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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 

( 

(II) 

SENATE COMMITTEE ON COMMERCE, SCIENCE, AND TRANSPORTATION 

ONE HUNDRED EIGHTH CONGRESS 

FIRST SESSION 

JOHN MCCAIN, Arizona, Chairman 

TED STEVENS, Alaska 

CONRAD BURNS, Montana 

TRENT LOTT, Mississippi 

KAY BAILEY HUTCHISON, Texas 

OLYMPIA J. SNOWE, Maine 

SAM BROWNBACK, Kansas 

GORDON H. SMITH, Oregon 

PETER G. FITZGERALD, Illinois 

JOHN ENSIGN, Nevada 

GEORGE ALLEN, Virginia 

JOHN E. SUNUNU, New Hampshire 

ERNEST F. HOLLINGS, South Carolina, 

Ranking 

DANIEL K. INOUYE, Hawaii 

JOHN D. ROCKEFELLER IV, West Virginia 

JOHN F. KERRY, Massachusetts 

JOHN B. BREAUX, Louisiana 

BYRON L. DORGAN, North Dakota 

RON WYDEN, Oregon 

BARBARA BOXER, California 

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 

TRENT LOTT, Mississippi 

KAY BAILEY HUTCHISON, Texas 

OLYMPIA J. SNOWE, Maine 

SAM BROWNBACK, Kansas 

GORDON H. SMITH, Oregon 

PETER G. FITZGERALD, Illinois 

JOHN ENSIGN, Nevada 

GEORGE ALLEN, Virginia 

JOHN E. SUNUNU, New Hampshire 

ERNEST F. HOLLINGS, South Carolina, 

Ranking 

DANIEL K. INOUYE, Hawaii 

JOHN D. ROCKEFELLER IV, West Virginia 

JOHN F. KERRY, Massachusetts 

JOHN B. BREAUX, Louisiana 

BYRON L. DORGAN, North Dakota 

RON WYDEN, Oregon 

BARBARA BOXER, California 

BILL NELSON, Florida 

MARIA CANTWELL, Washington 

(III) 

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 

(1) 

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 FederalState 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. 

2 

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 

3 

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 

4 

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 interVerDate Nov 24 2008 08:52 May 24, 2016 Jkt 075679 PO 00000 Frm 00008 Fmt 6633 Sfmt 6633 S:\GPO\DOCS\20149.TXT JACKIE
5 

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 

6 

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 

7 

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:] 

8 

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 

9 

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. 

10 

• 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 costbased 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. 

11 

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 recVerDate Nov 24 2008 08:52 May 24, 2016 Jkt 075679 PO 00000 Frm 00015 Fmt 6633 Sfmt 6621 S:\GPO\DOCS\20149.TXT JACKIE
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ommendation. 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. 

13 

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 highcost 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, nonrural 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 nonrural 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 

14 

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. 

15 

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. 

16 

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 adoptVerDate Nov 24 2008 08:52 May 24, 2016 Jkt 075679 PO 00000 Frm 00020 Fmt 6633 Sfmt 6601 S:\GPO\DOCS\20149.TXT JACKIE
17 

ed 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 fundingbase fees, charges assessed on interstate and international enduser 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. 

18 

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 

19 

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 

20 

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 

21 

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 

22 

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 repVerDate Nov 24 2008 08:52 May 24, 2016 Jkt 075679 PO 00000 Frm 00026 Fmt 6633 Sfmt 6601 S:\GPO\DOCS\20149.TXT JACKIE
23 

resents the basis for telephone service for people who live in highcost 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 teleVerDate Nov 24 2008 08:52 May 24, 2016 Jkt 075679 PO 00000 Frm 00027 Fmt 6633 Sfmt 6601 S:\GPO\DOCS\20149.TXT JACKIE
24 

communication 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 

25 

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 lowercost 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 

26 

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 highcost 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? 

27 

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 

28 

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-getsnothing 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 

29 

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. 

30 

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 

31 

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 governmentmandated 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 

32 

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, 

33 

‘‘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.] 

(35) 

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 comVerDate Nov 24 2008 08:52 May 24, 2016 Jkt 075679 PO 00000 Frm 00039 Fmt 6601 Sfmt 6621 S:\GPO\DOCS\20149.TXT JACKIE
36 

mitment 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. 

Æ 

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