```

[Senate Hearing 108-996]
[From the U.S. Government Publishing Office]

                                                        S. Hrg. 108-996
 
                    THE FUTURE OF UNIVERSAL SERVICE

=======================================================================

                                HEARING

                               before the

                     SUBCOMMITTEE ON COMMUNICATIONS

                                 of the

                         COMMITTEE ON COMMERCE,
                      SCIENCE, AND TRANSPORTATION
                          UNITED STATES SENATE

                      ONE HUNDRED EIGHTH CONGRESS

                             FIRST SESSION

                               __________

                            OCTOBER 30, 2003

                               __________

    Printed for the use of the Committee on Commerce, Science, and Transportation
    
    
    
    
    
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       SENATE COMMITTEE ON COMMERCE, SCIENCE, AND TRANSPORTATION

                      ONE HUNDRED EIGHTH CONGRESS

                             FIRST SESSION

                     JOHN McCAIN, Arizona, Chairman
TED STEVENS, Alaska                  ERNEST F. HOLLINGS, South 
CONRAD BURNS, Montana                    Carolina, Ranking
TRENT LOTT, Mississippi              DANIEL K. INOUYE, Hawaii
KAY BAILEY HUTCHISON, Texas          JOHN D. ROCKEFELLER IV, West 
OLYMPIA J. SNOWE, Maine                  Virginia
SAM BROWNBACK, Kansas                JOHN F. KERRY, Massachusetts
GORDON H. SMITH, Oregon              JOHN B. BREAUX, Louisiana
PETER G. FITZGERALD, Illinois        BYRON L. DORGAN, North Dakota
JOHN ENSIGN, Nevada                  RON WYDEN, Oregon
GEORGE ALLEN, Virginia               BARBARA BOXER, California
JOHN E. SUNUNU, New Hampshire        BILL NELSON, Florida
                                     MARIA CANTWELL, Washington
                                     FRANK R. LAUTENBERG, New Jersey
      Jeanne Bumpus, Republican Staff Director and General Counsel
             Robert W. Chamberlin, Republican Chief Counsel
      Kevin D. Kayes, Democratic Staff Director and Chief Counsel
                Gregg Elias, Democratic General Counsel
                                 ------                                

                     SUBCOMMITTEE ON COMMUNICATIONS

                    CONRAD BURNS, Montana, Chairman
TED STEVENS, Alaska                  ERNEST F. HOLLINGS, South 
TRENT LOTT, Mississippi                  Carolina, Ranking
KAY BAILEY HUTCHISON, Texas          DANIEL K. INOUYE, Hawaii
OLYMPIA J. SNOWE, Maine              JOHN D. ROCKEFELLER IV, West 
SAM BROWNBACK, Kansas                    Virginia
GORDON H. SMITH, Oregon              JOHN F. KERRY, Massachusetts
PETER G. FITZGERALD, Illinois        JOHN B. BREAUX, Louisiana
JOHN ENSIGN, Nevada                  BYRON L. DORGAN, North Dakota
GEORGE ALLEN, Virginia               RON WYDEN, Oregon
JOHN E. SUNUNU, New Hampshire        BARBARA BOXER, California
                                     BILL NELSON, Florida
                                     MARIA CANTWELL, Washington
                                     
                                     
                            C O N T E N T S

                              ----------                              
                                                                   Page
Hearing held on October 30, 2003.................................     1
Statement of Senator Brownback...................................     4
Statement of Senator Burns.......................................     1
Statement of Senator Dorgan......................................     3
Statement of Senator Lautenberg..................................    15
    Prepared statement...........................................    15
Statement of Senator Smith.......................................    16
Statement of Senator Stevens.....................................     2
Statement of Senator Sununu......................................     5

                               Witnesses

Hon. Michael K. Powell, Chairman, Federal Communications 
  Commission.....................................................     6
    Prepared statement...........................................     8

                                Appendix

Hollings, Hon. Ernest F., U.S. Senator from South Carolina, 
  prepared statement.............................................    35
Inouye, Hon. Daniel K., U.S. Senator from Hawaii, prepared 
  statement......................................................    35

                    THE FUTURE OF UNIVERSAL SERVICE

                              ----------                              

                       THURSDAY, OCTOBER 30, 2003

                                       U.S. Senate,
        Committee on Commerce, Science, and Transportation,
                                                    Washington, DC.
    The Committee met, pursuant to notice, at 10 a.m. in room 
SR-253, Russell Senate Office Building, Hon. Conrad Burns, 
presiding.

            OPENING STATEMENT OF HON. CONRAD BURNS, 
                   U.S. SENATOR FROM MONTANA

    Senator Burns. Good morning. Today we'll hear testimony 
about the Universal Service Program which is an extremely high 
priority.
    The Committee faces the stark reality that Universal 
Service is in grave and immediate danger. The size of the fund 
has exploded upward from $1 billion in 1996 to $6.3 billion in 
2003. Interstate revenues have plunged dramatically, however, 
from over $20 billion a quarter to only $17 billion a quarter, 
so we've got a drastic drop.
    The FCC has dealt with this decline by simply increasing 
the contribution rate assessed to providers of interstate 
telecommunications services from 3.9 percent in 1998, to 7.3 
percent in the second quarter of 2002, to the current rate of 
9.2 percent. Simply put, this trend is unsustainable.
    To address the crisis facing Universal Service, Senator 
Dorgan and I have recently hosted two very informative 
Universal Service summits in which we heard from a broad cross-
section of the parties interested in Universal Service and its 
reform. The summit provided an outstanding opportunity for a 
frank and open exchange with good give and take, and they were 
candid, and I felt all the stakeholders were at the table.
    To the extent that it's possible to boil down what we heard 
at the session and put it into a simple message, it is this. 
The status quo system is fundamentally broken, and without 
reform the Universal Service system is in peril. Having 
identified the problem and the urgent need to resolve it, the 
question is what we do to replace the current assessment 
mechanism.
    At the summit, participants suggested that we move to a 
system based on total revenues, to a system based on 
connections, to a system based on assigned working telephone 
numbers. The Federal-State Joint Board unanimously recommended 
a solution to us, with the legislation granting the Commission 
authority to include intrastate revenue in its fund support 
base. I understand that Chairman Powell strongly supports this 
move, which would provide for the near-term stabilization of 
the fund, but I'm not going to put words in his mouth.
    To this end, I've been working on draft legislation with my 
colleagues that would grant the Commission the authority while 
ensuring that it move forward and complete an overall plan 
within the next 6 months. In my view, the touchstones for 
reform must include competitive and technological neutrality, 
predictability, and sustainability.
    I understand that the Commission's agenda over the next 
year has been crowded with vital issues, which have deservedly 
occupied a great deal of its time and resources; however, 
Universal Service reform needs the same attention that has been 
devoted to crafting items in those other important proceedings.
    Finally, we need to ensure that any solutions which 
ultimately range from the decisions surrounding Universal 
Service reform bear in mind that the ever-changing technology 
landscape changes every day. The devices that our citizens use 
to communicate with one another today may not be the 
instruments of tomorrow. In this context, the shift to new 
technology, such as Voice over Internet Protocol is 
particularly critical.
    Clearly, the Members of this Committee care a great deal 
about Universal Service and will do everything it takes to 
ensure its viability. Rural America can afford no less.
    And I welcome the Chairman here today, and I look forward 
to his testimony. And now, Senator Stevens, the Chair 
recognizes you.

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

    Senator Stevens. Thank you very much, Mr. Chairman. I hope 
not to carry forward your prediction.
    [Laughter.]
    Senator Stevens. We've got to go to a vote on the floor 
now, and as soon as that's over I will have to go back to the 
appropriations process. I do have, as you know, a great 
interest in the subject of Universal Service. And working with 
my staff, we've developed a set of principles we believe are 
important to us, as Alaskans. So I just thought I'd like to put 
that in the record, particularly while the Chairman is here, 
and it'll be short. So I hope we'll be able to hear the 
Chairman's comments.
    I believe we should direct the FCC to conduct a rulemaking 
to require all users of public telephone switched networks, 
long distance, local companies, cellular, satellite, cable, 
Blackberry, Voice over Internet, to contribute to the Universal 
Service Fund in some manner and authorize the FCC to consider 
interstate revenues, telephone numbers, and individual 
identifiers in a way that will provide competitive neutrality.
    We should direct the FCC to develop a national standard for 
determining who is an eligible telecommunication carrier, with 
specific timelines. We should allow cell phone companies who 
would pay more into the system with either an interstate 
revenue or a telephone number system, to get additional price 
support to expand cell phone towers into rural areas. Allow 
cable and high-speed Internet providers as well as Blackberry-
type networks, who would be paying in, to receive support for 
expanding their high-speed networks into rural America. Direct 
the FCC to develop a procedure to be used by the states to 
begin reining in the Universal Service Fund in any market with 
two or more carriers. The Universal Service Fund should be 
limited overall, or new carriers could be denied entry. Require 
new eligible telecommunications carriers to quality for high-
cost support when the loop is over $24 in cost, based upon 
their own cost, not derivatively through incumbents' costs.
    Those are very basic, but we're getting down to the point 
where we're going to have to make some basic decisions. I 
believe the Universal Service Fund cannot continue much longer 
with one major portion of the industry paying in and so many 
receiving funds out or finding ways to avoid being included in 
the future. There seems to me to be too much attention given to 
how to avoid paying Universal Service Funds, rather than how to 
make it a universal system that's fair and competitively 
neutral for all.
    I look forward to being with you.
    Senator Burns. Thank you, Mr. Chairman. I appreciate that. 
And your suggestions are well taken as we work on this fund.
    Senator Dorgan?

              STATEMENT OF HON. BYRON L. DORGAN, 
                 U.S. SENATOR FROM NORTH DAKOTA

    Senator Dorgan. Mr. Chairman, thank you very much. Chairman 
Powell, thank you for being here today.
    Mr. Chairman, I have worked with you and the Senator from 
Alaska, Senator Stevens, on this issue. The issue of Universal 
Service is very, very important to rural areas of the country, 
to rural states especially. When we wrote the legislation in 
1996, we created a Universal Service that we said, at that 
point, would provide comparable service at affordable and 
comparable rates.
    Now, after 7 years of neglect--and I go back all the way to 
the FCC at the start of the development of the new law and the 
administration of the new law--the Universal Service Program is 
in significant trouble. We find that the contribution base is 
in decline, the industry is in the midst of a digital 
transformation, and that transformation is challenging 
regulatory rules and challenging, in many ways, the way we 
think about all of this. But while I think this migration to 
digital has been a great success for consumers, as new forms of 
communications--cell phones, e-mail, instant messaging, voice 
over the Internet--are invented and popularized, they present 
some real new challenges for us, as well.
    And I agree with you, Mr. Chairman, that we should not 
stunt the growth of progress in the migration to the advanced 
networks from the circuit-switched networks. I don't think we 
ought to try to stunt the growth of that, but we have to 
embrace the change and be flexible about how we deal with it. 
But none of that, in my judgment, means that we should ignore, 
or can ignore, the issues of Universal Service, because 
Universal Service is central to the question of whether we have 
a system of communications in this country that provides 
opportunities to all.
    The fact that there is a telephone in Regent, North Dakota, 
my little hometown, makes Donald Trump's telephone more 
valuable. Doesn't mean he's ever going to call Regent, but it 
means that his telephone instrument on his desk in New York 
City is made more valuable because someone in Cutbank, Montana, 
has a telephone that he can call if he wants to. That's the 
universality of service that all of us care a great deal about.
    Now, I will not repeat what my colleague from Alaska said. 
I don't know what my colleague from Montana said. I could 
hardly even guess, as a matter of fact.
    [Laughter.]
    Senator Dorgan. At least sometimes you can hardly guess. 
But I suspect both of them have covered, in some detail, the 
need to broaden the base. I know I heard my colleague from 
Alaska say that.
    We need to find a mechanism to broaden the base so that we 
have the resources necessary to have a Universal Service system 
that works. And does that mean finding a new collection 
mechanism? Does it mean doing as the Joint Board has suggested, 
including intrastate revenues in the contribution base? Is that 
enough? Or should the contribution base be broadened to include 
services like DSL, cable modems, VoIP?
    We really need, finally, to put all the spotlights on the 
same spot here and get an answer. We just can't any longer 
linger for 12 months, or 24 or 36 months, and keep watching 
this problem grow larger and see that solutions are not coming.
    So, Mr. Chairman, you have, I think, a significant burden 
here, as well. We do, in Congress. We need, together, to solve 
this problem, and I hope that a year from now, or 2 years from 
now, we're not here still talking about this problem. I think 
we will have taken whatever decisive action is necessary to fix 
that which is wrong, and we know that this fund is in decline, 
we know that that can't continue, and we know that we have to 
put these pieces together and make it work.
    Once again, just finally, I'm pleased that Senator Burns, 
Senator Stevens, and I have held two gatherings, summit 
gatherings, with stakeholders in all of this, and I think it's 
been a great exchange of information. I'm very pleased by the 
leadership of my colleagues, and I look forward to the rest of 
this hearing.
    Senator Burns. Well, Senator Dorgan, I want to thank you. I 
think you and Senator Stevens, in those summits, I think we 
come out of there with a very good exchange of information. And 
really, under those circumstances, wish it could have been a 
broader representation of the Senate. But, nonetheless, I think 
they were very good.
    Senator Brownback?

               STATEMENT OF HON. SAM BROWNBACK, 
                    U.S. SENATOR FROM KANSAS

    Senator Brownback. Thanks, Mr. Chairman, and thank you for 
holding the hearing. And, Chairman Powell, good to see you. I 
enjoyed visiting with you on the phone yesterday. I suppose in 
the future we'll visit over the Internet with the way things 
are converging and taking place.
    I just want to add my voice to the chorus. I agree with the 
things that I've heard said here today. The Universal Service 
Fund is very important to my state, but we're seeing explicit 
and implicit portions of it are under tremendous strain, a 
shrinking pool of resources, increase in demand. We're seeing 
the convergence in inter-platform competition that was promised 
by the Telecom Act of 1996 that a lot of people think has been 
a long time in coming, but we're seeing it, and we're now 
dealing with the impacts of that. This is one of the areas that 
we're going to have to deal with.
    I do look forward to working with the Chairman, Chairman 
Stevens and Senator Dorgan and others, in earnest on 
discovering and implementing reform on the Universal Service 
Fund, including contribution and distribution methodologies and 
ways of ensuring competition and Universal Service are no 
longer at odds with each other. And I think we're really going 
to have to look at that comprehensive reform that others have 
already spoken about, and I look forward to joining in that 
effort.
    Thanks, Mr. Chairman.
    Senator Burns. Thank you, Senator Brownback.
    Senator Sununu?

               STATEMENT OF HON. JOHN E. SUNUNU, 
                U.S. SENATOR FROM NEW HAMPSHIRE

    Senator Sununu. Thank you, Mr. Chairman. And welcome, 
Chairman Powell.
    I'm interested in this issue, obviously, because it has a 
big impact on the future of the telecommunications industry, 
but I'm also trying to ensure that, as we look at the issue, we 
approach it from a sense of consistency and fairness, not just 
in an arbitrary way that's driven by our desire to get our 
hands on more revenue.
    The phrase was used that ``the fund is in decline.'' I 
don't necessarily agree with that. Certainly the revenue base, 
the size of the revenue base, may be in decline, and the rate 
of assessment may be increasing, but, you know, I think the 
phrase ``the fund is out of control'' is maybe more 
appropriate.
    In an age where the cost of transmitting data and the cost 
of service and the cost of bandwidth is declining at a 
significant rate, the cost of the fund has increased 300 
percent in just 6 years. Now, that may well be partly due to 
the way that the legislation was written, the number of 
mandates that we've put onto the fund, and I think that's what 
we need to look at. We shouldn't just be approaching this from 
a sense of, ``We need more money. We wrote a lot of regulations 
requirements mandates into the law that are costing a lot of 
money, so let's find a way to increase the taxes on 
telecommunication.'' I think that could well be 
counterproductive if you broaden the base, but in the long run 
leave all the mandates, all the requirements in place, all the 
complexity in place, and do nothing to rationalize the system, 
then you may well be hurting those people in rural parts of the 
country that are trying to get access to modern services.
    So I think we need to look at the Universal Service 
Program, first, from the perspective of what are we trying to 
accomplish, and ask the question of whether legislation that 
was written only 8 years ago is really appropriate for the 
telecommunications industry and the goals of the fund five or 
10 years from now, because times certainly are a-changing.
    Thank you, Mr. Chairman.
    Senator Burns. I don't think there's anybody on this 
Committee that doesn't understand that we have to take a look 
at the fund itself and how it makes disbursements, along with 
the running base.
    Chairman Powell, thank you for coming this morning, and we 
look forward to your testimony.

    STATEMENT OF HON. MICHAEL K. POWELL, CHAIRMAN, FEDERAL 
                   COMMUNICATIONS COMMISSION

    Mr. Powell. Thank you, Senator, in your capacity as the 
Chair. I'm pleased to be here with you. Senators, it's always a 
pleasure to be here on this important topic.
    Providing high quality telecommunications services to all 
Americans at affordable rate is unquestionably a cornerstone of 
the Telecom Act. The act directed the FCC to advance two 
critical objectives, to open local markets to competition and 
to preserve and advance universal service.
    To promote these dual goals, the FCC is currently 
reexamining virtually every aspect of the Universal Service 
Program to ensure that the program is administered efficiently 
and remains sustainable as it confronts widespread marketplace 
and technological developments that have occurred since the 
Commission first adopted its rules.
    We are in the throes of major changes in communications. 
And as I've discussed with this Committee before, the telecom 
industry has embarked on a great digital migration. Traditional 
telecommunications services are migrating from old circuit-
switched networks to new and advanced Internet protocol 
networks. The demand pull of consumer choice and technological 
push of network innovation mean that this migration is 
inevitable. Indeed, regulators cannot stop it, nor should we 
want to, for it promises new competitive choices and 
spellbinding innovation for consumers. Our efforts to reform 
the Nation's Universal Service Program must embrace change and 
provide sufficient forward-looking flexibility to ensure that 
supported services remain affordable and ubiquitous.
    Digital migration should not be seen as a threat to our 
universal service objectives, but an opportunity. Indeed, the 
fact that schools and libraries program has succeeded in 
connecting 99 percent of public schools is an example of 
universal success in the digital age.
    And there is good news among the many challenges for 
advancing our goals of ubiquity and affordability. As Senator 
Sununu mentioned, new technology can reduce the cost of 
providing supported services, particularly in the higher cost 
areas of our country. The introduction of technologically 
advanced lower-cost networks also can have a disciplining 
effect on the high cost of the fund over time, thereby limiting 
the burden on our policies that it places on consumers.
    Deployment of network infrastructure to high-cost areas 
directly benefits consumers. And as many of you are aware, a 
high-quality network can serve as the basis for economic 
development and job creation in rural America.
    However, as we progress further in our digital journey, we 
will have to confront significant challenges, both in the short 
and long term. Fully recognizing this challenge, the FCC is 
currently examining every aspect of the Universal Service 
Program to ensure that it is administered effectively and 
remains sustainable as major marketplace and technological 
developments take root.
    At the center of the effort, as I have mentioned, are the 
goals of ubiquity and affordability. And to advance those 
goals, we must do a number of critical things.
    First, we must reform the FCC's contribution methodology 
for collecting Universal Service funds to address changes in 
the market and to ensure a more stable funding base. Several 
trends have put pressure on the contribution factor. Interstate 
revenues have been flat or in decline since 1999 as a result of 
price competition, bundled packages, and technology 
substitution. Moreover, expanding the base to include 
interstate revenues may, indeed, be needed to stem the 
declining tide.
    Second, we must control the growth of the Universal Service 
Fund, mindful that consumers ultimately are the ones that pay 
for achieving our Universal Service objectives. Particularly, 
we need a more rational method of distributing Universal 
Service support that promotes competition, but preserves the 
fund. To this end, the Joint Board will very soon make 
recommendations to the Commission on ETC eligibility and 
portability, two of the objectives that I think Senator Stevens 
mentioned in his principles at the outset.
    Third, we must improve the administration of our vast and 
sometimes unnecessarily technical rules in many of our 
programs. Clarifying and simplifying eligibility criteria in 
the schools and libraries program, Rural Healthcare Program, 
and low-income programs has been a priority. Indeed, at our 
next meeting, in November, we will present to the Commission an 
item that will advance the important homeland security and 
public safety interests of rural America by unlocking funds 
that Congress has designated for rural healthcare providers.
    And, finally, we must continue to diligently enforce the 
Universal Service rules that are currently on the books if we 
are to sustain Universal Service in a digital age, as well as 
maintain the accountability of these programs. Our recent 
enforcement activities are designed to ensure that every 
responsible entity pays their fair share. And today I'm 
actually quite happy to announce that because of stepped-up 
enforcement efforts at the Commission, the contribution factor 
for the first quarter of next year is likely to drop below 9 
percent, as opposed to increase to near 10 percent, as was once 
feared.
    But to get things right, unquestionably this has to be a 
joint effort, a joint effort of Congress, the FCC, and state 
commissions. Recently, Senator Burns, in partnership with 
Senators Stevens and Dorgan, have hosted a second industry 
summit on Universal Service in an attempt to find consensus on 
the critical question of which contribution methodology will 
best support the statutory goals. The summits, which have been 
very well attended, play a critical role in informing the 
debate and reaching fair and equitable solutions. And I really 
want to thank the Senators for their leadership on this issue, 
and look forward to partnering with them as we solve these 
problems.
    I thank you for very much for your indulgence this morning, 
and I look forward to your questions.
    [The prepared statement of Mr. Powell follows:]

        Prepared Statement of Hon. Michael K. Powell, Chairman, 
                   Federal Communications Commission
Summary
    Providing high-quality telecommunications services to all Americans 
at affordable rates is a cornerstone of the Telecommunications Act. The 
1996 Act directed the FCC to advance two key objectives--opening local 
markets to competition and preserving and advancing universal service. 
To promote these dual goals, the FCC is currently reexamining nearly 
every aspect of the program, to ensure that the program is administered 
efficiently and remains sustainable as it confronts widespread 
marketplace and technological developments that have occurred since the 
Commission first adopted its rules.
    We are in the throes of major changes in communications. As I have 
discussed with this Committee before, the telecommunications industry 
has embarked on a great Digital Migration. Traditional 
telecommunications services are migrating from old circuit-switched 
networks to new and advanced Internet protocol networks. The demand 
pull of consumer choice and technological push of network innovation 
mean that this migration is inevitable. Indeed, regulators cannot stop 
it, nor should we want to for it promises new competitive choices and 
spell-binding innovation for consumers. Our efforts to reform the 
Nation's universal service programs must embrace change and provide 
sufficient, forward-looking flexibility to ensure that supported 
services remain affordable and ubiquitous.
    Digital migration should not be seen as a threat to our universal 
service objectives, but an opportunity. Indeed, the fact that our 
Schools and Libraries program has succeeded in connecting 99 percent of 
public schools to the Internet is an example of universal service 
success in the Digital Age. And there is good news, among the 
challenges, for advancing our goals of ubiquity and affordability. New 
technology can reduce the costs of providing supported services, 
particularly in the higher-cost areas of our country. The introduction 
of technologically advanced, lower-costs networks also can have a 
disciplining effect on the high-cost fund over time, thereby limiting 
the burden our policies place on consumers. Deployment of network 
infrastructure to high-cost areas directly benefits consumers, and as 
many of you are aware, a high-quality network can serve as the basis 
for economic development and job creation in rural America.
    However, as we progress further in our digital journey, we will 
have to confront some significant challenges in the short and long 
term. Fully recognizing this challenge, the FCC is currently 
reexamining nearly every aspect of the universal service program to 
ensure that the program is administered effectively and that it remains 
sustainable as major marketplace and technological developments take 
root.
    At the center of our efforts to reform universal service are the 
goals of ubiquity and affordability. To advance these goals, we must do 
a number of critical things.
    First, we must reform the FCC's contribution methodology for 
collecting Universal Service Funds to address changes in the market and 
to ensure a more stable funding base. Several trends have put pressure 
on the contribution factor: Interstate revenues have been flat or in 
decline since 1999 as a result of price competition, bundled packages 
and technology substitution. Moreover, expanding the base to include 
intra-state revenues may be needed to stem the declining tide.
    Second, we must control the growth of the Universal Service Fund, 
mindful that consumers ultimately pay for achieving our universal 
service objectives. Particularly, we need a more rational method of 
distributing universal service support that promotes competition, but 
preserves the fund. To this end, the Joint Board will soon make 
recommendations to the Commission on ETC eligibility and portability.
    Third, we must improve the administration of our vast and sometimes 
unnecessarily technical rules in our programs. Clarifying and 
simplifying our eligibility criteria in the Schools and Libraries 
program, Rural Health Care program and low income programs has been a 
priority. Indeed, at our November meeting, I will present to the 
Commission an item that will advance the important homeland security 
and public health interests of rural America by unlocking the funds 
that Congress designated for rural health care providers.
    And, finally, we must continue to diligently enforce the universal 
service rules that are currently on the books if we are to sustain 
universal service in a digital age, as well as maintain the 
accountability of these programs. Our recent enforcement activities are 
designed to ensure that every responsible entity pays their fair share. 
I am happy to announce that because of our stepped up enforcement 
efforts, the contribution factor for the first quarter of next year 
likely will drop below 9 percent, as opposed to increase to 10 percent 
as was feared.
    To get things right, this must be a joint effort of Congress, the 
FCC and the State Commissions. Recently, Senator Burns, in partnership 
with Senator Stevens and Dorgan, hosted a second industry summit on 
universal service in an attempt to find consensus on the critical 
question of which contribution methodology will best support the 
statutory goals. The summits, which have been very well attended, play 
an important role in informing the debate and reaching fair and 
equitable solutions, and I thank the Senators for their leadership on 
this issue.
    Thank you and I look forward to your questions.
                                 ______
                                 
    Good morning, Mr. Chairman and distinguished members of the 
Committee. It is my pleasure to come before you today to discuss the 
Federal Communications Commission's (the ``FCC'' or the ``Commission'') 
efforts to preserve and advance universal service.
Introduction
    Providing high-quality telecommunications services to all Americans 
at affordable rates is a long-held telecommunications policy goal and a 
cornerstone of the Telecommunications Act of 1996 (the ``1996 Act''). 
The 1996 Act directed the FCC to further two key objectives--opening 
local markets to competition and preserving and advancing universal 
service in high-cost areas. Section 254 of the 1996 Act represents this 
country's shared social policy of ensuring ubiquitous and affordable 
service. Seven years after the passage of the 1996 Act, the Commission 
remains committed to furthering both these goals.
    We are in the throes of major changes in communications. As I have 
discussed with this Committee before, the telecommunications industry 
is immersed in a great Digital Migration. Traditional 
telecommunications services are migrating from old circuit-switched 
networks to new and advanced Internet protocol networks. The demand 
pull of consumer choice and technological push of network innovation 
mean that this migration is inevitable. Indeed, regulators cannot stop 
it, nor should we want to for it promises new competitive choices and 
spell-binding innovation for consumers. Our efforts to reform the 
Nation's universal service programs must embrace change and provide 
sufficient, forward-looking flexibility to ensure that supported 
services remain affordable and ubiquitous.
    Too often regulators and carriers alike try to conform the new to 
the old, whether for competitive reasons or simply because it is 
familiar. In cooperation with our state colleagues, we must evolve our 
universal service programs to be in sync with the exciting, and 
unstoppable, changes in the competitive digital communications 
landscape.
    Digital migration should not be seen as a threat to our universal 
service objectives, but an opportunity. There is good news, among the 
challenges, for advancing our goals of ubiquity and affordability. New 
technology can reduce the costs of providing supported services, 
particularly in the higher-cost areas of our country. The introduction 
of technologically advanced, lower-costs networks also can have a 
disciplining effect on the high-cost fund over time, thereby limiting 
the burden our policies place on consumers. Deployment of network 
infrastructure to high-cost areas directly benefits consumers, and as 
many of you are aware, a high-quality network can serve as the basis 
for economic development and job creation, two things that are sorely 
needed in rural America.
    However, as we progress further in our digital journey, we will 
have to confront some significant challenges in the short and long 
term. Fully recognizing this challenge, the FCC is currently 
reexamining nearly every aspect of the universal service program, not 
only to ensure that the program is administered as efficiently and 
effectively as possible and that the overall program remains 
sustainable, but also in response to widespread marketplace and 
technological developments that have occurred since the Commission 
first adopted its rules.
    At the center of our efforts to reform universal service are the 
goals of affordability, ubiquity and sufficiency. To meet these goals, 
we must do a number of critical things:

   First reform the FCC's contribution methodology for 
        collecting Universal Service Funds to address changes in the 
        market.

   We must control the growth of the Universal Service Fund, 
        mindful that consumers ultimately pay for achieving our 
        universal service objectives.

   We need a more rational method of distributing universal 
        service support to promote competition, but preserve the fund.

   We must streamline the administration of our vast and 
        sometimes unnecessarily technical rules in this area.

   And, finally, we must continue to diligently enforce the 
        universal service rules that are currently on the books if we 
        are to sustain universal service in a digital age.

    To get things right, this must be a joint effort of Congress, the 
FCC and the State Commissions. Recently, Senator Burns, in partnership 
with Senators Stevens and Dorgan, hosted a second industry summit on 
universal service in an attempt to find consensus on the critical 
question of which contribution methodology will best support the 
statutory goals. The summits, which have been very well attended, play 
an important role in informing the debate and reaching fair and 
equitable solutions, and I thank the Senators for their leadership on 
this issue.
II. Background on Current Universal Service Programs
    As always, the Commission's work in the universal service arena is 
guided by the public interest and the principles set out by Congress in 
the 1996 Act. Section 254 of the 1996 Act directs the Commission to 
base universal service policies on several fundamental principles, 
including: (1) promoting the availability of quality services at just, 
reasonable, and affordable rates; (2) increasing access to advanced 
telecommunications and information services throughout the Nation; and 
(3) providing comparable access to telecommunications services to all 
consumers, including those in low income, rural, insular, and high-cost 
areas. In addition, the 1996 Act expanded the scope of universal 
service by directing the Commission to establish support mechanisms for 
schools and libraries and for rural health care facilities for advanced 
services.
    In its present form, universal service consists of several programs 
which provided some $5.96 billion in support in 2002 and are projected 
to provide some $6.34 billion in support in 2003. The largest part of 
the fund goes to support service in high-cost areas. The monopoly 
environment once 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 monopoly era rates that 
provided surplus funds--such as business rates in urban areas--are 
undercut by new entrants and are driven towards a cost-based level. In 
the 1996 Act, Congress directed the FCC to adopt explicit support 
mechanisms that would be sufficient to ensure that rates remain 
affordable and reasonably comparable throughout the Nation.
High-cost Programs
    Accordingly, the FCC's high-cost mechanisms provide support to 
eligible telecommunications carriers for a portion of the costs of 
providing telephone service in rural and high-cost areas where such 
services otherwise might be prohibitively expensive. In 2002, 
approximately $2.9 billion in high-cost support was provided to 
approximately 1,500 carriers in all 50 states, American Samoa, Guam, 
the Northern Mariana Islands, Puerto Rico, and the Virgin Islands. In 
2002, Alaska, Wyoming, Montana, and North Dakota were among the top 
five states, in terms of amount of Federal high-cost support per line 
received.
Schools and Libraries Program
    The schools and libraries program, or the E-Rate program, provides 
discounts to eligible schools and libraries for telecommunications 
services, internal connections, and Internet access. The 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 services, internal connections, and Internet 
services. As a direct result of the e-rate program, 99 percent of 
America's schools are connected to the Internet.
Lifeline and LinkUp
    Other components, the Federal 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.
Rural Health Care
    And finally, the rural health care mechanism provides support to 
rural health care providers. While, as many of you are aware, 
participation in the rural health care mechanism has fallen short of 
the $400 million annual program cap, I am pleased to report that the 
Commission will be considering a variety of measures designed to 
strengthen this program at the FCC's November Open Meeting. In 
addition, I am going to be joined by members of Congress next week to 
tour a major rural health care facility to see how we can continue to 
improve this program.
    The Commission is constantly striving to ensure that the Federal 
universal service programs remain effective in a changing 
telecommunications marketplace. Indeed, we are currently engaged in 
proceedings regarding nearly every aspect of the universal service 
program, from contribution to distribution, to ensure that each 
component is administered as efficiently and effectively as possible 
and that the overall program remains sound. As the Commission engages 
in our ongoing review, our commitment remains steadfast to improve and 
strengthen all of our support mechanisms for the benefit of all 
consumers--especially consumers in high-cost areas, individuals with 
low incomes, and patrons of schools, libraries, and rural health care 
facilities. I will begin by discussing one of our biggest challenges--a 
reexamination of how we collect the monies used to support universal 
service.
III. Ongoing Challenges and Proceedings
Contribution Methodology
    Our first task in the area of universal service reform must be in 
the area of contribution methodology. The Commission collects funds for 
the various universal service support programs pursuant to section 
254(d) of the 1996 Act. Service providers must pay a percentage of 
their revenues from interstate end-user telecommunications services to 
the Universal Service Fund. This percentage, called the contribution 
factor, changes on a quarterly basis depending on the demand for 
funding and the base of reported revenues. The contribution factor for 
the fourth quarter of 2003 is 9.2 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 interstate telecommunications revenues grew 
between 1984 and 1999, they have since been flat or in decline as a 
result of price competition and migration to bundled services and new 
technologies. 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, information services such as 
Internet access, and customer premises equipment. Such bundling has 
been a boon for consumers, but has made it difficult to isolate 
revenues for interstate telecommunications services. Additional 
competitive pressures lie ahead on the technological horizon, as 
communications become more Internet-centric, as is the case with e-
mail, instant messaging and voice over IP applications.
    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, incremental rise in the contribution 
factor over time. And this trend is likely to continue as these new 
products and technologies become 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:

   The Commission increased the safe harbor that wireless 
        carriers may use to determine the interstate percentage of 
        their revenues from 15 percent to 28.5 percent.

   The Commission also adopted an interim regime that 
        eliminated the time lag between the reporting of revenues and 
        the recovery of contributions, which lessens the relative 
        burden facing long distance carriers with declining interstate 
        telecommunications revenues.

   And the Commission prohibited mark-ups of contribution costs 
        on customers' bills to ensure that carriers cannot profit from 
        inflated line charges (at least one major long distance carrier 
        was assessing a ``Universal Service Connectivity Charge'' for 
        residential customers of 11 percent when the relevant 
        contribution factor was 7.28 percent).

    While these are important steps, serious issues remain that the 
Commission must address to ensure the sustainability of universal 
service funding. 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 is subject to assessment and increases the difficulty of 
identifying interstate revenues. As a result, contribution factors over 
time are likely to continue their ascent given a contribution 
methodology based solely on interstate telecommunications service 
revenues.
    The Federal-State Joint Board (the ``Joint Board'') has recommended 
that Congress amend section 254 of the 1996 Act to provide the FCC with 
authority to assess intrastate revenues, in addition to interstate 
revenues. I heartily support this recommendation. At the Commission, we 
have begun considering the effect such a change would have on universal 
service. A total revenue assessment would make it easier for carriers 
to identify what revenues are counted for contribution purposes. 
Moreover, such an assessment would be lower and more stable than one 
based on interstate telecommunications revenues alone, although it 
bears mentioning that it is still the consumer that ultimately pays for 
universal service, and none of the proposals reduces the overall size 
of the fund.
    The FCC has also been contemplating whether to make substantial 
changes to the current methodology under existing statutory authority 
and is actively considering different contribution approaches. The 
Commission has sought comment on alternative methodologies based (in 
whole or in part) on end-user connections, including an approach that 
would collect based on assigned telephone numbers.
    These approaches arguably could create a more sustainable model for 
continuing universal service in the future as the digital migration 
marches on. 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. Additionally, 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 a connections-based methodology--argue 
that the effect of these proposals would be to reduce significantly the 
contributions of long-distance carriers (which have very few assigned 
telephone numbers or end-user connections) in violation of the 
statutory requirement that all carriers contribute on an equitable and 
nondiscriminatory basis.
    I am convinced that reform of the Commission's contribution 
methodology is required in the short-term if we are to ensure the 
sufficiency and predictability of support. To that end, I hope to forge 
a consensus so that this proceeding can be completed in the first half 
of next year. As the market for telecommunications and information 
services continues to evolve, I believe that a purely revenues-based 
contribution methodology may no longer be the best way to promote 
Congress's universal service mandate. Our overriding goal is to ensure 
that universal service funding remains stable. I have challenged the 
industry and the Commission's staff to continue to explore flexible and 
forward-thinking options that meet this test. Rest assured that the 
Commission will leave no option unexplored.
    As more communication services move to the Internet, questions will 
persist as to whether information service providers should be required 
to contribute to the fund. Fortunately, Congress has afforded the 
Commission with discretionary authority to assess those that are not 
telecommunication service providers, but do use telecommunications. The 
Commission has sought comment, in the Wireline Broadband Notice of 
Proposed Rulemaking, on whether all facilities-based providers of 
broadband services should be subject to the same contribution 
obligations as providers of telecommunications services.
    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 providers. The 
Commission accordingly sought comment on whether it should exercise its 
permissive authority and require all facilities-based broadband 
Internet access providers to contribute to the universal service 
mechanisms.
    Throughout our analysis, of course, we must balance the needs of 
funding these programs against the real burden that our contribution 
requirements could impose on consumers if we do not manage those 
requirements carefully.
Distribution of Support
    The incremental increases in the contribution factor have resulted 
not only from the shrinking of the interstate revenue base, but also 
from the marked increases in the demand for money from the fund. Much 
of the increased demand has resulted from the FCC's reform of the 
interstate access charge system, which has removed the implicit support 
in interstate access charges and created two explicit universal service 
mechanisms. As a result of these changes, many incumbent LECs 
(``ILECs'') now recover costs from the Universal Service Fund that 
previously were recovered through access charges from long distance 
carriers.
    This reform was required by the 1996 Act's requirement that the 
Commission eliminate implicit funding of universal service and create 
explicit funding mechanisms instead. In addition, the designation of 
wireless carriers and other competitors as eligible telecommunications 
carriers (``ETCs'') is increasing program demand. Growth on the demand 
side has been less of an issue with respect to the schools and 
libraries, rural health clinics, and low-income mechanisms, 
particularly since the first two mechanisms are capped under our rules, 
but the Commission must ensure that they remain efficient and effective 
as well.
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 ETCs. While competitive ETCs 
receive a very small percentage of high-cost funds overall, their share 
has been increasing noticeably in the last year and there has been a 
coinciding surge in the number of ETC applications as competition 
blossoms. Indeed, there are 27 pending applications at the FCC. 
Competitive ETCs receive support under the ``identical support'' rule 
(also called ``portable support''), which provides per-line support 
based on the incumbent carrier's costs. Incumbents do not lose support 
when a competitive ETC captures a line, because they just receive more 
support per line for their remaining lines. Meanwhile, the competitive 
ETC gets support for every line it has as well. 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 ILEC'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 on Universal Service to consider the intersection of competition 
and universal service in rural areas. The Joint Board, under 
Commissioner Abernathy's able leadership on the Federal side and 
Commissioner Nan Thompson's leadership on the state side, 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) of the 1996 Act. 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 have advanced a wide variety of proposals regarding 
portability in their comments and at the public forum. Several groups 
of ILECs 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. One proposal to control growth would be to continue 
basing support for all ETCs based on the incumbent's costs, but cap 
per-line support amounts upon entry of a competitor and consider 
supporting only a single connection per customer. ILECs generally 
oppose this proposal, 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.
    When it has finished considering the record, the Joint Board will 
make its recommended decision to the FCC, which we anticipate receiving 
in early January 2004. I look forward to reviewing it then.
2. Support for Non-Rural Carriers
    While rural carriers receive the lion's share of high-cost funding, 
``non-rural'' carriers (the Bell operating companies and other 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 forward-looking 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. 
Nonetheless, rural carriers receive substantial support in each of the 
states for which non-rural support is unavailable under the other 
portion of the high-cost mechanism. Non-rural carriers in these states 
also receive Federal support under the interstate access support 
mechanism, which distributes approximately $650 million annually to 
replace implicit support from interstate access charges.
    I realize that this Committee is considering legislation that would 
alter the distribution of non-rural support. The Commission recently 
completed its own review of this support mechanism in response to a 
remand by the Tenth Circuit Court of Appeals of an earlier FCC 
decision. The court ruled that the Commission had not adequately 
explained how the non-rural support mechanism is sufficient to enable 
states to set rural rates that are reasonably comparable to those in 
urban areas. In addition, the court directed the Commission to consider 
how to induce states to ensure rural and urban rate comparability 
within their borders, since the Federal mechanism aims primarily to 
mitigate cost differentials among the states and states have 
jurisdiction over local rates.
    Here again, the Commission has taken action. I am pleased to report 
that at the Commission's October Open Meeting the FCC took another step 
toward addressing the outstanding legal challenges to the non-rural 
mechanism. In the Tenth Circuit Remand Order, the FCC adopted a 
national threshold to determine when non-rural, high-cost support 
should be available by balancing the legitimate state need against the 
risk of excessive support. Importantly, in that proceeding the 
Commission asked a range of questions designed to make available 
additional, targeted Federal support as a means of inducing states to 
adopt explicit support mechanisms that will be sustainable in a 
competitive market.
Low-Income Support
    As I have described, 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.
    As always, the Commission will also continue its universal service 
related outreach efforts. Announced in August of this year, ``Project 
Heartland'' is aimed at building connectivity in rural areas and 
specifically targets three regions for additional FCC efforts: Alaskan 
Native Villages, the Appalachian region and the Mississippi Delta 
region. The Commission will continue our work with groups such as the 
Appalachian Regional Commission, the Delta Regional Authority, the 
Alaskan Rural Development Council and the National Congress of American 
Indians.
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 proceedings. These rulemakings, like 
the Lifeline/LinkUp rulemaking, aim to eliminate red tape while 
ensuring continued program integrity.
    As I mentioned previously, at the Commission's Open Meeting on 
November 13, 2003, the Commission will consider an Order to 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 is perhaps one of 
the greatest applications enabled by advances in telecommunications 
technology, and it takes on added importance in light of the increased 
homeland security threats--including bioterrorism--that our Nation 
confronts today.
Enforcement
    Finally, there is an important and perhaps underappreciated 
component of our universal service work that I would like to call to 
your attention. In recent months the FCC has taken significant steps to 
bolster its Universal Service Fund enforcement. The FCC has taken swift 
and decisive enforcement action against wrongdoers and has streamlined 
its process for identifying future violations. For example, in 
September, the Commission proposed a forfeiture against Globcom, Inc., 
a long-distance reseller, for violating the Commission's rules by 
failing to pay universal service contributions and to report accurate 
revenue information. The Globcom Notice of Apparent Liability is the 
largest forfeiture the Commission has ever proposed for such 
violations.
    Indeed, officials at USAC report that, in the wake of our 
enforcement action, USAC has experienced a notable increase in entities 
complying with our rules by paying their fair share into the fund. 
Through enforcement, the Commission is ensuring that the contribution 
burden is spread as widely as our rules currently require. This effort 
has contributed directly to slowing the rapid increase in the 
contribution factor and may well lead to a measurable decrease in this 
quarter's number.
    The FCC's Enforcement Bureau is also actively enforcing the 
Commission's new debarment rules, which establish procedures to prevent 
persons who have defrauded the government or engaged in similar acts 
through activities associated with or related to the schools and 
libraries support mechanism from receiving the benefits associated with 
that program. Finally, the FCC has developed a formalized process for 
coordinating and referring apparent violations of our USF rules to 
other government agencies, such as the Department of Justice, where 
appropriate.
IV. Conclusion
    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 
Committee on these challenging and critical issues.

    Senator Burns. Thank you, Mr. Chairman.
    And despite the Commission's early constant tinkering, we 
might say, the current assessment mechanism has not resulted in 
sufficient funds to preserve and advance these goals that you 
spoke of. In fact, the base of the funds that are collected are 
constantly shrinking, as noted by just about every Member on 
this Committee, and clearly the system is in bad need of 
expanding the base of contributors for those revenues and a 
system based on factors that interstate revenues and end users.
    You might want to think about that. Senator Lautenberg has 
joined the Committee this morning. Do you have a statement, 
before we start the questioning here?

            STATEMENT OF HON. FRANK R. LAUTENBERG, 
                  U.S. SENATOR FROM NEW JERSEY

    Senator Lautenberg. That's very generous of you, Mr. 
Chairman, to permit me to do that. In order to expedite things, 
I'll ask that the full statement be included in the record.
    Senator Burns. Without objection.
    Senator Lautenberg. Thank you very much.
    [The prepared statement of Senator Lautenberg follows:]

            Prepared Statement of Hon. Frank R. Lautenberg, 
                      U.S. Senator from New Jersey
    Mr. Chairman,

    Thank you for holding this hearing on the Universal Service Fund.
    ``Universal service'' is the Federal Government's commitment to the 
American people that they would have access to ``a rapid, efficient, 
nation-wide, and worldwide'' communication service with ``adequate 
facilities at reasonable [rate.]''
    We need to keep this commitment.
    We all know that the Universal Service System faces increasing 
demands for support and that the Fund is actually growing in dollars.
    Today, the Fund stands at more than six billion dollars, compared 
to just 1.7 billion in 1997.
    While this indeed is a lot of money, Universal Service's funding 
base--fees and charges assessed on interstate and international end 
user telecommunication revenues--continues to decline.
    In 2001 and 2002, the universal service funding base declined by an 
average of 8 percent per year.
    The decline in universal service's funding base will continue 
unless we stop carriers from finding ways to avoid contributing to the 
Universal Service Fund.
    I would like to briefly point to two specific funds within the 
Universal Service Fund that I believe are critically important to all 
Americans, particularly people in my part of the United States.
    First, the low income support fund is very important to children, 
single mothers and low income families in high-cost of living areas, 
like my home state of New Jersey.
    Second, ``E-Rate'' fund is important to thousands of school and 
libraries throughout America. I know there have been some problems with 
the problem, but the goals and contribution of the E-Rate funds to 
school and libraries are worth preserving.
    So while we discuss the future of the Universal Service Fund, we 
should keep the long-term viability and proportionate funding of these 
two important programs intact.
    Thank you, Mr. Chairman. I look forward to hearing from our 
witness.

    Senator Burns. Senator Smith, of Oregon, thank you for 
joining us this morning. Do you have a statement?

              STATEMENT OF HON. GORDON H. SMITH, 
                    U.S. SENATOR FROM OREGON

    Senator Smith. I do, Mr. Chairman. And, if I may, I'd 
actually like to present it, because I think it's very 
important to this hearing.
    And so I thank you for holding this hearing on the 
Universal Service Program. I believe it's a critical issue to 
rural America. In my opinion, universal service strikes at what 
is good about our form of government. It's a partnership 
between government and private sector to ensure that families 
in all parts of America have access to basic telecommunications 
service to improve their quality of life and provide economic 
opportunity. And it's fundamentally about fairness. Rural 
Americans are entitled to telephone service at fair rates and 
quality, as compared to telephone service provided in cities.
    But the Universal Service Program has challenges. The 
revenue base, as you've noted, is declining, while demands for 
funds are growing. And I think fundamentally what my testimony 
says is that we are not meeting the test of fairness and 
equity.
    I'll try to abbreviate, Mr. Chairman, because I want to 
point out that the Chairman of this Committee, his state of 
Arizona, his telephone users pay $4 million into this fund, and 
yet they don't receive one dime from this. Not one dime. 
Residents of South Carolina, the Ranking Member, South 
Carolinians pay three million into this non-rural program. They 
get nothing in return. Texas pays nearly $13 million into the 
non-rural program, and they get nothing back. Residents in New 
Hampshire pay more than one million and receive nothing. 
Virginia, they pay six million and receiving nothing. Louisiana 
pays $2.5 million into the non-rural fund and get nothing back. 
In my state of Oregon, we pay $2.5 million into the non-rural 
fund. We receive nothing in return. Yet Oregon has many remote 
rural areas, just like Montana does.
    Mr. Chairman, I would ask, in the interest of time, that my 
whole statement be included in the record.
    Senator Burns. Without objection.
    [The prepared statement of Senator Smith was unavailable at 
time of printing.]
    Senator Smith. But I think it is critical that S. 1380, the 
bill I've introduced with Senator Bayh, of Indiana, at a 
minimum be adopted by this Committee, and ask that our chairman 
help us figure out how to make this fair.
    There are three states that receive money from this, 
significant money. Eighty-five percent of the United States get 
nothing, and that cannot be fair.
    And so I don't want to take all of the time this morning, 
but my plea to Chairman Powell is to help us to fix a program 
that is clearly broken. It is also to address the concerns some 
may have that we have a broader approach to solving this 
problem. That may take a long time, and, frankly, we need to 
fix this soon.
    All you have to do to see where the money is going, it's 
going to Mississippi, Alabama, and West Virginia. Eighty-five 
percent of the money is going to those three states. And a few 
states--Montana gets a little, Wyoming gets a touch, Kentucky, 
New Hampshire, Maine, or rather Vermont, not New Hampshire. The 
rest of the states, all of which have rural areas, all of which 
have ratepayers paying into the program. They get absolutely 
nothing for this. And I just think that that is a mistake, and 
the evidence is behind me, and we ought to fix it.
    Thank you, Mr. Chairman.
    Senator Lautenberg. Mr. Chairman.
    Senator Burns. OK. Senator Lautenberg?
    Senator Lautenberg. We have spent $1.7 billion in 1997. And 
while this is, indeed, a lot of money, Universal Service's 
funding-base fees, charges assessed on interstate and 
international end-user telecommunication revenues, continue to 
decline. In 2001 and 2002, the Universal Service funding base 
declined by an average of 8 percent per year. The decline in 
the service base, the funding base, will continue unless we 
stop carriers from finding ways to avoid contributing to the 
Universal Service Fund.
    And I'd like to briefly point to two specific funds within 
the Universal Service Fund that I believe are critically 
important to all Americans, and particularly people in my part 
of the country. First, the low-income support fund, very 
important, children, single mothers, low-income families in 
high cost-of-living areas, like my home state of New Jersey. 
Second, the e-rate fund. It's a critically important fund at 
thousands of schools and libraries throughout America. And I 
know there have been some problems with it, but the goals and 
the contribution of the e-rate funds to schools and libraries 
are worth preserving. So while we discuss the future of the 
Universal Service Fund, we should keep the long-term viability 
and proportionate funding of these two important programs.
    And I'm quick to mention, since we, in New Jersey, are 
noteworthy, about the difference that we generally get back on 
the dollars we send down to Washington. We're about 49th in 
return on those dollars, and, in particular, with all the 
Universal Service funds, we sent in 219 million, and we got 
back 43 for our poor and remote people. We have them, in New 
Jersey. We have--unfortunately, every state has them, but we 
have more than our share.
    So, Mr. Chairman, I thank you very much and commend you for 
holding this hearing, and I enjoyed hearing from the 
commissioners.
    Senator Burns. I'm going to recognize Senator Stevens. He's 
got other duties to perform over in Appropriations. And so I'd 
recognize the Senator at this time.
    Senator Stevens. Well, I do appreciate the comments that 
the Chairman has made, but I think it would be good for us to 
focus a little on history here before we go into the question 
of what should be the future of the fund.
    When I came to the Senate, for instance, in Alaska, the 
Army provided all of the service for telephones in Alaska. It 
was completely a government system. We traveled through to a 
private system. And Hawaii at that time had a very poor system. 
Senator Inouye and I asked for a concept of equalization of 
costs. ``Rate integration'' is what we called it. And that 
started a concept of developing a fund, on a private basis, by 
the carriers themselves. It was not government money at all. 
The interstate rate pool was not administered by the FCC at 
all.
    It wasn't until 1996, the demands of that fund, having 
grown and grown and grown, that we decided that we ought to 
find a new title, and we called it the Universal Service Fund. 
It still was not Federal money, it was not taxed money; it was 
contributions from those people who used the basic interstate 
service into a fund to assure that every portion of the country 
could receive a call from the interstate fund. But the 1996 Act 
added to that the concept of the e-rate, the concept of 
providing service to schools, libraries, and health facilities, 
no matter where they were. And the concept that you're calling 
low-income fund was really that e-rate started in this 
Committee, as a matter of fact, by Senators Snowe and 
Rockefeller, put in an amendment to require this.
    The demands from that fund are now what is causing the 
enormous increase in demand for Universal Service 
contributions. So I think we ought to look back and wonder a 
little bit whether the users of communications services should 
continue to provide the assistance to schools, libraries, and 
health facilities, and have us be willing not to call it a tax. 
There still is an enormous demand to assure that the 
telecommunications system, really the total communications 
systems now, it's no longer used, it shouldn't be called 
telecommunications, telephones aren't involved in a lot of it. 
The communications system of the country demands unification to 
the point where no matter where you are, from Key West to Point 
Barrow, or from a northern port in Maine to the border of 
California down by San Diego, no matter where you are you 
should be able to freely access any other place in this 
country. And, as far as that's concerned now, you should be 
assured we're working to make certain that our people could 
reach anywhere on the globe as inexpensively as possible so we 
can continue to be the dominant partner in the global economy.
    Now, we're at the place now where Universal Service has to 
be reformed, but I think we need really a conference of this 
Committee to say where are we going. Should we turn to the 
financial Ways and Means Committee and say maybe you should 
devise a way that we meet these demands for the schools, 
libraries, and health facilities without putting the burden on 
communications systems. I'm not saying we should or shouldn't, 
but maybe we should, because that's a considerable increasing 
burden that has nothing to do with communications. And in my 
state, it demands a significant portion of that contribution, 
and I applaud it. We now have connections to all of our 
schools, and we now have connections to all our health 
facilities, and we've developed what we call telemedicine 
because of it.
    But the policy question we have here today is what to do 
with Universal Service in the future, and I think it demands 
more than a review of what you have under your jurisdiction, 
Mr. Chairman. It demands more of a review of what social 
concerns are we going to require the users of communications to 
pay for. And once we get that decided, then we can decide what 
system the communications system itself should contribute to 
make sure that it is ubiquitous, that it will meet any part, 
any demand from any American anywhere for communications.
    I'll close by saying I hope you heard about the two young 
snow machiners that were going across Mount McKinley, the area 
south of Mount McKinley. Now, some people don't believe snow 
machiners should be in that area, but they were going there, 
having a grand time racing across, and they didn't see a 
crevasse. And, lo and behold, one of them went down the 
crevasse, and his partner, when he got his machine stopped, he 
looked down the crevasse, and there, down there about 120 feet, 
is his partner, standing on the skis that were wedged in the 
ledge in this crevasse. And they shouted and argued for awhile. 
And finally, the gentleman down in the crevasse pulled out his 
cell phone and dialed 911. A satellite happened to be going 
over, picked it up and notified the local nearest 911, which 
was in Anchorage, and within 35 minutes a National Guard 
aircraft picked him out of the crevasse.
    Now, that may not mean much to you, but it does to me. But 
beyond that, that's ubiquitous coverage. The capability of 
getting a call from anywhere in the United States, even down 
the bottom of a crevasse, to assure health and safety and the 
ability to get aid. Now, I think that's what we ought to do. We 
ought to concentrate more on that.
    But I urge you to start thinking about what are these 
increasing demands on this system before and should we find 
some way to limit those, or should we find some way to pass 
them off before we decide who should start contributing to 
overall Universal Service Fund.
    Thank you very much.
    Senator Burns. You weren't the young man at the bottom of 
that crevasse, were you?
    Senator Stevens. If I was, you would have left me there.
    [Laughter.]
    Senator Burns. Yes, he was the man at the bottom of the 
crevasse.
    Mr. Chairman, you've heard the comments up here. And I 
would ask you, and I guess we're talking this morning about 
broadening the base of revenues and how they're derived. And 
let this Committee know, if you believe the lack of necessary 
statutory authority to adopt appropriate contribution 
mechanisms, what changes in the law would you recommend?
    Mr. Powell. Well, I think the first and most obvious thing, 
which I think you have introduced legislation to deal with is 
the fact that we currently are legally forbidden from assessing 
on intrastate revenues. And I think that as we struggle through 
what solutions we might make and to the method in which 
contributions are assessed, that is a significant impediment, 
not only because it's a source of funding, which I think is the 
obvious reason, but because more and more converged services 
make very little distinction between a long distance or an 
interstate communications and an intrastate communications.
    So, for example, in wireless technology, you see buckets of 
minutes. They're just buckets of minutes, as far as consumers 
are concerned. There's little difference between local and 
long. That's causing an enormous difficulty in separating out 
what constitute the interstate revenues and what constitute the 
intrastate revenues. And it's also an incentive for carriers to 
under-represent what portion of their revenues are actually 
interstate. And you start, in essence, estimating and sometimes 
guesstimating what that is. If all sources of revenue were 
available to the program and the Commission, that significant 
allocation challenge would be removed, and I think you would 
probably get a fairer representation of contributions and the 
methodology.
    Senator Burns. When you talk about telecommunications, and 
we talk about the different ways that we communicate, and in 
your statement you talked about those new services that have 
come online that maybe should be a participant in that revenue 
base, would Voice over Internet Protocol fit in that category?
    Mr. Powell. I think that there's nothing that prevents you 
from asking the question about whether any new services that 
comes along, like that one----
    [Laughter.]
    Mr. Powell.--could or couldn't be in the base. I think that 
that judgment has to be something in which you're balancing the 
various objectives that you achieve. I do believe there are 
times when Congress and the Commission have provided incubation 
periods for new and emerging technologies, because it wants to 
promote the competitive objectives of the statute or the 
innovation objectives, in which it doesn't impose that 
assessment for some period of time, as a part of fostering 
that.
    But I do think that nothing should, per se, be off the 
eligibility list.
    Senator Burns. Senator Dorgan?
    Senator Dorgan. Mr. Chairman, thank you very much.
    Again, Chairman Powell, thank you for being here and 
participating in this. Specifically, if you can, what services 
do you think should and should not contribute in the future, 
just as a policy matter?
    Mr. Powell. I do believe that what's going to happen over a 
decade or more is that basically all services are going to 
become IP protocol-based, which means, in essence, 
communications are going to be the Internet. And I think that 
as that metamorphosizes, we are going to have to metamorphosize 
the Universal Service Program to operate in that environment. 
So I think that there is a legitimate question about if and 
when those services begin to meet the principles that are 
themselves outlined by the Congress in this statute, when is it 
being subscribed to by a substantial portion of the community, 
et cetera, et cetera. But I do believe that probably the 
largest category in the migration that ultimately we'll have to 
ask the question about assessing.
    Senator Dorgan. You describe in your testimony that perhaps 
we should look at systems that are not necessarily revenue-
based, but isn't a revenue-based system a system that would 
make the most sense, generally?
    Mr. Powell. Well, I'm not sure of that. I mean, what we're 
finding is that, you know, when a system is revenues-based, 
you're very dependent on the throes of the marketplace. And for 
a long time, interstate revenues were very stable, but they've 
become very tumultuous because of the changes in the market. So 
we have, for example, just long-distance-carrier decline, 
interstate revenues there have declined dramatically over time. 
We have a service innovation that is combining services in ways 
that's very difficult to determine the actual revenues.
    I think the key to the program is stability, and one of the 
reasons I think it's worth examining some of the connection-
based proposals is, I believe that they're a little more stable 
as a factor than whether a company has a good revenue quarter, 
or is projected to have a good revenue quarter, in a market 
that's likely to remain relatively tumultuous over this digital 
transition period.
    Senator Dorgan. Let me ask, just for a moment, about the 
decision by the FCC that wireline broadband service is an 
information service and not a telecommunications service. As 
you know, when that decision was considered by the FCC, there 
were concerns about that. When we wrote the Telecommunications 
Act, it seems to me that we would not have--of course, that was 
1996, and what has happened is the world has changed. It 
changes and then changes again, there's this metamorphosis in 
communications. But I don't know that--I don't believe any of 
us would have imagined a day when the newest invention for 
communication over a phone line that is broadband would not be 
called a telecommunications service. Can you go through for me 
your thinking or reasoning there?
    Mr. Powell. Well, I do want to be clear, the Commission has 
yet to rule that wireline services are information service. 
It's just a proceeding that's underway. We do so with respect 
to cable modem services, but we have yet to complete our 
proceeding on DSL or wireline services, just to----
    Senator Dorgan. Right.
    Mr. Powell.--just to make the record accurate.
    I think what we are facing, just to put it in a nutshell, 
the challenge for the Commission is, all communication services 
are rapidly metamorphosizing to things that look more and more 
like Internet, more and more like information services, and 
less and less like telephone services, of the traditional 
variety, which is creating all kinds of gray areas in which new 
services have to be classified.
    Congress does have definitions of telecom services, but it 
also has explicit policies associated with Internet and 
information services policies. I think those decisions were 
made at a time when those categories were more clearly defined, 
and those categories are becoming more and more ambiguous. I 
think the Commission is facing factual challenges, as it sees 
new services emerge, as to what their nature is under this 
statute, and I think that's going to continue.
    Senator Dorgan. Yes, I understand a final decision hasn't 
been made, but my understanding of the announcements was that 
that was a direction you were heading, or you had tentative 
conclusions. Maybe I'm missing----
    Mr. Powell. That's accurate, yes.
    Senator Dorgan.--part of that. And if that's the case, 
under the 1996 Act, only, ``telecommunications services,'' are 
eligible for Universal Service support. Is that right? And if 
that's the case, if your tentative conclusion becomes a 
permanent conclusion, then broadband can never be supported by 
Universal Service. And if we migrate telephone service to 
broadband, for example, if we're moving in this direction, are 
we moving in a direction where your determination at the FCC 
will preclude a significant amount of service from ever being 
eligible for Universal Service, and how do you reconcile that?
    Mr. Powell. Let me take a moment with that question, 
because I think the answer is, not necessarily, not really. 
Because, first of all, on the contribution side, I think 
Congress, in its wisdom, gave the Commission permissive 
authority to assess contributions for those who use 
telecommunications, even if they're not telecommunications 
services. So I, personally, am strongly of the view that we do 
have legal authority to assess Universal Service contributions 
against information service providers that use telecom.
    On the receiving side, here's what the Joint Board has 
moved toward and the Commission has moved toward. The Universal 
Service funds don't actually go for services; they go for 
network costs and infrastructures. And the advantage that we 
have is, the vast majority, if not all, of the infrastructures 
on which broadband services are provided are integrated 
networks that are also part of telecommunications 
infrastructures. And so it is the case today that our policies 
are that there are no barriers. We don't attempt to require 
people parse what portions of their network are being used for 
information services and what portion of their networks are 
being used for telecom services, in receiving Universal Service 
funds.
    So to try to put that in a nutshell, a typical DSL network 
is being used for telephone services and information services, 
and the Universal Service receipts that they are obtaining can 
be used for investing in and improving the network, under our 
rules, regardless of what services on the service layer are 
ultimately going over that. And so I think what we try to do is 
be careful to say the funds are for network costs and 
infrastructure investment and are less tied to specifically 
what services run over them, to the greatest extent the law 
permits, and so a lot of money, Universal Service money, is, in 
fact, being used for infrastructure modification and upgrade 
that provides broadband services in rural America.
    Senator Dorgan. Mr. Chairman, I see my time is expired, but 
let me just mention that in Section 254, the call in that 
section for Universal Service explicitly in the 1996 Act had it 
covering advanced telecommunications and information services. 
So whatever we do as we move in this direction, it's critically 
important that we provide universal service support for that 
technology that represents the basis for telephone service for 
people who live in high-cost areas.
    Mr. Chairman, thank you.
    Senator Burns. Senator Sununu?
    Senator Sununu. Chairman Powell, in your statement you 
talked a little bit about portability. I know this was 
something that Senator Stevens mentioned in his opening 
remarks. I did not hear his ``opening'' opening remarks. And I 
would like for you just talk a little bit more about this issue 
of portability and ways that we should be mindful not to 
undermine portability as we look at changes to the Universal 
Service Fund.
    Mr. Powell. I think that's right. The one thing I would say 
is, what makes this challenge is, I think, Congress and the 
Commission have lots of goals, and many of them put strains on 
other goals. And so one of the things we see happening is, the 
fruits of success of the 1996 Act are part of what presents the 
challenge. So what we've had is an increasing amount of 
competition, an increasing amount of carriers, facility-based 
carriers and other type of carriers, entering markets and 
competing for consumers. We also have had successful technology 
migration and substitution. So we are seeing dramatic increase 
in uses of new technologies to provide communications systems, 
where once we only had the landline telephone system.
    We shouldn't be upset about that. That, to me, is a 
wonderful accomplishment. But what it means is there are a 
whole lot more supplicants showing up to the Universal Service 
trough looking to access that money as a way of lowering their 
costs, as well. And so one of the issues associated with 
portability is, as carriers begin to come into markets and 
you're dealing with more than just the traditional incumbent 
that's providing service, but others who are competing at it, 
now you have issues of technical neutrality to concern 
yourself. Are you biasing one technology over the other by the 
movement of the funds? Are you biasing competitive entry or 
preventing competitive entry, depending on the policies you 
adopt? So this a problem that has been presenting itself 
because of the successes of our other policies.
    And so what do we have to get right here? I think what we 
have to get right here it to make sure that the availability of 
funds and the allocation of them do not inadvertently bias one 
competitive alternative over another, because I don't think the 
Government should be in the business of picking the winners and 
losers in a market. And I think competition is for rural folks, 
too. I don't want a policy that would discourage entry or 
investment into rural America to offer competitive choices to 
rural consumers.
    The problem is, we're coming out of a relatively monopoly 
environment in which these problems wouldn't have been 
presented. So what portability is about is, if you win a 
customer, what do you get? Do you get all the Universal Service 
funds that the incumbent got? Do you get them based on the same 
cost that the incumbent had, or your own costs, or some other 
model of costs? And so those are the hard questions. And I'm 
happy to say these are very well teed up. This is something the 
Joint Board has been working on for a very long time, had a 
series of hearings in the summer, and are about to give us a 
recommendation on both eligible telecommunication carrier 
policy and portability policy. So this is pretty ripe for a set 
of decisions on the Commission's part.
    Senator Sununu. What are the critical concerns or critical 
issues, in your mind, or in the collective mind of the board, 
in comparing the advantage and disadvantages of assessments 
based on telephone numbers versus number of connections or the 
number of lines?
    Mr. Powell. Well, in many ways both are connection-based 
approaches. They're administered differently. One uses 
telephone numbers, one uses pure connections, but they're both 
basically connection-based approaches.
    The general benefit of the connection-based approaches is 
that it tends to be a more stable basis on which to assess. It 
tends to be a somewhat more technology-neutral basis on which 
to assess. But the critics would say what it potentially does 
is dramatically shift away certain classes of carriers from 
being contributors. The telephone approach is the most 
egregious in that regard, in this sense, that right now the 
biggest burden probably rests on long-distance interchange 
telephone carriers. Under a telephone-connection based, most 
long-distance carriers don't have telephone numbers associated 
with their customer relationships, and they could arguably be 
free completely, under the wrong kind of connection-based 
system, from contributing at all.
    And so the statute also tells us that the burden has to be 
equitably distributed among providers. So if you had a system 
that might make sense but left some out or shifted the burden 
dramatically to other classes, we could be challenged as not 
meeting the statute's requirement of equitable distribution. So 
that has been one of the great criticisms of the contribution 
method, and specifically the one associated with numbers.
    Now, if you'll indulge me, there's a way to deal with that. 
One of the things the Commission is looking at is the 
possibility of hybrid approaches; that is, a basic connection 
approach that also uses revenues to supplement that approach in 
some creative way so that some of those abuses are mitigated. 
But we're still working through that.
    Senator Sununu. Finally, are there any specific 
technologies that have caught your attention that you would 
want to highlight that you think have the greatest potential to 
reduce the cost of Universal Service as we look out over the 
next 5 or 10 years?
    Mr. Powell. Yes. You know, this is why I tried, in my 
statement, to make clear that we should see this as an 
opportunity and an exciting moment for Universal Service, 
because one of the great advantages of a lot of the new high-
technology stuff is, it's dramatically lower in cost to deploy 
and utilize than some of the cost structures that we've had to 
administer in the traditional wireline telephone system.
    I always like to use, just as a dramatic example, you know, 
a satellite, at 28,000 feet sees Butte, Montana, just the way 
it sees Manhattan, and it may make no distinction in its 
technological solution as to the way it delivers services.
    Wireless, even wireless terrestrial services, enjoy certain 
costs and geographic advantages that a company that has a 
string of wire over a mountain, down the hill, and 600 miles to 
the next house doesn't have.
    And so the key, to me, if we get our policies right, is 
that these things are colors on a palette of paint, and we can 
use them and apply them where they're optimal, given the 
demographics or the geographics of particular parts of the 
world.
    But one reason I think the leading agenda at the Commission 
right now is wireless technology is because we think it holds 
some of the greatest advantages for ubiquity, affordability, 
and lower-cost services for all consumers in all regions. And, 
as the Senator said, it was a wireless technology that would 
get the guy out of a crevasse. Nobody strung a twisted copper 
wire down there in case someone happens to fall in that 
location. There's no phone booth down there.
    Senator Burns. Thank you, Senator.
    I'll tell you what I'm going to do. I'm going to just 
recess the Committee. We've got about four or 5 minutes on this 
vote, and everybody can go vote, and then everybody can come 
back. Is that fair enough? And we'll stand in recess until we 
get back.
    [Recess.]
    Senator Burns. Senator Smith is next. Well, Senator 
Lautenberg was, but Senator Smith is here. I'm going to ask him 
just to take the gavel just for a second. I've got about a 15-
minute thing I've got to take care of, and so, Senator Smith, 
the Committee recognizes you, and you've got the gavel to do 
anything that you want to do at this time.
    [Laughter.]
    Senator Smith [presiding]. Now, what do I do with all this 
power?
    Senator Burns. It could be fleeting, you know.
    [Laughter.]
    Senator Smith. Thank you, Mr. Chairman.
    And, Chairman Powell, thank you for coming today. It's 
always a pleasure to see you. And you heard my abbreviated 
opening statement. Obviously, when it comes to the 
disbursement, I think these are your charts. We didn't prepare 
them, we got them from the FCC. And I think they speak for 
themselves in that, at least as to the distribution formula, 
there are a lot of people in rural areas, a lot of people 
everywhere, from all areas, making payments into this fund that 
get nothing back for it. And I understand that where they're 
served by long-distance carriers, they're somehow excluded, but 
then they also ought to be excluded from the charge, it seems 
to me. And I'm wondering if you can help us come up with a 
fairer distribution formula than this represents.
    Mr. Powell. Of course we can always do our best to help. I 
think there's something very, very important, though, that we 
have to also put on the table, because I think these charts are 
accurate, to the extent of what they are.
    The Universal Service Program is multiple programs, 
multiple pots of money that are expended for similar purposes. 
These numbers represent only the non-rural high-cost fund, only 
the money that is paid to the largest carriers in a state, 
which represents about $230 million. But we also have the rural 
high-cost fund, which represents more like $3 billion, which is 
distributed to every one of the 50 states in the United States. 
So, for example, a state like Virginia, that you mentioned, 
that does not get non-rural high-cost support for its large 
carrier, does get $70 million in rural-cost support, so that 
every state is receiving a fairly decent amount of high-cost 
Universal Service support, the difference being which carriers 
are receiving it. So a state like Virginia, their large 
incumbent may be getting no high-cost support, but their rural 
carriers throughout the state are getting a significant amount.
    I only say that because I think as we wrestle through what 
the fair distribution is, we have to look at what everybody's 
getting from all the pots of money. Moreover, the large 
incumbents also get money from other funds, like the state 
Universal Service Fund and the interstate access fund of $650 
million, which they draw from, as well.
    So that only makes the picture more complex, and so we 
wouldn't want our data to suggest that states are getting 
nothing. They're getting nothing from that bucket of money, but 
the huge bucket of money in high-cost, the $3 billion bucket, 
almost all of those states are getting pretty significant 
amounts of money.
    But we wrestle with how to make the distribution fair.
    Senator Smith. I love Mississippi and Alabama and West 
Virginia, but do they benefit from those other pots of money, 
too?
    Mr. Powell. They absolutely do. I wouldn't argue that there 
aren't states that get substantially more high-cost support 
than other states, but I think one of the things we're, I 
think, either by design or handicapped by is the essential 
premise of Universal Service is shifting money from some states 
to other states, to call it like it is. And that's just an 
absolute natural and automatic part of the program.
    Senator Smith. Well, it just seems to me that giving so 
many states nothing out of that pot of money just, on its face, 
seems unfair. And they may have large carriers, but it seems to 
me if they're paying into that pot, they ought to get something 
back out of it in some distribution formula that includes them.
    Mr. Powell. Well, again, I think the one thing I may 
slightly disagree with is, I think that, you know, people pay 
into the Universal Service Fund, and they are getting something 
back. I don't know how dramatic it is that it comes out of 
bucket A instead of bucket B, if it's real money, for the 
citizens of that state. And then there are states who aren't 
getting anything. You know, a state like Virginia that doesn't 
get the support that you mentioned, is getting $70 million from 
the other fund; but a state like Senator Lautenberg's New 
Jersey, is--or high-cost, high-paying states like Florida--are 
paying into both of these programs and getting very little from 
either.
    But some of that, I don't know how to completely cure, in 
that the fundamental premise of the program is to move money 
from some states, actually have them pay and have that money 
distributed elsewhere where it's more needed. But I suppose we 
can always work on a fairer distribution, so I wouldn't want to 
foreclose----
    Senator Smith. Have you seen the bill that Senator Bayh and 
I have introduced, or do you have any comment on it?
    Mr. Powell. I think my only--I haven't studied it, but I do 
know the basics, and I think my only comment would be in terms 
of the Congress making an assessment if one of its motivating 
concerns is equitable distribution. But to do that fully and 
fairly would be to also honestly take into account the full 
range of the programs and what states are getting, as opposed 
to look at only one fund in isolation. That would only be a 
recommendation and a caution.
    The other thing is, the proposal to do it based on high-
cost rate centers, which I think I understand to be the 
proposal, as long we understand that if we did that today that 
would be a massive increase in universal funding requirements. 
You would have to help me, but I think the statute probably--
the proposal recognizes the need to cap that at some point, 
because if it weren't capped, you would be talking about, I 
think, a very, very serious increase in the Universal Service 
funding requirements on a high-cost rate-center basis.
    And then if we're going to have a cap, then you have a 
whole issue about what happens when demand exceeds the cap and 
how do you distribute when you don't have enough money to meet 
the formula. I apologize for not knowing the details well 
enough to----
    Senator Smith. Well, currently rural states are penalized 
by what's called ``state averaging'' because they have a larger 
city in them, in that the carrier in the larger city serves 
those rural areas, but they're penalized by having a larger 
city. And what our bill does is focus on rural wire centers and 
allows the SEC to determine the costs fairly on that basis. 
Does that make sense to you?
    Mr. Powell. It makes sense that I understand what the 
concern is and what's trying to be addressed. You know, we have 
been fairly comfortable with the state-averaged system, but I 
think there are legitimate arguments about doing it 
differently. But the only thing I would also caution is, there 
are a lot of major carriers who--the reason that they have this 
problem is that they've sold off their rural exchanges. And if 
a company is going to sell off its rural exchanges to rural 
companies so that increasingly it is serving fewer people in 
those rural communities, and then wants the same universal 
service recovery from that, that's at least something, to be 
sure, that we want to embrace. But that's why we think, you 
know, sometimes when you have a large company, the averages 
help capture the full range of what they're serving. But I 
don't argue with you that the fact of averaging always has an 
over or under inclusive consequence.
    Senator Smith. Well, understanding averaging, I'm not 
asking for dollar-for-dollar payment, a dollar back for every 
dollar put in, but it does seem to me that when you have 
roughly 44 states that get absolutely nothing out of this pot 
of money into which they contribute, that, on its face, it just 
speaks of unfairness.
    And so we're going to push this and see if we can't give 
you the authority to modify that formula or perhaps--I know 
your Commission has addressed it already and have kept the 
status quo, as it's been. Obviously, I'm hoping to incentivize 
you to do something different. But I appreciate very much your 
considering it.
    I think my only additional comment is, in the FCC's 
decision last month it sought comment on how states should be 
given the opportunity to request additional funds. When do you 
expect the FCC to conclude this proceeding? And even if the FCC 
is capable of finishing the proceeding next year, which is 
probably optimistic, do you realize that it would have taken 
the FCC 8 years to implement the Universal Service Provision 
Act of 1996? I guess, again, it comes down to, is that really 
fair for rural customers served by larger carriers?
    Mr. Powell. Well, I would have a difficulty saying exactly 
when the proceeding would be completed, since we just initiated 
the rulemaking. I don't know the amount of comments we will 
receive, the breadth of them, the depth of them, or the 
complexity of them, but I will promise you it will not be 8 
years. And I certainly won't be here for it----
    [Laughter.]
    Mr. Powell.--if it's 8 years long.
    But I think this is a very--you know, I can only commit to 
you that I think we understand the importance you and others 
attach to it, and we'll commit the Commission to try to get it 
done as quickly as possible and have it be a priority.
    Senator Smith. Very good. Is Senator Lautenberg coming 
back, do you know?
    Well, those are my questions. OK, while we're waiting for 
Senator Lautenberg----
    Mr. Powell. OK.
    Senator Smith.--I'll take up your time, Michael. Appreciate 
it.
    In your written testimony, you state that, quote, ``We must 
evolve our Universal Service programs,'' and that, quote, ``We 
need a more rational method of distributing Universal Service 
support.'' The FCC was recently given an opportunity to 
equitably spread non-rural funds throughout the Nation. But, 
instead, they again adopted for the status quo. It goes to the 
fairness again, and our hope is that you meet again and decide 
differently.
    In most of its recent decisions, the FCC goes to great 
lengths to state that the Commission's role in Universal 
Service should be limited to supporting states that, ``that do 
not have the resources within their borders to support all of 
their high-cost lines.'' Recognizing this theory, the FCC has 
chosen to put the burden on 40 states with the responsibility 
to implement the 1996 Act, while it chooses to implement the 
Act for the remaining eight to ten states.
    And I think your point to me is that, as to that pot of 
money, that's an accurate description, but as to others, it may 
not be.
    Can you speak to what sort of fairness would be represented 
if you included all the pots of money that are involved here?
    Mr. Powell. Well, I just think if you include all pots of 
money, the gap between them is shrunk substantially, and you 
might still come to the same conclusion. I haven't done the 
math of exactly how people would line up. But I think if 
Virginia goes from it-gets-nothing to it-gets-70-million, and 
Colorado goes from it-gets-nothing to 60 million, if Montana 
goes from nothing to 60 million, then, the fairness gap 
between, their getting nothing and they would get more, I 
think, is shrunk. And so you may still conclude that there 
needs to be adjustments if fairness is the objective.
    But I think that you would find states are closer than our 
data would suggest by looking at a single bucket. That is, a 
state that looks like zero isn't really zero. If you're 
focusing on what the state receives, it's usually substantially 
higher. And then, whether that compared to a state that's 
getting, looking at your chart, something like Mississippi 
that's also getting more from this, looking at the delta 
there----
    Senator Smith. Well, on this--your chart shows Mississippi 
from this one pot as getting $120 million. And, you know, if 
Virginia gets 70 from a different pot, but they're getting $120 
million from this pot that is of concern to me, how much does 
Mississippi get from that other pot? In other words, why is 
Mississippi so high? I mean, I love Trent Lott, but why is it 
so high?
    [Laughter.]
    Mr. Powell. Now you're really going to get me in trouble.
    [Laughter.]
    Mr. Powell. I think that you always just--you know, the 
challenge of Universal Service is that you always have to look 
at what its first principles are, and I think it's above my pay 
grade as to whether people support a system that's meant to 
export money from some states to other states who have higher 
cost infrastructures. But that is what the system is. That's 
what it's been for a very long time. That's the way the statute 
works. And so the idea that all states would somehow equally 
receive or get the same amount that it pays in, I would only 
challenge that that's, sort of--it's a great notion, except for 
it's the opposite of the Universal Service Program. If 
everybody got what they paid in, then it wouldn't be the 
Universal Service Program, it would be some program where we 
just raise, collect, and distribute money. I don't know what 
its purpose would be.
    Senator Smith. No, I don't disagree with that, but every 
state has a rural aspect to it. Some, like mine, have a lot of 
rural aspects, and Montana, as well. And it just seems to me if 
Mississippi is getting $120 million from this pot, and 
Oregonians are contributing to that pot and getting nothing for 
it, that, on its face, that just doesn't seem right.
    So I've made my point, and I'd sure appreciate your help on 
it, Michael.
    Mr. Powell. Thank you.
    Senator Smith. Thank you very much for being here.
    Mr. Powell. Good talking to you.
    Senator Smith. You bet.
    Senator Burns [presiding]. Thank you, Senator Smith.
    And with your line of thinking, I think you stated, Mr. 
Chairman, that the Joint Board's going to make their 
recommendations back to you fairly quickly. When will they make 
those recommendations?
    Mr. Powell. Well, the ones we were speaking of is--the 
Joint Board is currently considering the ETC designation 
questions and the portability questions, and we anticipate that 
they will submit a recommendation to us probably sometime in 
early January.
    Senator Burns. Well, it's my thought right now that we 
should wait on those recommendations before we take a look at 
disbursements. And also I think they're going through an 
exercise where they're doing that now.
    Mr. Powell. Yes.
    Senator Burns. And those recommendations--I think right now 
what we have to deal with is to broaden the revenue base to 
limit--to bring down the load on just those folks who use long 
distance to ensure its viability.
    Whenever we start looking at the schools and libraries, we 
know we've had an explosion, we know that over 90 percent of 
the schools are wired now. I'm asking why should there be any 
more of a drawdown. When does that fund start to--that curve 
start down as far as expenditures are concerned, because we've 
done basically what we would say that we were going to do?
    Mr. Powell. Yes, it's a good question, actually. It's hard 
to say exactly when in time, but it would seem to me, at least 
in concept that the biggest part of the schools and libraries 
fund, in terms of money, is connections. And, you know, 
connections are something tangible that, they're either in now 
or they're not.
    Services, support of services is something that is, sort of 
ongoing, right? Every year you have an Internet service bill or 
a telecommunications service bill. So that component of the 
program seems to me to be more ongoing and dynamic. But I think 
the tough question for us, and perhaps even for Congress, is at 
what point, do you declare, that connections portion of it is 
beginning to diminish? Because there will be those who argue 
that now that you have connections, you need a strong 
maintenance program for those connections, you need expensive 
help desks for those connections.
    One of the challenges in a program like this, even though I 
happen to believe the program's goals are absolutely worthy, 
and have no problem with them and have no problem with the 
program, at some point you're going to have the courage to say 
it's not a program that can continually creep. Because with 
technology, I can always make you an argument where there's 
something else that would make it better. And so at what point 
do we start to say that begins to get into the realm of that 
should be the state's responsibility or the school system's 
responsibility? It's hard to know exactly where that line's 
going to be drawn. We're not quite there yet. I want to be 
clear about that. But I do think it's worth starting to talk 
about. What are the indicia of beginning to scale back on 
certain things. And then there are still swaths of schools that 
just haven't really fully been gotten to that we still have 
important work to do.
    Senator Burns. And I would also--putting in that same 
category, the business of telemedicine.
    Mr. Powell. Oh, yes.
    Senator Burns. We've tried----
    Mr. Powell. Well, the----
    Senator Burns. We've tried--I will tell you, Mr. Chairman, 
we have tried to do business with the healthcare financing 
system, as far as Medicare is concerned, for reimbursements for 
electronic consulting and this type of thing. When I look at my 
state of Montana, and I don't think we're any different than 
any other state, we look at our demographics in our rural 
areas, the age is going up. In other words, our amount of 
seniors are in rural areas where there's considerable distance 
between them and their healthcare providers. That trend will 
continue in my state for quite some time, so we're kind of 
concerned. We know healthcare will be delivered in a different 
way than has been done in the past. And the medical community 
in rural areas, such as Montana--I don't think we're rural, I 
think we're frontier, that's one step beyond rural--they have 
responded to that very well. Now, Universal Service did play a 
role in that. But also I think it's time that the healthcare, 
the system itself in healthcare, should start assuming some of 
those costs of delivering healthcare into rural areas and to 
energize that community that we're going to do things 
differently.
    And I would also--you recently commented on one thing the 
FCC needed to do to reform Universal Service, was to end 
regulatory arbitrage opportunities. Can you explain to this 
Committee what that statement means?
    Mr. Powell. Well, I'm not sure where it comes from, but 
I'll do my best. And I'll just answer broadly, because I think 
this is a challenge for regulators all the time.
    Let's just be blunt. When the government throws out a pot 
of money, people go after it. And it will incent behavior. It 
will incent private actors who are in the business of making 
money for figuring out how to get as much of it for themselves 
as possible and to keep others from getting as much of it as 
possible. So I think the government has a very, kind of, 
special regulatory responsibility when it is administering 
programs that include government-mandated pots of money, 
because I think you can distort behavior or drive things in 
directions that you may or may not mean to. You can bias 
competition, you can frustrate the arrival of different kinds 
of technology because those aren't profitable, not because the 
market says so, but because money is paid for one, but not the 
other.
    So, when I say that, I'm sometimes talking about 
intercarrier compensation, the way carriers compensate each 
other in a technology-changing world--sometimes I think that 
issue's raised in Universal Service--both of which are where 
regulators are saying a lot about who gets paid and how, and 
who gets their costs recovered and how, because the minute you 
get into that business, you're in the business of very smart 
companies figuring out how to position their business model to 
maximize their advantages.
    Sometimes that does not mean they will do the thing that's 
best for consumers of the market, because they're not really 
acting in a market; they're acting in a regulatory system, and 
they're arbitraging the opportunities. And I think we've seen 
that in things like the misuses of reciprocal compensation, 
intercarrier compensation, Universal Service, even schools and 
libraries. Some of the fraud actions that the government's 
bringing, you know, you put it out there, and they will come. 
And there are people with some unsavory stuff who showed up. So 
you have to be particularly disciplined about protecting that.
    Senator Burns. And I'm also hearing that in some cases, as 
far as the Universal Fund is concerned, there is--and as far as 
contribution, societal contribution, what is good for the 
majority of the people, that there is a point of diminishing 
returns.
    Mr. Powell. Oh, I think so, or that at least we have to 
have an honest willingness to ask that question repeatedly, 
which I think is what, you and some of your colleagues were 
getting at. As we go through this great migration to Internet 
light technology, I think it's an important moment to be, sort 
of, reinitializing, what are we really trying to do with 
Universal Service, who is it really for, what are we trying to 
actually achieve. It's actually a fairly old--this is a 
hundred-year-old program, in essence, and its original 
conception, I think the purposes are, unassailable, but what 
you're trying to achieve and the best way to achieve it seems 
to me to be constantly--should be subject to reexamination.
    So, for example, like we were talking about, if satellites 
were suddenly an optimal platform for voice communications, 
you'd have a very different set of questions associated with 
satellite-deployed voice communications than you did with 
copper-deployed ones. And I think if we just act like the 
Universal Service objectives are the same thing as the fund, 
we're going to make mistakes.
    The fund is a means to an end. It's not the only one, but 
it is a means to an end. So protecting the fund for its own 
sake shouldn't be the question. Protecting the goals and the 
role of the fund in protecting those goals seem to me the way I 
challenge our staff to think about it, because I'm scared we'll 
miss other innovative ways to make sure the citizens of these 
rural areas are served.
    Senator Burns. Well, we've got sizable challenges ahead of 
us----
    Mr. Powell. Yes, sir.
    Senator Burns.--and quite a lot of dialogue. And I don't 
think our accumulation of testimony and material to read before 
we finally get to bottom line--because we know this difference 
now, we see long distance as just a different kind of a world 
now, it's all you can eat in 49 minutes or whatever, and you 
buy so much time. And I know that probably causes great 
heartburn for auditors and this type thing on how do we 
collect, and I know we have to look at that, as far as the 
revenue base.
    But when carriers have to allocate costs between 
jurisdictions, I think probably this is the greatest challenge 
that we have, without resorting to burdensome audits, how in 
the world does the Commission ensure that those carriers are 
paying their fair share in the USF and the markets? I'd have to 
ask if the markets don't move forward toward, they're moving 
toward bundling, and they argue for a new assessment kind of 
mechanism, I think they're crying for it. Is that a proper 
assessment?
    Mr. Powell. I think that's right. It's just a matter of 
what. And what's the answer to that question?
    In many ways, I think the future has enough clarity now 
that we know things are going to look very, very different, in 
terms of the system of communications that we have, who the 
players in that system of communications are going to be, and 
how they're going to be more similar than different. I mean, 
all the buzz words about convergence are basically right. 
You're going to have communications companies and 
communications services, and they are not going to be, as a 
technical matter, particularly different from other kinds. I 
mean, it may be a visual picture, but it's still just bits.
    And so what I try to think about is, we all have short-term 
things we need to do, mid-term things we need to do, but we 
need to be crystal clear about where we think we're going to 
be, and understand that what we should really be saying to 
ourselves is, ``What's Universal Service in 10 years, when 
everything's IP or all the companies in the communications 
sector have reordered themselves into large communications 
services and provide suites in buckets?'' And so every 
incremental decision we make may be for the moment. Maybe it's 
to save the contribution factor for this quarter. But it should 
always be done in a way that's moving productively in the 
direction of where you think the trends are taking you anyway, 
and not choose ones that might work for the corridor but are 
going at cross-purposes of where you have to probably 
ultimately get to.
    Senator Burns. Well, if the 1996--and with all of its 
imperfections, the 1996 Act that deregulated a lot of areas--
and I would say that part of the great economy that we 
experienced in the 1990s was due, quite a lot of that--we 
didn't know how much venture capital was out there ready to 
come into the telecommunications industry until we did dereg a 
good part of it. Did we do it right? I'm not going to go into 
that. But what it did, it allowed those investments to come in, 
and it has clarified. You are right, we see the future now a 
lot better. Had we not passed the 1956 Act, if we were still 
operating under the 1995 Act, it would be as cloudy out there 
now as it was in 1996, and with not too many changes, to be 
right honest with you, that would have happened in the 
telecommunications industry. So I think you're exactly right.
    I want to thank you for coming this morning and sharing 
your thoughts on this. There will be other dialogue and other 
opportunities. And, Mr. Chairman, I was told awhile ago, with a 
little phone number, that there will be some more questions 
forthcoming, and if you could respond to them and the 
Committee, we could certainly appreciate that.
    And I thank you for coming this morning, and this hearing 
is closed.
    [Whereupon, at 11:45 a.m., the hearing was adjourned.]

                            A P P E N D I X

            Prepared Statement of Hon. Ernest F. Hollings, 
                    U.S. Senator from South Carolina
    Thank you, Mr. Chairman. Once again, today's hearing focuses 
attention on one of the cornerstones of U.S. telecommunications 
policy--namely, our commitment to ensuring that all Americans have 
access to quality communications services at reasonably comparable 
prices. While the promise of universal service began in the 1930s as a 
justification for the continuation of AT&T's monopoly, this principle 
has endured past the break-up of AT&T in 1984 and was explicitly 
articulated by Congress in the Telecommunications Act of 1996. As a 
result, our commitment to ensuring ``universal service'' continues to 
serve our Nation well in today's ever-changing communications 
marketplace by promoting the economic and social well-being of numerous 
communities across America.
    Unfortunately, over the last few years, the long-term viability of 
our current mechanism for supporting universal service has come into 
question. Recent increases in the size of the Universal Service Fund 
and the shrinking base of interstate revenues have resulted in calls 
for major modifications to the current contribution mechanism. In 
addition, growing wireless substitution and the rapid evolution of 
``voice-over-the Internet'' technologies threaten to place even further 
pressures on our current system of supporting ubiquitous, nationwide 
access to communications services. And while proposals to change the 
current contribution methodology have been under review by the FCC 
since May 2001, the FCC has yet to adopt significant changes that would 
ensure the long-term stability of the Universal Service Fund.
    In an attempt to address the logjam at the FCC, Senators Burns, 
Stevens, Dorgan and others have held a series of roundtable discussions 
with industry stakeholders to try and highlight differences and 
identify common ground. I want to commend my colleagues for their 
efforts in this regard. I look forward to working with them in the days 
ahead to draft legislation that will improve our current system.
    In undertaking this task, it is my hope that our friends in 
industry will join with us in recognizing that time is of the essence. 
Unless we are able to construct a system where all who benefit from the 
communications network help to support its universal availability, the 
continued evolution of new Internet-based communications technologies 
will only increase the strain on an already creaking system.
    As a result, today's hearing comes at a critical juncture, not only 
for our efforts to create an equitable and sustainable means of 
collecting support, but also for our understanding of what level of 
service should be supported in a society that will increasingly be 
dependent on advanced communications capabilities. As the FCC addresses 
these new challenges, it is essential that it keep in mind Congress' 
underlying goal of ensuring that consumers in all regions of the Nation 
have access to reasonably comparable services at reasonably comparable 
prices.
    With this as our guide, I look forward to the testimony of Chairman 
Powell and to his responses to our questions.
                                 ______
                                 
             Prepared Statement of Hon. Daniel K. Inouye, 
                        U.S. Senator from Hawaii
    Our discussion this morning revisits critical issues regarding the 
sufficiency, stability and viability of the Universal Service Fund. 
Indeed, today's examination follows earlier hearings conducted by this 
committee during the 107th Congress and this past April specifically 
focused on our current mechanism for funding universal service. This 
matter has also been under consideration at the FCC for some time. As a 
result, we are pleased to welcome Chairman Michael Powell and look 
forward to his testimony, which we hope will further illuminate these 
important issues.
    At its foundation, our commitment to universal service is founded 
on the belief that basic communications services should be available to 
all Americans at reasonable rates. Under the Telecommunications Act of 
1996, Congress reaffirmed its commitment to this principle, explicitly 
stating that the definition of universal service would be sufficiently 
flexible to capture ``an evolving level of telecommunications 
services'' so that all Americans might enjoy the promise of advances in 
communications technology. Additionally, Congress expanded the 
universal service commitment to include schools, libraries and rural 
health care providers as well as other eligible telecommunications 
carriers with the understanding that as telecommunications services 
reach more and more individuals, all Americans benefit.
    While our fidelity to these principles remains resolute, there is a 
growing recognition that out current method of funding universal 
service, which today relies on assessments to a telecommunications 
carrier's interstate and international voice revenues, is under 
increasing pressure. The evolution of new communications technologies 
such as Voice-over-Internet-Protocol (VoIP) communications as well as 
the increasing popularity of bundled wireless and competitive service 
offerings threaten to further diminish an already shrinking funding 
base. At the same time, the cost of providing universal service support 
continues to increase. Total universal service disbursements have 
increased from $1.8 billion in 1997 to $5.3 billion in 2002, and the 
fund is estimated to reach $7.1 billion by 2008. The rapid increase in 
the size of the fund coupled with the decline in interstate revenues 
has prompted the FCC to institute stopgap measures to temporarily 
stabilize the collection mechanism.
    There appears to be growing consensus that the question before us 
is no longer whether the universal service funding mechanism should be 
changed, but how it should be changed. The Commission is currently 
considering several proposals. While some proposals seek to modify the 
existing revenue-based mechanism, others propose instituting a ``per 
connection'' or ``per telephone number'' approach. Each of these plans 
would affect the proportionate share of contributions that each sector 
within the telecommunications industry collects as well as the relative 
share contributed by residential and business subscribers.
    In the end, there is a growing awareness that the pressures on 
universal service being brought to bear by a rapidly changing 
communications marketplace will require action, perhaps congressional 
action, sooner rather than later. As a result, I look forward to our 
discussion today with Chairman Powell, and to working with my 
colleagues in the days ahead toward placing our universal service 
system on firmer footing.

                                  

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