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78–133 2013

H.R. 5828, THE UNIVERSAL SERVICE REFORM 

ACT OF 2010 

HEARING 

BEFORE THE

SUBCOMMITTEE ON COMMUNICATIONS, 

TECHNOLOGY, AND THE INTERNET 

OF THE

COMMITTEE ON ENERGY AND 

COMMERCE 

HOUSE OF REPRESENTATIVES 

ONE HUNDRED ELEVENTH CONGRESS 

SECOND SESSION 

SEPTEMBER 16, 2010 

Serial No. 111–156 

( 

Printed for the use of the Committee on Energy and Commerce 

energycommerce.house.gov 


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(II) 

COMMITTEE ON ENERGY AND COMMERCE 

HENRY A. WAXMAN, California 

Chairman 

JOHN D. DINGELL, Michigan 

Chairman Emeritus 

EDWARD J. MARKEY, Massachusetts 

RICK BOUCHER, Virginia 

FRANK PALLONE, JR., New Jersey 

BART GORDON, Tennessee 

BOBBY L. RUSH, Illinois 

ANNA G. ESHOO, California 

BART STUPAK, Michigan 

ELIOT L. ENGEL, New York 

GENE GREEN, Texas 

DIANA DEGETTE, Colorado 

Vice Chairman 

LOIS CAPPS, California 

MICHAEL F. DOYLE, Pennsylvania 

JANE HARMAN, California 

TOM ALLEN, Maine 

JANICE D. SCHAKOWSKY, Illinois 

HILDA L. SOLIS, California 

CHARLES A. GONZALEZ, Texas 

JAY INSLEE, Washington 

TAMMY BALDWIN, Wisconsin 

MIKE ROSS, Arkansas 

ANTHONY D. WEINER, New York 

JIM MATHESON, Utah 

G.K. BUTTERFIELD, North Carolina 

CHARLIE MELANCON, Louisiana 

JOHN BARROW, Georgia 

BARON P. HILL, Indiana 

DORIS O. MATSUI, California 

DONNA M. CHRISTENSEN, Virgin Islands 

KATHY CASTOR, Florida 

JOHN P. SARBANES, Maryland 

CHRISTOPHER S. MURPHY, Connecticut 

ZACHARY T. SPACE, Ohio 

JERRY MCNERNEY, California 

BETTY SUTTON, Ohio 

BRUCE L. BRALEY, Iowa 

PETER WELCH, Vermont 

JOE BARTON, Texas 

Ranking Member 

RALPH M. HALL, Texas 

FRED UPTON, Michigan 

CLIFF STEARNS, Florida 

NATHAN DEAL, Georgia 

ED WHITFIELD, Kentucky 

JOHN SHIMKUS, Illinois 

JOHN B. SHADEGG, Arizona 

ROY BLUNT, Missouri 

STEVE BUYER, Indiana 

GEORGE RADANOVICH, California 

JOSEPH R. PITTS, Pennsylvania 

MARY BONO MACK, California 

GREG WALDEN, Oregon 

LEE TERRY, Nebraska 

MIKE ROGERS, Michigan 

SUE WILKINS MYRICK, North Carolina 

JOHN SULLIVAN, Oklahoma 

TIM MURPHY, Pennsylvania 

MICHAEL C. BURGESS, Texas 

MARSHA BLACKBURN, Tennessee 

PHIL GINGREY, Georgia 

STEVE SCALISE, Louisiana 


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SUBCOMMITTEE ON COMMUNICATIONS, TECHNOLOGY, AND THE INTERNET

RICK BOUCHER, Virginia 

Chairman 

EDWARD J. MARKEY, Massachusetts 

BART GORDON, Tennessee 

BOBBY L. RUSH, Illinois 

ANNA G. ESHOO, California 

BART STUPAK, Michigan 

DIANA DEGETTE, Colorado 

MICHAEL F. DOYLE, Pennsylvania 

JAY INSLEE, Washington 

ANTHONY D. WEINER, New York 

G.K. BUTTERFIELD, North Carolina 

CHARLIE MELANCON, Louisiana 

BARON P. HILL, Indiana 

DORIS O. MATSUI, California 

DONNA M. CHRISTENSEN, Virgin Islands 

KATHY CASTOR, Florida 

CHRISTOPHER S. MURPHY, Connecticut 

ZACHARY T. SPACE, Ohio 

JERRY MCNERNEY, California 

PETER WELCH, Vermont 

JOHN D. DINGELL, Michigan (ex officio) 

FRED UPTON, Michigan 

Ranking Member 

CLIFF STEARNS, Florida 

NATHAN DEAL, Georgia 

JOHN SHIMKUS, Illinois 

GEORGE RADANOVICH, California 

MARY BONO MACK, California 

GREG WALDEN, Oregon 

LEE TERRY, Nebraska 

MIKE FERGUSON, New Jersey 


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C O N T E N T S 

Page 

Hon. Rick Boucher, a Representative in Congress from the Commonwealth 

of Virginia, opening statement ............................................................................ 1 

Prepared statement .......................................................................................... 4 

Hon. Cliff Stearns, a Representative in Congress from the State of Florida, 

opening statement ................................................................................................ 7 

Hon. Henry A. Waxman, a Representative in Congress from the State of 

California, opening statement ............................................................................. 8 

Prepared statement .......................................................................................... 10 

Hon. Lee Terry, a Representative in Congress from the State of Nebraska, 

opening statement ................................................................................................ 12 

Hon. Michael F. Doyle, a Representative in Congress from the Commonwealth 

of Pennsylvania, opening statement ................................................................... 13 

Hon. Marsha Blackburn, a Representative in Congress from the State of 

Tennessee, opening statement ............................................................................ 13 

Hon. Doris O. Matsui, a Representative in Congress from the State of California, opening statement .................................................................................... 14 

Hon. Robert E. Latta, a Representative in Congress from the State of Ohio, 

opening statement ................................................................................................ 14 

Prepared statement .......................................................................................... 16 

Hon. Jerry McNerney, a Representative in Congress from the State of California, opening statement .................................................................................... 19 

Hon. Kathy Castor, a Representative in Congress from the State of Florida, 

opening statement ................................................................................................ 19 

Hon. John D. Dingell, a Representative in Congress from the State of Michigan, prepared statement ...................................................................................... 100 

Hon. Anna G. Eshoo, a Representative in Congress from the State of California, prepared statement .................................................................................. 101 

WITNESSES

Carol Mattey, Deputy Bureau Chief, Wireline Competition Bureau, Federal 

Communications Commission ............................................................................. 21 

Prepared statement .......................................................................................... 23 

Answers to submitted questions ...................................................................... 105 

Walter McCormick, President and Chief Executive Officer, United States 

Telecom Association ............................................................................................. 29 

Prepared statement .......................................................................................... 31 

Shirley Bloomfield, Chief Executive Officer, National Telecommunications Cooperative Association, NTCA ............................................................................... 35 

Prepared statement .......................................................................................... 37 

Steven Davis, Senior Vice President for Public Policy and Government Relations, Qwest Corporation ..................................................................................... 50 

Prepared statement .......................................................................................... 52 

Kathleen Grillo, Senior Vice President, Verizon ................................................... 68 

Prepared statement .......................................................................................... 70 

James Assey, Executive Vice President, National Cable and Telecommunications Association ............................................................................................... 76 

Prepared statement .......................................................................................... 78 

SUBMITTED MATERIAL

Letter of September 14, 2010, from American Farm Bureau Federation to 

the Subcommittee, submitted by Mr. Terry ....................................................... 103 


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(1) 

H.R. 5828, THE UNIVERSAL SERVICE REFORM 

ACT OF 2010 

THURSDAY, SEPTEMBER 16, 2010 

HOUSE OF REPRESENTATIVES,

SUBCOMMITTEE ON COMMUNICATIONS, TECHNOLOGY, 

AND THE INTERNET, 

COMMITTEE ON ENERGY AND COMMERCE, 

Washington, DC. 

The subcommittee met, pursuant to notice, at 10:04 a.m., in 

Room 2322, Rayburn House Office Building, Hon. Rick Boucher 

[chairman of the subcommittee] presiding. 

Present: Representatives Boucher, Stupak, Doyle, Inslee, Matsui, 

Christensen, Castor, Murphy, Space, McNerney, Waxman (ex officio), Stearns, Terry, Blackburn, and Latta. 

Staff Present: Amy Levine, Counsel; Greg Guice, Counsel; Sarah 

Fisher, Special Assistant; Josh Bercu, Intern; Tim Powderly, Counsel; Neil Fried, Minority Counsel; William Carty, Minority Professional Staff Member; and Jeanne Neal, Minority Research Analyst. 

OPENING STATEMENT OF HON. RICK BOUCHER, A REPRESENTATIVE IN CONGRESS FROM THE COMMONWEALTH 

OF VIRGINIA 

Mr. BOUCHER. The subcommittee will come to order. 

This morning’s hearing is a legislative hearing on H.R. 5828, the 

‘‘Universal Service Reform Act of 2010.’’ The bill is a comprehensive reform of the Universal Service High-Cost Fund, and the 

measure before us this morning has been revised in various respects based on recommendations we have received during and following the subcommittee’s last hearing on the legislation. 

H.R. 5828 is the product of a bipartisan effort that I undertook, 

beginning several years ago, with our subcommittee colleague, the 

gentleman from Nebraska, Mr. Terry. We have benefited from the 

advice and suggestions of other members of our subcommittee, 

members of the full committee, and a broad range, including dozens of interested parties. 

We have also conducted extensive conversations with a very 

broad audience. We have achieved consensus among a broad range 

of competing interests, and I think you will see that consensus 

clearly reflected here today in the testimony of our witnesses. You 

will hear this morning endorsements for the legislation from companies and trade associations that have long been in basic disagreement about the High-Cost Fund and how it should be reformed. 


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Net contributors into the fund, such as AT&T and Verizon, are 

today in agreement with net beneficiaries from the fund, such as 

rural carriers represented by NTCA, OPATSCO, and WTA, that 

H.R. 5828 in the form in which it appears before the committee 

today should be approved. We also have endorsements for the legislation from Qwest, CenturyLink, Frontier, Vonage, the National 

Cable and Telecommunications Association, and USTelecom, reflecting a truly broad consensus. 

The High-Cost Fund, which assures affordable rural telephone 

service, has come under increasing pressure, and comprehensive reform to ensure its continued stability is urgently needed. New technologies and new business plans are combining to diminish the 

long-distance revenues that historically have been the base of support for universal service. 

The current USF contribution rate stands near its highest level 

ever, at more than 13 percent. In October, that rate will dip slightly to 12.9 percent, but all signs point to double-digit contribution 

rates going forward in the absence of comprehensive reform. 

In addition, the Universal Service Fund is clearly outdated, as it 

supports only voice-based telephone service. Our legislation extends 

the program to broadband and, in fact, contains a mandate that 

carriers deploy broadband throughout their service territories as a 

condition of their continued receipt of universal service funding. 

Many of the Federal Communications Commission’s National 

Broadband Plan recommendations are reflected in our legislation. 

It gives the FCC the statutory authority that it needs to carry out 

its universal service goals. In addition, the legislation expands the 

fund’s contribution base by assessing intrastate as well interstate 

and international revenues, and it requires that providers of 

broadband connections make a contribution into the fund. 

The bill grants the FCC the authority to implement competitive 

bidding for distributions of fund moneys to wireless carriers, with 

a limit of two winners per service area, avoiding the potential legal 

challenges from those who argue that competitive bidding does not 

comport with existing statutory universal service principles. Removing regulatory uncertainty in these areas will avoid the protracted litigation regarding commission authority that almost certainly will come, particularly in the wake of the D.C. Circuit’s 

Comcast decision that further circumscribed FCC statutory authority. Passing this bill will allow for expeditious reform of the Universal Service Fund through appropriate action at the Federal 

Communications Commission. 

Our legislation would also direct the FCC to adopt a new cost 

model for USF support based on the provision of both voice and 

broadband service, while also limiting growth of the fund by providing that contribution burdens on consumers may not unreasonably increase. 

As I mentioned earlier, we mandate that all recipients of universal service support offer broadband throughout their service 

areas at minimum speeds that would be adjusted by the Commission from time to time. And we fully anticipate that these speeds 

will increase over time as technology permits. 

Other elements of our measure include fixing the phantom traffic 

problem by requiring that carriers pass through call identification 


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information so that the terminating carriers know to whom to send 

the bill for call originations. We eliminate traffic pumping by prohibiting carriers from sharing access charge revenue with third 

parties where those third parties offer free or reduced-cost services. 

We make permanent the Anti-Deficiency Act exemption for USF 

so that an annual appropriations rider will no longer be necessary 

in order to continue financing for the fund. And we deny universal 

service support in areas where there is competition in the offering 

of voice-based telephone service, a new departure for the Universal 

Service Fund. 

The bill modernizes a program that ensures the availability of 

communications connections to millions of Americans, benefiting 

not just the rural residents who live in the high-cost areas but benefitting our entire Nation. We are a stronger Nation when we are 

all connected through telecommunications services. Having rural 

America connected is essential for efficient nationwide communications and gives Internet-based businesses, for example, access to 

millions of homes that would be disconnected as customers to these 

Internet-based companies if the Universal Service Fund did not 

exist and was not viable. 

I want to thank the Members, their staffs, and the dozens of 

stakeholders who have participated with us in drafting a reform 

measure that, as the testimony of our witnesses today will reveal, 

enjoys a true consensus and very broad-based support. 

I want to thank our witnesses for taking the time to join us here 

in the wake of their participation with us in formulating this measure. We very much look forward to your testimony. 

That concludes my opening statement. I am pleased now to recognize the ranking Republican member of our subcommittee, the 

gentleman from Florida, Mr. Stearns. 

[The prepared statement of Mr. Boucher follows:] 


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STATEMENT OF CONGRESSMAN RICK BOUCHER 

Subcommittee on Communications, Technology and the Internet Hearing 

H.R. 5828, the Universal Service Reform Act of 2010 

September 16,2010 

The subcommittee will come to order. 

This morning's hearing is a legislative hearing on H.R. 5828, the Universal 

Service Reform Act of201O. 

The bill is a comprehensive reform ofthe Universal Service High Cost Fund, 

and the measure before us this morning has been revised in various respects based 

on recommendations we have received during and following the subcommittee's 

last hearing on the legislation. 

H.R. 5828 is the product of a bipartisan effort I undertook several years ago 

with our subcommittee colleague, the gentleman from Nebraska, Mr. Terry. We 

have benefitted from the advice and suggestions of many other members on a 

bipartisan basis. 

We have also conducted extensive conversations with dozens of stakeholder 

groups, and we have achieved consensus among a broad range of competing 

interests. 

You will hear this morning endorsements for the legislation from companies 

and trade associations that have long been in basic disagreement about how the 

High Cost Fund should be reformed. 

Net contributors into the Fund, such as AT&T and Verizon, are today in 

agreement with net beneficiaries of the Fund, such as rural earriers represented by 

NTCA, OPASTCO and WTA, that H.R. 5828 in the form in which it is before the 

committee should be approved. 

We also have endorsements for the legislation from Qwest, Century Link, 

Frontier, Vonage, the National Cable and Telecommunications Association, and 

USTelecom, reflecting a truly broad consensus. 
5 


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The High Cost Fund, which assures affordable rural telephone service, has 

come under increasing pressure, and comprehensive reform to ensure its continued 

stability is urgently needed. New technologies and new business plans are 

combining to diminish the long-distance revenues that have historically been relied 

upon to support USF. The current USF contribution rate stands near its highest 

level ever of more than 13 percent. In October, it will dip slightly to 12.9 percent, 

but all signs point to continued double-digit contribution rates after that unless 

reform occurs. 

In addition, the Universal Service Fund is outdated, as it supports only the 

provision of traditional voice telephone service. Our legislation extends the 

program to broadband. 

Many of the FCC's National Broadband Plan recommendations are reflected 

in our legislation. It gives the FCC the statutory authority it needs to carry out its 

universal service goals. In addition, the legislation: 

• Expands the Fund's contribution base by assessing intrastate, as well as 

interstate and international, revenues and requires that providers of 

broadband connections pay into the Fund. 

• We grant the FCC the authority to implement competitive bidding for 

distributions to wireless carriers, with a limit of two winners per service 

area, avoiding potential legal challenges from those who argue that 

competitive bidding does not comport with existing statutory Universal 

Service principles. 

Removing regulatory uncertainty in these areas will avoid protracted 

litigation regarding Commission authority, particularly in the wake of the D.C. 

Circuit's Corneas! decision, and allow for expeditious reform of the Universal 

Service program. 

Our legislation would also direct the FCC to adopt a new cost model for 

USF support based on the provision of both voice and broadband service, while 

also limiting growth ofthe Fund by providing that the contribution burden on 

consumers may not unreasonably increase. 

We mandate that all recipients ofUSF support offer broadband throughout 

their service areas, at minimum speeds established by the FCC. These required 

data rates will increase over time. 
6 


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Other elements in our measure include fixing the phantom traffic problem by 

requiring carriers to pass through call identification information, eliminating traffic 

pumping by prohibiting carriers from sharing access charge revenue with third 

parties that offer free or reduced-cost services, making permanent the AntiDeficiency Act exemption for USF, so that an annual appropriations rider is no 

longer required for that purpose, and denying USF support in areas where there is 

competition in voice telephone service. 

The bill modernizes a program that ensures the availability of 

communications connections to millions of Americans, benefitting not just the 

rural residents who live in high-cost areas, but benefitting the entire nation. We are 

a stronger nation when we are all connected through telecommunications. 

Having rural America connected is essential for efficient nationwide 

communications and gives Internet-based businesses access to millions of homes 

that would be disconnected in the absence ofthis program. 

I want to thank the members, their staffs, and the dozens of stakeholders 

who have participated with us in drafting a reform measure which reflects a broad 

consensus. 
7 

OPENING STATEMENT OF HON. CLIFF STEARNS, A REPRESENTATIVE IN CONGRESS FROM THE STATE OF FLORIDA 

Mr. STEARNS. Good morning. And thank you, Mr. Chairman. 

I just apologize, as I am sure you also agree, to the limited space 

here, and I apologize to the people who are standing. We are not 

in the main room because there is a health markup on 21 bills, 

from H.R. 211 to H.R. 6110. I am sure it is pretty important, but 

considering everything, we are sorry that we don’t have more room 

for you. 

But, Mr. Chairman, I want to thank all of you, thank you particularly for having this important legislative hearing on the ‘‘Universal Service Reform Act of 2010.’’ Also, I would like to commend 

my colleague, Mr. Terry, for his steadfast hard work in developing 

this legislation. You both received comments from many of us and 

have taken those into consideration. 

Reforming the broken Universal Service Fund I think is a top 

priority for everybody in this room. There is a bipartisan consensus, too, that the fund is broken. We can probably all agree that 

the system is fraught with waste, fraud, and abuse. A major overhaul is necessary. The question before us this morning is, what is 

the appropriate goal to accomplish this program and how do we 

achieve it? 

My colleagues, the 1996 Telecom Act codified universal service, 

but the concept goes back decades earlier to a time when there was 

really only one phone company. Now, the landscape looks a whole 

lot different, yet the fund is still administered by outdated rules. 

So, accordingly, there is a need to reform the program away from 

subsidies that may no longer be necessary as technology and services improve and become more widespread. Instead, we need to 

move towards a solution that ensures the goals of universal service 

but minimizes consumer cost. Throwing additional money at this 

crumbling program I think makes little sense. 

Nearly everyone in the country has access to phone service, and 

we have more competition and better technology than ever before. 

Yet, instead of shrinking the Universal Service Fund, it has 

ballooned to more than $8 billion a year, about twice what it was 

in 2000. Approximately $4.5 billion of that comes from the highcost program’s subsidies to rural carriers, more than three times 

the $1.3 billion spent on that program in 1997. 

And when the price tag for universal service goes up, subscribers, 

customers bear the burden. The FCC projects that almost 13 percent of the monthly long distance bill in the fourth quarter of 2010 

will be universal service fees, up from 5.7 percent in 2000. 

According to the FCC, however, the bill, as introduced—and this 

is their words—‘‘could substantially increase the size of the fund.’’ 

Among the reasons are provisions expanding the fund to broadband 

without—without—imposing a cap on the fund or ensuring sufficient offsetting savings. 

We should not support any Universal Service Fund reform legislation that is absent strong and statutory assurance that it will 

simply rein in the program. The prospect of expanding the program 

to subsidize broadband access raises serious concerns about potential huge cost increases. I would consider including broadband in 

the fund but, my colleagues, only if paired with reform that will 


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constrain growth in the fund at a minimum and preferably shrink 

it. I mean, that is the whole purpose of what we are trying to do. 

Thus, cost-containment reforms must be part of the mix. 

I am encouraged that the bill requires the FCC to determine support for wireless carriers through a competitive bidding mechanism, and that is an important cost-cutting reform. Such a mechanism should also be applied to wireline providers. I also support 

provisions in the bill that require the FCC to act on needed reforms 

in other area, such as intercarrier compensation and traffic pumping. 

I am still concerned about a couple of things. We need to target 

the money to the places and the people who really need it. The bill 

requires the FCC to establish a cost model that sets subsidy levels 

rather than using a market-based mechanism to subsidize a single 

wireline carrier in areas otherwise uneconomic to serve. Only wireless carriers would be subject to competitive bidding, and up to two 

wireless carriers could be subsidized in an area in addition to the 

incumbent wireline providers. 

Carriers would also be allowed to continue under rate-of-return 

regulation. Although the FCC would not be allowed to ‘‘unreasonably increase,’’ end quote, the amount consumers pay, the contribution factor could still rise, and the fund would not be capped. 

So, Mr. Chairman, I appreciate you holding this hearing. It is important to reexamine the goals and assess the results of the current program. We all agree that the system needs reform, and I 

hope we are able to work together towards a solution that is fair 

to all consumers. 

Mr. BOUCHER. Thank you very much, Mr. Stearns. 

The chairman of our full Energy and Commerce Committee, the 

gentleman from California, Mr. Waxman, is recognized for 5 minutes. 

OPENING STATEMENT OF HON. HENRY A. WAXMAN, A REPRESENTATIVE IN CONGRESS FROM THE STATE OF CALIFORNIA 

Mr. WAXMAN. I would like to begin my comments today by commending Chairman Boucher and Representative Terry for their efforts to bring forward legislation designed to reform the Universal 

Service High-Cost Fund. Chairman Boucher, in particular, has 

shown amazing leadership. We would not be here today without his 

dedication to universal service and his legislative acumen. 

As the FCC’s National Broadband Plan recognized, broadband is 

a foundation for economic growth, job creation, global competitiveness, and a better way of life. It is one of the great infrastructure 

opportunities for the 21st century. 

The universal service program represents our Nation’s historic 

commitment to ensure that all Americans have access to communications services, which has been a cornerstone of communications 

policy since the invention of the telephone. Before the adoption of 

the 1996 Telecommunications Act, this program was supported 

through a system of implicit subsidies designed to make phone 

service affordable in rural America. Some customers paid higher 

rates so that others could pay affordable rates. 


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The Telecommunications Act of 1996 turned that implicit subsidy 

into an explicit system that supports affordable phone service in 

rural America as well as communications services to schools, libraries, and rural hospitals. The Telecom Act also codified the FCC 

Lifeline and Link-Up programs that ensure low-income Americans, 

regardless of geography, have access to essential communications 

services, an issued championed by Representative Doris Matsui. 

The challenge now, as the National Broadband Plan outlines, is 

to transform this program from one that supports telephone service 

to one that ensures that all Americans have access to broadband 

and to ensure that consumer contributions to the fund are being 

used for the intended purposes. 

The draft legislation takes several positive steps. First, the draft 

legislation better targets subsidies to the areas that most need 

them in three key respects: first, calculating the necessary subsidy 

on a more precise, granular basis than the one used today; second, 

eliminating subsidies in those areas where competition has demonstrated that service can be provided without a subsidy; and, 

third, considering all the revenues that a provider earns using the 

subsidized facility instead of just a portion of that revenue. 

The draft legislation also proposes a way to reduce the duplicative subsidies sometimes given to wireless providers by limiting the 

number of wireless carriers that are eligible for support. 

In addition, the draft legislation gives the FCC the ability to 

change the contribution mechanism to better reflect the realities of 

the communications marketplace. As stakeholders know, the distinctions between interstate and intrastate have been blurred to 

the point that they are irrelevant. Contributions to the USF must 

reflect that reality. 

There are areas where I have some questions, which I hope this 

hearing will help clarify. A key point of reform should be to make 

the system more efficient and save consumers money. I hope this 

hearing will help us understand how the savings and costs add up 

under the legislation. 

Another key objective of reform is to provide a broadband service 

to all Americans. There are broad waiver provisions in this bill. We 

need to examine those provisions and their impact on the goal of 

universal broadband coverage. 

In closing, I again want to thank the chairman and Representative Terry for their efforts. I look forward to working with them 

and other members of the committee as we move forward in this 

area. 

Thank you, Mr. Chairman. 

[The prepared statement of Mr. Waxman follows:] 


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HENRY A. WAXMAN. CALlFORNIA 

CHAIRMAN 

ONE HUNDRED ELEVENTH CONGRESS 

ctCongre~~ of tbt Wnittb ~Matt~ 

~OU51' of l\epre5fntati\.Jc5 

COMMITTEE ON ENERGY AND COMMERCE 

2125 RAYBURN HOUSE OFFICE BUIL.DING 

WASHINGTON, DC 20515-6115 

M"jOillY (2'02) 225-2927 

MinOrity f2021::!2S--3f!;41 

Statement of Rep. Henry A. Waxman 

Chairman, Committee on Energy and Commerce 

JOE BARTON. TEXAS 

RANKING MEMBER 

Legislative Hearing on H.R. 5828, the Universal Service Reform Act of2010 

Subcommittee on Communicatious, Technology, and the Internet 

September 16,2010 

I would like to begin today by commending Chairman Boucher and Representative Terry 

for their efforts to bring forward legislation designed to reform the Universal Service High Cost 

Fund. Chainnan Boucher, in particular, has shown amazing leadership. We would not be here 

today without his dedication to universal service and his legislative acumen. 

As the Federal Communications Commission's (FCC) National Broadband Plan 

recognized, broadband is a foundation for economic growth, job creation, global competiveness, 

and a better way of life. It is one of the great infrastructure opportunities of the early 21" 

century. 

The universal service program represents our nation's historic commitment to ensure that 

all Americans have access to communications services, which has been a cornerstone of 

communications policy since the invention of the telephone. 

Before the adoption of the 1996 Telecommunications Act, this program was supported 

through a system of implicit subsidies designed to make phone service affordable in rural 

America. Some customers paid higher rates so others could pay affordable rates. The 

Telecommunications Act of 1996 turned that implicit subsidy system into an explicit system that 

supports affordable phone service in rural America, as well as communications services to 

schools, libraries, and rural hospitals. The Telecom Act also codified the FCC's Lifeline and 

Link-Up programs that ensure low-income Americans, regardless of geography, have access to 

essential communications services - an issue championed by Representative Doris Matsui. 

The challenge now, as the National Broadband Plan outlines, is to transfonn this program 

from one that supports telephone service to one that ensures that all Americans have access to 

broadband and to ensure that consumer contributions to the fund are being used for the 

intended purpose. 

The draft legislation takes several positive steps. First, the draft legislation better targets 

subsidies to the areas that most need them in three key respects: 
11 


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First, calculating the necessary subsidy on a more precise, granular basis than the one 

used today; 

Second, eliminating subsidies in those areas where competition has demonstrated that 

service can be provided without a subsidy; and 

Third, considering all the revenues that a provider earns using the subsidized facility, 

instead of just a portion of that revenue. 

The draft legislation also proposes a way to reduce the duplicative subsidies sometimes 

given to wireless providers by limiting the number of wireless carriers that are eligible for 

support. 

In addition, the draft legislation gives the FCC the ability to change the contribution 

mechanism to better reflect the realities of the communications marketplace. As stakeholders 

know, the distinctions between interstate and intrastate have been blurred to the point that they 

are irrelevant. Contributions to USF must reflect that reality. 

There are areas where I have some questions, which I hope this hearing will help clarify. 

A key point of reform should be to make the system more efficient and save consumers money. 

I hope this hearing will help us understand how the savings and costs add up under the 

legislation. 

Another key objective of reform is to provide broadband service to all Americans. There 

are broad waiver provisions in this bill. We need to examine those provisions and their impact 

on the goal of universal broadband coverage. 

In closing, I again want to thank the Chairman and Representative Terry for their efforts. 

I look forwarding to working with you and other members of the Committee as we move forward 

in th is area. 

2 
12 

Mr. BOUCHER. Well, thank you very much, Chairman Waxman. 

And thank you for you and your staff participating so actively with 

us on this measure and offering very highly constructive recommendations, most of which we are seeking to reflect in this 

measure and believe we have embodied here. 

The gentleman from Nebraska, Mr. Terry, who I have partnered 

with on a bipartisan basis now for several years to bring this measure forward, is recognized for 2 minutes. 

OPENING STATEMENT OF HON. LEE TERRY, A REPRESENTATIVE IN CONGRESS FROM THE STATE OF NEBRASKA 

Mr. TERRY. Thank you, Mr. Chairman. I appreciate working with 

you and our esteemed witnesses here. 

This bill is about three C’s: compromise, certainty, and cost savings. 

To say this bill is a product of compromise might be the understatement of the year. We have worked for years, soliciting everyone’s input, including those from the committee as well as the industry. As one might imagine, not everyone sitting here today totally agrees on what the best fix is, but we have reached a delicate 

balance here where we have buy-in from almost every entity in the 

industry and from the committee. Our success in finding a compromise is personified in the long list of companies and trade organizations that have endorsed this bill. 

And, Mr. Chairman, if I can ask unanimous consent to add one 

more to the list, a letter from the American Farm Bureau Federation. 

Mr. BOUCHER. Without objection. 

[The information appears at the conclusion of the hearing.] 

Mr. TERRY. ‘‘Certainty,’’ you hear that word a lot when I was 

home over the break from our small-business owners. Well, if you 

are a small telecom business, you want the same thing, especially 

if you are in a high-cost area in rural America. You want to know 

that the Universal Service Fund is going to be fixed and you can 

rely on it in the future. 

And now they will have the reassurance that the USF is reformed, it is efficient and able to continue to meet its goal that all 

should have access to the services at reasonable and comparable 

prices to those in suburban and urban areas. They no longer have 

to worry or wonder what might happen if the contribution factor 

continues to escalate. They will now have explicit support for their 

investments in broadband. Now they will have certainty. 

Lastly, we are taking the much-needed step of reforming the 

USF to produce cost savings. For a number of reasons, the fund 

has grown quickly within the last few years and has become 

unsustainable. We recognize this and address it by putting into 

place a number of cost-saving measures that will not only stabilize 

the fund but also reduce its size. 

Chairman Waxman outlined just a few of those cost-saving measures. Specifically, our bill implements a competitive bidding process 

for wireless carriers and eliminates USF support for wireline providers in competitive areas, while also ensuring that the contribution factor does not increase. In addition, the legislation finally diVerDate Mar 15 2010 03:38 Apr 05, 2013 Jkt 078133 PO 00000 Frm 00018 Fmt 6633 Sfmt 6633 E:\HR\OC\A133.XXX A133

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rects the FCC to fix their intercarrier compensation system and fix 

phantom traffic. 

I would like to again thank our witnesses for being here today— 

it is an impressive panel—and their willingness to compromise. We 

have together produced a bill that will not only create cost savings 

but will provide much-needed certainty for those investing in today’s telecommunications infrastructure. And I am proud to have 

worked with Chairman Boucher in this process and look forward 

to next week and the weeks coming on this bill. 

Thank you, and I yield back. 

Mr. BOUCHER. Thank you very much, Mr. Terry. 

The gentleman from Pennsylvania, Mr. Doyle, is recognized for 

2 minutes. 

OPENING STATEMENT OF HON. MICHAEL F. DOYLE, A REPRESENTATIVE IN CONGRESS FROM THE COMMONWEALTH 

OF PENNSYLVANIA 

Mr. DOYLE. Thank you, Mr. Chairman, for holding this hearing 

today on your bill to reform the Universal Service Fund. 

For Members of Congress on both sides of the aisle and both 

chambers, from mayors of towns without broadband, to consumers 

who are paying billions of dollars per year so that their friends and 

loved ones in rural areas can get connected, I think everybody 

agrees that the fund is broken. 

Your bill was an interesting approach to fixing it that I think 

merits thoughtful deliberation. I have a few technical questions on 

some topics, including traffic stimulation and implementation of 

the requirement that companies receiving Federal funding from the 

Universal Service Fund actually provide broadband. And I look forward to getting them answered today. 

And, with that, Mr. Chairman, I will yield back. 

Mr. BOUCHER. Well, thank you very much, Mr. Doyle. 

The gentlelady from Tennessee, Mrs. Blackburn, is recognized for 

2 minutes. 

OPENING STATEMENT OF HON. MARSHA BLACKBURN, A REPRESENTATIVE IN CONGRESS FROM THE STATE OF TENNESSEE 

Mrs. BLACKBURN. Thank you, Mr. Chairman. 

I want to welcome all of our witnesses that are here. 

And, Mr. Chairman, you mentioned that there has been some revisions and some give and take. And I applaud you, Ranking Member Stearns, and the staffs for all the work on this. 

I am encouraged by many of the proposals and reforms that are 

in this bill. Among those, I think that intercarrier compensation, 

the reforms there, that is important. I am pleased that the legislation takes a hard stance on traffic pumping. And it is long overdue 

that we introduce competitive bidding to the wireless industry. 

However, there are still some places that we are needing to do 

some work. As I have stated over and over again in this subcommittee, it is difficult for me to look at the USF and not see a 

typical regressive D.C. tax. It keeps getting bigger, and I am extremely disappointed that the bill does not put a cap on the fund 

or put a limit on how big it should be. We are talking about a deVerDate Mar 15 2010 03:38 Apr 05, 2013 Jkt 078133 PO 00000 Frm 00019 Fmt 6633 Sfmt 6633 E:\HR\OC\A133.XXX A133

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clining-cost industry, where both technology and fiber are reducing 

their cost over time. So I would argue that the cost of support and 

maintenance of those services through the USF should also be declining, as well. 

And I am hopeful that today’s hearing can help re-center some 

discussion on this issue and move forward to finding a completion 

and a bill that can go to the floor. 

I thank you. I yield back. 

Mr. BOUCHER. Thank you very much, Mrs. Blackburn. 

The gentlelady from California, Ms. Matsui, is recognized for 2 

minutes. 

OPENING STATEMENT OF HON. DORIS O. MATSUI, A REPRESENTATIVE IN CONGRESS FROM THE STATE OF CALIFORNIA 

Ms. MATSUI. Thank you, Mr. Chairman. And thank you for calling today’s hearing. I would like to commend you for your leadership on efforts to reform the Universal Service Fund. 

I would also like to welcome our witnesses. 

Unfortunately, millions of Americans, particularly those in tough 

economic times, simply cannot afford the costs associated with inhome broadband service. As a result, they are at a competitive disadvantage when it comes to employment, education, and other opportunities. So we are seeing more and more disabled Americans, 

seniors, and teenagers traveling several miles to their nearest community center or library just to get online. 

We know that broadband adoption rates are largely associated 

with income levels, and the cost of broadband services continues to 

be a barrier for hardworking families. According to the FCC, 28 

million Americans do not subscribe purely because of affordability 

barriers. 

That is why, just about 1 year ago today, I introduced H.R. 3646, 

the ‘‘Broadband Affordability Act,’’ which would expand the Universal Service Fund’s Lifeline Assistance Program for universal 

broadband adoption. 

This proposal will ensure that all Americans living in urban and 

rural areas have access to affordable broadband services. We never 

know where the next great idea or invention will come, so we must 

continue to eliminate barriers to accessing broadband services for 

our constituents. 

And I strongly believe that any reform to the Universal Service 

Fund needs to address broadband affordability barriers. I look forward to continue working with Chairmen Boucher, Waxman, and 

my colleagues on reforming the Universal Service Fund, and yield 

back the remainder of my time. 

Mr. BOUCHER. Thank you very much, Ms. Matsui. 

The gentleman from Ohio, Mr. Latta, is recognized for 2 minutes. 

OPENING STATEMENT OF HON. ROBERT E. LATTA, A 

REPRESENTATIVE IN CONGRESS FROM THE STATE OF OHIO 

Mr. LATTA. Thank you, Mr. Chairman, Ranking Member Stearns. 

Thank you very much for holding this hearing today on H.R. 5828. 

I applaud the chairman and Mr. Terry for working on this legislation that addresses reform of the Universal Service Fund. There 


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seems to be a consensus among stakeholders that action is needed, 

not only to ensure the feasibility and stability of the USF, but also 

to address the numerous issues surrounding its role in a changing 

marketplace. 

There is no doubt, since the USF began, it has assisted numerous rural areas of this country to have access to telecommunication 

services. As we have discussed in previous hearings on the National Broadband Plan with the goal of reaching the remaining 5 

percent of those who do not have access to broadband, there is an 

opportunity for the USF to be used to reach these remaining areas. 

Representing Ohio’s largest agricultural district, I am keenly aware 

of the importance broadband deployment plays in economic development and the nexus this access has to job creation. 

If the USF is expanded to include broadband services, I believe 

this should be done through the existing programs, not by creating 

a new funding stream or adding additional funding. It is my understanding that, in 1998, the total commitments to the fund totalled 

$3.56 billion and, in 2009, that amount grew to over $7.7 billion. 

This is tremendous growth over the past 10 years, and I have serious concerns that the funding will increase since the legislation 

there—there is not currently a cap on the fund or anything to ensure that the savings are offset. A cap will prevent uncontrolled 

growth as well as bring stability to the USF. 

In addition to the concern about uncontrolled growth, there have 

been reports of fraud, waste, and abuse of the USF, especially in 

the E–Rate Program. I am pleased that this legislation establishes 

performance measures and audits of the USF to help ensure that 

fraud, waste, and abuse are not occurring in any of the USF programs. 

I am hopeful that the interested stakeholder groups will continue 

to work on this legislation and address the issues surrounding the 

USF. And I believe that the positive benefits to the rural districts 

like mine have access for telecommunication services. 

Again, I am opposed to an expansion of the government program 

that already has had increasing costs to consumers. It is my hope 

that the USF can be reformed without an increased cost to consumers directly or through the Federal Government’s budget. 

And thank you, Mr. Chairman. I yield back. 

[The prepared statement of Mr. Latta follows:] 


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Congressman Robert E. Latta - The Committee on Energy & Commerce 

Subcommittee on Communications, Technology & the Internet 

Legislative Hearing on H.R. 5828, "Universal Service Reform Act of2010" 

Opening Statement - For the Record 

September 16,2010 

MR. CHAIRMAN; RANKING MEMBER STEARNS: Thank 

you for holding this hearing on H.R. 5828. I applaud Mr. Boucher and 

Mr. Terry for working on legislation that addresses reform for the 

Universal Service Fund. There seems to be consensus among 

stakeholders that action is needed not only to ensure the feasibility and 

stability of the USF, but also to address the numerous issues surrounding 

its role in a changing marketplace. 

There is no doubt that since the USF began it has assisted 

numerous rural areas of the country have access to telecommunications 

services. As we have discussed in previous hearings on the National 

Broadband Plan (NBP), with a goal of reaching the remaining 5% of 

those that do not have access to broadband, there is an opportunity for 

the USF to be used to reach these remaining areas. Representing Ohio's 

largest agricultural, I am keenly aware of the importance broadband 
17 


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deployment plays in economic development and the nexus this access 

has to job creation. 

If the USF is expanded to include broadband services, I believe 

this should be done through the existing program and not by creating a 

new funding stream, or adding additional funding. It is my 

understanding that in 1998 the total commitments to the fund totaled 

$3.56 billion; in 2009, that amount grew to over $7.7 billion. This is 

tremendous growth over the past ten years, and I have serious concerns 

that the funding will increase since in the legislation there is not 

currently a cap on the fund or anything to ensure that the savings are 

offset. A cap will prevent uncontrolled growth as well as bring stability 

to the USF. In addition to the concern about uncontrolled growth, there 

have been reports of fraud, waste and abuse of the USF, especially in the 

e-Rate program. I am pleased that the legislation establishes 

performance measures and audits of the USF to help ensure that fraud, 

waste and abuse are not occurring in any of the USF programs. 

T am hopeful that the interested stakeholder groups will continue 

to work on this legislation to address the issues surrounding the USF. I 

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believe there are positive benefits to rural districts like mine for access 

to telecommunications services. However, I am opposed to an 

expansion of a government program that already has had increasing 

costs to consumers. It is my hope that the USF can be reformed without 

an increased cost to consumers directly, or through the federal 

government's budget. 

Thank you. [Yield Back] 

3 
19 

Mr. BOUCHER. Thank you, Mr. Latta. 

The gentleman from California, Mr. McNerney, is recognized for 

2 minutes. 

OPENING STATEMENT OF HON. JERRY MCNERNEY, A REPRESENTATIVE IN CONGRESS FROM THE STATE OF CALIFORNIA 

Mr. MCNERNEY. Thank you, Mr. Chairman, for convening today’s 

hearing to discuss the Universal Service Reform Act. It is good to 

see progress being made on this issue. 

The universal service program was created over 10 years ago. 

Well, that may not seem long in many contexts, but in telecommunications that is an eternity. With so many advances in our 

technology, such as the rapid expansions of Internet and cell 

phones, it is now a good time to reassess our current policy and 

make appropriate updates. 

I commend the chairman and Representative Terry for their bipartisan work and taking into consideration important issues such 

as ensuring broadband service to those who currently may not be 

adequately served. 

As we hear from today’s witnesses, I hope to learn how we can 

continue to improve the bill and prevent any unintended negative 

consequences. We all want to develop legislation that benefits consumers and allows businesses to compete and thrive, and I look forward to working with my colleagues to craft the best possible legislation. 

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

time. 

Mr. BOUCHER. Thank you, Mr. McNerney. 

The gentleman from Washington State, Mr. Inslee, is recognized 

for 2 minutes. 

Mr. INSLEE. Thank you. 

I just want to point out that we have a real need, connecting the 

talent in our tribal communities. And I am hopeful that, as this bill 

proceeds, we will find a way to get some tribal representation on 

the board making decisions here. I look forward to making sure we 

get that done. 

Thank you. 

Mr. BOUCHER. Thank you, Mr. Inslee. 

The gentlelady from Florida, Ms. Castor, is recognized for 2 minutes. 

OPENING STATEMENT OF HON. KATHY CASTOR, A REPRESENTATIVE IN CONGRESS FROM THE STATE OF FLORIDA 

Ms. CASTOR. Thank you, Mr. Chairman. 

And thank you to the witnesses for being here today. 

Universal service reform is an issue I have been concerned about 

for some time. I am a cosponsor of H.R. 3646, the ‘‘Broadband Affordability Act,’’ introduced by my colleague, Representative Matsui, which would reduce the cost of broadband services for low-income urban and rural customers along the lines of the Lifeline and 

Link-Up programs within the USF. 

Lifeline and Link-Up have helped thousands of families afford 

the cost of telephone service since the mid-1980s, but now it is cell 


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phones and the Internet that have become the indispensable tools 

in our daily lives. Many of us take them for granted, but there are 

others in our communities who can’t even afford the most basic 

services. So I am glad to see that the bill before us today gives the 

FCC the authority to include broadband within the USF. 

There is an assumption that urban areas have plenty of access 

to broadband, but there are significant gaps. For many, broadband 

is out of reach. But it doesn’t have to be that way. Expanding the 

Lifeline and Link-Up program discounts would lower the cost of 

broadband for families living on the margins. 

We also must address the severe inequity in the USF. I have 

pointed out before, Floridians far overpay into the USF without receiving some sort of equitable return. The new cost model put forward by the FCC must correct this inequity as we implement the 

National Broadband Plan and reform the Universal Service Fund. 

Thank you very much. And I yield back. 

Mr. BOUCHER. Thank you, Ms. Castor. 

The gentleman from Connecticut, Mr. Murphy, is recognized for 

2 minutes. 

Mr. MURPHY. Thank you, Mr. Chairman. I look forward to hearing from the witnesses, and I will waive an opening statement. 

Mr. BOUCHER. Thank you, Mr. Murphy. We will add 2 minutes 

to your questioning time. 

The gentlelady from the Virgin Islands, Mrs. Christensen, is recognized for 2 minutes. 

Mrs. CHRISTENSEN. Thank you, Mr. Chairman. I, too, would just 

like to welcome the witnesses and waive my opening statement. 

Mr. BOUCHER. Thank you, Mrs. Christensen. Two minutes to you 

also. 

That concludes opening statements by members of the subcommittee. 

I am pleased now to recognize and introduce briefly our panel of 

witnesses. And we want to thank each of you for joining us here 

today. 

Carol Mattey is the deputy bureau chief of the Wireline Competition Bureau at the Federal Communications Commission. 

Walter McCormick is president and chief executive officer of the 

United States Telecom Association. 

Shirley Bloomfield is chief executive officer of the National Telecommunications Cooperative Association, NTCA, and is testifying 

today on behalf of NTCA, OPATSCO, and the Western Telecommunications Alliance, all associations of rural carriers. 

Steve Davis is the senior vice president for public policy and government relations at Qwest Corporation. 

Kathleen Grillo is the senior vice president for Verizon. 

And James Assey is executive vice president of the National 

Cable and Telecommunications Association. 

We welcome each of you. And, without objection, your prepared 

written statements will be made part of our record. We would welcome your oral summaries and ask that you keep those to approximately 5 minutes. 

Ms. Mattey, we will be happy to begin with you. 


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STATEMENTS OF CAROL MATTEY, DEPUTY BUREAU CHIEF, 

WIRELINE COMPETITION BUREAU, FEDERAL COMMUNICATIONS COMMISSION; WALTER MCCORMICK, PRESIDENT AND 

CHIEF EXECUTIVE OFFICER, UNITED STATES TELECOM ASSOCIATION; SHIRLEY BLOOMFIELD, CHIEF EXECUTIVE OFFICER, NATIONAL TELECOMMUNICATIONS COOPERATIVE ASSOCIATION, NTCA; STEVEN DAVIS, SENIOR VICE PRESIDENT 

FOR PUBLIC POLICY AND GOVERNMENT RELATIONS, QWEST 

CORPORATION; KATHLEEN GRILLO, SENIOR VICE PRESIDENT, VERIZON; JAMES ASSEY, EXECUTIVE VICE PRESIDENT, NATIONAL CABLE AND TELECOMMUNICATIONS ASSOCIATION 

STATEMENT OF CAROL MATTEY 

Ms. MATTEY. Thank you, Chairman Boucher, Ranking Member 

Stearns, members of the subcommittee. Thank you for the opportunity to testify today about the ‘‘Universal Service Reform Act of 

2010.’’ 

Universal service historically has been a significant success story 

in the United States. In addition to incentiuizing the private sector 

to bring affordable voice service to virtually all reaches of the country, the existing program has played an important role in strengthening communities and our economy by supporting modern networks capable of delivering broadband as well as voice service to 

many rural Americans. 

But the current system, which wasn’t designed to explicitly support broadband, is not working for everyone. While consumers in 

some places in rural America have access to some of the best 

broadband networks in the country, others don’t have access to 

broadband at all. While many speak of an urban-rural divide for 

broadband service, the more troubling trend is a rural-rural divide. 

Under the existing universal service rules, not all providers have 

the same incentives to upgrade their networks to provide 

broadband, and some have economic incentives to invest in areas 

already served by unsubsidized competitors. 

Maintaining the status quo is unlikely to achieve affordable and 

universal access to broadband. Critical elements of the current system, such as how we collect the money to support universal service 

and the intercarrier compensation framework, must be reexamined 

in light of changes in technology platforms and market dynamics, 

changes that the Universal Service Reform Act expressly contemplates. 

The Commission shares the goals expressed by Chairman Boucher and Representative Terry when they highlighted the need for 

comprehensive and forward-looking reform that will ensure that 

sufficient universal service support is available on a technologyneutral basis. 

In March of this year, the Commission unanimously adopted a 

joint statement on broadband, calling for the system to be comprehensively reformed to increase accountability and efficiency and 

encourage targeted investment in broadband infrastructure. I 

would like to elaborate briefly on a few shared principles that underlie the bill and the FCC’s current efforts. 


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First, forward-looking policies are critical. Simply because we 

have done things a certain way in the past does not mean those 

same policies make sense in a broadband world. It is incumbent 

upon all of us to take a close look at the current system to determine how to move forward towards our goal of advancing 

broadband. We need to find a foundation of continued private-sector investment and a pathway for broadband to evolve in the future. Our rules must be based on the technology and economic realities of today and tomorrow, not the last century. 

Second, targeted, technology-neutral, and sufficient levels of support are essential. We should target support only to those areas 

that really need it. We need to provide sufficient support to establish an effective public-private partnership in which support is 

made available in exchange for a commitment to meet reasonable 

public interest obligations. 

Third, a revamped program requires oversight and accountability. The bill’s vision and ours is to ensure USF dollars are spent 

in a responsible way. This means maintaining effective oversight. 

Whoever receives funding should be accountable for building out, 

and we should ensure that USF benefits as many unserved and underserved Americans as possible with no more support than is 

truly necessary. 

Fourth, we should remember that universal service is fundamentally about consumers in all parts of the country. Ultimately, it is 

the consumer that pays for universal service. As we go through this 

process of making policy choices and compromises, we should never 

lose sight of the burden and benefits to consumers. 

Finally, we must move quickly but wisely. Market participants 

need clarity and regulatory predictability so that they can make informed business decisions. We hope that all stakeholders will actively and constructively engage so that we can move swiftly to establish clear and sensible policies for the future. 

To conclude, on a personal note, as a member of the Commission 

staff who has worked on universal service issues since 2000, I am 

very encouraged by the bipartisan consensus and recognition of the 

need for reform. We at the FCC appreciate the leadership of the 

chairman and Representative Terry in introducing this bill. And we 

look forward to working with the subcommittee and others to ensure that reform moves forward. 

Thank you again for the opportunity to testify, and I will be 

happy to answer any questions. 

[The prepared statement of Ms. Mattey follows:] 


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Written Statement of 

Carol Mattey 

Deputy Chief, Wireline Competition Bureau 

Federal Communications Commission 

Hearing on H.R. 5828, "Universal Service Reform Act of 2010" 

Subcommittee on Communications, Technology, and the Internet 

United States House of Representatives 

September 16,2010 

Chairman Boucher, Ranking Member Steams, Members ofthe Subcommittee, thank you 

for the opportunity to testify today about the important subject of universal service and H.R. 

5828, the Universal Service Reform Act of2010. 

Following the introduction ofH.R. 5828, Representative Terry stated that the bill's goal 

is to ensure "everyone in America is connected into the 21st century telecommunications world." 

That objective is broadly shared by the FCC as we undertake the process of considering the 

recommendations included in the National Broadband Plan submitted to Congress in March. 

The National Broadband Plan recognized the important role that the private sector has 

played and must continue to play in investing in broadband facilities as well as promoting 

investment and innovation in broadband technologies and services. But, as Chairman Boucher 

and Representative Terry noted when introducing H.R. 5828, some Americans live in areas for 

which there simply is not an economic case for any provider to build, upgrade and maintain vital 

communications infrastructure. That is why we have what is known as the high cost program in 

the Universal Service Fund. 

Universal service historically has been a significant success story in the United States. In 

addition to incenting the private sector to bring affordable voice service to virtually all reaches of 

the country, the existing high cost program has played an important role in strengthening 

communities and our economy by supporting modem networks capable of delivering broadband 

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as well as voice services to millions of rural Americans who would not otherwise have such 

access. For example, the National Exchange Carriers' Association reported that a sampling of 

small telephone companies made approximately $5 billion of gross investments, mostly to 

modernize their networks, between 2006 and 2009. 

But, as I'm sure many of your constituents tell you, the current system, which wasn't 

designed to explicitly support broadband, is not working for everyone. While consumers in 

some places in rural America have access to some of the best broadband networks in the country, 

others don't have access to broadband at all, even though they are served by providers eligible 

for universal service support. While many speak of an urban/rural divide for broadband service, 

the more troubling trend is a rural/rural divide that reflects the antiquated structure and incentives 

of our current high cost program. 

Under the existing universal service rules, not all providers have the same incentives to 

upgrade their networks to provide broadband; some only receive sufficient support to maintain 

existing voice service. And some of those providers that are able to build broadband networks 

through universal service support have limited accountability for where the money is used and 

have economic incentives to invest most heavily in areas that are already served by unsubsidized 

competitors. 

Rules originally designed for a circuit-switched, voice network no longer make sense as 

we shift to packet-switched, broadband networks capable of supporting countless applications, 

including voice. While we have largely achieved the goal of universal voice service, maintaining 

the status quo policy framework is unlikely to achieve the goal of affordable and universal access 

to broadband. Critical elements ofthe current system such as how we collect the money to 

support universal service and the intercarrier compensation framework must be re-examined in 

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light of changes in technology platfonns and market dynamics - something that the Universal 

Service Reform Act of2010 expressly contemplates. These issues are all inter-related. 

The Commission shares the goals expressed by Chainnan Boucher and Representative 

Terry when they highlighted the need for "comprehensive and forward-looking" refonn that will 

"ensure that sufficient universal service support is available on a technology-neutral basis." In 

fact, the Commission has unanimously adopted a "Joint Statement on Broadband" calling for the 

Universal Service Fund and the intercarrier compensation system to be "comprehensively 

reformed to increase accountability and efficiency, encourage targeted investment in broadband 

infrastructure, and emphasize the importance of broadband to the future of these programs." 

I would like to elaborate on a few of these shared principles that underlie the Universal 

Service Reform Act and the FCC's current efforts: 

Forward-looking policies are critical because networks and technology are 

changing. The marketplace is changing. The opportunities and challenges are changing. Our 

policies must anticipate these changes. Simply because we have done things a certain way in the 

past does not mean those same policies and structures make sense in a broadband world. It is 

incumbent upon all of us to take a close look at the current universal service system to determine 

how to move toward our goal of advancing broadband. We need to provide a foundation for 

continued private sector investment in broadband and a pathway for broadband to grow and 

evolve in the future. Our rules must be forward looking, technology neutral, and incent judicious 

investment - based on technology and economic realities oftoday and tomorrow, not the last 

century. 

Targeted, technology-neutral and sufficient levels of support are essential to 

incentivize private sector entities to invest in partnership with the public sector. We should 

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be looking at ways to target support only to those areas that really need it to deploy and sustain 

broadband networks capable of providing high-quality broadband and voice services. We need 

to provide sufficient support to meet the mandates that come with that support, and recognize 

that expectations have to match economic reality. And we should do so without interfering with 

innovation and private investment in areas that can sustain un subsidized service. 

Responsible reform requires an effective public/private partnership in which 

support is made available in exchange for a commitment from providers to meet 

reasonable public interest obligations. We look forward to working with all the stakeholdersincluding state, local and Tribal governments, as well as service providers, community and 

consumer groups - to develop a unified vision of the obligations that we expect recipients of 

universal service funding to meet in the 21 st century. 

A revamped program also requires oversight and accountability. The bill's vision, and 

ours, is one in which the government sets forth explicit goals for the program and clear 

expectations for participants, and then takes active steps to ensure that USF dollars are spent in a 

responsible way that meets those goals and expectations. This means maintaining effective 

oversight ofthe system to ensure that those who receive support are responsible stewards ofthe 

money they are receiving from the American public. Whoever receives the funding should be 

held accountable for building out and serving consumers, and we should ensure that USF 

benefits as many unserved and underserved Americans as possible with no more public support 

than is truly necessary. 

As we move forward, we should remember that universal service is fundamentally 

about consumers in all parts of the country. Ultimately, it is the consumer who pays for 

universal service, and all consumers, whether they live in rural or urban areas, benefit from 

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additional Americans connecting to the network. Ensuring access to quality, affordable services 

at reasonably comparable rates for all consumers is not easy, but that is the goal set forth in the 

Telecommunications Act of 1996. That is the fundamental premise upon which our universal 

service policy has been based, and that will continue to guide our FCC efforts going forward as 

communications evolve in the future. 

Achieving this goal will involve choices and compromises because of the inherent 

tension between increasing the contribution burden on consumers and providing support where 

needed. But as we go through the process of making policy choices and compromises, we 

should never lose sight of the burden and benefits to consumers. Indeed, if the burden on 

consumers becomes too high, it could undermine the national consensus that universal service is 

a shared responsibility for all. 

And, finally, we must move forward with the process quickly, but wisely. Market 

participants need clarity and regulatory predictability so they can make informed business 

decisions, and have time to implement changes necessary to adapt to any new frameworks. 

Although many difficult and complex issues lie ahead, these complexities are not insurmountable 

if all parties are willing to work together to achieve universal broadband service for American 

consumers. It is in everyone's interest to know the rules of the road as quickly as possible, even 

though there may be a period of extended transition once new rules are adopted. We hope that 

all stakeholders will engage actively and constructively throughout this process of reform so that 

we can move swiftly to establish clear and sensible policies for the future. 

On a personal note, as a member of the Commission staff who has been working on 

universal service issues since 2000, I am encouraged by the bipartisan consensus and the 

recognition of the need for reform. No one would suggest that USF and ICC reform is a simple 

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process. Change never is. But we all agree that reform is necessary to make broadband the 

technology of choice for Americans in the 21 st century in a global economy, and that success 

depends on all stakeholders working together towards a shared end goal. We at the FCC 

appreciate the leadership of Chairman Boucher and Representative Terry in introducing H.R. 

5828, and we look forward to working with all of the members ofthe Subcommittee and other 

stakeholders to ensure that reform moves forward. 

Thank you again for the opportunity to testifY this morning. I will be happy to answer 

any questions you may have. 

6 
29 

Mr. BOUCHER. Thank you very much, Ms. Mattey. We are delighted to have you here. 

Mr. McCormick? 

STATEMENT OF WALTER MCCORMICK 

Mr. MCCORMICK. Mr. Chairman, Ranking Member Stearns, Mr. 

Terry, and members of the subcommittee, thank you for the opportunity to testify today in support of this important legislation. 

It is hard to overestimate the importance of broadband to our 

Nation’s economy, to America’s competitiveness, to education, to 

health care, to environmental sustainability, to job creation, and to 

our citizens’ quality of life. Today broadband has been built out to 

about every place in America where a reasonable business case can 

be made for deployment. Over the course of the last decade, 

broadband service providers have invested over $700 billion in deploying broadband infrastructure. 

According to the FCC’s National Broadband Plan, fixed 

broadband service of 4 megabits or more is now available to 95 percent of our population. This is an extraordinary accomplishment. 

Consider that earlier this year Congress passed universal health 

care that, when fully implemented some years from now, aims to 

cover 95 percent of Americans. We are there today with broadband. 

But getting to the last 5 percent of Americans, it is expensive. 

The FCC estimates that it is going to cost about $24 billion. It can 

only be done if Congress and the FCC address the financial fundamentals that lie at the foundation of rural service, which are 

universal service and intercarrier compensation. This bill does that. 

We are grateful to you, Mr. Chairman, and to Mr. Terry for the 

thought that you put into this legislation, for the attention to detail, for the inclusive process that you employed, and for the consensus that you forged. 

This bill addresses each of the key issues that are central to the 

integrity of universal service going forward. It expands the contribution base to include new technologies. It reforms USF distributions to target support where it is most needed, to reduce duplication, to balance competing interests, and to focus on broadband. It 

mandates reform of intercarrier compensation, the means by which 

carriers receive payment for the use of their networks. It addresses 

the egregious abuses of the system that have arisen with regard to 

phantom traffic and traffic pumping. It reforms the audit process. 

It prevents the Commission from restricting high-cost support to 

primary lines. And it resolves the longstanding administrative 

problem associated with the Anti-Deficiency Act. 

So we endorse this bill. We do so cognizant of the fact that our 

industry did not get everything that it wanted. But we do so in the 

spirit of compromise, in the spirit of bipartisanship that characterizes this package, and with the recognition that it would be imprudent to let the perfect be the enemy of the good, both for our industry and for our Nation. 

This bill deals with complex matters. It allocates large sums of 

money, and it impacts a variety of competing interests. The balance 

that has been struck is a fair but very delicate one, and it could 

tip easily. We recognize that to pull at one thread is to unravel the 


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fabric of an impressive blueprint for investment in 21st-century 

broadband communications. 

So, Mr. Chairman, based upon the substance of this package, 

coupled with clear assurances and a legislative history that assure 

our industry that it will not result in unfunded mandates, and this 

committee’s commitment to close oversight of Commission implementation, we recommend its passage. 

Again, thank you for your extraordinary work on this very important issue. 

[The prepared statement of Mr. McCormick follows:] 


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Testimony of 

Walter B. McCormick, Jr. 

President and CEO, United States Telecom Association 

before the 

House Committee on Energy and Commerce 

Subcommittee on Communications, Technology and the Internet 

"The Universal Service Reform Act of 2010" (H.R. 5828) 

September 16, 2010 

Chainnan Boucher, Ranking Member Stearns, and Members of the Subcommittee: 

Thank you for the opportunity to appear before you today to discuss updating the 

laws, and in turn securing the financial fundamentals, underlying the provision of 

universal service to rural Americans. I am Walter McConniek, President and CEO of the 

USTelecom Association. USTelecom represents innovative broadband companies 

ranging from some of the smallest rural telecoms in the nation to some of the largest 

companies in the U.S. economy. Our members offer a wide range of advanced 

broadband services, including voice, internet access, video, and data, on both a fixed and 

mobile basis. What unites our diverse membership is our shared detennination to deliver 

broadband services to all Americans - regardless of their location - a goal to which we 

know this Subcommittee is equally committed. 

The universal service program is an American suecess story. Today phone 

service is as ubiquitous as electricity and clean water throughout our nation. However, 

new technologies arise and evolve, and so it is time for universal service and the related 

regulatory framework governing payments among carriers to be updated to reflect the 

seismic changes in communications that have occurred over the nearly 15 years since 

passage of the 1996 Telecom Act. Paramount among these changes is the way in which 

broadband connections to the Internet have joined voice service as an integral part of our 

lives. 

Over the last decade, broadband providers have invested well over $700 billion in 

building and upgrading broadband networks. Reflecting the challenges of serving our 

Nation's vast geography and varied terrain, investmcnt on a per capita basis by 

broadband providers in the U.S. far exceeds that of other countries to which we are often 

compared, such as Japan, South Korea, and the United Kingdom. Ensuring that all 

Americans can enjoy the benefits of robust broadband is a goal USTelecom strongly 

supports. And because of the massive private sector investment in building broadband 

networks, we are close to this goal. According to the FCC's National Broadband Plan, 

robust broadband is available to 95% of the country. Getting to 100% will require an 

efficient and effective universal service program and sensible refonn to the Federal 

Communications Commission's (FCC) regulatory framework for payments between and 

among carriers. 

Chainnan Boucher and Representative Terry have thoughtfully crafted a bill that 

carefully balances many competing interests to modernize universal service and to bring 

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robust broadband to areas of rural America where today's business case would not 

support such deployment. In particular, H.R. 5828 provides for explicit support of 

broadband, better targets that support, and strives to match explicit support for the 

construction and operation of broadband networks with incentives to provide broadband 

service where it is not available. And by addressing intercarricr compensation as well as 

universal service, the bill takes a comprehensive approach to addressing the financial 

fundamentals that will help spur privatc investment in broadband facilities. We strongly 

support and share Chairman Boucher's and Representative Terry's commitment to 

providing all Americans an opportunity to have access to broadband, and at the same 

time we deeply appreciate their efforts to ensure that the legislation docs not impose 

unfunded mandates on broadband providers as we work to attain that objective. For that 

reason, and because H.R. 5828 as introduced would bring essential reforms not only to 

the Universal Service Fund (USF) program but also to the current intercarrier 

compensation regime, USTelecom is proud to endorse this legislation. 

While the intercarrier compensation provisions comprise a smaller portion of the 

legislation, the dollars involved are at least twice as much as currently available high-cost 

universal service support. Thus, the two systems must both be addressed because they 

are, by and large, opposite sides of the same coin. Universal service funds provide 

explicit subsidies to support reasonably priced services. By contrast, the fundamental 

problem with the existing intercarrier compensation system is that it is riddled with 

implicit subsidies that can no longer be maintained in today's era of new and competitive 

communications technologies. The transition from implicit to explicit support must be 

synchronized in a logical way that recognizes the investments telecommunications 

companies have made in reliance on existing mechanisms. 

I will retum to the subject of intercarrier compensation shortly, but please permit 

me first to note the important improvements the Boucher-Terry bill would make in the 

universal service program. Most importantly, the bill clarifies the FCC's authority to 

collect funds in a variety of ways to then distribute as universal service support. It 

authorizes methodologies including use of intrastate as well as interstate revenues, 

working telephone numbers used by communications providers, or any other current or 

new connections to the network. It properly broadens the base of contributors and 

provides the FCC with flexibility to use any or a combination of several methods to more 

fairly and equitably collect univcrsal service funds. 

We also appreciate the inclusion in the bill of provisions that addrcss particular 

issues with the current system - thc potcntial for disruption in the universal service 

program by application of the Anti-Deficiency Act and the inequities of restricting 

support to primary lines. Congress has addressed both over the years in annual 

appropriations legislation, but this bill would include those fixes in permanent law. 

The bill strikes the proper balance between the need for universal service support 

for broadband while not unreasonably increasing the burden that falls on consumers to 

fund universal service. It obligates providers to build out broadband facilities to unserved 

areas, but also makes necessary changes to ensure financial support for meeting those 

obligations by, among other things, better targeting available funds. And it includes 

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essential relief to providers in situations in which the mandate and the available support 

cannot be appropriately matched. 

Under today's system, rural consumers may be penalized by virtue of which 

company provides them service. The bill would eliminate that inequity by targeting rural 

areas for USF regardless of which company is providing service there and by eliminating 

the parent trap, which penalizes a rural carrier seeking to buy an exchange based solely 

on the seller's identity, rather than on the inherent characteristics of the area being served. 

That is the right and fair way to approach universal service snpport. 

The Boucher-Terry bill also appears to appropriately balance competing interests, 

in its efforts to better targets support by reducing or eliminating high-cost support 

provided in areas where 75 percent or more of the households havc voice and broadband 

service available from another wired provider, typically a cable company. To ensure 

consumers are protected, cable companies would be subject to a set of obligations similar 

to those for incumbent telecommunication providers - such as the basic requirement to 

provide service to any customer requesting it in the company's service area. Support 

would then be targeted to the non-competitive areas that tend to have the highest costs. 

This mechanism, then, seeks to target funds to the truly high-cost areas and conserves 

scarce universal service funds. 

Mr. Chairman, as you well know, it is not uncommon in the legislative process for 

one stakeholder or another to seek a tweak here or a change there that will make the 

legislation "just a little bit better" for them. But in this instancc, we would respectfully 

caution that changes to this delicately balanced package potentially risk undermining the 

compromises you and Representative Terry have worked so hard to forge. The bill as 

introduced strikes a very careful balance between establishing obligations to provide 

service in even the most financially challenging areas and the funding available to 

support the construction and operation of broadband networks in those areas. Mandates 

that exeeed the amount of support provided will not achieve their intended objective. 

Indeed, they risk driving broadband providers out of the program entirely. As this bill 

moves through the legislative process, it is very important that the delicate balance you 

have struck here not be upset by unrealistic expectations about what can or should be 

accomplished within the limits of the funding being made available. 

Let me return now to the other subject of H.R. 5828, intercarrier compensation 

the complex regulatory mechanism by which providers pay each other for carrying voice 

calls on each other's networks. The actual costs oftenninating a call are the same no 

matter where the call originated. However, as a result of the implicit regulatory subsidies 

mentioned earlier, the rate for terminating a call may be vastly different depending on the 

origin of the call. Under this system, regulatory arbitrage has become a serious financial 

problem in the industry, creating an unnecessary obstacle to efficient network investment 

and operation. The FCC has been struggling with reforming its compensation rules for a 

decade without success. H.R. 5828 provides much needed guidance, clarifies certain 

jurisdictional issues, and sets a deadline for the FCC to complete comprehensive reform. 

The bill also provi,des guidance on two important elements of reform - traffic pumping 

and phantom traffic - that arc long overdue for FCC action. 

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Traffic pumping is a scheme by which communications companies artificially 

generate huge volumes of calls, typically through the offering of services like free 

conference calling, and then bill other carriers at the highest possible compensation rate. 

These particu.1ar compcnsation ratcs wcre originally established to keep consumer 

charges reasonable in rural areas, where providers typically have high deployment costs 

but low average call volumes. Today these rates are being taken advantage of by entities 

using new technologies with very low deployment costs and tremendously high call 

volumes. These charges are ultimately borne by all consumers ofiong distance services: 

As the National Broadband Plan explained, "because the arbitrage opportunity exists, 

investment is directed to free conference calling and similar schemes for adult 

entertainment that ultimately cost consumers money, rather than to other, more 

productive endeavors." 

Phantom traffic is an even simpler and more pernicious arbitrage scheme -

communications companies send traffic over the network to and through other 

companies, but don't provide information sufficient for the traffic to be identified. As the 

National Broadband Plan explained, "traffic is masked to avoid paying the tenninating 

carrier intercarrier compensation entirely, and/or redirected to make it appear that the call 

should be subject to a lower rate." If you can't identify the traffic, you can't bill for it. 

So the costs of terminating phantom traffic are passcd on to others. The legislation 

addresses phantom traffic by including a simple but important provision that requires any 

communications provider that originates traffic to sufficiently identify it. 

As much as we appreciate and support the bill's inclusion of provisions to end 

both these regulatory arbitrage schemes, we hasten to emphasize that the FCC has a more 

than sufficient record to deal with them right now. It has received extensive public 

comment on both traffic pumping and phantom traffic - indeed, USTelecom has provided 

the Commission with detailed proposals for addressing both these issues that have 

received broad support. Moreover, the National Broadband Plan urges the FCC to adopt 

rules to reduce these arbitrage opportunities. It is critical that the Commission not use the 

pendency of legislation to delay further in adopting fixes to these rapidly growing 

problems, which it has ample jurisdictional authority to address. And so in addition to 

moving forward with this legislation, we hope the Subcommittee will encourage the FCC 

to follow the common sense guidance in the bill and adopt rules immediately. 

By squarely addressing the thorny issues of intercarrier compensation reform and 

universal service, the Universal Service Refonn Act of2010 represents an important 

milestone in the effort to establish a sound, modern regulatory framework for the future 

deployment and operation of broadband networks in rural America and throughout the 

Nation. Adoption of the key elements of the bill, whether legislatively or through speedy 

FCC action where appropriate, would remove a great deal of regulatory uncertainty and 

spur investment in broadband facilities. USTelecom looks forward to continuing to work 

with you, Chairman Boucher, as well as with you Representative Terry, and the members 

of the Subcommittee, to accomplish these worthy goals. 

4 
35 

Mr. BOUCHER. And thank you for that excellent testimony. 

Ms. Bloomfield? 

STATEMENT OF SHIRLEY BLOOMFIELD 

Ms. BLOOMFIELD. Thank you very much, Chairman Boucher, 

Ranking Member Stearns, Congressman Terry, members of the 

subcommittee. Good morning, and thank you very much for the invitation to testify today on H.R. 5828, the ‘‘Universal Service Reform Act of 2010,’’ which we are also very much in support of. 

NTCA, which represents more than 580 rural telephone companies, is who I am here on behalf of, along with my colleagues, 

OPATSCO and WTA. And, together, we represent 1,100 rural, rateof-return regulated, community-based communications and 

broadband service providers from around the Nation. Collectively, 

our member companies serve about one-third of the landmass of 

this country but about 5 percent of the total subscriber lines. 

So we would like to thank you very, very much for your leadership, Chairman Boucher and Congressman Terry, in particular, for 

your longstanding focus and understanding of both the critical importance of universal service support for today’s communication 

networks and the need for reform to usher in a new era of advanced communications. 

As you know, OPATSCO and WTA and NTCA have endorsed 

5828. The bill represents a laudable effort to seek compromise between many different viewpoints and interests on these very important issues. Your ability to find some common ground on such a 

complex topic is a testament to your efforts to the American public 

and a dedication to advancing telecommunications policy to better 

reflect the needs of the communications broadband-focused world. 

Universal service continues to be the cornerstone of our Nation’s 

communications policy and ensures that Americans living all across 

the country, and particularly in rural areas, receive services that 

are comparable to those in performance and price to those living 

in urban areas. And it is an opportunity for everybody in this country to benefit from a nationwide, integrated, advanced communications network. 

A typical self-sustaining business model that works in an urban 

area is much more difficult to achieve in a rural market. And those 

of you who have rural areas in your congressional districts know 

what I mean, when you are driving for miles, how difficult it is to 

put a telecommunications plant in those markets. 

In those high-cost areas, universal service is critical to overcoming the economic challenges of deploying communications networks. So, as members of the industry and Members of Congress 

recognize, it is time to update the universal service program and 

to reflect the shift from voice to a broadband world. 

The ‘‘Universal Service Reform Act of 2010’’ contains a number 

of program modifications that we support and that we think are 

very important and that I detail a little bit more further in my testimony, but I do want to hit on a couple of them. 

The bill maintains rate-of-return regulation for eligible communication providers, ensuring the needed stability and predictability 

in cost recovery to promote investment in high-cost, low-density 

parts of our country. It defines universal service to include highVerDate Mar 15 2010 03:38 Apr 05, 2013 Jkt 078133 PO 00000 Frm 00041 Fmt 6633 Sfmt 6633 E:\HR\OC\A133.XXX A133

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speed broadband service so that the support for the deployment 

and operation of broadband networks will be explicit. It also requires a contribution to the Universal Service Fund from a wider 

range of providers, including all broadband providers. And it requires the FCC to act on intercarrier comp reform in the near term 

and to allow the USF growth factor to accommodate intercarrier 

comp flows directed to it. 

So, although the bill contains these very important modifications 

to USF—our organizations do endorse the bill—we also have a couple of things that do raise some concerns for us: reducing or eliminating high-cost support in competitive areas and the implementation of a new, unproven cost model that may not permit rural providers to meet universal service goals of providing reasonable, comparable, and reliable service in high-cost areas. 

We are hopeful that if this legislation is adopted we can work 

with all of you to define and implement these measures in a way 

that acknowledges the critical role that rural telecommunication 

providers continue to play as carriers of last resort in their community. We also hope that the Congress and the FCC, if they are to 

act and implement any provisions, will recognize the very unique 

nature of some of these rural markets. 

Mr. Chairman, I want to thank you again for inviting me to be 

here with you. Your knowledge of the industry, your bipartisan efforts with Representative Terry, your commitment to strengthening 

and advancing communications for all Americans, both urban and 

rural, make us very fortunate to have you serving on this committee. 

The bill that we are discussing here today is a product of many 

hard years of work, a lot of effort on behalf of a lot of people. And 

we look forward to continuing to work with you to improve this 

measure and to answering any questions that the committee may 

have. 

Thank you very much. 

[The prepared statement of Ms. Bloomfield follows:] 


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NTCA 

Tht' VQi('(' of Rum! Teleo:nnm,l.miru{irJfts 

'-\'WW,nko org 

Statement by 

Shirley Bloomfield 

Chief Executive Officer 

National Telecommunications Cooperative Association 

On behalf of the 

NTCA 

National Telecommunications Cooperative Association 

OPASTCO 

Organization for the Promotion and Advancement of Small Telecommunications Companies 

WTA 

Western Telecommunications Alliance 

Before the 

United States House of Representatives 

Committee on Energy and Commerce's 

Subcommittee on Communications, Technology, and the Internet 

In the Matter of 

H.R. 5828, The "Universal Service Reform Act of2010" 

September 16, 20 I 0 
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Introduction 

Chairman Boucher, Ranking Member Steams, members of the Subcommittee, good morning and 

thank you for the invitation to participate in today's discussion regarding H.R. 5828, The 

Universal Service Reform Act of2010, which is sponsored by Chairman Boucher and Rep. 

Terry. 

I am the Chief Executive Officer of the National Telecommtmications Cooperative Association 

(NTCA), which represents more than 580 small, rurdl telecommunications cooperatives and 

commercial companies. However, my remarks today are also being made on behalf of the 

Organization for the Promotion and Advancement of Sma I! Telecommunications Companies 

(OPASTCO), and the Westem Telecommunications Alliance ("VTA), which along with NTCA, 

represent more than 1, 100 tural rate-of-return regulated community-based communications and 

broadband service providers from around the nation. Collectively, the service territories of these 

companies cover more than one-third (37%) of the nation's land mass while their total subscriber 

base accounts for only about 5% of the national total. 

Our organizations would like to thank the members of the Subcommittee - and Chairman 

Boucher and Rep. Terry, in particular - for their long-standing focus on and understanding of 

both the critical importance of universal service support for today's telecommunications 

networks, and the need for reform to usher in a new era of advanced communications. As you 

know, OPASTCO, NTCA, and WTA have endorsed H.R. 5828. The bill represents a laudable 

effort to seek compromise between many different viewpoints and interests on important issues. 

Your ability to find some common ground on such a complex and controversial topic is a 

testament to your efforts to serve the American public and your dedication to advancing 

telecommunications policy to reflect better the needs of a broadband-focused world. 

Universal service continues to be a cornerstone of our nation's communications policy. It 

ensures that Americans living in rural areas of th.c country receive services comparable in 

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performance and price to those living in more urban areas. We must continue working to ensure 

that all Americans, including those living in rural areas, have the opportunity to experience the 

benefits offered by a nationwide integrated advanced communications network. Indeed, for 

consumers in rural or remote communities, broadband represent~ a vital link to the rest of the 

world for the most basic of communications, and it will play an evcn more important role in such 

areas as civic, economic, educational, and medical interactions increasingly migrate online. 

The Universal Service Reform Act of2010 

Today, tclccom providers and policy makers alike are shifting their primary focus from voice 

services to broadband, which offers the promise of being the great equalizer between rural and 

non-rural areas of our nation. Rural communications servicc providers are working to replicate 

the success of their telephone service build-out by steadily deploying broadband infrastructure 

and related services to an increasing percentage of their subscribers. 

But this task is not easy, and more remains to be done. A typical self-sustaining business plan in 

an urban area is much more difficult to identifY and implement in rural markets. It is in these 

high-cost areas that universal service remains critieal to overcome the economic challenges of 

deploying eommunications networks. As members of the industry and Members of Congress 

recognize, it is time to update the universal service program to refleet this shift from voice to 

broadband. The Universal Service Reform Act of2010 would support sueh a transition and 

would enable many other important steps to update and improve the program. 

The Universal Service Reform Act of2010 contains a number of program modifications that we 

support. Among the modifications we support, the bill: 

Maintains rate of return regulation for eligible communication service providers; 

Defmes universal service to include high speed broadband service, so support for the 

deployment and operation of broadband networks "'ill be explicit; 

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Requires contribution to the Universal Service Fund from a wider range of providers, 

including all broadband providers; 

Requires the Federal Communications Commission (FCC) to act on intercarrier 

compensation reform in the near term and allows the Universal Servicc Fund growth 

factor to accommodate any intercarrier flows directed to it; 

Addresses so-called "phantom" traffic by mandating identification of all calls; 

Prohibits implementation of a primary line restriction; 

Includes requirements to ensure audits are fair and auditors are trained in universal 

service fund program compliance; 

Eliminates the so-called "parent trap" so that providers acquiring exchanges are not 

stymied from investing in such markets; 

Maintains current Act requirements on comparability of service in terms of price and 

scope as well as sufficiency of support; and 

Provides some relief from deployment requirements for high-speed broadband service to 

unserved areas where significant high-cost market conditions exist. 

Addressing each of these modifications in further detail: 

Rate of Return Regulation 

H.R. 5828 maintains rate-of-return regulation for the recovery of costs and distribution of highcost support to eligible communication service providers. Rate-of-return regulation represents a 

significant broadband deployment success story. Unfortunately, the National Broadband Plan 

recommends eliminating this regulatory framework that has enabled carriers operating in hardto-serve, high-cost areas to install and maintain critical high-speed connections. The Universal 

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Service Reform Act of2010 recognizes that rate-of-return regulation promotes highly desired 

investment in America's rural communications networks by providing stability to the carriers 

that serve these areas. In addition, under rate-of-return regulation, waste, fraud, and abuse are 

held in check and monitored regularly by regulatory bodies. Rate-of-return regulation is welltailored for promoting responsible investment in broadband networks in rural America. 

By contrast, price-cap regulation, which the National Broadband Plan proposes to replace rateof-return regulation, tends to drive investment where risk is least and likelihood of recovery is 

greatest and quickest - in other words, toward more urban and dcnsely populated markets. 

Price-cap regulation often provides little, ifany, incentive to invest in many parts of rural 

America where the costs to deploy are highest and the customer base is smalL As a result, pricecap regulation has proven far less successful in eneouraging deployment of advanced 

communications infrastructure in rural America. Ifpolicymakers truly desire to promote 

ubiquitous deployment of state-of-the-art communications infrastructure, the rate-of-return form 

of regulation must bc sustained as a foundation for broadband deployment. 

Explicit Support for Broadband Deployment 

Government policies and programs, including universal service, are instrumental in promoting 

affordable and comparable communications services for alL The United States public switched 

telecommunications network remains the envy of the world. The same should hold true as this 

network transitions toward provision of broadband services. While rural carriers have taken 

significant steps to deploy broadband already, more remains to be done, and the Universal 

Service Reform Act of201Otakes an important step by declaring broadband to be a universal 

service. 

While technological advances may help to reduce some costs associated with broadband 

deployment, it is still always going to be more expensive to serve rural America due to low 

population density, expansive distances, and often-rugged terrain. Without federal policies such 

as universal service to ensure adequate and predictable cost recovery mechanisms for broadband, 

our national goal of universal broadband access may never be realized. 

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Contribution Expansion 

The bill would assess contributions on any entity that currently pays into the Universal Service 

Fund, any provider of a service that uses telephone numbers or IP addresses to provide voice 

communications, and any provider that offers a network connection to the public. We support 

efforts to broaden the contribution base, and we bclievc that all those who cnable users to access 

networks should contribute to the Universal Service Fund. Expanding the current universal 

service programs to include broadband as a supported service without also requiring broadband 

services to contribute to universal service would undermine the goal of providing affordable, 

robust, and reasonably comparable broadband access service to all Americans. 

lntercarrier Compensation 

The bill would give the FCC authority to reform both interstate and intrastate intercarrier 

compensation, and directs the agency to act on such reform within one year of enactment of the 

bilL It also states that the FCC may recover intercarrier compensation revenues through an 

alternative recovery mechanism. 

Intercarrier compensation was developed to help ensure that local exchange carricrs can obtain 

sufficient cost recovery from other providers for use of the network. Such compensation is an 

essential part of operating and maintaining local connections to consumers. While we recognize 

the need for intercarrier compensation reform, the complete elimination of intercarrier 

compensation systems - which in many cases account for about one-third of rural telephone 

company revenue - would havc a devastating impact on the ability of such providers to sustain 

operations and investment. IlR. 5828 takes a reasonable approach to this issue, allowing the 

FCC to direct that costs traditionally recovered via intercarrier compensation may be recovered 

via the universal service system in the future. 

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Traffic Identification 

The Universal Service Refonn Act of 20 10 requires carriers to identify all traffic on their 

networks and requires all carriers to pass through that identification to ensure appropriate 

payment of intercarrier compensation. Our organizations support this effort to eliminate 50-

called "phantom traffic," which has substantially undennined the proper application and 

operation of the existing intercarrier compensation framework. We believe the time has long 

since come for policymakers to act on this matter in order to stem any further hemorrhaging of 

compensation as a result of phantom traffic. 

Audits 

The Universal Service Refonn Act of 20 1 0 directs the FCC to use appropriate audit methodology 

and auditors specifically trained in universal service fund program compliance. We recognize 

the fundamental role that audits can play in the oversight of policies and programs if they are 

conducted appropriately and responsibly. Unfortunately, the existing audit process has proven 

burdensome, and its costs appear to far outweigh its benefits. This failure was outlined by the 

February 12,2009 report from the Universal Service Administrative Company (USAC) that 

explained the audit's shortcomings in tenns of costs, approach, findings, and reporting. The 

USAC report noted how over the course of approximately three years, tens of millions of 

Universal Service Fund dollars have been spent to conduct more than 1000 separate audits -

funding which could have been better used to enhance broadband deployment in high-cost areas. 

Yet, even more telling, is that all these dollars later, the audit reports have identified no instances 

of fraud or gross non-compliance within the high-cost portion of the program. 

In apparent recognition of the need to improve these processes, the FCC recently took 

preliminary steps in conjunction with USAC to modify its audit approach. We support the 

efforts of this Subcommittee, and the provisions included in this bill, to help ensure that the FCC 

uses appropriate audit methodologies and processes, and reports factual program infonnation to 

Congress and the public in the future. 

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Elimination o/the "Parent Trap" 

We support elimination of the FCC's "parent trap" rule that forces carriers acquiring exchanges 

to receive support based on the level of support, if any, that the previous owner/carrier received. 

This policy limits the ability of carriers to invest in areas that may drastically need such 

investment. Elimination of the parent trap may make it more cost effective for carriers, in 

particular, small, rural carriers, to acquire and improve service to areas where quality service is 

currently not available. 

Comparable Access in Rural, High Cost Areas 

The National Broadband Plan (Plan) sets a national goal offour Mbps, but also announced a 

primary goal to provide 100 Mbps to 100 million households. Our nation has had a longstanding commitment to ensuring that reasonably comparable communications services are 

available to all Americans. But if the Plan's goals are implemented as announced, they could 

result in a digital divide between the 100 million (likely urban or suburban) households receiving 

100 Mbps and those in high-cost, rural areas that would receive speeds 25 times slower. H.R. 

5828 rightfully commits to just, reasonable, and affordable rates, and comparable services for all 

regions of the Nation. Specifically, the bill reaffirms that all consumers should have access to 

telecommunication and information services and rates that are reasonably comparable to those 

services provided in urban areas. 

Primary Line Restriction 

We support the bill's prohibition on restricting universal service support only to a primary line 

connection. Congress has rightfully declined to limit universal service support to primary lines 

on several occasions - such a limitation would be inconsistent with the underlying reality that 

teIeconununication providers build and maintain networks rather than a patchwork of individual 

lines and counections. There is an overall cost to building a network, and limiting cost recovery 

to only a few singular elements of the overall infrastructure would grossly underestimate the 

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actual costs of deployment leaving carriers and their consumers to make up the dramatic 

difference. 

Rural small businesses would be particularly vulnerable to such limitations. A primary line 

restriction would limit the ability to recovcr the high costs associated with providing 

telecommunications services in rural areas. 'Ibis would put rural businesses at a distinct 

disadvantage to their urban counterparts and is unfair to residential consumers as welL 

Rural wire-line carriers rely on this support, and the restriction would dramatically reduce 

incentives for the deployment and upgrade of facilities in rural areas. Moreover, because of its 

artificial limits on cost recovery, such a restriction could jeopardize the ability of rural carriers to 

service debt for and continue to operate already constructed plant facilities. 

Eligibility Waivers 

Rural carriers have made substantial strides to deploy broadband in the areas they serve - despite 

the fact that these areas represent some of the highest-cost, hardest-to-serve locations in the 

country. A National Exchange Carrier Association survey indicated that rate-of-return carriers 

participating in its traffic-sensitive pool had deployed DSL-capable broadband networks to 92% 

of their subscribers on average as of2009. This is consistent with the long track record of 

investment by rural providers in their communities, and rural providers are eager to deliver even 

higher bandwidth services to their customers going forward. In fact, rural carriers have a history 

oftaking every reasonable step to provide state-of-the-art communications infrastructure and 

services to their conswners. They are invested in their communities, and they are not expending 

effort to figure out how not to serve their friends, neighbors, and communities. For example, it 

was the rural sector that first completed the migration from multi-party to single party voice 

systems. It was the rural sector that first completed the transition from analog to digital. It was 

the rural sector that embraced wireless, fiber and a host of other teclmological and service 

advances ahead of other sectors of the industry. Why? Because doing so represents the very 

core of their mission - that is why they exist - to provide their consumers a service, not simply to 

generate profits. To put it another way, they exist to ensure rural Americans can access the same 

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economic, educational, health care, and personal opportunities Americans in every other region 

enjoy. 

Yet, geographic, technological, product availability, and economic considerations dictate that 

rural carriers operate in a common sense and judicious fashion. At times, the costs to reach 

individual customers or a given area may be so high that they limit or altogether preclude 

investment at a given point in time in the broadband networks necessary to serve the affected 

customers. The authors of this legislation have taken proper account of this reality. 

The waiver mechanism in the bill ensures that core statutory universal service principles will be 

upheld by promoting deployment of broadband on as widespread a basis as possible - while also 

recognizing that, even with best efforts, carriers operating in very high-cost areas may not be 

able to provide the speeds and types of services that will ultimately be required by the FCC to 

some small sliver of their subscriber base. Such a framework is particularly important given that 

the exact standards are still to be developed by the FCC in implementing this bill, and we 

therefore do not yet know what speeds and availability commitments would be required under a 

revised universal service program. Without the automatic waiver for very high-cost areas as 

contained in the current version of the bill, a rural carrier could make every possible effort to 

reach 100% broadband availability, fall only a handful of customers short of that standard 

because of the high-cost nature of the area it serves, and still lose essential universal service 

support. Not only would such a drastic loss of support be counterproductive in trying to reach 

the remaining unserved customers, but it would also threaten the ability of the provider to 

operate and maintain the substantial investments made in getting to 97%, 98%, or 99% network 

penetration. This automatic waiver for very high-cost areas is therefore critical to allow 

providers in such areas to operate and invest without fear that a minor shortfall in availability 

could result in a grievous loss of support - a loss that Vliill undermine their ability to continue 

serving the overwhelming majority of customers to whom thcy have delivered broadband. 

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Areas of Concern 

In the opcning part of this testimony, I referred to this bill as a laudable effort at finding common 

ground on very difficult issues, and for that reason, our organizations endorsed the bill. This 

being said, a few provisions of the bill cause concern for small, rural telecommunication 

providers. As representatives of these providers, we arc obligated to identifY and express these 

coucerns. Two provisions in particular are worth noting: 

Reducing or eliminating high-cost support in "competitive areas"; and 

Implementation of a new, unproven cost model that may not permit rural providers to 

meet universal service goals of providing reasonably comparable and reliable service in 

high-cost areas. 

Reducing or Eliminating High-Cost Support in "Competitive Areas" 

The bill proposes to reduce or eliminate altogether high-cost support in certain portions of those 

areas where at least 75% of the households can purchase wireline voice service and wired highspeed broadband service from an unsupported, facilities-based, non-incumbent provider. Many 

of the details of this proposal, such as how exactly areas will be apportioned and the process for 

"losing" and/or "re-obtaining" universal service support, are left for the FCC to develop in 

subsequent rulemakings. This uncertainty is of significant concern to rural providers, and could 

have the unintended consequence of hindering investment in broadband networks in the nearterm. 

Moreover, rural providers are particularly concerned that this proposal could lead to a dramatic 

loss of the support needed to continue operating and meet obligations to serve customers in highcost areas. For example, the bill precludes imposition of carrier-of-Iast-resort obligations on the 

non-incumbent provider in a "competitive area." This indicates that the incumbent will therefore 

continue to bear carrier-ot:'last-resort obligations in that competitive area, even as it may now 

receive little or no funding for bearing and living up to tllat obligation. 

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The carrier-of-Iast-resort obligation is essential to ensuring that service is available in rural areas. 

It effectively compels a carrier to keep or make network facilities available for customers in 

places where there might otherwise be no business case to do so. Even if a facilities-based 

competitor may enter a market (thus prompting a potential loss of support for the existing 

provider), this does not mean that the competitor will necessarily be there forever or operate 

throughout the entire area it once indicated it would serve. Companies rise and fall all the time, 

and what may look initially promising for entry into a new market often may not prove out over 

the longer term. Ifthere is no carrier-of-Iast-resort backstop and no recognition of the support 

needed to ensure that the carricr-of-Iast-resort can live up to such obligations, we may find that 

rural communities are left in part Of in whole with no one to turn to for broadband service. Any 

attempt to reduce or eliminate support in "competitive areas" must therefore be carefully 

coordinated and reconciled with the essential function that carriers of last resort will continue to 

play throughout rural America. 

The Cost Model Proposal 

As the industry is changing, so too is the manner of its cost recovery. The pressure to push direct 

consumer rates higher - to levels rural consumers can ill afford - is nearing a breaking point. 

The formula upon which intercarrier compensation has historically been based is undergoing 

extreme upheaval as communications minutes and types of traffic decrease and evolve. And the 

efforts to address these issues arise against a backdrop of simultaneous and contradictory 

pressures to both expand the universal service program (to support broadband deployment) and 

contract it (to control costs). 

The costs associated with providing communications services to consumers are not decreasing. 

Indeed, quite the contrary is true as carriers move to deploy and maintain equipment that 

responds to the increasing network capacity demands of consumers. Some contend, however, 

that fund growth can be constrained by using a cost model to drive particular kinds of network 

investment that may be perceived in the abstract as more efficient. Unfortunately, as rural 

carriers expressed in comments recently filed with the FCC and as congressional policy-makers 

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themselves have raised in years past, cost models generally fail to capture the nuances and 

unique characteristics of diffcrent companies operating to serve different population densities in 

different topographical and geographic environments. 

We raise this concern to underscore once again that there is far more to this debate than merely 

attempting to set a competitively ncutral stage or to limit costs that are already monitored and 

strictly audited. We agree that steps should be taken to ensure that universal service funds are 

used in the optimal manner and consistent with the public interest. However, it is crucially 

important to point out that the public interest includes living up to our statutory universal service 

responsibilities, which include the provision of reasonably comparable services and the resolve 

to provide such services in a ubiquitous manner - more directly, to provide comparable services 

to all and in aU areas, rather than focusing only upon those customers and portions of serving 

areas that are the least economically challenging. 

Conclusion 

Mr. Chainnan, I want to thank you again for inviting me to be here. Your knowledge of the 

industry and your commitment to strengthening advanced communications in both urban and 

rural America make us all fortunate to have you serve on this Subcommittee. 

The bill we are discussing here today is the product of many years of hard work for this 

Subcommittee. We look forward to continue working with you to move and improve this 

important bill going forward. In addition, I look forward to answering any questions you or your 

colleagues may have. 

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50 

Mr. BOUCHER. Thank you very much, Ms. Bloomfield. And we 

look forward to continuing our work with you. 

Mr. Davis? 

STATEMENT OF STEVEN DAVIS 

Mr. DAVIS. Good morning, Chairman Boucher, Ranking Member 

Stearns, and members of the committee. I appreciate the opportunity to express Qwest’s views this morning on the Universal 

Service Act of 2010, a bill which we do endorse. 

Qwest provides voice, data, Internet, and video services nationwide and globally and provides local telephone and high-speed 

Internet service in 14 western States. We provide approximately 10 

million telephone lines and approximately 3 million broadband 

lines and currently have broadband service available to more than 

85 percent of our customers. 

Earlier this year, Qwest and CenturyLink announced their intent 

to merge. The merger will result in a combined company that will 

provide voice and broadband services in 37 States and operate a 

national 180,000-mile fiber network. The post-merger company will 

have over 17 million telephone lines and serve over 5 million 

broadband customers. 

It is expected that the strong financial position of the combined 

company will enable it to make more broadband investment in the 

vast rural areas which it will serve. However, irrespective of the 

company’s size, there will remain many high-cost areas that are 

simply uneconomic to serve without financial support. 

Qwest’s territory, like that of CenturyLink and other midsized 

carriers, includes many rural communities with very low household 

density. For example, in Douglas and Gillette, Wyoming, Qwest 

serves customers with local loops more than 75 miles long. The cost 

of running basic telephone service and broadband service in these 

areas greatly exceeds the revenue opportunity. Yet the existing 

universal service program often fails to provide the support necessary to make these areas economic to serve. Reform is needed, 

and Qwest commends Chairman Boucher and Congressman Terry 

for their leadership in addressing this very difficult issue. 

The greatest flaw in the existing high-cost program is the use of 

State-level averaging to determine support. The current mechanism allocates high-cost support only if a company’s average costs 

statewide exceed a national benchmark rate. As a result, many of 

the Nation’s most sparsely populated communities served receive 

no Federal high-cost support whatsoever. So in Comstock, Minnesota, and Leonard, North Dakota, where Qwest’s cost of serving 

customers is over $200 a month and local rates are around $20 a 

month, we receive no Federal high-cost support. There are hundreds of other examples. 

The existing funds assumption that Qwest can overcharge customers in larger cities to subsidize the low-cost prices in rural 

areas is the product of a long-past monopoly environment. Therefore, we support the bill’s targeting of high-cost support to wire 

center and subwire center areas, which will result in support being 

efficiently targeted to truly high-cost areas. 

The bill also recognizes that support is inappropriate in areas 

where facilities-based competition exists. We agree. But sufficient 


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high-cost support must be provided for the higher-cost areas where 

the competitor does not offer service. The bill anticipates this scenario. 

Qwest also strongly supports the provisions prohibiting traffic 

pumping, a harmful and illegitimate scheme that is costing the 

communications industry and consumers millions of dollars every 

year. Qwest appreciates that the bill’s sponsors are addressing this 

serious issue. 

Additionally, Qwest supports the bill’s provisions addressing 

phantom traffic by requiring identification of traffic that originates 

on a carrier’s network and requiring intermediate carriers to pass 

through that identification information. 

Intercarrier compensation reform is also desperately needed, and 

a legislative mandate for the FCC to move forward and accomplish 

that reform may be the impetus we need to jump-start that process. 

Qwest also agrees with Chairman Boucher, Congressman Terry, 

the FCC, and others that it is time to explicitly and directly support the deployment of broadband-capable networks to unserved 

areas through a modified universal service program. Therefore, 

Qwest supports the bill’s explicit authorization of universal service 

support for the provision and maintenance and upgrading of 

broadband service. And I commend the work of the FCC in developing and drafting the National Broadband Plan. 

As the bill requires, broadband universal service obligations, including carrier-of-last-resort obligations, should only extend to the 

areas for which broadband universal service support is provided. 

And in replacing existing support, we urge the Congress and the 

FCC to recognize the importance of a reasonable transition mechanism. 

In drafting this bill, Chairman Boucher and Congressman Terry 

have provided Congress with a means to create a new and improved program for supporting universal service and access to basic 

telephone service and high-speed broadband service throughout 

America. And they have proposed additional reforms to intercarrier 

relationships that will result in fairer responsibilities for customers 

and carriers alike. 

Qwest greatly appreciates the subcommittee’s attention to these 

issues and renewed efforts to accomplish this much-needed reform. 

Thank you again for the opportunity to testify. 

[The prepared statement of Mr. Davis follows:] 


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BEFORE THE HOUSE COMMITTEE ON ENERGY AND COMMERCE 

SUBCOMMITTEE ON COMMUNICATIONS, 

TECHNOLOGY, AND THE INTE&'~ET 

Hearing on H.R. 5828, "Universal Service Reform Act of 2010" 

September 16, 2010 

TESTIMONY OF ROBERT STEVEN DAVIS 

SENIOR VICE PRESIDENT 

PUBLIC POLICY AND GOVERNMENT RELATIONS 

QWEST COMMUNICA TIONS INTERNATIONAL INC. 
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Good morning Chainnan Boucher, Ranking Member Steams, and Members of the 

Committee. My name is Steve Davis, and I am Senior Vice President for Public Policy 

and Government Relations for Qwest Communications International Inc. Today I am 

here on behalf of Qwest Corporation, which operates as an incumbent local exchange 

carrier (ILEC) in fourteen mid-western and western states and Qwest Communications 

Company, LLC, which operates a long-haul long-distance network and one of the world's 

largest Internet backbones. I appreciate the opportunity to share Qwest's views on House 

Bill 5828, Universal Service Refonn Act of201O, a bill endorsed by Qwest, and refornl 

of the federal universal service fund (USF) with you at today's hearing. 

I. About Qwest and the CenturyLinklQwest Merger 

Before I address the bill and universal service issues directly, I would like to tell 

you a bit about Qwest and why these issues are so important to us. Qwest provides voice, 

data, Internet and video services nationwide and globally. Qwest provides service in 

Arizona, Colorado, Idaho, Iowa, Minnesota, Montana, Nebraska, New Mexico, North 

Dakota, Oregon, South Dakota, Utah, Washington, and Wyoming. Its service territory in 

these fourteen states encompasses 272,000 square miles. As of December 31, 2009, 

Qwest provided approximately 10.3 million voice grade access lines and approximately 

three million broadband lines to customers in its territory I and currently has broadband 

available to more than 85% of its customer base. 

In April of this year, Qwest and CenturyLink announced their intent to merge the 

two companies. The merger is expected to close in the first half of 20 11 and result in a 

I fonn 10-K of Qwest Communications Intcmationallnc., filed with the U.S. Securities and Exchange 

Conunission. Feb. 16, 2010, at 2. 

2 
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combined company that will provide voice and advanced telecommunications services in 

37 states and operate a national 180,000 route mile fiber network. The post-merger 

company will have over 17 million telephone access lines and serve over five million 

high-speed internet customers. It is expected that the strong financial position of the 

combined company will enable it to make more investments to deploy broadband in the 

vast rural areas it will serve and push faster broadband speeds to more rural areas where 

there is a business case to do so. Even so, there will remain rural areas within the 

combined company service areas that will be uneconomic to serve without additional 

support. 

Qwest's and CenturyLink's ILEC territories include many rural communities and 

areas of low household density. In many cases the low density areas the companies serve 

are also an extended distance from the nearest town. In areas of low household density, 

the companies experience low loop density and loops of extremely long length. In fact, 

Qwest has 175 wire centers with local loop density of fewer than ten access lines per 

square mile. 2 As an example oflong loop lengths, in the wire centers of Douglas, 

Wyoming and Gillette, Wyoming, Qwest serves customers with local loops more than 75 

miles long. 

Qwest and CenturyLink are not alone. The extremely rural nature of many midsized companies' wire centers significantly increases their costs of providing basic local 

telephone service and broadband service in these rural areas relative to the costs for 

2 By contrast, within the Washington, D.C. city limits there are approximately 10,000 access lines per 

square mile. Washington. D.C. proper is 68.3 square miles. 

lillJl:i!en.wikipedia.orglwiki!Washington. D.C. Verizon has reported 668,803 access lines in D.C. to 

NECA. The NECA file is available at the following link: http://www.fcc.gov/wcbiiatd/neca.html. The file 

from the 2007 Report is in the zip file l.JSF08R07.zip and the file within the zip is USF2008LC08. The 

switched access line count for Verizon of DC is in cell R990. 

3 
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providing these services in more urban areas. This is due to several factors. The low 

density of rural areas results in increased costs per customer access line as fixed costs are 

spread over fewer lines. And, the extremely long loop lengths result in significantly 

increased costs to place and maintain the physical plant from the central office to the 

customer's premises. Still further, for Qwest, the rocky and mountainous terrain as well 

as significant lake regions that arc encountered in much of its ILEC region and in which 

it is harder to place and maintain physical plant, also drives up the cost of providing basic 

telephone service to customers in those areas. CenturyLink and other mid-sized carriers 

face similar challenges. 

And, the companies face robust competition in providing communication services 

throughout their ILEC regions. In each state in Qwest's ILEC territory, state regulators 

have found that there is sufficient competition in the provision of telecommunication 

services to afford reduced regulation or full deregulation of those services. But that 

competition tends to be concentrated in more urban areas, thus leaving the obligation to 

serve the higher-cost rural areas to the ILEC. 

These carriers frequently receive insufficient universal service support to provide 

service in these challenging conditions. Despite the extremely rural nature of Qwest's 

service territory, Qwest receives less than 1% of the federal funds allocated to support 

rural facilities deployments, and less than 6.7% of the federal funds allocated to non-rural 

companies. Although Qwest serves extremely rural areas in all fourteen ofthe states in 

its ILEC territory, Qwest only receives high cost support in four states: Montana, 

Wyoming, Nebraska and South Dakota. 

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Further, the high-cost funding that Qwest receives supports only voice services 

and does not support Qwest's broadband deployment activities. This is evidenced by the 

fact that Qwest's high-cost support is less than its total costs to provide, maintain and 

upgrade its facilities for voice services in the wire centers for which it receives high-cost 

support. Additionally, the FCC's non-rural High Cost Model, which develops forwardlooking costs for determining the size of the non-rural fund, is based on a voice-serviceonly architecture, and thus calculates non-rural costs without including facilities 

necessary for broadband deployment. 3 Qwest's use of its high-cost support is also 

consistent with the statutory requirement that all support received must be used "only for 

the provision, maintenance, and upgrading of facilities and services for which the support 

is intended." 47 U.S.C. § 254(e). Currently, broadband is not defined as a supported 

service under the existing high-cost mechanism. 

II. Qwest Endorses the "Universal Service Reform Act of 2010" 

First and foremost, Qwest commends Chairman Boucher and Congressman Terry 

for their leadership in addressing the much-needed reform of the universal service 

program. As Qwest has previously stated, we endorse Chairman Boucher and 

Congressman Terry's bill. Qwest supports not only the universal service reform 

provisions of the bill, but also the provisions addressing intercarrier compensation 

obligations. 

A. Qwest Supports the Bill's Targeting of Universal Service High-Cost 

Support To Wire Centers and Sub-Wire Centers 

J In contrast, the rural high-cost loop fund is based on embedded costs and includes the costs of fiber loop 

and loop electronics that provide broadband services. 

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To the credit of its sponsors, thc bill would allow for the targeting of federal highcost support to wire center and sub-wire center areas. Qwest fully supports this approach. 

Since its inception, the mechanism for distributing high cost support to "nonrural" carriers has been ineffective in distributing support and achieving the lmiversal 

service goals of the Telecommunications Act of 1996. Any new mechanism for 

distributing high-cost support must not replicate the errors of that mechanism. The 

greatest flaw in the existing non-rural high-cost program is the use of state-level 

averaging to determinc support. 4 The current mechanism allocates high-cost support to 

"non-rural" carriers in each state based on whether the ILEC's statewide average costs 

exceed a national benchmark. Even if a carrier serves several high-cost areas in a state, if 

its average costs statewide do not exceed the national benchmark, no high-cost support is 

available for that carrier in that state. As a result, today, many of the nation's most 

sparsely populated communities served by "non-rural" ILECs like Qwest receive little, if 

any, federal high-cost support. At the local level, Qwest and other "non-rural" ILECs 

serve thousands of rural wire centers with very high costs -- as calculated by the FCC's 

High Cost Model 5 -- yet receive little, if any, explicit federal support for those wire 

centers. For example, Qwest serves Patagonia, AZ (model monthly cost $127 per line), 

Deckers, CO (model monthly cost $137 per line), Rose Hill, IA (model monthly cost 

$162 per line), Comstock, MN (model monthly cost $221 per line), and Leonard, ND 

(model monthly cost $204 per line), but receives no federal high-cost support in any of 

these areas. Currently, the national average cost developed by the FCC's cost model is 

4 The rural program has the parallel flaw of using study area averaging and masking high-cost areas within 

the study area . 

.\ The High Cost Model is the model used to calculate the forward-looking costs of non-rural carriers used 

to detennine high-cost support io those carriers. 

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$21.43, and high-cost support is available where a non-rural carrier's statewide average 

cost per line exceeds two standard deviations of this national average, or $28.13 (the 

national benchmark). Clearly, all of the costs noted above well exceed this national 

benchmark, but because statewide average costs and not individual wire center costs 

are measured against the benchmark, none of these wire centers receives federal highcost support. There arc hundreds of other examples of Qwest wire centers and those of 

other mid-size carriers with costs above the national benchmark where no federal highcost support is received. 

The current use of statewide average costs to allocate high-cost support assumes 

that low-cost urban areas can subsidize high-cost areas. But, eompetition today in urban 

areas docs not allow support to flow to high-cost areas. In today's competitive 

marketplace, a different allocation method must be adopted to effectively and efficiently 

target high-cost support to high-cost areas. Thus, Qwest fully supports the bill's 

requirement that the new cost model for determining and distributing high-cost support 

should have the ability to calculate costs of and target support to wire center and sub-wire 

center areas. For each wire center, the model should also be able to distinguish the costs 

for the higher-density core area of the wire center from the less dense areas outside the 

core. 

B. High-Cost Support for an Incumbent Provider Must Be Maintained 

Wherever An Unsubsidized Competitor is Not Offering Service 

The bill also directs the FCC to implement a mechanism for reducing or 

eliminating high-cost support to incumbent carriers in areas where at least 75% of 

households can purchase voice and high-speed broadband service from an unsupported, 

facilities-based, non-incumbent provider. The premise that high-cost support should not 

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be offered to one wire line competitor where another unsubsidized wireline competitor 

extensively offers comparable services is reasonable. But, high-cost support must be 

provided for the higher cost areas where the unsubsidized competitor does not offer 

service. And, that support, which cannot be recovered through prices for supported 

services, must be provided consistent with the high costs to provide service to these 

customers .. 

Qwest agrees that developing a mechanism for evaluating the continued need of 

high-cost support in competitive areas is critical. Such a mechanism should help reduce 

inefficient use of high-cost support and re-direct those monies to more efficient uses such 

as broadband deployment to unserved areas or providing support to high-cost areas that 

currently receive no support due to state-wide averaging. Any process implemented 

should be a consistent approach that applies to high-cost support for both "rural" and 

"non-rural" carriers. Each step of universal service high-cost support reform should 

move away from the "rural" carrier versus "non-rural" carrier distinctions and move 

towards a consistent approach to support based on the nature of the area served. 

As the bill drafters have recognized, under any approach for eliminating high-cost 

support where it is not needed, sufficient support is required for every customer location 

that does not have an unsubsidized wireline competitive alternative. Absent a 

demonstration by the petitioner that unsubsidized wire line providers offer service to 

every customer location in the high-cost area, high-cost support for the area should not be 

wholly eliminated. Otherwise, Congress and the FCC run the risk of unintentionally 

reducing universal access to critical telecommunications services in high-cost rural areas. 

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High-cost support must be provided to the sub-wire center areas that the unsubsidized 

wireline competitor does not servc. 

C. Qwest Supports the Bill's Prohibition of Traffic Pumping. 

Qwest strongly supports the bill's provisions prohibiting traffic pumping. The bill 

prohibits a local exchange carrier from recovering access charges where it has a business, 

financial or contractual relationship with an entity pertaining to switched access revenues 

generated from services that the entity is offering for "free" or below cost. Traffic 

pumping is a hannful and illegitimate scheme that is costing the communications industry 

and consumers millions of dollars each year. Qwest fully supports immediate steps to 

clearly legislate the illegality ofthese activities. 

Traffic pumping arises from business relationships between small local exchange 

carriers (LECs) and providers of competitive non-rcgulated services such as conference 

calling and chat rooms. The scheme works likc this. The FCC's current rules allow these 

small LECs (generally rural LECs) to tariff very high interstate switched access rates 

because the rules assume that the LECs will have low traffic volumes and high per unit 

costs. The LEC's business partner (often referred to as a "Free Service Provider" or FSP) 

offers the conference calling, chat room or other competitive scrvices for free, with these 

services accessed via toll calls to numbers assigned to the small LEe. These FSPs are 

not actual customers, and do not order or pay for any telecommunications services from 

the LEe. The small LEC's traffic volumes skyrocket (often from a few thousand minutes 

per month to millions of minutes per month), its per-unit costs dive, and massive profits 

roll in from access charges paid by intcrexchange carriers C'IXCs"). The FSP finances its 

"free" operations via kickbacks from the LECs in the form of sharing of the high access 

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chargcs. To the extent that the LEC tariffs do not allow for charging switched access on 

traffic not destined for an end-user customer who purchases services, thc traffic 

implicated in the traffic pumping scheme is not switched access, and the tariff does not 

apply. However, as traffic pumping LECs become more sophisticated, they are filing 

tariffs which inelude traffic to non-customers as eligible for switched access charges. 

The scheme works because of several economic and regulatory quirks, the two 

most significant of which are: 

• First, the small LECs' termination of toll calls to the FSPs is a monopoly service. 

Whether the LEC is an incumbent LEC or a competitive LEC, it terminates all 

calls to the numbers assigned to the FSPs. Thus, rxcs cannot avoid routing 

traffic to the traffic pumping LECs and cannot seek to deliver traffic via aLEC 

with reasonable access rates . 

• . Second, the FCC's rules prohibit IXCs from avoiding the LECs' excessive 

charges by refusing to deliver the artificially pumped traffic to the LECs. 

It has been estimated that traffic pumping costs to the economy could cxceed $500 

million if the problem is not addressed. 

Last year, the Iowa Utilities Board determined that intrastate access charges 

generated by traffic pumping were unjust, unreasonable, and unlawful under Iowa law. 6 

Fundamentally, with the exception of the traffic pumping LECs themselves and their FSP 

partners, there appears to be universal agreement that traffic pumping presents a serious 

danger to the telecommunications structure, competition and public welfare. 

6 In re Qwest Communications Corporation v. Superior Telephone Cooperative, (Iowa Utilities Board 

September 21, 2009), Docket No. FCU-07-2. 

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Proposals have been advanced to prohibit traffic pumping. This bill proposes 

simply prohibiting the assessment of access charges in situations where the LEC and a 

FSP have a revenue sharing arrangement and the competitive service is offered below 

cost. A recent proposal by a coalition ofIXCs, including Qwest, and others (including a 

provider of conference calling service that does not rely on a traffic pumping scheme and 

thereby faces unfair competition from those that do), proposed a methodology to the FCC 

that would bring LEC rates to reasonable levels once certain levels of minutes were 

processed per month per line 7 The FCC's rulemaking on traffic pumping has been 

ongoing for almost three years, and resolution of traffic pumping is designated as an 

important part of the National Broadband Plan. The Plan identifies traffic pumping as an 

issue that should be addressed in the relatively near future, and Qwest agrees that rules 

should be implemented as soon as possible to prohibit traffic pumping activities. Qwcst 

appreciates that the bill sponsors are addressing this serious issue and supports the bill's 

proposed solution to the problem. 

D. Qwest Supports the Bill's Provisions Requiring Identification of 

Traffic and Requiring the Commission to Address Intercarrier 

Compensation Reform 

Requiring all carriers to identify traffic that originates on their networks and 

requiring intermediate carriers to pass through that identification information is a critical 

step in effectively addressing the variety of phantom traffic issues that are the result of no 

identification or mis-identification of traffic being handled by multiple carriers. 

Additionally, interearrier compensation reform is desperately needed and a legislative 

mandate for the FCC to move forward and accomplish that reform may bc the impetus 

7 See Letter from Glenn T. Reynolds, Vice President Policy, USTelecom to Marlene Dortch. Secretary, 

FCC, WC Dockct No. 07-135 (datcd Aug. 31, 2010). 

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needed to jumpstart that process. Qwest is pleased that Chairman Boucher and 

Representative Terry have included these provisions in the bill. 

E. Qwest Supports Universal Service for Broadband Services 

In the National Broadband Plan, (Plan), the FCC estimates that 14 million people 

living in seven million housing units in the U.S. do not have access to terrestrial 

broadband infrastructure that can provide the Plan's target broadband service.8 Qwest 

agrees with Chairman Boucher, Congressman Terry, the FCC, and others that to 

accomplish the goal of universal availability of broadband service in the United States, it 

is time to explicitly and directly support broadband service, especially deployment of 

broadband-capable networks to unserved areas, through a modified universal service 

high-cost program. And, with the completion of the Department of Agriculture Rural 

Utilities Service disbursement of funds for broadband deployment under the American 

Reinvestment and Recovery Act, this is now even more critical. Universal service 

support is now the only remaining potential source of funding for broadband deployment 

to unserved and underserved areas. Qwest thus supports the bill's explicit authorization 

of universal service support for the provision, maintenance and upgrading of high-speed 

broadband service. 

Reform is critical. The current high-cost program is already in need of significant 

repair and should be overhauled in order to explicitly and effectively support broadbandcapable networks. Further, as the bill drafters have recognized, the current non-rural 

high-cost model is not designed to consider broadband network costs and in tum does not 

provide support that would enable non-rural providers to take on those costs in many 

R NBP, Chapter 8.1 at 136. 

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mral areas. To accomplish universal broadband service, new mechanisms that directly 

support broadband deployment to those areas must be designed and implemented. 

And, there are other inefficiencies in the existing high-cost program that should 

be addressed and not perpetuated in reforming the program to support broadband. Highcost support to competitive carriers -- in areas that could not economically sustain one 

carrier -- has caused the fund to increase dramatically, while steering the fund well off its 

intended course of ensuring universal availability of essential communication services. 

Irrespective of whether it ever has, the high-cost program is not now providing support in 

a manner that effectively advances its fundamental goal of universal availability of 

essential communication services. 

Congress and the FCC need to refocus high-cost support to broadband and voice 

services, target support to truly high-cost areas, and eliminate extraneous support so that, 

at most, not more than one provider of fixed service and one provider of mobile service is 

receiving support. To accomplish this, Qwest supports the bill's direction that the FCC 

develop a new cost model for calculating high-cost support that takes into account the 

cost of providing voice service and high-speed broadband service that would replace the 

existing methodology for mral and non-mral earriers. Additionally, Qwest supports the 

FCC's recommendation in the National Broadband Plan to establish a Connect America 

Fund (CAF) to support universal access to broadband and voice services, and believes 

there should be two CAF mechanisms: (1) a competitive bidding process to support 

broadband deployment to unserved areas and (2) a model for ongoing support of 

broadband and voice service in high-cost areas. 9 

9 For additional information regarding Qwest's views on this issue, see Qwest's comments filed July 12, 

20 lOin In the Matter of Connect America Fund: A National Broadba/1d Pla/1for Our Future; High-Cost 

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As the bill requires, broadband universal service obligations, including carrier-oflast-resort obligations, should extend only to the area for which broadband universal 

service support is provided. Further, in designing the new distribution mechanism, the 

Commission should use total costs of providing supported services to determine ongoing 

support. In other words, all the costs of maintaining the network to provide voice 

services and broadband service at the targeted speeds and service quality level should be 

included. But, the costs of maintaining the network to provide broadband service at 

higher speeds and to provide video service should not be supported by the new fund. 

But, in replacing existing support, Congress and the FCC must recognize that any 

sudden elimination of that support will significantly undermine those carriers' ability (0 

invest in their networks. Before replacing existing support, the FCC must first design a 

new cost model for distributing support, and then a transition from legacy support can be 

determined. But, Congress should direct the Commission to promptly move forward with 

phasing out CETC high-cost program support that is not advancing universal service and 

refocus that support to effectively and efficiently promote access to broadband and voice 

services in high-cost areas. 

The bill as currently draftcd requires universal service fund recipients to offer 

broadband service at an FCC-determined minimum broadband speed throughout each 

service area in which it is receiving support within a specified timc period either through 

the recipient's own infrastructure or through resale of satellite broadband services. But, 

as the bill drafters recognized, any obligation to deploy broadband scrvice throughout a 

service area must be tempered by permitting reasonable technology and cost limitations. 

Universal Service Support, Notice of Inquiry and Notice of Proposed Rulemaking. WC Docket Nos. 10-90 

and 05-337, GN Docket No. 09-51, FCC 10-58, reI. Apr. 21. 2010. 

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Even with support for broadband deployment, certain areas will remain uneconomic to 

serve by wireline or wireless infrastructure. In those situations, a provider must be able 

to obtain a waiver of the service obligation. Thus, Qwest supports the bill's provisions 

authorizing a waiver of the requirement where offering broadband service would be 

technically or economically infeasible and authorizing an automatic waiver where a 

provider demonstrates that the cost per line of deploying broadband service is at least 

three times the nationwide average cost of providing the service. 

F. Qwest Supports Reform of the Universal Service Contribution 

Methodology 

The universal service contribution methodology needs to be simplified and 

restructured to better correspond with today's communication technologies and 

marketplace offerings. Because the marketplace has evolved to product offerings that 

often include packages and bundles of services providing interstate and intrastate 

telecommunications services and services that can be used as information services and/or 

telecommunications services, companies have had to adopt very complex administrative 

procedures to determine assessable interstate revenue. Further, the contribution factor. 

currently approximately 13% of assessable revenues, has become a significant fce for 

customers purchasing assessablc services. It is also high enough to affect competitive 

pricing if one provider views a service as assessable and a compctitor offering a similar 

service views that it is not assessable. Qwest thus supports the bill's providing the FCC 

with flexibility in designing a contribution methodology that will best resolve the myriad 

of problems with the current approach. In authorizing a broader base of contributors and 

the option to assess contributions on all communication service revenues, the bill gives 

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the FCC new tools that should greatly aid it in accomplishing effective contribution 

reform. 

III. Conclusion 

In drafting this bill, Chairman Boucher and Congressman Terry have provided 

Congress with a golden opportunity to adopt the successes and correct the errors of the 

current universal service high-cost program and structure a new and improved program 

for supporting universal access to basic telephone service and high-speed broadband 

service. And, they have proposed additional refon11S to the universal service program 

and intercarrier obligations that should result in fairer responsibilities for customers and 

carriers alike. Qwest greatly appreciates the Subcommittee's attention to these issues and 

its continued efforts to accomplish this much-needed reform. 

Thank you again for the opportunity to testify today on these important issues. 

look forward to your questions. 

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Mr. BOUCHER. Thank you very much, Mr. Davis, and thanks for 

your thoughtful comments. 

Ms. Grillo. 

STATEMENT OF KATHLEEN GRILLO 

Ms. GRILLO. Chairman Boucher, Ranking Member Stearns, and 

members of the subcommittee, good morning. And thank you for 

the opportunity to discuss the universal service reform bill introduced by Chairman Boucher and Congressman Terry. 

Congress last updated the Universal Service Act in 1996, almost 

a decade and a half ago. A lot has changed since then. Now is the 

time to put in place the policies that will help expand the reach of 

broadband networks to all Americans. Verizon is pleased to endorse 

the Boucher-Terry bill and congratulates its authors on crafting 

legislation that has bipartisan and industry support. 

Since the subcommittee’s last hearing on this topic, the FCC has 

submitted its National Broadband Plan to Congress. Like the USF 

reform bill, it represents the culmination of thousands of hours of 

work. It is a thoughtful, comprehensive approach aimed at maximizing the boundless power of the Internet and ensuring 

broadband access for every American. 

From our point of view, there are three priorities, and all of these 

issues are addressed in the bill before the subcommittee. 

First, universal service reform. There is no doubt about the critical need to revamp the high-cost universal service program. The 

High-Cost Fund is literally at a tipping point. The program has 

doubled over the last decade, and just to subsidize traditional voice 

service in rural areas. 

But plain old telephone service is rapidly becoming a thing of the 

past, and consumers demand much more. They want to surf the 

Internet, send e-mail, and download videos—and all over the same 

network connections. We must refocus the fund to reflect the way 

consumers live and work today. 

And as the bill repurposes the USF for broadband, we must keep 

in mind that consumers pay for the fund through charges on their 

monthly bills, and charges must be in line with what consumers 

can reasonably afford. 

As we have said before, the problem with universal service is not 

that we are spending too little money; it is that we are not spending it on the right services and in the right places. To that point, 

the bill takes an important step forward by putting in place a more 

rational, competitive bidding system for high-cost support to wireless carriers. 

Almost everybody recognizes that the way wireless carriers receive support today is problematic. Among other things, multiple 

wireless providers get support in the same areas, even where other 

carriers compete without any universal service support at all. And 

the right competitive bidding system will fix these problems. 

Second, intercarrier compensation. The system of charges between carriers for exchanging communications traffic is a mess. 

The current system is based upon distinctions which bundled services—phone, TV, and Internet access—have rendered meaningless. 

It is important to fix this broken system at the same time that the 

Universal Service Fund is updated. And the bill properly provides 


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a firm deadline, 1 year from enactment, for the FCC to complete 

intercarrier compensation reform. 

And third, traffic pumping. The traffic-pumping scams that have 

plagued the industry in recent years must be stopped immediately. 

These scams have cost the industry hundreds of millions of dollars 

as so-called traffic pumpers game the current system by exploiting 

antiquated rules. This bill would appropriately cut off many of 

those scams. 

And, lastly, I would like to say a word about one issue that isn’t 

addressed by the bill: broadband adoption in low-income households. Representative Matsui and others are leading voices on this 

issue. And for most Americans, broadband is an affordable service 

that offers tremendous value. That said, the price of broadband 

service is a real issue for some households. Digital literacy, affordability of a computer, and relevance are also significant factors. 

The National Broadband Plan proposed that the FCC launch pilot 

programs to test alternative solutions, and Verizon supports that 

approach. 

Thank you again for the subcommittee’s continued leadership on 

sustainable universal service policies, and we look forward to working with the subcommittee as we move forward. 

[The prepared statement of Ms. Grillo follows:] 


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Prepared Testimony of Verizon Senior Vice President Kathleen M. Grillo 

U.S. House of Representatives Committee on Energy and Commerce, 

Subcommittee on Communications, Technology, and the Internet 

"Universal Service Reform Act of 2010" 

Thursday, September 16, 2010 

Chairman Boucher, Ranking Member Stearns, and Members of the 

Committee: Thank you for the opportunity to discuss the Universal Service 

Reform Act of 2010 introduced by Chairman Boucher and Representative Terry. 

Congress last updated the Universal Service Fund in 1996 - almost a decade 

and a half ago. A lot has changed since then. It's now time to put in place the 

right policies that will help make broadband services even faster and further 

expand the reach of high-speed networks in America. 

Three things happened since the Committee last heard testimony on 

universal service reform: 

First, there is a bill. In July, following months of hard work and 

discussions with all sectors of the industry and others, Chairman Boucher and 

Representative Terry introduced the Universal Service Reform Act. Verizon is 

pleased to endorse the bill and congratulates the Chairman and Representative 

Terry on crafting legislation that has bipartisan and industry support. 

Second, there is a plan. The FCC submitted the National Broadband Plan 

to Congress earlier this year. Like the USF Reform Act, the Plan represents the 

culmination of thousands of hours devoted to developing a thoughtful, 

comprehensive approach to maximize the boundless power of the Internet and 

ensure that all Americans are connected. 

Third, the FCC is moving forward to implement national broadband 

priorities. The FCC has been acting on recommendations in the Broadband 

Plan. The FCC has also kicked off a number of other proposed rulemakings that 

track recommendations in the National Broadband Plan. 

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Now, three things must happen, all of which the bill before the Committee 

addresses. Let me talk a little bit about each of these priorities as well as other 

aspects of the Universal Service Reform Act itself. We commend Chairman 

Boucher and Representative Terry, who worked tirelessly on the bill to bring all 

stakeholders together and find consensus on these complicated issues. The 

result is legislation that would truly modernize the Universal Service Fund. All 

Americans have an interest in an up-to-date and sustainable universal service 

program. 

First. universal service reform. There is no doubt about the critical need to 

revamp the high-cost universal service program. The high-cost fund is literally at 

a tipping point. The program grew significantly in recent years in order to 

subsidize traditional voice service in rural areas. But plain-old telephone service 

is rapidly becoming a thing of the past. Consumers demand a lot more from their 

communications providers. They want to make phone calls, send text messages, 

surf the web, exchange email, download videos, etc. - all over the same network 

connections, whether wireline or wireless. Many of the tasks that we once 

performed using paper (such as renewing a driver's license), or in person (such 

as consulting with medical professionals), are now performed using broadband 

Internet connections. We must change the focus of the Universal Service Fund 

and make it work for consumers in a way that reflects how we now live and work. 

As we repurpose the USF for broadband we also should keep in mind that 

consumers pay for the fund through charges on their monthly bills. Whatever 

changes we make must be in line with what consumers can reasonably afford 

and must not reach a point where consumers rebel against the program. The 

National Broadband Plan makes clear that there are tough choices ahead and 

commits to reforming the fund within the amount spent for existing programs. 

Whether universal service reform comes from legislation or from the FCC, 

Verizon supports keeping the size of the fund manageable for consumers. This 

is important because the problem with universal service is not that we are 

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spending too little money; it's that we are not spending it on the right services in 

the right places. Both the Universal Service Reform Act and the National 

Broadband Plan could help fix that. 

Second, intercarrier compensation reform. The system of charges and 

rates between carriers for handling communications traffic is a mess. We have 

to fix this broken intercarrier compensation system at the same time that we 

update the Universal Service Fund. Some carriers rely on both universal service 

and intercarrier compensation funding as their primary revenue. Changes to one 

source of revenue should consider changes to the other, so as to minimize 

negative consequences for investment in network upgrades and broadband 

deployment. 

Moreover, it is not possible to maintain the current intercarrier 

compensation system in today's communications market. The current system is 

based on the idea that there are meaningful distinctions between interstate and 

intrastate services and between telecommunications and information services. 

The result of these distinctions is the current patchwork of vastly different 

charges and rates for communications traffic depending on what the traffic is, 

where it came from, and where it is going. In a market where most consumers 

now purchase a bundle of any-distance services (such as phone, TV, and 

Internet access), these distinctions are meaningless. And even in situations 

where it is still possible to measure traffic in these ways, continuing to do that just 

for intercarrier compensation purposes does not make sense. All of these 

complications and uncertainty reduce investment in broadband. 

Parties mostly agree that a single, low, uniform intercarrier compensation 

charge for terminating traffic on a network is the right solution. Carriers should 

also have the opportunity to rebalance their end-user rates. If they cannot 

recover lost access revenues from their customers, carriers could recover part of 

the difference during a transition period from a new universal service program. 

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The new USF intercarrier compensation program should be transitional and 

decline over time. And importantly. the new system should be a default system 

only. Carriers should be free to enter into different intercarrier compensation 

arrangements that make sense based on marketplace considerations. 

Third, traffic pumping. We have to stop the so-called "traffic-pumping" 

scams that have plagued the industry the last several years. And we have to do 

it right now. These scams have festered for five years. costing literally hundreds 

of millions of dollars. With traditional traffic-pumping schemes. the traffic 

pumpers game the intercarrier compensation system by exploiting antiquated 

FCC and state rules. They form collusive arrangements to drive traffic way up in 

rural areas with historically low traffic volumes and correspondingly high access 

rates. Some local exchange carriers in these areas then partner with chat-line 

and other providers that market services as "free" and collect kickbacks from the 

LECs. The kickbacks are paid with access revenues from long distance and 

wireless carriers held hostage under the current system. 

These scams are no different from illegal kickbacks involving regulated 

revenues in other industries. In the healthcare industry. for example. such 

kickbacks between healthcare providers and suppliers land people in jail. The 

intercarrier compensation rules that allow LECs to charge other carriers high 

access rates in rural areas are supposed to help consumers in these sparsely 

populated areas receive affordable and reliable service. The rules were never 

designed to enable these get-rich-quick schemes. And these are just the old 

traffic-pumping scams. Because traffic pumping has been allowed to fester for 

so long the schemes are evolving and becoming more brazen. We now know 

about new schemes involving wireless traffic that terminates to competitive local 

exchange carriers. 

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The time for talking about the nuances of traffic pumping is over. The 

dollars are huge, the scams are significant obstacles to universal broadband 

access, and the problems are getting worse the longer we wait. 

Let me turn now to the Universal Service Reform Act. This is important 

legislation that moves the ball forward on the critical issues - universal service 

reform, intercarrier compensation reform, traffic pumping - and other matters. 

The bill would transform the USF from a voice-based support system to a 

broadband system and help expand the reach of broadband services to those 

Americans who still lack access to high-speed networks. The bill also provides a 

firm deadline - one year from the time the bill passes - for the FCC to move 

forward with intercarrier compensation reform. That deadline is certainly 

workable. The pieces of intercarrier compensation reform are already in place, 

and a gentle push from Congress to get this issue over the goal line is just what 

we need. As well, the bill would cut off many of the traffic-pumping scams that 

are siphoning investments away from broadband. 

In addition, the Universal Service Reform Act puts in place a more 

rational, competitive bidding system for high-cost USF support to wireless 

carriers. Almost everybody recognizes that today's system is broken. Among 

other things, multiple wireless providers get support in the same areas, even 

where there are carriers that compete without any universal service support at 

all. The right competitive bidding system will fix these problems. Competitive 

bidding will also bring the Universal Service Fund in line with established 

procurement procedures at other federal agencies. 

The bill will also leave a number of important decisions to the FCC - the 

expert agency in charge of administering the fund and its various programs. 

Where the FCC comes out on these issues matters a lot and will determine 

whether the fund will shrink, grow, or stay about the same size. 

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For instance, the minimum download speed required to qualify as a 

broadband service is a significant metric that the FCC would need to set under 

the bill. The National Broadband Plan coalesces around a broadband speed 

target of 4 Mbps. There are divergent views about whether that target speed is 

too fast or too slow, but everyone recognizes that higher speeds require more 

network subsidies in rural areas. Likewise, the service area required for 

broadband deployment for both wireline and wireless carriers will directly impact 

the size of the fund and carrier business models. So will the number of carriers 

eligible to receive universal service subsidies. 

Other questions remain. How the FCC implements the challenge 

proceedings to reduce LEC high cost support in competitive areas will determine 

whether that part of the bill results in a savings. Another part of the bill correctly 

directs the FCC not to burden consumers unreasonably when it makes changes 

to the program. 

I'd like to close by talking about how to increase broadband adoption in 

low-income households - an issue not yet addressed in the bill but one that 

Representative Matsui and others are leading. For most Americans, broadband 

is an affordable service that offers tremendous value. That said, the price of 

broadband is a real issue for some households. In addition, digital literacy, 

affordability of a computer, and relevance are significant factors affecting 

broadband adoption. The National Broadband Plan and many parties have 

proposed that the FCC launch pilot programs to test out different alternatives. 

Verizon supports that approach. 

* * * 

Thank you for the opportunity to discuss these important issues and for the 

Committee's continued leadership on sustainable universal service policies. 

Verizon looks forward to working with the Committee and the FCC to move these 

matters forward. 

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76 

Mr. BOUCHER. Thank you very much, Ms. Grillo. 

Mr. Assey. 

STATEMENT OF JAMES ASSEY 

Mr. ASSEY. Thank you, Chairman Boucher, Ranking Member 

Stearns, Congressman Terry, and other members of the subcommittee. My name is James Assey. I am the executive vice president of NCTA, the National Cable and Telecommunications Association. I am honored to be with you here again and testify today 

in support of H.R. 5828, the ‘‘Universal Service Reform Act of 

2010.’’ 

Mr. Chairman, as many of the other witnesses have already told 

us, we live in a communications marketplace today that is fundamentally different from the world that greeted policymakers in 

1996. That was a world where industry was providing voice service 

over circuit-switched networks, a world where almost no one was 

on broadband, and only 23 percent of the country had dialup Internet access. 

The world we live in today is definitely very different. We believe 

that it is time, and in many respects past time, for us to begin the 

process of transitioning away from a monopoly-era support program to a more modern, a more neutral, and a more forward-looking, high-cost support mechanism that will bring broadband service 

to unserved areas and to underserved populations. 

We further believe that the FCC has provided us with a valuable 

resource in the National Broadband Plan, which synthesizes reams 

of data and helps us assess where we stand today, where we need 

to be, and what measures must be taken to ensure that our universal service system for the 21st century is efficient, effective, and 

maximizes the incentives for private investment in building 

broadband networks. 

Roughly 9 months ago, when the president of NCTA, Kyle 

McSlarrow, sat in this seat and testified on universal service reform, he suggested several elements that should be parts of any effort to reform universal service: first, that we must control the size 

of the High-Cost Fund to ensure that it does not impose unreasonable burdens on consumers or distort competition; second, that we 

must reduce or eliminate high-cost support in areas where it is 

demonstrated that service can be provided without support; third, 

that universal service support for broadband should be targeted to 

help extend capabilities in unserved areas that currently do not 

have broadband service; fourth, that the universal service contribution mechanism should be reformed to allow assessment based on 

telephone numbers or another appropriate mechanism that promotes stability and simplicity; and finally, that reform must reflect 

the modern-day principles of competitive neutrality with respect to 

eligibility for universal service support. 

Mr. Chairman, we continue to believe that these principles are 

the right ones and believe that H.R. 5828 helps to advance these 

principles in many significant respects. 

Chief among its virtues, the bill creates a permanent and ongoing mechanism to better calibrate high-cost support to current realities of a competitive marketplace by reducing or eliminating support in competitive areas. It also adds needed controls on the 


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growth of the fund by allowing the FCC to consider all net revenues that a provider may obtain and also by ensuring that reforms 

will not unreasonably increase the contribution burden on consumers. 

In addition, we support the bill’s efforts to complete intercarrier 

compensation reform within a year, to make broadband specifically 

eligible for universal service support without resorting to reclassification, to stating that USF support should be technology-neutral, 

and also including accountability provisions to ensure that moneys 

go where they are needed. 

Mr. Chairman, in sum, we are confident that H.R. 5828 is a 

deftly crafted compromise that can serve to remove jurisdictional 

impediments and help propel the FCC and our Nation towards 

meaningful and lasting reforms. And we look forward to working 

with you and the other members of the subcommittee. 

Thank you. 

[The prepared statement of Mr. Assey follows:] 


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TESTIMONY OF JAMES M. ASSEY 

EXECUTIVE VICE PRESIDENT 

NATIONAL CABLE & TELECOMMUNICATIONS ASSOCIATION 

on 

H.R.5828 

Universal Service Reform Act of2010 

before the 

Committee on Energy and Commerce 

Subcommittee on Communications, Technology, and the Internet 

UNITED STATES HOUSE OF REPRESENT A TIVES 

WASHINGTON, D.C. 

September 16, 2010 
79 


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TESTIMONY OF JAMES M. ASSEY 

EXECUTIVE VICE PRESIDENT 

NATIONAL CABLE & TELECOMMUNICATIONS ASSOCIATION 

Good morning, Chairman Boucher, Ranking Member Steams, and Members of the 

Subcommittee. My namc is James Assey, and I am the Executive Vice President of the National 

Cable & Telecommunications Association. Thank you for inviting me today to testify today in 

support ofH.R. 5828, the Universal Service Reform Act of201O. 

NCTA represents cable operators serving more than 90 percent of the nation's cable 

television households and more than 200 cable program networks. The cable industry is the 

nation's largest provider of residential high-speed Internet service, having invested more than 

$161 billion since 1996 to build two-way, interactive networks with fiber optic technology. 

Cable companies also provide state-of-the-art digital telephone service to more than 22 million 

American consumers in urban, suburban, and rural markets - almost wholly without any 

universal service support. Cable operators are committed to expanding access to quality voice 

and Internet services, and the dramatic growth in cable broadband subscribers is evidence of 

their success in doing so. 

The universal service program has long been a critical element of our communications 

policy, ensuring that all Americans have access to rapid and efficient communications services at 

reasonable rates - and it will remain a cornerstone of communications policy in the broadband 

era. As a major contributor to the federal universal service fund, the cable industry has a 

significant interest in universal service issues. We believe it is time to transition away from a 

monopoly-era support program and toward a more modern, neutral, and forward-looking high 

cost support mechanism that focuses on bringing broadband service to unserved areas and 
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underserved populations - and that the growth of local voice competition offers the opportunity 

for policymakers to make this transition. 

NCTA endorses the Universal Service Reform Act of2010 as a sound first step in 

modernizing the universal service program to bring it into the competitive era and refocus the 

program on broadband adoption and deployment where support is needed. H.R. 5828 recognizes 

that government subsidies are neither necessary nor appropriate in competitive areas where the 

marketplace is working. Building on a proposal NCTA filed last year with the Federal 

Communications Commission, the bill will establish a permanent mechanism for the FCC to 

reassess universal service support levels in competitive areas and reduce or eliminate support 

where adequate competition exists. The bill also recognizes the significance of resolving the 

difficult, but very important, issues surrounding intercarrier compensation reform. 

When NCTA President Kyle McSlarrow testified on universal service reform before this 

Subcommittee in November 2009, he suggested that reform should encompass several elements: 

controlling the size of the high cost fund to ensure that it does not impose unreasonable burdens 

on consumers or distort competition; reducing or eliminating high cost fund support to areas 

where basic service can be provided without the support; providing universal service support for 

high-speed broadband facilities in areas that currently do not have broadband service; reforming 

the universal service contribution mechanism to allow assessment based on tclephone numbcrs; 

and ensuring competitive neutrality in eligibility for universal service support. H.R. 5828 

addresses each of these issues. 

Importantly, the Universal Service Reform Act of 20 I 0 includes a mechanism for the 

FCC to reduce or eliminatc high cost support in competitive areas where the presence of one or 

more unsubsidized wireline competitors demonstrates that a universal service subsidy is no 

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longer necessary to support provision of services in that area. The bill reasonably defines a 

competitive area as a service area where more than 75 percent of households can purchase both 

wireline service and high-speed broadband service from a non-incumbent wireline provider, 

although we believe the bill should be clarified to state expressly that this test is satisfied in areas 

where two or more competitors combine to meet the 75 percent threshold. 

This reduction mechanism permits direction of high cost support away from areas that the 

competitive market has shown do not need the support, helping to direct scarce funds to only 

those areas where voice and broadband service would truly be unavailable without subsidy. 

Because the bill requires the FCC to apply the mechanism on a "recurring" basis, the nced for 

high cost support will be continually reassessed to take into account changes in competitive 

markets, ensuring that universal service support is always based on current needs and not 

historical market conditions that may no longer exist. To ensure that this mechanism fulfills its 

objectives, wc respectfully suggest that the bill be revised to ensure that the "hold harmless" 

provision does not prevent the FCC from reducing or eliminating high cost support in 

competitive areas. 

The Universal Service Reform Act of 20 1 0 rightly brings universal service support into 

the 21st Century by retargeting funding to support broadband services. The National Broadband 

Plan declares that "[ e )veryone in the United States today should have access to broadband 

services," and the Universal Service Reform Act of2010 represents a major step forward in 

accomplishing that laudable goal. We also applaud the bill for recognizing the special needs of 

tribal lands for continuing high cost support. 

Significantly, the bill funds the deployment of broadband services to all Americans 

without requiring that broadband be classified and regulated as a Title II telecommunications 

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service. Spurring broadband deployment requires a regulatory climate that promotes private 

sector investment and innovation by providing certainty and eliminating all unnecessary 

regulatory burdens. Maximizing incentives for private investment in broadband will minimize 

the impact on consumers who ultimately contribute to the universal service fund. 

As an essential corollary to providing universal service funds to support broadband, the 

bill clarifies that universal service mechanisms (including the assessment of contributions) 

should be competitively neutral, so as to neither "unfairly advantage one communications service 

provider over another" nor "unfairly favor nor disfavor one technology over another." In support 

of competitive neutrality, the bill makes two important changes to the current universal service 

programs. First, it opens high cost programs to all communications service providers able to 

provide required services, rather than limiting participation to only telccommunications carricrs. 

Second, it makes clear that a provider's service area - the area where it must meet universal 

service eligibility requirements - is the area where the provider itself is licensed or authorized to 

provide services rather than the incumbent local exchange carrier's territory. These are welcome 

changes that will allow the universal service program to focus on providing services to those in 

need, rather than on essentially irrelevant concerns about the type of provider or type of 

technology that brings those services. 

The bill also includes provisions intended to ensure that the high cost fund is no larger 

than necessary. For instance, it directs the Commission not to "unreasonably increase the 

contribution burden on consumers" as the fund is repurposed to support broadband services. On 

the "demand" side, in determining the amount of high cost support a provider might need, the 

bill rightly gives the FCC authority to consider a provider'S net revenues from the provision of 

any services over its communications infrastructure. If a provider is, in essence, telling the FCC 

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that it must have a financial subsidy for its network to be able to provide services in a high cost 

area, it is only appropriate that the provider should be required to demonstrate its financial need 

based on all services it provides over that infrastructure. Providers should not be allowed to 

obtain a subsidy for providing some services over their network when the mix of all services 

over that network provides them with a reasonable profit even without the subsidy. Finally, the 

bill retains the provision in current law that focuses universal service support on services that 

have been subscribed to by a substantial majority of residential customers "through the operation 

of market choices." This test appropriately ensures that the universal service program is focused 

on ensuring that consumers in rural and insular areas - particularly areas with no broadband - get 

access to service that is comparable to their urban and suburban counterparts. 

The bill also recognizes the continuing importance of the E-rate and other universal 

service programs. In particular, while providing well-planned and much necded reform to the 

high cost programs, the bill appropriately does not alter or limit entities' eligibility to receive 

universal scrvice support for providing services to schools, libraries, rural health care facilities, 

or to low-income consumers. The universal service programs that assist these entities are 

important and deserve continuing support. The bill's institution of new audit controls on these 

programs will ensure that the funds are appropriately spent. 

As this Subcommittee well knows, universal service reform is a challenging issue. Any 

effort to address this subject is bound to require some compromises, and H.R. 5828 is no 

exception. For example, NCTA has long supported a cap on high cost support, but the cost 

model approach provided in the bill leaves open the question of the ultimate size of the high cost 

fund. We also believe that support for broadband deployment should be expressly limited to 

unserved areas. In addition, we support other legislative efforts, such as those introduced by 

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Representatives Matsui and Markey to modernize the Lifeline, Link Up, and E-rate programs. 

On balance, however, H.R. 5828 is a constructive, positive step forward in bringing muchneeded reform to a universal service program that has gone too long without it, and NCTA is 

pleased to endorse the bilL We particularly appreciate the leadership of Chairman Boucher and 

Representative Terry on these important issues. 

Thank you again for the opportunity to share our views with you today. We look forward 

to continuing to work with you as you proceed to consideration of the bill. 

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Mr. BOUCHER. Mr. Assey, thank you very much. 

And thanks for the endorsements that were forthcoming today 

from all of our stakeholder private-sector witnesses. We appreciate 

your work with us and your support for the passage of this legislation, which reflects the results of that cooperative effort together. 

Ms. Grillo, let me direct a question to you, if I may. One of the 

things that we are doing in the bill to save money is moving from 

the current system of providing USF support to wireless, which essentially qualifies all of the wireless carriers in an area that meet 

the threshold and the qualifications for support, so you could have 

multiple carriers receiving support, and we are moving away from 

that in this bill to a competitive bidding model, where no more 

than two winners could be awarded support in a given study area. 

Have you done any cost estimating in terms of how much money 

we will save in terms of fund expenditures by moving to this competitive bidding model? At the present time, the wireless support 

is about $1.5 billion out of a $4 billion annual fund. Can you give 

us a sense of what the annual savings would be in terms of that 

wireless component if we move to this competitive bidding model? 

Ms. GRILLO. We have looked at that. As you know, Verizon, in 

particular, has been a proponent of using competitive bidding. We 

used to call it ‘‘reverse auction.’’ We actually developed a fairly 

comprehensive proposal when the FCC was looking at this a few 

years ago, and what we did at the time was we tried to come up 

with an estimate of, sort of, the proposal that we had and how 

much money that would save. And what we have done is, sort of, 

use that to look at the structure that the legislation sets up and, 

you know, sort of, use some of the assumptions we used then and 

also take into account some of the changes. 

Some of it is difficult because there are provisions in the bill that 

the FCC will have discretion to interpret. But, bottom line, we 

think probably the higher end of the range would be $500 million 

and probably the lower end would be about $200 million. 

Mr. BOUCHER. So that is savings of potentially as much as $500 

million, but at least as much as $200 million, depending on various 

factors that we can’t predict at this point. 

Ms. GRILLO. That is right. That is right. 

Mr. BOUCHER. OK. That is a pretty substantial savings, $200 

million on an annual basis, from just this one provision alone. 

Ms. GRILLO. Right, that is just that one provision. 

Mr. BOUCHER. Yes, OK. Well, thank you, Ms. Grillo. 

Ms. Bloomfield, a question for you. We are, in this legislation, 

preserving the rate-of-return model, which is the current foundation for awarding supported universal service. And I know that 

your companies, those that you are speaking for today, are particularly interested in retaining this rate-of-return model. 

Can you explain to us why keeping that means of providing support is so important to the rural carriers that benefit from USF? 

Ms. BLOOMFIELD. Thank you, Mr. Chairman. I would be very 

happy to answer that question. 

Rate-of-return regulation has actually really been part of the 

broadband success story in a lot of these rural markets. And what 

rate of return does is it allows the carriers to not get a guaranteed 

rate of return but it ensures that they are able to get some recovVerDate Mar 15 2010 03:38 Apr 05, 2013 Jkt 078133 PO 00000 Frm 00091 Fmt 6633 Sfmt 6633 E:\HR\OC\A133.XXX A133

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ery of their costs, of the capital expenses that they are putting into 

these rural markets when they build these networks. It gives them 

stability. It gives them predictability. It also recognizes the fact 

that they are carriers of last resort in these markets, that they are 

building out to the markets and edges of the market where nobody 

else actually wants to serve and take on those obligations. 

It also is one of those forms of regulation that really does prevent 

waste, fraud, and abuse because it has a lot of oversight from the 

regulations and the regulators. And I think the other thing that is 

very important in contrast is the other form of regulation potentially could be price cap. And price cap is a form of regulation that 

really drives incentive to invest in those areas where it is lowest 

risk and you get the greatest return. Obviously, a lot of these rural 

markets, that is not an economic model that is efficient and that 

actually works. 

Mr. BOUCHER. OK. 

Ms. Mattey, I am going to ask if you want to engage on this subject. And I will set the foundation for this engagement. The Commission, as part of its National Broadband Plan, had suggested 

that there might be a movement from rate-of-return regulation as 

the basis for USF distributions to price caps. 

And I would note that, in the provision we have placed in this 

legislation, we would retain the rate-of-return formula, but you 

could reduce administratively the rate of return that, in fact, is allowed. Today, it is a fairly high number. It is about 11.4 percent, 

as I understand it. And there is nothing in this provision that 

would prohibit you from reducing that percentage. If you thought 

that a lower number made sense, you could reduce it. 

So my question to you is this: Given that tremendous flexibility 

to establish what the rate of return actually is based on investment, why is that not a sufficient model? Why would it not be appropriate to take that course, which Ms. Bloomfield has said is so 

important to the rural carriers in order to provide predictability 

and other necessary planning devices, when you are given the very 

broad flexibility to actually decide what the real rate of return is? 

Ms. Mattey? 

Ms. MATTEY. Well, certainly, as you say, the FCC, under current 

rate-of-return regulation, could change the rate of return. And, as 

well, the FCC could look at other rules that apply to the current 

receipt of universal service high-cost support for the rate-of-return 

carriers. 

Mr. BOUCHER. OK. OK, fine. 

My time has expired, and I am pleased to recognize the gentleman from Florida, Mr. Stearns. 

Mr. STEARNS. Thank you, Mr. Chairman. 

Ms. Mattey, I have here the report from the FCC called, ‘‘Comparison: Universal Service Fund Transformation Recommendations, 

August 2010.’’ And I go to page 5, and it has the Boucher-Terry 

bill, talking about the size of the fund. And it has three or four 

comments. And one of the comments says, ‘‘The High-Cost Fund, 

not capped, may increase significantly.’’ 

Now, in the bill, they have the language that it can increase unreasonably—I mean charges can increase. There is no ceiling, there 

is no cap. It appears from what you are saying in this report—and 


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I need your comments—that you are saying the bill, as it is written 

today, will not control the cost of the Universal Service Fund. 

Ms. MATTEY. Well, as I understand it, the legislation does direct 

the Commission to not unreasonably increase the contribution burden on consumers. And, of course, we would very much appreciate 

any direction from Congress as to what constitutes an unreasonable burden. 

Mr. STEARNS. Well, Ms. Grillo pointed out accurately that the 

High-Cost Universal Service Fund has doubled over the last decade. At the same time, I think the unserved has not increased dramatically. So the question would be, since the fund is increasing, 

as Ms. Grillo mentioned, doubled over the last decade, you know, 

why does the fund keep going up? 

And I think what many of us are worried about is, the way the 

language is in the bill and based upon what you are saying here, 

do you think the costs will increase dramatically again, like we saw 

in the last 10 years? 

Ms. MATTEY. There are many reasons why the High-Cost Fund 

has increased over the last decade. Among the reasons are the loss 

of access lines that smaller carriers as well as larger carriers have 

incurred, as well as the growth in the funding provided to competitive ETCs. 

The bill has provisions that would address how funding should 

be provided to competitive ETCs. And, therefore, it would depend 

very much on how the bill would be implemented, you know, based 

on the direction from Congress. 

Mr. STEARNS. OK, but what you are saying here is that—your 

language here is that it may increase significantly. And, really, the 

purpose of the bill is to take and cap it and really decrease the cost 

so we can put it to broadband. I mean, that has been the underlying assumption that many of us have gone along with the bill, 

that if we can save money here, we will give it to broadband. As 

Mr. McCormick said, we have 95 percent of the market has up to 

4 megabytes, I think Mr. McCormick said. We are looking at 5 percent, the last 5 percent. 

And I would point out, this is true, but also the Departments of 

Agriculture and Commerce have not even finished off awarding $7 

billion in broadband grants and loans that are in the stimulus bill. 

So a lot of us are just concerned when you point out that it is not 

capped and may increase significantly. 

I guess another question would be to you: Do you think this fund 

will likely shrink? Can you say categorically ‘‘yes’’ or ‘‘no’’? 

Ms. MATTEY. Are you speaking about the High-Cost Fund? 

Mr. STEARNS. The whole fund. 

Ms. MATTEY. The whole fund. I do not believe the whole fund will 

shrink. 

Mr. STEARNS. I think that is fair to say. 

Ms. MATTEY. We submit our projections to the Office of Management and Budget. And our projections show that, over time, the 

fund will grow. 

Mr. STEARNS. You are saying including under the bill, too? 

Ms. MATTEY. I was referring to our projections that we submit, 

as required by law, to the Office of Management and Budget, you 


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know, indicate that the fund overall will grow. And that is a matter—— 

Mr. STEARNS. Under this bill and under what you said, did you 

come up with a quantitative amount that you thought it would increase by? 

Ms. MATTEY. No. 

Mr. STEARNS. Did you have any projection at all? 

Ms. MATTEY. We have not done an in-depth analysis of the specific provisions of the bill. 

Mr. STEARNS. OK. What is your definition of an underserved 

household? Does that include wireless as well as land lease? 

Ms. MATTEY. I would view, personally, an underserved household 

would be a household that has some form of broadband but perhaps does not have broadband of the speed that we are aiming for 

in the future. So it is a household that is beyond dial-up but perhaps does not have as robust a speed as we want as our goal. 

Mr. STEARNS. Mr. Chairman, I don’t see any clocks here, so I 

don’t know how much time I have left or not. 

Mr. BOUCHER. Well, it is one of the technical malfunctions we 

have here this morning. We are sort of beset with them. Actually, 

the Health Committee should have been having this room. Well, 

anyway, that is an intramural debate for another day. 

Mr. STEARNS. Well, I will just finish up with—— 

Mr. BOUCHER. You actually have a few more seconds. 

Mr. STEARNS. Oh, OK. 

Well, let me just ask each member of the panel if there is anything in the bill they would change, delete, or add. And just start 

with you, Ms. Mattey, and just work to my right. 

Ms. MATTEY. Well, you know, the FCC has not taken a formal 

position on the bill or any of the provisions—— 

Mr. STEARNS. I am not asking for a position. I mean, is there 

anything you would change? I mean, just any dot or comma or 

colon you would change? Anything in this bill you would change? 

I mean, you have indicated that it will increase significantly. I 

assume you would like to put some language that would say that 

it can’t go up and that the money has to be actually reduced. 

Ms. MATTEY. Actually, there is one area that the bill doesn’t really address, and that is the role of States in our shared FederalState responsibility for universal service. And I would note that 

Nebraska actually has gone through the process of doing rate rebalancing and has established a State high-cost fund which supports the provision of service to carriers in that State. 

So that is an area that, you know, I don’t see addressed in the 

bill, and I think it is something we certainly have been thinking 

about at the FCC. 

Mr. STEARNS. OK. 

Mr. McCormick? 

Mr. MCCORMICK. Well, there are a number of things that would 

sweeten the package for us. But, as I said, we know that this is 

a delicately balanced package, and we urge its package. 

Mr. STEARNS. OK. 

Ms. Bloomfield? 


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Ms. BLOOMFIELD. We also support the delicate balance. I would 

say cost models are difficult. What works in Montana doesn’t necessarily work in Alaska. 

Mr. STEARNS. Mr. Davis? 

Mr. DAVIS. I think I am in the same place, in that, as a package, 

we support it. Are there things we would write differently? Sure, 

but is that going to cause some other component of the bill to fall 

apart? 

Mr. STEARNS. Ms. Grillo? 

Ms. GRILLO. I think we have concerns about the contribution system as it exists today and a revenues-based system. You know, in 

a perfect world, perhaps we would support language that would 

move away from revenues and move closer to a numbers- or connections-based system. 

Mr. STEARNS. Mr. Assey? 

Mr. ASSEY. I would echo what my other colleagues have said. It 

is obviously a package. Obviously, we are very concerned about the 

cost controls, but we are comfortable with the bill as it stands. 

Mr. STEARNS. Thank you, Mr. Chairman. 

Mr. BOUCHER. Thank you very much, Mr. Stearns. 

I would just note that our legislation only addresses the HighCost Fund. It does not address the balance of universal service. So 

any thoughts about the overall fund perhaps growing really are not 

relevant to this specific legislation per se. 

The gentleman from Pennsylvania, Mr. Doyle, is recognized for 

5 minutes. 

Mr. DOYLE. Thank you, Mr. Chairman. 

I want to talk a little bit about paying for the USF by charging 

a fee for telephone numbers, this numbers approach. So I have 

three questions, and I am just looking for ‘‘yes’’ or ‘‘no’’ answers, 

But, I mean, it is not the SATs. You could say ‘‘maybe’’ or ‘‘I don’t 

know.’’ And I am exempting Ms. Mattey from this. I just want to 

ask the five witnesses. So I will state the three questions first. 

First, universities have hundreds, often thousands, of direct-dial 

phone numbers. A group of university IT professionals have filed 

a letter at the FCC saying that if the numbers approach replaced 

the current USF funding mechanism, their USF bill would increase 

tenfold, meaning they would have to take out telephones in dorms 

and bus shelters, making their campuses less safe. Can you understand why universities would seek an exemption for their numbers 

or face the prospect of ripping out their emergency call boxes? 

Secondly, some but not all electronic book readers, like Amazon 

Kindle, have telephone numbers. And that is because they wirelessly download new books via a Sprint cell connection. Now, Sony 

readers make you sync the reader to a PC via wifi. Can you see 

why a company like Amazon would have to eliminate this feature 

unless it can get an exemption to pay into the fund because their 

competitors wouldn’t have to? 

And, third, there are companies in my district, including Contact 

One Communications, that need thousands of numbers to sell services like call centers and telephone answering. Does it make sense 

that they would seek an exemption for their tens of thousands of 

numbers or risk paying tons and tons of new money to the Universal Service Fund? 


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And maybe we will just start with Mr. McCormick and just go 

right down right down the line, ‘‘yes,’’ ‘‘no,’’ ‘‘maybe,’’ or ‘‘I don’t 

know.’’ 

Mr. MCCORMICK. Well, first of all, yes, I understand the concern. 

But the legislation provides flexibility to the FCC in addressing 

those connections. 

And I would say that, in each and every one of those cases, particularly, like, the university telephones, universities are using 

those telephones to call into rural areas. I mean, the whole theory 

is that the utility of a telecommunications network, the utility of 

a broadband network is based upon—— 

Mr. DOYLE. Yes, but not for call boxes, certainly. 

Mr. MCCORMICK. But what the legislation does is to provide 

flexibility so that they can use IP addresses, they can use telephone 

numbers, and they can take into account these kinds of, sort of, 

like, large call boxes. 

Mr. DOYLE. Ms. Bloomfield? 

Ms. BLOOMFIELD. We have historically supported a revenuebased assessment, which we have just found to be a little bit easier. But I do think the important part is looking to expand the base 

so you limit some of the pressure there. 

Mr. DOYLE. Mr. Davis? 

Mr. DAVIS. Yes, no, no. 

No, I agree with Mr. McCormick, in that I think the legislation 

provides flexibility for the FCC to look at various circumstances, 

but I think it has to be recognized, as you go from one method of 

collection to another, some are going to pay less and some are 

going to pay more. It is just going to have that effect. 

Mr. DOYLE. Uh-huh. 

Ms. GRILLO. Yes, I mean, we agree that, you know, there are 

going to be concerns on all sides if you shift from revenues to numbers. And there has been a lot of talk, obviously, from universities 

and libraries. 

I guess what we would say is, the FCC has to keep in mind that 

the more exemptions there are, the higher the per-number charge 

or the per-connection charge would be. And that, you know, can be 

borne by consumers, by small-business owners. So that is just a 

consideration that I think the legislation would permit the FCC to 

take into account. 

Mr. DOYLE. Uh-huh. 

Mr. Assey? 

Mr. ASSEY. Yes, I understand, and I agree it is exactly the sort 

of thing the FCC ought to be empowered to work through, for the 

reasons that Kathy articulated, because the more exemptions you 

have, the higher the per-number charge. 

Mr. DOYLE. Yes, I mean, I think in these cases, Mr. Chairman, 

there is a good case to be made for a carveout, you know, in this 

numbers approach. But if the premise is that numbers is a cleaner 

way to do it, then the carveout sort of make it unclean. So perhaps 

we should just fix what is wrong on the contribution side by improving the revenue model instead. 

Let me ask Ms. Mattey, I have questions about the requirement 

in the bill that recipients of the Universal Service Fund provide 

broadband. Now, I wholeheartedly agree with that requirement, 


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and I appreciate Mr. Boucher adding it. However, some witnesses 

state that waiver provisions are needed to ensure that recipients 

of Federal money won’t have to provide broadband where it is most 

economically difficult. The bill would automatically grant waivers 

where the cost of deployment is more than three times the national 

average. 

Ms. Mattey, can you tell us, of the parts of America that aren’t 

connected to broadband, what percentage of those would cost more 

than three times the national average to connect? 

Ms. MATTEY. I can’t answer that question definitively because we 

don’t have complete information at this time to do that. 

I can say, based on extrapolating from our existing cost information that we have about, under our current rules, the provision of 

universal service for voice service, it looks like, ballpark, perhaps 

1 to 2 percent might be over that 3 percent threshold. 

Mr. DOYLE. Uh-huh. 

Ms. MATTEY. So it would be a situation, you know, where you 

would presumably be able to extend broadband to roughly twothirds of the unserved. But there may be, you know, a quarter of 

the unserved that are still not served with such a waiver provision. 

But I really caution you that that is very much of an estimate 

and we don’t have the information. 

Mr. DOYLE. But is it fair to say it is the FCC’s intent to look at 

the potential impact on your ability to require carriers to deploy 

broadband services to unserved areas on this? I mean, if we want 

to make sure that everyone that is getting this money deploys 

broadband, obviously what I am hearing is that is not going to happen, in some cases. 

Ms. MATTEY. Well, obviously, we would defer to the direction 

from Congress as to, sort of, how far we should go. Everybody recognizes that it is very, very expensive to extend service to that last 

percent. And we would follow the lead wherever Congress tells us 

to draw the line. 

Mr. DOYLE. Uh-huh. 

Mr. Chairman, thank you. I think I have used my time. 

Mr. BOUCHER. Thank you very much, Mr. Doyle. 

The gentleman from Nebraska, Mr. Terry, for 5 minutes. 

Mr. TERRY. Thank you. 

A couple of observations. First of all, on the revenue side, the requirement that if your service is primarily voice, that you would 

contribute, understanding there would be a variety of technologies, 

one where you probably have to use a revenue model and maybe 

another type of technology model where the numbers model makes 

better sense, so we give that level of flexibility to the FCC so they 

can determine which is the appropriate mechanism for the revenue. 

And is that an adequate flexibility for the FCC, Ms. Mattey? 

Ms. MATTEY. We very much appreciate the flexibility in this legislation. 

Mr. TERRY. All right. Thank you. 

Ms. Bloomfield, in that regard, is your constituency oK with 

that? 

Ms. BLOOMFIELD. Absolutely. I think the hybrid approach might 

be the one that makes the most sense. And we have been working 


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closely with others in the industry and the FCC to, kind of, figure 

out what that forward-looking model is going to be on that. 

Mr. TERRY. Ms. Grillo, you are the only one that seemed to be 

opposite of the flexibility. 

Ms. GRILLO. Well, we are not opposite of the flexibility. I think 

we just—we have had a concern for a long time about the current 

system, and it really gets more intense every year just because the 

idea that you can separate information services from telecom services just gets more challenging every year. 

So we do appreciate the flexibility. And, obviously, you know, the 

FCC is the expert agency and should be making these determinations. But we do feel strongly that the time is now to move toward 

a more objective numbers-, connections-based contribution. 

Mr. TERRY. Thank you. 

Back to you, Ms. Bloomfield. I am going to give this question to 

you because, frankly, it is your constituency that we started this 

process, to give them some level of certainty that the fund that 

they rely upon to provide services to the high-cost rural areas will 

exist in the future. There has been great concern about the costcontainment measures in here. And most of those cost-containment 

mechanisms in here really directly affect your constituency. And so 

I want to direct this question to you. 

And, first, before I make the question, we started this with a cap, 

and the cap was criticized. Your constituency opposed it pretty passionately. But we have gone to a different model where we specified 

the cost containment. Now the same people that criticize the cap 

are criticizing this mechanism now, which is a little frustrating to 

me. 

But I want to ask you, specifically, what are the cost-containment provisions in here, and how will they affect your constituents? 

Ms. BLOOMFIELD. Thank you for asking the question. 

I think, you know, when you look at the cap, I think part of the 

thing—you almost have to go back to what Congress and what policymakers really want to achieve. And if you are really talking 

about universal broadband to all Americans, let’s be clear, it is 

going to be a costly proposition. But I think the payback in the long 

run, you know, getting this country being broadband-deployed, is 

going to be very, very important for us moving forward. 

So I think it is hard to actually say, when you look at a cap and 

you say, well, what would the actual cap be, what would the cost 

be, what is the cost of getting broadband out there everywhere? 

And I think you have the pieces with the stimulus funding from 

NTIA and RUS going out the door; you look at the USF support. 

So I think there is kind of an unanswered question about what exactly that cost is. 

I think until you, kind of, look back at that and you, kind of, look 

at how do you expand the base, that you are including as many 

folks contributing as possible, I think a hard cap is very, very difficult. 

If you are in the process and you look at the waiver provision 

and you have that last 3 percent of your service territory that you 

need to build broadband out to but you are not quite sure what the 

cost is going to be because those customers are out on a very long 


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loop, the cap is really going to stop some of that investment, and 

I think particularly at a time when you really want to be giving 

incentives for investment. 

Mr. TERRY. Let me guide you towards the cost-savings measures 

that are in—— 

Ms. BLOOMFIELD. That are in the bill, OK. Let’s do that. 

Mr. TERRY [continuing]. This current version. And is that adequate for Mr. Stearns to have some level of confidence that this is 

not going to explode? 

And I guess we received this copy last night from the FCC, and 

I got it a few minutes ago, but, ‘‘The High-Cost Fund, not capped, 

may significantly increase.’’ I mean, our whole attempt was not to 

increase this. So, evidently, the FCC has said that we failed in 

that, but I think they misunderstand. 

Ms. BLOOMFIELD. And I think there are a lot of provisions in the 

legislation that ensure. You know, I think when you look at how 

you are actually distributing the money, I think the effort in terms 

of the competitive bidding with the wireless providers, the multiple 

ETCs, has been something that I think the entire industry has, 

kind of, watched with frustration for a long period of time. 

I think that, as you look at more competition in some of these 

markets, I think you are going to see some of the declining costs. 

So I don’t think you are going to see the explosion that has been 

projected. And, again, you know, you can’t put a number on it because a number is hard to come up with. 

Mr. TERRY. Mr. Assey, some of the cost-containment measures 

that you all brought forward to us have been adopted. Are you comfortable that those will actually be cost-saving measures? 

Mr. ASSEY. We are comfortable and hopeful that they will. You 

know, we live in a world where competition is not a static entity, 

and one of the most important things, I think, from our perspective, that this bill does is adopting a permanent and ongoing mechanism so that, as competition extends and we are able to provide 

broadband service in areas without support, we are not essentially 

picking one competitor versus another. 

Mr. TERRY. Right. I think that made sense, too. 

My time is probably way up, so I yield back. 

Mr. BOUCHER. Thank you, Mr. Terry. 

We have a series of recorded votes pending on the House floor, 

and we have about 8 minutes to respond to those roll-calls. I think 

we probably have time for Ms. Matsui to propound her questions. 

I don’t think we are going to have time for the other two colleagues 

to ask theirs. And Mr. Space says he is going to waive questions. 

I know Mr. Stupak has some questions. 

I am going to propose that we have Ms. Matsui’s questions, and 

then we will ask you to wait, if you will, and we will come back 

for further questioning subsequently. 

Ms. Matsui? 

Ms. MATSUI. Thank you, Mr. Chairman. 

As I mentioned previously in my opening statement, there are 

far too many households who just simply cannot afford broadband 

service. The USF low-income fund was created to ensure that 

qualified lower-income Americans living in urban areas and rural 


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areas have a program where they can access affordable telecommunication services. 

As we promote the transition of USF from telephone service to 

broadband services, the USF low-income fund is a vehicle to ensure 

all Americans living in urban and rural areas have equal access to 

at-home broadband services. My legislation to expand the USF 

Lifeline Assistance program for universal broadband assistance 

adoption will ensure that transition from telephone service to 

broadband service is a reality for these low-income households. 

A question for Ms. Mattey: In the recent FCC broadband adoption survey, did the FCC find that the price of broadband service 

and related installation costs is a main reason why lower-income 

households do not subscribe to the Internet? 

Ms. MATTEY. The survey indicated that typical non-adopters face 

multiple barriers, but cost was the one most frequently cited. 

Ms. MATSUI. With respect to any broadband Lifeline pilot program, would it be the intent of the FCC to administer the program 

to ensure that eligible low-income consumers in both urban and 

rural America have an equal opportunity to participate in the program? 

Ms. MATTEY. Oh, absolutely. 

Ms. MATSUI. OK. What are some of the factors that the FCC will 

consider to ensure a cost-effective Lifeline/Link-Up program for 

broadband? 

Ms. MATTEY. Well, we hosted a roundtable discussion about Lifeline in June, and we solicited information from a variety of stakeholders about how to effectively design pilots to test the provision 

of that subsidy for broadband. 

And we hope to very much also learn from the results of the 

BTOP awardees that will be announced and finished very, very 

soon, in the next week or 2. 

Ms. MATSUI. OK, that is good to know. Thank you. 

Questions for Ms. Grillo and Mr. Assey: From an industry standpoint, what are some of the factors you would encourage the FCC 

to consider in implementing such a Lifeline/Link-Up pilot project? 

Ms. GRILLO. Well, we have been involved in a pilot program similar to what you have described. Some of the other factors, other 

than cost to a consumer, may be relevance. Some consumers, you 

know, don’t see the relevance of broadband in terms of their everyday life. Some of it may have to do with security: concerns about 

the security of a connection and the information transmitted over 

it, concerns about children and what children do online. 

So a lot of what we have tried to focus on in terms of a pilot is 

an examination, today, what really does drive consumers and what 

the government can include in a Lifeline-type program that would 

actually address all of those issues, not just price or cost. But, obviously, that is a concern for a lot of people. 

Ms. MATSUI. Well, also, digital literacy. 

Ms. GRILLO. Exactly. 

Ms. MATSUI. OK. 

Mr. Assey? 

Mr. ASSEY. Yes, thank you for the question. This is obviously an 

area where the cable industry has done a lot of work, as well, and 


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we are proud to support your bill because we do think it is on target. 

The cable industry developed an A–Plus program to really focus 

on this adoption problem, because we recognize that even though 

the cable industry can provide service to 92 percent of households, 

there are a lot of people who could get it who don’t. 

What Ms. Mattey said, the data that was collected and talked 

about why people don’t adopt broadband covered many factors. And 

we, kind of, focused on three, digital literacy probably being chief 

among them. And our program is designed to focus on middleschool children and really try to educate them about safety, security, privacy, and make them comfortable with being in a digital 

environment. 

The other point I would raise, when we talk about cost, I think 

we need to look at that factor a little bit more discretely, because, 

unlike the situation with telephone service, one of the biggest gating factors in cost is actually the cost of the computer, not necessarily the cost of the service. And the data actually reflects that. 

So, focusing on the hardware, focusing on the service, focusing on 

the digital literacy, that coordinated approach will give us our best 

chance at success. 

Ms. MATSUI. OK, thank you. 

Ms. Bloomfield, in your view, would a Lifeline program for 

broadband increase adoption rates in rural America? 

Ms. BLOOMFIELD. Absolutely. We think it goes really hand-inhand with what the High-Cost Fund is already doing in terms of 

the deployment in rural America. So, the same incentives. We have 

the same issues in rural America as urban American does with 

low-income households. 

Ms. MATSUI. Thank you. 

And a final question for Ms. Mattey: How long, in your view, 

does the FCC believe it will need to conduct pilot programs to gather the appropriate information required to develop the most costeffective program possible? 

Ms. MATTEY. We are still working on that internally. We have 

had a series of meetings with various interested stakeholders. And 

in the course of those meetings, some have suggested, you know, 

1 year, 2 years, 3 years. Some have suggested things shorter and 

some longer, so we are still working on it. 

Ms. MATSUI. I think my preference would be to have something 

shorter. 

Thank you very much. I yield back. 

Mr. BOUCHER. Thank you very much, Ms. Matsui. And we look 

forward to working with you on a broadband Lifeline provision. 

And I want to commend you for bringing that very well-developed 

idea before the subcommittee. 

The gentleman from Florida, Mr. Stearns, is recognized for a 

unanimous consent request. 

Mr. STEARNS. Unanimous consent, Mr. Chairman, that the FCC’s 

report, ‘‘Comparison: Universal Service Fund Transformation Recommendations, August 2010,’’ be part of the record. 

Mr. BOUCHER. Without objection. 

And we stand in recess until the conclusion of these votes. 

[Recess.] 


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Mr. BOUCHER. I would like to ask our witnesses to resume at the 

witness table, please. Sorry for the delay. Thank you for your patience. 

At this time, I am pleased to recognize the gentleman from 

Michigan, Mr. Stupak, for 5 minutes. 

Mr. STUPAK. Thank you, Mr. Chairman. We thank you, and we 

thank our witnesses for staying with us so we could ask a round 

of questions. 

First, Mr. Chairman, let me thank you and Mr. Terry for putting 

forth this legislation. It is a pretty good piece of legislation. 

As I mentioned to you as we are walking down to votes, I still 

have concerns I have raised before in this committee and I continue 

to raise because it is an issue we have to deal with, and that is— 

while you mentioned public safety on page 10 of the bill, we don’t 

talk about a public safety network, specifically public safety and 

interoperability broadband network. And I would certainly hope 

there would be some way we could work this out. Ms. Matsui 

talked about a lifeline, but there is no greater lifeline than having 

interoperability for our first responders, whether it is an ambulance, a police officer, or a firefighter. We do need that, and I hope 

there would be a way we could work that out. I know this bill has 

been put together carefully, and it might be hard to do it, but let’s 

continue to explore possibilities. 

With that, let me ask Ms. Mattey a question, if I may. In your 

testimony, you note that, and I quote, ‘‘We should be looking at 

ways to target support only to those areas that really need it, to 

deploy and sustain broadband networks capable of providing highquality broadband and voice services.’’ 

So my question is, how would you or the FCC determine—or 

what factors will the FCC use to determine which areas need support and which areas don’t need support? 

Ms. MATTEY. Ultimately, the goal of universal service is to provide economic support to areas where there is no private-sector 

business case. So, in order to target support, one would look at the 

areas and determine whether or not, you know, there are multiple 

providers in that geographic area that are providing service without support and, conversely, is there only one provider in a particular area. So you need to look at, sort of, who is in the marketplace and figure out, from a business case perspective, where you 

need to add that supplemental investment coming from universal 

service. 

Mr. STUPAK. You said a private provider, so if that provider in 

that area is a municipality, would you still consider that an underserved area then? 

Ms. MATTEY. That is an interesting question I haven’t really 

thought about. I am not aware of any municipalities that are actually providing voice service. And, obviously, we want to make sure 

that consumers continue to have voice service as well as 

broadband. 

Mr. STUPAK. Well, let me ask you this because you brought it up 

and also Ms. Grillo brought it up. You mentioned the importance 

of ensuring that the burdens on the consumer never outweigh the 

benefits in the mission to provide support where it is needed. 


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So where is the tipping point? When does the burden outweigh 

the benefits? Where is that point? Have you thought about that? 

Have you kicked that around at the FCC? 

Ms. MATTEY. I have been thinking about that for a very long 

time. 

Mr. STUPAK. And your answer is? 

Ms. MATTEY. I wish someone would give me the answer. 

Mr. STUPAK. Well, that is a valid point. And we talk about these 

concepts, but we have to—you know, what factors are we going to 

take into consideration to find what is the tipping point? 

Ms. MATTEY. Right. I mean, ultimately, it is a political judgment, 

you know, and it is a collective judgment as a society. And we very 

much, you know, will take whatever direction Congress, you know, 

gives us in terms of deciding where that balance is. 

But, ultimately, you know, the point of the testimony was just 

to remember that consumers contribute to universal service as well 

as receive the benefits. 

Mr. STUPAK. Well, let me ask you this question then. In Ms. 

Bloomfield’s testimony, she points out that the FCC is in charge of 

determining the process for areas of losing or re-obtaining universal service support. Has the FCC thought about how they will 

develop the rulemaking for losing or re-obtaining? 

Ms. MATTEY. I am sorry, was that a question to me? Are you referring to what she said? 

Mr. STUPAK. To you. Ms. Bloomfield brought it up in her testimony, and I thought it was interesting. So has the FCC thought 

about how are you going to do this? What is the process for areas 

to determine if they are losing or re-obtaining universal service 

support? 

Ms. MATTEY. I am not sure I completely understand the question. 

I apologize. 

Mr. STUPAK. Ms. Bloomfield, do you want to elaborate a little bit 

on that? It was your testimony I am citing. 

Ms. BLOOMFIELD. I think Congressman Stupak is referring to, 

you know, what happens as access lines are decreasing—— 

Mr. STUPAK. Right, decreased. 

Ms. BLOOMFIELD [continuing]. And, you know, the impact of the 

line loss and what that does to the ultimate support that some of 

the providers are receiving today. 

Ms. MATTEY. Right. Well, under the current system for the smaller rate-of-return companies, as they lose lines, the amount of support per line they receive will go up under the existing support program, because that is designed to ensure that the small rate-of-return companies recover the fixed costs of their network regardless 

of how many customers actually choose to subscribe from that provider. 

Mr. STUPAK. OK. 

Mr. Davis, in your testimony, you point out that 14 million people living in 7 million housing units in the United States do not 

have access to broadband infrastructure. You go on to stress the 

importance of directly and explicitly supporting broadband service. 

Do you think the goal of providing broadband to unserved and 

underserved areas can be realized if the high-cost funding is reduced? 


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Mr. DAVIS. Do I think it can be realized if all high-cost—— 

Mr. STUPAK. Yes, if we start reducing high-cost funding. 

Mr. DAVIS. I think it depends over what period of time and 

whether you are talking about 100 percent coverage, as has been 

discussed. That gets extraordinarily expensive, and so we would 

have to look at that. But certainly—— 

Mr. STUPAK. Right. I am in one of those very expensive areas. 

Mr. DAVIS [continuing]. We can do a much better job of providing 

broadband support than we do today, and we can get broadband to 

a far higher percentage of customers than we do today with 

broadband support. 

Mr. STUPAK. But if we reduced the high-cost funding, of course 

we would leave more and more areas behind, right? 

Mr. DAVIS. I think we can make the current high-cost coverage 

much more efficient, as is anticipated in the bill, by reducing support to wireless carriers in areas that really do not deserve support. 

Mr. STUPAK. OK. 

Ms. Grillo, let me ask you this. In your testimony, you highlight 

the growing problems of traffic pumping and the urgent need to 

put a stop to the scams. You also mention that the Universal Service Reform Act will cut off many of the traffic-pumping scams. 

Do you think the bill’s language is strong enough to put an end 

to traffic pumping, or is there more we need to do? 

Ms. GRILLO. I think the language is strong enough to stop many, 

if not all, of the problems that we are seeing right now, yes. 

Mr. STUPAK. OK. 

Ms. Bloomfield, if I may, in your testimony you raise concerns 

about small rural telecommunication providers. Specifically, you 

point out the provisions that call to reduce or eliminate high-cost 

support in competitive areas. 

Rural areas make up a large part of my district. Can you please 

elaborate on the problems you foresee in rural areas if high-cost 

support were eliminated? 

Ms. BLOOMFIELD. Part of the problem is, when you talk about 

high-cost areas and whether or not they are competitive, a lot of 

that is going to depend on how you define ‘‘competitive.’’ 

So let’s say, for example, a carrier is able to build out to 98 percent of their service territory which is a very high-cost area but, 

you know, not able to, kind of, always get—you have, kind of, the 

doughnut and the hole, so it is very expensive to get to those outer 

regions. 

So when you look at competition, you know, is your competitor 

going to come in and actually provide service to just that center of 

the hole where you actually have that density and where it is actually a lower cost to be competitive? That leads to the question of 

what happens to those consumers at the very far reaches where it 

is very expensive to reach them. 

And the incumbents right now have the carrier-of-last-resort obligation. 

Mr. STUPAK. Right. 

Ms. BLOOMFIELD. So those carriers have to go out, regardless of 

the cost. So the problem is, if you kind of cut out the middle where 

it is ripe to be competitive, all you are doing is increasing the cost 

on the fringes. 


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Mr. STUPAK. Nothing, further, Mr. Chairman. 

Thank you. Thank you all for your testimony. 

Mr. BOUCHER. Well, Mr. Stupak, thank you very much for your 

thoughtful questions. 

Thanks again to our witnesses. I appreciate your very positive 

testimony today. 

Ms. Mattey, thank you for your informative testimony, coming 

from the Commission. I appreciate your attendance. 

I would simply note, in closing, that we have substantial savings 

that are contained within this legislation. Moving to competitive 

bidding on wireless, according to Ms. Grillo, saves between $200 

million and $500 million every year, in terms of High-Cost Fund 

expenditures. We deny support in areas where there is competition 

in the offering of voice-based telephone service. That will result in 

savings, although we don’t have a hard number on that. We address traffic pumping, which, in turn, is going to result in savings. 

And we say that net revenues from all supported services will be 

considered when determining the appropriate level of support. 

All of these are provisions that will result in savings from the 

High-Cost Fund. I felt compelled to note that, given some of the 

questions and comments that came forward this morning. 

Well, I want to thank everyone. This has been a very productive 

hearing. And we will have further proceedings on universal service. 

That said, this hearing is adjourned. 

[Whereupon, at 12:27 p.m., the subcommittee was adjourned.] 

[Material submitted for inclusion in the record follows:] 


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Statement of 

Representative John D. Dingell 

Committee on Energy and Commerce 

Subcommittee on Communications, Technology, and the Internet 

Hearing on "H.R. 5828, the Universal Service Reform Act of 20 10" 

September 16, 2010 

Thank you, Mr. Chairman. I commend you and Mr. Terry for your work on H.R. 5828, 

the Universal Service Reform Act of2010. 

Put simply, advances in telecommunications, the changing preferences of consumers with 

respect to such services, and a decreasing funding base have made it necessary for the 

Congress to re-examine the policy goals and functioning of the Universal Service Fund. 

Universal service mandates must be modernized with respect to these developments in 

order to ensure all Americans, regardless of geography or income, have access to highquality telecommunications at affordable rates. 

As I have suggested in the past, three principles should guide our efforts in this matter. 

First, all providers of telecommunications should contribute equitably to support 

universal service. Second, all communications - and not simply interstate andforeign 

communications should be subject to assessments to support universal service. Finally, 

we should not play favorites with new communications technologies when it comes to 

Universal Service Fund contribution requirements, because this will have the undesired 

effect of shortchanging the Fund, as well as amounts to the picking of winners and losers 

in the marketplace. I am pleased to see that H.R. 5828 incorporates these principles and, 

moreover, that the bill recognizes broadband as a universal service and makes provisions 

to support the expansion and maintenance of its infrastructure. 

Mr. Chairman, I thank you for your courtesy and commend you and Mr. Terry for the 

congenial, bi-partisan work that has produced the bill we consider here today. It is well 

written and enjoys wide support across an array of stakeholders. As such, I wish to add 

my name as a co-sponsor and urge you to maintain the fine balance you have struck in 

this legislation. 

I yield back the balance of my time. 
101 


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Statement of Anna G. Eshoo for the Record 

At the Communications, Internet and Technology Subcommittee 

On the Universal Service Reform Act of2010 

September 16,2010 

REP. ESHOO: Thank you, Chairman Boucher, for holding this hearing today. To the 

average American, Universal Service Reform may seem a very technical topic. But this 

topic has very important implications. I believe it can be a valuable tool to improve and 

enhance access to broadband services across the country. 

We all pay a Universal Service Fee, to ensure that communications services are available 

to everyone, including in places that are hard to reach, and for people who might not be 

able to afford service. In the 1930s, this was meant to ensure that carriers would provide 

rural homes with telephone service even if it was difficult or expensive to do so. 

Telecommunications have come a long way since then. We need to ensure that the 

Universal Service Program lives up to its name and provides essential 

telecommunications services to all Americans. Today, essential services should include 

broadband. 

The National Broadband Plan recognizes that extending broadband service raises the 

same challenges that telephones faced nearly a century earlier. They recognized that USF 

could be a powerful tool to ensure that all Americans had access to broadband. In order 

to do so, we need to change the old way of doing business. 
102 


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I appreciate the effort that the Chairman and Mr. Terry have put into this bill, and their 

commitment to using USF as a broadband deployment tool. But I have heard many 

concerns about the bill. It would bind the FCC's hands in their implementation ofUSF 

reforms in the National Broadband Plan. Indeed, some of the organizations testifYing 

today praise this bill precisely because the bill "redirects" the plan's efforts on USF. 

Further, the bill retains support for legacy technologies without imposing sufficient 

obligations to increase broadband support. It eliminates many free or below-cost 

teleconferencing services that consumers have come to rely on. It does not expand the 

Lifeline or Link-up programs to ensure that low-income families have access to 

broadband. It does not reform the E-Rate program to ensure that schools and libraries 

have access to broadband. 

In addition, we must ask about the obligations for carriers who receive this money. The 

BTOP grants program in the Recovery Act, which I strongly supported, required the 

recipients to abide by non-discrimination principles for net neutrality. We included that 

language because public funds come with public obligations. Over 2,000 applicants 

sought BTOP funds, and were willing to live by those terms. We should include similar 

language here. This should not be a giveaway to corporate interests to spend however 

they please. This is taxpayer money, and we have every right to require the recipients to 

abide by some rules of the road. 

I hope this hearing will be able to address the many concerns that have been raised. 
103 


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ph 

600 Mary!and Ave, S'vV 1 Suile 1(\OOW i V1ashmglofl,OC Z0-J24 f. 202 406.36;)6 

September 14, 2010 

The Honorable Rick Boucher 

Chairman 

Subcommittee on Communication, 

Technology and the Internet 

2125 Rayburn House Office Building 

Washington, DC 20515 

The Honorable Cliff Steams 

Ranking Member 

Subcommittee on Communication, 

Technology and the Internet 

2125 Rayburn House Office Building 

Washington, DC 20515 

Dear Chairman Boucher and Ranking Member Steams: 

The American Farm Bureau Federation believes that high-speed broadband services have great 

potential to bring opportunity to rural Americans. Farm Bureau represents more than 6 million 

families who live and work in rural America, many of whom do not have the same access to 

educational, medical, business and government services as Americans living in more populated 

areas. 

H.R. 5828, the Universal Service Re/orm Act 0/2010, has the potential to correct this inequity by 

declaring broadband a universal service, which allows for direct support from the Universal 

Service Fund (USF). Farm Bureau agrees that the USF should be used for long-term broadband 

deployment. 

Many farmers and ranchers conduct their business operations from their homes. As government 

agencies increasingly rely on information technology to disseminate and collect information, 

affordable, high-speed, home-based broadband connectivity is becoming a necessary tool for 

producers. Farmers and ranchers without access to affordable high-speed internet connections 

might eventually be unable to comply with government regulations, take advantage of 

government services or gain market information. Therefore, affordable home broadband access 

is especially important to keep American agriculture competitive in a world marketplace. 

America's farmers and ranchers need viable rural communities to supply the services needed to 

support their families and agricultural operations. To thrive, rural areas need access to health 

care, government services, educational and business opportunities. For many rural communities 

access can only be gained by using broadband services and sophisticated technologies that 

require high speed connections. Rural business owners need access to new markets and welleducated employees for their businesses. Rural health care providers need access to health 

information technology. Rural students need access to educational resources and continuing 

education opportunities. Current and future generations of rural Americans will be left behind 

their fellow citizens if they are without affordable high-speed broadband service to tap into 

health care and educational services, government agencies and new business opportunities. 
104 


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Affordability is a critical component to broadband use in rural America because rural household 

incomes are typically lower than those in more populated regions of the nation. In rural areas 

where broadband service is available, our members have reported that the service is beyond the 

financial means of many residents of their communities. The development ofa new cost model 

for universal support, which is part of this legislation, will ensure that the cost to the consumer is 

affordable. 

Farm Bureau calls on Congress to join us in making a commitment to revitalizing our rural 

communities and ensuring the health and welfare of present and future generations ofrural 

Americans by enacting H.R. 5828, Universal Service Reform Act of2010. 

Sincerely, 

Bob Stallman 

President 

CC: Members of the Subcommittee on Communication, Technology and the Internet 
105 


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WAXMAN, CA:'lfORN1A 

CHAIRMAN 

ONE HUNDRED ELEVENTH CONGRESS 

(:ongrt!)~ of tb1'. 

of 

Carol Ma:ttey 

COMMITTEE ON ENERGY AND COMMERCE 

2125 RAVSURN HousE OFfiCE BUILDING 

WASHINGTON, DC 20515-6115 

October 20. 2010 

Deputy Chief; Wireline Competition Bureau 

federal Communications Commission 

445 12th Street. SW. Room 5-C352 

Washington. DC 20554 

Dear Ms. Mattey: 

BARTON, TEMS 

RANK!NG MEMBER 

Thank you for appearing before the Subcommittee on Communications, and 

the Internet on September 16,2010, at the hearing entitled '·RR. 5828, the Cnlversal 

Rcfonn Act of 201 0." 

Pursuant to the Committee's Rules. attached are written questions for the record directed 

to you from certain Members of the Committee. III preparing your answers, please address your 

response to the Memoer who submitted the questions. 

by November 3. 2010, to Earley Gr~'Cn. ChiefC!erk. via email to W!ll2,,-,!I;i!;l!.'!!!.ill<!lliill2J~~CY. Please contact Earley Green or Jennifer Bcrc-nholz at 

(202) 

Sincerely, 

Attachment 
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The Honorable Cliff Stearns 

1. During the hearing we submitted for the record an August 2010 document in which the 

FCC says that under H.R. 5828 the high-cost fund is not capped and "may increase 

significantly." Which provisions in H.R. 5828 in particular does the FCC believe could 

significantly increase the size oftbe bigb-cost fund? 

As currently drafted, the bill gives the FCC the discretion to implement many key provisions, 

and the way that they are implemented could impact the ultimate size of the fund. Some of the 

choices that may increase the size of the fund include the extent to which the FCC may create a 

cost recovery mechanism in USF for intercarrier compensation revenues pursuant to Section 

301(b) ofH.R. 5828 and the provision in Section 103 requiring that USF support be calculated 

using wire centers for companies other than rate ofreturn carriers. That section also directs the 

FCC, when developing the new cost model, to develop and implement a mechanism that 

maintains rate-of-return regulation for those companies subject to rate-of-return regulation at the 

time of enactment. Such a provision could lead to continued growth in the interstate common 

line portion of the high cost fund. Other changes, such as the provision in Section 105 requiring 

the elimination of section 54.305 of the Commission's regulations, the so-called "parent trap" 

rule, which limits a carrier acquiring exchanges to the same per-line support the seller received 

prior to the transfer, may also increase the size ofthe high-cost fund. 

2. Mr. Barton and I bave said tbat we might accept a bipartisan compromise tbat expands 

tbe bigh-cost fund to broadband but ensures tbe bigh-cost fund does not grow, and 

preferably sbrinks it. Can tbe FCC assure me that the high-cost fund will not grow if 

H.R. 5828 becomes law? 

No. Because of various factors, it is difficult to predict whether the high-cost fund will grow, 

and, as noted above, there are provisions in H.R. 5828 that could potentially increase the fund, 

depending on how they are implemented by the FCC. Also, it is particularly difficult to say how 

enacting H.R. 5828 as currently drafted will impact the size of the high-cost fund relative to the 

current projections. While several components (high cost loop and interstate access support) of 

the high cost fund are currently capped, other components (local switching support and interstate 

common line support) are not. Trends in high cost payments are difficult to predict, depending 

among other things on the extent of access line loss and investment patterns of companies that 

receive support based on their own cost submissions. 

3. Are tbere any recommendations in the National Broadband Plan tbat the FCC could 

not adopt if H.R. 5828 became law? If so, what are tbey? 

The National Broadband Plan (NBP) recommended that the FCC eliminate all support provided 

to competitive eligible telecommunications carriers and use those savings, along with other 

savings, to establish a new Connect America Fund (CAF), which would ultimately replace the 

existing high-cost fund. The NBP also recommended that support under the CAF be limited to 

one provider per geographic area. IfH.R. 5828 is enacted in its current form, Section 104(a)(4) 

would prevent the FCC from eliminating all support to competitive eligible telecommunications 

carriers, and it would also not be able to limit support to one provider per geographic area. 
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The NBP also suggested that the FCC identifY ways to drive funding to efficient levels, including 

through the use of market-based mechanisms to award support based on neutral geographic units 

that are both company- and technology-agnostic. Section 104(a)(4) requires the FCC to establish 

competitive mechanisms to award support to mobile wireless communications service providers 

in areas where there are at least three such providers, but directs the Commission to maintain 

support at existing per-line levels in areas with less than three such providers, subject to 

adjustment under the interim cap. The net result of such provisions could be three supported 

providers in a given geographic area (one incumbent wireline provider and two mobile wireless 

providers. ) 

Further, the NBP suggests that the FCC consider using market-based mechanisms, where 

appropriate, to determine the firms that will receive CAF support and the amount of support they 

will receive. Section 103 requires the FCC to develop a model for incumbent carriers based on 

wire centers and study areas, which are geographies relevant to incumbent telephone companies. 

This provision potentially could preclude the use of market-based mechanisms for such 

companies. 

o 

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