the 1996 Act, the FCC adopted rules regarding the collection and distribution of universal service support. Now, with several years of experience under our belts, we are engaged in a reexamination of many aspects of the program to ensure that each component is administered as efficiently and effectively

as possible and that the overall program remains sustainable. A host of marketplace

and technological developments have already prompted some course corrections, and

may ultimately cause us to reassess certain fundamental policy choices made in the

initial implementation period. As we engage in this review, our commitment to preserving and advancing universal service remains unwavering.

I describe below some of the challenges confronting universal service and the efforts the FCC has underway to ensure that each component of the universal service

program remains faithful to the principles set forth in section 254 of the Act. These

proceedings aim to improve and strengthen all of our support mechanisms, and

therefore will benefit consumers in high-cost areas, families with low income, and

patrons of schools, libraries, and rural health care facilities. In my opinion, the FCC

will soon need to revise its rules regarding the collection of funds and their distribution through the various support mechanisms. I will begin with the contribution

methodology and then discuss issues pertaining to the distribution of support.

CONTRIBUTION METHODOLOGY

The Commission collects funds for the various universal service support programs

pursuant to section 254(d) of the Communications Act. Service providers must pay

a percentage of their revenues from interstate end-user telecommunications services

to the Universal Service Fund. This percentage fee, called the contribution factor,

changes on a quarterly basis depending on the demand for funding and the base

of reported revenues. The current contribution factor is 9.5 percent.

Several trends have combined to put upward pressure on the contribution factor,

which in turn has increased the funding burden on some consumers. While long distance revenues grew between 1984 and 1997, they have since been flat or in decline

as a result of price competition and substitution of wireless services, e-mail, and,

more recently, Voice Over Internet Protocol (VOIP) services. Because federal universal service contributions under existing rules are assessed only on interstate revenues from end-user telecommunications services, this shrinking of the applicable revenue base has contributed to a steady rise in the contribution factor over time—it

has increased by more than six percentage points over the last six years. While the

contribution factor for the fourth quarter of this year will be 9.2 percent, the slight

reduction from the current factor likely represents a one-time reprieve resulting

17

from an earlier over-collection, considering that the reported revenue base remains

in decline.

Another important trend has been the increasing prevalence of bundled service

plans. For years, wireless carriers have offered buckets of any-distance minutes at

flat rates, and now wireline carriers are offering packages including local and long

distance for a single price. In addition, many carriers offer business customers bundles that include local and long distance voice services, Internet access, and customer premises equipment. Such bundling has been a boon for consumers but has

made it difficult to isolate revenues from interstate telecommunications services.

And the problem is likely to get worse as bundling becomes more and more popular.

In December 2002, the Commission adopted a number of measures to stabilize the

universal service contribution factor in an effort to mitigate the growing funding

burden on consumers. For example, the Commission increased from 15% to 28.5%

the safe harbor that wireless carriers may use to determine the interstate percentage of their revenues. The Commission also eliminated the lag between the reporting of revenues and the recovery of contribution costs, which lessened the competitive disadvantages facing long distance carriers with sharply declining revenues.

And the Commission prohibited mark-ups of contribution costs on customers’ bills

to ensure that carriers cannot profit from inflated line charges.

While these were important steps, I believe that more fundamental reform will

be necessary to ensure the sustainability of universal service funding in the long

term. Bundling together interstate and intrastate services—and telecommunications

and information services—gives carriers the opportunity and incentive to understate

the portion of their revenues that are subject to assessment and increases the difficulty of identifying interstate revenues. Contribution factors therefore are likely to

continue their ascent under a contribution methodology based on interstate telecommunications service revenues.

For this reason, the Federal-State Joint Board has recommended that Congress

amend section 254 to provide the FCC with authority to assess intrastate revenues,

in addition to interstate revenues. A total revenue assessment would be far lower

and more stable than one based solely on interstate revenues, and, just as importantly, it would prevent carriers from avoiding their contribution obligations by allocating revenues to the intrastate jurisdiction.

In addition, the Commission has been considering whether to make substantial

changes under its existing statutory authority. The Commission has sought comment on alternative methodologies based (in whole or in part) on end-user connections or assigned telephone numbers, because such approaches arguably would create a more sustainable model for funding universal service in the future. The number of end-user connections has been more stable than the pool of interstate revenues, and connection-based charges can be adjusted based on the capacity of each

connection to ensure an equitable distribution of the funding burden among business and residential customers. Moreover, proponents of a contribution methodology

based on telephone numbers (with connection-based charges for high-capacity business lines) argue that it would not only be more stable but also promote number

conservation. Critics of these proposals—including carriers that would face increased assessments based on connections or telephone numbers—argue that reducing the contributions of long-distance carriers (which have very few assigned telephone numbers or end-user connections) would violate the statutory requirement

that all carriers contribute on an equitable and nondiscriminatory basis.

Finally, the Commission also has sought comment, in the Wireline Broadband

NPRM, on whether all facilities-based providers of broadband services should be

subject to the same contribution obligations. While a total-revenue methodology or

one based on end-user connections or telephone numbers would address problems

arising from the blurring of the line between interstate and intrastate telecommunications services, such changes would not necessarily broaden the contribution base

to include all broadband transmission services and new services such as VOIP. The

Commission accordingly sought comment on whether or not to change the contribution pool to include new services that currently are not assessed. Regardless of

whether such services are classified as telecommunications services or information

services, section 254 gives the FCC permissive authority to assess contributions on

‘‘telecommunications,’’ which underlies both types of services.

DISTRIBUTION OF SUPPORT

The steady increases in the contribution factor have resulted not only from the

shrinking of the interstate revenue base, but also from the significant increases in

the demand for funding. Much of the increased demand has resulted from the FCC’s

reform of interstate access charges: Many incumbent LECs now recover from the

18

Universal Service Fund costs that previously were recovered from long distance carriers. In addition, the increasing entry of wireless carriers and other competitors as

eligible telecommunications carriers (ETCs) has raised questions about the longterm sustainability of the high-cost support mechanisms. Demand growth has been

less of an issue with respect to the mechanisms that support schools and libraries,

rural health clinics, and low-income consumers, but I describe below the FCC’s recent initiatives to revise those programs to ensure that they remain efficient and

effective.

HIGH-COST SUPPORT

1. ETC/Portability Issues

Before enactment of the 1996 Act, only incumbent LECs received universal service

support. In recent years, however, wireless carriers and competitive LECs have been

designated as ETCs. While competitive ETCs receive a very small percentage of

high-cost funds overall, their share has been increasing dramatically in recent

months along with a surge in the number of ETC applications. Competitive ETCs

receive support under the ‘‘identical support’’ rule (also called ‘‘portable support’’),

which provides per-line support based on the incumbent ETC’s costs. Incumbents do

not lose support when a competitive ETC captures lines; rather, both carriers receive universal service funding. Rural LECs have argued that this regime creates

uneconomic arbitrage opportunities and threatens the viability of universal service,

while competitive ETCs generally contend that providing identical support—whether based on the incumbent LEC’s embedded costs or based on forward-looking economic costs—is essential to competitive neutrality.

In November 2002, the Commission asked the Federal-State Joint Board to consider the intersection of competition and universal service in rural areas. The Joint

Board subsequently sought comment on several key issues, including the manner

in which competitive ETCs receive support and the impact of providing support to

competitive ETCs on the growth of the universal service fund. The Joint Board also

sought comment on the process for designating ETCs and whether the FCC should

establish guidelines for consideration by the state commissions that make these determinations under section 214(e)(2). In July, the Joint Board held a public forum

on these issues, and a wide range of industry representatives, consumer advocates,

and state commissioners provided valuable insights.

Parties advanced a variety of proposals in their comments and at the public

forum. Several groups of incumbent LECs argue that competitive ETCs should receive support based on their own embedded costs. Some competitive ETCs argue

that incumbents and competitors should receive support based on forward-looking

economic costs. To control growth, some parties advocate capping support upon

entry of a competitor and dividing the funds pro-rata based on the percentage of

lines each carrier serves; other parties advocate supporting only a single connection

per household (current rules do not limit the number of wireline or wireless connections that are funded). Incumbent LECs generally oppose these proposals, arguing

that reforming the ETC-designation process—in particular, making the public interest analysis more exacting—would suffice to keep the Universal Service Fund from

growing too large.

The Joint Board is now considering the record and plans to provide a recommended decision to the FCC as expeditiously as possible.

2. Support for Non-Rural Carriers

While the rural high-cost support mechanism provides the lion’s share of the

funding—and correspondingly has received most of the attention—‘‘non-rural’’ carriers (the Bell operating companies and other relatively large LECs) also receive

high-cost support. Whereas rural carriers receive support based on their embedded

costs, non-rural funding is determined based on forward-looking economic costs.

Non-rural carriers receive support in a particular state if the statewide average cost

per line, as determined by a computer cost model, exceeds the national average cost

by a certain margin. Currently, non-rural carriers receive support in eight states

(Alabama, Kentucky, Maine, Mississippi, Montana, Vermont, West Virginia, and

Wyoming). While non-rural carriers in other states serve many high-cost wire centers, their statewide average costs are not sufficiently high to receive support. Moreover, rural carriers receive substantial support in each of the states for which nonrural support is unavailable.

I understand that this Subcommittee is considering legislation that would alter

the distribution of non-rural support. The Commission is nearing completion of its

own review of this support mechanism in response to a remand by the Tenth Circuit

Court of Appeals. The court ruled that the Commission did not adequately explain

19

how the non-rural support mechanism is sufficient to enable states to set affordable

rates that are reasonably comparable in both rural and urban areas. In addition,

the court directed the Commission to consider how to induce states to develop their

own support mechanisms to fund high-cost areas within their borders, since the federal mechanism aims primarily to mitigate cost differentials among the states. The

Joint Board issued its recommendations last October, and the Commission will complete its consideration of these issues next month.

LOW-INCOME SUPPORT

A separate component of the federal universal service program is the low-income

support mechanism, Lifeline/LinkUp. These programs provide funding that enables

low-income consumers to receive discounts on monthly service and installation

charges. An additional layer of discounts is available for eligible consumers living

on Indian tribal lands. Earlier this year, the Joint Board released a Recommended

Decision on proposals to bolster the effectiveness of Lifeline and LinkUp. This Recommended Decision suggests new ways for low-income consumers to qualify for support and also addresses questions regarding states’ efforts to engage in outreach and

to verify program eligibility. The goal of the pending rulemaking is to remove impediments to beneficiaries’ receiving support while simultaneously preserving the

integrity and enhancing the efficiency of the program.

SCHOOLS AND LIBRARIES AND RURAL HEALTH CARE FACILITIES

Finally, the Schools and Libraries support mechanism (E-Rate) and the support

mechanism for rural health care facilities provide additional support that enables

these institutions to receive discounts on basic and advanced telecommunications

services (as well as internal connections in the E-Rate program). Now that the Commission has had significant experience overseeing these programs, we are considering a variety of rule changes in pending rulemaking proceedings. These proceedings, like the Lifeline/LinkUp rulemaking, aim to eliminate red tape while ensuring continued program integrity.

In particular, the Commission will soon consider an Order that would modify the

rural health care mechanism. This support mechanism has been underutilized, so

the notice of proposed rulemaking sought comment on ways to alter eligibility requirements to eliminate obstacles to rural health clinics’ receiving support, while remaining faithful to the statutory purposes. Facilitating telemedicine by connecting

rural health clinics to regional hospitals and universities has always been an important goal, and it takes on added importance in light of the increased threat of bioterrorism.

Taken together, the reforms being considered by the Commission should ensure

the continued vitality of the federal universal service support mechanisms. The

Commission has no higher priority than delivering on the promise of ubiquitous,

high-quality, and affordable services. I would like to thank you, Mr. Chairman, for

calling this hearing, and I look forward to working with you and other members of

the Subcommittee on these challenging and critical issues.

Mr. UPTON. Thank you very much.

Mr. Rowe, welcome.

STATEMENT OF BOB ROWE

Mr. ROWE. Thank you. Mr. Chairman, members of the committee, I am Bob Rowe. I am Chairman of the Montana Commission, also a member of the Federal-state board on universal service.

I am speaking here today entirely in my own capacity.

I join in commending you for holding this terribly important

hearing. I am very honored to be sitting here between two good

friends of mine and with this very distinguished panel. I am going

to speak fast, like a Yankee, to stay within my timeframe.

This program does face real crucial and time-sensitive challenges. All of you in your opening statements did a superb job laying out what those challenges are.

I am actually more optimistic now than I have been in years that

we are going to really get at this and make progress. I am optimistic based on the experience we have had and the appreciation

20

by industry and consumer groups, by the FCC, the joint board, and

by Members of Congress that we have to act quickly and we have

to act wisely because the risk of failure is so high. And, again, I

think your thoughtful and intellectually diverse opening statements coupled with the great work being done on the Senate, led

particularly by Senator Burns and Senator Dorgan, really can give

us some optimism that we can get it right.

I start with two basic questions. The first question is, is universal service the problem or the solution as the saying goes? I

would argue that section 254 may be the most successful part of

the Telecommunications Act. And as I drive around Montana, as I

visit other States every day, I appreciate the successes of all four

elements of the Universal Service Program.

In my testimony, I describe, in particular, some of the good work

being done by the rural independents and cooperatives in Montana,

deploying really remarkable services in very tough-to-serve, very

costly to serve areas. Consistent with Mr. Cox’s point, most of the

services, the advanced services they provide, aren’t funded directly

by universal service, but the network over which both basic and advanced services typically are provided is supported in part, the loop

and the switch elements, by universal service. That’s the no-barriers base approach.

There are good things happening in rural America. And those are

very much associated with the success of the Universal Service

Program.

The second basic question, are we more concerned about supporting individual customers or supporting a network? My answer

is both. In my testimony, I discuss the key role of support to individuals, but I also describe the history of universal service coming

out of the system that was put in place over the Twentieth Century

to support the network with payments back and forth between carriers. This system was modified, became more complicated after the

breakup of AT&T, and was again modified after the 1996 act, particularly through creation of the CALLS and MAG Programs. So,

again, we’re supporting both networks and being mindful to the

needs of individual customers, who take service over those networks.

In terms of what is driving growth in the fund, I include some

charts provided by NECA at the back of my testimony. Two key

factors in recent years: first, again, the movement away from intercarrier payments or so-called implicit support to explicit support.

An enormous amount of the growth in the fund is the result of the

CALLS and MAG Programs putting money explicitly on universal

service-type payments.

The second issue—it’s a new issue in the last several years, but

it’s growing—is, of course, the relatively rapid uptake of competitive eligible telecommunications providers, particularly but not entirely, wireless. And, again, I go into that in more detail in my testimony.

What are the issues? In my written testimony, I describe in more

detail issues in the contribution area. I think others will go into

those in some detail, lay out the alternatives. I have been on record

since actually 1996 in supporting an assessment on all teleVerDate 11-MAY-2000 11:09 Dec 08, 2003 Jkt 000000 PO 00000 Frm 00024 Fmt 6633 Sfmt 6602 89965.TXT HCOM1 PsN: HCOM1
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communications revenue. That’s not the only solution, but it is a

good solution.

Telecommunications revenues are increasing. Interstate revenues

are declining. That is one solution. It is a solution addressed in a

letter the joint board sent to Senator Burns earlier this year.

The second set of issues has to do with eligibility. The third set

has to do with the cost basis for payment. Both of these complicated sets of issues are being addressed by the joint board right

now. And I’m encouraged that we are going to make some progress.

In the large company area that a number of the members discussed,—and by ‘‘large company,’’ I am referring to large companies, the Bell companies, that serve rural America—I have two concerns. The first has to do with the hybrid cost proxy model that is

the basis for determining costs by these companies. There are fundamental problems with that model. I have certainly addressed it

with the FCC. And they are issues that the FCC commissioners are

mindful of.

The second is that the payment, the statute that you passed says

rates and services in rural and urban America are to be reasonably

comparable. The standard adopted by the FCC addressed by the

court in the Tenth Circuit and then ultimately proposed for some

modification by the joint board instead compares rural costs to a

National average. And there is a very big difference between a National average and an urban average.

The final set of issues I address is whether there should be further modification of inter-carrier payments. I know a number of

people on the panel will speak to that issue. My concern is that to

the degree that issue was addressed, that the particular effects on

the rural carriers be factored in. They are, if anything, more dependent upon so-called access revenue and have less ability to average that revenue somewhere else if it goes away. If it is replaced

with universal service-type funds to some extent, that again puts

more pressure on the funds. So you have to have a robust base. But

we have to understand what we are doing there.

In my testimony, I recommend basically a three-part approach.

The first, I do think focused legislation would be very helpful. And,

again, both you and your colleagues in the Senate are looking at

that. Second, I think the joint board with congressional oversight

will make progress on the so-called portability issues having to do

with contribution and eligibility. And, third, to the degree that we

are going to address inter-carrier payments, I think we need a very

structured, a very rigorous approach to do that.

We spend our days in the weeds, in the details of this. From your

opening statements, you know the details very well as well. But ultimately your job is to basically provide a beacon to us to get us

out of the woods and back on the path to making this program the

success that you intended it to be.

Again, when I drive around Montana, look at the telemedicine facilities, the great facilities being deployed in schools and libraries

as well as the basic high-cost fund programs, I am optimistic. And

I recognize that this is an important program. Once you modify the

program, I think we need to do so in light of its successes and in

light of the critical place that you in passing the act gave it.

Thank you very much, Mr. Chairman.

22

1 All four of the Project exchanges on the Crow Reservation have DSL. Exchanges with as few

as seventy lines have been provisioned with DSL. 2For example, universal service does not support transport, which can be a key cost driver

for everything from connecting remote households [Joint Board Recommended Decision, Released July 10, 2002 (FCC 02J-1), Bob Rowe Separate Statement Concurring in Part Dissenting

In Part (pp. 43-53)], to getting broadband traffic back to the Tier 1 Internet [Victor Glass,

‘‘NECA Rural Broadband Cost Study: Summary of Results,’’ June 21, 2000; Victor Glass, ‘‘Rural

Realities: Will rural dwellers be forgotten in the broadband boom?’’ July 15, 2002].

[The prepared statement of Bob Rowe follows:]

PREPARED STATEMENT OF BOB ROWE, CHAIRMAN, MONTANA PUBLIC SERVICE

COMMISSION

Mr. Chairman and Members of the Committee, I am Bob Rowe, Chairman of the

Montana Public Service Commission, and a member of the Federal-State Joint

Board on Universal Service. I am speaking only on my own behalf. I commend you

for holding this important and timely hearing. I am truly honored to be here.

Real challenges face the federal universal system, as they do the entire telecommunications sector. However, I have perhaps more optimism now about the ability to address the challenges facing universal service than I have in quite some

time.

Why am I optimistic? Experience and an appreciation of the risks of failure to act

wisely have made the discussion of universal service issues more informed and constructive. I credit that to hard work among industry and consumer stakeholders, to

an engaged and effective Joint Board and FCC, and to leadership by Congress. More

on that later.

My testimony will briefly cover the following areas:

1. Several basic questions about universal service.

2. Factors driving the past and future growth in the fund.

3. Summary of current key issues in universal service.

4. Narrow versus broad approaches to issue resolution.

5. The critical role of Congress.

I will conclude by suggesting a combination of measures, including strong and

continuing Congressional oversight. These suggestions build in part on approaches

developed throughk the Universal Service Summits convened by Senators Burns

and Dorgan, along with focused legislation in several areas, especially contributions

to support universal service. I also suggest for consideration a possible approach to

addressing difficult issues in intercarrier compensation.

A. SEVERAL BASIC QUESTIONS ABOUT UNIVERSAL SERVICE.

Two questions seem especially important to me, and help shape the solutions we

craft:

1. Is universal service the problem or the solution?

2. Is universal service best understood mainly as a support system for customers

or for networks that serve customers?

Is universal service the problem or the solution?

It is disturbingly easy to encounter those who believe that the universal service

system is itself ‘‘the problem,’’ especially the high cost fund portion. I believe that

the programs embodied in Section 254 may perhaps be the Telecommunications

Act’s most tangible success. Each of the four programs—high cost fund, schools and

libraries, rural telemedicine, and lifeline-link-up—has produced real achievements.

In particular, the high cost support programs have allowed service providers to

maintain their networks while keeping rates affordable.

Universal service really is working in Montana. The seventeen rural carriers have

built high quality networks capable of supporting a wide range of services. They

have deployed DSL in 183 rural communities, including remote, low income areas

such as Crow Agency on the

Crow Reservation.1 Rural carriers have formed consortia to provide switched ATM

backbone and to provide at least 123 state-of-the-art video studios (Vision Net, MidRivers and Range) for everything from distance learning to supporting local businesses. Every Native American Indian Reservation in Montana has, for example, at

least one video studio operated by Vision Net. Most of these efforts are not supported by universal service,2 but the high cost fund has helped pay for the critical

local network facilities over which all these services originate and terminate, faciliVerDate 11-MAY-2000 11:09 Dec 08, 2003 Jkt 000000 PO 00000 Frm 00026 Fmt 6633 Sfmt 6621 89965.TXT HCOM1 PsN: HCOM1
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3 .Support for the loop has also likely allowed carriers to allocate more resources for advanced

services deployment than otherwise would have been the case. 4On June 9, 2003, the FCC issued a Notice of Proposed Rulemaking, requesting comments

on a Joint Board recommendation concerning the Lifeline and Link-up programs. 5 U.S. Census Bureau, 2000 Census.

6The initial ‘‘Ozark Plan,’’ following out of the 1934 Act, was driven by the distance traffic

had to be hauled and the hold time for interstate calls, and resulted in as much as 85 percent

of costs being assigned to the interstate jurisdiction for some rural carriers. From 1981 to 1997,

the interstate allocation of loop costs was gradually moved to a uniform 25 percent.

ties on which services such as DSL are directly deployed.3 A map of facilities deployed by rural Montana carriers is attached to this testimony.

The other programs supported by universal service have also produced real successes.4

The very high level of service provided in some of the nation’s most challenging

areas shows that the program is successful and important. Essential reforms should

be built upon this foundation.

Support for customers or for the network?

Many still argue that the existing high cost support system should be replaced

with one that makes payments to individual customers, as does the current Lifeline

program. Congress resolved this issue in the 1996 Act, saying that rates and services should be reasonably comparable between urban and rural or insular areas, not

customers. It is worth noting, however, that factors such as small local calling areas

in many rural areas (compared to the hundreds of thousands who may be within

an urban local calling area make rural customers’ total phone bills higher than

urban customers’ even where the nominal local exchange rate is lower. Moreover,

non-metropolitan status correlates very closely with low per capita income. I offer

two examples:

1. InterBel Telephone Cooperative serves about 3110 access lines in several small

communities in Northwest Montana. The residential and business basic exchange rates, including the Subscriber Line Charge, are $18.50 and $26.20.

Without universal service support, these figures would be $81 higher each

month. The per capita income in Eureka is $12,619 5. For the State of Montana

as a whole the per capita income was $17, 151.

2. If it were not for universal service support, local rates on the Crow Reservation

could be as high as $60 for residential customers and $70 for business customers. Per capita income on the Crow Reservation was $9,440 dollars in 1999,

with 21.8 percent unemployment.

Getting services to customers at affordable and comparable rates is obviously a

fundamental goal. However, we must also remember that existing universal service

arrangements arose out of the system of payments created over the years to pay

for building, maintaining, and operating the ‘‘network of networks’’ that served most

telecommunications carriers and most of their customers. Initially, most of this occurred by the independent companies allocating some of their costs to the interstate

jurisdiction. These costs were then recovered through the ‘‘settlements’’ between

AT&T and the independent carriers.6 With divestiture, this system was modified to

incorporate ‘‘access payments’’ by the inter-exchange carriers to the local carriers,

to support the local network required by IXC customers to originate and terminate

long distance calls. This has been compared to ‘‘rent’’ paid for use of the local networks. The FCC created a variety of programs to support specific services, such as

high-cost loops and switches deployed by smaller carriers. At the same time, a portion of the ‘‘non-traffic sensitive’’ costs were moved to end user payments, and the

‘‘subscriber line charge’’ (SLC) was created.

After passage of the 1996 Act, even more costs where shifted to end users, as the

FCC tried to make ‘‘implicit’’ support explicit (at least as to interstate costs), to

lower interstate access charges, and to move more ‘‘non-traffic sensitive’’ costs to end

users. The CALLS (Coalition for Affordable Local and Long Distance Service) program for large companies and the MAG (Multi-Association Group) program for small

companies are the prime examples.

As will be noted below, a network focus, in addition to a customer focus, helps

provide analytical clarity, sheds additional light on one of the key cost drivers (further replacement of access by universal service type payments), and helps focus the

discussion about what services should be covered by universal service. This history

shows that one cannot understand universal service solely as a program for reducing customers’ rates. Equally important, it has been used as a method of financing

the construction of quality plant in high-cost areas.

24

7 NECA operates the various intercarrier rate pools, conducts economic and technical analysis,

and provides other services to the telecommunications industry. It does not take positions on

policy issues. Use of this material does not constitute an endorsement by NECA for any position

in this testimony. This information was derived by NECA from reports filed with USAC and

other publicly-available information. 8Loop support increased due to regulatory changes resulting from MAG and RTF implementation, where the cap was increased and the payment calculation modified to incorporate growth

in the number of loops and in DGP-CPI. 9The ‘‘contribution’’ issue was not referred by the FCC to the Joint Board. However, the Joint

Board did hold a public meeting on the subject June 21, 2002, and state members did submit

two sets of comments to the FCC, most recently on May 20, 2003.

B. FACTORS DRIVING GROWTH IN THE FUND.

High cost loop support was capped by the FCC in 1994. The cap was intended

to be temporary, while universal service was ‘‘reformed.’’ Instead the cap has remained in place, although modified when the FCC adopted recommendations of the

Rural Task Force. The attached tables and charts were provided by NECA 7 at my

request.

Illustration 2 summarizes the current elements of universal service. Rural health

care ($20 million per year), and the Lifeline and Link-up programs for low income

customers ($741 million) are by far the smallest components. The Schools and Libraries program is substantial, but has been capped at $2.25 billion since 1997, and

therefore is not a driver of current fund growth. Programs comprising the High Cost

Fund are projected to total $3.4 billion for 2003. Illustration 3 shows the growth in

total high cost fund support since 1998, roughly a doubling in size.

Illustration 4 shows growth in the High Cost Fund from 1998 through 2003, by

components. The most significant increases in recent years, by far, have resulted

from two similar decisions. First, the ‘‘CALLS’’ plan adopted by the FCC caused a

roughly $650 million increase in the high cost fund. This new money limits how

much SLC charges may increase in rural areas as a result of the decision to reduce

access payments paid to price cap regulated (mainly large) ILECs. Then, the ‘‘MAG

plan’’ as adopted by the FCC, created a similar support plan, the Interstate Common Line Support (ICLS) program for rate-of-return regulated (mainly small)

ILECs. This program now costs about $425 million per year. These two programs,

costing more than $1 billion per year, were designed to reduce interstate access

charges.

Other factors have also caused costs to increase.8 Illustration 5 shows estimated

ILEC and Competitive Eligible Telecommunications Carrier (CETC) funding,

annualized, based on third quarter, 2003, numbers. ILECs will receive $3.41 billion

this year. CETCs will receive $251 million. Recent analysis indicates this figure may

be exceeded.

Illustration 6 shows the growth in the number of CETCs and funding from the

third quarter of 2002 to the third quarter of 2003. There were 30 CETCs in the

third quarter of 2002, and 165 one year later. CETCs received $56 million (1.8 percent of the fund) in 2002 and $ 252 million (7.3 percent of the fund) one year later.

It is generally agreed that there is substantial potential for further growth from

CETC certification.

C. SUMMARY OF ISSUES IN UNIVERSAL SERVICE.

1. Contributions.9 Currently, universal service is supported by an assessment on

interstate revenue. The FCC has made several adjustments to the contribution base

(most notably increasing the portion of wireless revenue assumed to be interstate

and therefore subject to the assessment from 15% to 28.5% and basing assessments

on prospective revenues). As a result, the assessment has temporarily stabilized at

slightly above nine percent. However, most observers expect this to be a temporary

reprieve from an increasing assessment on a decreasing base. Alternatives proposed

by various parties include:

a. Per connection assessment;

b. Capacity based assessments;

c. Per-telephone number and number equivalent assessments; and

d. Modifications to the revenue-based approach either by:

i. broadening the base to include more services (such as broadband services in

addition to DSL), or by eliminating the wireless ‘‘safe harbor,’’ or

ii. Deepening the base to allow assessment for the federal fund to be based on

intrastate as well as interstate revenue (with a similar modification for state

funds).

25

10See, Texas Office of Public Utility Counsel v. FCC, 183 F. ed 393 (5th Cir. 1999), prohibiting

assessment of intrastate revenues to support the Schools and Libraries program. Others have

suggested that a per-connection or per-telephone number approach would not comply with the

statute that requires all interstate carriers to contribute, or would not be equitable and nondiscriminatory. See 47 U.S.C. Section 254(d). 11Letter dated May 19, 2003, Attachment 1. While the state members of the Joint Board endorsed this approach, it is likely to be strongly opposed by a number of state commissions. 12 Eligibility-related and cost and payment issues were included in the ‘‘portability’’ referral

from the FCC to the Joint Board. The Joint Board held a very productive en banc hearing in

Denver on July 31, 2003, and is currently considering comments. This proceeding also concerns

specific issues such as whether support should be limited to a ‘‘primary line,’’ and how primary

line would be defined. 13Qwest Corp. v. FCC, 258 F.3d 1191 (2001). The FCC’s order was challenged by Maine,

Vermont, and Montana, as well as by Qwest. The court held, inter alia, that the FCC did not

provide an adequate explanation for its decision that the non-rural mechanism in the Ninth Report and Order achieved the statutory principles in Section 254; that the FCC failed to define

the key statutory terms ‘‘reasonably comparable’’ and ‘‘sufficient’’; that it did not adequately explain the 135 percent of national average funding benchmark. 14Montana, Maine, and Vermont have repeatedly urged the FCC to address problems with

inputs, formulas and maintenance of the model, but have generally been frustrated in their attempts to obtain critical information about the model. See, letter to the FCC from counsel for

the Vermont Public Service Board, September 12, 2003 (Attachment 2). Possible problems include but are not limited to assuming that cabling runs on straight compass lines,

underweighting the cost of traveling over mountains or rivers; apparently ignoring physical barriers such as highways or railroads; apparently not accounting sufficiently for physical barriers

such as shallow bedrock or rocky soil; not accounting for increased maintenance cost in snowy

regions; inconsistently treating broadband facilities.

Continued

Most of these proposals have been subjected to criticisms based on possible illegality under Section 254 as interpreted by the courts 10; administrative workability,

fairness, or other grounds. Most current attention is focusing either on the number

and number-equivalent approaches (developed most thoughtfully by FCC Commissioner Martin), or on expanding the revenue base to include more telecoms revenue.

Notably, the federal and state members of the Joint Board submitted a letter to

Senator Burns stating that deepening the base to include intrastate revenue was

a workable option.11

It has also been suggested that Congress clarify that any of the approaches are

acceptable, based on a determination by the FCC, thereby eliminating any possible

legal barrier to an approach determined most workable by the Commission.

2. Eligibility.12 The Joint Board is currently examining numerous questions regarding carrier eligibility for universal service support. What standards should

‘‘competitive eligible telecommunications carriers’’ (CETCs) have to meet in order to

be certified by a state commission or the FCC under Section 214, especially in areas

served by rural carriers? Should the FCC adopt a set of standards applicable to currently-certified ETCs and CETCs alike? Should this issue continue to be left to the

state commissions? Should the FCC set a floor, with state commissions able to build

on this floor? Could a set of wireless-appropriate standards be developed? Could a

‘‘best practices’’ or model standards for state commission consideration be developed?

Are there relevant differences between wireline CETC applicants (often rural overbuilders) and wireless CETC applicants? Is there a risk of diminished quality if one

set of carriers faces a lower standard than does another? How should state commissions evaluate the ‘‘public interest’’ component of the current statutory standard,

and should they consider the effect on the federal fund of multiple ETC designations?

3. Cost basis for payment. Currently, all ‘‘nonrural’’ companies, including all

the Bell Companies, receive support based on forward looking costs, determined

through the FCC’s Hybrid Cost Proxy Model (HCPM). Small companies receive support based on embedded (historical) costs. CETCs receive support based on (and on

a per-line basis identical to) the support of the incumbent for whose area the competitive carrier is granted ETC status. The Joint Board is currently considering a

number of issues here as well. For example, should the CETC receive payment

based on the incumbent’s costs, or on its own costs, and should those be forward

looking or embedded? Given concerns about the HCPM, should it ever be used for

rural carriers, and should it continue to be used even for large carriers?

4. Large Company Issues. The 10th Circuit Court of Appeals remanded to the

FCC its ‘‘large company’’ Ninth Report and Order.13 In turn, the FCC referred this

issue to the Joint Board, which issued a recommendation on October 16, 2002. The

Joint Board suggested several modifications, which the FCC is now considering. The

FCC’s order is expected soon. In my opinion, the combination of an imperfect cost

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In the 10th Circuit litigation, Qwest mounted an unsuccessful general challenge to the use

of forward looking cost models for universal service purposes. Based on several years of experience, one wonders how a court would view under Section 254 the model as implemented and

maintained. The Congress could instruct the FCC, if it continues to use cost models, to adequately staff and maintain the model, and to document and publicly disclose all modifications

to it. 15Only eight states receive high cost fund support under the large company program. Qwest

serves fourteen states, including twelve of the fifteen least densely populated states, but receives

high cost fund support for only two states: $10.307 million per year for Montana and $7.243

million per year for Wyoming. (It must be noted that many of the highest cost areas within

those states are served by rural carriers.) Verizon will receive $9.259 million per year in high

cost model support in Vermont and $5.529 million per year in Maine [based on 4th quarter 2003

projections by USAC]. 16Or costs, as there are many variables in rate comparability, including but not limited to

the size of the local calling area, how costs are assigned to different rate elements, the depreciation rates assumed, and so on. 17The Rural Task force recommended to the Joint Board and the FCC a ‘‘no barriers to advanced services’’ policy, including universal service support for plant that can (as built or with

the addition of elements) provide access to advanced services; encouraging carriers to remove

infrastructure barriers to such access; and, sizing the federal universal service fund so that it

does not present barriers to investment in plant needed to provide access to advanced services.

See, Joint Board’s Recommended Decision concerning covered services, Separate Statement of

Commissioner Rowe, Sections IV and V (July 10, 2002), pp. 47-52.

funding to areas served by the largest companies. This includes many states in the

west, but also New England states such as Maine and Vermont (a rural state in

which 85 percent of lines are served by Verizon).15 In my dissent to the Joint Board

recommendation, I argued that Section 254 requires that rates and services in rural

and insular areas be ‘‘reasonably comparable’’ with rates and services in urban

areas. Comparing rural rates 16 with a national average and then providing support

only for costs exceeding 135 percent of the national average falls far short of this

clear directive. A rural or insular area might be required to have rates or costs as

high as 165 percent of the urban average cost before it would be eligible for support

under the current system.

5. Covered services. The Joint Board is required periodically to review the list

of services eligible for support, and recommend changes. ‘‘On July 10, 2002, the

Joint Board recommended that the list remain unchanged on July 10, 2002 [Recommended Decision, Release Date (FCC 02J-1)]. The FCC issued an order adopting

that recommendation on July 14, 2003. In that proceeding, I dissented in part, suggesting that a focus on support for the network over which most services are provided would be a more reasonable approach than attempting to evaluate specific

services. For example, the primary requirement for DSL service (or similarly, high

speed wireless service) is a robust network, with clean loops. This is consistent with

the ‘‘no barriers’’ approach advocated by the Rural Task Force.17

6. Further modification of inter-carrier compensation systems. Many carriers, including but not limited to the largest ILECS and the IXCs, argue that further modification of inter-carrier compensation is required because of a variety of

threats to the current system. The full scope of the problem is being identified only

now, including through specific data requests by the FCC. It is abundantly clear,

however, that rural carriers are much more dependent on access payments than the

larger carriers. ‘‘Bill-and-keep’’ approaches are especially problematic for small carriers because they lack the ability to average costs over a larger area and the current pooling mechanisms function like high-cost support but are vulnerable if billand-keep is adopted. Also, intrastate access may eventually be as significant a concern as interstate access. If universal service support is further substituted for access payments, the upward pressure on the fund could be tremendous.

A. NARROW VERSUS BROAD APPROACHES TO ISSUE RESOLUTION.

Generally, one group of stakeholders prefers focusing on a particular issue, principally stabilizing the revenue base. Another group argues that a comprehensive approach is required, one that addresses all issues as part of the same package. The

narrow approach is advocated based on feasibility, and the urgency of the contributions issue. The broader approach is advocated based on the desirability of addressing all related issues, especially including intercarrier payments, in a consistent

manner, and that does not risk making decisions on narrower issues that may limit

the ability to address the larger issues. Some have said that it is unwise to resolve

contributions issues without also addressing eligibility issues at the same time.

A reasonable middle approach might be: 1. to move forward with a focused approach to the contributions issue, including legislation; 2. to address the portability

issues through the ongoing Joint Board process, with Congressional oversight; and

27

18The separations process identifies and assigns costs to the interstate and intrastate jurisdictions, and matches those costs with cost recovery. A separations process of some sort is required

when a provider of telecommunications service is regulated by two jurisdictions at once. Smith

v. Illinois, 282 U.S. 133 (1930).

3. to address intercarrier payments through a rigorous, structured approach. For

consideration, I suggest exploring a structured, analysis-based approach to resolving

intercarrier payments concerns. We can learn some positive and negative lessons

from ‘‘alternative dispute resolution’’ efforts such as CALLS, MAG, Rural Task

Force, and the Qwest Multi-state Section 271 collaboratives. Such a process would

require effective participation by all affected, especially the small carriers who are

especially vulnerable to changes in access revenue. It would likely benefit from a

high degree of transparency and independent facilitation; it should have access to

sound and extensive analysis. Its decision rules and eventual deliverable product

(e.g., a recommendation to the FCC, along with any dissents) should be clear. It

would be difficult to achieve a rigorous outcome based purely on consensus. Therefore, it might be desirable for the facilitator to be charged as an arbitrator or decision-maker. As noted before, revision of intercarrier compensation has strong implications for universal service, and also potentially implicates the process of jurisdictional separations.18

B. THE CRUCIAL ROLE OF CONGRESS.

Throughout implementation of the Telecommunications Act, Congressional oversight has been valuable, and has been appreciated by all of us concerned with dayto-day implementation. It’s easy for us to get lost in the forest, and Congress regularly provides a good beacon guiding us back to the main path.

I particularly commend to you the unique efforts of your Senate colleagues. As

you know, Senators Burns and Dorgan, with strong support from Senators Stevens,

Rockefeller, and others have convened two Summits. I was privileged to help moderate these two sessions. They were unique: The Senators sat at the table with a

very broad spectrum of stakeholders, participating in a very lively give-and-take,

furthering everyone’s understanding,

and significantly clarifying the issues and options. No stakeholder perspective

that asked to participate was excluded. (Reporters and investment analysts were not

invited in until the end of the meeting, but were then free to talk to participants.)

The Senators, of course, will decide what they do with this input. I commend this

process to you, and urge you to discuss the results with your colleagues in the Senate. Specific options include formal oversight proceedings, a Sense of the Congress

resolution on several key topics, and specific legislation, focused on issues including

the contribution base.

C. CONCLUSION.

When I drive across Montana or other rural areas, when I see a rural telemedicine facility, when I’m in a school where students are learning on-line, I recognize

universal service as a rip-roaring success. The programs included in universal service do face significant challenges. Some of those challenges are especially time-critical. All stakeholders desire a greater degree of certainty as they plan how to meet

their customers’ demands. Modifications should be designed to preserve what works,

and to achieve Congress’s vision in the remarkable language of Section 254.

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Mr. UPTON. Thank you, Mr. Rowe.

Mr. Gregg?

STATEMENT OF BILLY JACK GREGG

Mr. GREGG. Thank you, Mr. Chairman. May it please the committee, I am Billy Jack Gregg. I am Director of the Consumer Advocate Division of the West Virginia Public Service Commission.

Prior to addressing issues related to the long-term sustainability

of the universal service fund, I think it is important that we review

where we are today with the universal service fund. Since 1996,

when section 254 of the act was passed, the fund has grown from

$1.8 billion to $6.2 billion for this year, 2003.

$6.2 billion sounds like a lot of money, and it is. But we have

to put it in perspective. Last year the telecommunications industry

had total revenues of over $230 billion. That means that by collecting and redistributing less than 3 percent of the total telecom

revenues in this Nation, we have been able to keep phone service

affordable in all areas of our Nation. We have allowed phone service to be affordable to low-income individuals. We have assisted

rural health care providers. And we have wired all of our schools

and classrooms to the internet. That is quite an accomplishment

and something that all of us involved in universal service should

be quite proud.

Moreover, every State and every territory of this Nation benefits

from universal service. I have attached to my testimony as attachments 1 and 2 printouts from USAC’s annual report for 2002,

which shows payments under each support mechanism to each

State on both a total basis and ranked by total receipts and on a

per-line basis and ranked on a per-line basis.

In response to the statements from some of the members today,

I think it is important to see that when you look at the high-cost

fund, every State and every territory has received benefits from the

high-cost fund alone except the District of Columbia because it does

not have any high-cost areas. Otherwise, every State from the

Northern Mariana Islands to Delaware to Montana to Wyoming to

West Virginia all receive high-cost support.

The universal service fund has been one of the great public policy

successes of this country for the last 100 years. The issues we are

talking about today is, how do we sustain that success into the future? And, as has been mentioned by the members and the first

two speakers, we have to look at both sides of the equation: the income for the fund and the outgo from the fund.

In terms of the contribution base, I would just ratify what my fellow members on the joint board, Ms. Abernathy and Mr. Rowe,

said, we have to expand the base for universal service. The joint

board has previously sent a letter, as Mr. Rowe said, to Senator

Burns suggesting very targeted, very focused legislation that would

give the FCC the authority to assess on all revenues and all services. Since all benefit from universal service, all should contribute.

It’s a very simple proposition.

On the outgo side, the most important thing we can do is target

the high-cost support to fulfill the principles that are laid out in

section 254. And I believe that there are three very basic measures

39

1 In most respects, my testimony reflects the positions taken by NASUCA, although there are

some areas where NASUCA has not yet reached a consensus position.

that can be accomplished by the FCC to focus the support of the

high-cost fund.

No. 1, we need to limit support to a single line per household.

Right now under current rules, all lines supplied by all eligible

telecommunications carriers are eligible for support. A household

that has two land lines and three cell phone lines would receive

support for each of those lines. I believe that that is excessive. If

you limit it to a single line, we would get back to the original purpose, which was to provide comparable services at comparable

rates.

Second, we need to reform the basis of per-line support to be

based on each carrier’s own cost. Right now they are based on the

cost of the incumbent carrier. We believe that if you adopt this procedure, it should be capped at the incumbent’s level of support to

prevent any windfall to any competitor.

And, finally, we believe that the FCC should adopt guidelines for

the States in making public interest determinations for eligible

telecommunications carriers. I believe that those guidelines should

be based on very simple support guidelines. Those areas that are

truly costly to serve, where it makes no sense to have more than

one subsidized carrier, are the ones that would be targeted. I propose $20 and $30 guidelines. Above $20 per line per month,

those study areas should be allowed one additional eligible telecommunications carrier, those eligible to receive universal service

funding. Above $30 per line per month, only one eligible telecommunications carrier would be allowed.

About half of the rural study areas would be encompassed by

those guidelines, but they only serve 1.7 percent of the access lines

in this Nation. Yet, they receive 45 percent of total high-cost support. They are the truly small high-cost areas. And there should be

some limitation on subsidization of competition in those areas.

I want to thank you again for the opportunity to appear here.

And I look forward to the other statements.

[The prepared statement of Billy Jack Gregg follows:]

PREPARED STATEMENT OF BILLY JACK GREGG, DIRECTOR, CONSUMER ADVOCATE

DIVISION, PUBLIC SERVICE COMMISSION OF WEST VIRGINIA

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

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

a member of the National Association of State Utility Consumer Advocates

(NASUCA), an organization of 43 state utility consumer advocate offices from 41

states and the District of Columbia, charged by their respective state statutes with

representing utility consumers before state and federal utility commissions and before state and federal courts.1 I am a former member of the Board of Directors of

the Universal Service Administrative Company (USAC) and currently serve on the

Federal-State Joint Board on Universal Service. I greatly appreciate the opportunity

to testify at this legislative hearing on the sustainability of the Federal Universal

Service Fund (USF).

I. BACKGROUND

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

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2 Attachments 1 and 2 show actual disbursements to states during 2002 under each of the

federal USF support mechanisms. Attachment 1 ranks the states based on total support received. Attachment 2 considers the number of access lines in each state, and ranks the states

based on monthly support received per line. 3 As a practical matter, virtually all telecommunications carriers provide some sort of interstate service. 4Texas Office of Public Utility Counsel v. FCC, 183 F.3d 393 (5th Cir. 1999) at 448. 5Through 2002 the interstate revenue base for a particular year represents revenues reported

from the previous year. The USF assessment rate shown on Attachment 3 is not the actual rate

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

base. The interstate revenue base for years 1998-2003 comes from USAC reports. The interstate

revenue base for 1997 is estimated. Beginning in the second quarter of 2003, assessments are

based on projected collected revenues.

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

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

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

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

1997 containing several distinct support mechanisms. As a result, total USF funding

has grown from $1.8 billion in 1997 to $6.2 billion during 2003. While these support

amounts are large, they must be kept in perspective. Total telecommunications revenues in the United States last year were in excess of $230 billion. By annually collecting and redistributing less than 3% of these total revenues, we are able to make

phone service affordable in all high-cost areas of the nation; support low-income customers; assist rural health care providers; and connect all classrooms to the internet. Moreover, all states and territories benefit from the USF as shown on Attachments 1 and 2.2 That’s quite an accomplishment, and one that everyone involved

in the USF should be proud of as we move forward to ensure the long-term sustainability of the fund.

II. THE FUNDING BASE

As I mentioned earlier, total funding for the USF has grown from $1.8 billion to $6.2 billion. Unfortunately, the funding base for the USF has not kept pace with

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

and their customers.

The contribution base problem stems in large part from the wording of the Act

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

should make an equitable and nondiscriminatory contribution to the preservation

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

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

and sufficient mechanisms established by the Commission to preserve and advance

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

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

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

interstate telecommunications services.3

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

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

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

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

intrastate revenues for USF assessment purposes was struck down by the Fifth Circuit Court of Appeals in 1999.4 Since that time the contribution base for the USF

has been limited to only interstate and international revenues. As the USF has

grown in order to meet the Act’s direction that support be sufficient and explicit,

and as the interstate revenue base has leveled off, the assessment rate has increased rapidly.

Attachment 3 shows the change in USF funding since 1997, along with changes

in the interstate revenue contribution base for the USF.5 As you can see, the introduction of the schools and libraries fund and increases in the high-cost fund have

driven the overall size of the fund. As a result, the fund has tripled, rising from

approximately $1.8 billion in 1997 to approximately $6.2 billion this year. So long

as interstate revenues grew at a reasonable rate, the ultimate impact of fund

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

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

41

6These increases have been flowed through to most customers by means of line items. Beginning in the second quarter of 2003, carriers can no longer mark up these assessments, but can

only flow through the assessment rate approved by the Commission. 7 Under the ‘‘safe harbor’’ provisions, a wireless carrier can claim that 28.5% of its total revenues are interstate without further documentation. A wireless carrier claiming a smaller percentage of interstate revenues must have adequate documentation to back up such a claim. 8On Attachment 4 USF Funding and the Interstate Revenue Base are taken from USAC reports. The Total Revenue Base is taken from the FCC’s Telecommunications Industry Revenues

reports. The funding base for 1997 is estimated. Beginning in the second quarter of 2003, the

USF funding base has been based on carriers’ projected revenue collections. 9On May 19, 2003, the members of the Federal-State Joint Board on Universal Service sent

a letter to Senator Conrad Burns of Montana suggesting legislative changes to enable the FCC

to use a total revenue base for universal service contributions. 10 It should be noted that the FCC already has the discretionary power under 254(d) to require

contributions from any other provider of interstate telecommunications ‘‘if the public interest so

requires.’’

rate, from 5.7% in the fourth quarter of 2000 to 9.5% in the third quarter of 2003.6

A universal service fund which cannot depend on the stability of its funding base

is not predictable, is not sufficient, and is clearly not sustainable.

III. ALTERNATIVES FOR THE CONTRIBUTION BASE

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

base. One alternative would be to retain the current system, but remove restrictions

in current rules which artificially depress the existing interstate revenue contribution base. One such restriction is the so-called ‘‘safe harbors’’ which limit the contribution responsibility of certain classes of carriers. Beginning in the second quarter of 2003, the FCC raised the safe harbor for wireless carriers from 15% to 28.5%.7

However, in spite of these changes the interstate revenue base continues to decline.

Another restriction limits the contributions from broadband providers, one of the

fastest growing areas of telecommunications. Under current rules, providers of

broadband by means of digital subscriber line (DSL) service must contribute to the

fund, while cable modem service providers are exempt. It is obvious that such an

inequitable and artificial system of assessment on similar services cannot be maintained. However, proposals to eliminate the inequity by eliminating contributions

from DSL providers would only further shrink the interstate contribution base.

A second alternative would be to grant the FCC the authority to base contributions to the fund on total telecommunications revenues. While growth in the interstate revenue base has flattened out and begun to decline, total telecommunications

revenues from end-users have continued to grow at a healthy pace. Shown on Attachment 4 is a comparison of changes in the universal service fund, the interstate

revenue base, and total telecommunications revenues from 1997 to 2003.8 As you

can see, total telecommunications revenues would provide an adequate funding base

for the USF. In fact, if total telecommunications revenues had been used as the

funding base from the start, we would not be discussing this issue today. The

growth in the fund could have been accommodated while keeping the assessment

rate below 3%.

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

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

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

all revenues, intrastate as well as interstate.9 In addition, a total revenues base

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

voice traffic, migrates to the internet and is classified as ‘‘information services,’’ currently exempt from USF assessment.10 Finally, the impact of the use of total revenues on state universal service programs is unclear.

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

switched telephone network, or on assigned telephone numbers. The FCC is currently considering several such proposals. While these connection-based or numbersbased proposals do enlarge the base of the USF, and minimize problems with classification of services or revenues as information services, they do have several flaws:

(1) each proposal radically shifts the funding of the USF among industry groups;

(2) each proposal appears to exempt pure providers of interstate long distance from

making any contribution to the fund in contravention of the plain wording of Section

254(d); (3) each proposal requires capacity-based connection equivalents for high-capacity customers; and (4) each proposal shifts responsibility for payment of USF

charges from high-use to low-use customers.

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11TR Daily, March 26, 2003. 12The term ‘‘rural carrier’’ is defined at 47 U.S.C. 153(47). Generally, rural carriers are small

carriers serving rural and high-cost areas, while non-rural carriers tend to be larger carriers,

such as the regional Bell operating companies. There are approximately 80 non-rural carriers

which serve 90% of the access lines in the nation, while the 1400 rural carriers serve the remaining 10%. 13 Under the example provided above, if the per line support in the wire center was $10 per

line per month, the incumbent ETC would receive $20 (2 X $10) per month in support. Once

the wireless ETC began providing the three wireless ‘‘lines,’’ the wireless carrier would receive

$30 (3 X $10) per month for providing service to the same household. However, the incumbent’s

support would not be reduced. Thus, the USF would be obligated to pay out $50 per month in

A final alternative, which my office has proposed to the FCC, would be a hybrid

of the proposals described above. For example, the Commission could continue to

base 50% of the universal service assessment on interstate revenues, and assess the

remaining 50% on end-user connections to the public switched network. Such a hybrid would not require a statutory change and would ensure that all providers of

interstate services, even those that did not provide end-use connections, would continue to contribute to support universal service. In addition, this 50/50 hybrid approach would mitigate impacts on low-usage customers, and result in contributions

from various industry sectors that are very close to those produced by use of total

telecommunications revenues.

In finding a solution to the contribution base problem, I agree with Senator Stevens of Alaska who said last spring: ‘‘All companies that use the network, in my

judgment, should contribute to universal service, regardless of the type of service

they provide.’’ 11 I believe we must expand contribution responsibility to encompass

all revenues and all services that connect to the telecommunications network. Since

all benefit, all should contribute.

IV. ISSUES RELATED TO PARTICULAR SUPPORT MECHANISMS

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

on broadening the contribution base, but also on controlling and focusing the funds

paid out for the individual support mechanisms which make up the overall USF.

Each of these support mechanisms presents unique issues which will have to be resolved. Even though many have argued that we must stabilize the fund—which implies that we should limit funding—we must be mindful that the Act requires the

fund to be sufficient to carry out each of the universal service principles. For some

mechanisms this may require a limitation in funding, while for others an expansion

will be needed.

A. HIGH-COST SUPPORT

The high-cost support mechanism is the oldest portion of the fund, and is still the

biggest, amounting to $3.3 billion this year. Of this amount, approximately $800

million goes to non-rural companies, while $2.5 billion goes to rural carriers.12

As shown on Attachment 3, total high-cost support has grown by over $1 billion

since 2000. Most of this increase is the result of three new mechanisms which have

been added to the fund: high-cost model support, interstate access support, and

interstate common line support. These new funds have helped adapt the USF to the

introduction of competition by making support explicit and portable. However, the

continued growth in the high-cost fund has added to the unrelenting pressure on

the assessment rate which must be paid by all consumers.

Earlier this year, the FCC referred to the Joint Board a number of issues related

to the growth of the high-cost fund. These issues include determination of how many

lines to support, the cost basis of per line support, and whether guidelines should

be adopted for state eligible telecommunications carrier (ETC) determinations.

1. Limitation of Support to a Single Line Per Household

There is one issue common to all parts of the high-cost fund which threatens to

enlarge the fund to an unsupportable size. Under current rules, all lines provided

by ETCs in high-cost areas receive support. The support in any particular wire center is the same for all carriers, and is based on the costs of the incumbent carrier.

However, rather than competing for universal service support, all ETCs that provide

service receive support in equal per line amounts for all lines that they provide to

a home or small business. For example, a single family in a high-cost wire center

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

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

lines provided.13 As a result, the potential exists for a large increase in the highVerDate 11-MAY-2000 11:09 Dec 08, 2003 Jkt 000000 PO 00000 Frm 00046 Fmt 6633 Sfmt 6621 89965.TXT HCOM1 PsN: HCOM1
43

total support for this household, even though per line support for the wire center is only $10

per month. 14 In order to mitigate the impact of this change on rural carriers, per line support should be

redetermined based only on single lines. However, once an additional ETC enters the rural incumbent’s service territory, per line support should be frozen. This will prevent an unwarranted

spiraling of per line support which is possible under current rules. 15The complete list of supported services is found at 47 C.F.R. § 54.101(a). 16Section 214(e)(5) of the Act also requires any additional ETCs in a study served by a rural

carrier serve the rural carrier’s entire study area, unless the state and FCC concur that an area

less than the entire study area is appropriate.

cost fund as more and more carriers—especially wireless carriers—attain ETC status.

It is estimated that during 2002, support for secondary lines amounted to $336

million, or 11.5% of the entire high-cost fund. Moreover, support paid to wireless

carriers represents the fastest growing component of secondary line support. As

shown on Attachment 5, high-cost support for wireless carriers has grown from

$500,000 in 1999 to approximately $120 million in 2003.

If the high-cost fund is going to continue to provide affordable access in all parts

of the country, then it cannot continue to subsidize the unlimited desires of each

individual. I believe that federal USF support should be limited to a single line for

each household,14 and that the choice of which carrier receives USF support should

be left to each customer. This would mean that carriers would have to compete for

the USF subsidy. This will increase customer benefits and stabilize the federal highcost fund. Individual states should be free to subsidize additional lines if they so

choose.

2. Determination of the Cost Basis of Per Line Support

As I previously mentioned, the current high-cost system bases per line support on

the costs of the incumbent carrier, and offers this support to all ETCs serving the

same area. This is true even when competitive carriers—such as wireless carriers—

may have costs that are substantially less than the wireline incumbent. Another

means of limiting the growth of the high-cost fund would be to use each carrier’s

own costs as the basis for per line support. In order to ensure that no carrier receives an unwarranted windfall from USF support, support to competitors should

be capped at the per line support received by the incumbent.

3. Guidelines for ETC Public Interest Determinations

Under Section 214(e) of the Act, two different standards were adopted for designation of ETCs, depending on whether an area is served by a rural or non-rural incumbent carrier. For areas served by non-rural carriers, the Act mandates that

states must designate additional carriers as ETCs if they can provide all of the supported services 15 and advertise the availability of those services throughout the

service area. However, for areas served by rural carriers, states may designate additional ETCs, and must first find that it is in the public interest to do so.16

Unfortunately, there are currently no standards to guide states’ determination of

the ‘‘public interest’’ under Section 214(e) of the Act. As a result, state ETC determinations in rural study areas have varied widely in terms of conditions which must

be met by carriers prior to and after ETC designation. In many states the obligations on competitive ETCs are less than those imposed on incumbent ETCs.

Almost every party agrees that one of the purposes behind Section 214(e) was to

allow states to identify those areas where it was so costly to serve, that it made

no sense to have more than one subsidized carrier. However, since states have no

responsibility for funding the federal USF, and under current rules additional ETCs

mean more federal USF money coming into the state, it is very difficult for states

to find that it is not in the public interest to designate additional ETCs in rural

areas. This is true regardless of the cost to serve any particular area.

I believe the FCC should establish guidelines for the public interest determination. The guidelines should allow states to level the playing field among ETCs by

requiring all ETCs to offer an unlimited local calling plan, equal access to long distance carriers, and a comparable monthly price for local service. ETCs should also

be required to follow the same consumer protection rules, including billing and collection rules, that apply to incumbents.

In order to provide guidance to the states in identifying those areas where there

should be a limit on the number of subsidized carriers, I believe the FCC should

also establish ETC guidelines based on the amount of per line support received by

each study area. Under this approach, in rural study areas receiving an average of

$30 or more per line in monthly support the guideline would state that it is presumed that it is not in the public interest to designate more than one subsidized

44

carrier, i.e., more than one ETC. In areas receiving more than $20 per line in

monthly support, but less than $30 per line, it would be presumed that no more

than one additional subsidized carrier should be designated. There would be no limitation on the number of ETCs in study areas receiving less than $20 per line in

support. States would be able to overcome these presumptions by specific evidence

about particular carriers or particular areas.

Establishing such presumptive benchmarks based on the amount of monthly per

line support for each study area would be easy to administer, and would encompass

the truly small study areas where it is especially costly to serve. Of the 1400 rural

study areas, those study areas receiving over $20 per line in monthly high-cost support serve only 1.7% of the total access lines in the United States, but receive almost 45% of total high-cost support. In other words, these study areas represent the

small, high-cost areas where presumably it makes no sense to have more than a

limited number of subsidized carriers. Placing limitations on the number of ETCs

in these truly high-cost areas will help ensure the long-term sustainability of the

fund, and will help ensure that consumers in those areas continue to have highquality access at affordable rates.

B. LOW-INCOME SUPPORT

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

support mechanism in 1997. Nevertheless, participation in the Lifeline and Link-Up

programs varies widely among the states. As shown on Attachment 1, of the $673

million paid out for low-income support in 2002, almost half went to one state, California. This is not to disparage California’s low-income program, but to point out

that low-income support funds are distributed very unevenly throughout the nation.

There are also overall fund size implications from this skewed distribution. If every

state’s program was as successful as California’s, the size of the low-income support

fund would more than double to $1.5 billion. The FCC currently has a proceeding

open to review the operation of the low-income support mechanism. A Recommended

Decision from the Joint Board was issued in April 2003 which endorsed expanding

Lifeline and Link-Up eligibility to include customers with incomes at or below 135%

of the federal poverty guidelines. NASUCA has supported the use of a benchmark

based on 150% of the federal poverty guidelines, and has encouraged the use of

automatic enrollment and self-certification to ensure that as many eligible customers as possible receive Lifeline benefits.

C. SCHOOLS AND LIBRARIES SUPPORT

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

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

by the FCC in its Order of June 13, 2002, annual demand for e-rate funding is almost double the funds available. As more and more schools have become connected

to the internet through the e-rate, the demand for recurring or priority one funds

has increased. The result has been that the money available for internal connections

in the schools yet to be wired has been declining. The FCC’s decision to allow unused schools and libraries funds to be rolled forward to increase future funding may

help resolve this problem, but pressure on the cap is likely to continue. The FCC

is also currently considering comments on reforms to the schools and libraries fund

to address allegations of fraud and abuse, and inefficiency in the administration of

the program.

D. RURAL HEALTH CARE SUPPORT

Unlike the other support mechanisms, the rural health fund has had difficulty

generating sufficient demand. The FCC originally anticipated a rural health fund

sized at $400 million per year. However, in spite of repeated attempts to remake

the fund, disbursements have remained low, only $16.4 million in 2002. Like the

low-income program, benefits under the rural health care program are distributed

unevenly. During 2002 Alaska received 72% of total USF rural health care funding.

Although the FCC is currently examining the operation of the rural health fund,

it is clear that the root cause of the problems with the fund lie in the wording of

Section 254. Unlike the schools and libraries support mechanism which provides discounts from regular prices on all telecommunications services, and pays for internal

connections, Section 254(h) limits the rural health fund to the difference between

rates available to health care providers in rural and urban areas of a state. Since

many states have rural rates which are lower than urban rates, or have ‘‘postage

stamp’’ rates for data services, the rural support mechanism has been of limited

utility in meeting the needs of rural health providers. A statutory change should

be considered which would make the rural health section of the Act parallel with

45

the schools and libraries by providing services ‘‘at rates less than the amounts

charged for similar services to other parties.’’

V. CONCLUSION

In order to be stable and sustainable in the long-term, the USF must be configured like a pyramid: it must have a broad and stable base of contributions at the

bottom, and a narrow but sufficient focus of support at the top. The current universal service fund requires work on both ends of this structure. Issues related to

the contribution base must be resolved. Since all benefit, all should contribute. In

addition, the limited resources of the fund must be properly targeted to carry out

the purposes of the Act. In order to continue the public policy success of the universal service fund, we must support access, not excess.

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Mr. UPTON. Thank you very much.

Those buzzers, you might have guessed, were not a fire drill. But

we have got a couple of votes on the House floor. And we will temporarily adjourn at this point for about 20 minutes. We will resume

with Mrs. Greene’s testimony after these two votes.

[Brief recess.]

Mr. UPTON. I think we are okay for votes for a little while. Our

next votes will be many more. So it will put a real crimp to where

we are at. So we will try to get finished.

Ms. Greene, you are next. Welcome to the committee.

STATEMENT OF MARGARET H. GREENE

Mrs. GREENE. Thank you, Mr. Chairman. It is my honor to join

this panel today in discussing universal service, one of the most important issues facing the future of the telecommunications industry, and its contributions to the country.

Connecting virtually all Americans is a key goal in a fundamentally altered communications world. Far beyond these halls, of

course, we see broad evidence of this new world. Your son goes off

to college and calls home via the computer. You walk down the

street. And it seems the whole world has sprouted a cell phone

from their ear. You sign up for cable television. And you get not

just TV but internet and phone service as well.

It’s an exciting time for consumers. It’s a challenging time for our

companies. And it is also a challenging time for this body. The old

rules, written for the old world, have less and less application

today. These rules have to be adapted as quickly as possible to a

new marketplace that is being defined today by rapid technological

change and mounting competition.

This is the challenge for U.S. telecom policy. The universal service is no exception. The fund is in significant jeopardy today. As

communications migrate to broadband, the old world base of universal service funds, local and long distance wire line, is shrinking.

At the same time, demand for the fund’s resources is exploding.

The 1996 act dramatically expanded the size of the fund by declaring that universal service was no longer merely about ensuring

folks in remote areas had service. Instead, it became about financing a choice of providers, a profoundly more expensive proposition

in areas where the market alone struggles to support even one

company at reasonable rates. This change opened the floodgates

and could cost ratepayers an extra $2 billion annually in less than

4 years’ time.

Some suggest we should cap the fund. Such an approach ignores

a history of distorted economics around achieving universal service

and allows the excesses that do exist to continue unabated. The

more constructive approach, restore discipline in terms of who and

how many companies have access and get all participants in the

Twenty-First Century communications marketplace to contribute to

a Twenty-First Century universal service fund.

In a marketplace being defined by the fact that cable satellite,

wireless, wire line, and internet offerings all compete directly, it is

imperative that outdated rules not be permitted to distort what

should be consumer-driven competition. For universal service, that

52

means ensuring neutrality on both sides of the equation, who pays

in and who takes out?

For contributions, a reasonable fee assessed across today’s far

broader pool of market participants would help ensure the fund’s

viability without overburdening any set of companies or unfairly

throwing a price advantage to newer platforms.

On the distribution side, United States Telecom Association, of

which I served as chair this year, believes that the Federal fund

should be asked to support only one ETC in each high-cost area.

States that wish to subsidize companies by designating additional

providers should be permitted to do so provided that they pay the

additional cost so the fund is not destabilized for the entire Nation.

USTA also believes that there should be one high standard for

eligibility across all platforms. Either you deliver true universal

service or you don’t. Of course, these public resources should serve

their original purpose: helping offset the high cost of actual infrastructure. Given the candle-lit weekend so many East Coast residents have had in recent weeks, we as a Nation have a newfound

appreciation of the need for policies that ensure essential infrastructure remains robust and reliable.

In terms of telecommunications, we can do that through a focused, adequately funded universal service fund, through policy

that encourages companies to invest on their own, and by being

less prescriptive in how networks are built.

Today universal service requirements go down to the service and

the line. Why not demand one result? You’ve got to serve everyone.

You’ve got to do it reliably. And you have to deliver service comparable in scope with what is available elsewhere in terms of public safety obligations like 911. And then let the companies figure

out how best to get there.

Command and control regulations by nature are based on the

past. Network architecture at such a pivotal moment in the information revolution must be free to look to the future. U.S. policy

should encourage vigorous investment that keeps our infrastructure sophisticated and strong.

Grafting the old ways onto a new world doesn’t get us there.

That is primarily our concern with H.R. 1582. While we certainly

appreciate Congressman Terry’s leadership, we think this bill does

not go nearly far enough to safeguard universal service. It does not

address at all the contribution side of the equation. And it imposes

no new discipline in either how many companies have access or

what standard of service they provide. And the bill addresses only

the non-rural side of universal service, leaving out the lion’s share

of the communities that the fund serves.

Mr. Chairman, we need to be bold in preserving the future of

universal service in a new communications era. And time is of the

essence. By asking everyone to pay in and everyone to meet the

same high standard for eligibility, we can deliver a true, fair, and

constructive universal service policy for the Twenty-First Century.

I thank you for holding this hearing today. It is an important

issue. I thank you for your leadership and timely consideration.

[The prepared statement of Margaret H. Greene follows:]

53

PREPARED STATEMENT OF MARGARET H. GREENE, CHAIR, UNITED STATES TELECOM

ASSOCIATION

Universal service is one of the most important issues facing the future of the telecommunications industry and its contributions to the country. Connecting virtually

all Americans to the opportunity and security of the dial tone was one of the most

important achievements of the last century. In today’s Information Age, universal

service continues to embody the nation’s commitment to keeping the American

dream alive in every community—urban and rural.

The United States Telecom Association represents the entire local telecommunications industry—from my company, BellSouth, to small rural companies to a host

of innovative companies in between. We have worked extensively to forge an industry-wide position to ensure a strong future for this vital national priority in a fundamentally altered communications world. The old rules, written for the old world,

have less and less practical, constructive application today. These rules have to be

adapted—as quickly as possible—to a new marketplace that is being defined today

by rapid technological change and mounting competition. In a marketplace being defined by the fact that cable, satellite, wireless, wireline and Internet offerings all

compete directly, it is imperative that outdated rules and antiquated regulatory

classifications not be permitted to continue to distort what should be consumer-driven competition.

This is the challenge for U.S. telecom policy. Universal service is no exception.

The Fund is in significant jeopardy today, caught in a perilous limbo between our

regulatory past and a future that’s already here. The revenues that serve as the

base for contribution to the universal service fund are shrinking, putting pressure

on the revenue side of the Fund that is unsustainable. At the same time, demand

for the Fund’s resources is exploding in an undisciplined and arguably unproductive

way. The issue of universal service must be dealt with in a comprehensive way.

Both the assessment mechanism and the distribution formula must be addressed,

and quickly, if we are to sustain this long held goal of affordable and robust communications for all Americans.

The funding side of universal service is in trouble. It focuses on historical distinctions in geography and technology that no longer serve as viable definitions in today’s telecommunications world. Universal service funding is derived from an assessment on wireline companies, local and long distance, and wireless companies,

based on a factor applied to interstate revenues. In a world of bundled minutes delivered over at least four different technologies, this becomes increasingly meaningless.

As communications migrate to broadband, the old world base of universal service

funds—local and long distance wireline—is shrinking. And increasingly, alternate

technologies, like cable modem and VOIP, offer directly competitive services while

being exempt from the social responsibilities attendant to universal service. Like so

many other aspects of our current regulatory scheme for telecommunications, this

puts the historic providers of universal service, those living with the legacy of using

wireline revenue flows to subsidize social goals, at a competitive disadvantage in a

robustly competitive marketplace. This situation cannot exist without serious detriment to the regulated carriers and it must be fixed.

Fixing this competitive/social policy mismatch means, for the issue of universal

service, ensuring neutrality on both sides of the equation. Parity of obligation must

exist between those who offer functionally equivalent telecommunications services.

If broadband connections are to be assessed, as DSL is today, then functional

equivalents, like cable modem service, must pay.

Furthermore, users of intrastate as well as interstate services should contribute

to universal service. The distinction between intrastate and interstate services is artificial and unsustainable in today’s world. It creates perverse incentives to

mischaracterize traffic and again places the burden of supporting universal service

on less than the full universe of subscribers benefiting from universal service. It further puts a cost on the consumer of having to Fund the arcane regulatory exercise

of allocating revenues to a particular geography or jurisdiction even though those

revenues are derived from services, like bundled wireless or local and long distance

minutes, designed to free the consumer from the constraints of geography.

Besides these serious issues that constrain the funding area, demand for the

fund’s resources is exploding. This is due to the 1996 Act, which dramatically expanded the size of the Fund by declaring that universal service was no longer merely about ensuring folks in remote areas had service. Instead, it became about financing a choice of providers—a profoundly more expensive proposition in areas where

the market economics make it difficult to support even one company at reasonable

54

rates. This change opened the floodgates. Left unabated, it is expected to cost ratepayers an extra $2 billion [annually] in less than four years’ time.

On the distribution side, USTA believes this rise in demand on the Fund is unwise, unnecessary and unsustainable. Discipline must be brought to bear around

distribution of the Fund. This can be accomplished by implementing some specific

principles governing eligibility to draw from the Fund. Specifically, USTA asserts

that the federal Fund should be asked to support only one ETC in each high-cost

area. That ensures universal service. States that wish to subsidize competitors by

designating additional providers should be permitted to do so, provided they pay the

additional cost, so the Fund is not destabilized for the entire nation. Again, basic

connectivity is the goal of universal service.

To ensure connectivity, rates in high cost study areas should be comparable to

rates in other parts of the country and, thus, widely affordable. To that end, universal service support should be used to encourage continued investment in and rehabilitation of high cost study area infrastructure and help recover the actual or embedded cost of such networks (not lines or services) consistent with the recognition

of appropriate distinctions based on the size of the study area. Telecommunications

is a capital intensive business and steady investment is required for consumers to

be well served. Choosing only certain lines or services to support ignores the essential nature of telecommunications as a network industry. Each part of the network

can support multiple lines or services. It is administratively burdensome as well as

nonsensical to attempt to allocate support to only certain lines or services provided

by a network that operates as an integrated organism.

USTA also believes there should be one high standard for eligibility across all

platforms. Either you deliver true universal service or you don’t. Of course, it should

go without saying that these public resources should serve their original purpose:

helping offset the high costs of actual infrastructure. Given the candle-lit weekend

so many East Coast residents have had in recent weeks, we as a nation have a newfound appreciation of the need for policies that ensure essential infrastructure remains robust and reliable. In terms of telecommunications, we can do that through

a focused, adequately funded Universal Service Fund; through policy that encourages companies to invest on their own; and, by being less prescriptive in how networks are built.

Today, universal service requirements go down to the service and the line. Why

not demand one result? You’ve got to be willing to serve everyone; you’ve got to do

it reliably; and you have to deliver service comparable in scope with what is provided elsewhere, including meeting all public safety obligations. This is precisely the

constructive role that government should play today. Yes, consumers should define

the market—prices, services, technology. But government can ensure essential services—from 911 to ready, affordable access to a dial tone—reach all Americans. And,

U.S. policy should encourage vigorous investment that keeps our infrastructure sophisticated and strong.

Grafting the old ways onto a new world doesn’t get us there. That primarily is

our concern with HR 1582. We certainly appreciate Congressman Terry’s leadership,

but we think this bill does not go nearly far enough to safeguard universal service.

There are three large categories of support in the federal Universal Service Fund;

the e-rate for schools, libraries and rural health care, the low income program, and

high cost support for high cost areas. The Terry bill focuses in on one of about

twelve categories of funding in the high cost support program and essentially redistributes funds from high cost rural communities in Mississippi, Alabama and West

Virginia. Its companion measure in the Senate (S. 1380) spares West Virginia from

harm and slashes funding from the Commonwealth of Puerto Rico by redistributing

two categories of funding.

In part to control the size of the Universal Service Fund and to ensure that support went to carriers providing a substantial amount of service to the highest cost,

most rural areas, the FCC determined that levels of support for non-rural carriers

should be averaged on a state-wide area. For large carriers, this is relatively consistent with the practice of averaging support on a ‘‘study area’’ basis, which for

these carriers was generally an entire state.

Those non-rural carriers with large numbers of lines concentrated in urban areas

relative to their rural lines did not generally receive support from this category of

funding. Funding went to those carriers in states serving large numbers of rural

lines relative to total lines.

The Terry bill seeks to change the granularity of calculation of the burden of high

cost, largely rural lines from a state-wide average to a much smaller wire-center average and then impose an artificial ‘‘state-wide’’ cap of 5% in the House bill and 10%

in the Senate bill on the distribution in the large company category of funding. The

apparent purpose of those caps is to simply redistribute funding among large carVerDate 11-MAY-2000 11:09 Dec 08, 2003 Jkt 000000 PO 00000 Frm 00058 Fmt 6633 Sfmt 6621 89965.TXT HCOM1 PsN: HCOM1
55

riers without regard to the needs of affected consumers or actual investment. It in

fact rewards carriers that have sold off rural exchanges and punishes those carriers

that have consistently served rural communities.

The Terry Bill does not truly impose new discipline, either in how many companies have access to the fund or what standard of service they provide. It robs from

Peter (Puerto Rico) to pay Paul (Qwest) and even then addresses only the non-rural

side of universal service, leaving out the lion’s share of communities the Fund

serves.

Similarly, universal service cannot be looked at in isolation—the entire regulatory

regime under which carriers operate today impacts their ability to provide universal

service. Government managed competition is far inferior to the free market in its

ability to efficiently allocate resources to provide quality ubiquitous services to consumers. Market based competition in telecommunications will lead to increased capital investment, new jobs, economic growth, and a positive impact on the ability of

network operators to provide universal service with, in some cases, a lesser dependence on universal service funding.

We need to be bold in preserving the future of universal service in a new communications era. And, time is of the essence. Without significant change, four years

from now, ratepayers will have a tab that’s $2 billion higher—Federal policy will

continue to discourage investment in vital national infrastructure—and outdated

government rules will continue to pre-empt the consumers’ judgment in defining the

shape of American innovation.

By asking everyone to pay in and everyone to meet the same high standard for

eligibility, we can deliver a true, fair and constructive universal service policy for

the 21st century, one that keeps the nation’s commitment to ensuring real opportunity in every American community.

Mr. UPTON. Thank you very much.

Mr. Lubin, welcome.

STATEMENT OF JOEL LUBIN

Mr. LUBIN. Thank you, Mr. Chairman and members of the subcommittee. Thank you for inviting me here today to testify on behalf of AT&T on the subject of universal service.

AT&T is the Nation’s oldest and most far-reaching telecommunications carrier. And we are proud to serve customers in every corner of the country. More than any other carrier, we tie the Nation

together. And we are proud to be the carrier that brought the term

‘‘universal service’’ to the telecommunications lexicon.

In 1996, Congress directed the FCC to ensure that universal

service was reformed in a manner that would make subsidies specific, predictable, and explicit. Seven years later, this directive has

not been met fully. The universal service system is struggling to

keep up with the dynamic marketplace, technologically driven marketplace. And without change, the system will come under increasing pressure and ultimately become unsustainable.

Fortunately, there are changes that could be implemented by the

FCC within the existing structure of the act that can both alleviate

the pressures and provide a universal service system that will be

compatible with technological change and competition. Today I

wish to highlight two of these issues that we believe are essential.

First, the change necessary because of the demands on the system are ever-increasing while the base on the service, universal

service, funds are collected is shrinking. The situation is both competitively biased and economically unsustainable. Left unchanged,

it will put the USF in a death spiral while raising the assessment

rates, will erode public support for the universal service concept.

This would be a problem, not just for rural America but for all of

America.

56

I estimate that the universal service assessment in the year 2004

will exceed 10 percent. AT&T’s solution to the problem is to move

away from a revenue base system to a contribution base system on

telephone numbers for those services that have telephone numbers

and on a connections to the public network for special access and

private line services that do not utilize telephone numbers.

A numbers-based solution has several advantages over the current system. First, it would be competitively neutral. Second, it

would be predictable and simple, two things that customers tell us

they appreciate. Let’s remember it is the customer who pays the

bill. We all act as collection agents to collect the money and hand

it off to USAC.

Third, a numbers-based solution will ensure that the system is

not left to crumble as telephone traffic migrates to new technologies and protocols, such as voice over the internet. We believe

that a numbers-based solution to the question of how carriers contribute to universal service could be achieved under the existing

law. And we believe that a numbers-based solution would provide

adequately for both current and future demands on the universal

service system. What is needed is the will to reform the universal

service assessment mechanism.

The second change that I would like to highlight today is the

issue of eliminating the remaining disparities associated with

interstate access rates. As I said at the start, AT&T is proud of its

heritage as the carrier that truly ties America together, but today

the challenge of tieing America together is being borne significantly

by AT&T. AT&T is carrying the burden even as it must increasingly compete in the long distance market with regional Bell operating companies that provide service only in their largely urban

lower-cost service areas.

As part of the 1996 act, Congress ensured that all Americans

could be tied together affordably by mandating rate averaging and

rate integration for long distance services. But interstate access

charges, a significant component of the cost of long distance services, are not the same in all parts of the country. So that when

AT&T averages toll rates Nationwide, it has to charge its customers in the RBOC territory more than it otherwise would in

order to charge customers in small rural telco areas the same rate.

This puts carriers that serve rural America at a competitive disadvantage vis-a-vis carriers that serve primarily urban and suburban customers. We do not believe this is something that good public policy should encourage.

Two years ago AT&T presented a proposal to reform rural access

rates to the FCC. Since then, the economic challenges that led to

our plan have gotten worse. We need relief. Without relief, the

marketplace will drive AT&T and other National carriers to find

other less optimal solutions to the problem. Options are not attractive, and rural America should not be forced to bear their costs.

I look forward to answering your questions. Thank you again for

the opportunity to appear this afternoon.

[The prepared statement of Joel Lubin follows:]

57

PREPARED STATEMENT OF JOEL LUBIN, VICE PRESIDENT, AT&T CORP.

Mr. Chairman, and members of the Subcommittee, thank you for inviting me to

testify on behalf of AT&T as you address the important topic of universal service

reform.

It was AT&T that brought the term ‘‘universal service’’ to the telecommunications

lexicon. We are proud of our more than 125-year history as the nation’s oldest and

most far-reaching long-distance carrier; more than any other carrier, we tie together

all parts of America. On the basis of this experience, we understand the importance

of maintaining a vibrant and sustainable universal service system.

In 1996, the Congress directed the Federal Communications Commission, with the

assistance of a Federal-State Joint Board, to charter a new universal service mechanism—one that would work with, not against, competition in all markets. This new

universal service mechanism was to be specific, predictable, and sustainable as competition grew, and it was to be competitively neutral, both in the way that contributions were collected and support distributed.

Unfortunately, seven years and many Commission proceedings later, these goals

have yet to be achieved. Some progress has been made, most notably through adoption of the CALLS plan in May 2000 and later with adoption of the MAG plan in

October 2001, but we cannot yet say that we have a universal service system that

meets all of the goals set forth by Congress in 1996. Instead, we have an ever-increasing fund that is being raised from an ever-shrinking funding base—interstate

and international end-user telecommunications revenues—and a collection mechanism that is discriminatory and self-defeating. Something has to give.

It is beyond question that the fund is increasing. The fund today stands at more than $6 billion per year. Both the Office of Management and Budget and FCC staff

project additional increases in the size of the universal service fund, even if the

Commission makes no further policy changes that add to the obligations supported

through the USF. OMB projects total growth at just under 2% per year for FY2004-

2007. Only two parts of the fund won’t grow—the schools and libraries fund and

the $650 million interstate access support for areas served by price-cap carriers. All

other parts of the USF can and are likely to increase.

At the same time the system faces increasing demands for support, the universal

service funding base—interstate and international end user telecommunications revenues—continues to shrink. In 2001 and 2002, the universal service funding base

shrank by an average of 8% per year. If that rate of decline continues in combination with the projected growth in the demand for universal service support, in three

years, the USF contribution factor—the rate carriers are assessed and that they

pass on to consumers at the bottom of the bill—would rise from 9.5% today to 12.8%

in 2006. I believe that such a result is likely to be both economically and politically

unsustainable.

The competitive inequities built into the current system for raising universal service funding will only speed the shrinkage of the universal service funding base.

These competitive inequities take several forms. For example:

• if a consumer is a high-volume user of interstate long-distance service—the customer who traditionally has contributed the most to the support of universal

service—that consumer can pay substantially less into the fund by migrating

his or her long-distance calling to a wireless phone.

• if a consumer purchases interstate long-distance service bundled with local service

or information services, he or she can contribute less to the universal service

fund if the carrier providing the bundle allocates more revenue to the parts of

the bundle that do not contribute to the support of universal service than to

the interstate long-distance portion of the bill, which does contribute to universal service.

• if a consumer uses service provided by international carriers that carry little or

no interstate traffic, he or she can avoid universal service charges altogether

on that international calling.

• if a consumer uses some Voice over Internet Protocol services, e-mail, or instant

messaging, it is likely that he or she would not contribute anything to support

universal service.

Each of these outcomes encourages carriers to seek ways to avoid contributing to

the universal service fund and, increasingly, price sensitive consumers are moving

to services that allow them to avoid charges related to the support of universal service. When this happens, the universal service fund’s contribution base shrinks,

which causes the assessment rate to rise, which drives more consumers to find ways

to minimize their contribution. Perpetuation of this scenario will drive the fund into

a ‘‘death spiral,’’ something that is completely at odds with what the Congress directed when it added Section 254 to the Communications Act.

58

Because AT&T is deeply concerned about this problem, we have proposed a solution to the FCC—a universal service contribution system based on telephone numbers for those services that use telephone numbers, and on connections associated

with special access and private line services that do not use telephone numbers. If

numbers and number-equivalent connections grow 2% per year, a 2% annual increase in the fund would not change the projected $0.98 per number universal service assessment.

Moreover, a numbers-based solution offers the advantage of being ‘‘future-proof.’’

Voice-over-Internet-Protocol (VoIP) providers give their customers a telephone number so that those customers can receive calls from the public switched network. This

assignment of numbers will trigger an obligation to support universal service, with

the effect of keeping VoIP in the universal service contribution base. Preventing

‘‘leakage’’ from the universal service system is key to maintaining the stability of

the fund, and by focusing on numbers rather than technologies, we can avoid the

need to impose ‘‘one-size fits all’’ regulation on emerging services such as VoIP.

A numbers-based solution could be implemented today by the Commission, under

its existing statutory authority. This is not true with respect to the call to ‘‘expand

the base’’ by assessing intra-state revenues. Statutory change clearly would be necessary to achieve that goal, and even with such a change, it is not clear that just

adding intra-state revenues to the mix would be sufficient to sustain the fund over

the long haul. Revenues are unpredictable and it is not clear that revenues will continue to climb; if revenues plateau or drop, the assessment factor will have to rise—

exactly as it has today as interstate revenues have stagnated.

The connections-based solution proposed by BellSouth and SBC suffers from the

fact that it would not necessarily eliminate the problem of having customers face

multiple USF charges. In my view, this is a major failing both because it contributes

to consumer confusion and because it imposes additional cost on the industry.

Whether or not the Congress contemplates amendments to Section 254, what is

needed is the will for reform.

If, however, Congress decides that additional statutory authority is a necessary

precursor to reform of the universal service system, such legislation should be narrowly tailored and exclusively focused on enabling the Commission to consider a

wider array of inputs for funding universal service programs. An ‘‘enabling approach’’ to universal service legislation should permit the Commission to consider

a funding mechanism based on inter- and intra-state revenues, assigned, working

telephone numbers, connections to the public switched network, or any combination

of these elements, so long as such funding mechanism is competitively neutral

among all providers and technologies. Reform along these lines could help to ensure

the near- and long-term sustainability of the fund, maximize the support of universal service among the broadest array of providers of telecommunications services,

reduce the need for regular revisions in the assessment mechanism (which would

minimize carrier costs and consumer confusion associated with such changes), and

reduce the likelihood that any reforms adopted by the Commission would be subject

to challenge in the courts.

As I said at the outset, AT&T is proud of its heritage as the carrier that truly

ties America together. But today, the burden of tying America together—of providing long distance service in all corners of the country—is being borne substantially by AT&T. AT&T is carrying this burden, even as it must increasingly compete

in long distance with RBOCs that provide long distance service only in their largely

urban, lower-cost service areas.

As part of the 1996 Act’s universal service provisions, Congress ensured that all

Americans could be tied together affordably by mandating rate averaging and rate

integration for long distance services.

But interstate access charges—a significant component of the cost of long distance

service—are not the same in all parts of the country. The geographic toll rate averaging provisions of Section 254(g) make it imperative that the remaining traffic sensitive cost disparities be removed from interstate access rates and this support be

provided instead through the universal service fund.

In most areas served by the RBOCs, this reform was implemented through the

CALLS plan, and interstate access charges are now approximately .6 cents per access minute. In the areas served by small, rural carriers not covered by the CALLS

plan, the average interstate access charges AT&T faces are much higher. For example, the average NECA minute of access averages 2.6 cents per minute. When AT&T

averages its toll rates nationwide, it has to charge its customers in the RBOC territory more than it otherwise would, in order to charge the customer in the small,

rural carrier’s service area the average rate.

This burden was barely bearable before Bell entry into the long distance market,

when AT&T had to compete with MCI, Sprint, and other carriers that could choose

59

not to serve certain geographies or service areas. Now, with the Bells having secured approval to enter the long distance market in most of the country, this burden

has become intolerable. Verizon, which is already the nation’s third largest long distance carrier, gets an unfair competitive advantage from the Act’s toll averaging requirements because it doesn’t serve all of America. In addition to incenting certain

carriers not to serve rural America, these high access changes—and the desire to

avoid paying them—provided the economic incentive for the ‘‘Canadian Gateway’’

access fraud committed against AT&T.

Fortunately, the 1996 Act allows for a solution that preserves toll averaging while

restoring a level playing field to long distance competition. The local network costs—

primarily high switching and transport costs—that lead to these high rural company

access charges—which can be as high as 10 cents per minute of use—could be supported through explicit universal service funding.

More than two years ago, AT&T and several other carriers presented just such

a proposal to the FCC. Unfortunately, the Commission has not implemented our

proposal, and since that time, the economic challenges that led us to file our plan

have gotten worse. The need for relief is now acute.

In order to alleviate these competitive problems and eliminate any incentive for

parties to ‘‘game the system,’’ the Commission should move expeditiously to reform

the inter-carrier compensation regime. Unless the Commission acts aggressively, the

marketplace will force AT&T and other national carriers to find other, less optimal

solutions. Those options are not attractive to us, nor should they be attractive to

policymakers, and rural America should not be forced to bear their cost.

Thank you again for the opportunity to testify here today. At AT&T, we believe

firmly that a vibrant, sustainable universal service system is important to the wellbeing of both the telecommunications industry and the American economy. But decisions must be made, and some bold actions taken to secure universal service for the

future. On behalf of my company, I hope you agree, and look forward to working

with you and the members of this Subcommittee as you continue your important

work in this area.

Mr. UPTON. Thank you.

Mr. Post?

STATEMENT OF GLEN POST

Mr. POST. Thank you, Mr. Chairman. My name is Glen Post. I

am Chief Executive Officer and Chairman of the Board for

CenturyTel. I appreciate the opportunity to speak before you today.

I am representing CenturyTel and the Independent Telephone and

Telecommunications Alliance, ITTA. ITTA is an association of 13

mid-sized telecommunications companies who together serve more

than 10 million lines in 40 States.

CenturyTel is a leading provider of telecommunications services

to 2.4 million customers, mostly in rural areas, the smaller cities

across the country, in 22 States that include many of the States

represented by the members of this subcommittee.

Many regulatory and technology changes have taken place since

the act was passed in 1996. We want you to know that ITTA companies share common goals with the larger Bell operating companies and the smaller telephone companies to maintain the incentive

to invest in our markets and to see meaningful deregulation of our

businesses. However, this hearing should not be about companies.

It should be about consumers and the continuity of the network

that keeps us all connected.

The Nation’s telecommunications future is at a crossroads. Evolving technology, competition, and converging network platforms are

rapidly outpacing our ability to keep rates comparable and affordable for all consumers, regardless of where they live. In our view,

affordable modern telecommunications infrastructure and advanced

services can make the difference between success or failure in economic development, creation of jobs in rural markets.

60

Universal service support as envisioned by the act is still the

telecommunications linchpin for millions of Americans and thousands of communities. It would be fair to say that perhaps no other

industry has the potential to more directly impact and improve the

lives and livelihoods of your constituents than the telecommunications industry. However, for that potential to be fully realized,

some bold changes must take place to provide much-needed stability for this industry.

Today there is an undeniable need to address the full array of

issues associated with telecommunications reform. We support

those initiatives. However, the first and highest priority of the Congress should be to stabilize and strengthen the Telecommunication

Act’s universal service mandates, which include predictability, sustainability, and sufficiency.

If meaningful universal service reform is not accomplished first,

other needed reforms, such as deregulation, inter-carrier compensation, and the future of broadband deployment, are likely to be

grounded on an unsure foundation and are likely to fail to deliver

their full-intended benefits for the American consumer.

Addressing the rapidly eroding USF contribution base is the first

critical step in the process of shoring up the universal service system. Contributions to universal service funding should be based on

revenues. A revenue-based assessment methodology is both competitively and technologically neutral. Assessing revenues, instead

of connections or numbers, avoids imposing a regressive flat fee on

low-volume consumers. A revenues-based system eliminates potential gaming that may be associated with connections or numbersbased approaches and also anticipates future changes in technology

that may make connections-based approaches meaningless.

Also, the FCC should be permitted to assess the broadest base

of revenues possible, including intrastate revenues. However, this

is only part of the solution.

If Congress is going to effectively deal with the crisis looming

over universal service, it must consider expanding the contribution

base to all providers that currently rely on the telecommunications

network. Congress and the FCC must make sure that any new contribution mechanism is capable of keeping pace with technology by

assessing the broadest base of providers possible.

Also, current caps on universal service funds have a direct and

negative correlation to advancing the universal service and advanced services deployment goals of the act. The growth and size

of the fund are controlled today by arbitrarily capping the funds

without regard to the impact on consumers. This is not the answer.

In rural areas, significant investment is still needed.

Also, the rapid increase in the number of competitive eligible

telecommunications carriers raises critical issues for the consumers

in rural America. Present rules for ETC designation are being interpreted in widely different fashions by stakeholder service commissions and are often not consistent with the intent of the act.

We’re concerned that present rules allow carriers to offer varying

levels of service commitments to customers based on investments

and cost of the ILEC. This raises obvious questions regarding the

reasonableness of this method of distribution of universal service

funds.

61

The following are recommendations of actions related to universal service that need to occur to protect consumers. First of all,

telecommunications providers, regardless of their network platforms, should be required to pay in the universal service fund. This

includes cable broadband providers, internet service providers, all

wireless services, long distance, and local exchange companies.

Second, States that approve additional ETCs should be required

to help with additional funding needs.

Third, CETC portability rules need to be changed to reflect reality and reasonableness. Regulatory oversight should ensure that

funds are truly being used to serve consumers in high-cost areas

and that the amount of support reflects the service commitment.

Finally, consumers must not be overlooked in the process of

achieving telecommunications reform. Congress should make sure

that rural consumers do not bear a disproportionate rate burden

that would place advanced services out of the financial reach of

most Americans.

This committee and the Congress have a great opportunity before

them to initiate legislative changes and provide meaningful direction to the FCC that will offer much-needed positive signals to the

telecom sector of our economy. Our Nation’s telecommunications

system did not happen by accident. There has been and should always be a strong commitment to building and maintaining evolving

networks that connect all of our citizens in rural and urban areas

to each other and the rest of the world.

Thank you for the opportunity of speaking with you today.

[The prepared statement of Glen Post follows:]

PREPARED STATEMENT OF GLEN POST, CEO AND CHAIRMAN OF THE BOARD FOR

CENTURYTEL ON BEHALF OF THE INDEPENDENT TELEPHONE AND TELECOMMUNICATIONS ALLIANCE (ITTA)

Good afternoon. My name is Glen Post, and I am Chief Executive Officer and

Chairman of the Board for CenturyTel. I appreciate the opportunity to appear before you today representing CenturyTel and the Independent Telephone and Telecommunications Alliance (ITTA). ITTA is an association of 13 mid-sized telecommunications companies who together serve more than 10 million lines in 40

states.

CenturyTel is a national telecommunications company with headquarters in Monroe, Louisiana. We are a leading provider of telecommunications services in 22

states that include many of the states represented by members of this Subcommittee including Michigan, Louisiana, Texas, Ohio, Wyoming, New Mexico, Mississippi, Oregon, Missouri, and Tennessee. We specialize in providing high quality

telephone, long distance, Internet, broadband and advanced services in rural and

small urban markets. Today, CenturyTel is the eighth largest telephone company

in the United States with 2.4 million access lines. Much of CenturyTel’s recent

growth has come from the acquisition of telephone lines from the larger Bell Operating Companies in multiple states. The majority of our 3 million customers and

7,000 employees live and work in the very areas that have the most critical stake

in the issue we will discuss today.

Many regulatory and technology changes have taken place since the

Telecommuni-cations Act was passed in 1996. We want you to know that ITTA companies share common goals with the larger Bell Operating Companies as well as the

smaller telephone companies to both maintain the incentive to continue investing

in our markets and to see meaningful deregulation of our businesses. However, this

hearing should not be about companies. It should be about consumers and the continuity of the network that keeps us all connected. It should be about the future

and not the present. We empathize with the other providers that serve high cost

markets and appreciate the challenges and concerns those markets pose from a

service and investment standpoint.

62

The nation’s telecommunications future is at a crossroads. Evolving technology,

competition, and converging network platforms are rapidly outpacing the existing

regulatory mechanisms’ ability to keep rates comparable and affordable for all consumers regardless of where they live. There are a number of proposed changes in

telecommunications that could put the stability of rural telecommunications at risk.

We commend Chairman Tauzin and Chairman Upton and the members of this Subcommittee for addressing these issues that are crucial to consumers in so many regions of our nation.

I have been asked to provide you with a mid-size company perspective about our

view of telecommunications and universal service as it relates to our customers and

the markets we serve. Mid size companies understand that our business success depends on the long-term economic viability of our communities. In our view, affordable, modern telecommunications infrastructure and advanced services can make

the difference between the site for a proposed industrial park remaining a field of

weeds, or actually being considered as a promising location by a global manufacturing company. Businesses today look for areas where the telecommunications infrastructure has kept pace with technology and which provide the ability to communicate anywhere in the world. Universal service support plays a big role in this picture.

As members of this Subcommittee know, agriculture has long been the leading

economic driver for much of rural America. However, I would ask that you also consider telecommunications as a force that will create jobs, spur investment and allow

all citizens to effectively connect with the rest of the Nation and the world. It would

be fair to say that perhaps no other industry has the potential to more directly impact and improve the lives and livelihoods of your constituents than the telecommunications industry. However, for that potential to be fully realized, some bold

changes must take place to provide much-needed stability.

The one thing that has not changed since the passage of the Telecommunications

Act is that rural and small urban markets remain unique in their demographics,

service needs and cost-of-service characteristics. Universal service support, as envisioned by the Act, is still the telecommunications lynchpin for millions of consumers.

These consumers have become increasingly sophisticated in the types and quality

of services they need and expect. Thanks to the Universal Service system, our companies like CenturyTel have been able to ensure that rural America has not been

left behind by the digital revolution. We believe that in a global economy, rural and

small urban consumers not only deserve, but also truly need, reliable and affordable

advanced telecommunications services to talk with loved ones, conduct business, be

entertained and connect with the rest of the world.

One of the challenges these customers and their phone providers face is the ability to keep basic and advanced services affordable and to overcome the challenges

of distance associated with high cost markets. However, this premise and the system that supports it are under attack from a variety of fronts. The reason we are

here today is to attempt to find reasonable solutions that will help to keep America’s

telecommunications system the model for the rest of the world.

A vast and complex task awaits, but there is a need for sequencing and

prioritization of the issues we face. To attempt to resolve all pending issues simultaneously prior to stabilizing universal service is to run the risk of failing from the

outset. There is an undeniable need to address the full array of issues associated

with telecommunications reform, and we support those initiatives and the need to

move ahead as an industry. Our industry is in serious need of economic stabilization

that can be brought about through deregulation and free market competition. However, the first and highest priority of the Congress must be to stabilize and

strengthen the Telecommunication Act’s universal service mandates which include:

predictability, sustainability and sufficiency.

Few issues more directly affect consumers, the economy, job creation or investment in the country’s national security infrastructure than universal service.

Whether we are talking about affordable services for everyone, national security,

bridging the Digital Divide or successfully placing an emergency 911 call, universal

service is the key component that affects our industry and customers. Stabilization

of universal service must be viewed as the ‘‘base’’ upon which all other reforms are

built. If meaningful universal service reform is not accomplished first, other needed

reforms such as deregulation, intercarrier compensation and the future of

broadband deployment are likely to be grounded on an unsure foundation and are

likely to fail to deliver their full-intended benefits to the American consumer.

63

CONTRIBUTION MECHANISMS

Addressing the rapidly eroding USF contribution base is the critical first step in

the process of shoring up the universal service system. Without ensuring a predictable, sustainable, and sufficient funding base, other reforms could end up being academic. Contributions to universal service funding should be based on revenues. A

revenues-based assessment methodology is both competitively and technologically

neutral. Assessing revenues instead of connections or numbers avoids imposing a regressive flat fee on low-volume consumers. A revenues-based system eliminates potential ‘‘gaming’’ that may be associated with connections or numbers-based approaches and also anticipates future changes in technology that may make connections-based approaches meaningless. All providers have revenues that may be fairly

assessed on a non-discriminatory basis, which makes such an assessment competitively neutral among consumers. The FCC should be permitted to assess the broadest base of revenues possible, including intrastate revenues.

However, this is only part of the solution.

To provide true long-term sustainability, the base of contributors must be expanded beyond what may be considered the traditional or legacy providers of today.

Consumers are rapidly adapting to a world in which they receive their telecommunications services, including voice service, from their Internet Service Provider such

as AOL or their cable modem provider, neither of which are currently subject to assessment. If Congress is going to effectively deal with the crisis looming over universal service and not simply postpone the day of reckoning, it must consider expanding the contribution base to all providers that currently rely on the telecommunications network. Anything less perpetuates rather than resolves the underlying problem. Ultimately, the expansion of universal service contribution mechanisms must be a progressive process with the goal of achieving long-term sustainability that is immune to technological change.

The FCC is considering basing its assessment on other metrics beside revenues.

Some carriers who would advocate the use of telephone numbers as an assessment

mechanism are, ironically, companies that do not have a telephone number link

with customers, and would consequently be mostly immune from such an approach.

Additionally, telephone numbers are not able to capture new technologies that provide voice service such as Voice Over Internet Protocol (VOIP) or even Instant Messaging services that are so prevalent today. Furthermore, the VOIP industry currently works with traditional telephone numbers and without them. A telephone

number-based approach would skew the VOIP industry toward a non-numbers

based approach. Congress and the FCC must make sure that any new contribution

mechanism is capable of keeping pace with technology by assessing the broadest

base of providers possible.

DISBURSEMENT OF UNIVERSAL SERVICE FUNDING

The rapid escalation in the number of Competitive Eligible Telecommunications

Carriers (CETC’s) raises critical issues for the customers of ITTA members. Present

rules for ETC designation are being interpreted in widely different fashions by state

public service commissions and are often not consistent with the intent of the Act.

We are concerned that present rules allow carriers to offer different levels of service

commitment to customers even though they are receiving the same level of support.

This anomaly in universal service portability requirements places an ever-increasing

pressure on universal service funding that directly or indirectly affects all American

phone users.

Appropriate standards for the ETC designation process must be instituted and enforced. Unchecked distribution of universal service support threatens consumers and

carriers alike. Currently, designations are often based on inconsistent or non-existent criteria. Minimum uniform, technologically neutral national criteria for state review of applications would do much to rationalize a chaotic, unpredictable process

that ultimately does not serve the consumer’s interest. Any such standards would

also require some provision for enforcement, both at the federal and state levels, if

they are not to be rendered meaningless from the outset.

CAPS ON UNIVERSAL SERVICE FUNDING

Reform of the contribution mechanism and disbursement procedures, while necessary first steps, are nonetheless insufficient by themselves to cure the ailing universal service system. Current caps on universal service funds have a direct and

negative correlation to advancing the universal service and advanced services deployment goals of the Act. Existing caps are fundamentally in conflict with the

broad universal service mandates laid down in the 1996 Act. They are also a disVerDate 11-MAY-2000 11:09 Dec 08, 2003 Jkt 000000 PO 00000 Frm 00067 Fmt 6633 Sfmt 6621 89965.TXT HCOM1 PsN: HCOM1
64

service to rural consumers and an impediment to the delivery of advanced services

to all consumers. Carriers, competitors and consumers alike will benefit from removing existing fund caps.

The growth of the fund is controlled today by arbitrarily capping the funds without regard to the impact on consumers. This is not the answer. In rural areas, significant investment is still needed.

INTERCARRIER COMPENSATION REFORM COULD THREATEN UNIVERSAL SERVICE

Carriers that use our networks should continue to pay fair compensation to use

those networks. Access charges that long distance companies pay to compensate

local phone companies have been reduced and the balance of that money has been

shifted into universal service funding. Further access charge reductions will only

put more pressure on the funds. Increasing downward pressure on access rates becomes a problem, particularly for the customers of companies operating in high cost

rural areas. Zeroing out carrier access charges will mean that the customer ultimately pays an increased price to subsidize the stockholders of long distance companies.

RECOMMENDATIONS TO ADDRESS UNIVERSAL SERVICE ISSUES

There are no easy answers to solving all of the issues associated with universal

service or telecommunications reform. However, there are a combination of actions

that need to occur to protect consumers. First, all telecommunications service providers, regardless of their network platform, should be required to pay into the universal service fund. This includes cable, all broadband providers of any kind, Internet Service Providers (ISPs), all wireless devices, long distance and local exchange

companies. Second, states that approve additional ETC’s should be required to help

with the funding. Third, CETC portability rules need to be changed to reflect reality. Today, CETC’s are drawing the same support as the incumbent phone provider based on the ILEC’s cost. This is putting increased pressure on the fund. They

should have more stringent certification standards than they have today. The FCC

should establish minimum criteria that individual state commissions can use in assessing eligibility. CETC’s should be required to serve an entire rural study area—

something they are not being held accountable for today. Regulatory oversight

should ensure that funds are being used to serve consumers in high cost areas for

all recipients of support.

Finally, CenturyTel believes portability requirements should be modified to recognize that many of today’s USF dollars are actually access charges formerly paid by

long distance companies—these dollars should not be portable to competitors.

CONCLUSION

Ultimately, consumers must not be overlooked in the process of achieving telecommunications reform. Consumers have seen a steady increase in their local phone

bills due to a variety of end-user charges that have been systematically applied

since the passage of the Act. Consumers also face shouldering the burden of pending

proposals that would eliminate carrier-to-carrier revenues, such as access charges,

and replace them with higher customer charges such as local rates and subscriber

line charges. Congress should make sure that rural consumers do not bear a disproportionate rate burden that would place advanced services out of the financial

reach of most Americans or add additional pressure to universal service funds.

This Committee and the Congress have a great opportunity before them to initiate

legislative changes and provide meaningful direction to the FCC that will offer

much-needed positive signals to the telecom sector of our economy. Telecommunications has the potential to create jobs, spur investment and provide economic stability to literally every state and to every section of the country. We must remember

that our nation’s telecommunications system did not happen by accident. There has

been, and should always be, a strong commitment to building and maintaining

evolving networks that connect all of our citizens in rural and urban areas to each

other and the rest of the world.

Mr. UPTON. Thank you very much.

Mrs. Shank?

STATEMENT OF SIDNEY SHANK

Ms. SHANK. Good afternoon. I am the manager of Bloomingdale

Telephone Company, which is an independently owned teleVerDate 11-MAY-2000 11:09 Dec 08, 2003 Jkt 000000 PO 00000 Frm 00068 Fmt 6633 Sfmt 6602 89965.TXT HCOM1 PsN: HCOM1
65

communications corporation headquartered in Bloomingdale, Michigan. We’ve been engaged in the provision of local exchange service

for nearly 100 years. Today we serve approximately 2,000 customers in our Bloomingdale exchange itself. However, we serve

about 8,500 customers in Allegen, Kalamazoo, and Van Buren

Counties with other telecommunications needs.

We are involved in the provision of telecommunications business

systems, networking, internet, broadband services, long distance,

cellular, competitive local exchange services, and DBS services.

We are proud of the record of service, which is representative of

the Nation’s small rural incumbent local exchange carriers. That’s

why I’m so pleased to be appearing on behalf of the hundreds that

are represented by NTCA and OPASTCO.

The success of Bloomingdale and its small rural ILEC colleagues

is tied directly to a dedication to community and the Nation’s commitment to universal service. Yet, in the uncertain competitive deregulatory environment that we operate in today, these constants

may be in jeopardy. Left hanging in the balance could be quality,

affordable service for rural areas and telecommunications.

It’s no secret that the ability to fully recover costs is the very lifeblood of our small rural ILECs. Thus, of particular concern to all

of us today are the many regulatory and judicial proceedings that

will either sustain or destroy this ability and subsequently the continued investment in rural telecommunications infrastructure will

be in jeopardy.

Any adjustment to one of the three components of our cost recovery, the local end-user rates; inter-carrier compensation, such as

access charges; and universal service, requires the inverse adjustment of the others. Not surprisingly, the local end-user rate component is the least able to tolerate increased pressure. Conversely,

the inter-carrier component is the one most susceptible to regulatory and competitive-oriented pressures. This leaves universal

service as the most likely to contend with cost recovery fluctuations.

In past access charge reduction proceedings, the universal service

fund has been charged with such residual cost recovery responsibilities. And the current debate over additional inter-carrier compensation adjustments has suggested this could happen again. Yet,

with other regulatory dilemmas currently facing the USF, we fear

it is ill-prepared to take on another such obligation.

Perhaps the most notable of these is how easily many States and

the FCC are granting USF ETC status to competitors. Adding insult to injury is the fact that under the FCC’s current rules, competitor support is based on the incumbent’s costs, this despite the

fact that the law requires carriers to certify support is for actual

universal service-allowed costs. This has led to a ballooning USF,

which could eventually erode public support for the underlying National policy. Also problematic is change in economic and regulatory environment that is eroding the USF funding.

We believe that all policymakers must take the responsibility of

granting ETC designations much more seriously. NTCA and

OPASTCO have both put forth sets of standards on which such decisions could be based. These focus on encouraging policymakers to

66

impose the same service, billing, quality, capability, and recording

standards on competitors that incumbents already face.

We also strongly believe that Congress should direct the FCC to

follow the law when asked for the contributions to the universal

service fund. The FCC is entertaining the idea of adopting certain

contribution proposals we contend would not adhere to the law.

Some of these proposals, connections and numbers-based, would

allow today’s larger contributors, the long distance mammoths, to

escape their statutory universal service responsibilities.

Considering the current dilemma that faces the USF, we should

expand the base of contributors and revenues that are accessed,

rather than relieving entities of a statutory responsibility. We have

registered our views, both in the State and Federal regulatory arenas. In many cases, we have done so with the judicial as well. Yet,

we now believe it is time for Congress to weigh in on these matters.

We are hopeful that with your direction, policymakers and judicial, the public, and competitors alike, will be guided by the principle that USF is a scarce National resource. Congress has the ultimate authority and responsibility to ensure that the USF is carefully managed in order to best serve the public interest. Universal

service is not a tool to be used to incite artificial competition. It is

a tool to help ensure the existence of a Nationwide ubiquitous telecommunications network, a network that has been proven again

and again to be so critical to our National and economic security.

Congress must continue to ensure that the underlying principles

of this long-lasting National policy are safely adhered to now and

in the future. And I thank you so much for your time and for allowing me to be here today. Thank you.

[The prepared statement of Sidney Shank follows:]

PREPARED STATEMENT OF SIDNEY SHANK, MANAGER, BLOOMINGDALE TELEPHONE

COMPANY ON BEHALF OF THE NATIONAL TELECOMMUNICATIONS COOPERATIVE

ASSOCIATIONAND THE ORGANIZATION FOR THE PROMOTION AND ADVANCEMENT OF

SMALL TELECOMMUNICATIONS COMPANIES

Chairman Upton, members of the subcommittee, my name is Sidney Shank, and

I am the manager of Bloomingdale Telephone Company, which is an independently

owned telecommunications corporation headquartered in Bloomingdale, Michigan.

We’ve been engaged in the provision of local exchange service for nearly 100 years.

Today we serve approximately 2000 customers with an investment of over 250 miles

of cable. But that’s not all we provide to our community and the surrounding area.

In addition, we are involved in the provision of Internet, broadband services, long

distance, cellular, competitive local exchange services, and Direct Broadcast Satellite (DBS) services.

We are proud of this record of service, which is representative of the nation’s

small rural ILECs. That’s why I’m also pleased to be appearing on behalf of the

hundreds that are represented by the National Telecommunications Cooperative Association (NTCA) and the Organization for the Promotion and Advancement of

Small Telecommunications Companies (OPASTCO).

THE IMPORTANCE OF UNIVERSAL SERVICE

Today, the Subcommittee will hear from a variety of witnesses that are deeply interested in the future of universal service—each for very different reasons. Let me

state at the outset that our concern is centered exclusively on ensuring that the

strong mandates of the nation’s long-standing policy of universal telecommunications service are carried out in a manner that best serves consumers. That is how

we have always conducted our businesses.

The success of Bloomingdale, and its small rural ILEC colleagues, is tied directly

to a dedication to community, and the nation’s commitment to universal service.

67

Yet, in the uncertain competitive deregulatory environment that we operate in

today, these constants may be in jeopardy. Left hanging in the balance could be

quality, affordable, universally available rural telecommunications service.

It’s no secret that the ability to fully recover costs is the very lifeblood of small

rural ILECs. Thus, of particular concern to us today are the many regulatory and

judicial proceedings that will either sustain or destroy this ability—and subsequently the continued investment in rural telecommunications infrastructure.

Any adjustment to one of the three components of our cost recovery—the local

end-user rates, intercarrier compensation such as access charges, and universal

service—requires the inverse adjustment of the others. Not surprisingly, the local

end-user rate component is the least able to tolerate increased pressure. Conversely,

the intercarrier component is the one most susceptible to regulatory and competitive

oriented pressures. This leaves universal service as the most likely to contend with

cost recovery fluctuations.

In past proceedings on access charge reductions, the USF has been charged with

such residual cost recovery responsibilities. And the current debate over additional

intercarrier compensation adjustments has suggested this could happen again. Yet

with other regulatory dilemmas currently facing the USF, we fear it is ill prepared

to take on another such obligation.

GREATER OVERSIGHT AND REFORM OF THE ETC DESIGNATION PROCESS IS NEEDED

Perhaps most notable of these regulatory dilemmas is how easily many states and

the FCC are granting USF ETC status to competitors today. These carriers are receiving this valuable designation without having to comply with the same stringent

service, billing, quality, capability, coverage, and reporting requirements that ILECs

must, and have been happy to, adhere to each and every day. Is it too much to ask

carriers to meet such obligations as a condition of receiving scarce USF support? We

think not. Adding insult to injury is the fact that under the FCC’s current rules,

competitor support is based on incumbent costs. This despite the fact that the law

requires carriers to certify support is for actual universal service allowed costs.

This problem is particularly pronounced with regard to wireless competitive

ETCs. For example, since 1999, universal service support allocated to wireless

CETCs has increased dramatically from $500,000 in 1999 to a projection of approximately $240 million in 2003. This astonishing growth in support to wireless CETCs

is particularly troubling since these carriers are not held to the same regulatory obligations and service standards faced by other carriers.

We ask that Congress reaffirm its strong admonition about financially supporting

competition when it crafted section 214(e) of the Act. In enacting this section of the

law governing the designation of multiple ETCs, Congress clearly recognized that

supported competition would not always be in the ‘‘public interest’’ of areas served

by rural telephone companies. Sadly, some state commissions and the FCC have ignored the intent of Congress and have designated additional ETCs without thoughtfully considering the factors that determine the public interest. Regulators have

placed far too much emphasis upon the Act’s general goal of competition at the expense of rural markets and consumers. The result of state government-sponsored artificial competition in rural service areas has been a swollen USF that has put the

entire universal service program at great risk.

POSSIBLE SOLUTIONS TO THE CETC DESIGNATION PROCESS

Mr. Chairman, many witnesses come before your committee without solutions.

However, I am very pleased that both NTCA and OPASTCO have each developed

their own principles to strengthen the public interest standard governing the CETC

designation process.

This past July, during a forum of the Federal-State Joint Board on Universal

Service, NTCA put forth, and urged the adoption of a seven-point public interest

test for evaluation of ETC designations in rural telco service areas. The points are

as follows:

1. Is the additional ETC designation of the requesting carrier required to ensure

that consumers living in the rural ILEC service territory have access to the

nine support services listed in the definition of universal service at rates that

are comparable to similar services and rates received by consumers living in

urban areas?

2. Would the requesting ETC designation be able to provide service to the entire

rural ILEC service territory, as required by FCC rules?

3. Do the potential benefits to the rural service area of granting the ETC designation outweigh the ultimate burdens on consumers that will occur through the

added growth in state/federal universal service funds?

68

4. Is the carrier requesting designation willing to demonstrate its cost to provide

universal service to consumers living in the rural ILEC service territory?

5. Would the ETC designation result in excessive support to the requesting carrier

based on the amount of support distributed under the identical support rule?

6. If the carrier seeking ETC designation is offering rural consumers universal service at a rate that is at, below or slightly above the comparable rate for supported services, why is the requesting carrier seeking universal service support?

7. Is the carrier requesting ETC designation willing to adhere to quality-of-service

guidelines or other state-specific requirements?

Earlier, OPASTCO had developed an industry white paper, titled, ‘‘Universal

Service: A Congressional Mandate At Risk.’’ This paper elaborates upon how misinterpretations of the public interest standard by state and federal regulators when

designating multiple ETCs has placed the universal service fund in serious jeopardy. The recommendations of the OPASTCO paper have also been presented to the

Joint Board for its consideration. It lays out the following principles, guidelines and

requirements that State commissions and the FCC should utilize in their consideration of ETC applications for rural telephone company service areas:

1. Rural consumers should receive access to affordable, high-quality telecommunications and information services, including advanced services that are reasonably comparable to those services provided in urban areas and at reasonably

comparable rates.

2. The high-cost support mechanisms should not be used as an incentive to attract

uneconomic competition in the areas served by rural telephone companies.

3. The USF is a scarce national resource that must be carefully managed to serve

the public interest.

4. Rural universal service support reflects the difference between the cost of serving

high-cost rural areas and the rate levels mandated by policymakers.

5. The public interest is served only when the benefits from supporting multiple carriers exceed the costs of supporting multiple networks.

6. In areas where the costs of supporting multiple networks exceed the public benefits from supporting multiple carriers, the public interest dictates providing support to a single carrier that provides critical telecommunications infrastructure.

7. The cost of market failure in high-cost rural America could be severe.

Along with the adoption of public interest principles, the OPASTCO white paper

further recommends that in order to be considered for ETC status in a rural telephone company service area, a carrier should be required to demonstrate to the

state commission or FCC that it meets, and will abide by, all of the following qualifications and requirements:

1. A carrier must demonstrate its ability and willingness to provide all of the services supported by the federal High-Cost program throughout the service area.

2. In fulfilling the requirement to advertise its services and rates, an ETC must emphasize its universal service obligation to offer service to all consumers in the

service area.

3. A carrier must have formal arrangements in place to serve customers where facilities have yet to be built out.

4. A carrier must have a plan for building out its network once it receives ETC designation and must make demonstrative progress toward achieving its build-out

plan in order to retain ETC designation.

5. A carrier must demonstrate that it is financially stable.

Lastly, OPASTCO suggests State commissions and the FCC should also adopt the

following policies regarding ETC designations in rural telephone company service

areas:

1. ETC designations in rural telephone company service areas should be made at

the study area level (an ILEC’s entire service territory within one state).

2. State commissions and the FCC should ensure that competitive ETCs will be capable of providing high-quality service to all of the customers in the service area

should the rural ILEC find it necessary to relinquish its own ETC designation.

3. Any service quality standards, reporting requirements and customer billing requirements established by the state commission should be applied equally to all

ETCs in the state.

4. State commissions have the authority to decertify any ETC that is not meeting

any of the qualifications or requirements enumerated above.

We strongly believe that the long-term sustainability of the federal USF has been

greatly threatened by federal and state regulator decisions about whether to designate multiple ETCs in an area served by a rural telephone company. The number

of competing carriers seeking designation as eligible to receive universal service support is growing at an everincreasing pace. If the size of the USF reaches a point

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where further growth is prohibited, yet the number of carriers receiving support

continues to grow, then no carrier will have the funding necessary to provide affordable, high-quality telecommunications services and rural consumers will be denied

the benefits promised by the Act. This is an area that Congress simply can no

longer ignore.

CONTRIBUTION METHODOLOGIES MUST ADHERE TO STATUTORY MANDATES

Unfortunately, there are other major regulatory proceedings that are still underway that have the potential to undermine the USF and its underlying national policy. It is very possible that the FCC could still adopt a ‘‘connections-based’’ or ‘‘numbers-based’’ proposal for revising the universal service contribution methodology,

which without a legislative change, may not comply with the Telecommunications

Act of 1996’s requirement that every interstate telecommunications provider contribute to the Fund on an ‘‘equitable and nondiscriminatory basis.’’ We urge the

Congress to direct the FCC to follow the law and ensure that interstate carriers continue to contribute their fair share to the Fund. We also believe the FCC should

be strongly encouraged to take action that would broaden the base of contributors

to universal service. NTCA and OPASTCO have both advocated a narrow legislative

approach as one part of this solution, which would effectively overcome a judicial

decision that limits USF assessments to interstate and international revenues.

The FCC has recently given consideration to three different ‘‘connections-based’’

proposals for revising the universal service contribution methodology. The first proposal would impose a flat monthly fee for each end-user connection and assess a

‘‘minimum’’ contribution from each interstate telecommunications provider regardless of whether the carrier provides connections. The second proposal would split

‘‘connections-based’’ based contributions between switched access and interstate

transport providers. The final proposal would assess contributions on the basis of

telephone numbers assigned to end-users. We are very concerned that through these

proposals the Commission is considering possibly adopting a new contribution methodology that would violate the requirement set forth in the 1996 Act that calls for

‘‘equitable and nondiscriminatory’’ contributions from every interstate telecommunications carrier.

In addition, we also all strongly believe that any reform of the universal service

contribution methodology should expand the base of contributions to the Fund. As

you know, the universal service system has been funded by a broad-based national

system of industry contributions. The traditional contribution base—the long distance market—has steadily declined, eroding the funding base for universal service.

Alternatives to long distance—wireless, e-mail, Internet Protocol (IP) telephony, and

most broadband platforms—have not been asked to contribute their fair share to alleviate the shortfall. We are very concerned that the proposals currently pending before the FCC would fail to broaden the contribution base sufficiently, and fail to ensure the stability and sufficiency of the USF for the long-term.

The manner in which contributions are assessed for the USF is a very complex

and controversial issue. Furthermore, I can assure you in the strongest possible

terms that we are unified in our view that any further modifications by the FCC

to the contribution methodology must be consistent with the statute’s clear requirement that all interstate telecommunications services contribute to the USF on an

equitable and nondiscriminatory basis. Regardless of how the FCC ultimately approaches this issue, interstate interexchange carriers have to remain principal contributors as mandated by the law.

We all agree that universal service support needs to be sufficient and sustainable

and should be fair to all providers and users of all kinds of networks. We are aware

of growth in the USF and concerned about shifts in the types of interstate services

consumers are utilizing. These developments have created a serious issue about how

to prevent erosion and evasion of support mechanisms. Thus, we firmly believe that

the FCC needs to assess the broadest possible list of contributors to keep each carrier’s contribution and the amount it needs to recover from its customers as small

as possible.

We need to emphasize that the gradual but ever-growing use of broadband platforms and Internet Protocol (IP) networks plays a growing role in the instability of

the contribution base. Consumers use IP networks in a variety of ways (access to

the World Wide Web, e-mail, instant messaging, Internet telephony) and via various

platforms (cable, wireless, satellite) to substitute for interstate calls on the public

switched network. As this ‘‘Internet substitution’’ grows, traditional interstate revenues providing the funding base for universal service will diminish. And there will

be little offsetting gain, since presently only wireline telecommunications carriers

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ice. All other Internet access providers using other platforms remain exempt from

the obligation.

Federal law allows the FCC to assess all providers of interstate ‘‘telecommunications’’ if the public interest so requires, even if they are not common carriers. We

believe that all providers that compete with each other and provide the same functions should have the same contribution responsibilities. This means that cable

modem providers and other information service providers that provide their own

transmission should contribute, just as ILECs presently contribute for their transmission role in providing Internet access. This also means that wireless carriers

need to be assessed on a fairer basis than even the ‘‘modified safe harbor’’ adopted

by the Commission last year.

More specifically, in reassessing who must contribute to the Fund, Congress

should insist that interexchange carriers, Internet access providers, wireless carriers, bundled service providers, payphone providers, dial-around services, and IP

telephony providers, as well as local exchange carriers all contribute to the USF.

Broadband service providers, whether considered information service providers or

telecommunications service providers, also should be included as supporters of universal service. Finding an equitable way of assessing contributions to universal

service support on carriers, and—as I just discussed—broadening the base of contributors to universal service are significant issues the FCC needs to resolve to

make universal service support funding sustainable.

UNIVERSAL SERVICE IS GOOD PUBLIC POLICY FOR AMERICA

The high-cost component of the universal service program handles approximately $3.3 billion in annual carrier-to-carrier support transactions, which represents

slightly more than half the amount that is channeled through the overall fund each

year. The high-cost component is a ‘‘safetynet’’ of sorts for rural carriers and their

subscribers, but it is also a tool to ensure that all Americans enjoy the benefits and

security of a nationwide integrated network. Congress and successive administrations have wisely recognized the value of this component of the program and now,

above all else, need to take steps to ensure its ongoing ability to function according

to statutory intent.

The high-cost element of the Fund is used to build telecommunications ‘‘platform’’

infrastructure. Without a telecommunications platform, our schools and libraries,

rural health care, and lifeline and linkup programs, and millions of rural Americans, have nothing. Modern telecommunications infrastructure in rural America enables diversity of education, health, and other social services comparable to those

in urban areas.

Our nation’s first priority for rural areas should be to provide a stable environment for continued telecommunications investment. One of the most important ways

rural Americans have benefited from universal service is that it has sustained a

telecommunications commitment to rural communities for decades. ‘‘Rural telephone

companies,’’ as defined in the 1996 Act, have become an integral part of rural communities throughout America and have remained economically viable in these highcost areas due, in large part, to strong universal service policy.

In sum, a strong universal service policy is still needed today to ensure a stable

environment that encourages continued telecommunications investment in rural

America. Incumbent rural telephone companies have met the challenge of deploying

telecommunications infrastructure in high-cost rural areas. With a strong universal

service policy, they can continue to help rural communities and rural Americans realize diversity of education, improved health and other social services, and economic

development through modern telecommunications.

Mr. UPTON. Thank you very much.

Mr. Stanton?

STATEMENT OF JOHN STANTON

Mr. STANTON. Thank you, Mr. Chairman. The burden and luxury

of being the final speaker of a large panel is that I have the opportunity to make some of my comments responsive and the burden

and responsibility to attempt to be brief.

The wireless industry celebrates its 20th birthday, the anniversary of the first customer becoming a wireless customer in Chicago,

Illinois in October. So in October 1983, our industry was born. In

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cent of Americans now have a wireless phone. The industry’s revenues in total now exceed as of 2003 the total revenues of the local

exchange business in the United States. So the wireless business

on that basis has become the largest part of the telecom industry.

Wireless is fundamentally the best way to provide services in

rural areas from an economic point of view. In areas with population densities below ten people per square mile, in most exchanges, wireless can provide service more efficiently and more economically over the long term.

Western Wireless, the company that I founded in 1994, provides

services to approximately 800,000 square miles of territories. We

built the 1,500 sites that we offer in the 9 years that the company

has been in existence in addition to some sites that were built by

predecessor companies that we operated.

We have managed during that time to also build systems that

are relied upon by our 1.25 million customers as their primarily

telecommunications device. Our company has been a leader in

terms of building systems that we believe can be responsive to consumer needs.

About 5 years ago, in the Antelope Valley of Nevada, no telephone service, wired or wireless, was available. We in an agreement with PacBell and with the Nevada Public Service Commission

agreed to build a wireless system that literally represented the

first form of any telecommunications services that was available in

that community.

Two years later, in Regent, North Dakota, we introduced the first

competitive wireless service, providing services directly competitive

with the local exchange carrier. Two weeks later, the local exchange carrier that we connected with cutoff our access to the public switch network by cutting off our switch, which was restored

only a few weeks later. The challenge for us has been we operate

in an intensely competitive environment, but we have also done I

think the right thing.

In the Pine Ridge Indian Reservation in South Dakota, we have

introduced services about 3 years ago on Election Day 2000. And

in doing so, we now have majority market share in that market because we have been willing to commit substantial investment and

we have been able to grow that business.

Earlier this month, we introduced a wireless data service. And

while not directly a result of universal service monies, our ability

to build a voice-grade system enabled us, then, to layer on top of

that data services. The two little girls in this picture had their first

opportunity to interact with the internet via a wireless connection

and their only opportunity to interact with the internet via that

wireless connection.

New services are possible because of universal service. Our company began attempting to get certified as an eligible telecommunications carrier roughly 5 years ago. And I can guarantee you that

commissioners such as Chairman Rowe and Commissioner Gregg

as well as the other commissioners across the country have been

rigorous in examining the applications of wireless carriers. It has

taken us a total of 5 years to get certified in 13 of the 14 States

in which we have applied.

72

We have as a result of that and in reliance on the understanding

that we were going to be able to access the universal service monies invested approximately $500 million, extending our coverage

and expanding our services into rural areas. That commitment,

doubling the total property, plant, and equipment that the company operated, was a direct result and in reliance on our understanding of the new rules promulgated by the 1996 act.

The 1996 act effectively allowed new players to enter the market.

It also allowed new players or players that were in the market to

contribute effectively to the fund. Commissioner Gregg cited the increase in the fund from $1.8 billion to $6.1 billion. Nearly 40 percent of those monies come from the wireless industry.

In fact, between 2002 and 2003, the amounts of monies that the

wireless carriers will pay into the fund increased from $900 million

to $1.8 billion. And, in total, wireless carriers now contribute approximately 30 percent of the money going into the funds. And, yet,

even with an increase recently in amounts coming out, our payments coming out of the fund represent less than 2 percent of the

fund’s total. So we pay in 30 percent, and we take out 2 percent,

despite the fact that companies like my own make substantial commitments to rural areas.

The core issue is, do you support competition in rural areas?

Competition benefits rural customers. It disciplines all of the operators within the market. And it guarantees the ability of customers

to get better services in rural areas than they would otherwise.

Thank you, Mr. Chairman.

[The prepared statement of John Stanton follows:]

PREPARED STATEMENT OF JOHN STANTON, CHAIRMAN, DIRECTOR & CHIEF EXECUTIVE

OFFICER, WESTERN WIRELESS CORPORATION

Mr. Chairman and members of the Committee, I commend you and your colleagues for conducting this hearing to examine the critically important issue of the

future of universal service. I especially appreciate this opportunity given to Western

Wireless to address a subject—universal service—that is not only of great interest

to this committee, but also is a subject that runs to the core of the company I founded in 1994.

Western Wireless provides wireless telecommunications services in 19 western

states with a focus on serving the telecommunications needs of rural consumers.

Over the years, wireless service has become essential to a growing number of Americans who are increasingly using wireless service for their basic and advanced telecommunications needs. In urban areas, wireless and wireline carriers compete with

one another based upon their costs of providing service, which has resulted in intermodal competition to the benefit of consumers. In rural areas, however, wireline carriers have historically received an exclusive subsidy, called universal service, that

has provided the incumbent local exchange carriers a decisive advantage over their

only potential competitors—wireless carriers.

In 1996, Congress adopted sweeping changes to the telecommunications landscape

by introducing competition into the local market, including the universal service

market. Now, for the first time, many rural consumers are realizing the benefits of

competition brought about by the Telecommunications Act of 1996 and the pro-competitive policies of the Federal Communications Commission. Coincidently, with

competitive carriers’ entry into the universal service market, incumbent local exchange carriers have cried foul, attempting to reverse the 1996 Act’s pro-competitive

promises for rural consumers and restore their monopoly power over the local market.

Congress’ vision for universal service, which I share, is that it is an evolving set

of services based upon consumer preferences. In rural and urban areas alike, consumers increasingly prefer wireless service over wireline service for their communications needs. The FCC and state commissions have recognized this trend and

have concluded that the public interest is served by designating wireless carriers

73

as eligible for universal service support. So, instead of talking about competition

brought about by the competitive local exchange carriers (‘‘CLECs’’), we find ourselves here today talking about one of the bigger successes of the 1996 Act and that

is universal service and the fact that rural consumers are, for the first time, beginning to experience the benefits of a competitive local telecommunications market.

In this testimony, I explain that: (i) wireless communications serves the needs of

rural consumers; (ii) a competitive universal service system allows rural consumers

to realize the benefits of a competitive market; and (iii) Congress should continue

its oversight of the emerging competitive universal service market to ensure that

rural consumers remain the primary beneficiary of efforts to reform the system.

WIRELESS SERVES THE NEEDS OF RURAL CONSUMERS

Western Wireless provides cellular telephone service in 19 western states, including on more than 85 Indian reservations and American Indian communities. The

Company is the second largest wireless carrier in the country based upon geography

served, covering approximately 25 percent of the continental U.S. with an average

population density of approximately eleven people per square mile. Western Wireless serves many areas that do not have access to basic telephone service, much less

advanced telecommunications services.

Western Wireless has a long history of providing service to unserved and underserved consumers. In 1994, through a unique arrangement with the Nevada Public

Utilities Commission and the incumbent local exchange carrier, Western Wireless

began providing wireless local loop service to small businesses and residential consumers in a remote area of Nevada that did not have access to wireline local telephone service. In 1999, Western Wireless began offering wireless local loop service

in Senator Dorgan’s hometown of Regent, a community of less than 300 people,

which was one of the first competitive local telephone service offerings in rural

America, resulting in the availability of new and innovative services to consumers

for the first time. In August 2000, Western Wireless took another step towards serving the telecommunications needs of consumers living in some of the more rural

areas of the U.S. by entering into a historic agreement called Tate Woglaka (Talking

Wind) with the Oglala Lakota Tribe on the Pine Ridge reservation, resulting in

many tribal members having access to basic telephone service, including emergency

9-1-1 service, for the first time. And more recently, Western Wireless embarked

upon an effort to more broadly bring the benefits of competition to the local telephone market in rural America. The centerpiece of this effort was the Company’s

petitions seeking designation as an Eligible Telecommunications Carrier (ETC) for

purposes of universal service support. Today, Western Wireless is an ETC for purposes of universal service support in 14 states, plus the Pine Ridge Indian reservation in South Dakota, and has emerged as the preeminent competitive universal

service provider in the United States.

A COMPETITIVE UNIVERSAL SERVICE SYSTEM

It has been a national policy since 1934 to make available to all Americans, regardless of the location of their residence, affordable telecommunications services.

In too many cases, rural areas have been effectively excluded from the benefits of

a competitive telecommunications market because incumbent local telephone companies have historically monopolized access to universal service support necessary to

provide affordable telecommunications services in these rural, high-cost areas. The

1996 Act changed all of that and now, through a competitive universal service system, rural consumers are beginning to realize the benefits of competition.

Many consumers are using mobile wireless service in lieu of wireline as their primary mode of communications. Wireless service has emerged as a fully robust competitor to traditional wireline telephone service. Survey results and other data reveal a strong willingness by a substantial number of consumers to substitute wireless service for wireline telephony. For example, a recent study by Ernst & Young

and PriMetrica Research Survey confirms the growing displacement of primary lines

by wireless service. The study surveyed 700 households and found that:

• Close to one-half of households would drop their wireline service for a family

share wireless plan with 600 shared base minutes offered at $50 per month.

• Roughly one-third of US households would drop their wireline service for a family

share wireless plan with 2000 shared base minutes offered at $130 per month.

• Not surprisingly, households that currently have wireless service expressed a

greater willingness to drop their wireline service than households that do not

have any wireless service.

Survey data focusing on consumers in rural areas shows similar results. Western

Wats, an independent consultant, completed a survey in February 2003 that proVerDate 11-MAY-2000 11:09 Dec 08, 2003 Jkt 000000 PO 00000 Frm 00077 Fmt 6633 Sfmt 6621 89965.TXT HCOM1 PsN: HCOM1
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vides what may be the best, most current insight into the needs and preferences

of rural consumers. The survey asked 1,000 rural residents within Western Wireless’ territory about their use of wireless phones. The survey found that of the rural

consumers who had wireless service:

• 50% stated that their wireless phone has become more important to them, while

their landline phone has become less important;

• 51% said that wireless service has replaced some or a large percentage of their

home landline service;

• 48% reported that wireless service has replaced 90% or more of their landline long

distance;

• Nearly 25% reported that they consider their wireless phone to be their primary

phone; and

• Approximately 65% reported that they have friends or family members whom they

contact primarily on their wireless phone.

These surveys confirm that wireless service is essential to a growing number of

Americans, many of whom are substituting wireless for wireline service. This fundamental change, which is occurring in rural areas, as well as in urban areas, reflects

the ‘‘will’’ of consumers, which must be recognized by government policies that are

competitively and technologically neutral. The universal service system as implemented by the FCC is a good example of a competitively and technologically neutral

policy that has enabled rural consumers to realize the benefits of competition envisioned by the 1996 Act.

Consumers will likely increasingly ‘‘cut the cord’’ implement services, like local

number portability and enhanced 9-1-1 services, that further blur the lines between

wireline and wireless service. To this end, Western Wireless is in the process of

sending bona fide requests for number portability to many of the wireline and wireless carriers within its markets.

Competition is the means by which rural consumers can obtain service reasonably

comparable to those services provided in urban areas. Over the last few years, as

competition has developed in the universal service market, it has become clear that

competition preserves and advances universal service by:

(1) Making service available in areas previously unserved by incumbent carriers. As

many state commissions know, there are numerous areas within rural states

where consumers do not have access to affordable landline service. On the Pine

Ridge Indian reservation, Western Wireless’ competitive universal service offering has made telephone service available to many tribal members for the first

time, resulting in dramatic increases in telephone penetration rates. In Reese

River Valley, Nevada, Western Wireless has provided telephone service for the

last 10 years to residents not served by the landline carrier. In Montana, Western Wireless serves many rural consumers that do not have access to landline

telephone service. All of these examples demonstrate how universal service is

advanced by competition.

(2) Providing new and innovative services that are reasonably comparable to those

services provided in urban areas. Western Wireless’ entry into the local telephone market has not only resulted in new and innovative services being available to rural consumers, but has also forced the incumbent carrier to offer better service. For example, in Regent, North Dakota, after Western Wireless entered the market and began offering new services previously unavailable, the

incumbent carrier responded by offering an expanded local calling area, lower

rates, and data services.

(3) Facilitating access to advanced services. Many rural areas do not have access to

advanced services and are unlikely to be served in the future by landline carriers due to wireline limitations. Competition provides the only hope to bridge

this ‘‘digital divide.’’ Recently, Western Wireless demonstrated the capabilities

of wireless service to bridge the digital divide in the small rural town of Terry,

Montana, where the Company deployed advanced high-speed digital technology

with the capability to offer data speeds of up to 140 Kbps.

a. The establishment of a competitive universal service market, and specifically

Western Wireless’ provision of universal service on the Pine Ridge Indian reservation, is also bridging the ‘‘digital divide’’ in rural America. In September

2003, Western Wireless introduced high-speed data services on the Pine Ridge

Indian reservation through the implementation of next generation digital

technology and the donation of 22 laptop computers capable of internet access

at speeds up to 140 Kbps. Western Wireless’ ability to provide advanced telecommunications services on the Pine Ridge Indian reservation and other rural

areas are dependent upon high-quality network facilities in rural areas,

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which, in turn, is largely dependent upon the availability of universal service

support.

State Commissions and the FCC agree that a competitive universal service system

benefits rural consumers. There is near unanimous agreement among policymakers

that the public interest is served by a competitive universal service system. Specifically:

• The Minnesota commission acknowledged that Congress and the Minnesota Legislature were ‘‘deeply committed to opening local markets to competition,’’ but

that it was responsible under Section 214(e)(2) to determine on a case-by-case

basis whether some rural telephone company areas could not sustain or benefit

from competition. The state commission first looked to whether Western Wireless’ designation would benefit consumers in rural Minnesota, and determined

that Western Wireless would bring reliability, high service quality, affordability,

customer choice and new and innovative services.

• The Kansas Commission stated that the clear and unmistakable public policy imperative from both the federal and state legislatures is that competition is a

goal, even in rural areas. Arguments were made that competition is not in the

public interest in any rural telephone company service area because it may

jeopardize universal service. However, the commission concluded that no

articulable facts had been presented to reach the broad conclusion that competition and universal service are never able to exist together in rural areas. The

Commission did not accept the assertion that designating additional ETCs in

rural areas will necessarily threaten universal service. The commission found

that the benefits of competition and customer choice should be available to Kansans living in non-rural areas and that general concerns and speculation are not

sufficient justification for adopting a policy that would result in benefits and

services that are available to other Kansans not also being available to rural

telephone customers. The Commission concluded that the rural telephone companies did not demonstrate any adverse impacts and that competition should

not be withheld from customers in rural areas.

• The Nebraska Commission concluded ‘‘the public interest requirement for designation of an ETC in rural areas is not meant as a protective barrier for rural telephone companies but rather as a method for ensuring that rural areas receive

the same benefits from competition as their urban neighbors.’’

• The South Dakota Commission found that Western Wireless’ provision of ‘‘universal service throughout the study areas will be beneficial to the public.’’

• The North Dakota Commission summed things up this way: ‘‘The Commission

finds that designating Western as an additional ETC in the study area of each

rural telephone company will advance universal service by bringing new telecommunications services to North Dakota consumers, by bringing competitive

choice for universal services to residential customers, by offering a highly reliable and top quality universal service offering, and by providing cost effective

means for customers in remote areas to acquire universal services.’’

• The Texas Public Utilities Commission said in 2000, when designating Western

Wireless as an ETC: ‘‘[T]he Commission is unwavering in its support of a simple

proposition: Rural Texans are not second class citizens and should not be deprived of competitive alternatives or access to new technologies.’’

CONGRESS SHOULD CONTINUE ITS OVERSIGHT OF THE EMERGING COMPETITIVE

UNIVERSAL SERVICE MARKET.

Congress and this Subcommittee in particular should continue its oversight over

the development of a competitive universal service market to ensure that rural consumers continue to be the primary beneficiary of universal service policies. To this

end, I suggest the following:

1. Create A Stable, Sustainable Universal Service Funding Mechanism By

Ensuring Adequate Funds Are Available To Preserve And Advance Universal Service. Until universal service evolves to a market-based solution for providing telephone service to rural America, any support provided to rural areas must

be distributed on an equitable, non-discriminatory basis to both incumbents and

competitive carriers. Federal legislation may be necessary to provide the FCC with

the authority to base universal service contributions upon a broad range of revenue

sources to ensure a stable, sustainable universal service funding mechanism. At the

same time, universal service support to carriers must be based upon the most efficient technology for providing service.

2. As Consumers’ Telecommunications Needs Evolve, The Universal Service Policy of the U.S. Needs To Reflect Consumers’ Increasing Reliance On

Wireless Services. The focus of any universal service policy should be the conVerDate 11-MAY-2000 11:09 Dec 08, 2003 Jkt 000000 PO 00000 Frm 00079 Fmt 6633 Sfmt 6621 89965.TXT HCOM1 PsN: HCOM1
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sumer. Wireless service has emerged as a fully robust competitor to wireline telephony, resulting in many rural customers ‘‘cutting the cord’’ and other consumers

using wireless as a substitute for wireline usage or additional lines. Competitive Eligible Telecommunications Carriers (‘‘CETCs’’), including wireless CETCs, use high

cost support to serve unserved and underserved areas, thereby ‘‘advancing’’ universal service.

3. Universal service policies must be competitively-neutral. It has been a

national policy since 1934 to make available to all Americans, regardless of the location of their residence, affordable telecommunications services. All too often, however, rural areas have been effectively excluded from the benefits of a competitive

telecommunications market because incumbent local telephone companies have historically monopolized access to universal service support necessary to provide affordable telecommunications services in these rural, high-cost areas. Clearly, a competitive carrier that does not have access to universal service funds would not choose

to enter the local market and compete with incumbent carriers who do have access

to universal service support. I89CONCLUSION

The competitive universal service system is working: rural consumers are gaining

access to services previously reserved to their urban counterparts. Rural consumers

today have begun to realize the vision of the 1996 Act’s pro-competitive mandates,

including those that apply to the universal service market. Wireless service provides

the only real option for rural consumers to bridge the ‘‘geographic divide’’ and fully

participate in our global economy. A competitive universal service market is a success because of the progressive thinking of Congress and pro-competitive policies of

the FCC and state commissions. Congress should continue to oversee the development of universal service in the United States and take action, as necessary, to further develop the emerging competitive universal service market.

Mr. UPTON. Thank you all very much.

Again, I apologize that the votes interrupted it in the middle. At

this point, we are going to alternate between the Republican and

Democrat side asking questions of 5 minutes each. And we’ll move

in the order that members appeared and their seniority, knowing

full well that a couple of members have an extra 3 minutes for

those that deferred their opening statements.

I would like to focus my time on the eligible telecommunications

carrier, ETC, issue. Ms. Shank, in your testimony, you suggested

that there was a ‘‘Lax state in Federal Communications Commission consideration of what constitutes the public interest when

granting ETC status to competitors.’’ I would like to have a little

better picture of what that means and the implication of such lax

considerations. What are they for rural ILECs and universal service funding in general?

Ms. SHANK. In public interest, I feel that small telephone companies are regulated. We have demands to meet. We have quality of

service. And I think the public interest people want those things.

It doesn’t matter where somebody builds a new house or what.

We’re there to provide service to them.

What is happening is our wireless is coming into our area and

not that that is all bad, but the problem is you get two and three

of them coming in a small area like Bloomingdale Telephone Company if they’re all pulling on it. It does affect it very much.

Our public interest people, I think that they so need the network

that we set up years ago. And they have an interest in being able

to always know they can rely on telephone service. And if you look

back when we have bad things happen, like in New York and everything, where those systems of wireless and everything didn’t

work, you saw lines of people at pay stations. So I think public interest still has a desire to continue with a good strong network in

the United States.

77

Mr. UPTON. Commissioner Abernathy, how would you respond to

the suggestion that there is a lax state in FCC consideration of

what constitutes the public interest?

Ms. ABERNATHY. I guess I would respond by saying one of the

reasons that the FCC referred the ETC issue over to the joint

board was a recognition that we need to make this process better.

And there are some improvements that can be made.

Most of the parties who responded in response to the whole joint

board process on either side of this issue have said that it would

be very beneficial to have more concrete guidance from the FCC

about what it takes to be designated and guidelines for being designated as an ETC because at the end of the day, there has to be

a public interest analysis associated with it.

Some of the concerns have been that because funds continue to

run to both the wire line provider as well as the new ETC, that

there may be no incentive to really do a public interest analysis because no harm, no foul. You’re not going to lose any support.

So I think at the end of the day, this is one of the major areas

that we’re looking at as the joint board. And we can do better.

Mr. UPTON. What do you think with regard to Mr. Stanton’s comment that the wireless industry contributes 30 percent and, yet, receives only about 2 percent of the fund?

Ms. ABERNATHY. I think that that really goes to the question of

when you’re contributing to the fund, is there any obligation to

then receive support from the fund? And the answer pretty much

is no because the way it works is all telecom carriers contribute

and not all qualify for funding.

Now, again, at the end of the day, as we all know, it’s passed

through to consumers. And so what we’re really looking at is our

consumers contributing fairly and equitably. And are we distributing it in a way that there is no arbitrage between the various industries?

I do agree with Mr. Stanton that wireless has been of tremendous benefit to rural America, no question in my mind. So what we

are deliberating about is at what point does a company that is

lightly regulated and has done a fabulous job in rural America,

when they then come to the government and say, ‘‘And now I

would like to be able to receive some subsidy support,’’ what are

the bells and whistles? What are the obligations that go along with

receiving that subsidy?

As long as they’re out there providing service competitively with

their own capital investment, we pretty much do leave them alone,

but I think there are some obligations that necessarily go along

with being qualified to receive government subsidies.

Mr. UPTON. Ms. Shank, what are some of your obligations as the

carrier of last resort? How do those requirements compare to the

obligations of carriers serving the same areas? And how should the

fact that a rural ILEC is the carrier of a last resort factor into

whether a competitive carrier should be designated as an ETC in

the same area?

Ms. SHANK. No. 1, we’re regulated. We have to provide service

to whoever comes in there. We are regulated by billing standards.

We are regulated by the rates we charge and all of those things.

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And, as a last resort provider, there is never a question. When

somebody applies in our service, they are provided with service.

You have some of the other competitors coming in. In all areas,

it doesn’t always work either in our exchange. So people cannot depend on that. As a last resort, they depend on us to provide that

service. And we’re there under regulations to provide it and will

provide service to each and every customer living in our exchange.

Mr. UPTON. I see my time has expired. Mr. Gordon?

Mr. GORDON. Thank you.

Mrs. Greene, in Tennessee, you’re not only regulated by the FCC

but also by what we call the Tennessee Public Service Commission.

And so with that, there are implicit and explicit additional charges

for universal service. What are some of the issues we are concerned

with as we look at this about the relationship between the FCC

and various State universal service regulations?

Mrs. GREENE. You are correct that we are regulated by the Tennessee regulatory authority. And what we have right now is really

a situation where we have conflicting theoretical schemes that have

been layered on top of each other that have the potential to do a

lot of damage to the incumbent local exchange industry.

We have a social pricing program that is imposed by States, all

the States, like the Tennessee commission. And in that social pricing program, we have a history of pricing regulations that have

business subsidizing residential and urban subsidizing rural.

When you take that and you overlay it with a pro-competitive

plan that is enforced by the FCC that not only creates our wholesale business but makes us price that wholesale business at a deeply discounted rate you then have a series of interlocking implicit

subsidies that really don’t work anymore. If those implicit subsidies

were made explicit, the size of the universal service fund would

just really explode.

Mr. GORDON. So what do we need to do about that?

Mrs. GREENE. Well, first of all, I think we need to breathe life

into a couple of things that were required by the 1996 act that

have not yet been implemented.

The 1996 act had three basic goals. One was to create competition. And it has been very successful at that. In our service territory alone, in our nine States, we have on any given day between

350 and 385 competitors just in the wire line space. So it’s been

very successful in creating competition.

The other two premises of the act were, first of all, to make implicit subsidies explicit. The State public service commissions have

not stepped up to the plate either by creating State universal service funds or by allowing rates to rise to their natural level with

some sort of protections about comparably affordable services between urban and rural areas.

But, in addition to that, a final goal of the Telecommunications

Act was to encourage deregulation and to allow marketplace competition to supplant command and control regulation. That has not

happened at all. And, in fact, today what you have is both at the

State and Federal level more regulation than we have had at any

time in our history.

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Mr. GORDON. Ms. Abernathy, as we look at this, what are your

concerns in terms of the State issues versus the FCC and that

interrelation?

Ms. ABERNATHY. Actually, it’s something that we addressed as a

joint board when we were dealing with this whole non-rural support mechanism. And one of the major issues that came up there

was given that we generally look at Statewide average costs per

line for non-rural carriers and then we compare that to a Nationwide benchmark, how do you, nevertheless, ensure that support is

sufficient and that the rates are reasonably comparable?

What we have done historically is that we presume that if they’re

within 135 percent of the Nationwide average, that the States are

in a position to make sure that urban and rural rates are reasonably comparable because you spread the rates across your low-cost

customers and your high-cost customers. That’s been the interaction with the States.

What we did as a joint board is we then said, ‘‘Okay. In addition,

as another safety mechanism, to the extent that you still may not

have reasonably comparable rates for various reasons within a

State, then’’—this is the recommendation again from the joint

board—‘‘you can come back either to the FCC, to the Nationwide

USF, or to a State USF and ask for additional funding dollars providing the documentation about why you’re unable to keep your

rates at comparable levels for between urban and rural customers.’’

The reason this approach has been historically taken was the belief that while rural carriers aren’t able to absorb any of these high

costs themselves and so, therefore, they qualify based on their own

costs, that with the larger carriers, such as the incumbent BOCs,

that they are able to engage in this shifting of burdens between

high and low-cost customers.

Mr. GORDON. And then where that does leave us with a so-called

level playing field?

Ms. ABERNATHY. Well, where that leaves us is at the end of the

day, customers are fine under the current approach. The real question is, is it unfair to the carriers, the larger carriers, who now face

competition for their lower-cost customers that traditionally have

been absorbing some of the costs of the higher-cost customers?

So now you’re really engaged in a debate about, is this the best

way to manage the USF? Is it fair to the carriers who are now facing competition? Can they continue to be able to balance off these

costs between high and low-cost customers?

Necessarily, if we change this method, you will drive up the size

of the fund explicitly because you won’t have large companies any

more that are doing this for you within their own customer base.

Mr. GORDON. Thank you, Mr. Chairman.

Mr. WHITFIELD. Mr. Terry is recognized for 5 minutes.

Mr. TERRY. Thank you. I appreciate that. I had a statement, but

I appreciate the effort.

With that, let me just start off by saying that this has been a

fairly decent hearing and I have appreciated listening. I think we

could have had more diverse opinions up here, but I will get into

that later. Certainly I think one of the issues that anyone listening

to the testimony here would take is just how complicated universal

service is and will become when we factor in new technologies.

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And just down on the far end at my left, it was an interesting

discussion between Western Wireless and Bloomingdale Telephone

Company. And one that is raging within my own State back home

is the role of wireless in universal service fund in rural areas. And

it really begs the question, and I think it forces us to have to go

back and say, ‘‘Hey, what is universal fund? What is the purpose

of it? How are we going to define it because times have changed?

Do we need to modernize it or is it simply going to be that every

residence for safety purposes should have one line into their

house?’’ It’s going to take a Herculean effort to modernize universal

service fund. And I’m certainly willing to participate in that. In

fact, I have mentioned to Chairman Upton on a couple of times

that I think we should put together a very diverse but controlled,

not controlled in the sense that we control the outcomes but certainly if you have a 40-member panel versus a 10-member panel,

you could probably get more accomplished with the smaller, but I

think we should put together a panel of diverse views and have discussions amongst those and really figure out new and unique ways

to do it.

It’s just been my year now that I dove into the universal service

fund. I see that there are a variety of different ways to fix this.

And I just think we need a total fix. I am just not very confident

that will ever come about.

I mean, even if we could put together an effort, I am just not

sure that with all the interests that have just been displayed here

today, that we are ever going to get there. So let me lay down the

second premise here.

We are all in it for our own. Okay? I am representing a State

that I feel is getting screwed right now, to put it bluntly. And that

is why I have been so emphatic regarding the high-cost non-rural

fund and its distribution.

It just baffles me when we have six counties in the State of Nebraska that rank as the poorest in the Nation, when we have counties like Cherry County that are larger than two States and have

800 people in it, in that county, that we can’t qualify for that fund.

And I see States that are listed here that are just as rural, the Dakotas, for example, that don’t share in this high-cost fund. And so

there seems to be something inherently wrong.

And since the FCC adopted this, Ms. Abernathy, you are going

to get some of my questions here. Now, just as a member of the

commissioners, are you aware of this discrepancy in distribution in

the high-cost non-rural fund?

For example, my State that pays into this, that’s a rural State

but doesn’t receive anything out of it. Is this something that the

FCC is aware of or you are aware of personally?

Ms. ABERNATHY. I’m personally well-aware of it, thanks to having spent some time with you and your staff. And I do appreciate

the discussions we have had because this is very complex.

What I had always focused on before this point was the USF

funds that flow to Nebraska and South Dakota and North Dakota,

Wyoming, Utah. And they’re net receiver States. So I had always

looked at, as a rural State, are you receiving the U.S. dollars? Are

you paying in but getting more than you pay in? And the answer

is yes, to the tune of around $8 million, sometimes $20 million.

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What I had never stepped back and said, ‘‘But what about the

non-rural carrier within that State? Are they able to continue to

balance rates between rural and urban without any USF support?’’

Again, historically what has been done is to say, ‘‘Larger carriers,

you do that balancing within the State. And then at the back end,

if you need more support, we give it to you.’’

But it has been an obligation placed on the larger carriers. So

all the rural carriers within your State, you know, they’re receiving

the payments. The non-rural, the large carrier, which would bequest, yes, they are expected to absorb some of this. And is that

methodology sustainable given competition?

Mr. TERRY. Let me ask the follow-up in there. Do you feel that

that methodology, the current methodology, is——

Mr. WHITFIELD. Mr. Terry, your time has expired, but——

Mr. TERRY. Will you yield me your time?

Mr. WHITFIELD. I’m sure when the chairman gets back, he may

do another round.

Mr. TERRY. I will do the second.

Mr. WHITFIELD. Mr. Markey is recognized for 5 minutes.

Mr. MARKEY. Thank you, Mr. Chairman.

Looking ahead, it is now clear to almost everyone that the current universal service policy’s days are numbered. The clamor for

additional funds keeps growing. Meanwhile, the traditional interstate revenue base for providing such funds continues to hemorrhage. That’s because so-called long distance service is increasingly

becoming conjoined with flat rate local and long distance packages

for both wireless and wire line service. In addition, there will be

an inevitable and in my view rapidly accelerating migration from

circuit switch telecommunications services to nontraditional internet protocol-based telecommunications services.

So, Ms. Greene, you are from BellSouth. Are you any relation to

Judge Harold Greene, who broke up the Bell system?

Mrs. GREENE. Actually, I got hired right after the breakup of the

Bell system, and I had a lot of people at BellSouth ask me that.

They really weren’t very nice to me until I answered it. But no, sir,

I am not.

Mr. MARKEY. You claim no relationship? I didn’t think so.

Do you believe, Ms. Greene, given the sweeping nature of the

change in the marketplace that the FCC and the States should

nickel and dime some minor adjustments to current formulas for

collecting universal service and continue to monitor IP telephony

and other issues or do we need a more comprehensive revamping

of how such fees are collected and distributed?

Mrs. GREENE. Yes, sir. I think we need a comprehensive overview of the fund. We need a comprehensive view of who contributes. And we also need to look at the distribution of the fund. So

no, I don’t believe nickel and diming is correct. We do need a comprehensive overview.

Mr. MARKEY. Mr. Lubin, could you give me your quick view on

that?

Mr. LUBIN. Yes. I have a tremendous sense of urgency. I think

the universal service mechanism is broken. I think the assessment

rate today of 9.5 next year will exceed 10 percent. I think it’s only

going to get worse. And I urge——

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Mr. MARKEY. Comprehensive?

Mr. LUBIN. Comprehensive.

Mr. MARKEY. A re-looking of the whole system?

Mr. LUBIN. Correct.

Mr. MARKEY. Okay. Thank you. Thank you both for your questions.

Let me yield the balance of my time to the gentleman from

Michigan, Mr. Stupak, which he can use in addition to his own

time.

Mr. STUPAK. I appreciate the gentleman yielding.

Commissioner Abernathy, I understand that the commission is

completing its review of the support mechanism for non-rural carriers. As you know, representative Terry and I have H.R. 1582.

Will the commission in its review of this fund be providing comment on our legislation as well?

Ms. ABERNATHY. At this point, I haven’t seen a draft item from

the bureau. As far as I know, there was nothing in the record comparing the legislation. So to the best of my knowledge, we will not,

but I will certainly give you better information as we get more information from the bureau.

Mr. STUPAK. Okay. In your testimony, you were talking a little

bit about intrastate. What is the reason that intrastate revenues

were not included in the contribution methodology? And it would

seem to me that there is not a strong objection among the stakeholders regarding including intrastate revenues. Won’t that at least

provide some measure of relief?

Ms. ABERNATHY. Is the question, would it help us if we are able

to effect both interstate and intrastate?

Mr. STUPAK. Yes.

Ms. ABERNATHY. Absolutely. It makes a huge difference for a couple of reasons.

Mr. STUPAK. Why wasn’t it included initially, then?

Ms. ABERNATHY. By Congress?

Mr. STUPAK. By Congress.

Ms. ABERNATHY. Well, I don’t know, but I think there was some

belief——

Mr. STUPAK. There was——

Ms. ABERNATHY. [continuing] originally that we could.

Mr. STUPAK. Yes.

Ms. ABERNATHY. And then the case went up on appeal and the

court said we couldn’t. So it may very well be that Congress

thought that we were able to assess.

Mr. STUPAK. Okay. Mr. Lubin, yesterday several organizations

put out an ad in the Washington Post—I think they were AARP,

Rainbow Push, National Grange—urging the FCC to maintain a

revenue based universal service funding system. They also sharply

criticized a connections-based system, such as the one that you

have proposed, claiming that it will unfairly burden low-income

customers. Could you respond to that comment or criticism?

Mr. LUBIN. Yes. From our point of view, first of all, we supported

the telephone number approach, which is similar to a connectionbased approach. Our belief is that absolutely does not harm lowincome individuals. In fact, what we suggest the commission might

83

consider is to exempt people who are on lifeline programs. So people who are on life line programs would not pay the dollar.

But I would like to go even one step further. Every time we have

looked at the data, people who are considered low-volume, which

was the other point that they raised in that article, that low-volume, there really is no correlation usage and people with ethnicity

or age or income. In fact, what you find are people who have low

usage follow the whole demographic spectrum. Conversely, people

who are low-income at various points in time could be high-usage

toll users.

So we think, actually, a connections-based or a numbers-based,

which we put forward, creates simplicity, stability. The customer

knows exactly what they are going to be paying every month.

Mr. STUPAK. I guess my time is up, Mr. Chairman. I will look

for my opportunity to ask questions later.

Mr. UPTON. Thank you.

Mr. Walden? And you get the extra bonus of 3 minutes.

Mr. WALDEN. The bonus points. Thank you, Mr. Chairman.

Let me go to Commissioner Abernathy. I am trying to get a better understanding of this high-cost rural area fund. The ‘‘high-cost

non-rural fund’’ I guess is the term.

I have seen this printout that shows contributions to USF by

State—I am sure you have seen it, too—and then payments from

the USF. I am just trying to figure out why this occurs the way

it does in this particular fund and then how this fund is related

to other funds that make other payments that you have alluded to.

For example, with all due respect to my friend from Mississippi, Mississippi gets $104 million and Alabama gets $43 million and

West Virginia gets $26 million. And then it’s a couple of million

and a bunch of zeros from there on.

Can you explain how we arrive at that and then, anybody on the

panel, too, if that is a fair distribution of funds because it seems

kind of odd——

Ms. ABERNATHY. Right.

Mr. WALDEN. [continuing] unless you’re from Mississippi or Alabama?

Ms. ABERNATHY. Which I am not. I will explain, and then I may

yield to my colleagues to help with this.

The way it is supposed to work is you look per State at the number of rural high-cost customers that are entitled to USF. You then

look at the amount of money you’re collecting from all of the customers within the State to support all USF programs. You then

back out all of the revenues that they receive and see what the

total amount is.

So, in theory, the way it should work is that the States that are

receiving the most funds are those that have the largest number

of high-cost rural carriers as——

Mr. WALDEN. And how is that defined? What is a high-cost rural

carrier?

Ms. ABERNATHY. High-cost rural carrier. It’s based on an average. You look at Nationwide averages. You calculate whose costs

are above and whose costs are below that benchmark. And that’s

how you define who are the high-cost companies. And then——

Mr. WALDEN. Is that on a company-wide basis?

84

Ms. ABERNATHY. For the rural carriers, it is based on their cost

models that are used to identify their costs. For the non-rural carriers, the non-rural carriers then end up receiving support depending upon the volume of high-cost customers they have versus the

volume of low-cost customers they have. And even if they have

numbers of high-cost customers, if the low-cost customers ultimately drive their overall costs down to within a Nationwide average, then they won’t get that much support.

But I think I may allow Billy Jack to step in or Bob Rowe.

Mr. GREGG. There are about 185 million land lines in the United

States. And we have rural carriers, which tend to be the smaller,

more rural carriers; and non-rural carriers, which are the larger

carriers, like the regional Bell holding companies.

Mr. WALDEN. But they may cover a rural area.

Mr. GREGG. Right, but the——

Mr. WALDEN. As well as an urban area?

Mr. GREGG. Right. And there are only 80 non-rural carriers in

the entire United States, but they serve 90 percent of all the access

lines. There are 1,358 rural study areas that serve only 10 percent

of the access lines.

The non-rural high-cost fund that you have been speaking of

amounts to $240 million a year. That’s only 7.2 percent of the entire high-cost fund. The lion’s share of the high-cost fund goes to

these 1,358 rural carriers, $2.5 billion each year. Eight hundred

million total goes to these 80 non-rural carriers. Two hundred forty

is the high-cost model. And that is the——

Mr. WALDEN. That’s the chart we’re looking at?

Mr. GREGG. Right. And it’s the distribution of that support. That

$240 million is as she stated. First, you calculate a National average cost of all of the non-rural carriers. And that’s about $22 per

line per month. Then you apply a benchmark. The benchmark that

has been used, heretofore, is 135 percent. That results in about a

$30 per line per month benchmark.

Any States, any non-rural States, that have costs over that

benchmark, the Federal fund will support 76 percent of that difference. So you have 8 States that have per line costs per month

above $30. The others are below. There are two that are very close,

Nebraska and South Dakota, to the benchmark.

Depending on what the FCC does with the Tenth Circuit remand

decision, which is due out next month, there may be more States

getting high-cost distribution or less. It just depends on what they

finally come up with.

Mr. ROWE. Mr. Chairman, representative, if I could weigh in,

too? Both your State and my State do receive significant support

in the fund targeted at the small programs. And your concern,

again, is to the large company program.

The FCC’s initial decision was appealed to the Tenth Circuit,

was remanded to the FCC. The court said, among other things,

that the commission failed to adequately define terms ‘‘reasonably

comparable’’ and ‘‘sufficient’’ and failed to explain how the particular mechanism was consistent with the statutory requirement

that urban, underline ‘‘urban,’’ and rural rates and services be reasonably comparable.

85

That decision was then referred by the FCC to the joint board.

Everyone worked on that in good faith and very diligently. I was

one of the dissenting commissioners and wrote at length that, in

my view, comparing rural and insular costs to National average

costs was not compliant with the statute.

Quoting the former economist for this committee, who went on

to serve on the FCC, we have to, as a first matter, follow the law.

That’s, of course, an unusual sentiment coming from an economist.

But in my view, despite good effort and some progress coming out

of the joint board recommendation, we have not yet followed the

law in that very basic way.

Depending on how you determine the urban average cost—and

there are a number of ways that were included in the record before

the joint board—it might be necessary for one of the large carriers

to have average costs of 164 percent of an urban average up to,

using a rural utility service study from several years ago, 233 percent of the urban average before they would be eligible for support

under the large company program.

As Mr. Gregg pointed out, the large company program represents

a very small portion of the overall universal service fund, also represents a very small portion even of the high-cost fund. So this is

a critical problem.

If I could, I would add that this has been perceived as a quest

issue. I don’t consider it a quest issue, Rather, I would say, first

of all, it’s a question about providing sufficient support for networks that serve all customers.

Second, I think it’s of potential concern to competitive providers,

who follow the advice of another good economist, Willie Sutton, and

go where the money is.

Mr. WALDEN. I have got 4 seconds left. Let me just try and find

out an answer. Do you think, then, that this is a fair distribution

of this $200 million or is it inequitable that the basis of the $200

million goes to just a handful of States, including Montana?

Mr. ROWE. Mr. Chairman, representative, in my view, no for the

reasons that I stated in my dissent.

Mr. WALDEN. All right. Ms. Abernathy?

Ms. ABERNATHY. In my view, again, so long as rates are affordable and reasonably comparable across States, then I think it is

fair. And we have managed to make sure that happens through the

support mechanism safeguards we have in place.

Mr. WALDEN. All right. Thank you very much.

Mr. UPTON. Thank you.

Next we will go to the chairman of the full committee, the chairman from Louisiana, Mr. Tauzin.

Chairman TAUZIN. Thank you, Mr. Chairman. And thanks for

conducting this hearing.

To start with, I wasn’t here for the opening statements. And I

missed a lot of the questions. I apologize, but we were working on

a Medicare conference. So excuse me.

I would like to take us back a bit. I mean, universal service fund

was based upon a rather simple notion, was it not? Was it not

based upon the notion that we wanted everybody in the country to

be connected so that by homogenizing rates somewhat in the country, we could make it affordable for sparsely populated parts of

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America that should also be part of the telephone networks? So my

phone became more valuable because more Americans were connected to it. So we all benefited in a sense.

I mean, that was a simple notion, was it not? It wasn’t an attempt by government to, if you will, socialize telephones as an economic entity. It was a design to make sure everybody had a phone.

Therefore, all of our phones were valuable to us and the whole economic network by which our country communicated would be more

valuable as a result. Wasn’t that basically it, anyone? I see no disagreement.

Mr. GREGG. Absolutely. The problem now is, how do we transition that system that was borne in a monopoly environment into

a newly competitive——

Chairman TAUZIN. It’s more complex than that. I mean, it has

really become a Rube Goldberg kind of structure where all of you

have been discussing for some time now—I have read a lot of statements on the background of this. All of you have been discussing

who is paying and who is paying into the system and who gets

money out of it, who should be paying it, and who should be receiving money, and how they get in one State region or another, and

where the long lines ought to pay more than the ILECs.

I mean, it has really gotten to be something that the average

American would find extraordinarily difficult to follow. From the

simple notion that we started out with that we were homogenizing

rates in America so that everybody could afford a phone, we have

gone way, way beyond that simple notion now. And it has gotten

to such a complex, difficult bureaucratic mess that we are literally

I think at some point going to have to re-simplify the system.

Is that basically correct or do you want to make it more complex?

If we are re-simplifying the system and we are facing the fact that

American communication, world communication is changing, people

are going to be making telephone calls on different systems other

than the telephone. They’re going to be making telephone calls on

the internet, making telephone calls on wireless systems and satellite systems that were never designed as telephone systems. They

were data systems or they were video systems. They’ve suddenly

become all amalgamated in broadband distributions, what have

you. But they are outside of this system of support, aren’t they,

today?

So you have got cable companies and other companies that are

going to be distributing video signals. They could be your utility

company, could be your wonderful utility company that you depend

upon for electricity and sometimes leaves you in the dark. They

will be supplying you now with telephone service and even video

signals with it so you can see who you’re talking to. And that’s

going to be both wonderful and frightening simultaneously.

So all of that is going to change, but they are outside the support

system today, are they not? And so we face a situation where the

simple notion of homogenizing rates so everybody can have a phone

has now become a system where more and more of the folks who

put into that system are going to be delivering telephone service

without being part of it; and, second, where the amount of money

available to make sure everybody has a phone is diminishing while

demand grows for money under the system.

87

So it’s sort of like Social Security. I mean, when we started out

with Social Security, there were 15 people working for every person

collecting Social Security. We’re down to—what is it, folks? Aren’t

we down to about two, two and a half people, I think, less than

three now? We’re working to support every person retired. And it’s

becoming a stressed system. And this system is becoming stressed

for that reason. Is that about right? Everybody is shaking their

heads.

So the question is, is it time for us to reform this system so it’s

simple again, No. 1? And does that mean that we have to make it

a simple proposition, anybody who is providing voice service by any

means has to be part of that system, so that everybody can benefit

from that system mutually the same way the universal service

fund was originally designed, or do we just scrap the system? Is it

outdated? Is it outmoded? Has it served its usefulness? What is

correct here? Which way do we go?

Mr. GREGG. I believe, Mr. Chairman, since all benefit, all should

contribute. It’s a very simple proposition.

Chairman TAUZIN. Anyone else?

Mr. ROWE. I believe, Mr. Chairman, on the contribution side, in

particular, both of the leading proposals, either a number-equivalent assessment or broadening and depending the revenue base,

are very much in the spirit of your suggestion that we simplify the

collection mechanism and, in simplifying it, reconcile how we collect support much better with how the market is working, how

services are being packaged, and how the network is evolving.

Chairman TAUZIN. Let me give you a warning. I appreciate anyone who wants to jump in at any time. Come on in. We had something called a property tax relief system in Louisiana. We had

property tax exemptions for people up to a certain limit. And then

the State paid the counties or the parishes for the amount of

money they lost to support that system.

And parishes started working out gimmicks to cheat on it. The

court finally threw it all out. It got too complex. It got unfair. People were benefiting unequally under it. And our Constitution generally says, particularly when it comes to taxes and government,

that we sort of have got to treat people equally and fairly. And

when some people start benefiting and other people skip out, free

from their obligation, sooner or later, a court is going to step in and

throw it all out.

Are we in danger of that with the universal service fund at some

point?

Ms. ABERNATHY. I think we have a real opportunity to simplify

the collection mechanism here and figure out a better way to collect

the revenues. The biggest challenge, the one you recognized, is,

how do we distribute it and to whom do we distributed it and who

is entitled to it?

Chairman TAUZIN. Well, there is one other thing you have got to

think about that we have to think about because it has been raised

by this committee. Mr. Chairman, I know my time has expired, and

I will just lay it on the table for everybody to think about.

The old notion was everybody should have a telephone. Is the

new notion that everybody should have more than just a telephone?

Is the new notion that we want to make sure that everybody in

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rural America has the same advantage in the new communication

structures we’re building in this country as anyone who lives in an

urban area? Are we going to have ‘‘haves’’ and ‘‘have nots’’ in the

new broadband world, in effect? Do we use the universal service

fund to make sure that doesn’t happen?

I will yield back, but, Mr. Chairman, maybe somebody wants to

comment.

Mr. GREGG. The act mandates that all customers in all parts of

the Nation, including high-cost areas, have comparable services, including advance services, at comparable prices. But our whole task

is to make sure that we promote access and not excess, that we

don’t go out and support four or five lines per home when, really,

what we are trying to do is have one line to each home and an affordable line here.

The rest of it should be up to the individual or individual State

if they want to go beyond that. But the Federal universal service

fund should establish a baseline for everybody.

Mr. POST. Two observations. First, I agree with a lot of the

thought process that you articulated in terms of learning from the

last 6 years. And I would hope that we would learn such that we

would define a mechanism that does not distort the marketplace,

that minimizes leakage in the future so that we don’t come back

in two or 3 years and find we picked a method that, in fact, allows

leakage.

I would also hope we would find a solution that is predictable for

customers, customer-friendly. And once we identify what that solution is, we then ask your second question. And your second question is, what should be funded? For example, do I want to have

wireless infrastructure in rural America comparable to what I have

in urban America? That is a question which, unfortunately, gets

confused today by granting ETC status, which is supposed to be

head-to-head competition. But it’s really not head-to-head competition.

If it is, you look at that question versus if what they’re going to

do is upgrade the infrastructure and give two and three and four

connections to a customer’s household, I’m not making a decision

whether that is good or bad. What I am saying, pick a rational

mechanism and then ask the question, what do I want it to fund?

And then the next question you should be asking is, how much

is it going to cost? And is that what I want to see this new line

item to be on everyone’s bill? And, all of a sudden, you would have

a very rational, coherent way of looking at the problem.

Mr. STANTON. Mr. Chairman, I would like to just add. I think

that you are absolutely right. The system needs to be simplified.

What I would, respectfully, disagree with is that the system is universal service.

Our industry, the wireless industry, is about 20 years old, almost

20 years old. And we generate as an industry now more revenues

than the local exchange business does. Our industry now contributes about 30 percent of the monies to the fund and only takes

about 2 percent out. But the bigger issue is not universal service.

It is the continuation of rate of return regulation of carriers, including the local exchange carriers when they have competition.

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Between Judge Green and the Telecom Act, if we fundamentally

change the system so that competition can replace regulation

where competition exists, universal service is a small subset of the

total. Monies are paid in access charges that are a part of the total.

Rate of return regulation is a part of the total. Using the most economic technology with which to provide service to people who can’t

otherwise get telephone service, which I believe wireless is, is a

part of the solution.

But you can’t just take universal service in isolation. I think we

have suggested to the joint board and the FCC and would suggest

to the Congress that there is a bigger picture that needs to get simplified. And in the end, competition replaces the need for regulation.

Mr. UPTON. Thank you. The gentleman’s time has expired. I

would recognize the gentleman from Michigan, Mr. Stupak, for 5

minutes.

Mr. STUPAK. Thank you, Mr. Chairman.

Let me follow up on what the chairman was asking, but let me

ask it this way. Ms. Greene, you don’t seem to be a fan of Representative Terry’s and my bill in looking at your testimony and

some of your statements here today. Let me ask you this question,

though. Since places like—what was it?—Mississippi and West Virginia and some of these others are getting so much money out of

that universal service fund, what service are they being provided,

the simple telephone or with the money that is coming out of the

universal service fund for Mississippi, $103 million last year, do

they have all kinds of other services being added to the rural customers in Mississippi?

Mrs. GREENE. Well, the non-rural fund—this kind of goes back

to the conversation that we were having earlier. The non-rural

fund is a very small part of the universal service overall compensation flow.

Mr. STUPAK. Granted, but they did still get $103 million out of

it last year.

Mrs. GREENE. Right.

Mr. STUPAK. So are they getting just a simple telephone, as the

chairman asked, or are they getting voice, data, and all the other

services with it that are being funded by the rest of the Nation?

Mrs. GREENE. What they are getting is a stipend that offsets the

high cost of providing service in Mississippi.

Mr. STUPAK. Understood.

Mrs. GREENE. And that is not a function of specific service that

is provided. We do provide advance services to good parts of Mississippi.

Mr. STUPAK. But the services, you’re getting this $103 million out

of the fund. And with that, you are able to provide more than just

a simple telephone but other services, too, where Nebraska doesn’t

get it because they won’t get any money out of the fund or northern

Michigan won’t receive those added services because they don’t

have any money out of the fund?

Mrs. GREENE. Well, Nebraska does get about $33 million out of

high-cost universal service funds. They don’t get money out of the

non-rural fund.

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Mr. STUPAK. They don’t get any money out of the high-cost nonrural fund.

Mrs. GREENE. Right. And in large part of why Mississippi and

Alabama get the amounts of money that they do——

Mr. STUPAK. I understand all of that. I understand all of that.

What I am trying to ask you——

Mrs. GREENE. I thought your question indicated that maybe you

didn’t understand, that it was a function that we serve 90 percent

of the States,——

Mr. STUPAK. I understand it.

Mrs. GREENE. [continuing] like Qwest, which serves only a small

portion of this.

Mr. STUPAK. This fund has only been around since we did the

Telecommunications Act of 1996. Therefore, I would think if you

are going to spend $103 million last year and I’m sure other years

close to that more money just in Mississippi, not only would you

be putting in telephone lines, but it would think you would also be

putting in the services that a lot of us don’t have in rural areas,

like the broadband, like the data, like the voice, ‘‘Yes’’ or ‘‘No’’?

Mrs. GREENE. Yes, we are, but you’re really kind of confusing the

way that the fund works and what eligibility for the fund is attributable to.

Mr. STUPAK. Here’s the part I’m not confused on. The part I’m not confused on, if I am getting $103 million out of a fund that all

the Nation kicks into but only about 7 or 8 States are allowed underneath the formula to take advantage of, not only are they being

provided the service that we all want them to have underneath

telecommunications, but they also have that distinct advantage of

receiving other services the rest of us, who are just as rural, but

because we may have a big city like Detroit, therefore, we are offset, we do not receive money underneath the high-cost non-rural

fund only.

Now, I agree there are other areas that they can apply for, but

the kicker for us and for some of us who feel that this is just simply wrong is not only do you take 2 States getting about 70 percent

of the money, but they are also, and rightly so, getting added services and benefits the rest of us do not have an opportunity to have

or the carriers working our areas don’t have access to the money

to put in the extra services. So we see two advantages: lack of

money and lack of upgrade of services that would benefit our areas

because of the money that is coming out for just a few States.

I am sure Mr. Gregg wants to say something.

Mr. GREGG. Yes. Just in terms of how that money is used, I can

give you the personal example of what we do in West Virginia. We

receive about $31 million from the non-rural high-cost fund. We

conduct an annual rigorous review of that money before it is received.

We use approximately $26 million of it to reduce rates for customers. We have some of the highest rates in the Nation. It’s an

average credit on each person’s bill in the State that’s served by

Verizon of $3 per month.

The FCC’s latest rate survey that just came out show that we

still have the second highest rates in the Nation, even after the

credit.

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Mr. STUPAK. I don’t disagree with that, but the part that I have

a problem with is not only the money part, but, look, there are nonrural carriers who serve rural customers in over 40 other States.

So those rural customers that are being served by a non-rural carrier, why shouldn’t they get a discount on their bill also from

money out of this fund?

I just think it’s a simple fairness issue and not only is it a fairness issue on reduction of rates, but now I understand it is also

fairness on the services that are being provided.

Chairman TAUZIN. Would my friend yield?

Mr. STUPAK. Sure. Go ahead.

Chairman TAUZIN. What is so crazy about this system is you

have got grandmas and grandpas on Social Security subsidizing

their children who are earning good money on their phone bills

today. Isn’t that correct?

I mean, it’s true. It depends where you live. You could be living

on a Social Security income, aged, and barely struggling to pay

your food and your drug bills. And, yet, the system requires you to

be subsidizing your children who are making a good living but living a different place in America. It’s a little nutty. There are inequities all over it like that as you begin to study it.

And that’s why, again, my friend is right. It’s full of those kind

of inequities. The more you look at it, the more you see them. And

the more you come to the conclusion we need to simplify this thing.

Thank you, sir.

Mr. UPTON. The gentleman’s time has expired.

The gentleman from Kentucky, Mr. Whitfield.

Mr. WHITFIELD. Thank you, Mr. Chairman. I want to thank the

panel for joining us today and for their patience. I know it has been

a long afternoon.

I want to congratulate Mrs. Greene for her—I guess you are coming to the end of your years as chairman of the USTA. And I’m

sure it’s been an exciting year for you.

I think the testimonies showed quite clearly today that there are

a lot of inequities in this system and that at least the appearance

is that most people think there need to be comprehensive reform.

I noticed, Ms. Greene, in your testimony, you indicated that

USTA believes that Federal funds should be used to support only

one eligible telecommunication carrier in each high-cost area. Is

that correct?

Mrs. GREENE. That’s right.

Mr. WHITFIELD. And other members of the panel, do you all have

any response to that or any views on that recommendation?

Mr. GREGG. I have made a variation on that proposal, which is

that on the truly high-cost areas, those above $20 per line per

month in terms of support, there would be a limitation between

$20 and $30 per line per month. Only one additional eligible carrier would be allowed and above $30 only one carrier at all.

This would encompass half of the study areas in the United

States served by rural carriers but only 1.7 percent of all the access

lines. It’s the truly small high-cost areas. That’s where we need to

restrict the amount of subsidy going. It doesn’t make any sense to

have multiple subsidized carriers there. Below $20 per line, I would

part ways with USTA.

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The section 214E of the act mandates that we have multiple

ETCs in areas served by non-rural carriers. Non-rural carriers receive high-cost support, too. The highest is Puerto Rico Telephone

Company that receives about $8 per line per month. So obviously

there is unlimited subsidy there. And I believe that allowing areas that receive less than $20 per

line per month, whether they be rural or non-rural, to have multiple ETCs would be reasonable and would not excessively increase

the fund like allowing multiple ETCs in these really high-cost

areas.

Mr. STANTON. I would respectfully disagree with the notion of

having a single carrier be designated. There is an underlying presumption that if you only designate one ETC, that you designate

the wire telephone company in that geography. In many cases, that

is, particularly as I said in my oral testimony, in areas below ten

people per square mile, which is the vast majority of the territory

that my company serves. You are excluding the more efficient provider of service, that wireless can provide service at a lower cost

in those areas. And, therefore, not only are you excluding them in,

for example, Commissioner Gregg’s proposal, but you are actually

punishing all of the system by requiring that you subsidize the less

efficient provider.

And I would argue that if you create arbitrary milestones that

say you only allow one if the cost per company is above a certain

level, that you create incentives for the telephone company to actually increase their costs to be above that level to preclude having

competition.

You, in effect, reward inefficiency associated with high cost. And

I’m an admitted capitalist. In my view, there is only one mechanism by which you can truly create the most efficient system. And

that is the introduction of competition. And having multiple carriers able to provide service on a level playing field in a market is

the way to create competition.

Mr. WHITFIELD. Mr. Lubin, were you going to make a comment?

Mr. LUBIN. Yes. The thing I want to highlight is I think we have

two issues that get mixed up. And I appreciate the question because I am going to try to use it to highlight the point.

One issue is, do I want to create head-to-head competition? And

that is a public policy question. You have to come to grips with an

answer. In those areas of the country where you want head-to-head

competition and you want wireless to compete with the incumbent

wired, make a decision if you want that. If you do, so be it.

The second question is, in those areas where you don’t want competition, Billy Jack comes up with a mechanism to do that. That’s

fine. Make a public policy decision that says, ‘‘In some geographic

areas, I don’t want to see competition.’’ But there is one more issue.

And that issue is, with wireless, let’s say you want head-to-head

competition. So you mark that box, ‘‘I want head-to-head competition.’’ But now the wireless company comes in and says, ‘‘I am

going to offer you four connections in a household’’; whereas, maybe

the wired house only has one.

If you had head-to-head competition, do you want to fund four

connections? Let’s hypothetically say the subsidy per line is $10.

Now you’re putting pressure on the fund. All I am highlighting to

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you is that is an explicit issue for public policy considerations because without considering it, you are going to expand the fund.

Mrs. GREENE. But let’s go back 1 second to the original purpose

of universal service. The original purpose of the universal service

was to provide a mechanism to encourage companies to invest in

a marketplace where market economics alone would not make it

worthwhile to invest.

And we had a concept called carrier of last resort that was born

out of that. And it goes along with the whole concept of universal

service. To have multiple carriers of last resort in a marketplace

where the economics of that marketplace don’t even support a single carrier is sort of a questionable activity. And that’s what the

USTA position is designed to reflect.

Mr. WHITFIELD. Mr. Chairman, if I may interrupt, I waived my

opening statement. And I thought——

Mr. UPTON. Oh, I’m sorry. You get an extra 3 minutes. So you’ve

still got——

Mr. GREGG. I just wanted to amend one thing that Mr. Lubin

said. The question is not whether we will have areas where there

is no competition. That is a policy decision that has already been

made by Congress. The whole issue is, are there areas where we

don’t want to have subsidized competition?

And as far as the issue raised by Mr. Stanton of there could be

an inefficient carrier in an area where you have limited ETCs, that

is up to each State. And States have the power to decertify ETCs

and to place some other carrier in there that they believe can do

a better job of providing universal service. It’s the State’s call.

Mr. WHITFIELD. Now, in the 1996 act, of course, as you all have

said, we expanded from ensuring rural services to also financing

choice of providers. And wireless is one of those providers now and

is doing a good job.

The question I would have is, do each of these providers have the

same public service obligation or is there a difference in that? And

if there is, should that have any input into who receives the benefit?

Mr. ROWE. Mr. Chairman, there are substantial differences.

Those differences are complex. This and the primary line discussion are areas where I am actually fairly confident that the joint

board is going to make some progress.

As to the service obligations, the question that we are currently

looking at is, should the competitive carriers be subjected to effectively the same obligations, either by the FCC or by the State commission, as are the incumbent carriers? Should the FCC set a floor,

allowing State commissions to exceed that floor? Is it possible to

develop an appropriate set of service quality expectations for wireless carriers specifically? I think all of those things are on the

table.

Generally State commissions do not regulate wireless carriers

but are allowed to regulate essentially service quality issues. Also,

as part of certifying competitive carriers, States may impose appropriate restrictions.

There is a lot more thought going into this than there was even

three or 4 years ago, when the first round of applications came in.

And we are all paying more attention to it.

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Mr. WHITFIELD. Ms. Greene?

Mrs. GREENE. One of the fundamental differences, of course,

being that wireless doesn’t serve the same serving territory that a

wire line does. It’s not as comprehensive a serving territory.

Mr. WHITFIELD. Ms. Abernathy?

Ms. ABERNATHY. I think the only thing I would add is that part

of what we are trying to do with this ETC proceeding in front of

the joint board is come to grips with the fact that the new competitors build out differently and provide service differently than the

incumbents.

But to the extent we want to encourage competition in rural

areas, somehow we have to reconcile how much subsidy support do

we give to a new provider without jeopardizing or risking basic

support for the incumbent for the customers?

Mr. POST. Just a couple of comments. The sole purpose of the

USF has been not to provide competition or defaults to competition

but to provide affordable local service rates to customers in rural

America or in high-cost areas. I think we have, I know the States

have, lost sight of that in the areas we operate. That seems to be

the only criterion for a carrier entering a market that it provides

additional competition. The real issue or the real focus or purpose

of the universal service fund is really forgotten in many cases.

Second, there has to be some kind of control here or obviously

universal service funding is going to collapse under its own weight.

There has to be some type of criteria developed that says this is

what is required for a company to qualify for universal service

funding because in some of our markets in rural America, we have

four and five wireless carriers in these markets.

If every one of them has funded it $20 or $30 a line, those markets, or more in some cases, you can see what happens. Where is

the funding coming from? How is the money going to be used? Obviously it is not in the public interest when that happens.

Mr. STANTON. If I may add from the one wireless perspective on

the panel, the taking on the responsibility of being a carrier of last

resort is a decision that a wired company made at some point in

time in its history, probably before any wireless companies existed

in many cases.

The presumption that they should continue to be that carrier of

last resort I take issue with. Our company, for example, is the carrier of last resort in the Antelope Valley in Nevada, which I spoke

of before. The alternative was that the local residents could pay

$100,000 to bring wires in. And that was how the telephone company, the wire telephone company, was going to make service

available to them.

The residents couldn’t afford that. We were willing to build service out into that community and take on, in effect, the carrier of

last resort responsibilities. And we are willing to take that on in

a number of cases.

I don’t represent all wireless companies. I can’t tell you all of

them would be willing to do that or how they would be willing to

do it. But we are willing as a company to participate in the process

fully, and we have taken on some responsibilities and are more

than happy to continue to do that. But I think what we ask is to

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be treated fairly, not like the new kid coming to the party gets all

of the burdens and none of the benefits.

Mr. WHITFIELD. Thank you, Mr. Chairman.

Mr. UPTON. The gentleman from Florida, Mr. Deutsch.

Mr. DEUTSCH. Thank you, Mr. Chairman.

Ms. Greene, could you take a moment to explain the concept of

negative dollar flow from the universal service fund and why

BellSouth cannot access the universal funds in Florida?

Mrs. GREENE. This goes back to the discussion that we had about

the non-rural carrier fund. We access only as a non-rural or large

company carrier.

One of the fundamental structures that governs non-rural is that

need is calculated as Statewide level. And so in Florida, we have

enough urban areas to offset the rural areas. And as a result of

that, we don’t qualify for taking funds in that area.

Mr. DEUTSCH. So even though there obviously are areas that are

both by definitional status rural and by logical status rural

throughout the State, I mean, you know Florida very well, as I

do——

Mrs. GREENE. Yes, sir.

Mr. DEUTSCH. [continuing] that none of those areas qualify for

any of the funding?

Mrs. GREENE. And that is a good point. BellSouth serves more

rural access lines than all of the independent companies in our

service territory put together. We take money from this very small

segment of the universal fund, the non-rural fund, only in two

States, even though we do serve rural access lines in our other

seven States.

Mr. DEUTSCH. Again, it just seems a little bit illogical. I mean,

is there any proposal that you could see the FCC changing to provide relief in this situation?

Mrs. GREENE. Well, I think that any time that we have a discussion—I am sitting here next to Mr. Gregg’s charts. Any time that

we have a discussion about rural universal service fund, I think we

need to have a comprehensive discussion about all the different

subsidy flows that go to offset the cost of rural universal service.

I do think that we need to have a comprehensive look at how to

redo this system.

Mr. DEUTSCH. In any specifics that you would suggest or we just

really need to go through the process of really looking at it in terms

of this anomaly that you are describing?

Mrs. GREENE. Yes. I think we need to go through the process of

looking at it. I think we need to simplify the multiple funds. I

think we need to, most importantly, broaden the base of payers.

Mr. DEUTSCH. Yes. Go ahead, Mr. Rowe.

Mr. ROWE. Mr. Chairman, as I have suggested earlier, the discussion about the large company fund is not necessarily a debate

between BellSouth, on one hand, and other carriers, on the other.

In my view, if you were to go back to what the law says, reasonable

comparability of rural and urban rates and services, and if you

were to deal seriously, very seriously, with the problems in the hybrid cost proxy model, upon which support is based, certainly carriers that currently receive money would receive a different amount

of money.

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But it would not necessarily be disadvantageous to BellSouth

overall. It would simply be better met with what we do than what

the law now requires.

Mr. DEUTSCH. Thank you.

Mr. Gregg?

Mr. GREGG. Yes. Just to follow up on what Ms. Greene said, the rural carriers in Florida receive about $79 million from the highcost fund. BellSouth, even though it serves rural areas, does not

because, as she said, their overall average cost is low because they

also serve urban areas.

Mr. DEUTSCH. Right.

Mr. GREGG. One of the things that we have to keep in mind

when we look at reforming any of this, the distribution or the size

of the fund, is to be mindful of what the chairman said. Everybody

in the United States has to pay for this. And if we end up doing

things that end up growing the fund exorbitantly, that is going to

have to be paid for. And we are already under pretty unrelenting

pressure.

I think that the joint board when they recommended what they

did in the Tenth Circuit remand was mindful of trying to keep the

fund under control but to provide relief in those areas where it was

truly needed. That was the supplemental rate request that Commissioner Abernathy spoke of.

If, even with all Federal support and all State support, you still

didn’t have comparable rates,—that is the real litmus test—they

can come back for additional support under that recommendation.

And we will see what the FCC does in October on that.

Mr. DEUTSCH. Right. I mean, I understand what you’re saying.

It just seems a little bit from the policy side if you’re treating customers—and most of my constituents or, in fact, maybe all of my

constituents are BellSouth customers or a very extraordinary high

percentage are BellSouth customers. They have this distinct in

terms of their own rates disadvantage.

I mean, I can articulate a policy reason why the other carriers

kept that advantage and BellSouth obviously has other advantages

over them, but it clearly makes my constituents pay more on average.

Do you want to give me the extra time or not the extra time?

Last question. And hopefully just Commissioner Abernathy can

give a short answer. The future of universal service is something

that we all need to focus on.

I am glad to be here today for that important discussion, but ultimately I feel that we need a decision out of the FCC soon, as we

all know that the current path is unsustainable, technology is

changing every day.

Could you speak to the FCC’s efforts to address the internal conflict between the telecommunications service and the information

services in terms of contribution methodology?

Ms. ABERNATHY. Yes. Thank you. We put out for comment the

question about, how do we handle this by statute? We can legally

decide that, even if a service is an information service, not a telecommunications service, that that entity could be obliged to contribute to the universal service fund. So the real question, then, is,

what do we do once we define what broadband services are? And

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all of those entities, if they are treated alike, will they be contributing to USF or will they not be contributing?

It’s an open question in front of the FCC. I can’t tell you how all

of us are going to vote. I have said publicly that it seems to me

that a fund of this size and this obligation, that you spread it

across as broad a base as possible so you have as small a hit as

possible on multiple providers.

But this additional issue goes to a proceeding that is ongoing

about what category of service will broadband fit into. And then

you ask, following that answer, what are the USF or other kinds

of obligations that may go along with it?

Mr. UPTON. Thank you.

Mr. Bass gets the advantage of the deferral, 8 minutes.

Mr. BASS. Thank you very much, Mr. Chairman. It’s an interesting hearing, very complex.

Telecommunication in a State like New Hampshire is really a

form of transportation. There are many different reasons why New

Hampshire is way down. In fact, it didn’t even make the top 50

States. We are 51 in terms of support of this universal fund. And

there are lots of reasons for that, some of which have been dealt

with in this discussion.

The New Hampshire Public Utilities Commission from the very

beginning has had a philosophy that telephone service must be

very low-cost. And today you can still get a telephone for less than

$10 a month. Now, the telephone providers have to juggle things

around a little bit, but ultimately they are required to do that.

Unfortunately, that may be part of the reason why New Hampshire is so low on that list because it may look in this formula like

it’s very urban because the utility PUC requires that the rates be

very low.

The other problem is that New Hampshire is not really a State—

and there are a lot of other States like this—where income and

wealth are fairly even across the States. We are a relatively

wealthy State, but there is significant disparity.

So in some parts of the State, you may have all kinds of services.

In other parts of the State, you have nothing but no subsidy on top

of all of that.

I guess my question is, should there be a different mechanism for

determining the allocation of high-cost support that is not based on

States’ boundaries but, rather, on even a single line or a single

service or a town or a community or a county because there are

counties in New Hampshire that are very poor and there are counties in New Hampshire that are amongst the richest in the Nation?

Does anybody in this panel have any thoughts about that concept?

Mr. GREGG. Yes. Section 152B of the act preserves the traditional

State roles and on top of the Federal roles. In fact, that was the

limiting factor that caused the Fifth Circuit to limit the ability of

the FCC to assess on all revenues, was that traditional province of

State rate-making and control over their intrastate revenues.

And that’s why I believe we should continue to look at equalizing

costs and trying to keep rates comparable among States from the

Federal viewpoint and then leaving it to the States to try to keep

rates comparable within their borders. It’s a partnership, a Federal

approach to comparable and affordable rates.

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Now, in terms of New Hampshire’s $10 rate, the support formula

is based not on rates, but on cost. And it looks at the cost in New

Hampshire compared to a Nationwide average cost. Now, that is

one of the issues.

If New Hampshire is not requiring their end users to contribute

close to what the cost of that service is, is it fair to ask other consumers in, say, inner-city Baltimore or in Denver or in Arizona to

contribute to their rates or their upkeep of their network through

having support there when their rates are so low?

That’s why we put in the supplementary rate review, so if there

are truly areas where in spite of Federal support, in spite of State

support, you still have exorbitantly high State rates, they can ask

for supplemental support. But if your rates are still down around

$10, it seems like there needs to be some additional contribution

from end users as well as, say, the State universal service fund before you ask other people in other States to contribute to helping.

Mr. BASS. Any other comments from anybody else?

Mr. ROWE. I think Mr. Gregg made the correct point in describing the difficulty doing a rate-to-rate comparison. When we have

looked at how retail rates are set, there are many important variables. The one I focus on, in particular, is the size of the local calling area.

My guess is the local calling area in your State is relatively

small. Even if it may be large geographically, you probably can’t

reach that many customers for your local rate, depreciation rates,

assignment of costs to the long distance services or local service, a

lot of variables in the rate component. So generally I think a costto-cost comparison makes more sense.

The two alternatives that have been focused on primarily are:

one, going right down to the smallest possible unit of making a

comparison, a central office typically, less of a concern for the

rural, the small, carriers because they typically don’t have as many

offices, less territory to average over. That can be an important factor for the Bell companies, in particular.

The other alternative, though, if you are going to stay with what

we are calling a State-to-State comparison—it’s really a telephone

company study area to study area comparison—is to be very serious, very rigorous about the statutory requirement of reasonable

comparability of rural and urban rates and services. And, again, I

think for the large companies, if we do a better job with that, the

results will also be better for everyone.

Mr. BASS. Mr. Terry’s bill provides for a 5 percent cap on highcost lines, high-cost funds. What about the concept of having a 5

percent cap for the entire universal service fund per State?

Mr. GREGG. There currently are caps on several of the mechanisms in the universal service fund. The biggest caps is the schools

and libraries. It’s capped at $2.25 billion each year and always has

been. That’s a hard cap. The high-cost loop portion of the high-cost

fund that goes to rural carriers has a cap on it. It grows each year

by a certain factor, but it is capped.

The concept of caps can work. However, I think that it is better

to if you are going to have a cap at least let it grow so that it can

move around as conditions change.

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As you heard in here today, there are conflicting demands on the

fund. On the one hand, people want the fund to be affordable. They

want the assessment rate to be low. That means it shouldn’t grow.

On the other hand, people want the fund to go out and support all

of the new whiz bang services that everybody wants. And that is

going to require more money.

Mr. BASS. The caps you talked about were not per State. They

were per fund.

Mr. GREGG. They were per fund, right.

Mr. BASS. I am talking about a 5 percent cap for State for the

universal.

Mr. GREGG. I think it might be arbitrary because what you

would do is States that have a very large need; for example, Wyoming or Mississippi, that has very large per-line needs, might not

get enough support to have comparable services.

Mr. BASS. Fair enough. Fair enough.

Yes, commissioner?

Ms. ABERNATHY. I think it would be very difficult to just in a

sense say, ‘‘You’re not entitled to any more money, regardless of

how high-cost your loop costs are, to build out to these rural areas.’’

But I think one other factor we have to continually bring ourselves back to is it’s not simply that urban and rural rates have

to be reasonably comparable. Rates have to be affordable, too.

What is affordable gets mixed into this debate at the same time

because what we ultimately decided at the joint board is while it

might be nice to have a $10, a $15, or even a $20 rate, that it is

okay for rates to go as high as around $30, I think we said. And

we viewed that as affordable because otherwise what you are really

doing is saying there is no limit on how much you would support.

It would be decided by the State about how low they wanted to

drive their rates.

Mr. BASS. Interesting point.

Thank you, Mr. Chairman.

Mr. UPTON. The gentleman from Maryland, Mr. Wynn, is recognized for 5 minutes.

Mr. WYNN. Thank you, Mr. Chairman. I apologize for not being

here earlier. I just have a couple of questions.

First, for Ms. Greene of BellSouth, I understand that you do represent rural and lower-income areas. And the question I have is

whether the FCC’s list of universal service providers should be expanded to include broadband services. I don’t know if this has been

covered earlier. And should we move away from a service-based approach and support networks?

Mrs. GREENE. Yes, I do agree that we should move away from

a service-based approach and support networks. Basically, the way

that this system is administered today, it’s on a service or a line

basis. And that has the effect basically of constraining the investment and making government decide, instead of consumers, what

investments in forward-looking technology should be. So I think

that it should go to a network basis.

Mr. WYNN. Now, what about the expansion regarding universal

service? Should it include broadband?

Mrs. GREENE. Again, I think that it should be a function of doing

the calculations on what is the cost of universal service. And then

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that money should be provided to the carrier. And the carrier

should make the decisions on network infrastructure, instead of

listing each specific service that should be required in universal

service.

Mr. WYNN. Thank you.

Mr. ROWE. Mr. Chairman, representative, could I follow up?

Mr. WYNN. Sure.

Mr. ROWE. When the joint board looked at this issue, we were

required to evaluate services under the act. I think your point is

right on target. I said earlier that all services basically ride over

the same network. And the best thing we can do is to support the

development of a robust network that is forwardly upgradable.

The cost, the incremental cost, of providing, for example, DSL

service over the wire line network is now negligible provided that

wire line network is built in a sufficiently robust fashion. It’s been

referred to as the no-barriers approach. It’s equally applicable to

wireless networks. So, again, I think a network focus, rather than

a service focus, is in many ways very helpful.

Mr. WYNN. Okay. Thank you.

Mr. Lubin, how would broadband services, such as those in large

companies with private networks, be assessed under your model for

universal service?

Mr. LUBIN. AT&T took no position in terms of the assessment of

DSL or cable modem services. And so the reason, quite candidly,

we went to a numbers-based mechanism is we thought it was an

effective way to broaden the base, actually under the existing statutory authority that the FCC has to go to numbers, which would

be a way to not focus on a revenue basis but, rather, start assessing connections for special access pipes, private line pipes. The fatter the pipe, the more you pay. And where you have a telephone

number, you assess the number. And you don’t worry about what

services are being carried over the connection or the number.

Mr. WYNN. But what would you anticipate would be the possible

costs on a per-line basis?

Mr. LUBIN. The number that we put in the record was 98 cents

per telephone number and per connection. The fatter the pipe, you

would pay more. We also in the record at the FCC suggested that

you might want to exempt people who are lifeline consumers, who

have a lifeline assistance program, such that they would not pay

the 98-cent fee. If you did that, then the fee would be approximately 99 cents or $1.

Mr. WYNN. Okay. Thank you.

Ms. Abernathy, one question. I get a sense—and maybe this was

covered earlier and, again, my apologies—that we are looking at redefining the definition of universal service, as opposed to how the

traditional telephone access for everyone to call police and fire and

people like that, to covering a broader range of service, internet access and things like that. Is that where you’re headed? Is that what

we’re talking about? Are we still back at the kind of traditional notion that we need to at least make sure everyone has access to

basic telephony?

Ms. ABERNATHY. That is not where the FCC’s proceedings are

currently headed. And, in fact, previously the joint board looked at

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this issue of, should we broaden the definition of support in services?

The joint board made a recommendation to the commission that

no, we should support the existing services that have traditionally

been supported. The FCC looked at that order and implemented

that recommendation in July of 2003.

So we’re not at this point exploring whether or not we should expand the list of supported services. Rather, we are looking at, at

least in the broadband context in one of the FCC’s proceedings,

should broadband providers be obligated to contribute to the USF

fund, like other providers, such as wire line and wireless and long

distance?

Mr. WYNN. Did you take a position on that?

Ms. ABERNATHY. On the joint board?

Mr. WYNN. No. On the question of whether broadband providers

ought to be included?

Ms. ABERNATHY. Not yet. It’s still pending in front of the FCC.

Mr. WYNN. You don’t want to give us a hint, do you?

Ms. ABERNATHY. I already gave a hint a little earlier, unfortunately, although——

Mr. WYNN. I’ll talk to you about it. I relinquish the balance of

my time. Thank you.

Mr. UPTON. Thank you.

The gentleman from Mississippi, Mr. Pickering, is recognized for

8 minutes as he deferred earlier.

Mr. PICKERING. I thank you, Mr. Chairman. I want to commend

you for having this hearing.

I don’t think there is anything in telecommunications more important or significant than the debate that we are beginning now

in the hearings. The universal service fund and the possibility of

reform is probably the most important policy question that we have

in telecommunications, either as we try to move in this Congress

or hopefully in the very near future. It is something that started

in the 1996 act and that you all have all captured very well with

the current state of both emerging technologies, emerging competition, and the changes that those have brought to the universal

service fund.

Mr. Gregg, you did a great job in saying where we have been and

where we are at present. The question for us is, where will we be

5 years from today? Where will we be 10 years from today? And

basically where will we be for the next generation? The decisions

that we make in a universal service fund reform could shape. And

the 1996 act has shaped dramatically, as you described, the services we have in rural areas, the deployment that we have, the advanced services, education, health care.

What I would like to ask, has anybody done any of the projections on where we are going to be in 5 years? In 1996, the universal service fund was $1.6, $1.8 billion. And today it’s approximately $6 billion. What is that fund going to be in 5 years? Mr.

Gregg?

Mr. GREGG. Most of the projections have gone out to about 2007.

They were usually in conjunction with the FCC’s contribution base

proposals. They were looking at, what would the contribution base

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be under different alternatives? What would the assessment rate

then be based on the expected fund size for that period?

Mr. PICKERING. What if we did nothing?

Mr. GREGG. The problem is that the projections that we had in

that case I think were before we started having a big up swing in

the number of eligible carriers for the high-cost fund. They projected a total fund of in excess of $7 billion, around $7.3 to $7.5

billion. However, if we continue to have a doubling of new ETCs

drawing on the high-cost fund each year, those may be low. For example, new wireless ETCs received only $500,000 in the

fund in 1999. And I’m glad, actually, Mr. Stanton, that wireless

carriers in all technologies are accepting the obligations of being eligible telecommunications carriers. However, we have to be mindful

of their overall impact on the fund. It’s gone from $500,000 to $20 million to $40 million, this year to $120 million. Next year we expect it to more than double because of all the ETC applications that are in the pipeline. So we

may be looking at a total fund probably closer to $8 or $9 billion

if there is no limitation such that I have described earlier, the limitation on single-line support, the limitation on the number of ETCs

in high-cost areas.

Mr. PICKERING. And would $7, $8, $9 billion be sufficient to sustain what we are currently doing with the universal service fund?

I guess the question is, if we have a consensus that the current

system is either inequitable, that’s one area of debate. I think

that’s very fair to Mississippi and Alabama and to our region. And

we want to protect that. But it’s a broader question. Not only is it

fair, but is it outdated? Is it inequitable? Does it actually hinder

deployment? Does it hinder and burden the companies that are trying to provide these services? Does it hinder competition? And

those are larger public policy questions. And so is the current system sustainable?

My sense is that everybody in the panel would say no. Just trying to get the points of consensus. Would everybody agree with the

one line limitation? Would there be a disagreement on the one line?

The principle of all who play pay, everybody pays in? Should there

be a principle of competitive neutrality, that we try to find ways

to be competitively neutral and technology-neutral as we try to reform the system?

This is an area that I think we’re coming to a place, one of those

rare political moments, where everyone agrees that the current system is not sustainable, that it serves no one as well as it should,

which gives us an opportunity possibly to get local, long, although

distances, now we have really reached a point where there is not

a distinction in distance in the service.

And we’re also having the bundling of services. So you don’t have

this distinction of you have no longer the segregated markets, but

now you have the commingled, bundled offerings of service. So you

no longer can really calculate based on the particular offering and

so as we try to find some new system of collection based on what

service. All of those things as we try to follow a principle of simplification, just like the tax reform, if you could simplify and broaden and increase participation, you can actually lower the cost to

each so it benefits everyone would actually increase and sustain

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the fund over a period of time. I think that is what we want to

achieve.

And I think that we are at that time where we could get rural,

non-rural, long, local, CLECs, wireless to a table to possibly see if

we could come up with a comprehensive approach to modernize

universal service so that it achieves the objectives.

And, Mr. Chairman, I look forward to working with the committee and the staff and with all the industry participants to start

that. And I think the sooner that we do that, the better. And I do

think we have some emerging principles that we could all at least

establish a framework of discussions and reform on.

I know the joint board is soon to make some decisions. That

would give us some clarification in major decisions. But Congress

really needs to act in this area to get the full benefit of what we

need to do.

I know that I am talking more than I am asking, but I have listened for a long time. I do appreciate all of your participation. Mr.

Chairman, again, this is a very important issue. And for my own

State of Mississippi and rural States like Mississippi, this is critical to the new deployment and making sure that we maintain the

services.

BellSouth has done a tremendous job in a State like mine and

across the Southeast. We have wireless companies that are doing

a great job of going in to rural areas. And competition is beginning

to development. So how do we get all of those at the table so we

can make something work? And that’s what we want to see happen?

To my friend from Nebraska, if Southern Mississippi meets Nebraska—you have to give me at least a 10-point spread—we will

set aside universal service fund debates in the next Congress and

find a fair and equitable solution for the Cornhuskers.

Mr. TERRY. I kind of like the catfish and steaks one that we discussed earlier.

Mr. UPTON. Have you talked to Coach Osborne?

Mr. PICKERING. He is going to give me 14 points. Mr. Terry I am

having a hard time getting ten points.

I would say, in all seriousness, I don’t know if regional approaches are going to work. So I would like to sit down with Nebraska and Michigan, not in a way to look at which regions get

more. We would argue that Michigan and Nebraska give more than

Mississippi in energy assistance. I think it would be counterproductive and wouldn’t be what will eventually pass, but if we

look in a broad, comprehensive way, I do think that we can modernize it, simplify it, and increase participation and sustain the

fund for the long term.

With that, I yield back. Thank you, Mr. Chairman.

Mr. UPTON. I would just remind the gentleman from Mississippi

that I think Southern Mississippi played the Wolverines in a ball

game a couple of years ago. And I could give you 40 points and still

win.

Mr. PICKERING. I think it was 35 points.

Mr. UPTON. The gentleman from Nebraska.

Mr. TERRY. Yes. Times have changed over the last few years, especially for us Huskers.

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In listening to Chip’s discussion here, frankly, we were on the

same page until he said that Mississippi should be able to keep all

of that money. That’s the only part that I disagreed with.

Mr. Chairman, maybe I should be so bold to suggest that Chip

and I even start a task force on your behalf with your guidance as

chairman to start looking into this.

I appreciate all the senators that have gone on the Stupak-Terry

or Terry-Stupak bill, but I would really like to see the House drive

the discussions on universal service reform.

Again, I want to come back to the point that I still have——

Mr. UPTON. If the gentleman would yield just for 1 second?

Mr. TERRY. Yes.

Mr. UPTON. I would note that today, despite a lot of things going

on, a health conference on prescription drugs and a host of other

things, we have had 22 members of this subcommittee come at

some point——

Mr. TERRY. It shows the importance.

Mr. UPTON. [continuing] to discuss. And they have been very engaged and involved and concerned about where we are going.

Clearly, it is, as I said in my opening statement, the engine is broken, sort of like the Fram oil filter commercial, the bottom line

being if not now, when are you going to pay, something like that,

right, pay me now, pay me later, pay me now or pay me later.

So we are going to continue this good dialog listening. I look forward to your input. We have had a good amount of your interest

for sure. And it’s one of the reasons why we’re having the hearing

today.

Mr. TERRY. And I greatly appreciate that you are having this

hearing today.

In that respect, I would like to take it from listening to action

at some point in time. But I worry, as we have seen here just in

the series of questions that Chip asked the panel, out of the nine

people up there to each panel, we saw people nodding their heads

‘‘Yes’’ and ‘‘No’’ to the same questions.

And I think that shows the difficulty that it’s going to be to simplify the system in the long run. That certainly would be my goal

as long as rural areas are treated uniformly and fairly, which

brings me back to the question that I couldn’t get to, Chairman

Abernathy. And that’s you recognize that there are these types of

discrepancies up here, just the States that I think are inherently

rural, although may have some metropolitan area, that receive

nothing from the fund, Arizona, Arkansas. No one of us would

think of Arkansas as just highly cosmopolitan and metropolitan.

They’ve got a significant rural population but receive nothing.

Georgia, Iowa, Kansas, Kentucky, Minnesota. I’ve been to northern

Minnesota, not northern Michigan, but there is nothing but rural

population up there.

So my question is just, in a personal sense, do you think that’s

fair that eight States under this fund share the entire pool where

States that do have significant rural populations that are serviced

by the Bell receive nothing?

Ms. ABERNATHY. I guess, again, I would go back to say, are these

States receiving universal service support? They are. Now, the nonVerDate 11-MAY-2000 11:09 Dec 08, 2003 Jkt 000000 PO 00000 Frm 00108 Fmt 6633 Sfmt 6602 89965.TXT HCOM1 PsN: HCOM1
105

rural companies are not. You’re absolutely right. The non-rural

companies are not. So I just want to distinguish between——

Mr. TERRY. Sure.

Ms. ABERNATHY. [continuing] do the States go, do they not?

Again, I can only tell you historically why this has existed and

is it fair. I guess when I look at the USF system, there is very little

about it that I think any one person would say, ‘‘Oh, well, this

seems eminently fair.’’

Most of it seems unusual or somewhat convoluted. I know why

we are where we are with the non-rural. Again, the idea was, let’s

funnel most of the money to the rural carriers. And these big companies that were the spinoffs from AT&T, they can move the

money around as long as they have enough low-cost customers.

This premise was based on a pre-competitive environment. And

so now the question is, can that model survive in a world where

everyone is facing competition? And is this fair to the customer

base that they serve? I think it is a question we are going to have

to answer.

I look, for example, at the District of Columbia. You know, this

is not a needs-based system. So there is no money flowing into the

District of Columbia. Are there people who live in the District who

are supporting universal service who don’t make a lot of money?

Yes, there are. So, you know, we have a lot of challenges in front

of them.

And I don’t dispute that the inherent equities of the system are

questionable in some respects. What we are trying to do through

the joint board efforts and through meeting with all of you is to

slowly peel back at these issues and try and rationalize them in as

best a way we can given the technology of the day and the competitive market of today.

Mr. TERRY. Thank you.

My time is up unless you want to yield me some more.

Mr. UPTON. You can ask another question if you’d like.

Mr. TERRY. No. Go ahead.

Mr. UPTON. Well, this concludes the hearing for today. I appreciate your time. I know Mr. Rowe had to leave early to catch a

plane. Actually, he had to leave on time to catch a plane. But we

appreciate your testimony and the members’ participation. We look

forward to seeing you in the days ahead. Thank you.

[Whereupon, at 5 p.m., the hearing was adjourned.]

[Additional material submitted for the record follows:]

PREPARED STATEMENT OF F.J. POLLAK, PRESIDENT AND CEO, TRACFONE WIRELESS,

INC.

I am F.J. Pollak. I am President and CEO of TracFone Wireless, Inc. TracFone

is a wireless telecommunications company headquartered at Miami, Florida. It differs from other wireless providers in that it offers primarily prepaid services. Consumers purchase wireless phones (which we subsidize) from retail outlets (including,

for example, WalMart, K-Mart and others) and usage cards which provide quantities

of wireless service usage that vary depending on the price of the card selected. Unlike traditional wireless providers, TracFone customers purchase service on a ‘‘payas-you-go’’ basis. There are no credit checks; no minimum volume or term commitments; no early termination fees. Many of TracFone’s customers are lower volume,

often lower income, users for whom wireless service would otherwise be either unavailable or at least impractical. TracFone service also is popular with families who

want wireless phones for their own or their children’s safety but who do not need

and possibly cannot afford a traditional service plan. Currently, TracFone has more

106

than 2.6 million customers and its business continues to grow. TracFone service is

available throughout the United States, including offshore locations.

TracFone is profoundly concerned about certain proposals before the Federal Communications Commission (FCC) to change the manner in which telecommunications

service providers contribute to the Universal Service Fund. TracFone believes that

the fairest, most competitively neutral and most appropriate way to assess universal

service contributions is based on each service provider’s revenues. TracFone believes

that cries by certain providers that interstate revenues are decreasing are unsupported and are factually inaccurate. While it may be true that certain carriers’ revenues are decreasing, total interstate revenues are increasing as consumers migrate

their services to those of wireless providers, Voice over the Internet Protocol (VoIP)

providers and others.

In December 2002, the FCC took several significant steps to address shortcomings

in the universal service contribution methodology. First, it raised the wireless safe

harbor from 15% to 28.5%. This was a step in the right direction, but the FCC

should not stop there. We believe that several of the major wireless providers’ interstate usage levels are well above 28.5% and there is no reason why wireless carriers—like other telecommunications carriers—should not be assessed on their actual interstate usage revenues. Their interstate usage is measurable. Second, the

FCC wisely has prohibited service providers from ‘‘marking up’’ their pass through

of universal service contribution charges. By eliminating the opportunity for certain

providers to turn their universal service contribution obligations into ‘‘profit centers,’’ the FCC has reduced the impact of those consumers who pay to support universal service without reducing the amount of support for the Universal Service

Fund.

Neither the connection-based nor the telephone number-based plans which have

been proposed by the FCC and supported by a few carriers should be adopted. Those

plans would violate the statutory requirement that ‘‘every’’ telecommunications carrier that provides interstate service must contribute on an equitable and nondiscriminatory basis to support universal service. Moreover, those plans would result in lower volume users (who are often lower income consumers) paying a disproportionate share of the universal service burden. Simply put, it is neither equitable nor nondiscriminatory for a consumer who makes $1.00 of interstate calls per

month to now be charged $2.00 per month while a large volume user who makes

$1,000 of interstate calls per month would be charged $1,001.

TracFone recommends that a revenue-based contribution methodology be maintained, but that the methodology should include all revenues derived from telecommunications. Specifically:

• The wireless safe harbor should be eliminated as no longer being necessary and

each wireless provider should contribute based on its actual interstate revenues; • The FCC should use its existing statutory authority to assess all providers of telecommunications. This would include cable modem services, other broadband

services, and Voice Over the Internet Protocol (VoIP) telephone services. • Congress should grant the FCC the authority to assess intrastate revenues, but

only to the extent needed to generate sufficient funding to meet requirements

of the Universal Service Fund.

Thank you for affording TracFone the opportunity to present its views on universal service to the Subcommittee.

AARP

April 28, 2003

The Honorable MICHAEL K. POWELL

Chairman

Federal Communications Commission

445 12th Street, S.W.

Suite 8B201

Washington, DC 20554

Re: Reply Comments to Federal-State Joint Board on Universal Service, CC Docket

96-45; and CC Dockets 98-171, 90-571, 92-237, 99-200, 95-116, 98-170

DEAR CHAIRMAN POWELL: As the FCC prepares to issue a final ruling on proposed

changes to the way in which the Universal Service Fund (USF) is collected, AARP

would like to reiterate and reemphasize views submitted to the Commission in August of last year. AARP has been a strong supporter of the universal service fund,

recognizing its importance in providing essential telecommunications services to traditionally underserved communities. We are firmly on record supporting the elimination of surcharges and line items as a means to collect universal service funds.

107

Absent elimination of such charges, however, the existing system of collecting contributions is preferable to the contemplated move to a per-line charge.

AARP has lent its support to the implementation of the Universal Service Fund,

particularly the assistance it provides to low-income consumers, since its inception.

We have actively promoted the Lifeline/Link-Up programs within the community. In

fact, the Commission participated in an event AARP sponsored with the Florida

Public Service Commission in Tallahassee last year to educate consumers about the

two telephone savings programs. Therefore, we have a clear understanding of the

need to adequately fund the program. We believe that a mechanism that levies contributions from every consumer equitably, based on a percentage of the charges assessed for long distance calls, would provide the monies needed to implement the

USF without having to make any changes to the existing formula. By ‘‘equitably’’,

we mean that special exemptions or preferential rates should not be afforded certain

classes of consumers, as is currently the case. The carriers who employ this practice

continue to unfairly discriminate against residential consumers, and AARP believes

that now is the time to discontinue the practice.

We are concerned that the move to a per-line charge would further institutionalize

the universal service line-item charge. Such a change in regulation now would diminish chances of eliminating the per-line charge from consumer’s monthly bills, as

we have contended it should be in previous filings with the Commission. However,

the existing funding mechanism at least does not penalize consumers who make few

or no long distance telephone calls. Under the proposed funding mechanism, these

low-volume long distance service callers would be required to pay the bulk of the

funding for Universal Service. Based on comments filed with the Commission during

its review of low-volume long-distance users in 1999, some 44% of consumers fall

into this category. While the goal of the Universal Service Fund is to maintain affordable rates for all consumers, this proposal appears to ask those who most need

help to provide a disproportionate amount of the funding.

Ideally, all consumers should see their monthly USF charges decline to $.00

through a system that would allow carriers to recover their cost in rates as a legitimate cost of business. AARP believes that the elimination of line-item charges

would advance universal service and ultimately benefit more residential consumers.

Absent that fundamental shift, however, we support maintaining the existing system of funding the Universal Service Fund based on a percentage of the cost of long

distance phone calls a consumer makes. We commend the Commission for increasing the ‘‘safe harbor’’ percentage for wireless carriers in your interim ruling as a

means to better capture the true percentage of long-distance calls. We hope that you

maintain this system so that carriers can assign the percentage recovery equitably

preventing residential consumers from being further disadvantaged.

In summary, adequate funding of the universal service program is of critical importance. AARP commends the Commission for seeking the appropriate means with

which to implement the program. However, we believe that the move to a per-line

charge would be harmful to the very population the fund seeks to help. Therefore,

we reiterate our request that the Commission not adopt a per-line cost recovery

mechanism and offer our assistance in continuing to seek more suitable alternatives.

If you have any further questions, feel free to call me, or have your staff contact

Jeff Kramer of our Federal Affairs staff at 434-3800.

Sincerely,

DAVID CERTNER

Director, Federal Affairs

AMERICAN COUNCIL OF THE BLIND

June 27, 2003

MARLENE H. DORTCH

Office of the Secretary

Federal Communications Commission

445 12th Street, SW

Washington. DC 20554

Re: Federal-State Joint Board on Universal Service, CC Docket 96-45; and CC Dockets 98-171, 90-571,92-237,99-200, 95-1 16,98-170

DEAR MS. DORTCH: As the FCC prepares to issue a final ruling on proposed

changes to fund the Universal Service Fund (USF), the American Council of the

Blind (ACB) would like to share with you our thoughts. As the nation’s leading

membership organization of blind and visually impaired people, ACB is concerned

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about how proposed changes in the USF funding mechanism could disproportionately harm low and fixed income consumers, many of whom are blind and visually

impaired.

Universal service is very important to people with disabilities. It helps ensure the

delivery of affordable and accessible telecommunications services to all Americans,

including those who live in high-cost areas and/or on limited incomes, as well as to

schools, libraries and rural health providers. As many Americans with disabilities

live on fixed or limited incomes and are more likely to be unemployed than Americans without disabilities, ensuring the maintenance of the USF is very important

to our organization.

We are very concerned that the current proposal to switch from a revenue-based

universal service funding mechanism to a connection-based one would be harmful

to the very population the fund seeks to help. Under a connection-based methodology, customers would be charged the same amount for universal service whether

they make one interstate phone call or 100, e.g., a low volume residential customer

would contribute the same amount as a high-volume business customer. So rather

than helping provide affordable service to those that need it most, this proposal appears to ask them to contribute a disproportionate amount of the funding.

We are also concerned about the impact of this connection-based funding mechanism on users of pre-paid wireless services. For the blind and visually impaired,

wireless phones provide significant benefits including safety, security and convenience. Pre-paid wireless services, in particular, are an important product to many

people with disabilities. Pre-paid wireless gives people who cannot afford or cannot

qualify for regular cell phone service the opportunity to enjoy its benefits. We are

troubled that changing the USF mechanism to connection-based would significantly

increase the cost of pre-paid wireless companies’ USF contributions which would

force companies to increase the usage charges for such services. We urge you to ensure that any changes to the USF mechanism do not inadvertently raise the cost

of pre-paid wireless service to the detriment of consumers who need it most.

We appreciate the opportunity to share with you our concerns and urge you to

ensure that any changes to the universal service funding mechanism do not unintentionally hurt the very people universal service was created to help.

Sincerely.

CHARLES CRAWFORD

Executive Director, American Council of the Blind

REPLY COMMENTS OF COMMUNITY ACTION PARTNERSHIP, AMERICAN ASSOCIATION OF

PEOPLE WITH DISABILITIES, CONSUMER ACTION AND RAINBOW-PUSH COALITION

APRIL 18, 2003

Re: Reply Comments to Federal-State Joint Board on Universal Service, CC Docket

96-45; and CC Dockets 98-171, 90-571, 92-237, 99-200, 95-116, 98-170

The following organizations jointly provide these reply comments addressing a

proposal under consideration by the Federal Communications Commission (Commission) that focuses on how universal services are funded:

I. STATEMENT OF INTERESTS

Community Action Partnership (CAP) is the national association representing

the interests of the 1,000 Community Action Agencies (CAAs) organized to change

people’s lives, embody the spirit of hope, improve communities, and make America

a better place to live. CAP serves as a national forum for policy on poverty and to

strengthen, promote, represent and serve its network of member agencies to assure

that the issues of the poor are effectively heard and addressed. CAP works to advance the economic condition, educational attainment, political influence, health and

civil rights of low-income Americans. CAP works hard to ensure that low-income

Americans are not left behind.

American Association of People with Disabilities (AAPD) is the largest national nonprofit cross-disability member organization in the United States, dedicated to ensuring economic self-sufficiency and political empowerment for the more

than 56 million Americans with disabilities. AAPD works in coalition with other disability organizations for the full implementation and enforcement of disability nondiscrimination laws, particularly the Americans with Disabilities Act (ADA) of 1990

and the Rehabilitation Act of 1973.

Consumer Action is a San Francisco-based education and advocacy organization

that has worked on telephone, banking and privacy issues for more than 30 years.

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1 47 U.S.C. Paragraph 254(d)

2 Comment Letter of TracFone, Inc. CC Docket Nos. 96-45, 98-171, 90-571, 92-237, 99-200,

95-116, and 98-170, February 28, 2003

Consumer Action works through a national network of more than 6,500 communitybased organizations that serve low and moderate-income consumers, recent immigrants and people of color.

Rainbow/PUSH Coalition is a progressive organization that advocates for social

change. With a membership of nearly 300,000, Rainbow/PUSH is a national coalition of under-served employees, consumers, and entrepreneurs committed to securing equal protection, opportunity, and access under the law. Consistent with this

mission, Rainbow/PUSH seeks to ensure equal access to services, employment and

ownership opportunities in the telecommunications industry. The connection-based

methodology proposal (CBM) being reviewed at the Commission will pose a disproportionate financial burden on low-income and low-volume consumers. Rainbow/

PUSH has a substantial interest in this proceeding, because of the adverse impact

that the CBM will have on many of our constituents.

II. COMMENTS

Under the current system, telecommunications firms are required to use a percentage of their interstate revenue to support the Universal Service Fund (USF).

Under the proposed system, contributions would be based on a flat monthly connection-based fee. Considering that many of the Commenters’ members/affiliates are eligible for the universal service programs, we are strong supporters for the Universal

Service Fund, and the need to provide a reliable source of funding for universal

service programs. We also endorse the Commission’s recent changes to the universal

service contribution methodology. However, we are wary about radical changes to

this revised contribution methodology that may negatively affect the populations we

ultimately serve.

We believe that a connection-based mechanism unfairly and adversely impacts

lower income and lower volume users of interstate services, and on carriers who provide services to such consumers. The Commenters point out that a connection-based

mechanism is neither equitable nor nondiscriminatory to carriers who provide services to our members/affiliates, which violates Section 254(d) of the Communications

Act which states that ‘‘[e]very telecommunications carrier that provides interstate

telecommunications services shall contribute, on an equitable and nondiscriminatory

basis, to be specific, predictable and sufficient mechanisms established by the Commission to preserve and advance universal service.’’ 1 The implementation of a connection-based mechanism would present a significant, unnecessary change in the

way in which USF contributions are collected.

We recommend that the Commission consider alternative modifications to the contribution methodology. The Commenters bring to the Commission’s attention some

example modifications noted by TracFone Wireless, Inc.’s recent comments in which

they

‘‘. . . urges the Commission to consider additional changes to the revenue-based

contribution methodology, such as eliminating the wireless safe harbor and ensuring that broadband Internet access services, particularly Internet based telephony services, contribute to the Universal Service Fund.’’ 2

We concur that such changes could provide significant additional resources for

universal service programs. Additionally, these suggested changes would most likely

not have a negative effect on lower income and lower volume users of interstate

services.

CONCLUSION

In summary, the Commenters believe that radical changes to the revised contribution methodology may have unintended negative consequences on consumers. We

believe that the best available alternative to ensure the continued viability of the

universal service programs is to consider alternative modifications to the contribution methodology, such as eliminating the wireless safe harbor and ensuring that

Internet based telephony services contribute to the Universal Service Fund. Hence,

we respectfully request that the Commission more carefully review proposed

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changes to the universal service funding and request that the Commission discard

the proposal for a connection-based funding system.

Sincerely,

DERRICK SPAN, National President

Community Action Partnership

KEN MCELDOWNEY, Executive Director

Consumer Action

ANDREW J. IMPARATO, President and CEO

American Association of People with Disabilities

CLEO FIELDS, General Counsel

Rainbow/PUSH Coalition

LEAGUE OF UNITED LATIN AMERICAN CITIZENS

April 18, 2003

MARLENE H. DORTCH

Office of the Secretary

Federal Communications Commission

445 12th Street, SW

Washington, DC 20554

Re: Federal-State Joint Board on Universal Service, CC Docket 96-45; and CC Dockets 98-171, 90-571, 92-237, 99-200, 95-116, 98-170

DEAR MS. DORTCH: The League of United Latin American Citizens (LULAC) appreciates this opportunity to provide additional comments in the aforementioned

proceedings. In particular, we would like to reemphasize our view that adoption of

a connection based proposal will have negative consequences for Hispanic consumers

who are low volume long distance customers and those that utilize prepaid wireless

services. We believe that a radical shift in the universal service contribution methodology from one based on interstate revenues to one based on connections or telephone numbers is not only ill-conceived, it is unwarranted.

The assertion that interstate revenues are on decline does not entirely ring true

when one considers that interstate communication is simply shifting from wireline

to wireless, instant messaging, e-mail and voice-over Internet. Indeed, even the FCC

acknowledged this shift in the December 13, 2002 Interim Rule when they lifted the

wireless safe harbor from 15 percent to 28.5 percent. LULAC supports this revenuebased refinement and looks forward to assessing the outcome of this change on universal service contributions when data becomes available. We encourage the FCC

to continue along this path and to explore other refinements to the current methodology.

As we mentioned in our earlier filing, LULAC takes a special interest in this proceeding because we want to ensure all Hispanic Americans have access to affordable

wireless telephone service. While, almost half of U.S. Hispanics, or approximately

16 million Latinos, have mobile phones, according to Cheskin Research; we also

know that there is a unique population of the Hispanic market that relies on prepaid wireless service as their only wireless option. These types of individuals include:

• young people who cannot meet credit or security deposit requirements;

• migrant and seasonal workers without a permanent address or other institutional

prerequisites;

• people who are unwilling to enter into a long-term contractual commitment;

• senior citizens or public assistance recipients who are on fixed incomes;

• individuals who want to control their telephone costs; and

• women and others who use them primarily for emergency or security purposes.

Since this population tends to be low-volume, low cost customers, they are often

overlooked by wireless carriers who prefer high volume, high cost customers. Yet,

we understand, there are nearly 10 million pre-paid wireless customers nationwide

that are being served by companies such as TracFone and Verizon Wireless thereby

documenting the critical role pre-paid service plays in meeting the needs of consumers. LULAC urges the FCC to pay particular attention to how the connectionbased proposals will adversely affect pre-paid telephone providers who serve this

unique audience. The goal of universal service must include fostering a marketplace

that encourages providers to serve all customers; and the FCC must prevent obstacles from being erected. In addition, changes to the universal service funding mechanism must not impose a regressive charge for universal service on low-volume customers such as those mentioned above.

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LULAC notes that a number of other public interest groups that represent large

constituencies of low-income consumers, such as the Community Action Partnership,

Rainbow-PUSH and the NAACP, share our concern about negative consequences of

abandoning the revenue-based methodology. We also note industry groups, including

mobile wireless carriers, small local exchange carriers, and state public utility commissions find fault with the various connection-based proposals on different

grounds. Consequently, we urge the FCC to conclude that retention of the revenue

based system, with the interim changes of December 13, 2002, is the correct path

to follow.

Thank you for taking our views into consideration and please do not hesitate to

call upon us if we can be of further assistance.

Sincerely,

HECTOR M. FLORA,

LULAC National President

NAACP

April 18, 2003

MARLENE H. DORTCH

Office of the Secretary

Federal Communications Commission

445 12th Street, SW

Washington, DC 20554

Re: Reply Comments to Federal-State Joint Board on Universal Service, CCDocket

96-45; and CC Dockets 98-171, 90-571, 92-237, 99-200, 95-116, 98-170

DEAR MS. DORTCH: I am writing this letter to reiterate my concern regarding proposed reforms to the contribution methodology for the Universal Service Fund

(USF). As I mentioned in my February 27, 2003 letter, the NAACP’s principal objective is to ensure the political, educational, social and economic equality for racial

and ethnic minority groups of United States and to eliminate race prejudice. The

USF has been instrumental in ensuring that all Americans have access to affordable, comprehensive telecommunications services, particularly consumers in highcost service areas, low-income consumers, schools, libraries and rural health providers.

Presently, telecommunications firms are required to use a percentage of their

interstate revenue to support the Universal Service Fund. The fund is used to help

compensate telephone companies for providing access to services at reasonable and

affordable rates throughout the country, including rural, insular and high cost

areas, and to public institutions. Many of the consumers who benefit from the USF

are our constituents.

We strongly support the Federal Communications Commission’s (FCC) laudable

goal of maintaining the viability of the USF. However, the new proposal to shift

from a revenue-based system to one based on connections—meaning USF contributions would be based on a flat monthly connection fee—raises concerns.

Under this proposal, consumers who make few or no interstate calls would be assessed the same as consumers, especially businesses, who make more interstate

calls. Low-volume and primarily residential customers could unfairly bear the burden of contributing to the universal service fund. Additionally, studies have concluded that telephone providers who service the low-volume population will be at

a competitive disadvantage under a connection-based methodology.

Consumers who utilize products such as pre-paid wireless services could be adversely affected by the connection-based proposals. As the FCC is aware, pre-paid

wireless provides service to portions of the African American community, including:

low-income users or young people who cannot meet credit or security deposit requirements; migrant and seasonal workers without a permanent address; people

who are unwilling to enter into a long-term contractual commitment; senior citizens

or public assistance recipients who are on a fixed incomes; individuals who want to

control their telephone costs; and women and others who use them primarily for

emergency or security purposes among others. The connection-based methodology

would significantly raise the cost of this particular type of telephone service at the

expense of consumers such as those mentioned above.

I urge the FCC to carefully weigh the impact of any intended reforms to the universal service funding methodology to our nation’s most vulnerable as we work together to find better ways to increase funding to such a valuable program.

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If there is anything I can do to help advance this process, I can be reached by

telephone at (202) 638-2269.

Sincerely,

HILARY O. SHELTON

Director

BEFORE THE FEDERAL COMMUNICATIONS COMMISSION, WASHINGTON, DC 20554

April 16, 2003

MARLENE H. DORTCH

Office of the Secretary

Federal Communications Commission

445 12th Street, SW

Washington, DC 20554

Re: Reply Comments on Federal-State Joint Board on Universal Service CC Docket

96-45 CC Dockets 98-171, 90-571, 92-237, 99-200, 95-116, 98-170

To: The Commission

REPLY COMMENTS OF THE NATIONAL GRANGE OF THE ORDER OF PATRONS OF

HUSBANDRY

The National Grange of the Order of Patrons of Husbandry (the ‘‘Grange’’) hereby

submit these reply comments to encourage the Commission to adopt equitable and

non-discriminatory regulations related to assessments for the Universal Service

Fund.

The Grange is the oldest general farm and rural public interest organization in

the United States. Founded in 1867, today the Grange represents nearly 300,000

individual members affiliated with 3,000 local, county and state Grange chapters

across rural America. More than 70% of all local Grange chapters are located in

communities of 2,500 persons or less.

The Grange recognizes the importance of the Universal Service Fund (USF) to the

public welfare, especially in rural communities. In rural America, there is an admitted lack of overall communications services. Rural areas with many small towns and

villages are considered to be on the wrong side of the ‘‘last mile’’ of telecommunications services. A major purpose of the USF is to help rural areas achieve parity

in telecommunication standards that is comparable to the more densely populated

metropolitan areas of the United States. The National Grange also believes that full

and fair competition is the only way to provide state-of-the-art telecommunications

services to rural populations, especially those contained within the ‘‘last mile.’’

Section 254(d) of the Communications Act requires that ‘‘[every telecommunications carrier that provides interstate telecommunications services shall contribute,

on an equitable and nondiscriminatory basis, to the specific predictable and sufficient mechanisms established by the commission to preserve and advance universal

service.]’’

Today, all telephone companies that provide telephone service between states or

internationally contribute to the USF. The exact amount is adjusted every quarter,

based on the projected universal service needs and the projected revenues generated

by interstate and international calls. Currently, each company makes a business decision regarding whether and how to assess customers, in order to recover their USF

costs. Wireless service providers have a special provision that is based on a flat rate

calculation of estimated total revenues rather than actual revenues generated by

interstate telephone calls. The Study estimates that wireless connections will grow

by more than 50 million between 2002 and 2007 while land line connections are expected to grow by fewer than six million over the same time period.

Current, proposals that have been submitted to the FCC suggest that major

changes are necessary in the collection of universal service funds. One comment period for that topic has already passed. Following that, the FCC issued a public notice seeking reply comments on a staff study (the study) regarding alternative contribution methodologies. The study undertakes to project the effects that alternative

collection based methodologies would have on the universal service fund.

The Grange strongly disagrees with the assumptions that major changes are necessary in the revenue-based methodologies used to currently collect funds for the

USF. The following observations and comments are submitted by the Grange in response to the study and in support of our position.

Various methodologies used by the Commission staff project significant shifts in

the burden of payment among long distance carriers, local exchange carriers and

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wireless carriers. Under the baseline projection for revenue based methodology the

share of contributions by industry segment would shift from 59% for long distance

carriers, 26% for local carriers and 15% for wireless carriers in 2002 to 41%, 32%

and 27%, respectively, by 2007. However, all baseline projections for connection or

telephone number based methodologies shift a disproportionate share of the USF

funding responsibility away from long distance carriers to local carriers and wireless

carriers. In 2002 the long distance carriers were responsible for 59% of USF revenues. Under Proposals 1, 2, and 3, respectively, that responsibility would fall to

22%, 29% or 13%. The financial responsibility for maintaining the USF would shift

dramatically to local carriers and wireless carriers under any of the connection

based methodologies examined in the study. With this shift would come significant

shifts in the financial burden on individual consumers, especially in rural areas,

with no apparent benefit to consumer populations that are dependent on USF funding to maintain telephone service.

In contrast, The National Grange believes a modified revenue based methodology

is the most reasonable alternative for funding the USF because it will result in the

fewest disruptions in the long-standing relationships among various companies and

their consumers.

We do not see how any of the connection or phone number based methodologies

fit the intention of the Telecommunications Act of 1996 Act or Section 254(d). Connection based methodologies would fail to meet the requirement that every telecommunications carrier contribute to the USF. Connection based methodologies will

disproportionately affect low volume long distance callers, residential customers,

and customers on fixed incomes. All of these customer groups are disproportionately

represented in rural communities. Since one of the major purposes of the USF is

to provide or enhance telephone services in high cost rural residential areas the

Grange do not see the logic in any methodology that would effectively increase USF

contributions from consumers who already reside in high cost rural areas.

Connection based methodologies would also significantly reduce the responsibility

of high volume, business users of long distance telephone services to financially support the USF by effectively imposing additional USF charges on intrastate telephone

calls.

Connection based methodologies would remove the current responsibility that

each company has to decide whether and how to assess customers to recover USF

costs. Instead it would replace those business decisions with de facto USF surcharges on every telephone connection. In the best interest of fairness in competition, the consumer-driven marketplace should dictate the success or failure of a

business plan, not the manner in which the government structures its fees. To shift

the burden of payment from one type of business model to another in a seemingly

arbitrary manner would be inequitable and unfair treatment of private business entities.

On December 12, 2002, the Commission issued an interim rule regarding modest

changes to the current revenue based methodology. The interim rule modified the

current revenue base to increase the minimum assessment that wireless carriers

pay USF charges on from 15% to 28.5% of revenues. This change better captures

the industry wide proportion of wireless calls that involve long distance service, but

is still an imperfect measure of the contribution that the individual wireless carriers

make to overall interstate service. The interim rule also changed the assessment

base from ‘‘revenues accrued’’ to ‘‘projected revenues’’ to address concerns by some

long distance carriers related to the declining customer base that some carriers are

experiencing. Finally, the interim rule prohibits telecommunications carriers from

charging customers any ‘‘mark-up’’ above their relevant contribution factor for their

USF assessments. The National Grange believes that these changes are sufficient

to maintain the solvency of the USF for several years on a basis that is equitable

and nondiscriminatory to the various segments of the telephone industry.

As a group whose membership is overwhelmingly from rural America, the National Grange views the universal service fund as a necessity in the achievement

of parity of services to all segments of the United States. Therefore, we support the

current revenue-based methodology as the most fair and least market intrusive

manner in which funds are collected.

The National Grange encourages the Commission to continue to study the issues

surrounding this proceeding and to make small changes to correct minor inefficiencies or inequities, as done in the recent past. For example, the Commission should

move away from ‘‘safe harbor assessments’’ for the wireless carrier industry and replace them with methodologies that accurately reflect each wireless company’s proportion of the long distance market. In addition, we respectfully urge the Commissioners to allow an adequate passage of time between implemented changes, to

allow valid observations of the results.

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For the reasons explained in these comments, the Grange urges the Commissioners to reject the connection-based methodologies to fund the USF. We oppose

any drastic changes to the method of collection of universal service funds. Instead

the Grange urges the Commission to retain the basic structure of the current revenue based methodology for assessing USF contributions. In addition, the interim

changes put in place in December of 2002 should be given a chance to work. Additional modifications to fine-tune the existing revenue based methodology should be

explored to assure both sufficient USF revenues and an equitable distribution of

USF fees across various segments of the telephone industry as well as across the

various segments of the consumer population, including rural consumers.

Respectfully submitted,

LEROY WATSON, Director of Legislative Affairs

The National Grange

NATIONAL INDIAN EDUCATION ASSOCIATION

April 18, 2003

MARLENE H. DORTCH

Office of the Secretary

Federal Communications Commission

445 12th Street, SW

Washington, DC 20554

Re: Federal-State Joint Board on Universal Service, CC Docket 96-45; and CC Dockets 98-171, 90-571, 92-237, 99-200, 95-116, 98-170

DEAR MS. DORTCH: The National Indian Education Association submits this letter

as a reply comment to express our trepidation about the Federal Communications

Commission’s (FCC) consideration of an alternative funding mechanism for universal service. Under the proposed mechanism, contributions would be based on a

flat monthly connection fee as opposed to the current system based on a percentage

of interstate revenue.

The National Indian Education Association (NIEA) supports traditional Native

cultures and values, to enable Native learners to become contributing members of

their communities, to promote Native control of educational institutions, and to improve educational opportunities and resources for American Indians, Alaska Natives, and Native Hawaiians throughout the United States. NIEA has promoted the

interests of Native Americans in telecommunications to Congress, before the FCC

and in the courts.

Because the majority of Native Americans live, work, and learn in rural areas,

many participate in the Lifeline and Link-up programs. Additionally, many Native

American libraries, schools, and universities are beneficiaries of the E-rate program.

E-rate is a vital program providing numerous Native American K-12 public schools

and libraries with significant discounts on telecommunications services, Internet access, and internal connections costs; thereby ensuring our teachers, students and

families have access to the richness of the world wide web. Hence, NIEA is an avid

supporter the Universal Service Fund, and the need to generate reliable sources of

funding for universal service programs.

NIEA is instrumental in working with Native American schools and libraries to

apply for E-rate discounts, and we support the FCC’s goal of ensuring the USF is

positioned to meet future demands. We advocate not only for the continuance of the

USF but also for the expansion of base contributors as well. An expanded base of

contributors will assure the availability of affordable, accessible telecommunications

services. However, in the case of the connection-based proposal, NIEA is concerned

that prepaid wireless carriers that service rural localities, such as TracFone, Inc.,

would be disproportionately impacted, resulting in a higher fee assessment for Native American consumers of such services. Prepaid wireless service offers Native

Americans an affordable accessible communication option. Prepaid wireless service

is an off-the-shelf, pay-as-you-go, service that offers consumers wireless service with

no contracts, no credit checks, no monthly fees, no activation fees, no security deposits and no age limits. Such features provide Native Americans with true costs for

services. Because of living in rural localities, many calling plans hit Native Americans with hidden roaming fees and various other charges that are financially burdensome. With prepaid wireless services, there are no surprises. Native Americans

pay for minutes that are expended.

As iterated in our previous comments on this matter, under this new connectionbased proposal, carriers whose services are designed for customers that make fewer

calls would carry a greater payment burden. Such a burden would also be levied

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on the prepaid wireless customers. In short, customers who make few interstate

calls would be assessed the same cost as customers who make many interstate calls.

This would be a major financial cost to Native Americans, who generally are lowvolume interstate callers. The result would be low-volume, residential customers

disproportionately contributing to the universal service fund. The connection-based

proposal does not live up to a primary statutory principle that guides universal service fund policy: quality services should be available at just, reasonable, and affordable rates.

NIEA urges the FCC to consider alternative modifications to the contribution

methodology. We would like to point out that other commenters have identified additional contribution methodologies—such as, eliminating the wireless safe harbor

and ensuring that broadband Internet access services contribute to the Universal

Service Fund—as viable alternatives. We agree that such changes could possibly

provide significant additional resources for universal service programs. Additionally,

these suggested changes would most likely not have a negative effect on Native

Americans.

NIEA asks that the FCC take a closer look at the connection-based proposal. We

are confident that you will find that it is not in the interest of consumers, especially

Native American prepaid wireless consumers. Nor do we believe that adoption of

this methodology is necessary to ensure a robust USF. We, instead, encourage the

FCC to retain the current revenue-based mechanism and to carefully explore fair

and equitable ways to expand the base of contributors as a means for generating

additional revenues.

JOHN CHEEK, Executive Director

National Indian Education Association

ORGANIZATION CONCERNED ABOUT RURAL EDUCATION

July 17, 2003

MARLENE H. DORTCH

Office of the Secretary

Federal Communications Commission

445 12th Street, SW

Washington, DC 20554

Re: Ex Parte Comments to FCC Staff on Study of Universal Service Fund CC Docket Nos. 96-45, 98-171, 90-571, 92-237, 99-200, 95-116, 98-170, NSD File No L00-72

DEAR MS. DORTCH: The achievement of parity in telecommunications standards

in rural America is a major purpose of the universal service fund (USF). Rural

schools, libraries and homes deserve to have equal access to telephones and other

telecommunications services when compared to those located in more densely populated areas of the United States. In rural America, some great strides have been

made in the delivery of telecommunications services. For example, it is estimated

that 89% of rural homes have wireline telephone service and the e-rate program,

paid for by the Universal Service Fund, has made some progress in bringing services to our rural schools and libraries.

The very formation of the Organization Concerned about Rural Education (OCRE)

was predicated on the belief of equality in educational standards with respect to the

condition of physical structures, quality teachers and the access to technology. As

a result, OCRE has long been a staunch advocate for the sustainability of the universal service fund. Yet, recently, some concerns have been expressed that the future holds a decline in funds available to sustain the universal service fund. Among

the reasons cited for this trend are a decline in interstate revenues, the bundling

of local and long distance calling packages and customer demand for universal service programs.

Consequently, there are those who believe that the current collection system simply needs minor modifications while others believe a major change in the collection

methodology is necessitated. To that end, and much to the credit of the FCC, a Staff

Study was done that attempted to project the effects various proposals would have

on the universal service fund. The FCC seeks to ensure the full funding of the USF

by changing collection methodology. Three of the four proposals would drastically

change the method of collection from a revenue-based system to a connection-based

system.

In all of the connection-based proposals presented in the study, there seems to be

a significant shift in the burden or payment from interstate and international business community calls to the residential customer base. Can such a radical change

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in the formula for collection methodology be justified if the people, including families

with school-aged children, who are to benefit from the universal service fund are

those who must shoulder the greatest burden of payment? In addition, the ever-protected reserve fund, considered to be an absolute necessity by industry and consumer groups, although briefly mentioned, is conspicuously absent from the staff

study. This leads to questions revolving around the reserve fund, and its subsequent

condition if this radical change in collection is made.

As an organization whose focus is on the success of rural education, OCRE views

the universal service fund as a necessity in the achievement of parity of services

to all segments of the United States. Therefore, we support the current revenuebased methodology as the most fair and least market intrusive manner in which

funds are collected. In that way, the FCC avoids taking the inevitable blame for capriciously changing collection methodologies that disproportionately affect customers

who make few or no long distance calls. With that in mind, OCRE suggests that

the FCC seriously considers an expansion in the base of contributors to the USF.

This would be more inclusive of all types of telecommunications providers, would

solve the existing concern of decline in interstate revenues, as well as thwart the

potentially inequitable result that a connection-based methodology will cause. Furthermore, it certainly would conform with market trends.

In another decision, the FCC increased the safe-harbor rate used as the basis for

wireless providers to contribute to the USF from 15% to 28.5%. OCRE commends

the Commission for its ability to timely recognize shifting market trends and act accordingly. As time progresses, this will likely prove to be a wise decision on the part

of the FCC that will help the USF to remain sustainable and predictable.

OCRE views the proposed connection based changes as unnecessarily extreme,

and opposes any drastic changes to the method of collection of universal service

funds. We encourage the Commission to make small changes to correct minor inefficiencies or inequities, as done in the recent past. In addition, we respectfully urge

the Commissioners to allow an adequate passage of time between implemented

changes, to allow the results to be observed fully.

We urge the Commissioners to retain the current revenue based mechanism for

assessing universal service fund contributions.

Sincerely,

DALE LESTINA

President

TELECOMMUNICATIONS RESEARCH & ACTION CENTER

April 18, 2003

MARLENE H. DORTCH

Office of the Secretary

Federal Communications Commission

445 12th Street, SW

Washington, DC 20554

Re: Reply Comments to Federal-State Joint Board on Universal Service, CC Docket

96-45; and CC Dockets 98-171, 90-571, 92-237, 99-200, 95-116, 98-170

DEAR MS. DORTCH: The Telecommunications Research & Action Center (TRAC)

submits these reply comments to the Federal Communications Commission (Commission) to express once again its concern regarding the above-captioned proceedings. As noted in our February 27, 2003, letter to the Commission, TRAC is a

non-profit membership organization based in Washington, DC, that, since its inception in 1983, has promoted the interests of residential telecommunications customers. TRAC staff researches telecommunications issues and publishes rate comparisons to help consumers make informed decisions regarding their long distance

and local phone service options. TRAC can be found on the web at http://

www.trac.org.

TRAC strongly urges the Commission to carefully measure the adverse impact on

residential consumers before the Commission drastically alters how it assesses contributions to the universal service fund (USF). TRAC notes that other Commenters

and even Commission’s staff have found that should the Commission change from

the current revenue-based methodology (RBM) to a connection-based methodology

(CBM), ‘‘such a change would shift much of the responsibility for USF funding from

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1See Comments of Consumers Union, Texas Office of Public Utility Counsel, Consumer Federation of America, Appalachian People’s Action Coalition, Center for Digital Democracy,

Edgemont Neighborhood Coalition and Migrant Legal Action Program at page I (April 22, 2002).

See also Projected Assessments under Proposal 2 of Connection-Based Methodology published

in Federal Communications Commission Public Notice FCC 03-31, Commission Seeks Comment

On Staff Study Regarding Alternative Contribution Methodologies, February 26, 2003.

business users to residential users, and would increase USF rates for many averageuse and low-use residential customers.’’ 1

TRAC highly recommends that the Commission consider how the proposed CBM

runs afoul of the clear mandate of the Telecommunications Act of 1996 (1996 Act)

to assess every telecommunication carrier for USF contributions. Under the CBM,

the assessment would shift from the carriers to the end-users. As TRAC previously

remarked, the Commission is tasked with assessing contributions in an equitable

and non-discriminatory manner. Under the proposed CBM, high-volume and lowvolume consumers would be charged the same flat fee. This is hardly equitable or

nondiscriminatory, given that business consumers, who typically make many interstate calls would be assessed the same as residential consumers, many of whom are

low-income and low-volume callers. Low-volume residential consumers would have

to contribute the same to the USF as high-volume residential or business consumers.

Finally, TRAC stresses the twin hardship faced by low-income and low-volume

users who use pre-paid wireless services should the Commission adopt the CBM.

Low-income users of pre-paid wireless services are ineligible to receive the FCC’s

‘‘Lifeline’’ exemption from USF contributions. Sadly, low-income and low-volume

consumers will be charged a flat connection fee regardless of the number of calls

they make as well as being ineligible for the Lifeline exemption.

The connection-based methodology disparately impacts low-income and low-volume residential consumers. In addition, the CBM is contrary to aims of the 1996

Act. Accordingly, TRAC highly recommends that the Commission abandon any further consideration of the proposed connection-based methodology.

Sincerely,

DIRCK A. HARGRAVES, Esq., Counsel

Telecommunications Research & Action Center

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