[House Hearing, 108 Congress]
[From the U.S. Government Publishing Office]



 
                    THE FUTURE OF UNIVERSAL SERVICE
=======================================================================

                                HEARING

                               before the

          SUBCOMMITTEE ON TELECOMMUNICATIONS AND THE INTERNET

                                 of the

                    COMMITTEE ON ENERGY AND COMMERCE
                        HOUSE OF REPRESENTATIVES

                      ONE HUNDRED EIGHTH CONGRESS

                             FIRST SESSION

                               __________

                           SEPTEMBER 24, 2003

                               __________

                           Serial No. 108-49

                               __________

       Printed for the use of the Committee on Energy and Commerce



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



                               __________



                       U.S. GOVERNMENT PRINTING OFFICE
89-965                       WASHINGTON : 2003
_____________________________________________________________________________
For Sale by the Superintendent of Documents, U.S. Government Printing Office
Internet: bookstore.gpo.gov  Phone: toll free (866) 512-1800; (202) 512-1800  
Fax: (202) 512-2250 Mail: Stop SSOP, Washington, DC 20402-0001




                    ------------------------------  





                    COMMITTEE ON ENERGY AND COMMERCE

               W.J. ``BILLY'' TAUZIN, Louisiana, Chairman

MICHAEL BILIRAKIS, Florida           JOHN D. DINGELL, Michigan
JOE BARTON, Texas                      Ranking Member
FRED UPTON, Michigan                 HENRY A. WAXMAN, California
CLIFF STEARNS, Florida               EDWARD J. MARKEY, Massachusetts
PAUL E. GILLMOR, Ohio                RALPH M. HALL, Texas
JAMES C. GREENWOOD, Pennsylvania     RICK BOUCHER, Virginia
CHRISTOPHER COX, California          EDOLPHUS TOWNS, New York
NATHAN DEAL, Georgia                 FRANK PALLONE, Jr., New Jersey
RICHARD BURR, North Carolina         SHERROD BROWN, Ohio
  Vice Chairman                      BART GORDON, Tennessee
ED WHITFIELD, Kentucky               PETER DEUTSCH, Florida
CHARLIE NORWOOD, Georgia             BOBBY L. RUSH, Illinois
BARBARA CUBIN, Wyoming               ANNA G. ESHOO, California
JOHN SHIMKUS, Illinois               BART STUPAK, Michigan
HEATHER WILSON, New Mexico           ELIOT L. ENGEL, New York
JOHN B. SHADEGG, Arizona             ALBERT R. WYNN, Maryland
CHARLES W. ``CHIP'' PICKERING,       GENE GREEN, Texas
Mississippi                          KAREN McCARTHY, Missouri
VITO FOSSELLA, New York              TED STRICKLAND, Ohio
ROY BLUNT, Missouri                  DIANA DeGETTE, Colorado
STEVE BUYER, Indiana                 LOIS CAPPS, California
GEORGE RADANOVICH, California        MICHAEL F. DOYLE, Pennsylvania
CHARLES F. BASS, New Hampshire       CHRISTOPHER JOHN, Louisiana
JOSEPH R. PITTS, Pennsylvania        TOM ALLEN, Maine
MARY BONO, California                JIM DAVIS, Florida
GREG WALDEN, Oregon                  JAN SCHAKOWSKY, Illinois
LEE TERRY, Nebraska                  HILDA L. SOLIS, California
ERNIE FLETCHER, Kentucky
MIKE FERGUSON, New Jersey
MIKE ROGERS, Michigan
DARRELL E. ISSA, California
C.L. ``BUTCH'' OTTER, Idaho

                   Dan R. Brouillette, Staff Director

                   James D. Barnette, General Counsel

      Reid P.F. Stuntz, Minority Staff Director and Chief Counsel

                                 ______

          Subcommittee on Telecommunications and the Internet

                     FRED UPTON, Michigan, Chairman

MICHAEL BILIRAKIS, Florida           EDWARD J. MARKEY, Massachusetts
JOE BARTON, Texas                      Ranking Member
CLIFF STEARNS, Florida               BOBBY L. RUSH, Illinois
  Vice Chairman                      KAREN McCARTHY, Missouri
PAUL E. GILLMOR, Ohio                MICHAEL F. DOYLE, Pennsylvania
CHRISTOPHER COX, California          JIM DAVIS, Florida
NATHAN DEAL, Georgia                 RICK BOUCHER, Virginia
ED WHITFIELD, Kentucky               EDOLPHUS TOWNS, New York
BARBARA CUBIN, Wyoming               BART GORDON, Tennessee
JOHN SHIMKUS, Illinois               PETER DEUTSCH, Florida
HEATHER WILSON, New Mexico           ANNA G. ESHOO, California
CHARLES W. ``CHIP'' PICKERING,       BART STUPAK, Michigan
Mississippi                          ELIOT L. ENGEL, New York
VITO FOSSELLA, New York              ALBERT R. WYNN, Maryland
CHARLES F. BASS, New Hampshire       GENE GREEN, Texas
MARY BONO, California                JOHN D. DINGELL, Michigan,
GREG WALDEN, Oregon                    (Ex Officio)
LEE TERRY, Nebraska
W.J. ``BILLY'' TAUZIN, Louisiana
  (Ex Officio)

                                  (ii)




                            C O N T E N T S

                               __________
                                                                   Page

Testimony of:
    Abernathy, Kathleen Q., Commissioner, Federal Communications 
      Commission.................................................    13
    Greene, Margaret H., President, Regulatory and External 
      Affairs, BellSouth Corporation.............................    51
    Gregg, Billy Jack, Director, Consumer Advocate Division, 
      Public Service Commission of West Virginia.................    38
    Lubin, Joel, Vice President, AT&T Corporation................    55
    Post, Glen F., Chairman and Chief Executive Officer, 
      CenturyTel, Inc............................................    59
    Rowe, Bob, Chairman, Montana Public Service Commission.......    19
    Shank, Sidney, General Manager, Bloomingdale Telephone Co....    64
    Stanton, John W., Chairman and Chief Executive Officer, 
      Western Wireless Corporation...............................    70
Material submitted for the record by:
    Certner, David, Diector, Federal Affairs, AARP, letter dated 
      April 28, 2002.............................................   106
    Cheek, John, Executive Director, National Indian Education 
      Association, letter dated April 18, 2003...................   114
    Community Action Partnership, American Association of People 
      with Disabilities, Consumer Action and Rainbow-Push 
      Coalition, reply comments of...............................   108
    Crawford, Charles, Executive Director, American Council of 
      the Blind, letter dated June 27, 2002......................   107
    Hargraves, Dirck A., Counsel, Telecommunications Research and 
      Action Center, letter dated April 18, 2003.................   116
    League of United Latin American Citizens, letter dated April 
      18, 2003...................................................   110
    Lestina, Dale, President, OCRE, letter dated July 17, 2003...   115
    National Association of Development Organizations, letter 
      dated September 2, 2003....................................   118
    Pollak, F.J., President and CEO, TracFone Wireless, Inc., 
      prepared statement of......................................   105
    Shelton, Hilary O., Director, NAACP, letter dated April 18, 
      2003.......................................................   111
    Watson, Leroy, Director of Legislative Affairs, The National 
      Grange, reply comments of..................................   112

                                 (iii)

  


                    THE FUTURE OF UNIVERSAL SERVICE

                              ----------                              


                     WEDNESDAY, SEPTEMBER 24, 2003

              House of Representatives,    
              Committee on Energy and Commerce,    
                     Subcommittee on Telecommunications    
                                          and the Internet,
                                                    Washington, DC.
    The subcommittee met, pursuant to notice, at 1 p.m., in 
room 2123, Rayburn House Office Building, Hon. Fred Upton 
(chairman) presiding.
    Members present: Representatives Upton, Gillmor, Cox, Deal, 
Whitfield, Shimkus, Wilson, Pickering, Bass, Bono, Walden, 
Terry, Tauzin (ex officio), Markey, Rush, Boucher, Gordon, 
Deutsch, Stupak, Wynn, Green, and Dingell (ex officio).
    Staff present: Dan Brouillette, staff director; Howard 
Waltzman, majority counsel; Will Nordwind, majority counsel and 
policy coordinator; William Carty, legislative clerk; Greg 
Rothschild, minority counsel; and Jessica McNiece, minority 
staff assistant.
    Mr. Upton. Sorry for the delay. We had a number of votes on 
the floor. And I understand that we are going to have votes 
about every hour. A couple of votes will not be able to roll 
this like we are able to do from time to time.
    So good afternoon. Today's hearing is entitled ``The Future 
of Universal Service.'' We have before us a very distinguished 
and very large panel of witnesses. So I am going to keep my 
opening remarks brief.
    At the outset, I want to offer a special welcome to one of 
our witnesses, Sid Shank of Bloomingdale Telephone Company, 
which is located in my district. Over the years, I have made 
many visits to Bloomingdale and Paw Paw, where she lives, with 
its one four-way blinking traffic light; yellow, by the way--I 
think it's yellow anyway--and have seen what a terrific 
difference the nearly 100-year-old Bloomingdale Telephone 
Company has made in the lives of the 2,000 customers that it 
currently serves. As a result, I have witnessed firsthand the 
valuable byproduct of universal service.
    Universal service is a cherished principle of our Nation's 
telecommunications system, which has been and continues to be a 
vital link for rural America and those most in need. However, 
coming from Michigan, the auto State, I would say that while 
the car is still running, the engine light has come on, 
suggesting that the universal service engine needs an overhaul 
if we are going to keep it running for another 100,000 miles 
and beyond. Today we are lifting up the hood and checking 
things out.
    We know that competitive forces, which have evolved since 
the Telecommunications Act of 1996, are putting great strain on 
the universal service engine.
    On the contribution side, trends suggest that the amount of 
money coming into universal service is declining. CLECs are 
competing for business and urban residential customers, which 
is an implicit source of universal service funding for the 
ILECs serving rural customers.
    Also, different technologies are competing against one 
another. So, instead of making traditional land line long 
distance calls an explicit source of universal service funding, 
people are using e-mail, wireless phones, voice over internet 
protocols, which currently contribute less or nothing to the 
universal service relative to traditional land line long 
distance calls.
    Meanwhile, on the demand side, trends suggest that it is 
increasing at a rapid pace as more and more wireless companies 
are seeking universal service funding in rural areas where 
rural ILECs aren't currently serving and receiving universal 
service. Many rural carriers are also seeking to use universal 
service funds to build the infrastructure to provide advanced 
services.
    Of course, every one of our constituents shoulders the 
burden of universal service on their phone bills. So we need to 
be ever mindful about our responsibility to them and their 
family budgets.
    All of these pressures suggest that the current system is 
unsustainable. And it is our job to make sure that it is fixed, 
not only for today but also for whatever the telecommunications 
future may bring.
    Today we are going to hear about the problems and some of 
the proposed solutions. I suspect that there will be some 
difference with respect to the solutions, but I certainly look 
forward to working with every member of this subcommittee as we 
take stock of today's testimonies and answers to our questions 
so that we can best prepare ourselves for the job ahead of us 
in the coming days.
    At this point, I will remind all members that if they waive 
their opening statement, they will get an extra 3 minutes on 
their first round of questions. And with that inducement, that 
will raise to my friend Mr. Gordon from Tennessee.
    Mr. Gordon. It sounds like ``Let's Make a Deal'' here.
    Mr. Upton. Yes.
    Mr. Gordon. You are right. We have a lot of witnesses. We 
need to get on with this. I will just briefly say that my 
district is well-represented by BellSouth. And, Ms. Greene, you 
do a good job with that organization.
    And, as you know, I represent the wealthiest part of 
Tennessee, the suburbs of Nashville, and the poorest part, 
there in the root of the Appalachian part of Tennessee. So it's 
interesting how you are able to serve both of these well. And I 
hope the panel as we go through today will talk a little bit 
about whether there should be standards and how we should go 
about assessing and having standards for people or for 
organizations that have to serve this diverse type of groups, 
from the wealthiest to the poorest. I think that that is 
something that we need to be looking at, and I hope that you 
will address it.
    Thank you.
    Mr. Upton. I would yield for an opening statement from Mr. 
Gillmor.
    Mr. Gillmor. Thank you very much, Mr. Chairman. I have a 
very profound and insightful statement that is on the way from 
my office. It's not here, but I will enter it into the record 
when it gets here. I do want to commend you for going forward 
with these hearings.
    This is a very important subject area where the changes in 
the marketplace are making a significant difference in how we 
take care of a universal service fund. There are also some 
serious questions of fairness in the way the burden is mapped. 
And I'm glad that we're taking a look at it. I hope that we 
will continue to do it in even more depth.
    Thank you.
    [The prepared statement of Hon. Paul Gillmor follows:]
    Prepared Statement of Hon. Paul E. Gillmor, a Representative in 
                    Congress from the State of Ohio
    I thank the Chairman for the opportunity to address the future of 
Universal Service, a critical issue in states with rural, high-cost 
areas, such as mine. Although the goals and performance of this program 
have been successful, a majority of the telecommunications sector and 
many Members here today recognize the fund's current situation, in 
which competition and technology have begun to wear away at the 
Universal Service system. More specifically, the cost of the fund 
continues to grow and revenues diminish as consumers have migrated to 
data services such as email and voice-over Internet.
    Furthermore, the current formula has flaws that in some cases have 
led to unfair results. For example, under the existing system, larger 
carriers that serve rural customers often shortchange millions of rural 
Americans, as carriers in a few states currently receive up to 80 
percent of the funding. In my home state of Ohio, residents pay almost 
$7 million into the fund for non-rural carriers, but none of this 
funding actually reaches rural Ohio. As a consequence, rural Ohioans 
are subsidizing the telephone service of rural residents in other 
states.
    While certainly a worthy issue to address, I also look forward to 
hearing from the well-balanced panel of witnesses concerning a 
comprehensive approach to ensuring the continued viability of Universal 
Service in addition to other immediate and long-term solutions.
    Again, I thank the Chairman for holding this timely hearing and 
yield back the remainder of my time.

    Mr. Upton. I yield to Mr. Dingell, the ranking member of 
the full committee.
    Mr. Dingell. Mr. Chairman, I thank you for your courtesy 
and commend you for holding these hearings. This is a great 
opportunity, and it is one that I hope this committee will take 
advantage of.
    I am pleased that we are examining this very important 
issue of universal service and its future because I am becoming 
increasingly concerned about the future stability of universal 
service support mechanisms. Providing high-quality 
telecommunications services at affordable rates to all 
Americans has long been a cornerstone of our Nation's 
telecommunications policy and was enacted into law in the 
Telecommunications Act of 1996.
    As this committee embarks on critical examination of the 
universal service and how to ensure that it is sustained in the 
future, we must be willing to ask tough questions of those 
companies who have benefited handsomely from deregulation and 
make sure that the players are all asked to contribute in an 
equitable manner.
    In 1996, the Congress believed that universal service 
programs could be supported by assessing a charge against 
interstate telecommunications services.
    As we all know, much has changed in the telecommunications 
landscape since 1996. And these changes now demand a thorough 
reexamination of the manner in which we support universal 
service.
    The explosive growth in the use of e-mail and wireless 
services has replaced traditional long distance voice service 
for many Americans, and has dramatically slowed the growth of 
wire line interstate minutes. At the same time, cost per minute 
has fallen. These events have dramatically decreased the pool 
of revenue available to support universal service and caused 
the assessment on consumers' bills to rise to 9.5 percent.
    Also important, as networks become digital and capable of 
offering multiple types of service, carriers have begun to 
bundle products to consumers in attractive commercial 
offerings. In many regions, the consumer can purchase local and 
long distance voice service, high-speed internet service, and 
wireless service from a single carrier at a single price. This 
is wonderful for consumers, who are realizing the savings and 
convenience of real competition, but it is beginning to wreak 
havoc on those who must determine which portion of that bundled 
rate is for interstate service and can, thus, be assessed for 
purchased purposes of universal service.
    Finally, the present system also leads to several 
marketplace inequities. For example, though cable companies and 
phone companies offer comparable broadband products to 
consumers, only telco DSL service offered by the phone 
companies must support universal service.
    As the Federal Communications Commission and our committee 
contemplate action to address these issues, I suggest that we 
begin to adhere to certain principles. First, all providers--
and I mean all, A-L-L, providers--of telecommunications should 
provide equitably for contributions to support universal 
service. There is absolutely no reason to exempt certain 
products offered by particular industries simply because those 
industries have traditionally provided video rather than common 
carrier services.
    Next, all communications and not simply interstate 
communications should be assessed. In a world of packeted 
networks and bundled service offerings, it is simply nonsense 
for the FCC to determine which communications are interstate, 
rather than intrastate, in nature.
    Finally, as new services come on line, such as voice over 
the internet protocol, we should be careful not to play 
favorites for the so-called new technologies. Contrary to what 
some might say, we are not stifling the growth of new services 
by asking them to play by exactly the same rules as their 
competitors play and to confront the same challenges and 
difficulties that they confront. Rather, if we allow carriers 
to evade universal service requirements simply because of the 
technology or type of technology of their network, then not 
only will we be shortchanging universal service support 
mechanisms, but we will be picking winners and the losers in 
the marketplace. And, worse, we will be stacking the deck 
unfairly against certain participants in the industry.
    Mr. Chairman, I look forward to working with you and with 
Chairman Tauzin on the issue. We must stand ready to make tough 
choices to ensure the continued service of the 
telecommunications industry to our people and the continued 
success of that service. I thank you for your courtesy to me.
    Mr. Upton. Thank you, Mr. Dingell.
    I recognize Mr. Cox for an opening statement.
    Mr. Cox. Thank you, Mr. Chairman. I welcome our witnesses 
here. I thank you for holding this hearing on an issue that is 
of great import to many of us who are determined not to repeat 
the disastrous history of overregulation in the traditional 
telephone market.
    When we debated in this committee the 1996 act, there was a 
consideration at that time of an amendment that I proposed that 
would have limited universal service to voice-grade telephony. 
The truth is that we are living in a world right now where 
voice and data are merging, where, indeed, what we call data is 
very difficult to define. And the kinds of telecommunications 
services that consumers can avail themselves of are expanding 
very rapidly.
    One of the reasons that this program is in trouble is that 
demand for funds has been growing while the support base has 
not been growing with it. We need to look at ways to limit what 
might otherwise be an inexorable expansion of a program that 
would at that point be in search of a purpose.
    I think the fundamental purposes that need to be maintained 
for universal service include making sure that everyone, 
whether they can afford it or not, has a lifeline. They ought 
to be able to call 911. People should not be so shut out from 
the rest of society that they can't get an ambulance to take 
them to the emergency room. But at the same time, we ought not 
ask most consumers to pay taxes to subsidize people getting 
video conferencing or getting all of the services that might 
someday be available in the form of data over what used to be 
telephone lines. We certainly don't want to be paying for 
movies on demand or any such thing. And I think it is time for 
us to take a very, very hard look at what is it that we are 
trying to accomplish with this program. And I would think that 
the lessons that we have learned since 1996 would be very 
instructive in this respect but that now because of the 
financial problems of this program would be a fine time to 
explicitly describe universal service as voice-grade telephony 
and use it as a lifeline program.
    I thank the chairman. I yield back.
    Mr. Upton. Thank you.
    Mr. Stupak?
    Mr. Stupak. Thank you, Mr. Chairman.
    The Federal Universal Service Program is of critical 
importance to rural parts of America, including my district. 
Universal service ensures that households in all parts of 
America have access to basic telecommunications services, even 
in the most rural areas. But the FCC's program for non-rural 
carriers is no longer effectively meeting these goals. 
Overwhelmingly, the program benefits carriers and customers in 
three States, and millions of rural customers served by non-
rural carriers receive no benefit at all. The FCC itself 
compiled a chart that illustrates this clearly.
    According to the FCC, residents in Michigan pay more than 
$5 million into the non-rural part of USF Program. Yet, 
carriers and consumers in Michigan receive no money for the 
program in return. Similar cases exist in 42 other States as 
well.
    And I would ask unanimous consent to submit this chart from 
the FCC into the record.
    [The chart follows:]

                  USF Net Dollar Flow for High-Cost Rural Areas Served by Mixed Carriers: 2001
                                 (Annual Payments and Contributions in Millions)
                                          High-Cost, Non-Rural Fund ONLY
----------------------------------------------------------------------------------------------------------------
                                                               Contribs to
                           State                                   USF*        Paymts from USF   Net Dollar Flow
----------------------------------------------------------------------------------------------------------------
Alabama....................................................     2,650,000.29     42,863,000.88     40,213,000.59
Alaska.....................................................       497,000.70              0.00       -497,000.70
Arizona....................................................     4,074,000.18              0.00     -4,074,000.18
Arkansas...................................................     1,584,000.18              0.00     -1,584,000.18
California.................................................    19,405,000.93              0.00    -19,405,000.93
Colorado...................................................     3,997,000.10              0.00     -3,997,000.10
Connecticut................................................     3,131,000.86              0.00     -3,131,000.86
Delaware...................................................       779,000.03              0.00       -779,000.03
Florida....................................................    13,334,000.32              0.00    -13,334,000.32
Georgia....................................................     6,483,000.90              0.00     -6,483,000.90
Hawaii.....................................................       800,000.08              0.00       -800,000.08
Idaho......................................................     1,031,000.32              0.00     -1,031,000.32
Illinois...................................................     8,842,000.11              0.00     -8,842,000.11
Indiana....................................................     3,700,000.57              0.00     -3,700,000.57
Iowa.......................................................     1,775,000.15              0.00     -1,775,000.15
Kansas.....................................................     1,886,000.91              0.00     -1,886,000.91
Kentucky...................................................     2,468,000.49              0.00     -2,468,000.49
Louisiana..................................................     2,635,000.49              0.00     -2,635,000.49
Maine......................................................       937,000.83      6,629,000.32      5,691,000.50
Maryland...................................................     4,517,000.17              0.00     -4,517,000.17
Massachusetts..............................................     5,480,000.82              0.00     -5,480,000.82
Michigan...................................................     5,674,000.50              0.00     -5,674,000.50
Minnesota..................................................     3,503,000.19              0.00     -3,503,000.19
Mississippi................................................     1,664,000.31    103,960,000.88    102,296,000.57
Missouri...................................................     3,801,000.38              0.00     -3,801,000.38
Montana....................................................       733,000.33      4,334,000.25      3,600,000.92
Nebraska...................................................     1,184,000.37              0.00     -1,184,000.37
Nevada.....................................................     1,863,000.09              0.00     -1,863,000.09
New Hampshire..............................................     1,249,000.82              0.00     -1,249,000.82
New Jersey.................................................     8,371,000.35              0.00     -8,371,000.35
New Mexico.................................................     1,256,000.82              0.00     -1,256,000.82
New York...................................................    13,745,000.77              0.00    -13,745,000.77
North Carolina.............................................     5,804,000.34              0.00     -5,804,000.34
North Dakota...............................................       555,000.01              0.00       -555,000.01
Ohio.......................................................     6,791,000.80              0.00     -6,791,000.80
Oklahoma...................................................     2,102,000.54              0.00     -2,102,000.54
Oregon.....................................................     2,592,000.57              0.00     -2,592,000.57
Pennsylvania...............................................     8,344,000.42              0.00     -8,344,000.42
Rhode Island...............................................       857,000.75              0.00       -857,000.75
South Carolina.............................................     2,790,000.75              0.00     -2,790,000.75
South Dakota...............................................       584,000.43              0.00       -584,000.43
Tennessee..................................................     3,721,000.83              0.00     -3,721,000.83
Texas......................................................    12,880,000.80              0.00    -12,880,000.80
Utah.......................................................     1,532,000.46              0.00     -1,532,000.46
Vermont....................................................       560,000.33     10,026,000.78      9,466,000.45
Virginia...................................................     6,038,000.66              0.00     -6,038,000.66
Washington.................................................     4,434,000.74              0.00     -4,434,000.74
West Virginia..............................................     1,161,000.21     25,894,000.38     24,733,000.17
Wisconsin..................................................     3,232,000.07              0.00     -3,232,000.07
Wyoming....................................................       463,000.12      6,138,000.62      5,675,000.51
  TOTAL....................................................   199,848,000.13    199,848,000.13              0.00
----------------------------------------------------------------------------------------------------------------
Source: FCC Universal Service Monitoring Report, CC Docket No. 98-202, October 2002, Table 3.17, page 3-26.
Notes: Figures may not add due to rounding. Support payments do not include quarterly true-ups. USF is an
  abbreviation for the Universal Service Fund, which funds the high-cost support mechanisms.
* Carriers make payments into the fund based on end-user interstate telecom revenues. The estimates in this
  column are computed by multiplying the state's share of end-user revenue times the nationwide total at the
  bottom of this column. For the methodology used to derive the state's share, see the technical appendix to
  Chapter 1 of the source document.

    Mr. Upton. Without objection.
    Mr. Stupak. When I first learned about this, I was amazed. 
Apparently, the rationale that leads to this inequity is as 
follows: The FCC uses the average cost of the non-rural 
carriers serving the State and compares that with the National 
average cost of providing telephone service. If a State's 
average is more than 135 percent of the National average, the 
State is eligible for funding. If the State is below 135 
percent, it is not eligible for funding.
    On the face of it, this approach makes sense. However, it 
has flaws. First, the cost of providing service in a State is 
skewed downward if a non-rural carrier provides service to 
residents in a city in that State.
    In addition, this method ignores the intent of Congress. 
Congress told the FCC to ensure comparable rates between urban 
and rural areas. Universal service is designed to ensure that 
rural residents in all parts of the country are afforded access 
to telephone service that is comparable in price and quality to 
service in cities. A scheme that sends 70 percent of the funds 
to two States does nothing to advance urban, rural rate 
compatibility in my State or most States in the Nation.
    The Universal Service Fairness Act that Representative 
Terry and I have introduced would solve this problem by 
assessing each rural area independently. Each telephone company 
wire center is compared to a National benchmark. If the wire 
center is over the benchmark, it would receive support. If the 
wire center is below the benchmark, it would not. This method 
would enable residents, rural residents, across America to be 
treated fairly. And it ensures that lower-cost areas would not 
benefit.
    Mr. Chairman, I share the view of many of the members of 
this subcommittee that we should undertake a review of the 
entire USF Program. The program has many challenges. However, I 
believe that we should consider moving to fix inequities that 
do rural customers a great disservice while we continue to 
grapple with the larger issues as well.
    With that, I yield back the remaining 6 seconds of my time.
    Mr. Upton. The gentleman's time has expired. I recognize 
the gentleman from Nebraska, Mr. Terry, certainly.
    Mr. Terry. Thank you, Mr. Chairman, for holding this 
important hearing.
    I would like to as well focus my comments on one aspect of 
universal service fund. And that's the high-cost, non-rural 
fund. Now, although the FCC calls it non-rural carriers, in 
fact, actually, this service serves more than 70 percent of 
rural Americans.
    This program may be one of the most poorly targeted 
programs in the Federal Government. More than half of the 
program, $120 million out of $234 million, benefits one single 
State. Nearly 85 percent of this program goes to carriers in 
only three States. And only eight States receive any funding 
under this program. It's interesting to note that some of the 
rural States that do not benefit from this program include 
Texas, who donates over $12 million to this program, and 
receives nothing; Tennessee, $3.7 million and receives nothing. 
Nebraska receives nothing.
    Ironically, the States that do benefit from this program, 
although rural and deserving of some support, are not the most 
rural States in America. For example, by almost every measure, 
my State, Nebraska, is considered rural. According to the cost 
and the most recent Census data, Nebraska is one-third as 
densely populated as Mississippi. Yet, carriers serving 
residents in Nebraska receive no support under this program.
    I am proud to partner with Mr. Stupak in a bill that would 
correct this, as he has outlined in his opening statement. By 
using a different formula, 40 States, more than 40 States, will 
receive some degree of funding, as opposed to just 8.
    Now, Mr. Chairman, you and I have discussed the necessity 
to review and work toward complete reform of the USF Program. 
And I want you to know, as I have told you on the floor, 
consider me a partner in that effort.
    I do agree that we need to completely reform the Universal 
Service Program on the distribution, on the revenue side, but 
let's also recognize that that is going to be a very arduous, 
tedious, and lengthy process. And I would respectfully request 
that we not punish in that time States like mine, Nebraska. And 
let's resolve the inequities while we can now.
    With that, I look forward to working with you on the 
Universal Service Fund and continue to plead that we at least 
do what we can and move the Terry-Stupak bill.
    I yield back my 9 seconds.
    Mr. Upton. The gentleman yields back the balance of his 
time.
    We recognize Mr. Green for an opening statement.
    Mr. Green. Thank you, Mr. Chairman. I appreciate the offer 
of the extra 3 minutes, but I think I want to say what I have 
so it will get into the record now. And I thank you for calling 
the hearing on the future of universal service.
    I expect that we will hear agreement from our panelists 
today and from many members that the universal service fund 
needs to be preserved. We may have different reasons for that. 
Mine is because I believe we must have a healthy fund to 
improve education through our schools and library funding known 
as the e-rate.
    People who are talking about reducing claims on the fund 
should be warned that if they try to scale back or limit e-rate 
funding, I think we will see a tremendous outcry from our 
teachers and our parents and our school districts across the 
country. I don't want to get into the nuts and bolts of e-rate 
or some of its recent publicity, but I want to talk about what 
e-rate has done for the school children in my hometown in 
Houston.
    With their recent receipt of over $50 million in year 6, 
the Houston Independent School District, very urban district, 
200,000-plus children, has received approximately $200 million 
in universal service funding through e-rate.
    Between 1998 and 2001, internet access in our minority 
classrooms jumped from 37 percent to 81 percent. And we were 
successful in bridging that digital divide because of the 
universal service fund. I believe these investments will be 
paid back many times over when these children fully enter our 
society and our workforce.
    Ninety-five percent of all of our Houston public school 
classrooms are now connected, with over 90 percent using high-
speed connections. Teachers are connected to their schools' 
resources at their homes. And hopefully students will also be 
able to connect through their homes.
    Smaller districts also benefit. I have a number of 
districts other than Houston Independent School District. I 
have one small district that's 80 percent economically 
disadvantaged. And they received more than $1.5 million in e-
rate funding. This low-income district is now scoring 90 
percent on all their State achievement tests. And the school 
administrators say that it couldn't have happened without e-
rate-provided funding from the universal service fund. So 
improving educational opportunities for these schools is my 
motivation for seeking solutions to the coming crunch for the 
universal service fund.
    I don't know the solution on how to make the deposits and 
withdrawals on the fund match up. And I look forward to hearing 
from our distinguished panelists on how this may be 
accomplished. But I do know the approach should be 
comprehensive in considering all aspects of the universal 
service, both within and without the actual universal service 
fund.
    Before we hear about potential solutions for universal 
service in general and the fund in particular, I will make one 
observation. If the FCC is going to continue to demand that the 
incumbent local exchange carriers subsidize their competitors 
to pick off their high-value customers through the UNE-P system 
and the TELRIC pricing mechanism behind it, the incumbents are 
going to become less and less able to have their business 
models support the majority of rural and high-cost customers, 
whom they now serve.
    And if incumbents that do not draw much from the fund can 
no longer afford to serve these rural customers, then other 
companies will move in using the universal service fund dollars 
to serve these customers. If we think the fund is in trouble 
now, it may get a lot worse if action is not taken. It is a 
complicated relationship, but if balance were restored to this 
industry by eliminating UNE-P or the TELRIC pricing, we would 
retain the ability of the incumbents to provide universal 
service without causing increased burden on the fund.
    If incumbents cannot serve their current rural customers, 
the burden on the fund is going to get bigger. And soon people 
are talking about making more folks pay into the fund, causing 
a lot more pain.
    All the while, we have critical needs in our schools and 
our school children and need telecommunication investments. If 
these investments are hit because we would rather subsidize a 
few companies, I think that would be particularly a shame.
    And, again, I'm glad the panel is here, Mr. Chairman. I am 
glad you are holding this hearing. Thank you.
    Mr. Upton. Thank you, Mr. Green.
    Mr. Walden?
    Mr. Walden. Mr. Chairman, I will waive an opening 
statement.
    Mr. Upton. Good for you.
    Ms. Bono?
    Ms. Bono. I'll waive also.
    Mr. Upton. Mr. Whitfield?
    Mr. Whitfield. I'll waive also.
    Mr. Upton. Mr. Bass?
    Mr. Bass. I'll waive.
    Mr. Upton. Ms. Wilson?
    Mrs. Wilson. Enter it into the record.
    Mr. Upton. Without objection.
    All members' statements will be a part of the record. So do 
you defer as well?
    Mrs. Wilson. I'll waive.
    Mr. Upton. Mr. Pickering?
    Mr. Pickering. I will defer as well.
    Mr. Upton. Mr. Boucher?
    Mr. Boucher. Well, thank you, Mr. Chairman. I do have 
something to say.
    As a representative of a rural Virginia district, I have a 
very strong interest in assuring that the longstanding 
commitment our Nation has made to affordable telephone service 
for everyone remains at the core of our Federal 
telecommunications policy.
    We have a telephone service penetration rate in the high 90 
percentile Nationwide, an achievement that few Nations can 
claim. That sterling accomplishment is a consequence of and is 
directly attributable to this commitment to universal service, 
through which the residents of high-cost rural areas receive 
the basic local telephone service at the same monthly rate as 
the residents of the easier-to-serve metropolitan regions.
    In the absence of our universal service policy, the high 
cost of stringing telephone lines over large distances and 
mountainous terrain would place the cost of telephone service 
beyond the reach of tens of thousands of my constituents and 
tens of millions of rural Americans.
    And so, as we embark on these timely hearings--and I think 
they are timely--to survey the changes and the universal 
service funding and delivery mechanisms, which the arrival of 
competition in the telecommunications industry makes necessary, 
I will urge the members to retain our core basic universal 
service policy: affordable local telephone service for everyone 
with the same basic monthly rate for rural and urban residents 
alike. But changes must come in the mechanics by which we 
achieve that result.
    In an era of highly competitive markets for both wired and 
wireless telephone service, the universal service policy is 
still based on the concept of a local telephone monopoly with a 
single wire line provider for all voice service. To a large 
extent, the policy is still based on the notion of a vertically 
integrated system with a single provider for both local and 
long distance service, a condition which has not prevailed in 
the United States for 20 years.
    All universal service revenues, the system's money end, are 
derived from charges on interstate services while purely 
intrastate services escape any universal service charge. CLECs, 
who serve business customers only, take the cream off the top, 
depriving the universal service fund of much of its traditional 
revenue service resource, which leaving the incumbent CLEC with 
an even greater universal service funding responsibility.
    Telephony offered by cable systems through the cable modem 
service in packaged switching format looks and feels exactly 
like local telephone service, but it escapes any universal 
service payment responsibility.
    These matters only scratch the surface in a complex system 
for which changes must come. I want to commend the chairman for 
launching the committee's deliberations on universal service. I 
very much look forward to the witnesses who have joined us here 
today. And I want to join the chairman in thanking them for 
their participation. And I look forward to participating with 
the members as we make the changes which must be made while 
reserving our core principle of affordable service for 
everyone.
    Thank you, Mr. Chairman.
    Mr. Upton. Thank you, Mr. Boucher.
    Mr. Rush?
    Mr. Rush. Thank you, Mr. Chairman. Mr. Chairman, I join 
with my colleagues on the committee in applauding you for 
holding this hearing on universal services.
    Oversight of universal service programs is critical for all 
parts of the country. And it is indeed important to residents 
of cities and suburbs. We contribute the lion's share of 
funding for this program. And it is important to rural America 
also to ensure that rural residents have access to quality 
affordable telephone services.
    Seven years after the passage of the Telecommunications 
Act, the goals of the act remain the same to both reserve and 
advance universal services. However, the future of the fund is 
now in danger.
    Mr. Chairman, since we passed the 1996 Telecommunications 
Act, the technological landscape has certainly drastically 
changed, never to return. We are now witnessing an explosion of 
wireless and internet technologies. And they're offering a 
bundle of services, which, in part, is great for the consumer 
but, on the other hand, has the potential to shrink the base of 
revenues for the universal service fund. This is, in part, due 
to the funding mechanism, which is totally reliant on 
interstate and international end user telecommunication 
revenues, thereby increasing the difficulty of identifying 
interstate revenues.
    As we continue to fund notable programs, like the E-rate 
Program and the Rural Health Care Program, reform will be 
necessary to ensure the sustainability of the fund in the long 
term. That said, Mr. Chairman, I look forward to hearing the 
testimonies of our distinguished panelists, who offer proposals 
on how we can best restructure the universal service fund so 
that we can ensure that it is being used responsibly and fairly 
and that it indeed is fully funded.
    Thank you, Mr. Chairman. I yield back the balance of my 
time.
    Mr. Upton. Thank you, Mr. Rush. I know you are rooting for 
the Cubs tonight, too.
    Mr. Rush. I predict a victory, Mr. Chairman.
    Mr. Upton. For the Red Sox for Mr. Markey here. He will be 
here. He's at the health conference.
    [Additional statements submitted for the record follow:]
Prepared Statement of Hon. Barbara Cubin, a Representative in Congress 
                       from the State of Wyoming
    Thank you, Mr. Chairman.
    I would like to thank you for holding this hearing to examine the 
state of Universal Service, and jump-starting the effort to ensure the 
solvency of this important fund. We must make certain that the USF 
continues to assist rural and high cost communities--and low income 
Americans--stay connected in our modern world.
    Being from a rural state, I can appreciate how difficult it is to 
provide ubiquitous, affordable phone service across states like 
Wyoming. Those who are fortunate enough to live in Wyoming, however, 
should not have the misfortune of exorbitant telephone rates. After 
all, a phone in New York City is worthless if there isn't anyone on the 
other end of the line.
    We have come a long way from the initial concept of Universal 
Service, and the means of communication hardly resemble the rotary dial 
phone that I grew up with. With new and emerging technologies changing 
how we stay connected, there have also emerged new questions on how the 
USF should operate. For this to be an effective process, we need to 
assess the role of telecommunications providers regarding their 
obligations to the fund as well as examine who is receiving a subsidy 
from the fund. Spiraling contribution rates are not the sign of a 
balanced program. And no consumer wants to open his or her phone bill 
and see a regularly ballooning USF contribution.
    I am certain that ensuring the solvency of the USF has as many 
different potential solutions as the witnesses we have testifying 
today--if not more. Hopefully, there are some common themes we can 
build upon and reach a consensus approach that will be widely supported 
throughout communities, the industry and Congress.
    As a result of this hearing, I would like to learn from our panel 
just what changes they would propose to ensure the viability of 
Universal Service. I would also like to hear everyone's thoughts on how 
we arrived at this precipice . . . what went wrong?
    We have a unique opportunity to take today's pending troubles with 
the fund and craft a common sense, dependable solution. One that had 
broad support and one that is rock-solid, so that we won't be holding a 
hearing a few more years down the road and asking, ``What went wrong?'' 
again.
    Thank you Mr. Chairman, I yield back the balance of my time.
                                 ______
                                 
 Prepared Statement of Hon. W.J. ``Billy'' Tauzin, Chairman, Committee 
                         on Energy and Commerce
    Mr. Chairman, thank you for calling this hearing today. Universal 
service is a complicated, but important, topic, and this subcommittee 
needs to begin to understand its current status and what lies in its 
future.
    Ensuring that all Americans have access to affordable telephone 
service has been an important public policy goal for more than fifty 
years. However, competitive forces created after the '96 Act have made 
the current system unsustainable. Unless key changes are made in the 
universal service regime, I fear that the fund will spiral out of 
control, and that many of our rural constituents, including those in my 
district in Louisiana, will be without affordable telephone service.
    Competition has impacted universal service in three respects. 
First, competition among local exchange carriers for business and urban 
residential customers has eroded a primary source of implicit universal 
service funding for incumbent local exchange carriers (ILECs). 
Competition is great for consumers, but it requires changes in 
universal service policies.
    Second, competition among technologies has begun to reduce the pot 
of money from which universal service derives its funding. People send 
emails rather than make long-distance phone calls. That drains revenues 
from interstate revenues. People use their wireless phones rather than 
wireline phones. And burgeoning technologies like Voice over Internet 
Protocol (VOIP) do not currently contribute to universal service 
funding.
    Third, competition has begun among different services for universal 
service dollars. Wireless companies are beginning to use universal 
service funds to serve wireless carriers. And wireless companies are 
receiving universal service dollars even though a particular customer 
is still being served by a wireline company that uses universal service 
dollars. In addition, some people want to use universal service money 
to fund broadband in rural areas. This has greatly increased the demand 
on universal service money.
    All of these competitive trends have put unprecedented pressure on 
the universal service program. The program needs to be modernized to 
reflect all of these trends.
    I look forward to hearing the testimony of our witnesses today so 
that we can begin to educate members regarding different ideas for 
universal service reform. I hope this committee will engage in a 
vigorous debate about this issue and coalesce around a strategy for 
reform. I look forward to working with Chairman Upton, Mr. Dingell, and 
other interested parties to ensure that we bring long-term 
sustainability to the universal service program.

    Mr. Upton. We are delighted to have a distinguished panel 
with us this afternoon. And we are joined by Ms. Kathleen 
Abernathy, a commissioner of the FCC; Mr. Bob Rowe, Chairman of 
the Montana Public Service Commission; Mr. Billy Jack Gregg, 
Director of the Consumer Advocate Division, Public Service 
Commission of West Virginia; Ms. Margaret Greene, President of 
the Regulatory and External Affairs of BellSouth; Mr. Joel 
Lubin, Vice President of AT&T Mr. Glen Post, Chairman and 
Chief Executive Officer of CenturyTel; Ms. Sid Shank, General 
Manager of Bloomingdale Telephone Company from the greatest 
city of Michigan; and Mr. John Stanton, Chairman and CEO of 
Western Wireless Corporation.
    Ladies and gentlemen, your testimony has been made a part 
of the record in its entirety. We appreciate very much that you 
sent it up early so we had a chance to look at it last night, 
for me, my staff, and other members of the committee. It's made 
a part of the record.
    We are going to try to limit your remarks to 5 minutes.
    Ms. Commissioner Abernathy, we will start with you. Welcome 
back.

  STATEMENTS OF KATHLEEN Q. ABERNATHY, COMMISSIONER, FEDERAL 
 COMMUNICATIONS COMMISSION; BOB ROWE, CHAIRMAN, MONTANA PUBLIC 
   SERVICE COMMISSION; BILLY JACK GREGG, DIRECTOR, CONSUMER 
ADVOCATE DIVISION, PUBLIC SERVICE COMMISSION OF WEST VIRGINIA; 
MARGARET H. GREENE, PRESIDENT, REGULATORY AND EXTERNAL AFFAIRS, 
    BELLSOUTH CORPORATION; JOEL LUBIN, VICE PRESIDENT, AT&T 
 CORPORATION; GLEN POST, CHAIRMAN AND CHIEF EXECUTIVE OFFICER, 
 CENTURYTEL, INC.; SIDNEY SHANK, GENERAL MANAGER, BLOOMINGDALE 
 TELEPHONE CO.; AND JOHN STANTON, CHAIRMAN AND CHIEF EXECUTIVE 
             OFFICER, WESTERN WIRELESS CORPORATION

    Ms. Abernathy. Thank you very much, Chairman Upton and 
distinguished members of the subcommittee. It is a pleasure to 
be here today. And I appreciate the opportunity to discuss the 
future of universal service. And I also applaud you for taking 
the time and energy to tackle this very difficult issue.
    As pointed out by all of you, I think, the goal of 
providing high-quality telecommunications services to all 
Americans at affordable rates is a cherished principle in U.S. 
telecommunications policy and one of the cornerstones of the 
act. All too often, we forget that in the not too distant past, 
phone service was a luxury that few in rural America could 
afford. Today, however, universal service funding has 
guaranteed citizens throughout the country the ability to 
communicate at reasonable rates.
    I know that every member of this subcommittee understands 
the importance of universal service. And as chair of the 
Federal-state joint board on universal service, I also make it 
a top priority.
    My written statement provides details on the challenges 
confronting universal service and the various rulemaking 
proceedings that we have pending at the FCC. So what I thought 
I would do this afternoon is highlight two key issues 
identified in my written statement; first, the contribution 
methodology debate; and, second, the issues surrounding who 
qualifies for universal service support in areas served by 
rural telephone companies. I think everyone agrees that for 
universal service to remain vital, we must ensure that 
sufficient funds continue to flow into the system and that the 
funding burden is spread among contributors in an equitable and 
a nondiscriminatory manner.
    The commission took some important steps last December to 
stabilize the universal service contribution factor in an 
effort to mitigate the growing funding burden on some 
consumers. But the existing regime remains in jeopardy for 
several reasons. And I believe that more fundamental reforms 
will be necessary to protect universal service in the long 
term.
    I think, as anyone with a cell phone can attest, the 
telecom market has evolved away from reliance on traditional 
long distance service and toward new services, like wireless 
and e-mail and more recently voice over IP.
    Since universal service funding comes only from interstate 
revenues and there is a Federal court decision that said the 
FCC is not permitted under section 254 of the act to assess 
intrastate revenues, then this continuing decline in interstate 
revenue base has forced the FCC to increase the contribution 
factor substantially to meet funding demands.
    Another concern arises from the increasing prevalence of 
bundled service offerings. And I know a number of you mentioned 
that. While these bundles are great for consumers because 
they're convenient, they save us money, that's fine, but they 
also make it extremely difficult to identify that part of the 
bundle that is the interstate telecommunications piece.
    Since the FCC's existing rules only allow us to assess 
contributions on the interstate minutes, somehow we have to try 
and isolate those revenues from the revenues that are generated 
from intrastate services or from other information services. At 
the same time, however, simple economics will likely lead 
carriers to attempt to minimize their contribution obligations 
by shifting revenues to categories of service that are not 
assessed USF obligations.
    So how do we respond to these marketplace and technological 
changes? One option is for Congress to give the FCC the 
authority to assess contributions on both interstate and 
intrastate revenues. This total revenue assessment approach 
would be more predictable and would make it harder for carriers 
to shield some of their revenues in different categories.
    In addition, however, the FCC is considering whether to 
adopt alternative contribution methodologies under our existing 
authority. So, for example, a system based on physical 
connections or assigned telephone numbers might be more stable 
than the revenue model we currently use. And proponents note 
that these alternatives would eliminate the need to consider 
this whole debate about interstate versus intrastate 
jurisdiction or telecom service versus information service 
monies. But these proposals, nevertheless, remain 
controversial, in large part, because they would shift 
contribution obligations away from long distance carriers and 
into the pockets of the LECs and the wireless carriers.
    While universal service charges, as we all know, are 
ultimately passed through to consumers, industry segments, 
nevertheless, strive to minimize the charges on their own bills 
for competitive reasons.
    Finally, the FCC has also sought comment on broadening the 
contribution base to include the telecom component of all 
broadband services, including both DSL and cable model 
services. Spreading the contribution burden across a broader 
base of services would necessarily drive down the USF charge 
imposed on any single service. Those are proposals that are 
currently in front of us.
    Now, apart from the contribution methodology, the other 
primary source of instability in the universal service regime 
is the support mechanisms for those carriers that serve rural 
America. This component has grown substantially over time. And 
this increase in demand for funds when combined with the 
decreasing revenue base is responsible for the fact that we now 
have a contribution factor that is approaching double digits.
    Another funding issue that has received particular 
attention is the intersection of competition and universal 
service in rural areas. While new competitors, including 
wireless providers, currently receive a very small percentage 
of overall USF support, their share has been growing rapidly 
along with a surge in applications to become eligible telecom 
carriers who were entitled to support.
    This trend, together with the fact that incumbent carriers 
do not lose any support if a customer switches to a 
competitor's service, suggests that rule changes may be 
necessary to avoid placing unreasonable strains on the overall 
high-cost support mechanisms. And, therefore, the FCC has asked 
the USF joint board to consider a variety of issues relating to 
the designation of competitive ETCs and the manner in which all 
ETCs receive support.
    In closing, while universal service is facing a number of 
challenges, I am confident that with your help and your 
guidance and the commitment of the FCC, that we will be able to 
ensure the sustainability of the various support mechanisms. We 
have initiated the necessary rulemaking proceedings. Together I 
think we can respond to the challenges ahead.
    And I want to thank you for the opportunity to testify. And 
I look forward to answering any questions you may have. Thank 
you.
    [The prepared statement of Kathleen Q. Abernathy follows:]
Prepared Statement of Hon. Kathleen Q. Abernathy, Commissioner, Federal 
                       Communications Commission
    Good afternoon, Chairman Upton and distinguished members of the 
Subcommittee. I appreciate the opportunity to appear before you to 
discuss the challenges confronting universal service and the FCC's 
efforts to preserve and advance this critical policy objective.
    The goal of providing high-quality telecommunications services to 
all Americans at affordable rates is a cherished principle in U.S. 
telecommunications policy and one of the cornerstones of the 
Telecommunications Act of 1996. I know that every member of this 
Subcommittee understands the importance of universal service, and, as 
Chair of the Federal-State Board on Universal Service, I make it a top 
priority to ensure that the federal support mechanisms fulfill their 
objectives.
    The 1996 Act directed the FCC to promote two key goals that at 
times appear to be in tension with one another: opening local markets 
to competition and preserving universal service. The prior monopoly 
environment enabled regulators to promote universal service by building 
implicit subsidies into local and long distance rate structures. In a 
competitive environment, however, these implicit subsidies cannot be 
sustained, since the rates that provided surplus funds--such as 
business rates in urban areas--are undercut by new entrants and 
eventually driven down to a cost-based level. Congress accordingly 
directed the FCC to adopt explicit support mechanisms that would be 
sufficient to ensure that rates remain affordable and reasonably 
comparable throughout the nation. In response, the FCC developed 
several explicit support mechanisms for carriers that provide service 
in high-cost areas. High-cost support will total approximately $3.3 
billion in 2003.
    The 1996 Act also expanded the scope of universal service by 
directing the Commission to establish support mechanisms for schools 
and libraries and for rural health care facilities. The schools and 
libraries program (often called the E-Rate program) provides up to 
$2.25 billion in annual support and has enabled millions of school 
children and library patrons to gain access to advanced 
telecommunications and Internet services. While the rural health 
program generally has been underutilized, the FCC is considering a 
variety of measures to strengthen it, as discussed below.
    In addition to the high-cost support mechanisms and the programs 
supporting schools, libraries, and rural health clinics, the FCC's 
Lifeline and LinkUp programs provide discounts off monthly service 
charges and connection fees to ensure that low-income consumers have 
access to basic telephone service. This year, these programs will 
provide approximately $691 million in support.
    All of these programs promote the universal service goals set forth 
in section 254(b) of the Act, including the availability of quality 
services at affordable rates; access to advanced services in all 
regions of the Nation; comparable access to telecommunications services 
for all consumers, including low-income consumers and those living in 
rural, insular, and other high-cost areas; and access to advanced 
services for schools, libraries, and rural health care facilities. 
Shortly after Congress's enactment of the 1996 Act, the FCC adopted 
rules regarding the collection and distribution of universal service 
support. Now, with several years of experience under our belts, we are 
engaged in a reexamination of many aspects of the program to ensure 
that each component is administered as efficiently and effectively as 
possible and that the overall program remains sustainable. A host of 
marketplace and technological developments have already prompted some 
course corrections, and may ultimately cause us to reassess certain 
fundamental policy choices made in the initial implementation period. 
As we engage in this review, our commitment to preserving and advancing 
universal service remains unwavering.
    I describe below some of the challenges confronting universal 
service and the efforts the FCC has underway to ensure that each 
component of the universal service program remains faithful to the 
principles set forth in section 254 of the Act. These proceedings aim 
to improve and strengthen all of our support mechanisms, and therefore 
will benefit consumers in high-cost areas, families with low income, 
and patrons of schools, libraries, and rural health care facilities. In 
my opinion, the FCC will soon need to revise its rules regarding the 
collection of funds and their distribution through the various support 
mechanisms. I will begin with the contribution methodology and then 
discuss issues pertaining to the distribution of support.
                        contribution methodology
    The Commission collects funds for the various universal service 
support programs pursuant to section 254(d) of the Communications Act. 
Service providers must pay a percentage of their revenues from 
interstate end-user telecommunications services to the Universal 
Service Fund. This percentage fee, called the contribution factor, 
changes on a quarterly basis depending on the demand for funding and 
the base of reported revenues. The current contribution factor is 9.5 
percent.
    Several trends have combined to put upward pressure on the 
contribution factor, which in turn has increased the funding burden on 
some consumers. While long distance revenues grew between 1984 and 
1997, they have since been flat or in decline as a result of price 
competition and substitution of wireless services, e-mail, and, more 
recently, Voice Over Internet Protocol (VOIP) services. Because federal 
universal service contributions under existing rules are assessed only 
on interstate revenues from end-user telecommunications services, this 
shrinking of the applicable revenue base has contributed to a steady 
rise in the contribution factor over time--it has increased by more 
than six percentage points over the last six years. While the 
contribution factor for the fourth quarter of this year will be 9.2 
percent, the slight reduction from the current factor likely represents 
a one-time reprieve resulting from an earlier over-collection, 
considering that the reported revenue base remains in decline.
    Another important trend has been the increasing prevalence of 
bundled service plans. For years, wireless carriers have offered 
buckets of any-distance minutes at flat rates, and now wireline 
carriers are offering packages including local and long distance for a 
single price. In addition, many carriers offer business customers 
bundles that include local and long distance voice services, Internet 
access, and customer premises equipment. Such bundling has been a boon 
for consumers but has made it difficult to isolate revenues from 
interstate telecommunications services. And the problem is likely to 
get worse as bundling becomes more and more popular.
    In December 2002, the Commission adopted a number of measures to 
stabilize the universal service contribution factor in an effort to 
mitigate the growing funding burden on consumers. For example, the 
Commission increased from 15% to 28.5% the safe harbor that wireless 
carriers may use to determine the interstate percentage of their 
revenues. The Commission also eliminated the lag between the reporting 
of revenues and the recovery of contribution costs, which lessened the 
competitive disadvantages facing long distance carriers with sharply 
declining revenues. And the Commission prohibited mark-ups of 
contribution costs on customers' bills to ensure that carriers cannot 
profit from inflated line charges.
    While these were important steps, I believe that more fundamental 
reform will be necessary to ensure the sustainability of universal 
service funding in the long term. Bundling together interstate and 
intrastate services--and telecommunications and information services--
gives carriers the opportunity and incentive to understate the portion 
of their revenues that are subject to assessment and increases the 
difficulty of identifying interstate revenues. Contribution factors 
therefore are likely to continue their ascent under a contribution 
methodology based on interstate telecommunications service revenues.
    For this reason, the Federal-State Joint Board has recommended that 
Congress amend section 254 to provide the FCC with authority to assess 
intrastate revenues, in addition to interstate revenues. A total 
revenue assessment would be far lower and more stable than one based 
solely on interstate revenues, and, just as importantly, it would 
prevent carriers from avoiding their contribution obligations by 
allocating revenues to the intrastate jurisdiction.
    In addition, the Commission has been considering whether to make 
substantial changes under its existing statutory authority. The 
Commission has sought comment on alternative methodologies based (in 
whole or in part) on end-user connections or assigned telephone 
numbers, because such approaches arguably would create a more 
sustainable model for funding universal service in the future. The 
number of end-user connections has been more stable than the pool of 
interstate revenues, and connection-based charges can be adjusted based 
on the capacity of each connection to ensure an equitable distribution 
of the funding burden among business and residential customers. 
Moreover, proponents of a contribution methodology based on telephone 
numbers (with connection-based charges for high-capacity business 
lines) argue that it would not only be more stable but also promote 
number conservation. Critics of these proposals--including carriers 
that would face increased assessments based on connections or telephone 
numbers--argue that reducing the contributions of long-distance 
carriers (which have very few assigned telephone numbers or end-user 
connections) would violate the statutory requirement that all carriers 
contribute on an equitable and nondiscriminatory basis.
    Finally, the Commission also has sought comment, in the Wireline 
Broadband NPRM, on whether all facilities-based providers of broadband 
services should be subject to the same contribution obligations. While 
a total-revenue methodology or one based on end-user connections or 
telephone numbers would address problems arising from the blurring of 
the line between interstate and intrastate telecommunications services, 
such changes would not necessarily broaden the contribution base to 
include all broadband transmission services and new services such as 
VOIP. The Commission accordingly sought comment on whether or not to 
change the contribution pool to include new services that currently are 
not assessed. Regardless of whether such services are classified as 
telecommunications services or information services, section 254 gives 
the FCC permissive authority to assess contributions on 
``telecommunications,'' which underlies both types of services.
                        distribution of support
    The steady increases in the contribution factor have resulted not 
only from the shrinking of the interstate revenue base, but also from 
the significant increases in the demand for funding. Much of the 
increased demand has resulted from the FCC's reform of interstate 
access charges: Many incumbent LECs now recover from the Universal 
Service Fund costs that previously were recovered from long distance 
carriers. In addition, the increasing entry of wireless carriers and 
other competitors as eligible telecommunications carriers (ETCs) has 
raised questions about the long-term sustainability of the high-cost 
support mechanisms. Demand growth has been less of an issue with 
respect to the mechanisms that support schools and libraries, rural 
health clinics, and low-income consumers, but I describe below the 
FCC's recent initiatives to revise those programs to ensure that they 
remain efficient and effective.
                           high-cost support
1. ETC/Portability Issues
    Before enactment of the 1996 Act, only incumbent LECs received 
universal service support. In recent years, however, wireless carriers 
and competitive LECs have been designated as ETCs. While competitive 
ETCs receive a very small percentage of high-cost funds overall, their 
share has been increasing dramatically in recent months along with a 
surge in the number of ETC applications. Competitive ETCs receive 
support under the ``identical support'' rule (also called ``portable 
support''), which provides per-line support based on the incumbent 
ETC's costs. Incumbents do not lose support when a competitive ETC 
captures lines; rather, both carriers receive universal service 
funding. Rural LECs have argued that this regime creates uneconomic 
arbitrage opportunities and threatens the viability of universal 
service, while competitive ETCs generally contend that providing 
identical support--whether based on the incumbent LEC's embedded costs 
or based on forward-looking economic costs--is essential to competitive 
neutrality.
    In November 2002, the Commission asked the Federal-State Joint 
Board to consider the intersection of competition and universal service 
in rural areas. The Joint Board subsequently sought comment on several 
key issues, including the manner in which competitive ETCs receive 
support and the impact of providing support to competitive ETCs on the 
growth of the universal service fund. The Joint Board also sought 
comment on the process for designating ETCs and whether the FCC should 
establish guidelines for consideration by the state commissions that 
make these determinations under section 214(e)(2). In July, the Joint 
Board held a public forum on these issues, and a wide range of industry 
representatives, consumer advocates, and state commissioners provided 
valuable insights.
    Parties advanced a variety of proposals in their comments and at 
the public forum. Several groups of incumbent LECs argue that 
competitive ETCs should receive support based on their own embedded 
costs. Some competitive ETCs argue that incumbents and competitors 
should receive support based on forward-looking economic costs. To 
control growth, some parties advocate capping support upon entry of a 
competitor and dividing the funds pro-rata based on the percentage of 
lines each carrier serves; other parties advocate supporting only a 
single connection per household (current rules do not limit the number 
of wireline or wireless connections that are funded). Incumbent LECs 
generally oppose these proposals, arguing that reforming the ETC-
designation process--in particular, making the public interest analysis 
more exacting--would suffice to keep the Universal Service Fund from 
growing too large.
    The Joint Board is now considering the record and plans to provide 
a recommended decision to the FCC as expeditiously as possible.
2. Support for Non-Rural Carriers
    While the rural high-cost support mechanism provides the lion's 
share of the funding--and correspondingly has received most of the 
attention--``non-rural'' carriers (the Bell operating companies and 
other relatively large LECs) also receive high-cost support. Whereas 
rural carriers receive support based on their embedded costs, non-rural 
funding is determined based on forward-looking economic costs. Non-
rural carriers receive support in a particular state if the statewide 
average cost per line, as determined by a computer cost model, exceeds 
the national average cost by a certain margin. Currently, non-rural 
carriers receive support in eight states (Alabama, Kentucky, Maine, 
Mississippi, Montana, Vermont, West Virginia, and Wyoming). While non-
rural carriers in other states serve many high-cost wire centers, their 
statewide average costs are not sufficiently high to receive support. 
Moreover, rural carriers receive substantial support in each of the 
states for which non-rural support is unavailable.
    I understand that this Subcommittee is considering legislation that 
would alter the distribution of non-rural support. The Commission is 
nearing completion of its own review of this support mechanism in 
response to a remand by the Tenth Circuit Court of Appeals. The court 
ruled that the Commission did not adequately explain how the non-rural 
support mechanism is sufficient to enable states to set affordable 
rates that are reasonably comparable in both rural and urban areas. In 
addition, the court directed the Commission to consider how to induce 
states to develop their own support mechanisms to fund high-cost areas 
within their borders, since the federal mechanism aims primarily to 
mitigate cost differentials among the states. The Joint Board issued 
its recommendations last October, and the Commission will complete its 
consideration of these issues next month.
                           low-income support
    A separate component of the federal universal service program is 
the low-income support mechanism, Lifeline/LinkUp. These programs 
provide funding that enables low-income consumers to receive discounts 
on monthly service and installation charges. An additional layer of 
discounts is available for eligible consumers living on Indian tribal 
lands. Earlier this year, the Joint Board released a Recommended 
Decision on proposals to bolster the effectiveness of Lifeline and 
LinkUp. This Recommended Decision suggests new ways for low-income 
consumers to qualify for support and also addresses questions regarding 
states' efforts to engage in outreach and to verify program 
eligibility. The goal of the pending rulemaking is to remove 
impediments to beneficiaries' receiving support while simultaneously 
preserving the integrity and enhancing the efficiency of the program.
         schools and libraries and rural health care facilities
    Finally, the Schools and Libraries support mechanism (E-Rate) and 
the support mechanism for rural health care facilities provide 
additional support that enables these institutions to receive discounts 
on basic and advanced telecommunications services (as well as internal 
connections in the E-Rate program). Now that the Commission has had 
significant experience overseeing these programs, we are considering a 
variety of rule changes in pending rulemaking proceedings. These 
proceedings, like the Lifeline/LinkUp rulemaking, aim to eliminate red 
tape while ensuring continued program integrity.
    In particular, the Commission will soon consider an Order that 
would modify the rural health care mechanism. This support mechanism 
has been underutilized, so the notice of proposed rulemaking sought 
comment on ways to alter eligibility requirements to eliminate 
obstacles to rural health clinics' receiving support, while remaining 
faithful to the statutory purposes. Facilitating telemedicine by 
connecting rural health clinics to regional hospitals and universities 
has always been an important goal, and it takes on added importance in 
light of the increased threat of bioterrorism.
    Taken together, the reforms being considered by the Commission 
should ensure the continued vitality of the federal universal service 
support mechanisms. The Commission has no higher priority than 
delivering on the promise of ubiquitous, high-quality, and affordable 
services. I would like to thank you, Mr. Chairman, for calling this 
hearing, and I look forward to working with you and other members of 
the Subcommittee on these challenging and critical issues.

    Mr. Upton. Thank you very much.
    Mr. Rowe, welcome.

                      STATEMENT OF BOB ROWE

    Mr. Rowe. Thank you. Mr. Chairman, members of the 
committee, I am Bob Rowe. I am Chairman of the Montana 
Commission, also a member of the Federal-state board on 
universal service. I am speaking here today entirely in my own 
capacity.
    I join in commending you for holding this terribly 
important hearing. I am very honored to be sitting here between 
two good friends of mine and with this very distinguished 
panel. I am going to speak fast, like a Yankee, to stay within 
my timeframe.
    This program does face real crucial and time-sensitive 
challenges. All of you in your opening statements did a superb 
job laying out what those challenges are.
    I am actually more optimistic now than I have been in years 
that we are going to really get at this and make progress. I am 
optimistic based on the experience we have had and the 
appreciation by industry and consumer groups, by the FCC, the 
joint board, and by Members of Congress that we have to act 
quickly and we have to act wisely because the risk of failure 
is so high. And, again, I think your thoughtful and 
intellectually diverse opening statements coupled with the 
great work being done on the Senate, led particularly by 
Senator Burns and Senator Dorgan, really can give us some 
optimism that we can get it right.
    I start with two basic questions. The first question is, is 
universal service the problem or the solution as the saying 
goes? I would argue that section 254 may be the most successful 
part of the Telecommunications Act. And as I drive around 
Montana, as I visit other States every day, I appreciate the 
successes of all four elements of the Universal Service 
Program.
    In my testimony, I describe, in particular, some of the 
good work being done by the rural independents and cooperatives 
in Montana, deploying really remarkable services in very tough-
to-serve, very costly to serve areas. Consistent with Mr. Cox's 
point, most of the services, the advanced services they 
provide, aren't funded directly by universal service, but the 
network over which both basic and advanced services typically 
are provided is supported in part, the loop and the switch 
elements, by universal service. That's the no-barriers base 
approach.
    There are good things happening in rural America. And those 
are very much associated with the success of the Universal 
Service Program.
    The second basic question, are we more concerned about 
supporting individual customers or supporting a network? My 
answer is both. In my testimony, I discuss the key role of 
support to individuals, but I also describe the history of 
universal service coming out of the system that was put in 
place over the Twentieth Century to support the network with 
payments back and forth between carriers. This system was 
modified, became more complicated after the breakup of AT&T, 
and was again modified after the 1996 act, particularly through 
creation of the CALLS and MAG Programs. So, again, we're 
supporting both networks and being mindful to the needs of 
individual customers, who take service over those networks.
    In terms of what is driving growth in the fund, I include 
some charts provided by NECA at the back of my testimony. Two 
key factors in recent years: first, again, the movement away 
from inter-carrier payments or so-called implicit support to 
explicit support. An enormous amount of the growth in the fund 
is the result of the CALLS and MAG Programs putting money 
explicitly on universal service-type payments.
    The second issue--it's a new issue in the last several 
years, but it's growing--is, of course, the relatively rapid 
uptake of competitive eligible telecommunications providers, 
particularly but not entirely, wireless. And, again, I go into 
that in more detail in my testimony.
    What are the issues? In my written testimony, I describe in 
more detail issues in the contribution area. I think others 
will go into those in some detail, lay out the alternatives. I 
have been on record since actually 1996 in supporting an 
assessment on all telecommunications revenue. That's not the 
only solution, but it is a good solution.
    Telecommunications revenues are increasing. Interstate 
revenues are declining. That is one solution. It is a solution 
addressed in a letter the joint board sent to Senator Burns 
earlier this year.
    The second set of issues has to do with eligibility. The 
third set has to do with the cost basis for payment. Both of 
these complicated sets of issues are being addressed by the 
joint board right now. And I'm encouraged that we are going to 
make some progress.
    In the large company area that a number of the members 
discussed,--and by ``large company,'' I am referring to large 
companies, the Bell companies, that serve rural America--I have 
two concerns. The first has to do with the hybrid cost proxy 
model that is the basis for determining costs by these 
companies. There are fundamental problems with that model. I 
have certainly addressed it with the FCC. And they are issues 
that the FCC commissioners are mindful of.
    The second is that the payment, the statute that you passed 
says rates and services in rural and urban America are to be 
reasonably comparable. The standard adopted by the FCC 
addressed by the court in the Tenth Circuit and then ultimately 
proposed for some modification by the joint board instead 
compares rural costs to a National average. And there is a very 
big difference between a National average and an urban average.
    The final set of issues I address is whether there should 
be further modification of inter-carrier payments. I know a 
number of people on the panel will speak to that issue. My 
concern is that to the degree that issue was addressed, that 
the particular effects on the rural carriers be factored in. 
They are, if anything, more dependent upon so-called access 
revenue and have less ability to average that revenue somewhere 
else if it goes away. If it is replaced with universal service-
type funds to some extent, that again puts more pressure on the 
funds. So you have to have a robust base. But we have to 
understand what we are doing there.
    In my testimony, I recommend basically a three-part 
approach. The first, I do think focused legislation would be 
very helpful. And, again, both you and your colleagues in the 
Senate are looking at that. Second, I think the joint board 
with congressional oversight will make progress on the so-
called portability issues having to do with contribution and 
eligibility. And, third, to the degree that we are going to 
address inter-carrier payments, I think we need a very 
structured, a very rigorous approach to do that.
    We spend our days in the weeds, in the details of this. 
From your opening statements, you know the details very well as 
well. But ultimately your job is to basically provide a beacon 
to us to get us out of the woods and back on the path to making 
this program the success that you intended it to be.
    Again, when I drive around Montana, look at the 
telemedicine facilities, the great facilities being deployed in 
schools and libraries as well as the basic high-cost fund 
programs, I am optimistic. And I recognize that this is an 
important program. Once you modify the program, I think we need 
to do so in light of its successes and in light of the critical 
place that you in passing the act gave it.
    Thank you very much, Mr. Chairman.
    [The prepared statement of Bob Rowe follows:]
   Prepared Statement of Bob Rowe, Chairman, Montana Public Service 
                               Commission
    Mr. Chairman and Members of the Committee, I am Bob Rowe, Chairman 
of the Montana Public Service Commission, and a member of the Federal-
State Joint Board on Universal Service. I am speaking only on my own 
behalf. I commend you for holding this important and timely hearing. I 
am truly honored to be here.
    Real challenges face the federal universal system, as they do the 
entire telecommunications sector. However, I have perhaps more optimism 
now about the ability to address the challenges facing universal 
service than I have in quite some time.
    Why am I optimistic? Experience and an appreciation of the risks of 
failure to act wisely have made the discussion of universal service 
issues more informed and constructive. I credit that to hard work among 
industry and consumer stakeholders, to an engaged and effective Joint 
Board and FCC, and to leadership by Congress. More on that later.
    My testimony will briefly cover the following areas:

1. Several basic questions about universal service.
2. Factors driving the past and future growth in the fund.
3. Summary of current key issues in universal service.
4. Narrow versus broad approaches to issue resolution.
5. The critical role of Congress.
    I will conclude by suggesting a combination of measures, including 
strong and continuing Congressional oversight. These suggestions build 
in part on approaches developed throughk the Universal Service Summits 
convened by Senators Burns and Dorgan, along with focused legislation 
in several areas, especially contributions to support universal 
service. I also suggest for consideration a possible approach to 
addressing difficult issues in intercarrier compensation.
          a. several basic questions about universal service.
    Two questions seem especially important to me, and help shape the 
solutions we craft:

1. Is universal service the problem or the solution?
2. Is universal service best understood mainly as a support system for 
        customers or for networks that serve customers?
Is universal service the problem or the solution?
    It is disturbingly easy to encounter those who believe that the 
universal service system is itself ``the problem,'' especially the high 
cost fund portion. I believe that the programs embodied in Section 254 
may perhaps be the Telecommunications Act's most tangible success. Each 
of the four programs--high cost fund, schools and libraries, rural 
telemedicine, and lifeline-link-up--has produced real achievements. In 
particular, the high cost support programs have allowed service 
providers to maintain their networks while keeping rates affordable.
    Universal service really is working in Montana. The seventeen rural 
carriers have built high quality networks capable of supporting a wide 
range of services. They have deployed DSL in 183 rural communities, 
including remote, low income areas such as Crow Agency on the
    Crow Reservation.1 Rural carriers have formed consortia 
to provide switched ATM backbone and to provide at least 123 state-of-
the-art video studios (Vision Net, Mid-Rivers and Range) for everything 
from distance learning to supporting local businesses. Every Native 
American Indian Reservation in Montana has, for example, at least one 
video studio operated by Vision Net. Most of these efforts are not 
supported by universal service,2 but the high cost fund has 
helped pay for the critical local network facilities over which all 
these services originate and terminate, facilities on which services 
such as DSL are directly deployed.3 A map of facilities 
deployed by rural Montana carriers is attached to this testimony.
---------------------------------------------------------------------------
    \1\ All four of the Project exchanges on the Crow Reservation have 
DSL. Exchanges with as few as seventy lines have been provisioned with 
DSL.
    \2\ For example, universal service does not support transport, 
which can be a key cost driver for everything from connecting remote 
households [Joint Board Recommended Decision, Released July 10, 2002 
(FCC 02J-1), Bob Rowe Separate Statement Concurring in Part Dissenting 
In Part (pp. 43-53)], to getting broadband traffic back to the Tier 1 
Internet [Victor Glass, ``NECA Rural Broadband Cost Study: Summary of 
Results,'' June 21, 2000; Victor Glass, ``Rural Realities: Will rural 
dwellers be forgotten in the broadband boom?'' July 15, 2002].
    \3\ .Support for the loop has also likely allowed carriers to 
allocate more resources for advanced services deployment than otherwise 
would have been the case.
---------------------------------------------------------------------------
    The other programs supported by universal service have also 
produced real successes.4
---------------------------------------------------------------------------
    \4\ On June 9, 2003, the FCC issued a Notice of Proposed 
Rulemaking, requesting comments on a Joint Board recommendation 
concerning the Lifeline and Link-up programs.
---------------------------------------------------------------------------
    The very high level of service provided in some of the nation's 
most challenging areas shows that the program is successful and 
important. Essential reforms should be built upon this foundation.
Support for customers or for the network?
    Many still argue that the existing high cost support system should 
be replaced with one that makes payments to individual customers, as 
does the current Lifeline program. Congress resolved this issue in the 
1996 Act, saying that rates and services should be reasonably 
comparable between urban and rural or insular areas, not customers. It 
is worth noting, however, that factors such as small local calling 
areas in many rural areas (compared to the hundreds of thousands who 
may be within an urban local calling area make rural customers' total 
phone bills higher than urban customers' even where the nominal local 
exchange rate is lower. Moreover, non-metropolitan status correlates 
very closely with low per capita income. I offer two examples:

1. InterBel Telephone Cooperative serves about 3110 access lines in 
        several small communities in Northwest Montana. The residential 
        and business basic exchange rates, including the Subscriber 
        Line Charge, are $18.50 and $26.20. Without universal service 
        support, these figures would be $81 higher each month. The per 
        capita income in Eureka is $12,619 5. For the State 
        of Montana as a whole the per capita income was $17, 151.
---------------------------------------------------------------------------
    \5\ U.S. Census Bureau, 2000 Census.
---------------------------------------------------------------------------
2. If it were not for universal service support, local rates on the 
        Crow Reservation could be as high as $60 for residential 
        customers and $70 for business customers. Per capita income on 
        the Crow Reservation was $9,440 dollars in 1999, with 21.8 
        percent unemployment.
    Getting services to customers at affordable and comparable rates is 
obviously a fundamental goal. However, we must also remember that 
existing universal service arrangements arose out of the system of 
payments created over the years to pay for building, maintaining, and 
operating the ``network of networks'' that served most 
telecommunications carriers and most of their customers. Initially, 
most of this occurred by the independent companies allocating some of 
their costs to the interstate jurisdiction. These costs were then 
recovered through the ``settlements'' between AT&T and the independent 
carriers.6 With divestiture, this system was modified to 
incorporate ``access payments'' by the inter-exchange carriers to the 
local carriers, to support the local network required by IXC customers 
to originate and terminate long distance calls. This has been compared 
to ``rent'' paid for use of the local networks. The FCC created a 
variety of programs to support specific services, such as high-cost 
loops and switches deployed by smaller carriers. At the same time, a 
portion of the ``non-traffic sensitive'' costs were moved to end user 
payments, and the ``subscriber line charge'' (SLC) was created.
---------------------------------------------------------------------------
    \6\ The initial ``Ozark Plan,'' following out of the 1934 Act, was 
driven by the distance traffic had to be hauled and the hold time for 
interstate calls, and resulted in as much as 85 percent of costs being 
assigned to the interstate jurisdiction for some rural carriers. From 
1981 to 1997, the interstate allocation of loop costs was gradually 
moved to a uniform 25 percent.
---------------------------------------------------------------------------
    After passage of the 1996 Act, even more costs where shifted to end 
users, as the FCC tried to make ``implicit'' support explicit (at least 
as to interstate costs), to lower interstate access charges, and to 
move more ``non-traffic sensitive'' costs to end users. The CALLS 
(Coalition for Affordable Local and Long Distance Service) program for 
large companies and the MAG (Multi-Association Group) program for small 
companies are the prime examples.
    As will be noted below, a network focus, in addition to a customer 
focus, helps provide analytical clarity, sheds additional light on one 
of the key cost drivers (further replacement of access by universal 
service type payments), and helps focus the discussion about what 
services should be covered by universal service. This history shows 
that one cannot understand universal service solely as a program for 
reducing customers' rates. Equally important, it has been used as a 
method of financing the construction of quality plant in high-cost 
areas.
                 b. factors driving growth in the fund.
    High cost loop support was capped by the FCC in 1994. The cap was 
intended to be temporary, while universal service was ``reformed.'' 
Instead the cap has remained in place, although modified when the FCC 
adopted recommendations of the Rural Task Force. The attached tables 
and charts were provided by NECA 7 at my request.
---------------------------------------------------------------------------
    \7\ NECA operates the various intercarrier rate pools, conducts 
economic and technical analysis, and provides other services to the 
telecommunications industry. It does not take positions on policy 
issues. Use of this material does not constitute an endorsement by NECA 
for any position in this testimony. This information was derived by 
NECA from reports filed with USAC and other publicly-available 
information.
---------------------------------------------------------------------------
    Illustration 2 summarizes the current elements of universal 
service. Rural health care ($20 million per year), and the Lifeline and 
Link-up programs for low income customers ($741 million) are by far the 
smallest components. The Schools and Libraries program is substantial, 
but has been capped at $2.25 billion since 1997, and therefore is not a 
driver of current fund growth. Programs comprising the High Cost Fund 
are projected to total $3.4 billion for 2003. Illustration 3 shows the 
growth in total high cost fund support since 1998, roughly a doubling 
in size.
    Illustration 4 shows growth in the High Cost Fund from 1998 through 
2003, by components. The most significant increases in recent years, by 
far, have resulted from two similar decisions. First, the ``CALLS'' 
plan adopted by the FCC caused a roughly $650 million increase in the 
high cost fund. This new money limits how much SLC charges may increase 
in rural areas as a result of the decision to reduce access payments 
paid to price cap regulated (mainly large) ILECs. Then, the ``MAG 
plan'' as adopted by the FCC, created a similar support plan, the 
Interstate Common Line Support (ICLS) program for rate-of-return 
regulated (mainly small) ILECs. This program now costs about $425 
million per year. These two programs, costing more than $1 billion per 
year, were designed to reduce interstate access charges.
    Other factors have also caused costs to increase.8 
Illustration 5 shows estimated ILEC and Competitive Eligible 
Telecommunications Carrier (CETC) funding, annualized, based on third 
quarter, 2003, numbers. ILECs will receive $3.41 billion this year. 
CETCs will receive $251 million. Recent analysis indicates this figure 
may be exceeded.
---------------------------------------------------------------------------
    \8\ Loop support increased due to regulatory changes resulting from 
MAG and RTF implementation, where the cap was increased and the payment 
calculation modified to incorporate growth in the number of loops and 
in DGP-CPI.
---------------------------------------------------------------------------
    Illustration 6 shows the growth in the number of CETCs and funding 
from the third quarter of 2002 to the third quarter of 2003. There were 
30 CETCs in the third quarter of 2002, and 165 one year later. CETCs 
received $56 million (1.8 percent of the fund) in 2002 and $ 252 
million (7.3 percent of the fund) one year later. It is generally 
agreed that there is substantial potential for further growth from CETC 
certification.
               c. summary of issues in universal service.
    1. Contributions.9 Currently, universal service is 
supported by an assessment on interstate revenue. The FCC has made 
several adjustments to the contribution base (most notably increasing 
the portion of wireless revenue assumed to be interstate and therefore 
subject to the assessment from 15% to 28.5% and basing assessments on 
prospective revenues). As a result, the assessment has temporarily 
stabilized at slightly above nine percent. However, most observers 
expect this to be a temporary reprieve from an increasing assessment on 
a decreasing base. Alternatives proposed by various parties include:
---------------------------------------------------------------------------
    \9\ The ``contribution'' issue was not referred by the FCC to the 
Joint Board. However, the Joint Board did hold a public meeting on the 
subject June 21, 2002, and state members did submit two sets of 
comments to the FCC, most recently on May 20, 2003.

a. Per connection assessment;
b. Capacity based assessments;
c. Per-telephone number and number equivalent assessments; and
d. Modifications to the revenue-based approach either by:
    i. broadening the base to include more services (such as broadband 
            services in addition to DSL), or by eliminating the 
            wireless ``safe harbor,'' or
    ii. Deepening the base to allow assessment for the federal fund to 
            be based on intrastate as well as interstate revenue (with 
            a similar modification for state funds).
    Most of these proposals have been subjected to criticisms based on 
possible illegality under Section 254 as interpreted by the courts 
10; administrative workability, fairness, or other grounds. 
Most current attention is focusing either on the number and number-
equivalent approaches (developed most thoughtfully by FCC Commissioner 
Martin), or on expanding the revenue base to include more telecoms 
revenue. Notably, the federal and state members of the Joint Board 
submitted a letter to Senator Burns stating that deepening the base to 
include intrastate revenue was a workable option.11
---------------------------------------------------------------------------
    \10\ See, Texas Office of Public Utility Counsel v. FCC, 183 F. ed 
393 (5th Cir. 1999), prohibiting assessment of intrastate revenues to 
support the Schools and Libraries program. Others have suggested that a 
per-connection or per-telephone number approach would not comply with 
the statute that requires all interstate carriers to contribute, or 
would not be equitable and non-discriminatory. See 47 U.S.C. Section 
254(d).
    \11\ Letter dated May 19, 2003, Attachment 1. While the state 
members of the Joint Board endorsed this approach, it is likely to be 
strongly opposed by a number of state commissions.
---------------------------------------------------------------------------
    It has also been suggested that Congress clarify that any of the 
approaches are acceptable, based on a determination by the FCC, thereby 
eliminating any possible legal barrier to an approach determined most 
workable by the Commission.
    2. Eligibility.12 The Joint Board is currently examining 
numerous questions regarding carrier eligibility for universal service 
support. What standards should ``competitive eligible 
telecommunications carriers'' (CETCs) have to meet in order to be 
certified by a state commission or the FCC under Section 214, 
especially in areas served by rural carriers? Should the FCC adopt a 
set of standards applicable to currently-certified ETCs and CETCs 
alike? Should this issue continue to be left to the state commissions? 
Should the FCC set a floor, with state commissions able to build on 
this floor? Could a set of wireless-appropriate standards be developed? 
Could a ``best practices'' or model standards for state commission 
consideration be developed? Are there relevant differences between 
wireline CETC applicants (often rural overbuilders) and wireless CETC 
applicants? Is there a risk of diminished quality if one set of 
carriers faces a lower standard than does another? How should state 
commissions evaluate the ``public interest'' component of the current 
statutory standard, and should they consider the effect on the federal 
fund of multiple ETC designations?
---------------------------------------------------------------------------
    \12\ Eligibility-related and cost and payment issues were included 
in the ``portability'' referral from the FCC to the Joint Board. The 
Joint Board held a very productive en banc hearing in Denver on July 
31, 2003, and is currently considering comments. This proceeding also 
concerns specific issues such as whether support should be limited to a 
``primary line,'' and how primary line would be defined.
---------------------------------------------------------------------------
    3. Cost basis for payment. Currently, all ``nonrural'' companies, 
including all the Bell Companies, receive support based on forward 
looking costs, determined through the FCC's Hybrid Cost Proxy Model 
(HCPM). Small companies receive support based on embedded (historical) 
costs. CETCs receive support based on (and on a per-line basis 
identical to) the support of the incumbent for whose area the 
competitive carrier is granted ETC status. The Joint Board is currently 
considering a number of issues here as well. For example, should the 
CETC receive payment based on the incumbent's costs, or on its own 
costs, and should those be forward looking or embedded? Given concerns 
about the HCPM, should it ever be used for rural carriers, and should 
it continue to be used even for large carriers?
    4. Large Company Issues. The 10th Circuit Court of Appeals remanded 
to the FCC its ``large company'' Ninth Report and Order.13 
In turn, the FCC referred this issue to the Joint Board, which issued a 
recommendation on October 16, 2002. The Joint Board suggested several 
modifications, which the FCC is now considering. The FCC's order is 
expected soon. In my opinion, the combination of an imperfect cost 
model 14 with the formula used to award support does result 
in significant under-funding to areas served by the largest companies. 
This includes many states in the west, but also New England states such 
as Maine and Vermont (a rural state in which 85 percent of lines are 
served by Verizon).15 In my dissent to the Joint Board 
recommendation, I argued that Section 254 requires that rates and 
services in rural and insular areas be ``reasonably comparable'' with 
rates and services in urban areas. Comparing rural rates 16 
with a national average and then providing support only for costs 
exceeding 135 percent of the national average falls far short of this 
clear directive. A rural or insular area might be required to have 
rates or costs as high as 165 percent of the urban average cost before 
it would be eligible for support under the current system.
---------------------------------------------------------------------------
    \13\ Qwest Corp. v. FCC, 258 F.3d 1191 (2001). The FCC's order was 
challenged by Maine, Vermont, and Montana, as well as by Qwest. The 
court held, inter alia, that the FCC did not provide an adequate 
explanation for its decision that the non-rural mechanism in the Ninth 
Report and Order achieved the statutory principles in Section 254; that 
the FCC failed to define the key statutory terms ``reasonably 
comparable'' and ``sufficient''; that it did not adequately explain the 
135 percent of national average funding benchmark.
    \14\ Montana, Maine, and Vermont have repeatedly urged the FCC to 
address problems with inputs, formulas and maintenance of the model, 
but have generally been frustrated in their attempts to obtain critical 
information about the model. See, letter to the FCC from counsel for 
the Vermont Public Service Board, September 12, 2003 (Attachment 2). 
Possible problems include but are not limited to assuming that cabling 
runs on straight compass lines, underweighting the cost of traveling 
over mountains or rivers; apparently ignoring physical barriers such as 
highways or railroads; apparently not accounting sufficiently for 
physical barriers such as shallow bedrock or rocky soil; not accounting 
for increased maintenance cost in snowy regions; inconsistently 
treating broadband facilities.
    In the 10th Circuit litigation, Qwest mounted an unsuccessful 
general challenge to the use of forward looking cost models for 
universal service purposes. Based on several years of experience, one 
wonders how a court would view under Section 254 the model as 
implemented and maintained. The Congress could instruct the FCC, if it 
continues to use cost models, to adequately staff and maintain the 
model, and to document and publicly disclose all modifications to it.
    \15\ Only eight states receive high cost fund support under the 
large company program. Qwest serves fourteen states, including twelve 
of the fifteen least densely populated states, but receives high cost 
fund support for only two states: $10.307 million per year for Montana 
and $7.243 million per year for Wyoming. (It must be noted that many of 
the highest cost areas within those states are served by rural 
carriers.) Verizon will receive $9.259 million per year in high cost 
model support in Vermont and $5.529 million per year in Maine [based on 
4th quarter 2003 projections by USAC].
    \16\ Or costs, as there are many variables in rate comparability, 
including but not limited to the size of the local calling area, how 
costs are assigned to different rate elements, the depreciation rates 
assumed, and so on.
---------------------------------------------------------------------------
    5. Covered services. The Joint Board is required periodically to 
review the list of services eligible for support, and recommend 
changes. ``On July 10, 2002, the Joint Board recommended that the list 
remain unchanged on July 10, 2002 [Recommended Decision, Release Date 
(FCC 02J-1)]. The FCC issued an order adopting that recommendation on 
July 14, 2003. In that proceeding, I dissented in part, suggesting that 
a focus on support for the network over which most services are 
provided would be a more reasonable approach than attempting to 
evaluate specific services. For example, the primary requirement for 
DSL service (or similarly, high speed wireless service) is a robust 
network, with clean loops. This is consistent with the ``no barriers'' 
approach advocated by the Rural Task Force.17
---------------------------------------------------------------------------
    \17\ The Rural Task force recommended to the Joint Board and the 
FCC a ``no barriers to advanced services'' policy, including universal 
service support for plant that can (as built or with the addition of 
elements) provide access to advanced services; encouraging carriers to 
remove infrastructure barriers to such access; and, sizing the federal 
universal service fund so that it does not present barriers to 
investment in plant needed to provide access to advanced services. See, 
Joint Board's Recommended Decision concerning covered services, 
Separate Statement of Commissioner Rowe, Sections IV and V (July 10, 
2002), pp. 47-52.
---------------------------------------------------------------------------
    6. Further modification of inter-carrier compensation systems. Many 
carriers, including but not limited to the largest ILECS and the IXCs, 
argue that further modification of inter-carrier compensation is 
required because of a variety of threats to the current system. The 
full scope of the problem is being identified only now, including 
through specific data requests by the FCC. It is abundantly clear, 
however, that rural carriers are much more dependent on access payments 
than the larger carriers. ``Bill-and-keep'' approaches are especially 
problematic for small carriers because they lack the ability to average 
costs over a larger area and the current pooling mechanisms function 
like high-cost support but are vulnerable if bill-and-keep is adopted. 
Also, intrastate access may eventually be as significant a concern as 
interstate access. If universal service support is further substituted 
for access payments, the upward pressure on the fund could be 
tremendous.
         a. narrow versus broad approaches to issue resolution.
    Generally, one group of stakeholders prefers focusing on a 
particular issue, principally stabilizing the revenue base. Another 
group argues that a comprehensive approach is required, one that 
addresses all issues as part of the same package. The narrow approach 
is advocated based on feasibility, and the urgency of the contributions 
issue. The broader approach is advocated based on the desirability of 
addressing all related issues, especially including intercarrier 
payments, in a consistent manner, and that does not risk making 
decisions on narrower issues that may limit the ability to address the 
larger issues. Some have said that it is unwise to resolve 
contributions issues without also addressing eligibility issues at the 
same time.
    A reasonable middle approach might be: 1. to move forward with a 
focused approach to the contributions issue, including legislation; 2. 
to address the portability issues through the ongoing Joint Board 
process, with Congressional oversight; and 3. to address intercarrier 
payments through a rigorous, structured approach. For consideration, I 
suggest exploring a structured, analysis-based approach to resolving 
intercarrier payments concerns. We can learn some positive and negative 
lessons from ``alternative dispute resolution'' efforts such as CALLS, 
MAG, Rural Task Force, and the Qwest Multi-state Section 271 
collaboratives. Such a process would require effective participation by 
all affected, especially the small carriers who are especially 
vulnerable to changes in access revenue. It would likely benefit from a 
high degree of transparency and independent facilitation; it should 
have access to sound and extensive analysis. Its decision rules and 
eventual deliverable product (e.g., a recommendation to the FCC, along 
with any dissents) should be clear. It would be difficult to achieve a 
rigorous outcome based purely on consensus. Therefore, it might be 
desirable for the facilitator to be charged as an arbitrator or 
decision-maker. As noted before, revision of intercarrier compensation 
has strong implications for universal service, and also potentially 
implicates the process of jurisdictional separations.18
---------------------------------------------------------------------------
    \18\ The separations process identifies and assigns costs to the 
interstate and intrastate jurisdictions, and matches those costs with 
cost recovery. A separations process of some sort is required when a 
provider of telecommunications service is regulated by two 
jurisdictions at once. Smith v. Illinois, 282 U.S. 133 (1930).
---------------------------------------------------------------------------
                    b. the crucial role of congress.
    Throughout implementation of the Telecommunications Act, 
Congressional oversight has been valuable, and has been appreciated by 
all of us concerned with day-to-day implementation. It's easy for us to 
get lost in the forest, and Congress regularly provides a good beacon 
guiding us back to the main path.
    I particularly commend to you the unique efforts of your Senate 
colleagues. As you know, Senators Burns and Dorgan, with strong support 
from Senators Stevens, Rockefeller, and others have convened two 
Summits. I was privileged to help moderate these two sessions. They 
were unique: The Senators sat at the table with a very broad spectrum 
of stakeholders, participating in a very lively give-and-take, 
furthering everyone's understanding,
    and significantly clarifying the issues and options. No stakeholder 
perspective that asked to participate was excluded. (Reporters and 
investment analysts were not invited in until the end of the meeting, 
but were then free to talk to participants.) The Senators, of course, 
will decide what they do with this input. I commend this process to 
you, and urge you to discuss the results with your colleagues in the 
Senate. Specific options include formal oversight proceedings, a Sense 
of the Congress resolution on several key topics, and specific 
legislation, focused on issues including the contribution base.
                             c. conclusion.
    When I drive across Montana or other rural areas, when I see a 
rural telemedicine facility, when I'm in a school where students are 
learning on-line, I recognize universal service as a rip-roaring 
success. The programs included in universal service do face significant 
challenges. Some of those challenges are especially time-critical. All 
stakeholders desire a greater degree of certainty as they plan how to 
meet their customers' demands. Modifications should be designed to 
preserve what works, and to achieve Congress's vision in the remarkable 
language of Section 254.
[GRAPHIC] [TIFF OMITTED] 99965.001

[GRAPHIC] [TIFF OMITTED] 99965.002

[GRAPHIC] [TIFF OMITTED] 99965.003

[GRAPHIC] [TIFF OMITTED] 99965.004

[GRAPHIC] [TIFF OMITTED] 99965.005

[GRAPHIC] [TIFF OMITTED] 99965.006

[GRAPHIC] [TIFF OMITTED] 99965.007

[GRAPHIC] [TIFF OMITTED] 99965.008

[GRAPHIC] [TIFF OMITTED] 99965.009

[GRAPHIC] [TIFF OMITTED] 99965.010

    Mr. Upton. Thank you, Mr. Rowe.
    Mr. Gregg?

                  STATEMENT OF BILLY JACK GREGG

    Mr. Gregg. Thank you, Mr. Chairman. May it please the 
committee, I am Billy Jack Gregg. I am Director of the Consumer 
Advocate Division of the West Virginia Public Service 
Commission.
    Prior to addressing issues related to the long-term 
sustainability of the universal service fund, I think it is 
important that we review where we are today with the universal 
service fund. Since 1996, when section 254 of the act was 
passed, the fund has grown from $1.8 billion to $6.2 billion 
for this year, 2003.
    $6.2 billion sounds like a lot of money, and it is. But we 
have to put it in perspective. Last year the telecommunications 
industry had total revenues of over $230 billion. That means 
that by collecting and redistributing less than 3 percent of 
the total telecom revenues in this Nation, we have been able to 
keep phone service affordable in all areas of our Nation. We 
have allowed phone service to be affordable to low-income 
individuals. We have assisted rural health care providers. And 
we have wired all of our schools and classrooms to the 
internet. That is quite an accomplishment and something that 
all of us involved in universal service should be quite proud.
    Moreover, every State and every territory of this Nation 
benefits from universal service. I have attached to my 
testimony as attachments 1 and 2 printouts from USAC's annual 
report for 2002, which shows payments under each support 
mechanism to each State on both a total basis and ranked by 
total receipts and on a per-line basis and ranked on a per-line 
basis.
    In response to the statements from some of the members 
today, I think it is important to see that when you look at the 
high-cost fund, every State and every territory has received 
benefits from the high-cost fund alone except the District of 
Columbia because it does not have any high-cost areas. 
Otherwise, every State from the Northern Mariana Islands to 
Delaware to Montana to Wyoming to West Virginia all receive 
high-cost support.
    The universal service fund has been one of the great public 
policy successes of this country for the last 100 years. The 
issues we are talking about today is, how do we sustain that 
success into the future? And, as has been mentioned by the 
members and the first two speakers, we have to look at both 
sides of the equation: the income for the fund and the outgo 
from the fund.
    In terms of the contribution base, I would just ratify what 
my fellow members on the joint board, Ms. Abernathy and Mr. 
Rowe, said, we have to expand the base for universal service. 
The joint board has previously sent a letter, as Mr. Rowe said, 
to Senator Burns suggesting very targeted, very focused 
legislation that would give the FCC the authority to assess on 
all revenues and all services. Since all benefit from universal 
service, all should contribute. It's a very simple proposition.
    On the outgo side, the most important thing we can do is 
target the high-cost support to fulfill the principles that are 
laid out in section 254. And I believe that there are three 
very basic measures that can be accomplished by the FCC to 
focus the support of the high-cost fund.
    No. 1, we need to limit support to a single line per 
household. Right now under current rules, all lines supplied by 
all eligible telecommunications carriers are eligible for 
support. A household that has two land lines and three cell 
phone lines would receive support for each of those lines. I 
believe that that is excessive. If you limit it to a single 
line, we would get back to the original purpose, which was to 
provide comparable services at comparable rates.
    Second, we need to reform the basis of per-line support to 
be based on each carrier's own cost. Right now they are based 
on the cost of the incumbent carrier. We believe that if you 
adopt this procedure, it should be capped at the incumbent's 
level of support to prevent any windfall to any competitor.
    And, finally, we believe that the FCC should adopt 
guidelines for the States in making public interest 
determinations for eligible telecommunications carriers. I 
believe that those guidelines should be based on very simple 
support guidelines. Those areas that are truly costly to serve, 
where it makes no sense to have more than one subsidized 
carrier, are the ones that would be targeted.
    I propose $20 and $30 guidelines. Above $20 per line per 
month, those study areas should be allowed one additional 
eligible telecommunications carrier, those eligible to receive 
universal service funding. Above $30 per line per month, only 
one eligible telecommunications carrier would be allowed.
    About half of the rural study areas would be encompassed by 
those guidelines, but they only serve 1.7 percent of the access 
lines in this Nation. Yet, they receive 45 percent of total 
high-cost support. They are the truly small high-cost areas. 
And there should be some limitation on subsidization of 
competition in those areas.
    I want to thank you again for the opportunity to appear 
here. And I look forward to the other statements.
    [The prepared statement of Billy Jack Gregg follows:]
  Prepared Statement of Billy Jack Gregg, Director, Consumer Advocate 
          Division, Public Service Commission of West Virginia
    My name is Billy Jack Gregg and I am the Director of the West 
Virginia Consumer Advocate Division. My office is charged with the 
responsibility of representing West Virginia utility ratepayers in 
state and federal proceedings which may affect rates for electricity, 
gas, telephone and water service. My office is also a member of the 
National Association of State Utility Consumer Advocates (NASUCA), an 
organization of 43 state utility consumer advocate offices from 41 
states and the District of Columbia, charged by their respective state 
statutes with representing utility consumers before state and federal 
utility commissions and before state and federal courts.1 I 
am a former member of the Board of Directors of the Universal Service 
Administrative Company (USAC) and currently serve on the Federal-State 
Joint Board on Universal Service. I greatly appreciate the opportunity 
to testify at this legislative hearing on the sustainability of the 
Federal Universal Service Fund (USF).
---------------------------------------------------------------------------
    \1\ In most respects, my testimony reflects the positions taken by 
NASUCA, although there are some areas where NASUCA has not yet reached 
a consensus position.
---------------------------------------------------------------------------
                             i. background
    The most important issue facing the Federal Universal Service Fund 
is its long-term sustainability. We must ensure that the USF is 
sufficient, predictable and affordable for all parties involved: fund 
recipients, telecommunications providers and consumers. Before I 
address the current problems facing the USF, I believe it is 
appropriate to review the achievements of the USF since the passage of 
the Telecommunications Act of 1996 (the Act).
    Section 254 of the Act enshrined and expanded universal service 
principles which had been followed by the Federal Communications 
Commission for decades. Based upon the requirements of Section 254, the 
FCC, after consultation with the Federal-State Joint Board on Universal 
Service, created a new Universal Service Fund in 1997 containing 
several distinct support mechanisms. As a result, total USF funding has 
grown from $1.8 billion in 1997 to $6.2 billion during 2003. While 
these support amounts are large, they must be kept in perspective. 
Total telecommunications revenues in the United States last year were 
in excess of $230 billion. By annually collecting and redistributing 
less than 3% of these total revenues, we are able to make phone service 
affordable in all high-cost areas of the nation; support low-income 
customers; assist rural health care providers; and connect all 
classrooms to the internet. Moreover, all states and territories 
benefit from the USF as shown on Attachments 1 and 2.2 
That's quite an accomplishment, and one that everyone involved in the 
USF should be proud of as we move forward to ensure the long-term 
sustainability of the fund.
---------------------------------------------------------------------------
    \2\ Attachments 1 and 2 show actual disbursements to states during 
2002 under each of the federal USF support mechanisms. Attachment 1 
ranks the states based on total support received. Attachment 2 
considers the number of access lines in each state, and ranks the 
states based on monthly support received per line.
---------------------------------------------------------------------------
                          ii. the funding base
    As I mentioned earlier, total funding for the USF has grown from 
$1.8 billion to $6.2 billion. Unfortunately, the funding base for the 
USF has not kept pace with the growth in the fund, resulting in higher 
and higher USF assessments on carriers and their customers.
    The contribution base problem stems in large part from the wording 
of the Act itself. Section 254(b)(4) states that: ``All providers of 
telecommunications services should make an equitable and 
nondiscriminatory contribution to the preservation and advancement of 
universal service.'' However, Section 254(d) states: ``Every 
telecommunications carrier that provides interstate telecommunications 
services shall contribute on an equitable and non-discriminatory basis, 
to the specific, predictable, and sufficient mechanisms established by 
the Commission to preserve and advance universal service.'' In other 
words, even though the principle set forth in the Act is that all 
telecommunications providers should contribute to the fund, and even 
though the fund benefits all areas of the country, Section 254(d) 
limits the obligation to support the fund to a subset of 
telecommunications carriers--providers of interstate telecommunications 
services.3
---------------------------------------------------------------------------
    \3\ As a practical matter, virtually all telecommunications 
carriers provide some sort of interstate service.
---------------------------------------------------------------------------
    In 1997 the FCC decided to base the funding for the high-cost and 
low-income support mechanisms on each carrier's interstate and 
international revenue, while the funding for schools and libraries and 
rural health support mechanisms were supported by assessments on all 
revenues, interstate and intrastate. The use of intrastate revenues for 
USF assessment purposes was struck down by the Fifth Circuit Court of 
Appeals in 1999.4 Since that time the contribution base for 
the USF has been limited to only interstate and international revenues. 
As the USF has grown in order to meet the Act's direction that support 
be sufficient and explicit, and as the interstate revenue base has 
leveled off, the assessment rate has increased rapidly.
---------------------------------------------------------------------------
    \4\ Texas Office of Public Utility Counsel v. FCC, 183 F.3d 393 
(5th Cir. 1999) at 448.
---------------------------------------------------------------------------
    Attachment 3 shows the change in USF funding since 1997, along with 
changes in the interstate revenue contribution base for the 
USF.5 As you can see, the introduction of the schools and 
libraries fund and increases in the high-cost fund have driven the 
overall size of the fund. As a result, the fund has tripled, rising 
from approximately $1.8 billion in 1997 to approximately $6.2 billion 
this year. So long as interstate revenues grew at a reasonable rate, 
the ultimate impact of fund growth on the USF assessment rate and 
customers' bills was fairly moderate. However, beginning in 2000 
interstate revenue growth began to flatten out, and during 2002 started 
to decline. The result has been a steep escalation in the assessment 
rate, from 5.7% in the fourth quarter of 2000 to 9.5% in the third 
quarter of 2003.6 A universal service fund which cannot 
depend on the stability of its funding base is not predictable, is not 
sufficient, and is clearly not sustainable.
---------------------------------------------------------------------------
    \5\ Through 2002 the interstate revenue base for a particular year 
represents revenues reported from the previous year. The USF assessment 
rate shown on Attachment 3 is not the actual rate used in any quarter, 
but is derived by dividing annual funding by the annual interstate 
revenue base. The interstate revenue base for years 1998-2003 comes 
from USAC reports. The interstate revenue base for 1997 is estimated. 
Beginning in the second quarter of 2003, assessments are based on 
projected collected revenues.
    \6\ These increases have been flowed through to most customers by 
means of line items. Beginning in the second quarter of 2003, carriers 
can no longer mark up these assessments, but can only flow through the 
assessment rate approved by the Commission.
---------------------------------------------------------------------------
              iii. alternatives for the contribution base
    There are several alternatives available in order to stabilize the 
USF contribution base. One alternative would be to retain the current 
system, but remove restrictions in current rules which artificially 
depress the existing interstate revenue contribution base. One such 
restriction is the so-called ``safe harbors'' which limit the 
contribution responsibility of certain classes of carriers. Beginning 
in the second quarter of 2003, the FCC raised the safe harbor for 
wireless carriers from 15% to 28.5%.7 However, in spite of 
these changes the interstate revenue base continues to decline.
---------------------------------------------------------------------------
    \7\ Under the ``safe harbor'' provisions, a wireless carrier can 
claim that 28.5% of its total revenues are interstate without further 
documentation. A wireless carrier claiming a smaller percentage of 
interstate revenues must have adequate documentation to back up such a 
claim.
---------------------------------------------------------------------------
    Another restriction limits the contributions from broadband 
providers, one of the fastest growing areas of telecommunications. 
Under current rules, providers of broadband by means of digital 
subscriber line (DSL) service must contribute to the fund, while cable 
modem service providers are exempt. It is obvious that such an 
inequitable and artificial system of assessment on similar services 
cannot be maintained. However, proposals to eliminate the inequity by 
eliminating contributions from DSL providers would only further shrink 
the interstate contribution base.
    A second alternative would be to grant the FCC the authority to 
base contributions to the fund on total telecommunications revenues. 
While growth in the interstate revenue base has flattened out and begun 
to decline, total telecommunications revenues from end-users have 
continued to grow at a healthy pace. Shown on Attachment 4 is a 
comparison of changes in the universal service fund, the interstate 
revenue base, and total telecommunications revenues from 1997 to 
2003.8 As you can see, total telecommunications revenues 
would provide an adequate funding base for the USF. In fact, if total 
telecommunications revenues had been used as the funding base from the 
start, we would not be discussing this issue today. The growth in the 
fund could have been accommodated while keeping the assessment rate 
below 3%.
---------------------------------------------------------------------------
    \8\ On Attachment 4 USF Funding and the Interstate Revenue Base are 
taken from USAC reports. The Total Revenue Base is taken from the FCC's 
Telecommunications Industry Revenues reports. The funding base for 1997 
is estimated. Beginning in the second quarter of 2003, the USF funding 
base has been based on carriers' projected revenue collections.
---------------------------------------------------------------------------
    Use of total revenues would also eliminate disputes about whether 
revenues are intrastate or interstate, and would equitably spread the 
obligation to support universal service to all providers and to all 
customers based on their use of the network. However, basing federal 
universal service on total revenues would require a statutory change to 
clarify that the FCC has the authority to base contributions on all 
revenues, intrastate as well as interstate.9 In addition, a 
total revenues base could be susceptible to erosion in the future as 
more and more traffic, including voice traffic, migrates to the 
internet and is classified as ``information services,'' currently 
exempt from USF assessment.10 Finally, the impact of the use 
of total revenues on state universal service programs is unclear.
---------------------------------------------------------------------------
    \9\ On May 19, 2003, the members of the Federal-State Joint Board 
on Universal Service sent a letter to Senator Conrad Burns of Montana 
suggesting legislative changes to enable the FCC to use a total revenue 
base for universal service contributions.
    \10\ It should be noted that the FCC already has the discretionary 
power under 254(d) to require contributions from any other provider of 
interstate telecommunications ``if the public interest so requires.''
---------------------------------------------------------------------------
    A third alternative would be to base assessments on connections to 
the public switched telephone network, or on assigned telephone 
numbers. The FCC is currently considering several such proposals. While 
these connection-based or numbers-based proposals do enlarge the base 
of the USF, and minimize problems with classification of services or 
revenues as information services, they do have several flaws: (1) each 
proposal radically shifts the funding of the USF among industry groups; 
(2) each proposal appears to exempt pure providers of interstate long 
distance from making any contribution to the fund in contravention of 
the plain wording of Section 254(d); (3) each proposal requires 
capacity-based connection equivalents for high-capacity customers; and 
(4) each proposal shifts responsibility for payment of USF charges from 
high-use to low-use customers.
    A final alternative, which my office has proposed to the FCC, would 
be a hybrid of the proposals described above. For example, the 
Commission could continue to base 50% of the universal service 
assessment on interstate revenues, and assess the remaining 50% on end-
user connections to the public switched network. Such a hybrid would 
not require a statutory change and would ensure that all providers of 
interstate services, even those that did not provide end-use 
connections, would continue to contribute to support universal service. 
In addition, this 50/50 hybrid approach would mitigate impacts on low-
usage customers, and result in contributions from various industry 
sectors that are very close to those produced by use of total 
telecommunications revenues.
    In finding a solution to the contribution base problem, I agree 
with Senator Stevens of Alaska who said last spring: ``All companies 
that use the network, in my judgment, should contribute to universal 
service, regardless of the type of service they provide.'' 
11 I believe we must expand contribution responsibility to 
encompass all revenues and all services that connect to the 
telecommunications network. Since all benefit, all should contribute.
---------------------------------------------------------------------------
    \11\ TR Daily, March 26, 2003.
---------------------------------------------------------------------------
          iv. issues related to particular support mechanisms
    In looking at the long-term sustainability of the fund, we need to 
focus not only on broadening the contribution base, but also on 
controlling and focusing the funds paid out for the individual support 
mechanisms which make up the overall USF. Each of these support 
mechanisms presents unique issues which will have to be resolved. Even 
though many have argued that we must stabilize the fund--which implies 
that we should limit funding--we must be mindful that the Act requires 
the fund to be sufficient to carry out each of the universal service 
principles. For some mechanisms this may require a limitation in 
funding, while for others an expansion will be needed.
                          a. high-cost support
    The high-cost support mechanism is the oldest portion of the fund, 
and is still the biggest, amounting to $3.3 billion this year. Of this 
amount, approximately $800 million goes to non-rural companies, while 
$2.5 billion goes to rural carriers.12
---------------------------------------------------------------------------
    \12\ The term ``rural carrier'' is defined at 47 U.S.C. 153(47). 
Generally, rural carriers are small carriers serving rural and high-
cost areas, while non-rural carriers tend to be larger carriers, such 
as the regional Bell operating companies. There are approximately 80 
non-rural carriers which serve 90% of the access lines in the nation, 
while the 1400 rural carriers serve the remaining 10%.
---------------------------------------------------------------------------
    As shown on Attachment 3, total high-cost support has grown by over 
$1 billion since 2000. Most of this increase is the result of three new 
mechanisms which have been added to the fund: high-cost model support, 
interstate access support, and interstate common line support. These 
new funds have helped adapt the USF to the introduction of competition 
by making support explicit and portable. However, the continued growth 
in the high-cost fund has added to the unrelenting pressure on the 
assessment rate which must be paid by all consumers.
    Earlier this year, the FCC referred to the Joint Board a number of 
issues related to the growth of the high-cost fund. These issues 
include determination of how many lines to support, the cost basis of 
per line support, and whether guidelines should be adopted for state 
eligible telecommunications carrier (ETC) determinations.
1. Limitation of Support to a Single Line Per Household
    There is one issue common to all parts of the high-cost fund which 
threatens to enlarge the fund to an unsupportable size. Under current 
rules, all lines provided by ETCs in high-cost areas receive support. 
The support in any particular wire center is the same for all carriers, 
and is based on the costs of the incumbent carrier. However, rather 
than competing for universal service support, all ETCs that provide 
service receive support in equal per line amounts for all lines that 
they provide to a home or small business. For example, a single family 
in a high-cost wire center could be provided two landlines by an 
incumbent ETC and three cellular lines by a wireless ETC. Each of these 
carriers would receive equal support for each of the lines 
provided.13 As a result, the potential exists for a large 
increase in the high-cost fund as more and more carriers--especially 
wireless carriers--attain ETC status.
---------------------------------------------------------------------------
    \13\ Under the example provided above, if the per line support in 
the wire center was $10 per line per month, the incumbent ETC would 
receive $20 (2 X $10) per month in support. Once the wireless ETC began 
providing the three wireless ``lines,'' the wireless carrier would 
receive $30 (3 X $10) per month for providing service to the same 
household. However, the incumbent's support would not be reduced. Thus, 
the USF would be obligated to pay out $50 per month in total support 
for this household, even though per line support for the wire center is 
only $10 per month.
---------------------------------------------------------------------------
    It is estimated that during 2002, support for secondary lines 
amounted to $336 million, or 11.5% of the entire high-cost fund. 
Moreover, support paid to wireless carriers represents the fastest 
growing component of secondary line support. As shown on Attachment 5, 
high-cost support for wireless carriers has grown from $500,000 in 1999 
to approximately $120 million in 2003.
    If the high-cost fund is going to continue to provide affordable 
access in all parts of the country, then it cannot continue to 
subsidize the unlimited desires of each individual. I believe that 
federal USF support should be limited to a single line for each 
household,14 and that the choice of which carrier receives 
USF support should be left to each customer. This would mean that 
carriers would have to compete for the USF subsidy. This will increase 
customer benefits and stabilize the federal high-cost fund. Individual 
states should be free to subsidize additional lines if they so choose.
---------------------------------------------------------------------------
    \14\ In order to mitigate the impact of this change on rural 
carriers, per line support should be redetermined based only on single 
lines. However, once an additional ETC enters the rural incumbent's 
service territory, per line support should be frozen. This will prevent 
an unwarranted spiraling of per line support which is possible under 
current rules.
---------------------------------------------------------------------------
2. Determination of the Cost Basis of Per Line Support
    As I previously mentioned, the current high-cost system bases per 
line support on the costs of the incumbent carrier, and offers this 
support to all ETCs serving the same area. This is true even when 
competitive carriers--such as wireless carriers--may have costs that 
are substantially less than the wireline incumbent. Another means of 
limiting the growth of the high-cost fund would be to use each 
carrier's own costs as the basis for per line support. In order to 
ensure that no carrier receives an unwarranted windfall from USF 
support, support to competitors should be capped at the per line 
support received by the incumbent.
3. Guidelines for ETC Public Interest Determinations
    Under Section 214(e) of the Act, two different standards were 
adopted for designation of ETCs, depending on whether an area is served 
by a rural or non-rural incumbent carrier. For areas served by non-
rural carriers, the Act mandates that states must designate additional 
carriers as ETCs if they can provide all of the supported services 
15 and advertise the availability of those services 
throughout the service area. However, for areas served by rural 
carriers, states may designate additional ETCs, and must first find 
that it is in the public interest to do so.16
---------------------------------------------------------------------------
    \15\ The complete list of supported services is found at 47 C.F.R. 
 54.101(a).
    \16\ Section 214(e)(5) of the Act also requires any additional ETCs 
in a study served by a rural carrier serve the rural carrier's entire 
study area, unless the state and FCC concur that an area less than the 
entire study area is appropriate.
---------------------------------------------------------------------------
    Unfortunately, there are currently no standards to guide states' 
determination of the ``public interest'' under Section 214(e) of the 
Act. As a result, state ETC determinations in rural study areas have 
varied widely in terms of conditions which must be met by carriers 
prior to and after ETC designation. In many states the obligations on 
competitive ETCs are less than those imposed on incumbent ETCs.
    Almost every party agrees that one of the purposes behind Section 
214(e) was to allow states to identify those areas where it was so 
costly to serve, that it made no sense to have more than one subsidized 
carrier. However, since states have no responsibility for funding the 
federal USF, and under current rules additional ETCs mean more federal 
USF money coming into the state, it is very difficult for states to 
find that it is not in the public interest to designate additional ETCs 
in rural areas. This is true regardless of the cost to serve any 
particular area.
    I believe the FCC should establish guidelines for the public 
interest determination. The guidelines should allow states to level the 
playing field among ETCs by requiring all ETCs to offer an unlimited 
local calling plan, equal access to long distance carriers, and a 
comparable monthly price for local service. ETCs should also be 
required to follow the same consumer protection rules, including 
billing and collection rules, that apply to incumbents.
    In order to provide guidance to the states in identifying those 
areas where there should be a limit on the number of subsidized 
carriers, I believe the FCC should also establish ETC guidelines based 
on the amount of per line support received by each study area. Under 
this approach, in rural study areas receiving an average of $30 or more 
per line in monthly support the guideline would state that it is 
presumed that it is not in the public interest to designate more than 
one subsidized carrier, i.e., more than one ETC. In areas receiving 
more than $20 per line in monthly support, but less than $30 per line, 
it would be presumed that no more than one additional subsidized 
carrier should be designated. There would be no limitation on the 
number of ETCs in study areas receiving less than $20 per line in 
support. States would be able to overcome these presumptions by 
specific evidence about particular carriers or particular areas.
    Establishing such presumptive benchmarks based on the amount of 
monthly per line support for each study area would be easy to 
administer, and would encompass the truly small study areas where it is 
especially costly to serve. Of the 1400 rural study areas, those study 
areas receiving over $20 per line in monthly high-cost support serve 
only 1.7% of the total access lines in the United States, but receive 
almost 45% of total high-cost support. In other words, these study 
areas represent the small, high-cost areas where presumably it makes no 
sense to have more than a limited number of subsidized carriers. 
Placing limitations on the number of ETCs in these truly high-cost 
areas will help ensure the long-term sustainability of the fund, and 
will help ensure that consumers in those areas continue to have high-
quality access at affordable rates.
                         b. low-income support
    The FCC greatly expanded the eligibility criteria and the size of 
the low-income support mechanism in 1997. Nevertheless, participation 
in the Lifeline and Link-Up programs varies widely among the states. As 
shown on Attachment 1, of the $673 million paid out for low-income 
support in 2002, almost half went to one state, California. This is not 
to disparage California's low-income program, but to point out that 
low-income support funds are distributed very unevenly throughout the 
nation. There are also overall fund size implications from this skewed 
distribution. If every state's program was as successful as 
California's, the size of the low-income support fund would more than 
double to $1.5 billion. The FCC currently has a proceeding open to 
review the operation of the low-income support mechanism. A Recommended 
Decision from the Joint Board was issued in April 2003 which endorsed 
expanding Lifeline and Link-Up eligibility to include customers with 
incomes at or below 135% of the federal poverty guidelines. NASUCA has 
supported the use of a benchmark based on 150% of the federal poverty 
guidelines, and has encouraged the use of automatic enrollment and 
self-certification to ensure that as many eligible customers as 
possible receive Lifeline benefits.
                    c. schools and libraries support
    The schools and libraries fund has been capped since its inception 
at $2.25 billion. Demand for schools and libraries funds have always 
far exceeded the cap. As noted by the FCC in its Order of June 13, 
2002, annual demand for e-rate funding is almost double the funds 
available. As more and more schools have become connected to the 
internet through the e-rate, the demand for recurring or priority one 
funds has increased. The result has been that the money available for 
internal connections in the schools yet to be wired has been declining. 
The FCC's decision to allow unused schools and libraries funds to be 
rolled forward to increase future funding may help resolve this 
problem, but pressure on the cap is likely to continue. The FCC is also 
currently considering comments on reforms to the schools and libraries 
fund to address allegations of fraud and abuse, and inefficiency in the 
administration of the program.
                      d. rural health care support
    Unlike the other support mechanisms, the rural health fund has had 
difficulty generating sufficient demand. The FCC originally anticipated 
a rural health fund sized at $400 million per year. However, in spite 
of repeated attempts to remake the fund, disbursements have remained 
low, only $16.4 million in 2002. Like the low-income program, benefits 
under the rural health care program are distributed unevenly. During 
2002 Alaska received 72% of total USF rural health care funding.
    Although the FCC is currently examining the operation of the rural 
health fund, it is clear that the root cause of the problems with the 
fund lie in the wording of Section 254. Unlike the schools and 
libraries support mechanism which provides discounts from regular 
prices on all telecommunications services, and pays for internal 
connections, Section 254(h) limits the rural health fund to the 
difference between rates available to health care providers in rural 
and urban areas of a state. Since many states have rural rates which 
are lower than urban rates, or have ``postage stamp'' rates for data 
services, the rural support mechanism has been of limited utility in 
meeting the needs of rural health providers. A statutory change should 
be considered which would make the rural health section of the Act 
parallel with the schools and libraries by providing services ``at 
rates less than the amounts charged for similar services to other 
parties.''
                             v. conclusion
    In order to be stable and sustainable in the long-term, the USF 
must be configured like a pyramid: it must have a broad and stable base 
of contributions at the bottom, and a narrow but sufficient focus of 
support at the top. The current universal service fund requires work on 
both ends of this structure. Issues related to the contribution base 
must be resolved. Since all benefit, all should contribute. In 
addition, the limited resources of the fund must be properly targeted 
to carry out the purposes of the Act. In order to continue the public 
policy success of the universal service fund, we must support access, 
not excess.
[GRAPHIC] [TIFF OMITTED] 99965.011

[GRAPHIC] [TIFF OMITTED] 99965.012

[GRAPHIC] [TIFF OMITTED] 99965.013

[GRAPHIC] [TIFF OMITTED] 99965.014

[GRAPHIC] [TIFF OMITTED] 99965.015

    Mr. Upton. Thank you very much.
    Those buzzers, you might have guessed, were not a fire 
drill. But we have got a couple of votes on the House floor. 
And we will temporarily adjourn at this point for about 20 
minutes. We will resume with Mrs. Greene's testimony after 
these two votes.
    [Brief recess.]
    Mr. Upton. I think we are okay for votes for a little 
while. Our next votes will be many more. So it will put a real 
crimp to where we are at. So we will try to get finished.
    Ms. Greene, you are next. Welcome to the committee.

                 STATEMENT OF MARGARET H. GREENE

    Mrs. Greene. Thank you, Mr. Chairman. It is my honor to 
join this panel today in discussing universal service, one of 
the most important issues facing the future of the 
telecommunications industry, and its contributions to the 
country.
    Connecting virtually all Americans is a key goal in a 
fundamentally altered communications world. Far beyond these 
halls, of course, we see broad evidence of this new world. Your 
son goes off to college and calls home via the computer. You 
walk down the street. And it seems the whole world has sprouted 
a cell phone from their ear. You sign up for cable television. 
And you get not just TV but internet and phone service as well.
    It's an exciting time for consumers. It's a challenging 
time for our companies. And it is also a challenging time for 
this body. The old rules, written for the old world, have less 
and less application today. These rules have to be adapted as 
quickly as possible to a new marketplace that is being defined 
today by rapid technological change and mounting competition.
    This is the challenge for U.S. telecom policy. The 
universal service is no exception. The fund is in significant 
jeopardy today. As communications migrate to broadband, the old 
world base of universal service funds, local and long distance 
wire line, is shrinking.
    At the same time, demand for the fund's resources is 
exploding. The 1996 act dramatically expanded the size of the 
fund by declaring that universal service was no longer merely 
about ensuring folks in remote areas had service. Instead, it 
became about financing a choice of providers, a profoundly more 
expensive proposition in areas where the market alone struggles 
to support even one company at reasonable rates. This change 
opened the floodgates and could cost ratepayers an extra $2 
billion annually in less than 4 years' time.
    Some suggest we should cap the fund. Such an approach 
ignores a history of distorted economics around achieving 
universal service and allows the excesses that do exist to 
continue unabated. The more constructive approach, restore 
discipline in terms of who and how many companies have access 
and get all participants in the Twenty-First Century 
communications marketplace to contribute to a Twenty-First 
Century universal service fund.
    In a marketplace being defined by the fact that cable 
satellite, wireless, wire line, and internet offerings all 
compete directly, it is imperative that outdated rules not be 
permitted to distort what should be consumer-driven 
competition. For universal service, that means ensuring 
neutrality on both sides of the equation, who pays in and who 
takes out?
    For contributions, a reasonable fee assessed across today's 
far broader pool of market participants would help ensure the 
fund's viability without overburdening any set of companies or 
unfairly throwing a price advantage to newer platforms.
    On the distribution side, United States Telecom 
Association, of which I served as chair this year, believes 
that the Federal fund should be asked to support only one ETC 
in each high-cost area. States that wish to subsidize companies 
by designating additional providers should be permitted to do 
so provided that they pay the additional cost so the fund is 
not destabilized for the entire Nation.
    USTA also believes that there should be one high standard 
for eligibility across all platforms. Either you deliver true 
universal service or you don't. Of course, these public 
resources should serve their original purpose: helping offset 
the high cost of actual infrastructure. Given the candle-lit 
weekend so many East Coast residents have had in recent weeks, 
we as a Nation have a newfound appreciation of the need for 
policies that ensure essential infrastructure remains robust 
and reliable.
    In terms of telecommunications, we can do that through a 
focused, adequately funded universal service fund, through 
policy that encourages companies to invest on their own, and by 
being less prescriptive in how networks are built.
    Today universal service requirements go down to the service 
and the line. Why not demand one result? You've got to serve 
everyone. You've got to do it reliably. And you have to deliver 
service comparable in scope with what is available elsewhere in 
terms of public safety obligations like 911. And then let the 
companies figure out how best to get there.
    Command and control regulations by nature are based on the 
past. Network architecture at such a pivotal moment in the 
information revolution must be free to look to the future. U.S. 
policy should encourage vigorous investment that keeps our 
infrastructure sophisticated and strong.
    Grafting the old ways onto a new world doesn't get us 
there. That is primarily our concern with H.R. 1582. While we 
certainly appreciate Congressman Terry's leadership, we think 
this bill does not go nearly far enough to safeguard universal 
service. It does not address at all the contribution side of 
the equation. And it imposes no new discipline in either how 
many companies have access or what standard of service they 
provide. And the bill addresses only the non-rural side of 
universal service, leaving out the lion's share of the 
communities that the fund serves.
    Mr. Chairman, we need to be bold in preserving the future 
of universal service in a new communications era. And time is 
of the essence. By asking everyone to pay in and everyone to 
meet the same high standard for eligibility, we can deliver a 
true, fair, and constructive universal service policy for the 
Twenty-First Century.
    I thank you for holding this hearing today. It is an 
important issue. I thank you for your leadership and timely 
consideration.
    [The prepared statement of Margaret H. Greene follows:]
Prepared Statement of Margaret H. Greene, Chair, United States Telecom 
                              Association
    Universal service is one of the most important issues facing the 
future of the telecommunications industry and its contributions to the 
country. Connecting virtually all Americans to the opportunity and 
security of the dial tone was one of the most important achievements of 
the last century. In today's Information Age, universal service 
continues to embody the nation's commitment to keeping the American 
dream alive in every community--urban and rural.
    The United States Telecom Association represents the entire local 
telecommunications industry--from my company, BellSouth, to small rural 
companies to a host of innovative companies in between. We have worked 
extensively to forge an industry-wide position to ensure a strong 
future for this vital national priority in a fundamentally altered 
communications world. The old rules, written for the old world, have 
less and less practical, constructive application today. These rules 
have to be adapted--as quickly as possible--to a new marketplace that 
is being defined today by rapid technological change and mounting 
competition. In a marketplace being defined by the fact that cable, 
satellite, wireless, wireline and Internet offerings all compete 
directly, it is imperative that outdated rules and antiquated 
regulatory classifications not be permitted to continue to distort what 
should be consumer-driven competition.
    This is the challenge for U.S. telecom policy. Universal service is 
no exception. The Fund is in significant jeopardy today, caught in a 
perilous limbo between our regulatory past and a future that's already 
here. The revenues that serve as the base for contribution to the 
universal service fund are shrinking, putting pressure on the revenue 
side of the Fund that is unsustainable. At the same time, demand for 
the Fund's resources is exploding in an undisciplined and arguably 
unproductive way. The issue of universal service must be dealt with in 
a comprehensive way. Both the assessment mechanism and the distribution 
formula must be addressed, and quickly, if we are to sustain this long 
held goal of affordable and robust communications for all Americans.
    The funding side of universal service is in trouble. It focuses on 
historical distinctions in geography and technology that no longer 
serve as viable definitions in today's telecommunications world. 
Universal service funding is derived from an assessment on wireline 
companies, local and long distance, and wireless companies, based on a 
factor applied to interstate revenues. In a world of bundled minutes 
delivered over at least four different technologies, this becomes 
increasingly meaningless.
    As communications migrate to broadband, the old world base of 
universal service funds--local and long distance wireline--is 
shrinking. And increasingly, alternate technologies, like cable modem 
and VOIP, offer directly competitive services while being exempt from 
the social responsibilities attendant to universal service. Like so 
many other aspects of our current regulatory scheme for 
telecommunications, this puts the historic providers of universal 
service, those living with the legacy of using wireline revenue flows 
to subsidize social goals, at a competitive disadvantage in a robustly 
competitive marketplace. This situation cannot exist without serious 
detriment to the regulated carriers and it must be fixed.
    Fixing this competitive/social policy mismatch means, for the issue 
of universal service, ensuring neutrality on both sides of the 
equation. Parity of obligation must exist between those who offer 
functionally equivalent telecommunications services. If broadband 
connections are to be assessed, as DSL is today, then functional 
equivalents, like cable modem service, must pay.
    Furthermore, users of intrastate as well as interstate services 
should contribute to universal service. The distinction between 
intrastate and interstate services is artificial and unsustainable in 
today's world. It creates perverse incentives to mischaracterize 
traffic and again places the burden of supporting universal service on 
less than the full universe of subscribers benefiting from universal 
service. It further puts a cost on the consumer of having to Fund the 
arcane regulatory exercise of allocating revenues to a particular 
geography or jurisdiction even though those revenues are derived from 
services, like bundled wireless or local and long distance minutes, 
designed to free the consumer from the constraints of geography.
    Besides these serious issues that constrain the funding area, 
demand for the fund's resources is exploding. This is due to the 1996 
Act, which dramatically expanded the size of the Fund by declaring that 
universal service was no longer merely about ensuring folks in remote 
areas had service. Instead, it became about financing a choice of 
providers--a profoundly more expensive proposition in areas where the 
market economics make it difficult to support even one company at 
reasonable rates. This change opened the floodgates. Left unabated, it 
is expected to cost ratepayers an extra $2 billion [annually] in less 
than four years' time.
    On the distribution side, USTA believes this rise in demand on the 
Fund is unwise, unnecessary and unsustainable. Discipline must be 
brought to bear around distribution of the Fund. This can be 
accomplished by implementing some specific principles governing 
eligibility to draw from the Fund. Specifically, USTA asserts that the 
federal Fund should be asked to support only one ETC in each high-cost 
area. That ensures universal service. States that wish to subsidize 
competitors by designating additional providers should be permitted to 
do so, provided they pay the additional cost, so the Fund is not 
destabilized for the entire nation. Again, basic connectivity is the 
goal of universal service.
    To ensure connectivity, rates in high cost study areas should be 
comparable to rates in other parts of the country and, thus, widely 
affordable. To that end, universal service support should be used to 
encourage continued investment in and rehabilitation of high cost study 
area infrastructure and help recover the actual or embedded cost of 
such networks (not lines or services) consistent with the recognition 
of appropriate distinctions based on the size of the study area. 
Telecommunications is a capital intensive business and steady 
investment is required for consumers to be well served. Choosing only 
certain lines or services to support ignores the essential nature of 
telecommunications as a network industry. Each part of the network can 
support multiple lines or services. It is administratively burdensome 
as well as nonsensical to attempt to allocate support to only certain 
lines or services provided by a network that operates as an integrated 
organism.
    USTA also believes there should be one high standard for 
eligibility across all platforms. Either you deliver true universal 
service or you don't. Of course, it should go without saying that these 
public resources should serve their original purpose: helping offset 
the high costs of actual infrastructure. Given the candle-lit weekend 
so many East Coast residents have had in recent weeks, we as a nation 
have a newfound appreciation of the need for policies that ensure 
essential infrastructure remains robust and reliable. In terms of 
telecommunications, we can do that through a focused, adequately funded 
Universal Service Fund; through policy that encourages companies to 
invest on their own; and, by being less prescriptive in how networks 
are built.
    Today, universal service requirements go down to the service and 
the line. Why not demand one result? You've got to be willing to serve 
everyone; you've got to do it reliably; and you have to deliver service 
comparable in scope with what is provided elsewhere, including meeting 
all public safety obligations. This is precisely the constructive role 
that government should play today. Yes, consumers should define the 
market--prices, services, technology. But government can ensure 
essential services--from 911 to ready, affordable access to a dial 
tone--reach all Americans. And, U.S. policy should encourage vigorous 
investment that keeps our infrastructure sophisticated and strong.
    Grafting the old ways onto a new world doesn't get us there. That 
primarily is our concern with HR 1582. We certainly appreciate 
Congressman Terry's leadership, but we think this bill does not go 
nearly far enough to safeguard universal service.
    There are three large categories of support in the federal 
Universal Service Fund; the e-rate for schools, libraries and rural 
health care, the low income program, and high cost support for high 
cost areas. The Terry bill focuses in on one of about twelve categories 
of funding in the high cost support program and essentially 
redistributes funds from high cost rural communities in Mississippi, 
Alabama and West Virginia. Its companion measure in the Senate (S. 
1380) spares West Virginia from harm and slashes funding from the 
Commonwealth of Puerto Rico by redistributing two categories of 
funding.
    In part to control the size of the Universal Service Fund and to 
ensure that support went to carriers providing a substantial amount of 
service to the highest cost, most rural areas, the FCC determined that 
levels of support for non-rural carriers should be averaged on a state-
wide area. For large carriers, this is relatively consistent with the 
practice of averaging support on a ``study area'' basis, which for 
these carriers was generally an entire state.
    Those non-rural carriers with large numbers of lines concentrated 
in urban areas relative to their rural lines did not generally receive 
support from this category of funding. Funding went to those carriers 
in states serving large numbers of rural lines relative to total lines.
    The Terry bill seeks to change the granularity of calculation of 
the burden of high cost, largely rural lines from a state-wide average 
to a much smaller wire-center average and then impose an artificial 
``state-wide'' cap of 5% in the House bill and 10% in the Senate bill 
on the distribution in the large company category of funding. The 
apparent purpose of those caps is to simply redistribute funding among 
large carriers without regard to the needs of affected consumers or 
actual investment. It in fact rewards carriers that have sold off rural 
exchanges and punishes those carriers that have consistently served 
rural communities.
    The Terry Bill does not truly impose new discipline, either in how 
many companies have access to the fund or what standard of service they 
provide. It robs from Peter (Puerto Rico) to pay Paul (Qwest) and even 
then addresses only the non-rural side of universal service, leaving 
out the lion's share of communities the Fund serves.
    Similarly, universal service cannot be looked at in isolation--the 
entire regulatory regime under which carriers operate today impacts 
their ability to provide universal service. Government managed 
competition is far inferior to the free market in its ability to 
efficiently allocate resources to provide quality ubiquitous services 
to consumers. Market based competition in telecommunications will lead 
to increased capital investment, new jobs, economic growth, and a 
positive impact on the ability of network operators to provide 
universal service with, in some cases, a lesser dependence on universal 
service funding.
    We need to be bold in preserving the future of universal service in 
a new communications era. And, time is of the essence. Without 
significant change, four years from now, ratepayers will have a tab 
that's $2 billion higher--Federal policy will continue to discourage 
investment in vital national infrastructure--and outdated government 
rules will continue to pre-empt the consumers' judgment in defining the 
shape of American innovation.
    By asking everyone to pay in and everyone to meet the same high 
standard for eligibility, we can deliver a true, fair and constructive 
universal service policy for the 21st century, one that keeps the 
nation's commitment to ensuring real opportunity in every American 
community.

    Mr. Upton. Thank you very much.
    Mr. Lubin, welcome.

                     STATEMENT OF JOEL LUBIN

    Mr. Lubin. Thank you, Mr. Chairman and members of the 
subcommittee. Thank you for inviting me here today to testify 
on behalf of AT&T on the subject of universal service.
    AT&T is the Nation's oldest and most far-reaching 
telecommunications carrier. And we are proud to serve customers 
in every corner of the country. More than any other carrier, we 
tie the Nation together. And we are proud to be the carrier 
that brought the term ``universal service'' to the 
telecommunications lexicon.
    In 1996, Congress directed the FCC to ensure that universal 
service was reformed in a manner that would make subsidies 
specific, predictable, and explicit. Seven years later, this 
directive has not been met fully. The universal service system 
is struggling to keep up with the dynamic marketplace, 
technologically driven marketplace. And without change, the 
system will come under increasing pressure and ultimately 
become unsustainable.
    Fortunately, there are changes that could be implemented by 
the FCC within the existing structure of the act that can both 
alleviate the pressures and provide a universal service system 
that will be compatible with technological change and 
competition. Today I wish to highlight two of these issues that 
we believe are essential.
    First, the change necessary because of the demands on the 
system are ever-increasing while the base on the service, 
universal service, funds are collected is shrinking. The 
situation is both competitively biased and economically 
unsustainable. Left unchanged, it will put the USF in a death 
spiral while raising the assessment rates, will erode public 
support for the universal service concept. This would be a 
problem, not just for rural America but for all of America.
    I estimate that the universal service assessment in the 
year 2004 will exceed 10 percent. AT&T's solution to the 
problem is to move away from a revenue base system to a 
contribution base system on telephone numbers for those 
services that have telephone numbers and on a connections to 
the public network for special access and private line services 
that do not utilize telephone numbers.
    A numbers-based solution has several advantages over the 
current system. First, it would be competitively neutral. 
Second, it would be predictable and simple, two things that 
customers tell us they appreciate. Let's remember it is the 
customer who pays the bill. We all act as collection agents to 
collect the money and hand it off to USAC.
    Third, a numbers-based solution will ensure that the system 
is not left to crumble as telephone traffic migrates to new 
technologies and protocols, such as voice over the internet. We 
believe that a numbers-based solution to the question of how 
carriers contribute to universal service could be achieved 
under the existing law. And we believe that a numbers-based 
solution would provide adequately for both current and future 
demands on the universal service system. What is needed is the 
will to reform the universal service assessment mechanism.
    The second change that I would like to highlight today is 
the issue of eliminating the remaining disparities associated 
with interstate access rates. As I said at the start, AT&T is 
proud of its heritage as the carrier that truly ties America 
together, but today the challenge of tieing America together is 
being borne significantly by AT&T. AT&T is carrying the burden 
even as it must increasingly compete in the long distance 
market with regional Bell operating companies that provide 
service only in their largely urban lower-cost service areas.
    As part of the 1996 act, Congress ensured that all 
Americans could be tied together affordably by mandating rate 
averaging and rate integration for long distance services. But 
interstate access charges, a significant component of the cost 
of long distance services, are not the same in all parts of the 
country. So that when AT&T averages toll rates Nationwide, it 
has to charge its customers in the RBOC territory more than it 
otherwise would in order to charge customers in small rural 
telco areas the same rate. This puts carriers that serve rural 
America at a competitive disadvantage vis-a-vis carriers that 
serve primarily urban and suburban customers. We do not believe 
this is something that good public policy should encourage.
    Two years ago AT&T presented a proposal to reform rural 
access rates to the FCC. Since then, the economic challenges 
that led to our plan have gotten worse. We need relief. Without 
relief, the marketplace will drive AT&T and other National 
carriers to find other less optimal solutions to the problem. 
Options are not attractive, and rural America should not be 
forced to bear their costs.
    I look forward to answering your questions. Thank you again 
for the opportunity to appear this afternoon.
    [The prepared statement of Joel Lubin follows:]
      Prepared Statement of Joel Lubin, Vice President, AT&T Corp.
    Mr. Chairman, and members of the Subcommittee, thank you for 
inviting me to testify on behalf of AT&T as you address the important 
topic of universal service reform.
    It was AT&T that brought the term ``universal service'' to the 
telecommunications lexicon. We are proud of our more than 125-year 
history as the nation's oldest and most far-reaching long-distance 
carrier; more than any other carrier, we tie together all parts of 
America. On the basis of this experience, we understand the importance 
of maintaining a vibrant and sustainable universal service system.
    In 1996, the Congress directed the Federal Communications 
Commission, with the assistance of a Federal-State Joint Board, to 
charter a new universal service mechanism--one that would work with, 
not against, competition in all markets. This new universal service 
mechanism was to be specific, predictable, and sustainable as 
competition grew, and it was to be competitively neutral, both in the 
way that contributions were collected and support distributed.
    Unfortunately, seven years and many Commission proceedings later, 
these goals have yet to be achieved. Some progress has been made, most 
notably through adoption of the CALLS plan in May 2000 and later with 
adoption of the MAG plan in October 2001, but we cannot yet say that we 
have a universal service system that meets all of the goals set forth 
by Congress in 1996. Instead, we have an ever-increasing fund that is 
being raised from an ever-shrinking funding base--interstate and 
international end-user telecommunications revenues--and a collection 
mechanism that is discriminatory and self-defeating. Something has to 
give.
    It is beyond question that the fund is increasing. The fund today 
stands at more than $6 billion per year. Both the Office of Management 
and Budget and FCC staff project additional increases in the size of 
the universal service fund, even if the Commission makes no further 
policy changes that add to the obligations supported through the USF. 
OMB projects total growth at just under 2% per year for FY2004-2007. 
Only two parts of the fund won't grow--the schools and libraries fund 
and the $650 million interstate access support for areas served by 
price-cap carriers. All other parts of the USF can and are likely to 
increase.
    At the same time the system faces increasing demands for support, 
the universal service funding base--interstate and international end 
user telecommunications revenues--continues to shrink. In 2001 and 
2002, the universal service funding base shrank by an average of 8% per 
year. If that rate of decline continues in combination with the 
projected growth in the demand for universal service support, in three 
years, the USF contribution factor--the rate carriers are assessed and 
that they pass on to consumers at the bottom of the bill--would rise 
from 9.5% today to 12.8% in 2006. I believe that such a result is 
likely to be both economically and politically unsustainable.
    The competitive inequities built into the current system for 
raising universal service funding will only speed the shrinkage of the 
universal service funding base. These competitive inequities take 
several forms. For example:

 if a consumer is a high-volume user of interstate long-distance 
        service--the customer who traditionally has contributed the 
        most to the support of universal service--that consumer can pay 
        substantially less into the fund by migrating his or her long-
        distance calling to a wireless phone.
 if a consumer purchases interstate long-distance service bundled with 
        local service or information services, he or she can contribute 
        less to the universal service fund if the carrier providing the 
        bundle allocates more revenue to the parts of the bundle that 
        do not contribute to the support of universal service than to 
        the interstate long-distance portion of the bill, which does 
        contribute to universal service.
 if a consumer uses service provided by international carriers that 
        carry little or no interstate traffic, he or she can avoid 
        universal service charges altogether on that international 
        calling.
 if a consumer uses some Voice over Internet Protocol services, e-
        mail, or instant messaging, it is likely that he or she would 
        not contribute anything to support universal service.
    Each of these outcomes encourages carriers to seek ways to avoid 
contributing to the universal service fund and, increasingly, price 
sensitive consumers are moving to services that allow them to avoid 
charges related to the support of universal service. When this happens, 
the universal service fund's contribution base shrinks, which causes 
the assessment rate to rise, which drives more consumers to find ways 
to minimize their contribution. Perpetuation of this scenario will 
drive the fund into a ``death spiral,'' something that is completely at 
odds with what the Congress directed when it added Section 254 to the 
Communications Act.
    Because AT&T is deeply concerned about this problem, we have 
proposed a solution to the FCC--a universal service contribution system 
based on telephone numbers for those services that use telephone 
numbers, and on connections associated with special access and private 
line services that do not use telephone numbers. If numbers and number-
equivalent connections grow 2% per year, a 2% annual increase in the 
fund would not change the projected $0.98 per number universal service 
assessment.
    Moreover, a numbers-based solution offers the advantage of being 
``future-proof.'' Voice-over-Internet-Protocol (VoIP) providers give 
their customers a telephone number so that those customers can receive 
calls from the public switched network. This assignment of numbers will 
trigger an obligation to support universal service, with the effect of 
keeping VoIP in the universal service contribution base. Preventing 
``leakage'' from the universal service system is key to maintaining the 
stability of the fund, and by focusing on numbers rather than 
technologies, we can avoid the need to impose ``one-size fits all'' 
regulation on emerging services such as VoIP.
    A numbers-based solution could be implemented today by the 
Commission, under its existing statutory authority. This is not true 
with respect to the call to ``expand the base'' by assessing intra-
state revenues. Statutory change clearly would be necessary to achieve 
that goal, and even with such a change, it is not clear that just 
adding intra-state revenues to the mix would be sufficient to sustain 
the fund over the long haul. Revenues are unpredictable and it is not 
clear that revenues will continue to climb; if revenues plateau or 
drop, the assessment factor will have to rise--exactly as it has today 
as interstate revenues have stagnated.
    The connections-based solution proposed by BellSouth and SBC 
suffers from the fact that it would not necessarily eliminate the 
problem of having customers face multiple USF charges. In my view, this 
is a major failing both because it contributes to consumer confusion 
and because it imposes additional cost on the industry.
    Whether or not the Congress contemplates amendments to Section 254, 
what is needed is the will for reform.
    If, however, Congress decides that additional statutory authority 
is a necessary precursor to reform of the universal service system, 
such legislation should be narrowly tailored and exclusively focused on 
enabling the Commission to consider a wider array of inputs for funding 
universal service programs. An ``enabling approach'' to universal 
service legislation should permit the Commission to consider a funding 
mechanism based on inter- and intra-state revenues, assigned, working 
telephone numbers, connections to the public switched network, or any 
combination of these elements, so long as such funding mechanism is 
competitively neutral among all providers and technologies. Reform 
along these lines could help to ensure the near- and long-term 
sustainability of the fund, maximize the support of universal service 
among the broadest array of providers of telecommunications services, 
reduce the need for regular revisions in the assessment mechanism 
(which would minimize carrier costs and consumer confusion associated 
with such changes), and reduce the likelihood that any reforms adopted 
by the Commission would be subject to challenge in the courts.
    As I said at the outset, AT&T is proud of its heritage as the 
carrier that truly ties America together. But today, the burden of 
tying America together--of providing long distance service in all 
corners of the country--is being borne substantially by AT&T. AT&T is 
carrying this burden, even as it must increasingly compete in long 
distance with RBOCs that provide long distance service only in their 
largely urban, lower-cost service areas.
    As part of the 1996 Act's universal service provisions, Congress 
ensured that all Americans could be tied together affordably by 
mandating rate averaging and rate integration for long distance 
services.
    But interstate access charges--a significant component of the cost 
of long distance service--are not the same in all parts of the country. 
The geographic toll rate averaging provisions of Section 254(g) make it 
imperative that the remaining traffic sensitive cost disparities be 
removed from interstate access rates and this support be provided 
instead through the universal service fund.
    In most areas served by the RBOCs, this reform was implemented 
through the CALLS plan, and interstate access charges are now 
approximately .6 cents per access minute. In the areas served by small, 
rural carriers not covered by the CALLS plan, the average interstate 
access charges AT&T faces are much higher. For example, the average 
NECA minute of access averages 2.6 cents per minute. When AT&T averages 
its toll rates nationwide, it has to charge its customers in the RBOC 
territory more than it otherwise would, in order to charge the customer 
in the small, rural carrier's service area the average rate.
    This burden was barely bearable before Bell entry into the long 
distance market, when AT&T had to compete with MCI, Sprint, and other 
carriers that could choose not to serve certain geographies or service 
areas. Now, with the Bells having secured approval to enter the long 
distance market in most of the country, this burden has become 
intolerable. Verizon, which is already the nation's third largest long 
distance carrier, gets an unfair competitive advantage from the Act's 
toll averaging requirements because it doesn't serve all of America. In 
addition to incenting certain carriers not to serve rural America, 
these high access changes--and the desire to avoid paying them--
provided the economic incentive for the ``Canadian Gateway'' access 
fraud committed against AT&T.
    Fortunately, the 1996 Act allows for a solution that preserves toll 
averaging while restoring a level playing field to long distance 
competition. The local network costs--primarily high switching and 
transport costs--that lead to these high rural company access charges--
which can be as high as 10 cents per minute of use--could be supported 
through explicit universal service funding.
    More than two years ago, AT&T and several other carriers presented 
just such a proposal to the FCC. Unfortunately, the Commission has not 
implemented our proposal, and since that time, the economic challenges 
that led us to file our plan have gotten worse. The need for relief is 
now acute.
    In order to alleviate these competitive problems and eliminate any 
incentive for parties to ``game the system,'' the Commission should 
move expeditiously to reform the inter-carrier compensation regime. 
Unless the Commission acts aggressively, the marketplace will force 
AT&T and other national carriers to find other, less optimal solutions. 
Those options are not attractive to us, nor should they be attractive 
to policymakers, and rural America should not be forced to bear their 
cost.
    Thank you again for the opportunity to testify here today. At AT&T, 
we believe firmly that a vibrant, sustainable universal service system 
is important to the well-being of both the telecommunications industry 
and the American economy. But decisions must be made, and some bold 
actions taken to secure universal service for the future. On behalf of 
my company, I hope you agree, and look forward to working with you and 
the members of this Subcommittee as you continue your important work in 
this area.

    Mr. Upton. Thank you.
    Mr. Post?

                     STATEMENT OF GLEN POST

    Mr. Post. Thank you, Mr. Chairman. My name is Glen Post. I 
am Chief Executive Officer and Chairman of the Board for 
CenturyTel. I appreciate the opportunity to speak before you 
today. I am representing CenturyTel and the Independent 
Telephone and Telecommunications Alliance, ITTA. ITTA is an 
association of 13 mid-sized telecommunications companies who 
together serve more than 10 million lines in 40 States.
    CenturyTel is a leading provider of telecommunications 
services to 2.4 million customers, mostly in rural areas, the 
smaller cities across the country, in 22 States that include 
many of the States represented by the members of this 
subcommittee.
    Many regulatory and technology changes have taken place 
since the act was passed in 1996. We want you to know that ITTA 
companies share common goals with the larger Bell operating 
companies and the smaller telephone companies to maintain the 
incentive to invest in our markets and to see meaningful 
deregulation of our businesses. However, this hearing should 
not be about companies. It should be about consumers and the 
continuity of the network that keeps us all connected.
    The Nation's telecommunications future is at a crossroads. 
Evolving technology, competition, and converging network 
platforms are rapidly outpacing our ability to keep rates 
comparable and affordable for all consumers, regardless of 
where they live. In our view, affordable modern 
telecommunications infrastructure and advanced services can 
make the difference between success or failure in economic 
development, creation of jobs in rural markets.
    Universal service support as envisioned by the act is still 
the telecommunications linchpin for millions of Americans and 
thousands of communities. It would be fair to say that perhaps 
no other industry has the potential to more directly impact and 
improve the lives and livelihoods of your constituents than the 
telecommunications industry. However, for that potential to be 
fully realized, some bold changes must take place to provide 
much-needed stability for this industry.
    Today there is an undeniable need to address the full array 
of issues associated with telecommunications reform. We support 
those initiatives. However, the first and highest priority of 
the Congress should be to stabilize and strengthen the 
Telecommunication Act's universal service mandates, which 
include predictability, sustainability, and sufficiency.
    If meaningful universal service reform is not accomplished 
first, other needed reforms, such as deregulation, inter-
carrier compensation, and the future of broadband deployment, 
are likely to be grounded on an unsure foundation and are 
likely to fail to deliver their full-intended benefits for the 
American consumer.
    Addressing the rapidly eroding USF contribution base is the 
first critical step in the process of shoring up the universal 
service system. Contributions to universal service funding 
should be based on revenues. A revenue-based assessment 
methodology is both competitively and technologically neutral. 
Assessing revenues, instead of connections or numbers, avoids 
imposing a regressive flat fee on low-volume consumers. A 
revenues-based system eliminates potential gaming that may be 
associated with connections or numbers-based approaches and 
also anticipates future changes in technology that may make 
connections-based approaches meaningless.
    Also, the FCC should be permitted to assess the broadest 
base of revenues possible, including intrastate revenues. 
However, this is only part of the solution.
    If Congress is going to effectively deal with the crisis 
looming over universal service, it must consider expanding the 
contribution base to all providers that currently rely on the 
telecommunications network. Congress and the FCC must make sure 
that any new contribution mechanism is capable of keeping pace 
with technology by assessing the broadest base of providers 
possible.
    Also, current caps on universal service funds have a direct 
and negative correlation to advancing the universal service and 
advanced services deployment goals of the act. The growth and 
size of the fund are controlled today by arbitrarily capping 
the funds without regard to the impact on consumers. This is 
not the answer. In rural areas, significant investment is still 
needed.
    Also, the rapid increase in the number of competitive 
eligible telecommunications carriers raises critical issues for 
the consumers in rural America. Present rules for ETC 
designation are being interpreted in widely different fashions 
by stakeholder service commissions and are often not consistent 
with the intent of the act.
    We're concerned that present rules allow carriers to offer 
varying levels of service commitments to customers based on 
investments and cost of the ILEC. This raises obvious questions 
regarding the reasonableness of this method of distribution of 
universal service funds.
    The following are recommendations of actions related to 
universal service that need to occur to protect consumers. 
First of all, telecommunications providers, regardless of their 
network platforms, should be required to pay in the universal 
service fund. This includes cable broadband providers, internet 
service providers, all wireless services, long distance, and 
local exchange companies.
    Second, States that approve additional ETCs should be 
required to help with additional funding needs.
    Third, CETC portability rules need to be changed to reflect 
reality and reasonableness. Regulatory oversight should ensure 
that funds are truly being used to serve consumers in high-cost 
areas and that the amount of support reflects the service 
commitment.
    Finally, consumers must not be overlooked in the process of 
achieving telecommunications reform. Congress should make sure 
that rural consumers do not bear a disproportionate rate burden 
that would place advanced services out of the financial reach 
of most Americans.
    This committee and the Congress have a great opportunity 
before them to initiate legislative changes and provide 
meaningful direction to the FCC that will offer much-needed 
positive signals to the telecom sector of our economy. Our 
Nation's telecommunications system did not happen by accident. 
There has been and should always be a strong commitment to 
building and maintaining evolving networks that connect all of 
our citizens in rural and urban areas to each other and the 
rest of the world.
    Thank you for the opportunity of speaking with you today.
    [The prepared statement of Glen Post follows:]
  Prepared Statement of Glen Post, CEO and Chairman of the Board for 
         CenturyTel on Behalf of the Independent Telephone and 
                   Telecommunications Alliance (ITTA)
    Good afternoon. My name is Glen Post, and I am Chief Executive 
Officer and Chairman of the Board for CenturyTel. I appreciate the 
opportunity to appear before you today representing CenturyTel and the 
Independent Telephone and Telecommunications Alliance (ITTA). ITTA is 
an association of 13 mid-sized telecommunications companies who 
together serve more than 10 million lines in 40 states.
    CenturyTel is a national telecommunications company with 
headquarters in Monroe, Louisiana. We are a leading provider of 
telecommunications services in 22 states that include many of the 
states represented by members of this Subcommittee including Michigan, 
Louisiana, Texas, Ohio, Wyoming, New Mexico, Mississippi, Oregon, 
Missouri, and Tennessee. We specialize in providing high quality 
telephone, long distance, Internet, broadband and advanced services in 
rural and small urban markets. Today, CenturyTel is the eighth largest 
telephone company in the United States with 2.4 million access lines. 
Much of CenturyTel's recent growth has come from the acquisition of 
telephone lines from the larger Bell Operating Companies in multiple 
states. The majority of our 3 million customers and 7,000 employees 
live and work in the very areas that have the most critical stake in 
the issue we will discuss today.
    Many regulatory and technology changes have taken place since the 
Telecommuni-cations Act was passed in 1996. We want you to know that 
ITTA companies share common goals with the larger Bell Operating 
Companies as well as the smaller telephone companies to both maintain 
the incentive to continue investing in our markets and to see 
meaningful deregulation of our businesses. However, this hearing should 
not be about companies. It should be about consumers and the continuity 
of the network that keeps us all connected. It should be about the 
future and not the present. We empathize with the other providers that 
serve high cost markets and appreciate the challenges and concerns 
those markets pose from a service and investment standpoint.
    The nation's telecommunications future is at a crossroads. Evolving 
technology, competition, and converging network platforms are rapidly 
outpacing the existing regulatory mechanisms' ability to keep rates 
comparable and affordable for all consumers regardless of where they 
live. There are a number of proposed changes in telecommunications that 
could put the stability of rural telecommunications at risk. We commend 
Chairman Tauzin and Chairman Upton and the members of this Subcommittee 
for addressing these issues that are crucial to consumers in so many 
regions of our nation.
    I have been asked to provide you with a mid-size company 
perspective about our view of telecommunications and universal service 
as it relates to our customers and the markets we serve. Mid size 
companies understand that our business success depends on the long-term 
economic viability of our communities. In our view, affordable, modern 
telecommunications infrastructure and advanced services can make the 
difference between the site for a proposed industrial park remaining a 
field of weeds, or actually being considered as a promising location by 
a global manufacturing company. Businesses today look for areas where 
the telecommunications infrastructure has kept pace with technology and 
which provide the ability to communicate anywhere in the world. 
Universal service support plays a big role in this picture.
    As members of this Subcommittee know, agriculture has long been the 
leading economic driver for much of rural America. However, I would ask 
that you also consider telecommunications as a force that will create 
jobs, spur investment and allow all citizens to effectively connect 
with the rest of the Nation and the world. It would be fair to say that 
perhaps no other industry has the potential to more directly impact and 
improve the lives and livelihoods of your constituents than the 
telecommunications industry. However, for that potential to be fully 
realized, some bold changes must take place to provide much-needed 
stability.
    The one thing that has not changed since the passage of the 
Telecommunications Act is that rural and small urban markets remain 
unique in their demographics, service needs and cost-of-service 
characteristics. Universal service support, as envisioned by the Act, 
is still the telecommunications lynchpin for millions of consumers. 
These consumers have become increasingly sophisticated in the types and 
quality of services they need and expect. Thanks to the Universal 
Service system, our companies like CenturyTel have been able to ensure 
that rural America has not been left behind by the digital revolution. 
We believe that in a global economy, rural and small urban consumers 
not only deserve, but also truly need, reliable and affordable advanced 
telecommunications services to talk with loved ones, conduct business, 
be entertained and connect with the rest of the world.
    One of the challenges these customers and their phone providers 
face is the ability to keep basic and advanced services affordable and 
to overcome the challenges of distance associated with high cost 
markets. However, this premise and the system that supports it are 
under attack from a variety of fronts. The reason we are here today is 
to attempt to find reasonable solutions that will help to keep 
America's telecommunications system the model for the rest of the 
world.
    A vast and complex task awaits, but there is a need for sequencing 
and prioritization of the issues we face. To attempt to resolve all 
pending issues simultaneously prior to stabilizing universal service is 
to run the risk of failing from the outset. There is an undeniable need 
to address the full array of issues associated with telecommunications 
reform, and we support those initiatives and the need to move ahead as 
an industry. Our industry is in serious need of economic stabilization 
that can be brought about through deregulation and free market 
competition. However, the first and highest priority of the Congress 
must be to stabilize and strengthen the Telecommunication Act's 
universal service mandates which include: predictability, 
sustainability and sufficiency.
    Few issues more directly affect consumers, the economy, job 
creation or investment in the country's national security 
infrastructure than universal service. Whether we are talking about 
affordable services for everyone, national security, bridging the 
Digital Divide or successfully placing an emergency 911 call, universal 
service is the key component that affects our industry and customers. 
Stabilization of universal service must be viewed as the ``base'' upon 
which all other reforms are built. If meaningful universal service 
reform is not accomplished first, other needed reforms such as 
deregulation, intercarrier compensation and the future of broadband 
deployment are likely to be grounded on an unsure foundation and are 
likely to fail to deliver their full-intended benefits to the American 
consumer.
                        contribution mechanisms
    Addressing the rapidly eroding USF contribution base is the 
critical first step in the process of shoring up the universal service 
system. Without ensuring a predictable, sustainable, and sufficient 
funding base, other reforms could end up being academic. Contributions 
to universal service funding should be based on revenues. A revenues-
based assessment methodology is both competitively and technologically 
neutral. Assessing revenues instead of connections or numbers avoids 
imposing a regressive flat fee on low-volume consumers. A revenues-
based system eliminates potential ``gaming'' that may be associated 
with connections or numbers-based approaches and also anticipates 
future changes in technology that may make connections-based approaches 
meaningless. All providers have revenues that may be fairly assessed on 
a non-discriminatory basis, which makes such an assessment 
competitively neutral among consumers. The FCC should be permitted to 
assess the broadest base of revenues possible, including intrastate 
revenues.
    However, this is only part of the solution.
    To provide true long-term sustainability, the base of contributors 
must be expanded beyond what may be considered the traditional or 
legacy providers of today. Consumers are rapidly adapting to a world in 
which they receive their telecommunications services, including voice 
service, from their Internet Service Provider such as AOL or their 
cable modem provider, neither of which are currently subject to 
assessment. If Congress is going to effectively deal with the crisis 
looming over universal service and not simply postpone the day of 
reckoning, it must consider expanding the contribution base to all 
providers that currently rely on the telecommunications network. 
Anything less perpetuates rather than resolves the underlying problem. 
Ultimately, the expansion of universal service contribution mechanisms 
must be a progressive process with the goal of achieving long-term 
sustainability that is immune to technological change.
    The FCC is considering basing its assessment on other metrics 
beside revenues. Some carriers who would advocate the use of telephone 
numbers as an assessment mechanism are, ironically, companies that do 
not have a telephone number link with customers, and would consequently 
be mostly immune from such an approach. Additionally, telephone numbers 
are not able to capture new technologies that provide voice service 
such as Voice Over Internet Protocol (VOIP) or even Instant Messaging 
services that are so prevalent today. Furthermore, the VOIP industry 
currently works with traditional telephone numbers and without them. A 
telephone number-based approach would skew the VOIP industry toward a 
non-numbers based approach. Congress and the FCC must make sure that 
any new contribution mechanism is capable of keeping pace with 
technology by assessing the broadest base of providers possible.
               disbursement of universal service funding
    The rapid escalation in the number of Competitive Eligible 
Telecommunications Carriers (CETC's) raises critical issues for the 
customers of ITTA members. Present rules for ETC designation are being 
interpreted in widely different fashions by state public service 
commissions and are often not consistent with the intent of the Act. We 
are concerned that present rules allow carriers to offer different 
levels of service commitment to customers even though they are 
receiving the same level of support. This anomaly in universal service 
portability requirements places an ever-increasing pressure on 
universal service funding that directly or indirectly affects all 
American phone users.
    Appropriate standards for the ETC designation process must be 
instituted and enforced. Unchecked distribution of universal service 
support threatens consumers and carriers alike. Currently, designations 
are often based on inconsistent or non-existent criteria. Minimum 
uniform, technologically neutral national criteria for state review of 
applications would do much to rationalize a chaotic, unpredictable 
process that ultimately does not serve the consumer's interest. Any 
such standards would also require some provision for enforcement, both 
at the federal and state levels, if they are not to be rendered 
meaningless from the outset.
                   caps on universal service funding
    Reform of the contribution mechanism and disbursement procedures, 
while necessary first steps, are nonetheless insufficient by themselves 
to cure the ailing universal service system. Current caps on universal 
service funds have a direct and negative correlation to advancing the 
universal service and advanced services deployment goals of the Act. 
Existing caps are fundamentally in conflict with the broad universal 
service mandates laid down in the 1996 Act. They are also a disservice 
to rural consumers and an impediment to the delivery of advanced 
services to all consumers. Carriers, competitors and consumers alike 
will benefit from removing existing fund caps.
    The growth of the fund is controlled today by arbitrarily capping 
the funds without regard to the impact on consumers. This is not the 
answer. In rural areas, significant investment is still needed.
   intercarrier compensation reform could threaten universal service
    Carriers that use our networks should continue to pay fair 
compensation to use those networks. Access charges that long distance 
companies pay to compensate local phone companies have been reduced and 
the balance of that money has been shifted into universal service 
funding. Further access charge reductions will only put more pressure 
on the funds. Increasing downward pressure on access rates becomes a 
problem, particularly for the customers of companies operating in high 
cost rural areas. Zeroing out carrier access charges will mean that the 
customer ultimately pays an increased price to subsidize the 
stockholders of long distance companies.
          recommendations to address universal service issues
    There are no easy answers to solving all of the issues associated 
with universal service or telecommunications reform. However, there are 
a combination of actions that need to occur to protect consumers. 
First, all telecommunications service providers, regardless of their 
network platform, should be required to pay into the universal service 
fund. This includes cable, all broadband providers of any kind, 
Internet Service Providers (ISPs), all wireless devices, long distance 
and local exchange companies. Second, states that approve additional 
ETC's should be required to help with the funding. Third, CETC 
portability rules need to be changed to reflect reality. Today, CETC's 
are drawing the same support as the incumbent phone provider based on 
the ILEC's cost. This is putting increased pressure on the fund. They 
should have more stringent certification standards than they have 
today. The FCC should establish minimum criteria that individual state 
commissions can use in assessing eligibility. CETC's should be required 
to serve an entire rural study area--something they are not being held 
accountable for today. Regulatory oversight should ensure that funds 
are being used to serve consumers in high cost areas for all recipients 
of support.
    Finally, CenturyTel believes portability requirements should be 
modified to recognize that many of today's USF dollars are actually 
access charges formerly paid by long distance companies--these dollars 
should not be portable to competitors.
                               conclusion
    Ultimately, consumers must not be overlooked in the process of 
achieving telecommunications reform. Consumers have seen a steady 
increase in their local phone bills due to a variety of end-user 
charges that have been systematically applied since the passage of the 
Act. Consumers also face shouldering the burden of pending proposals 
that would eliminate carrier-to-carrier revenues, such as access 
charges, and replace them with higher customer charges such as local 
rates and subscriber line charges. Congress should make sure that rural 
consumers do not bear a disproportionate rate burden that would place 
advanced services out of the financial reach of most Americans or add 
additional pressure to universal service funds.
    This Committee and the Congress have a great opportunity before 
them to initiate legislative changes and provide meaningful direction 
to the FCC that will offer much-needed positive signals to the telecom 
sector of our economy. Telecommunications has the potential to create 
jobs, spur investment and provide economic stability to literally every 
state and to every section of the country. We must remember that our 
nation's telecommunications system did not happen by accident. There 
has been, and should always be, a strong commitment to building and 
maintaining evolving networks that connect all of our citizens in rural 
and urban areas to each other and the rest of the world.

    Mr. Upton. Thank you very much.
    Mrs. Shank?

                    STATEMENT OF SIDNEY SHANK

    Ms. Shank. Good afternoon. I am the manager of Bloomingdale 
Telephone Company, which is an independently owned 
telecommunications corporation headquartered in Bloomingdale, 
Michigan. We've been engaged in the provision of local exchange 
service for nearly 100 years. Today we serve approximately 
2,000 customers in our Bloomingdale exchange itself. However, 
we serve about 8,500 customers in Allegen, Kalamazoo, and Van 
Buren Counties with other telecommunications needs.
    We are involved in the provision of telecommunications 
business systems, networking, internet, broadband services, 
long distance, cellular, competitive local exchange services, 
and DBS services.
    We are proud of the record of service, which is 
representative of the Nation's small rural incumbent local 
exchange carriers. That's why I'm so pleased to be appearing on 
behalf of the hundreds that are represented by NTCA and 
OPASTCO.
    The success of Bloomingdale and its small rural ILEC 
colleagues is tied directly to a dedication to community and 
the Nation's commitment to universal service. Yet, in the 
uncertain competitive deregulatory environment that we operate 
in today, these constants may be in jeopardy. Left hanging in 
the balance could be quality, affordable service for rural 
areas and telecommunications.
    It's no secret that the ability to fully recover costs is 
the very lifeblood of our small rural ILECs. Thus, of 
particular concern to all of us today are the many regulatory 
and judicial proceedings that will either sustain or destroy 
this ability and subsequently the continued investment in rural 
telecommunications infrastructure will be in jeopardy.
    Any adjustment to one of the three components of our cost 
recovery, the local end-user rates; inter-carrier compensation, 
such as access charges; and universal service, requires the 
inverse adjustment of the others. Not surprisingly, the local 
end-user rate component is the least able to tolerate increased 
pressure. Conversely, the inter-carrier component is the one 
most susceptible to regulatory and competitive-oriented 
pressures. This leaves universal service as the most likely to 
contend with cost recovery fluctuations.
    In past access charge reduction proceedings, the universal 
service fund has been charged with such residual cost recovery 
responsibilities. And the current debate over additional inter-
carrier compensation adjustments has suggested this could 
happen again. Yet, with other regulatory dilemmas currently 
facing the USF, we fear it is ill-prepared to take on another 
such obligation.
    Perhaps the most notable of these is how easily many States 
and the FCC are granting USF ETC status to competitors. Adding 
insult to injury is the fact that under the FCC's current 
rules, competitor support is based on the incumbent's costs, 
this despite the fact that the law requires carriers to certify 
support is for actual universal service-allowed costs. This has 
led to a ballooning USF, which could eventually erode public 
support for the underlying National policy. Also problematic is 
change in economic and regulatory environment that is eroding 
the USF funding.
    We believe that all policymakers must take the 
responsibility of granting ETC designations much more 
seriously. NTCA and OPASTCO have both put forth sets of 
standards on which such decisions could be based. These focus 
on encouraging policymakers to impose the same service, 
billing, quality, capability, and recording standards on 
competitors that incumbents already face.
    We also strongly believe that Congress should direct the 
FCC to follow the law when asked for the contributions to the 
universal service fund. The FCC is entertaining the idea of 
adopting certain contribution proposals we contend would not 
adhere to the law. Some of these proposals, connections and 
numbers-based, would allow today's larger contributors, the 
long distance mammoths, to escape their statutory universal 
service responsibilities.
    Considering the current dilemma that faces the USF, we 
should expand the base of contributors and revenues that are 
accessed, rather than relieving entities of a statutory 
responsibility. We have registered our views, both in the State 
and Federal regulatory arenas. In many cases, we have done so 
with the judicial as well. Yet, we now believe it is time for 
Congress to weigh in on these matters.
    We are hopeful that with your direction, policymakers and 
judicial, the public, and competitors alike, will be guided by 
the principle that USF is a scarce National resource. Congress 
has the ultimate authority and responsibility to ensure that 
the USF is carefully managed in order to best serve the public 
interest. Universal service is not a tool to be used to incite 
artificial competition. It is a tool to help ensure the 
existence of a Nationwide ubiquitous telecommunications 
network, a network that has been proven again and again to be 
so critical to our National and economic security.
    Congress must continue to ensure that the underlying 
principles of this long-lasting National policy are safely 
adhered to now and in the future. And I thank you so much for 
your time and for allowing me to be here today. Thank you.
    [The prepared statement of Sidney Shank follows:]
  Prepared Statement of Sidney Shank, Manager, Bloomingdale Telephone 
   Company on Behalf of the National Telecommunications Cooperative 
 Associationand the Organization for the Promotion and Advancement of 
                   Small Telecommunications Companies
    Chairman Upton, members of the subcommittee, my name is Sidney 
Shank, and I am the manager of Bloomingdale Telephone Company, which is 
an independently owned telecommunications corporation headquartered in 
Bloomingdale, Michigan. We've been engaged in the provision of local 
exchange service for nearly 100 years. Today we serve approximately 
2000 customers with an investment of over 250 miles of cable. But 
that's not all we provide to our community and the surrounding area. In 
addition, we are involved in the provision of Internet, broadband 
services, long distance, cellular, competitive local exchange services, 
and Direct Broadcast Satellite (DBS) services.
    We are proud of this record of service, which is representative of 
the nation's small rural ILECs. That's why I'm also pleased to be 
appearing on behalf of the hundreds that are represented by the 
National Telecommunications Cooperative Association (NTCA) and the 
Organization for the Promotion and Advancement of Small 
Telecommunications Companies (OPASTCO).
                  the importance of universal service
    Today, the Subcommittee will hear from a variety of witnesses that 
are deeply interested in the future of universal service--each for very 
different reasons. Let me state at the outset that our concern is 
centered exclusively on ensuring that the strong mandates of the 
nation's long-standing policy of universal telecommunications service 
are carried out in a manner that best serves consumers. That is how we 
have always conducted our businesses.
    The success of Bloomingdale, and its small rural ILEC colleagues, 
is tied directly to a dedication to community, and the nation's 
commitment to universal service. Yet, in the uncertain competitive 
deregulatory environment that we operate in today, these constants may 
be in jeopardy. Left hanging in the balance could be quality, 
affordable, universally available rural telecommunications service.
    It's no secret that the ability to fully recover costs is the very 
lifeblood of small rural ILECs. Thus, of particular concern to us today 
are the many regulatory and judicial proceedings that will either 
sustain or destroy this ability--and subsequently the continued 
investment in rural telecommunications infrastructure.
    Any adjustment to one of the three components of our cost 
recovery--the local end-user rates, intercarrier compensation such as 
access charges, and universal service--requires the inverse adjustment 
of the others. Not surprisingly, the local end-user rate component is 
the least able to tolerate increased pressure. Conversely, the 
intercarrier component is the one most susceptible to regulatory and 
competitive oriented pressures. This leaves universal service as the 
most likely to contend with cost recovery fluctuations.
    In past proceedings on access charge reductions, the USF has been 
charged with such residual cost recovery responsibilities. And the 
current debate over additional intercarrier compensation adjustments 
has suggested this could happen again. Yet with other regulatory 
dilemmas currently facing the USF, we fear it is ill prepared to take 
on another such obligation.
 greater oversight and reform of the etc designation process is needed
    Perhaps most notable of these regulatory dilemmas is how easily 
many states and the FCC are granting USF ETC status to competitors 
today. These carriers are receiving this valuable designation without 
having to comply with the same stringent service, billing, quality, 
capability, coverage, and reporting requirements that ILECs must, and 
have been happy to, adhere to each and every day. Is it too much to ask 
carriers to meet such obligations as a condition of receiving scarce 
USF support? We think not. Adding insult to injury is the fact that 
under the FCC's current rules, competitor support is based on incumbent 
costs. This despite the fact that the law requires carriers to certify 
support is for actual universal service allowed costs.
    This problem is particularly pronounced with regard to wireless 
competitive ETCs. For example, since 1999, universal service support 
allocated to wireless CETCs has increased dramatically from $500,000 in 
1999 to a projection of approximately $240 million in 2003. This 
astonishing growth in support to wireless CETCs is particularly 
troubling since these carriers are not held to the same regulatory 
obligations and service standards faced by other carriers.
    We ask that Congress reaffirm its strong admonition about 
financially supporting competition when it crafted section 214(e) of 
the Act. In enacting this section of the law governing the designation 
of multiple ETCs, Congress clearly recognized that supported 
competition would not always be in the ``public interest'' of areas 
served by rural telephone companies. Sadly, some state commissions and 
the FCC have ignored the intent of Congress and have designated 
additional ETCs without thoughtfully considering the factors that 
determine the public interest. Regulators have placed far too much 
emphasis upon the Act's general goal of competition at the expense of 
rural markets and consumers. The result of state government-sponsored 
artificial competition in rural service areas has been a swollen USF 
that has put the entire universal service program at great risk.
           possible solutions to the cetc designation process
    Mr. Chairman, many witnesses come before your committee without 
solutions. However, I am very pleased that both NTCA and OPASTCO have 
each developed their own principles to strengthen the public interest 
standard governing the CETC designation process.
    This past July, during a forum of the Federal-State Joint Board on 
Universal Service, NTCA put forth, and urged the adoption of a seven-
point public interest test for evaluation of ETC designations in rural 
telco service areas. The points are as follows:

1. Is the additional ETC designation of the requesting carrier required 
        to ensure that consumers living in the rural ILEC service 
        territory have access to the nine support services listed in 
        the definition of universal service at rates that are 
        comparable to similar services and rates received by consumers 
        living in urban areas?
2. Would the requesting ETC designation be able to provide service to 
        the entire rural ILEC service territory, as required by FCC 
        rules?
3. Do the potential benefits to the rural service area of granting the 
        ETC designation outweigh the ultimate burdens on consumers that 
        will occur through the added growth in state/federal universal 
        service funds?
4. Is the carrier requesting designation willing to demonstrate its 
        cost to provide universal service to consumers living in the 
        rural ILEC service territory?
5. Would the ETC designation result in excessive support to the 
        requesting carrier based on the amount of support distributed 
        under the identical support rule?
6. If the carrier seeking ETC designation is offering rural consumers 
        universal service at a rate that is at, below or slightly above 
        the comparable rate for supported services, why is the 
        requesting carrier seeking universal service support?
7. Is the carrier requesting ETC designation willing to adhere to 
        quality-of-service guidelines or other state-specific 
        requirements?
    Earlier, OPASTCO had developed an industry white paper, titled, 
``Universal Service: A Congressional Mandate At Risk.'' This paper 
elaborates upon how misinterpretations of the public interest standard 
by state and federal regulators when designating multiple ETCs has 
placed the universal service fund in serious jeopardy. The 
recommendations of the OPASTCO paper have also been presented to the 
Joint Board for its consideration. It lays out the following 
principles, guidelines and requirements that State commissions and the 
FCC should utilize in their consideration of ETC applications for rural 
telephone company service areas:

1. Rural consumers should receive access to affordable, high-quality 
        telecommunications and information services, including advanced 
        services that are reasonably comparable to those services 
        provided in urban areas and at reasonably comparable rates.
2. The high-cost support mechanisms should not be used as an incentive 
        to attract uneconomic competition in the areas served by rural 
        telephone companies.
3. The USF is a scarce national resource that must be carefully managed 
        to serve the public interest.
4. Rural universal service support reflects the difference between the 
        cost of serving high-cost rural areas and the rate levels 
        mandated by policymakers.
5. The public interest is served only when the benefits from supporting 
        multiple carriers exceed the costs of supporting multiple 
        networks.
6. In areas where the costs of supporting multiple networks exceed the 
        public benefits from supporting multiple carriers, the public 
        interest dictates providing support to a single carrier that 
        provides critical telecommunications infrastructure.
7. The cost of market failure in high-cost rural America could be 
        severe.
    Along with the adoption of public interest principles, the OPASTCO 
white paper further recommends that in order to be considered for ETC 
status in a rural telephone company service area, a carrier should be 
required to demonstrate to the state commission or FCC that it meets, 
and will abide by, all of the following qualifications and 
requirements:

1. A carrier must demonstrate its ability and willingness to provide 
        all of the services supported by the federal High-Cost program 
        throughout the service area.
2. In fulfilling the requirement to advertise its services and rates, 
        an ETC must emphasize its universal service obligation to offer 
        service to all consumers in the service area.
3. A carrier must have formal arrangements in place to serve customers 
        where facilities have yet to be built out.
4. A carrier must have a plan for building out its network once it 
        receives ETC designation and must make demonstrative progress 
        toward achieving its build-out plan in order to retain ETC 
        designation.
5. A carrier must demonstrate that it is financially stable.
    Lastly, OPASTCO suggests State commissions and the FCC should also 
adopt the following policies regarding ETC designations in rural 
telephone company service areas:

1. ETC designations in rural telephone company service areas should be 
        made at the study area level (an ILEC's entire service 
        territory within one state).
2. State commissions and the FCC should ensure that competitive ETCs 
        will be capable of providing high-quality service to all of the 
        customers in the service area should the rural ILEC find it 
        necessary to relinquish its own ETC designation.
3. Any service quality standards, reporting requirements and customer 
        billing requirements established by the state commission should 
        be applied equally to all ETCs in the state.
4. State commissions have the authority to decertify any ETC that is 
        not meeting any of the qualifications or requirements 
        enumerated above.
    We strongly believe that the long-term sustainability of the 
federal USF has been greatly threatened by federal and state regulator 
decisions about whether to designate multiple ETCs in an area served by 
a rural telephone company. The number of competing carriers seeking 
designation as eligible to receive universal service support is growing 
at an everincreasing pace. If the size of the USF reaches a point where 
further growth is prohibited, yet the number of carriers receiving 
support continues to grow, then no carrier will have the funding 
necessary to provide affordable, high-quality telecommunications 
services and rural consumers will be denied the benefits promised by 
the Act. This is an area that Congress simply can no longer ignore.
      contribution methodologies must adhere to statutory mandates
    Unfortunately, there are other major regulatory proceedings that 
are still underway that have the potential to undermine the USF and its 
underlying national policy. It is very possible that the FCC could 
still adopt a ``connections-based'' or ``numbers-based'' proposal for 
revising the universal service contribution methodology, which without 
a legislative change, may not comply with the Telecommunications Act of 
1996's requirement that every interstate telecommunications provider 
contribute to the Fund on an ``equitable and nondiscriminatory basis.'' 
We urge the Congress to direct the FCC to follow the law and ensure 
that interstate carriers continue to contribute their fair share to the 
Fund. We also believe the FCC should be strongly encouraged to take 
action that would broaden the base of contributors to universal 
service. NTCA and OPASTCO have both advocated a narrow legislative 
approach as one part of this solution, which would effectively overcome 
a judicial decision that limits USF assessments to interstate and 
international revenues.
    The FCC has recently given consideration to three different 
``connections-based'' proposals for revising the universal service 
contribution methodology. The first proposal would impose a flat 
monthly fee for each end-user connection and assess a ``minimum'' 
contribution from each interstate telecommunications provider 
regardless of whether the carrier provides connections. The second 
proposal would split ``connections-based'' based contributions between 
switched access and interstate transport providers. The final proposal 
would assess contributions on the basis of telephone numbers assigned 
to end-users. We are very concerned that through these proposals the 
Commission is considering possibly adopting a new contribution 
methodology that would violate the requirement set forth in the 1996 
Act that calls for ``equitable and nondiscriminatory'' contributions 
from every interstate telecommunications carrier.
    In addition, we also all strongly believe that any reform of the 
universal service contribution methodology should expand the base of 
contributions to the Fund. As you know, the universal service system 
has been funded by a broad-based national system of industry 
contributions. The traditional contribution base--the long distance 
market--has steadily declined, eroding the funding base for universal 
service. Alternatives to long distance--wireless, e-mail, Internet 
Protocol (IP) telephony, and most broadband platforms--have not been 
asked to contribute their fair share to alleviate the shortfall. We are 
very concerned that the proposals currently pending before the FCC 
would fail to broaden the contribution base sufficiently, and fail to 
ensure the stability and sufficiency of the USF for the long-term.
    The manner in which contributions are assessed for the USF is a 
very complex and controversial issue. Furthermore, I can assure you in 
the strongest possible terms that we are unified in our view that any 
further modifications by the FCC to the contribution methodology must 
be consistent with the statute's clear requirement that all interstate 
telecommunications services contribute to the USF on an equitable and 
nondiscriminatory basis. Regardless of how the FCC ultimately 
approaches this issue, interstate interexchange carriers have to remain 
principal contributors as mandated by the law.
    We all agree that universal service support needs to be sufficient 
and sustainable and should be fair to all providers and users of all 
kinds of networks. We are aware of growth in the USF and concerned 
about shifts in the types of interstate services consumers are 
utilizing. These developments have created a serious issue about how to 
prevent erosion and evasion of support mechanisms. Thus, we firmly 
believe that the FCC needs to assess the broadest possible list of 
contributors to keep each carrier's contribution and the amount it 
needs to recover from its customers as small as possible.
    We need to emphasize that the gradual but ever-growing use of 
broadband platforms and Internet Protocol (IP) networks plays a growing 
role in the instability of the contribution base. Consumers use IP 
networks in a variety of ways (access to the World Wide Web, e-mail, 
instant messaging, Internet telephony) and via various platforms 
(cable, wireless, satellite) to substitute for interstate calls on the 
public switched network. As this ``Internet substitution'' grows, 
traditional interstate revenues providing the funding base for 
universal service will diminish. And there will be little offsetting 
gain, since presently only wireline telecommunications carriers are 
required to contribute on the basis of revenues earned from Internet 
access service. All other Internet access providers using other 
platforms remain exempt from the obligation.
    Federal law allows the FCC to assess all providers of interstate 
``telecommunications'' if the public interest so requires, even if they 
are not common carriers. We believe that all providers that compete 
with each other and provide the same functions should have the same 
contribution responsibilities. This means that cable modem providers 
and other information service providers that provide their own 
transmission should contribute, just as ILECs presently contribute for 
their transmission role in providing Internet access. This also means 
that wireless carriers need to be assessed on a fairer basis than even 
the ``modified safe harbor'' adopted by the Commission last year.
    More specifically, in reassessing who must contribute to the Fund, 
Congress should insist that interexchange carriers, Internet access 
providers, wireless carriers, bundled service providers, payphone 
providers, dial-around services, and IP telephony providers, as well as 
local exchange carriers all contribute to the USF. Broadband service 
providers, whether considered information service providers or 
telecommunications service providers, also should be included as 
supporters of universal service. Finding an equitable way of assessing 
contributions to universal service support on carriers, and--as I just 
discussed--broadening the base of contributors to universal service are 
significant issues the FCC needs to resolve to make universal service 
support funding sustainable.
          universal service is good public policy for america
    The high-cost component of the universal service program handles 
approximately $3.3 billion in annual carrier-to-carrier support 
transactions, which represents slightly more than half the amount that 
is channeled through the overall fund each year. The high-cost 
component is a ``safetynet'' of sorts for rural carriers and their 
subscribers, but it is also a tool to ensure that all Americans enjoy 
the benefits and security of a nationwide integrated network. Congress 
and successive administrations have wisely recognized the value of this 
component of the program and now, above all else, need to take steps to 
ensure its ongoing ability to function according to statutory intent.
    The high-cost element of the Fund is used to build 
telecommunications ``platform'' infrastructure. Without a 
telecommunications platform, our schools and libraries, rural health 
care, and lifeline and linkup programs, and millions of rural 
Americans, have nothing. Modern telecommunications infrastructure in 
rural America enables diversity of education, health, and other social 
services comparable to those in urban areas.
    Our nation's first priority for rural areas should be to provide a 
stable environment for continued telecommunications investment. One of 
the most important ways rural Americans have benefited from universal 
service is that it has sustained a telecommunications commitment to 
rural communities for decades. ``Rural telephone companies,'' as 
defined in the 1996 Act, have become an integral part of rural 
communities throughout America and have remained economically viable in 
these high-cost areas due, in large part, to strong universal service 
policy.
    In sum, a strong universal service policy is still needed today to 
ensure a stable environment that encourages continued 
telecommunications investment in rural America. Incumbent rural 
telephone companies have met the challenge of deploying 
telecommunications infrastructure in high-cost rural areas. With a 
strong universal service policy, they can continue to help rural 
communities and rural Americans realize diversity of education, 
improved health and other social services, and economic development 
through modern telecommunications.

    Mr. Upton. Thank you very much.
    Mr. Stanton?

                    STATEMENT OF JOHN STANTON

    Mr. Stanton. Thank you, Mr. Chairman. The burden and luxury 
of being the final speaker of a large panel is that I have the 
opportunity to make some of my comments responsive and the 
burden and responsibility to attempt to be brief.
    The wireless industry celebrates its 20th birthday, the 
anniversary of the first customer becoming a wireless customer 
in Chicago, Illinois in October. So in October 1983, our 
industry was born. In that time, the industry has grown to the 
point that roughly 55 percent of Americans now have a wireless 
phone. The industry's revenues in total now exceed as of 2003 
the total revenues of the local exchange business in the United 
States. So the wireless business on that basis has become the 
largest part of the telecom industry.
    Wireless is fundamentally the best way to provide services 
in rural areas from an economic point of view. In areas with 
population densities below ten people per square mile, in most 
exchanges, wireless can provide service more efficiently and 
more economically over the long term.
    Western Wireless, the company that I founded in 1994, 
provides services to approximately 800,000 square miles of 
territories. We built the 1,500 sites that we offer in the 9 
years that the company has been in existence in addition to 
some sites that were built by predecessor companies that we 
operated.
    We have managed during that time to also build systems that 
are relied upon by our 1.25 million customers as their 
primarily telecommunications device. Our company has been a 
leader in terms of building systems that we believe can be 
responsive to consumer needs.
    About 5 years ago, in the Antelope Valley of Nevada, no 
telephone service, wired or wireless, was available. We in an 
agreement with PacBell and with the Nevada Public Service 
Commission agreed to build a wireless system that literally 
represented the first form of any telecommunications services 
that was available in that community.
    Two years later, in Regent, North Dakota, we introduced the 
first competitive wireless service, providing services directly 
competitive with the local exchange carrier. Two weeks later, 
the local exchange carrier that we connected with cutoff our 
access to the public switch network by cutting off our switch, 
which was restored only a few weeks later. The challenge for us 
has been we operate in an intensely competitive environment, 
but we have also done I think the right thing.
    In the Pine Ridge Indian Reservation in South Dakota, we 
have introduced services about 3 years ago on Election Day 
2000. And in doing so, we now have majority market share in 
that market because we have been willing to commit substantial 
investment and we have been able to grow that business.
    Earlier this month, we introduced a wireless data service. 
And while not directly a result of universal service monies, 
our ability to build a voice-grade system enabled us, then, to 
layer on top of that data services. The two little girls in 
this picture had their first opportunity to interact with the 
internet via a wireless connection and their only opportunity 
to interact with the internet via that wireless connection.
    New services are possible because of universal service. Our 
company began attempting to get certified as an eligible 
telecommunications carrier roughly 5 years ago. And I can 
guarantee you that commissioners such as Chairman Rowe and 
Commissioner Gregg as well as the other commissioners across 
the country have been rigorous in examining the applications of 
wireless carriers. It has taken us a total of 5 years to get 
certified in 13 of the 14 States in which we have applied.
    We have as a result of that and in reliance on the 
understanding that we were going to be able to access the 
universal service monies invested approximately $500 million, 
extending our coverage and expanding our services into rural 
areas. That commitment, doubling the total property, plant, and 
equipment that the company operated, was a direct result and in 
reliance on our understanding of the new rules promulgated by 
the 1996 act.
    The 1996 act effectively allowed new players to enter the 
market. It also allowed new players or players that were in the 
market to contribute effectively to the fund. Commissioner 
Gregg cited the increase in the fund from $1.8 billion to $6.1 
billion. Nearly 40 percent of those monies come from the 
wireless industry.
    In fact, between 2002 and 2003, the amounts of monies that 
the wireless carriers will pay into the fund increased from 
$900 million to $1.8 billion. And, in total, wireless carriers 
now contribute approximately 30 percent of the money going into 
the funds. And, yet, even with an increase recently in amounts 
coming out, our payments coming out of the fund represent less 
than 2 percent of the fund's total. So we pay in 30 percent, 
and we take out 2 percent, despite the fact that companies like 
my own make substantial commitments to rural areas.
    The core issue is, do you support competition in rural 
areas? Competition benefits rural customers. It disciplines all 
of the operators within the market. And it guarantees the 
ability of customers to get better services in rural areas than 
they would otherwise.
    Thank you, Mr. Chairman.
    [The prepared statement of John Stanton follows:]
    Prepared Statement of John Stanton, Chairman, Director & Chief 
            Executive Officer, Western Wireless Corporation
    Mr. Chairman and members of the Committee, I commend you and your 
colleagues for conducting this hearing to examine the critically 
important issue of the future of universal service. I especially 
appreciate this opportunity given to Western Wireless to address a 
subject--universal service--that is not only of great interest to this 
committee, but also is a subject that runs to the core of the company I 
founded in 1994.
    Western Wireless provides wireless telecommunications services in 
19 western states with a focus on serving the telecommunications needs 
of rural consumers. Over the years, wireless service has become 
essential to a growing number of Americans who are increasingly using 
wireless service for their basic and advanced telecommunications needs. 
In urban areas, wireless and wireline carriers compete with one another 
based upon their costs of providing service, which has resulted in 
intermodal competition to the benefit of consumers. In rural areas, 
however, wireline carriers have historically received an exclusive 
subsidy, called universal service, that has provided the incumbent 
local exchange carriers a decisive advantage over their only potential 
competitors--wireless carriers.
    In 1996, Congress adopted sweeping changes to the 
telecommunications landscape by introducing competition into the local 
market, including the universal service market. Now, for the first 
time, many rural consumers are realizing the benefits of competition 
brought about by the Telecommunications Act of 1996 and the pro-
competitive policies of the Federal Communications Commission. 
Coincidently, with competitive carriers' entry into the universal 
service market, incumbent local exchange carriers have cried foul, 
attempting to reverse the 1996 Act's pro-competitive promises for rural 
consumers and restore their monopoly power over the local market.
    Congress' vision for universal service, which I share, is that it 
is an evolving set of services based upon consumer preferences. In 
rural and urban areas alike, consumers increasingly prefer wireless 
service over wireline service for their communications needs. The FCC 
and state commissions have recognized this trend and have concluded 
that the public interest is served by designating wireless carriers as 
eligible for universal service support. So, instead of talking about 
competition brought about by the competitive local exchange carriers 
(``CLECs''), we find ourselves here today talking about one of the 
bigger successes of the 1996 Act and that is universal service and the 
fact that rural consumers are, for the first time, beginning to 
experience the benefits of a competitive local telecommunications 
market.
    In this testimony, I explain that: (i) wireless communications 
serves the needs of rural consumers; (ii) a competitive universal 
service system allows rural consumers to realize the benefits of a 
competitive market; and (iii) Congress should continue its oversight of 
the emerging competitive universal service market to ensure that rural 
consumers remain the primary beneficiary of efforts to reform the 
system.
              wireless serves the needs of rural consumers
    Western Wireless provides cellular telephone service in 19 western 
states, including on more than 85 Indian reservations and American 
Indian communities. The Company is the second largest wireless carrier 
in the country based upon geography served, covering approximately 25 
percent of the continental U.S. with an average population density of 
approximately eleven people per square mile. Western Wireless serves 
many areas that do not have access to basic telephone service, much 
less advanced telecommunications services.
    Western Wireless has a long history of providing service to 
unserved and underserved consumers. In 1994, through a unique 
arrangement with the Nevada Public Utilities Commission and the 
incumbent local exchange carrier, Western Wireless began providing 
wireless local loop service to small businesses and residential 
consumers in a remote area of Nevada that did not have access to 
wireline local telephone service. In 1999, Western Wireless began 
offering wireless local loop service in Senator Dorgan's hometown of 
Regent, a community of less than 300 people, which was one of the first 
competitive local telephone service offerings in rural America, 
resulting in the availability of new and innovative services to 
consumers for the first time. In August 2000, Western Wireless took 
another step towards serving the telecommunications needs of consumers 
living in some of the more rural areas of the U.S. by entering into a 
historic agreement called Tate Woglaka (Talking Wind) with the Oglala 
Lakota Tribe on the Pine Ridge reservation, resulting in many tribal 
members having access to basic telephone service, including emergency 
9-1-1 service, for the first time. And more recently, Western Wireless 
embarked upon an effort to more broadly bring the benefits of 
competition to the local telephone market in rural America. The 
centerpiece of this effort was the Company's petitions seeking 
designation as an Eligible Telecommunications Carrier (ETC) for 
purposes of universal service support. Today, Western Wireless is an 
ETC for purposes of universal service support in 14 states, plus the 
Pine Ridge Indian reservation in South Dakota, and has emerged as the 
preeminent competitive universal service provider in the United States.
                 a competitive universal service system
    It has been a national policy since 1934 to make available to all 
Americans, regardless of the location of their residence, affordable 
telecommunications services. In too many cases, rural areas have been 
effectively excluded from the benefits of a competitive 
telecommunications market because incumbent local telephone companies 
have historically monopolized access to universal service support 
necessary to provide affordable telecommunications services in these 
rural, high-cost areas. The 1996 Act changed all of that and now, 
through a competitive universal service system, rural consumers are 
beginning to realize the benefits of competition.
    Many consumers are using mobile wireless service in lieu of 
wireline as their primary mode of communications. Wireless service has 
emerged as a fully robust competitor to traditional wireline telephone 
service. Survey results and other data reveal a strong willingness by a 
substantial number of consumers to substitute wireless service for 
wireline telephony. For example, a recent study by Ernst & Young and 
PriMetrica Research Survey confirms the growing displacement of primary 
lines by wireless service. The study surveyed 700 households and found 
that:

 Close to one-half of households would drop their wireline service for 
        a family share wireless plan with 600 shared base minutes 
        offered at $50 per month.
 Roughly one-third of US households would drop their wireline service 
        for a family share wireless plan with 2000 shared base minutes 
        offered at $130 per month.
 Not surprisingly, households that currently have wireless service 
        expressed a greater willingness to drop their wireline service 
        than households that do not have any wireless service.
    Survey data focusing on consumers in rural areas shows similar 
results. Western Wats, an independent consultant, completed a survey in 
February 2003 that provides what may be the best, most current insight 
into the needs and preferences of rural consumers. The survey asked 
1,000 rural residents within Western Wireless' territory about their 
use of wireless phones. The survey found that of the rural consumers 
who had wireless service:

 50% stated that their wireless phone has become more important to 
        them, while their landline phone has become less important;
 51% said that wireless service has replaced some or a large 
        percentage of their home landline service;
 48% reported that wireless service has replaced 90% or more of their 
        landline long distance;
 Nearly 25% reported that they consider their wireless phone to be 
        their primary phone; and
 Approximately 65% reported that they have friends or family members 
        whom they contact primarily on their wireless phone.
    These surveys confirm that wireless service is essential to a 
growing number of Americans, many of whom are substituting wireless for 
wireline service. This fundamental change, which is occurring in rural 
areas, as well as in urban areas, reflects the ``will'' of consumers, 
which must be recognized by government policies that are competitively 
and technologically neutral. The universal service system as 
implemented by the FCC is a good example of a competitively and 
technologically neutral policy that has enabled rural consumers to 
realize the benefits of competition envisioned by the 1996 Act.
    Consumers will likely increasingly ``cut the cord'' implement 
services, like local number portability and enhanced 9-1-1 services, 
that further blur the lines between wireline and wireless service. To 
this end, Western Wireless is in the process of sending bona fide 
requests for number portability to many of the wireline and wireless 
carriers within its markets.
    Competition is the means by which rural consumers can obtain 
service reasonably comparable to those services provided in urban 
areas. Over the last few years, as competition has developed in the 
universal service market, it has become clear that competition 
preserves and advances universal service by:

(1) Making service available in areas previously unserved by incumbent 
        carriers. As many state commissions know, there are numerous 
        areas within rural states where consumers do not have access to 
        affordable landline service. On the Pine Ridge Indian 
        reservation, Western Wireless' competitive universal service 
        offering has made telephone service available to many tribal 
        members for the first time, resulting in dramatic increases in 
        telephone penetration rates. In Reese River Valley, Nevada, 
        Western Wireless has provided telephone service for the last 10 
        years to residents not served by the landline carrier. In 
        Montana, Western Wireless serves many rural consumers that do 
        not have access to landline telephone service. All of these 
        examples demonstrate how universal service is advanced by 
        competition.
(2) Providing new and innovative services that are reasonably 
        comparable to those services provided in urban areas. Western 
        Wireless' entry into the local telephone market has not only 
        resulted in new and innovative services being available to 
        rural consumers, but has also forced the incumbent carrier to 
        offer better service. For example, in Regent, North Dakota, 
        after Western Wireless entered the market and began offering 
        new services previously unavailable, the incumbent carrier 
        responded by offering an expanded local calling area, lower 
        rates, and data services.
(3) Facilitating access to advanced services. Many rural areas do not 
        have access to advanced services and are unlikely to be served 
        in the future by landline carriers due to wireline limitations. 
        Competition provides the only hope to bridge this ``digital 
        divide.'' Recently, Western Wireless demonstrated the 
        capabilities of wireless service to bridge the digital divide 
        in the small rural town of Terry, Montana, where the Company 
        deployed advanced high-speed digital technology with the 
        capability to offer data speeds of up to 140 Kbps.
    a. The establishment of a competitive universal service market, and 
            specifically Western Wireless' provision of universal 
            service on the Pine Ridge Indian reservation, is also 
            bridging the ``digital divide'' in rural America. In 
            September 2003, Western Wireless introduced high-speed data 
            services on the Pine Ridge Indian reservation through the 
            implementation of next generation digital technology and 
            the donation of 22 laptop computers capable of internet 
            access at speeds up to 140 Kbps. Western Wireless' ability 
            to provide advanced telecommunications services on the Pine 
            Ridge Indian reservation and other rural areas are 
            dependent upon high-quality network facilities in rural 
            areas, which, in turn, is largely dependent upon the 
            availability of universal service support.
    State Commissions and the FCC agree that a competitive universal 
service system benefits rural consumers. There is near unanimous 
agreement among policymakers that the public interest is served by a 
competitive universal service system. Specifically:

 The Minnesota commission acknowledged that Congress and the Minnesota 
        Legislature were ``deeply committed to opening local markets to 
        competition,'' but that it was responsible under Section 
        214(e)(2) to determine on a case-by-case basis whether some 
        rural telephone company areas could not sustain or benefit from 
        competition. The state commission first looked to whether 
        Western Wireless' designation would benefit consumers in rural 
        Minnesota, and determined that Western Wireless would bring 
        reliability, high service quality, affordability, customer 
        choice and new and innovative services.
 The Kansas Commission stated that the clear and unmistakable public 
        policy imperative from both the federal and state legislatures 
        is that competition is a goal, even in rural areas. Arguments 
        were made that competition is not in the public interest in any 
        rural telephone company service area because it may jeopardize 
        universal service. However, the commission concluded that no 
        articulable facts had been presented to reach the broad 
        conclusion that competition and universal service are never 
        able to exist together in rural areas. The Commission did not 
        accept the assertion that designating additional ETCs in rural 
        areas will necessarily threaten universal service. The 
        commission found that the benefits of competition and customer 
        choice should be available to Kansans living in non-rural areas 
        and that general concerns and speculation are not sufficient 
        justification for adopting a policy that would result in 
        benefits and services that are available to other Kansans not 
        also being available to rural telephone customers. The 
        Commission concluded that the rural telephone companies did not 
        demonstrate any adverse impacts and that competition should not 
        be withheld from customers in rural areas.
 The Nebraska Commission concluded ``the public interest requirement 
        for designation of an ETC in rural areas is not meant as a 
        protective barrier for rural telephone companies but rather as 
        a method for ensuring that rural areas receive the same 
        benefits from competition as their urban neighbors.''
 The South Dakota Commission found that Western Wireless' provision of 
        ``universal service throughout the study areas will be 
        beneficial to the public.''
 The North Dakota Commission summed things up this way: ``The 
        Commission finds that designating Western as an additional ETC 
        in the study area of each rural telephone company will advance 
        universal service by bringing new telecommunications services 
        to North Dakota consumers, by bringing competitive choice for 
        universal services to residential customers, by offering a 
        highly reliable and top quality universal service offering, and 
        by providing cost effective means for customers in remote areas 
        to acquire universal services.''
 The Texas Public Utilities Commission said in 2000, when designating 
        Western Wireless as an ETC: ``[T]he Commission is unwavering in 
        its support of a simple proposition: Rural Texans are not 
        second class citizens and should not be deprived of competitive 
        alternatives or access to new technologies.''
  congress should continue its oversight of the emerging competitive 
                       universal service market.
    Congress and this Subcommittee in particular should continue its 
oversight over the development of a competitive universal service 
market to ensure that rural consumers continue to be the primary 
beneficiary of universal service policies. To this end, I suggest the 
following:
    1. Create A Stable, Sustainable Universal Service Funding Mechanism 
By Ensuring Adequate Funds Are Available To Preserve And Advance 
Universal Service. Until universal service evolves to a market-based 
solution for providing telephone service to rural America, any support 
provided to rural areas must be distributed on an equitable, non-
discriminatory basis to both incumbents and competitive carriers. 
Federal legislation may be necessary to provide the FCC with the 
authority to base universal service contributions upon a broad range of 
revenue sources to ensure a stable, sustainable universal service 
funding mechanism. At the same time, universal service support to 
carriers must be based upon the most efficient technology for providing 
service.
    2. As Consumers' Telecommunications Needs Evolve, The Universal 
Service Policy of the U.S. Needs To Reflect Consumers' Increasing 
Reliance On Wireless Services. The focus of any universal service 
policy should be the consumer. Wireless service has emerged as a fully 
robust competitor to wireline telephony, resulting in many rural 
customers ``cutting the cord'' and other consumers using wireless as a 
substitute for wireline usage or additional lines. Competitive Eligible 
Telecommunications Carriers (``CETCs''), including wireless CETCs, use 
high cost support to serve unserved and underserved areas, thereby 
``advancing'' universal service.
    3. Universal service policies must be competitively-neutral. It has 
been a national policy since 1934 to make available to all Americans, 
regardless of the location of their residence, affordable 
telecommunications services. All too often, however, rural areas have 
been effectively excluded from the benefits of a competitive 
telecommunications market because incumbent local telephone companies 
have historically monopolized access to universal service support 
necessary to provide affordable telecommunications services in these 
rural, high-cost areas. Clearly, a competitive carrier that does not 
have access to universal service funds would not choose to enter the 
local market and compete with incumbent carriers who do have access to 
universal service support. I89CONCLUSION
    The competitive universal service system is working: rural 
consumers are gaining access to services previously reserved to their 
urban counterparts. Rural consumers today have begun to realize the 
vision of the 1996 Act's pro-competitive mandates, including those that 
apply to the universal service market. Wireless service provides the 
only real option for rural consumers to bridge the ``geographic 
divide'' and fully participate in our global economy. A competitive 
universal service market is a success because of the progressive 
thinking of Congress and pro-competitive policies of the FCC and state 
commissions. Congress should continue to oversee the development of 
universal service in the United States and take action, as necessary, 
to further develop the emerging competitive universal service market.

    Mr. Upton. Thank you all very much.
    Again, I apologize that the votes interrupted it in the 
middle. At this point, we are going to alternate between the 
Republican and Democrat side asking questions of 5 minutes 
each. And we'll move in the order that members appeared and 
their seniority, knowing full well that a couple of members 
have an extra 3 minutes for those that deferred their opening 
statements.
    I would like to focus my time on the eligible 
telecommunications carrier, ETC, issue. Ms. Shank, in your 
testimony, you suggested that there was a ``Lax state in 
Federal Communications Commission consideration of what 
constitutes the public interest when granting ETC status to 
competitors.'' I would like to have a little better picture of 
what that means and the implication of such lax considerations. 
What are they for rural ILECs and universal service funding in 
general?
    Ms. Shank. In public interest, I feel that small telephone 
companies are regulated. We have demands to meet. We have 
quality of service. And I think the public interest people want 
those things. It doesn't matter where somebody builds a new 
house or what. We're there to provide service to them.
    What is happening is our wireless is coming into our area 
and not that that is all bad, but the problem is you get two 
and three of them coming in a small area like Bloomingdale 
Telephone Company if they're all pulling on it. It does affect 
it very much.
    Our public interest people, I think that they so need the 
network that we set up years ago. And they have an interest in 
being able to always know they can rely on telephone service. 
And if you look back when we have bad things happen, like in 
New York and everything, where those systems of wireless and 
everything didn't work, you saw lines of people at pay 
stations. So I think public interest still has a desire to 
continue with a good strong network in the United States.
    Mr. Upton. Commissioner Abernathy, how would you respond to 
the suggestion that there is a lax state in FCC consideration 
of what constitutes the public interest?
    Ms. Abernathy. I guess I would respond by saying one of the 
reasons that the FCC referred the ETC issue over to the joint 
board was a recognition that we need to make this process 
better. And there are some improvements that can be made.
    Most of the parties who responded in response to the whole 
joint board process on either side of this issue have said that 
it would be very beneficial to have more concrete guidance from 
the FCC about what it takes to be designated and guidelines for 
being designated as an ETC because at the end of the day, there 
has to be a public interest analysis associated with it.
    Some of the concerns have been that because funds continue 
to run to both the wire line provider as well as the new ETC, 
that there may be no incentive to really do a public interest 
analysis because no harm, no foul. You're not going to lose any 
support.
    So I think at the end of the day, this is one of the major 
areas that we're looking at as the joint board. And we can do 
better.
    Mr. Upton. What do you think with regard to Mr. Stanton's 
comment that the wireless industry contributes 30 percent and, 
yet, receives only about 2 percent of the fund?
    Ms. Abernathy. I think that that really goes to the 
question of when you're contributing to the fund, is there any 
obligation to then receive support from the fund? And the 
answer pretty much is no because the way it works is all 
telecom carriers contribute and not all qualify for funding.
    Now, again, at the end of the day, as we all know, it's 
passed through to consumers. And so what we're really looking 
at is our consumers contributing fairly and equitably. And are 
we distributing it in a way that there is no arbitrage between 
the various industries?
    I do agree with Mr. Stanton that wireless has been of 
tremendous benefit to rural America, no question in my mind. So 
what we are deliberating about is at what point does a company 
that is lightly regulated and has done a fabulous job in rural 
America, when they then come to the government and say, ``And 
now I would like to be able to receive some subsidy support,'' 
what are the bells and whistles? What are the obligations that 
go along with receiving that subsidy?
    As long as they're out there providing service 
competitively with their own capital investment, we pretty much 
do leave them alone, but I think there are some obligations 
that necessarily go along with being qualified to receive 
government subsidies.
    Mr. Upton. Ms. Shank, what are some of your obligations as 
the carrier of last resort? How do those requirements compare 
to the obligations of carriers serving the same areas? And how 
should the fact that a rural ILEC is the carrier of a last 
resort factor into whether a competitive carrier should be 
designated as an ETC in the same area?
    Ms. Shank. No. 1, we're regulated. We have to provide 
service to whoever comes in there. We are regulated by billing 
standards. We are regulated by the rates we charge and all of 
those things. And, as a last resort provider, there is never a 
question. When somebody applies in our service, they are 
provided with service.
    You have some of the other competitors coming in. In all 
areas, it doesn't always work either in our exchange. So people 
cannot depend on that. As a last resort, they depend on us to 
provide that service. And we're there under regulations to 
provide it and will provide service to each and every customer 
living in our exchange.
    Mr. Upton. I see my time has expired. Mr. Gordon?
    Mr. Gordon. Thank you.
    Mrs. Greene, in Tennessee, you're not only regulated by the 
FCC but also by what we call the Tennessee Public Service 
Commission. And so with that, there are implicit and explicit 
additional charges for universal service. What are some of the 
issues we are concerned with as we look at this about the 
relationship between the FCC and various State universal 
service regulations?
    Mrs. Greene. You are correct that we are regulated by the 
Tennessee regulatory authority. And what we have right now is 
really a situation where we have conflicting theoretical 
schemes that have been layered on top of each other that have 
the potential to do a lot of damage to the incumbent local 
exchange industry.
    We have a social pricing program that is imposed by States, 
all the States, like the Tennessee commission. And in that 
social pricing program, we have a history of pricing 
regulations that have business subsidizing residential and 
urban subsidizing rural.
    When you take that and you overlay it with a pro-
competitive plan that is enforced by the FCC that not only 
creates our wholesale business but makes us price that 
wholesale business at a deeply discounted rate you then have a 
series of interlocking implicit subsidies that really don't 
work anymore. If those implicit subsidies were made explicit, 
the size of the universal service fund would just really 
explode.
    Mr. Gordon. So what do we need to do about that?
    Mrs. Greene. Well, first of all, I think we need to breathe 
life into a couple of things that were required by the 1996 act 
that have not yet been implemented.
    The 1996 act had three basic goals. One was to create 
competition. And it has been very successful at that. In our 
service territory alone, in our nine States, we have on any 
given day between 350 and 385 competitors just in the wire line 
space. So it's been very successful in creating competition.
    The other two premises of the act were, first of all, to 
make implicit subsidies explicit. The State public service 
commissions have not stepped up to the plate either by creating 
State universal service funds or by allowing rates to rise to 
their natural level with some sort of protections about 
comparably affordable services between urban and rural areas.
    But, in addition to that, a final goal of the 
Telecommunications Act was to encourage deregulation and to 
allow marketplace competition to supplant command and control 
regulation. That has not happened at all. And, in fact, today 
what you have is both at the State and Federal level more 
regulation than we have had at any time in our history.
    Mr. Gordon. Ms. Abernathy, as we look at this, what are 
your concerns in terms of the State issues versus the FCC and 
that interrelation?
    Ms. Abernathy. Actually, it's something that we addressed 
as a joint board when we were dealing with this whole non-rural 
support mechanism. And one of the major issues that came up 
there was given that we generally look at Statewide average 
costs per line for non-rural carriers and then we compare that 
to a Nationwide benchmark, how do you, nevertheless, ensure 
that support is sufficient and that the rates are reasonably 
comparable?
    What we have done historically is that we presume that if 
they're within 135 percent of the Nationwide average, that the 
States are in a position to make sure that urban and rural 
rates are reasonably comparable because you spread the rates 
across your low-cost customers and your high-cost customers. 
That's been the interaction with the States.
    What we did as a joint board is we then said, ``Okay. In 
addition, as another safety mechanism, to the extent that you 
still may not have reasonably comparable rates for various 
reasons within a State, then''--this is the recommendation 
again from the joint board--``you can come back either to the 
FCC, to the Nationwide USF, or to a State USF and ask for 
additional funding dollars providing the documentation about 
why you're unable to keep your rates at comparable levels for 
between urban and rural customers.''
    The reason this approach has been historically taken was 
the belief that while rural carriers aren't able to absorb any 
of these high costs themselves and so, therefore, they qualify 
based on their own costs, that with the larger carriers, such 
as the incumbent BOCs, that they are able to engage in this 
shifting of burdens between high and low-cost customers.
    Mr. Gordon. And then where that does leave us with a so-
called level playing field?
    Ms. Abernathy. Well, where that leaves us is at the end of 
the day, customers are fine under the current approach. The 
real question is, is it unfair to the carriers, the larger 
carriers, who now face competition for their lower-cost 
customers that traditionally have been absorbing some of the 
costs of the higher-cost customers?
    So now you're really engaged in a debate about, is this the 
best way to manage the USF? Is it fair to the carriers who are 
now facing competition? Can they continue to be able to balance 
off these costs between high and low-cost customers?
    Necessarily, if we change this method, you will drive up 
the size of the fund explicitly because you won't have large 
companies any more that are doing this for you within their own 
customer base.
    Mr. Gordon. Thank you, Mr. Chairman.
    Mr. Whitfield. Mr. Terry is recognized for 5 minutes.
    Mr. Terry. Thank you. I appreciate that. I had a statement, 
but I appreciate the effort.
    With that, let me just start off by saying that this has 
been a fairly decent hearing and I have appreciated listening. 
I think we could have had more diverse opinions up here, but I 
will get into that later. Certainly I think one of the issues 
that anyone listening to the testimony here would take is just 
how complicated universal service is and will become when we 
factor in new technologies.
    And just down on the far end at my left, it was an 
interesting discussion between Western Wireless and 
Bloomingdale Telephone Company. And one that is raging within 
my own State back home is the role of wireless in universal 
service fund in rural areas. And it really begs the question, 
and I think it forces us to have to go back and say, ``Hey, 
what is universal fund? What is the purpose of it? How are we 
going to define it because times have changed? Do we need to 
modernize it or is it simply going to be that every residence 
for safety purposes should have one line into their house?'' 
It's going to take a Herculean effort to modernize universal 
service fund. And I'm certainly willing to participate in that. 
In fact, I have mentioned to Chairman Upton on a couple of 
times that I think we should put together a very diverse but 
controlled, not controlled in the sense that we control the 
outcomes but certainly if you have a 40-member panel versus a 
10-member panel, you could probably get more accomplished with 
the smaller, but I think we should put together a panel of 
diverse views and have discussions amongst those and really 
figure out new and unique ways to do it.
    It's just been my year now that I dove into the universal 
service fund. I see that there are a variety of different ways 
to fix this. And I just think we need a total fix. I am just 
not very confident that will ever come about.
    I mean, even if we could put together an effort, I am just 
not sure that with all the interests that have just been 
displayed here today, that we are ever going to get there. So 
let me lay down the second premise here.
    We are all in it for our own. Okay? I am representing a 
State that I feel is getting screwed right now, to put it 
bluntly. And that is why I have been so emphatic regarding the 
high-cost non-rural fund and its distribution.
    It just baffles me when we have six counties in the State 
of Nebraska that rank as the poorest in the Nation, when we 
have counties like Cherry County that are larger than two 
States and have 800 people in it, in that county, that we can't 
qualify for that fund. And I see States that are listed here 
that are just as rural, the Dakotas, for example, that don't 
share in this high-cost fund. And so there seems to be 
something inherently wrong.
    And since the FCC adopted this, Ms. Abernathy, you are 
going to get some of my questions here. Now, just as a member 
of the commissioners, are you aware of this discrepancy in 
distribution in the high-cost non-rural fund?
    For example, my State that pays into this, that's a rural 
State but doesn't receive anything out of it. Is this something 
that the FCC is aware of or you are aware of personally?
    Ms. Abernathy. I'm personally well-aware of it, thanks to 
having spent some time with you and your staff. And I do 
appreciate the discussions we have had because this is very 
complex.
    What I had always focused on before this point was the USF 
funds that flow to Nebraska and South Dakota and North Dakota, 
Wyoming, Utah. And they're net receiver States. So I had always 
looked at, as a rural State, are you receiving the U.S. 
dollars? Are you paying in but getting more than you pay in? 
And the answer is yes, to the tune of around $8 million, 
sometimes $20 million.
    What I had never stepped back and said, ``But what about 
the non-rural carrier within that State? Are they able to 
continue to balance rates between rural and urban without any 
USF support?'' Again, historically what has been done is to 
say, ``Larger carriers, you do that balancing within the State. 
And then at the back end, if you need more support, we give it 
to you.''
    But it has been an obligation placed on the larger 
carriers. So all the rural carriers within your State, you 
know, they're receiving the payments. The non-rural, the large 
carrier, which would bequest, yes, they are expected to absorb 
some of this. And is that methodology sustainable given 
competition?
    Mr. Terry. Let me ask the follow-up in there. Do you feel 
that that methodology, the current methodology, is----
    Mr. Whitfield. Mr. Terry, your time has expired, but----
    Mr. Terry. Will you yield me your time?
    Mr. Whitfield. I'm sure when the chairman gets back, he may 
do another round.
    Mr. Terry. I will do the second.
    Mr. Whitfield. Mr. Markey is recognized for 5 minutes.
    Mr. Markey. Thank you, Mr. Chairman.
    Looking ahead, it is now clear to almost everyone that the 
current universal service policy's days are numbered. The 
clamor for additional funds keeps growing. Meanwhile, the 
traditional interstate revenue base for providing such funds 
continues to hemorrhage. That's because so-called long distance 
service is increasingly becoming conjoined with flat rate local 
and long distance packages for both wireless and wire line 
service. In addition, there will be an inevitable and in my 
view rapidly accelerating migration from circuit switch 
telecommunications services to nontraditional internet 
protocol-based telecommunications services.
    So, Ms. Greene, you are from BellSouth. Are you any 
relation to Judge Harold Greene, who broke up the Bell system?
    Mrs. Greene. Actually, I got hired right after the breakup 
of the Bell system, and I had a lot of people at BellSouth ask 
me that. They really weren't very nice to me until I answered 
it. But no, sir, I am not.
    Mr. Markey. You claim no relationship? I didn't think so.
    Do you believe, Ms. Greene, given the sweeping nature of 
the change in the marketplace that the FCC and the States 
should nickel and dime some minor adjustments to current 
formulas for collecting universal service and continue to 
monitor IP telephony and other issues or do we need a more 
comprehensive revamping of how such fees are collected and 
distributed?
    Mrs. Greene. Yes, sir. I think we need a comprehensive 
overview of the fund. We need a comprehensive view of who 
contributes. And we also need to look at the distribution of 
the fund. So no, I don't believe nickel and diming is correct. 
We do need a comprehensive overview.
    Mr. Markey. Mr. Lubin, could you give me your quick view on 
that?
    Mr. Lubin. Yes. I have a tremendous sense of urgency. I 
think the universal service mechanism is broken. I think the 
assessment rate today of 9.5 next year will exceed 10 percent. 
I think it's only going to get worse. And I urge----
    Mr. Markey. Comprehensive?
    Mr. Lubin. Comprehensive.
    Mr. Markey. A re-looking of the whole system?
    Mr. Lubin. Correct.
    Mr. Markey. Okay. Thank you. Thank you both for your 
questions.
    Let me yield the balance of my time to the gentleman from 
Michigan, Mr. Stupak, which he can use in addition to his own 
time.
    Mr. Stupak. I appreciate the gentleman yielding.
    Commissioner Abernathy, I understand that the commission is 
completing its review of the support mechanism for non-rural 
carriers. As you know, representative Terry and I have H.R. 
1582. Will the commission in its review of this fund be 
providing comment on our legislation as well?
    Ms. Abernathy. At this point, I haven't seen a draft item 
from the bureau. As far as I know, there was nothing in the 
record comparing the legislation. So to the best of my 
knowledge, we will not, but I will certainly give you better 
information as we get more information from the bureau.
    Mr. Stupak. Okay. In your testimony, you were talking a 
little bit about intrastate. What is the reason that intrastate 
revenues were not included in the contribution methodology? And 
it would seem to me that there is not a strong objection among 
the stakeholders regarding including intrastate revenues. Won't 
that at least provide some measure of relief?
    Ms. Abernathy. Is the question, would it help us if we are 
able to effect both interstate and intrastate?
    Mr. Stupak. Yes.
    Ms. Abernathy. Absolutely. It makes a huge difference for a 
couple of reasons.
    Mr. Stupak. Why wasn't it included initially, then?
    Ms. Abernathy. By Congress?
    Mr. Stupak. By Congress.
    Ms. Abernathy. Well, I don't know, but I think there was 
some belief----
    Mr. Stupak. There was----
    Ms. Abernathy. [continuing] originally that we could.
    Mr. Stupak. Yes.
    Ms. Abernathy. And then the case went up on appeal and the 
court said we couldn't. So it may very well be that Congress 
thought that we were able to assess.
    Mr. Stupak. Okay. Mr. Lubin, yesterday several 
organizations put out an ad in the Washington Post--I think 
they were AARP, Rainbow Push, National Grange--urging the FCC 
to maintain a revenue based universal service funding system. 
They also sharply criticized a connections-based system, such 
as the one that you have proposed, claiming that it will 
unfairly burden low-income customers. Could you respond to that 
comment or criticism?
    Mr. Lubin. Yes. From our point of view, first of all, we 
supported the telephone number approach, which is similar to a 
connection-based approach. Our belief is that absolutely does 
not harm low-income individuals. In fact, what we suggest the 
commission might consider is to exempt people who are on 
lifeline programs. So people who are on life line programs 
would not pay the dollar.
    But I would like to go even one step further. Every time we 
have looked at the data, people who are considered low-volume, 
which was the other point that they raised in that article, 
that low-volume, there really is no correlation usage and 
people with ethnicity or age or income. In fact, what you find 
are people who have low usage follow the whole demographic 
spectrum. Conversely, people who are low-income at various 
points in time could be high-usage toll users.
    So we think, actually, a connections-based or a numbers-
based, which we put forward, creates simplicity, stability. The 
customer knows exactly what they are going to be paying every 
month.
    Mr. Stupak. I guess my time is up, Mr. Chairman. I will 
look for my opportunity to ask questions later.
    Mr. Upton. Thank you.
    Mr. Walden? And you get the extra bonus of 3 minutes.
    Mr. Walden. The bonus points. Thank you, Mr. Chairman.
    Let me go to Commissioner Abernathy. I am trying to get a 
better understanding of this high-cost rural area fund. The 
``high-cost non-rural fund'' I guess is the term.
    I have seen this printout that shows contributions to USF 
by State--I am sure you have seen it, too--and then payments 
from the USF. I am just trying to figure out why this occurs 
the way it does in this particular fund and then how this fund 
is related to other funds that make other payments that you 
have alluded to.
    For example, with all due respect to my friend from 
Mississippi, Mississippi gets $104 million and Alabama gets $43 
million and West Virginia gets $26 million. And then it's a 
couple of million and a bunch of zeros from there on.
    Can you explain how we arrive at that and then, anybody on 
the panel, too, if that is a fair distribution of funds because 
it seems kind of odd----
    Ms. Abernathy. Right.
    Mr. Walden. [continuing] unless you're from Mississippi or 
Alabama?
    Ms. Abernathy. Which I am not. I will explain, and then I 
may yield to my colleagues to help with this.
    The way it is supposed to work is you look per State at the 
number of rural high-cost customers that are entitled to USF. 
You then look at the amount of money you're collecting from all 
of the customers within the State to support all USF programs. 
You then back out all of the revenues that they receive and see 
what the total amount is.
    So, in theory, the way it should work is that the States 
that are receiving the most funds are those that have the 
largest number of high-cost rural carriers as----
    Mr. Walden. And how is that defined? What is a high-cost 
rural carrier?
    Ms. Abernathy. High-cost rural carrier. It's based on an 
average. You look at Nationwide averages. You calculate whose 
costs are above and whose costs are below that benchmark. And 
that's how you define who are the high-cost companies. And 
then----
    Mr. Walden. Is that on a company-wide basis?
    Ms. Abernathy. For the rural carriers, it is based on their 
cost models that are used to identify their costs. For the non-
rural carriers, the non-rural carriers then end up receiving 
support depending upon the volume of high-cost customers they 
have versus the volume of low-cost customers they have. And 
even if they have numbers of high-cost customers, if the low-
cost customers ultimately drive their overall costs down to 
within a Nationwide average, then they won't get that much 
support.
    But I think I may allow Billy Jack to step in or Bob Rowe.
    Mr. Gregg. There are about 185 million land lines in the 
United States. And we have rural carriers, which tend to be the 
smaller, more rural carriers; and non-rural carriers, which are 
the larger carriers, like the regional Bell holding companies.
    Mr. Walden. But they may cover a rural area.
    Mr. Gregg. Right, but the----
    Mr. Walden. As well as an urban area?
    Mr. Gregg. Right. And there are only 80 non-rural carriers 
in the entire United States, but they serve 90 percent of all 
the access lines. There are 1,358 rural study areas that serve 
only 10 percent of the access lines.
    The non-rural high-cost fund that you have been speaking of 
amounts to $240 million a year. That's only 7.2 percent of the 
entire high-cost fund. The lion's share of the high-cost fund 
goes to these 1,358 rural carriers, $2.5 billion each year. 
Eight hundred million total goes to these 80 non-rural 
carriers. Two hundred forty is the high-cost model. And that is 
the----
    Mr. Walden. That's the chart we're looking at?
    Mr. Gregg. Right. And it's the distribution of that 
support. That $240 million is as she stated. First, you 
calculate a National average cost of all of the non-rural 
carriers. And that's about $22 per line per month. Then you 
apply a benchmark. The benchmark that has been used, 
heretofore, is 135 percent. That results in about a $30 per 
line per month benchmark.
    Any States, any non-rural States, that have costs over that 
benchmark, the Federal fund will support 76 percent of that 
difference. So you have 8 States that have per line costs per 
month above $30. The others are below. There are two that are 
very close, Nebraska and South Dakota, to the benchmark.
    Depending on what the FCC does with the Tenth Circuit 
remand decision, which is due out next month, there may be more 
States getting high-cost distribution or less. It just depends 
on what they finally come up with.
    Mr. Rowe. Mr. Chairman, representative, if I could weigh 
in, too? Both your State and my State do receive significant 
support in the fund targeted at the small programs. And your 
concern, again, is to the large company program.
    The FCC's initial decision was appealed to the Tenth 
Circuit, was remanded to the FCC. The court said, among other 
things, that the commission failed to adequately define terms 
``reasonably comparable'' and ``sufficient'' and failed to 
explain how the particular mechanism was consistent with the 
statutory requirement that urban, underline ``urban,'' and 
rural rates and services be reasonably comparable.
    That decision was then referred by the FCC to the joint 
board. Everyone worked on that in good faith and very 
diligently. I was one of the dissenting commissioners and wrote 
at length that, in my view, comparing rural and insular costs 
to National average costs was not compliant with the statute.
    Quoting the former economist for this committee, who went 
on to serve on the FCC, we have to, as a first matter, follow 
the law. That's, of course, an unusual sentiment coming from an 
economist. But in my view, despite good effort and some 
progress coming out of the joint board recommendation, we have 
not yet followed the law in that very basic way.
    Depending on how you determine the urban average cost--and 
there are a number of ways that were included in the record 
before the joint board--it might be necessary for one of the 
large carriers to have average costs of 164 percent of an urban 
average up to, using a rural utility service study from several 
years ago, 233 percent of the urban average before they would 
be eligible for support under the large company program.
    As Mr. Gregg pointed out, the large company program 
represents a very small portion of the overall universal 
service fund, also represents a very small portion even of the 
high-cost fund. So this is a critical problem.
    If I could, I would add that this has been perceived as a 
quest issue. I don't consider it a quest issue, Rather, I would 
say, first of all, it's a question about providing sufficient 
support for networks that serve all customers.
    Second, I think it's of potential concern to competitive 
providers, who follow the advice of another good economist, 
Willie Sutton, and go where the money is.
    Mr. Walden. I have got 4 seconds left. Let me just try and 
find out an answer. Do you think, then, that this is a fair 
distribution of this $200 million or is it inequitable that the 
basis of the $200 million goes to just a handful of States, 
including Montana?
    Mr. Rowe. Mr. Chairman, representative, in my view, no for 
the reasons that I stated in my dissent.
    Mr. Walden. All right. Ms. Abernathy?
    Ms. Abernathy. In my view, again, so long as rates are 
affordable and reasonably comparable across States, then I 
think it is fair. And we have managed to make sure that happens 
through the support mechanism safeguards we have in place.
    Mr. Walden. All right. Thank you very much.
    Mr. Upton. Thank you.
    Next we will go to the chairman of the full committee, the 
chairman from Louisiana, Mr. Tauzin.
    Chairman Tauzin. Thank you, Mr. Chairman. And thanks for 
conducting this hearing.
    To start with, I wasn't here for the opening statements. 
And I missed a lot of the questions. I apologize, but we were 
working on a Medicare conference. So excuse me.
    I would like to take us back a bit. I mean, universal 
service fund was based upon a rather simple notion, was it not? 
Was it not based upon the notion that we wanted everybody in 
the country to be connected so that by homogenizing rates 
somewhat in the country, we could make it affordable for 
sparsely populated parts of America that should also be part of 
the telephone networks? So my phone became more valuable 
because more Americans were connected to it. So we all 
benefited in a sense.
    I mean, that was a simple notion, was it not? It wasn't an 
attempt by government to, if you will, socialize telephones as 
an economic entity. It was a design to make sure everybody had 
a phone. Therefore, all of our phones were valuable to us and 
the whole economic network by which our country communicated 
would be more valuable as a result. Wasn't that basically it, 
anyone? I see no disagreement.
    Mr. Gregg. Absolutely. The problem now is, how do we 
transition that system that was borne in a monopoly environment 
into a newly competitive----
    Chairman Tauzin. It's more complex than that. I mean, it 
has really become a Rube Goldberg kind of structure where all 
of you have been discussing for some time now--I have read a 
lot of statements on the background of this. All of you have 
been discussing who is paying and who is paying into the system 
and who gets money out of it, who should be paying it, and who 
should be receiving money, and how they get in one State region 
or another, and where the long lines ought to pay more than the 
ILECs.
    I mean, it has really gotten to be something that the 
average American would find extraordinarily difficult to 
follow. From the simple notion that we started out with that we 
were homogenizing rates in America so that everybody could 
afford a phone, we have gone way, way beyond that simple notion 
now. And it has gotten to such a complex, difficult 
bureaucratic mess that we are literally I think at some point 
going to have to re-simplify the system.
    Is that basically correct or do you want to make it more 
complex? If we are re-simplifying the system and we are facing 
the fact that American communication, world communication is 
changing, people are going to be making telephone calls on 
different systems other than the telephone. They're going to be 
making telephone calls on the internet, making telephone calls 
on wireless systems and satellite systems that were never 
designed as telephone systems. They were data systems or they 
were video systems. They've suddenly become all amalgamated in 
broadband distributions, what have you. But they are outside of 
this system of support, aren't they, today?
    So you have got cable companies and other companies that 
are going to be distributing video signals. They could be your 
utility company, could be your wonderful utility company that 
you depend upon for electricity and sometimes leaves you in the 
dark. They will be supplying you now with telephone service and 
even video signals with it so you can see who you're talking 
to. And that's going to be both wonderful and frightening 
simultaneously.
    So all of that is going to change, but they are outside the 
support system today, are they not? And so we face a situation 
where the simple notion of homogenizing rates so everybody can 
have a phone has now become a system where more and more of the 
folks who put into that system are going to be delivering 
telephone service without being part of it; and, second, where 
the amount of money available to make sure everybody has a 
phone is diminishing while demand grows for money under the 
system.
    So it's sort of like Social Security. I mean, when we 
started out with Social Security, there were 15 people working 
for every person collecting Social Security. We're down to--
what is it, folks? Aren't we down to about two, two and a half 
people, I think, less than three now? We're working to support 
every person retired. And it's becoming a stressed system. And 
this system is becoming stressed for that reason. Is that about 
right? Everybody is shaking their heads.
    So the question is, is it time for us to reform this system 
so it's simple again, No. 1? And does that mean that we have to 
make it a simple proposition, anybody who is providing voice 
service by any means has to be part of that system, so that 
everybody can benefit from that system mutually the same way 
the universal service fund was originally designed, or do we 
just scrap the system? Is it outdated? Is it outmoded? Has it 
served its usefulness? What is correct here? Which way do we 
go?
    Mr. Gregg. I believe, Mr. Chairman, since all benefit, all 
should contribute. It's a very simple proposition.
    Chairman Tauzin. Anyone else?
    Mr. Rowe. I believe, Mr. Chairman, on the contribution 
side, in particular, both of the leading proposals, either a 
number-equivalent assessment or broadening and depending the 
revenue base, are very much in the spirit of your suggestion 
that we simplify the collection mechanism and, in simplifying 
it, reconcile how we collect support much better with how the 
market is working, how services are being packaged, and how the 
network is evolving.
    Chairman Tauzin. Let me give you a warning. I appreciate 
anyone who wants to jump in at any time. Come on in. We had 
something called a property tax relief system in Louisiana. We 
had property tax exemptions for people up to a certain limit. 
And then the State paid the counties or the parishes for the 
amount of money they lost to support that system.
    And parishes started working out gimmicks to cheat on it. 
The court finally threw it all out. It got too complex. It got 
unfair. People were benefiting unequally under it. And our 
Constitution generally says, particularly when it comes to 
taxes and government, that we sort of have got to treat people 
equally and fairly. And when some people start benefiting and 
other people skip out, free from their obligation, sooner or 
later, a court is going to step in and throw it all out.
    Are we in danger of that with the universal service fund at 
some point?
    Ms. Abernathy. I think we have a real opportunity to 
simplify the collection mechanism here and figure out a better 
way to collect the revenues. The biggest challenge, the one you 
recognized, is, how do we distribute it and to whom do we 
distributed it and who is entitled to it?
    Chairman Tauzin. Well, there is one other thing you have 
got to think about that we have to think about because it has 
been raised by this committee. Mr. Chairman, I know my time has 
expired, and I will just lay it on the table for everybody to 
think about.
    The old notion was everybody should have a telephone. Is 
the new notion that everybody should have more than just a 
telephone? Is the new notion that we want to make sure that 
everybody in rural America has the same advantage in the new 
communication structures we're building in this country as 
anyone who lives in an urban area? Are we going to have 
``haves'' and ``have nots'' in the new broadband world, in 
effect? Do we use the universal service fund to make sure that 
doesn't happen?
    I will yield back, but, Mr. Chairman, maybe somebody wants 
to comment.
    Mr. Gregg. The act mandates that all customers in all parts 
of the Nation, including high-cost areas, have comparable 
services, including advance services, at comparable prices. But 
our whole task is to make sure that we promote access and not 
excess, that we don't go out and support four or five lines per 
home when, really, what we are trying to do is have one line to 
each home and an affordable line here.
    The rest of it should be up to the individual or individual 
State if they want to go beyond that. But the Federal universal 
service fund should establish a baseline for everybody.
    Mr. Post. Two observations. First, I agree with a lot of 
the thought process that you articulated in terms of learning 
from the last 6 years. And I would hope that we would learn 
such that we would define a mechanism that does not distort the 
marketplace, that minimizes leakage in the future so that we 
don't come back in two or 3 years and find we picked a method 
that, in fact, allows leakage.
    I would also hope we would find a solution that is 
predictable for customers, customer-friendly. And once we 
identify what that solution is, we then ask your second 
question. And your second question is, what should be funded? 
For example, do I want to have wireless infrastructure in rural 
America comparable to what I have in urban America? That is a 
question which, unfortunately, gets confused today by granting 
ETC status, which is supposed to be head-to-head competition. 
But it's really not head-to-head competition.
    If it is, you look at that question versus if what they're 
going to do is upgrade the infrastructure and give two and 
three and four connections to a customer's household, I'm not 
making a decision whether that is good or bad. What I am 
saying, pick a rational mechanism and then ask the question, 
what do I want it to fund?
    And then the next question you should be asking is, how 
much is it going to cost? And is that what I want to see this 
new line item to be on everyone's bill? And, all of a sudden, 
you would have a very rational, coherent way of looking at the 
problem.
    Mr. Stanton. Mr. Chairman, I would like to just add. I 
think that you are absolutely right. The system needs to be 
simplified. What I would, respectfully, disagree with is that 
the system is universal service.
    Our industry, the wireless industry, is about 20 years old, 
almost 20 years old. And we generate as an industry now more 
revenues than the local exchange business does. Our industry 
now contributes about 30 percent of the monies to the fund and 
only takes about 2 percent out. But the bigger issue is not 
universal service. It is the continuation of rate of return 
regulation of carriers, including the local exchange carriers 
when they have competition.
    Between Judge Green and the Telecom Act, if we 
fundamentally change the system so that competition can replace 
regulation where competition exists, universal service is a 
small subset of the total. Monies are paid in access charges 
that are a part of the total. Rate of return regulation is a 
part of the total. Using the most economic technology with 
which to provide service to people who can't otherwise get 
telephone service, which I believe wireless is, is a part of 
the solution.
    But you can't just take universal service in isolation. I 
think we have suggested to the joint board and the FCC and 
would suggest to the Congress that there is a bigger picture 
that needs to get simplified. And in the end, competition 
replaces the need for regulation.
    Mr. Upton. Thank you. The gentleman's time has expired. I 
would recognize the gentleman from Michigan, Mr. Stupak, for 5 
minutes.
    Mr. Stupak. Thank you, Mr. Chairman.
    Let me follow up on what the chairman was asking, but let 
me ask it this way. Ms. Greene, you don't seem to be a fan of 
Representative Terry's and my bill in looking at your testimony 
and some of your statements here today. Let me ask you this 
question, though. Since places like--what was it?--Mississippi 
and West Virginia and some of these others are getting so much 
money out of that universal service fund, what service are they 
being provided, the simple telephone or with the money that is 
coming out of the universal service fund for Mississippi, $103 
million last year, do they have all kinds of other services 
being added to the rural customers in Mississippi?
    Mrs. Greene. Well, the non-rural fund--this kind of goes 
back to the conversation that we were having earlier. The non-
rural fund is a very small part of the universal service 
overall compensation flow.
    Mr. Stupak. Granted, but they did still get $103 million 
out of it last year.
    Mrs. Greene. Right.
    Mr. Stupak. So are they getting just a simple telephone, as 
the chairman asked, or are they getting voice, data, and all 
the other services with it that are being funded by the rest of 
the Nation?
    Mrs. Greene. What they are getting is a stipend that 
offsets the high cost of providing service in Mississippi.
    Mr. Stupak. Understood.
    Mrs. Greene. And that is not a function of specific service 
that is provided. We do provide advance services to good parts 
of Mississippi.
    Mr. Stupak. But the services, you're getting this $103 
million out of the fund. And with that, you are able to provide 
more than just a simple telephone but other services, too, 
where Nebraska doesn't get it because they won't get any money 
out of the fund or northern Michigan won't receive those added 
services because they don't have any money out of the fund?
    Mrs. Greene. Well, Nebraska does get about $33 million out 
of high-cost universal service funds. They don't get money out 
of the non-rural fund.
    Mr. Stupak. They don't get any money out of the high-cost 
non-rural fund.
    Mrs. Greene. Right. And in large part of why Mississippi 
and Alabama get the amounts of money that they do----
    Mr. Stupak. I understand all of that. I understand all of 
that. What I am trying to ask you----
    Mrs. Greene. I thought your question indicated that maybe 
you didn't understand, that it was a function that we serve 90 
percent of the States,----
    Mr. Stupak. I understand it.
    Mrs. Greene. [continuing] like Qwest, which serves only a 
small portion of this.
    Mr. Stupak. This fund has only been around since we did the 
Telecommunications Act of 1996. Therefore, I would think if you 
are going to spend $103 million last year and I'm sure other 
years close to that more money just in Mississippi, not only 
would you be putting in telephone lines, but it would think you 
would also be putting in the services that a lot of us don't 
have in rural areas, like the broadband, like the data, like 
the voice, ``Yes'' or ``No''?
    Mrs. Greene. Yes, we are, but you're really kind of 
confusing the way that the fund works and what eligibility for 
the fund is attributable to.
    Mr. Stupak. Here's the part I'm not confused on. The part 
I'm not confused on, if I am getting $103 million out of a fund 
that all the Nation kicks into but only about 7 or 8 States are 
allowed underneath the formula to take advantage of, not only 
are they being provided the service that we all want them to 
have underneath telecommunications, but they also have that 
distinct advantage of receiving other services the rest of us, 
who are just as rural, but because we may have a big city like 
Detroit, therefore, we are offset, we do not receive money 
underneath the high-cost non-rural fund only.
    Now, I agree there are other areas that they can apply for, 
but the kicker for us and for some of us who feel that this is 
just simply wrong is not only do you take 2 States getting 
about 70 percent of the money, but they are also, and rightly 
so, getting added services and benefits the rest of us do not 
have an opportunity to have or the carriers working our areas 
don't have access to the money to put in the extra services. So 
we see two advantages: lack of money and lack of upgrade of 
services that would benefit our areas because of the money that 
is coming out for just a few States.
    I am sure Mr. Gregg wants to say something.
    Mr. Gregg. Yes. Just in terms of how that money is used, I 
can give you the personal example of what we do in West 
Virginia. We receive about $31 million from the non-rural high-
cost fund. We conduct an annual rigorous review of that money 
before it is received.
    We use approximately $26 million of it to reduce rates for 
customers. We have some of the highest rates in the Nation. 
It's an average credit on each person's bill in the State 
that's served by Verizon of $3 per month.
    The FCC's latest rate survey that just came out show that 
we still have the second highest rates in the Nation, even 
after the credit.
    Mr. Stupak. I don't disagree with that, but the part that I 
have a problem with is not only the money part, but, look, 
there are non-rural carriers who serve rural customers in over 
40 other States. So those rural customers that are being served 
by a non-rural carrier, why shouldn't they get a discount on 
their bill also from money out of this fund?
    I just think it's a simple fairness issue and not only is 
it a fairness issue on reduction of rates, but now I understand 
it is also fairness on the services that are being provided.
    Chairman Tauzin. Would my friend yield?
    Mr. Stupak. Sure. Go ahead.
    Chairman Tauzin. What is so crazy about this system is you 
have got grandmas and grandpas on Social Security subsidizing 
their children who are earning good money on their phone bills 
today. Isn't that correct?
    I mean, it's true. It depends where you live. You could be 
living on a Social Security income, aged, and barely struggling 
to pay your food and your drug bills. And, yet, the system 
requires you to be subsidizing your children who are making a 
good living but living a different place in America. It's a 
little nutty. There are inequities all over it like that as you 
begin to study it.
    And that's why, again, my friend is right. It's full of 
those kind of inequities. The more you look at it, the more you 
see them. And the more you come to the conclusion we need to 
simplify this thing.
    Thank you, sir.
    Mr. Upton. The gentleman's time has expired.
    The gentleman from Kentucky, Mr. Whitfield.
    Mr. Whitfield. Thank you, Mr. Chairman. I want to thank the 
panel for joining us today and for their patience. I know it 
has been a long afternoon.
    I want to congratulate Mrs. Greene for her--I guess you are 
coming to the end of your years as chairman of the USTA. And 
I'm sure it's been an exciting year for you.
    I think the testimonies showed quite clearly today that 
there are a lot of inequities in this system and that at least 
the appearance is that most people think there need to be 
comprehensive reform.
    I noticed, Ms. Greene, in your testimony, you indicated 
that USTA believes that Federal funds should be used to support 
only one eligible telecommunication carrier in each high-cost 
area. Is that correct?
    Mrs. Greene. That's right.
    Mr. Whitfield. And other members of the panel, do you all 
have any response to that or any views on that recommendation?
    Mr. Gregg. I have made a variation on that proposal, which 
is that on the truly high-cost areas, those above $20 per line 
per month in terms of support, there would be a limitation 
between $20 and $30 per line per month. Only one additional 
eligible carrier would be allowed and above $30 only one 
carrier at all.
    This would encompass half of the study areas in the United 
States served by rural carriers but only 1.7 percent of all the 
access lines. It's the truly small high-cost areas. That's 
where we need to restrict the amount of subsidy going. It 
doesn't make any sense to have multiple subsidized carriers 
there. Below $20 per line, I would part ways with USTA.
    The section 214E of the act mandates that we have multiple 
ETCs in areas served by non-rural carriers. Non-rural carriers 
receive high-cost support, too. The highest is Puerto Rico 
Telephone Company that receives about $8 per line per month. So 
obviously there is unlimited subsidy there.
    And I believe that allowing areas that receive less than 
$20 per line per month, whether they be rural or non-rural, to 
have multiple ETCs would be reasonable and would not 
excessively increase the fund like allowing multiple ETCs in 
these really high-cost areas.
    Mr. Stanton. I would respectfully disagree with the notion 
of having a single carrier be designated. There is an 
underlying presumption that if you only designate one ETC, that 
you designate the wire telephone company in that geography. In 
many cases, that is, particularly as I said in my oral 
testimony, in areas below ten people per square mile, which is 
the vast majority of the territory that my company serves. You 
are excluding the more efficient provider of service, that 
wireless can provide service at a lower cost in those areas. 
And, therefore, not only are you excluding them in, for 
example, Commissioner Gregg's proposal, but you are actually 
punishing all of the system by requiring that you subsidize the 
less efficient provider.
    And I would argue that if you create arbitrary milestones 
that say you only allow one if the cost per company is above a 
certain level, that you create incentives for the telephone 
company to actually increase their costs to be above that level 
to preclude having competition.
    You, in effect, reward inefficiency associated with high 
cost. And I'm an admitted capitalist. In my view, there is only 
one mechanism by which you can truly create the most efficient 
system. And that is the introduction of competition. And having 
multiple carriers able to provide service on a level playing 
field in a market is the way to create competition.
    Mr. Whitfield. Mr. Lubin, were you going to make a comment?
    Mr. Lubin. Yes. The thing I want to highlight is I think we 
have two issues that get mixed up. And I appreciate the 
question because I am going to try to use it to highlight the 
point.
    One issue is, do I want to create head-to-head competition? 
And that is a public policy question. You have to come to grips 
with an answer. In those areas of the country where you want 
head-to-head competition and you want wireless to compete with 
the incumbent wired, make a decision if you want that. If you 
do, so be it.
    The second question is, in those areas where you don't want 
competition, Billy Jack comes up with a mechanism to do that. 
That's fine. Make a public policy decision that says, ``In some 
geographic areas, I don't want to see competition.'' But there 
is one more issue. And that issue is, with wireless, let's say 
you want head-to-head competition. So you mark that box, ``I 
want head-to-head competition.'' But now the wireless company 
comes in and says, ``I am going to offer you four connections 
in a household''; whereas, maybe the wired house only has one.
    If you had head-to-head competition, do you want to fund 
four connections? Let's hypothetically say the subsidy per line 
is $10. Now you're putting pressure on the fund. All I am 
highlighting to you is that is an explicit issue for public 
policy considerations because without considering it, you are 
going to expand the fund.
    Mrs. Greene. But let's go back 1 second to the original 
purpose of universal service. The original purpose of the 
universal service was to provide a mechanism to encourage 
companies to invest in a marketplace where market economics 
alone would not make it worthwhile to invest.
    And we had a concept called carrier of last resort that was 
born out of that. And it goes along with the whole concept of 
universal service. To have multiple carriers of last resort in 
a marketplace where the economics of that marketplace don't 
even support a single carrier is sort of a questionable 
activity. And that's what the USTA position is designed to 
reflect.
    Mr. Whitfield. Mr. Chairman, if I may interrupt, I waived 
my opening statement. And I thought----
    Mr. Upton. Oh, I'm sorry. You get an extra 3 minutes. So 
you've still got----
    Mr. Gregg. I just wanted to amend one thing that Mr. Lubin 
said. The question is not whether we will have areas where 
there is no competition. That is a policy decision that has 
already been made by Congress. The whole issue is, are there 
areas where we don't want to have subsidized competition?
    And as far as the issue raised by Mr. Stanton of there 
could be an inefficient carrier in an area where you have 
limited ETCs, that is up to each State. And States have the 
power to decertify ETCs and to place some other carrier in 
there that they believe can do a better job of providing 
universal service. It's the State's call.
    Mr. Whitfield. Now, in the 1996 act, of course, as you all 
have said, we expanded from ensuring rural services to also 
financing choice of providers. And wireless is one of those 
providers now and is doing a good job.
    The question I would have is, do each of these providers 
have the same public service obligation or is there a 
difference in that? And if there is, should that have any input 
into who receives the benefit?
    Mr. Rowe. Mr. Chairman, there are substantial differences. 
Those differences are complex. This and the primary line 
discussion are areas where I am actually fairly confident that 
the joint board is going to make some progress.
    As to the service obligations, the question that we are 
currently looking at is, should the competitive carriers be 
subjected to effectively the same obligations, either by the 
FCC or by the State commission, as are the incumbent carriers? 
Should the FCC set a floor, allowing State commissions to 
exceed that floor? Is it possible to develop an appropriate set 
of service quality expectations for wireless carriers 
specifically? I think all of those things are on the table.
    Generally State commissions do not regulate wireless 
carriers but are allowed to regulate essentially service 
quality issues. Also, as part of certifying competitive 
carriers, States may impose appropriate restrictions.
    There is a lot more thought going into this than there was 
even three or 4 years ago, when the first round of applications 
came in. And we are all paying more attention to it.
    Mr. Whitfield. Ms. Greene?
    Mrs. Greene. One of the fundamental differences, of course, 
being that wireless doesn't serve the same serving territory 
that a wire line does. It's not as comprehensive a serving 
territory.
    Mr. Whitfield. Ms. Abernathy?
    Ms. Abernathy. I think the only thing I would add is that 
part of what we are trying to do with this ETC proceeding in 
front of the joint board is come to grips with the fact that 
the new competitors build out differently and provide service 
differently than the incumbents.
    But to the extent we want to encourage competition in rural 
areas, somehow we have to reconcile how much subsidy support do 
we give to a new provider without jeopardizing or risking basic 
support for the incumbent for the customers?
    Mr. Post. Just a couple of comments. The sole purpose of 
the USF has been not to provide competition or defaults to 
competition but to provide affordable local service rates to 
customers in rural America or in high-cost areas. I think we 
have, I know the States have, lost sight of that in the areas 
we operate. That seems to be the only criterion for a carrier 
entering a market that it provides additional competition. The 
real issue or the real focus or purpose of the universal 
service fund is really forgotten in many cases.
    Second, there has to be some kind of control here or 
obviously universal service funding is going to collapse under 
its own weight. There has to be some type of criteria developed 
that says this is what is required for a company to qualify for 
universal service funding because in some of our markets in 
rural America, we have four and five wireless carriers in these 
markets.
    If every one of them has funded it $20 or $30 a line, those 
markets, or more in some cases, you can see what happens. Where 
is the funding coming from? How is the money going to be used? 
Obviously it is not in the public interest when that happens.
    Mr. Stanton. If I may add from the one wireless perspective 
on the panel, the taking on the responsibility of being a 
carrier of last resort is a decision that a wired company made 
at some point in time in its history, probably before any 
wireless companies existed in many cases.
    The presumption that they should continue to be that 
carrier of last resort I take issue with. Our company, for 
example, is the carrier of last resort in the Antelope Valley 
in Nevada, which I spoke of before. The alternative was that 
the local residents could pay $100,000 to bring wires in. And 
that was how the telephone company, the wire telephone company, 
was going to make service available to them.
    The residents couldn't afford that. We were willing to 
build service out into that community and take on, in effect, 
the carrier of last resort responsibilities. And we are willing 
to take that on in a number of cases.
    I don't represent all wireless companies. I can't tell you 
all of them would be willing to do that or how they would be 
willing to do it. But we are willing as a company to 
participate in the process fully, and we have taken on some 
responsibilities and are more than happy to continue to do 
that. But I think what we ask is to be treated fairly, not like 
the new kid coming to the party gets all of the burdens and 
none of the benefits.
    Mr. Whitfield. Thank you, Mr. Chairman.
    Mr. Upton. The gentleman from Florida, Mr. Deutsch.
    Mr. Deutsch. Thank you, Mr. Chairman.
    Ms. Greene, could you take a moment to explain the concept 
of negative dollar flow from the universal service fund and why 
BellSouth cannot access the universal funds in Florida?
    Mrs. Greene. This goes back to the discussion that we had 
about the non-rural carrier fund. We access only as a non-rural 
or large company carrier.
    One of the fundamental structures that governs non-rural is 
that need is calculated as Statewide level. And so in Florida, 
we have enough urban areas to offset the rural areas. And as a 
result of that, we don't qualify for taking funds in that area.
    Mr. Deutsch. So even though there obviously are areas that 
are both by definitional status rural and by logical status 
rural throughout the State, I mean, you know Florida very well, 
as I do----
    Mrs. Greene. Yes, sir.
    Mr. Deutsch. [continuing] that none of those areas qualify 
for any of the funding?
    Mrs. Greene. And that is a good point. BellSouth serves 
more rural access lines than all of the independent companies 
in our service territory put together. We take money from this 
very small segment of the universal fund, the non-rural fund, 
only in two States, even though we do serve rural access lines 
in our other seven States.
    Mr. Deutsch. Again, it just seems a little bit illogical. I 
mean, is there any proposal that you could see the FCC changing 
to provide relief in this situation?
    Mrs. Greene. Well, I think that any time that we have a 
discussion--I am sitting here next to Mr. Gregg's charts. Any 
time that we have a discussion about rural universal service 
fund, I think we need to have a comprehensive discussion about 
all the different subsidy flows that go to offset the cost of 
rural universal service.
    I do think that we need to have a comprehensive look at how 
to redo this system.
    Mr. Deutsch. In any specifics that you would suggest or we 
just really need to go through the process of really looking at 
it in terms of this anomaly that you are describing?
    Mrs. Greene. Yes. I think we need to go through the process 
of looking at it. I think we need to simplify the multiple 
funds. I think we need to, most importantly, broaden the base 
of payers.
    Mr. Deutsch. Yes. Go ahead, Mr. Rowe.
    Mr. Rowe. Mr. Chairman, as I have suggested earlier, the 
discussion about the large company fund is not necessarily a 
debate between BellSouth, on one hand, and other carriers, on 
the other. In my view, if you were to go back to what the law 
says, reasonable comparability of rural and urban rates and 
services, and if you were to deal seriously, very seriously, 
with the problems in the hybrid cost proxy model, upon which 
support is based, certainly carriers that currently receive 
money would receive a different amount of money.
    But it would not necessarily be disadvantageous to 
BellSouth overall. It would simply be better met with what we 
do than what the law now requires.
    Mr. Deutsch. Thank you.
    Mr. Gregg?
    Mr. Gregg. Yes. Just to follow up on what Ms. Greene said, 
the rural carriers in Florida receive about $79 million from 
the high-cost fund. BellSouth, even though it serves rural 
areas, does not because, as she said, their overall average 
cost is low because they also serve urban areas.
    Mr. Deutsch. Right.
    Mr. Gregg. One of the things that we have to keep in mind 
when we look at reforming any of this, the distribution or the 
size of the fund, is to be mindful of what the chairman said. 
Everybody in the United States has to pay for this. And if we 
end up doing things that end up growing the fund exorbitantly, 
that is going to have to be paid for. And we are already under 
pretty unrelenting pressure.
    I think that the joint board when they recommended what 
they did in the Tenth Circuit remand was mindful of trying to 
keep the fund under control but to provide relief in those 
areas where it was truly needed. That was the supplemental rate 
request that Commissioner Abernathy spoke of.
    If, even with all Federal support and all State support, 
you still didn't have comparable rates,--that is the real 
litmus test--they can come back for additional support under 
that recommendation. And we will see what the FCC does in 
October on that.
    Mr. Deutsch. Right. I mean, I understand what you're 
saying. It just seems a little bit from the policy side if 
you're treating customers--and most of my constituents or, in 
fact, maybe all of my constituents are BellSouth customers or a 
very extraordinary high percentage are BellSouth customers. 
They have this distinct in terms of their own rates 
disadvantage.
    I mean, I can articulate a policy reason why the other 
carriers kept that advantage and BellSouth obviously has other 
advantages over them, but it clearly makes my constituents pay 
more on average.
    Do you want to give me the extra time or not the extra 
time? Last question. And hopefully just Commissioner Abernathy 
can give a short answer. The future of universal service is 
something that we all need to focus on.
    I am glad to be here today for that important discussion, 
but ultimately I feel that we need a decision out of the FCC 
soon, as we all know that the current path is unsustainable, 
technology is changing every day.
    Could you speak to the FCC's efforts to address the 
internal conflict between the telecommunications service and 
the information services in terms of contribution methodology?
    Ms. Abernathy. Yes. Thank you. We put out for comment the 
question about, how do we handle this by statute? We can 
legally decide that, even if a service is an information 
service, not a telecommunications service, that that entity 
could be obliged to contribute to the universal service fund. 
So the real question, then, is, what do we do once we define 
what broadband services are? And all of those entities, if they 
are treated alike, will they be contributing to USF or will 
they not be contributing?
    It's an open question in front of the FCC. I can't tell you 
how all of us are going to vote. I have said publicly that it 
seems to me that a fund of this size and this obligation, that 
you spread it across as broad a base as possible so you have as 
small a hit as possible on multiple providers.
    But this additional issue goes to a proceeding that is 
ongoing about what category of service will broadband fit into. 
And then you ask, following that answer, what are the USF or 
other kinds of obligations that may go along with it?
    Mr. Upton. Thank you.
    Mr. Bass gets the advantage of the deferral, 8 minutes.
    Mr. Bass. Thank you very much, Mr. Chairman. It's an 
interesting hearing, very complex.
    Telecommunication in a State like New Hampshire is really a 
form of transportation. There are many different reasons why 
New Hampshire is way down. In fact, it didn't even make the top 
50 States. We are 51 in terms of support of this universal 
fund. And there are lots of reasons for that, some of which 
have been dealt with in this discussion.
    The New Hampshire Public Utilities Commission from the very 
beginning has had a philosophy that telephone service must be 
very low-cost. And today you can still get a telephone for less 
than $10 a month. Now, the telephone providers have to juggle 
things around a little bit, but ultimately they are required to 
do that.
    Unfortunately, that may be part of the reason why New 
Hampshire is so low on that list because it may look in this 
formula like it's very urban because the utility PUC requires 
that the rates be very low.
    The other problem is that New Hampshire is not really a 
State--and there are a lot of other States like this--where 
income and wealth are fairly even across the States. We are a 
relatively wealthy State, but there is significant disparity.
    So in some parts of the State, you may have all kinds of 
services. In other parts of the State, you have nothing but no 
subsidy on top of all of that.
    I guess my question is, should there be a different 
mechanism for determining the allocation of high-cost support 
that is not based on States' boundaries but, rather, on even a 
single line or a single service or a town or a community or a 
county because there are counties in New Hampshire that are 
very poor and there are counties in New Hampshire that are 
amongst the richest in the Nation? Does anybody in this panel 
have any thoughts about that concept?
    Mr. Gregg. Yes. Section 152B of the act preserves the 
traditional State roles and on top of the Federal roles. In 
fact, that was the limiting factor that caused the Fifth 
Circuit to limit the ability of the FCC to assess on all 
revenues, was that traditional province of State rate-making 
and control over their intrastate revenues.
    And that's why I believe we should continue to look at 
equalizing costs and trying to keep rates comparable among 
States from the Federal viewpoint and then leaving it to the 
States to try to keep rates comparable within their borders. 
It's a partnership, a Federal approach to comparable and 
affordable rates.
    Now, in terms of New Hampshire's $10 rate, the support 
formula is based not on rates, but on cost. And it looks at the 
cost in New Hampshire compared to a Nationwide average cost. 
Now, that is one of the issues.
    If New Hampshire is not requiring their end users to 
contribute close to what the cost of that service is, is it 
fair to ask other consumers in, say, inner-city Baltimore or in 
Denver or in Arizona to contribute to their rates or their 
upkeep of their network through having support there when their 
rates are so low?
    That's why we put in the supplementary rate review, so if 
there are truly areas where in spite of Federal support, in 
spite of State support, you still have exorbitantly high State 
rates, they can ask for supplemental support. But if your rates 
are still down around $10, it seems like there needs to be some 
additional contribution from end users as well as, say, the 
State universal service fund before you ask other people in 
other States to contribute to helping.
    Mr. Bass. Any other comments from anybody else?
    Mr. Rowe. I think Mr. Gregg made the correct point in 
describing the difficulty doing a rate-to-rate comparison. When 
we have looked at how retail rates are set, there are many 
important variables. The one I focus on, in particular, is the 
size of the local calling area.
    My guess is the local calling area in your State is 
relatively small. Even if it may be large geographically, you 
probably can't reach that many customers for your local rate, 
depreciation rates, assignment of costs to the long distance 
services or local service, a lot of variables in the rate 
component. So generally I think a cost-to-cost comparison makes 
more sense.
    The two alternatives that have been focused on primarily 
are: one, going right down to the smallest possible unit of 
making a comparison, a central office typically, less of a 
concern for the rural, the small, carriers because they 
typically don't have as many offices, less territory to average 
over. That can be an important factor for the Bell companies, 
in particular.
    The other alternative, though, if you are going to stay 
with what we are calling a State-to-State comparison--it's 
really a telephone company study area to study area 
comparison--is to be very serious, very rigorous about the 
statutory requirement of reasonable comparability of rural and 
urban rates and services. And, again, I think for the large 
companies, if we do a better job with that, the results will 
also be better for everyone.
    Mr. Bass. Mr. Terry's bill provides for a 5 percent cap on 
high-cost lines, high-cost funds. What about the concept of 
having a 5 percent cap for the entire universal service fund 
per State?
    Mr. Gregg. There currently are caps on several of the 
mechanisms in the universal service fund. The biggest caps is 
the schools and libraries. It's capped at $2.25 billion each 
year and always has been. That's a hard cap. The high-cost loop 
portion of the high-cost fund that goes to rural carriers has a 
cap on it. It grows each year by a certain factor, but it is 
capped.
    The concept of caps can work. However, I think that it is 
better to if you are going to have a cap at least let it grow 
so that it can move around as conditions change.
    As you heard in here today, there are conflicting demands 
on the fund. On the one hand, people want the fund to be 
affordable. They want the assessment rate to be low. That means 
it shouldn't grow. On the other hand, people want the fund to 
go out and support all of the new whiz bang services that 
everybody wants. And that is going to require more money.
    Mr. Bass. The caps you talked about were not per State. 
They were per fund.
    Mr. Gregg. They were per fund, right.
    Mr. Bass. I am talking about a 5 percent cap for State for 
the universal.
    Mr. Gregg. I think it might be arbitrary because what you 
would do is States that have a very large need; for example, 
Wyoming or Mississippi, that has very large per-line needs, 
might not get enough support to have comparable services.
    Mr. Bass. Fair enough. Fair enough.
    Yes, commissioner?
    Ms. Abernathy. I think it would be very difficult to just 
in a sense say, ``You're not entitled to any more money, 
regardless of how high-cost your loop costs are, to build out 
to these rural areas.''
    But I think one other factor we have to continually bring 
ourselves back to is it's not simply that urban and rural rates 
have to be reasonably comparable. Rates have to be affordable, 
too.
    What is affordable gets mixed into this debate at the same 
time because what we ultimately decided at the joint board is 
while it might be nice to have a $10, a $15, or even a $20 
rate, that it is okay for rates to go as high as around $30, I 
think we said. And we viewed that as affordable because 
otherwise what you are really doing is saying there is no limit 
on how much you would support. It would be decided by the State 
about how low they wanted to drive their rates.
    Mr. Bass. Interesting point.
    Thank you, Mr. Chairman.
    Mr. Upton. The gentleman from Maryland, Mr. Wynn, is 
recognized for 5 minutes.
    Mr. Wynn. Thank you, Mr. Chairman. I apologize for not 
being here earlier. I just have a couple of questions.
    First, for Ms. Greene of BellSouth, I understand that you 
do represent rural and lower-income areas. And the question I 
have is whether the FCC's list of universal service providers 
should be expanded to include broadband services. I don't know 
if this has been covered earlier. And should we move away from 
a service-based approach and support networks?
    Mrs. Greene. Yes, I do agree that we should move away from 
a service-based approach and support networks. Basically, the 
way that this system is administered today, it's on a service 
or a line basis. And that has the effect basically of 
constraining the investment and making government decide, 
instead of consumers, what investments in forward-looking 
technology should be. So I think that it should go to a network 
basis.
    Mr. Wynn. Now, what about the expansion regarding universal 
service? Should it include broadband?
    Mrs. Greene. Again, I think that it should be a function of 
doing the calculations on what is the cost of universal 
service. And then that money should be provided to the carrier. 
And the carrier should make the decisions on network 
infrastructure, instead of listing each specific service that 
should be required in universal service.
    Mr. Wynn. Thank you.
    Mr. Rowe. Mr. Chairman, representative, could I follow up?
    Mr. Wynn. Sure.
    Mr. Rowe. When the joint board looked at this issue, we 
were required to evaluate services under the act. I think your 
point is right on target. I said earlier that all services 
basically ride over the same network. And the best thing we can 
do is to support the development of a robust network that is 
forwardly upgradable.
    The cost, the incremental cost, of providing, for example, 
DSL service over the wire line network is now negligible 
provided that wire line network is built in a sufficiently 
robust fashion. It's been referred to as the no-barriers 
approach. It's equally applicable to wireless networks. So, 
again, I think a network focus, rather than a service focus, is 
in many ways very helpful.
    Mr. Wynn. Okay. Thank you.
    Mr. Lubin, how would broadband services, such as those in 
large companies with private networks, be assessed under your 
model for universal service?
    Mr. Lubin. AT&T took no position in terms of the assessment 
of DSL or cable modem services. And so the reason, quite 
candidly, we went to a numbers-based mechanism is we thought it 
was an effective way to broaden the base, actually under the 
existing statutory authority that the FCC has to go to numbers, 
which would be a way to not focus on a revenue basis but, 
rather, start assessing connections for special access pipes, 
private line pipes. The fatter the pipe, the more you pay. And 
where you have a telephone number, you assess the number. And 
you don't worry about what services are being carried over the 
connection or the number.
    Mr. Wynn. But what would you anticipate would be the 
possible costs on a per-line basis?
    Mr. Lubin. The number that we put in the record was 98 
cents per telephone number and per connection. The fatter the 
pipe, you would pay more. We also in the record at the FCC 
suggested that you might want to exempt people who are lifeline 
consumers, who have a lifeline assistance program, such that 
they would not pay the 98-cent fee. If you did that, then the 
fee would be approximately 99 cents or $1.
    Mr. Wynn. Okay. Thank you.
    Ms. Abernathy, one question. I get a sense--and maybe this 
was covered earlier and, again, my apologies--that we are 
looking at redefining the definition of universal service, as 
opposed to how the traditional telephone access for everyone to 
call police and fire and people like that, to covering a 
broader range of service, internet access and things like that. 
Is that where you're headed? Is that what we're talking about? 
Are we still back at the kind of traditional notion that we 
need to at least make sure everyone has access to basic 
telephony?
    Ms. Abernathy. That is not where the FCC's proceedings are 
currently headed. And, in fact, previously the joint board 
looked at this issue of, should we broaden the definition of 
support in services?
    The joint board made a recommendation to the commission 
that no, we should support the existing services that have 
traditionally been supported. The FCC looked at that order and 
implemented that recommendation in July of 2003.
    So we're not at this point exploring whether or not we 
should expand the list of supported services. Rather, we are 
looking at, at least in the broadband context in one of the 
FCC's proceedings, should broadband providers be obligated to 
contribute to the USF fund, like other providers, such as wire 
line and wireless and long distance?
    Mr. Wynn. Did you take a position on that?
    Ms. Abernathy. On the joint board?
    Mr. Wynn. No. On the question of whether broadband 
providers ought to be included?
    Ms. Abernathy. Not yet. It's still pending in front of the 
FCC.
    Mr. Wynn. You don't want to give us a hint, do you?
    Ms. Abernathy. I already gave a hint a little earlier, 
unfortunately, although----
    Mr. Wynn. I'll talk to you about it. I relinquish the 
balance of my time. Thank you.
    Mr. Upton. Thank you.
    The gentleman from Mississippi, Mr. Pickering, is 
recognized for 8 minutes as he deferred earlier.
    Mr. Pickering. I thank you, Mr. Chairman. I want to commend 
you for having this hearing.
    I don't think there is anything in telecommunications more 
important or significant than the debate that we are beginning 
now in the hearings. The universal service fund and the 
possibility of reform is probably the most important policy 
question that we have in telecommunications, either as we try 
to move in this Congress or hopefully in the very near future. 
It is something that started in the 1996 act and that you all 
have all captured very well with the current state of both 
emerging technologies, emerging competition, and the changes 
that those have brought to the universal service fund.
    Mr. Gregg, you did a great job in saying where we have been 
and where we are at present. The question for us is, where will 
we be 5 years from today? Where will we be 10 years from today? 
And basically where will we be for the next generation? The 
decisions that we make in a universal service fund reform could 
shape. And the 1996 act has shaped dramatically, as you 
described, the services we have in rural areas, the deployment 
that we have, the advanced services, education, health care.
    What I would like to ask, has anybody done any of the 
projections on where we are going to be in 5 years? In 1996, 
the universal service fund was $1.6, $1.8 billion. And today 
it's approximately $6 billion. What is that fund going to be in 
5 years? Mr. Gregg?
    Mr. Gregg. Most of the projections have gone out to about 
2007. They were usually in conjunction with the FCC's 
contribution base proposals. They were looking at, what would 
the contribution base be under different alternatives? What 
would the assessment rate then be based on the expected fund 
size for that period?
    Mr. Pickering. What if we did nothing?
    Mr. Gregg. The problem is that the projections that we had 
in that case I think were before we started having a big up 
swing in the number of eligible carriers for the high-cost 
fund. They projected a total fund of in excess of $7 billion, 
around $7.3 to $7.5 billion. However, if we continue to have a 
doubling of new ETCs drawing on the high-cost fund each year, 
those may be low.
    For example, new wireless ETCs received only $500,000 in 
the fund in 1999. And I'm glad, actually, Mr. Stanton, that 
wireless carriers in all technologies are accepting the 
obligations of being eligible telecommunications carriers. 
However, we have to be mindful of their overall impact on the 
fund.
    It's gone from $500,000 to $20 million to $40 million, this 
year to $120 million. Next year we expect it to more than 
double because of all the ETC applications that are in the 
pipeline. So we may be looking at a total fund probably closer 
to $8 or $9 billion if there is no limitation such that I have 
described earlier, the limitation on single-line support, the 
limitation on the number of ETCs in high-cost areas.
    Mr. Pickering. And would $7, $8, $9 billion be sufficient 
to sustain what we are currently doing with the universal 
service fund?
    I guess the question is, if we have a consensus that the 
current system is either inequitable, that's one area of 
debate. I think that's very fair to Mississippi and Alabama and 
to our region. And we want to protect that. But it's a broader 
question. Not only is it fair, but is it outdated? Is it 
inequitable? Does it actually hinder deployment? Does it hinder 
and burden the companies that are trying to provide these 
services? Does it hinder competition? And those are larger 
public policy questions. And so is the current system 
sustainable?
    My sense is that everybody in the panel would say no. Just 
trying to get the points of consensus. Would everybody agree 
with the one line limitation? Would there be a disagreement on 
the one line? The principle of all who play pay, everybody pays 
in? Should there be a principle of competitive neutrality, that 
we try to find ways to be competitively neutral and technology-
neutral as we try to reform the system?
    This is an area that I think we're coming to a place, one 
of those rare political moments, where everyone agrees that the 
current system is not sustainable, that it serves no one as 
well as it should, which gives us an opportunity possibly to 
get local, long, although distances, now we have really reached 
a point where there is not a distinction in distance in the 
service.
    And we're also having the bundling of services. So you 
don't have this distinction of you have no longer the 
segregated markets, but now you have the commingled, bundled 
offerings of service. So you no longer can really calculate 
based on the particular offering and so as we try to find some 
new system of collection based on what service. All of those 
things as we try to follow a principle of simplification, just 
like the tax reform, if you could simplify and broaden and 
increase participation, you can actually lower the cost to each 
so it benefits everyone would actually increase and sustain the 
fund over a period of time. I think that is what we want to 
achieve.
    And I think that we are at that time where we could get 
rural, non-rural, long, local, CLECs, wireless to a table to 
possibly see if we could come up with a comprehensive approach 
to modernize universal service so that it achieves the 
objectives.
    And, Mr. Chairman, I look forward to working with the 
committee and the staff and with all the industry participants 
to start that. And I think the sooner that we do that, the 
better. And I do think we have some emerging principles that we 
could all at least establish a framework of discussions and 
reform on.
    I know the joint board is soon to make some decisions. That 
would give us some clarification in major decisions. But 
Congress really needs to act in this area to get the full 
benefit of what we need to do.
    I know that I am talking more than I am asking, but I have 
listened for a long time. I do appreciate all of your 
participation. Mr. Chairman, again, this is a very important 
issue. And for my own State of Mississippi and rural States 
like Mississippi, this is critical to the new deployment and 
making sure that we maintain the services.
    BellSouth has done a tremendous job in a State like mine 
and across the Southeast. We have wireless companies that are 
doing a great job of going in to rural areas. And competition 
is beginning to development. So how do we get all of those at 
the table so we can make something work? And that's what we 
want to see happen?
    To my friend from Nebraska, if Southern Mississippi meets 
Nebraska--you have to give me at least a 10-point spread--we 
will set aside universal service fund debates in the next 
Congress and find a fair and equitable solution for the 
Cornhuskers.
    Mr. Terry. I kind of like the catfish and steaks one that 
we discussed earlier.
    Mr. Upton. Have you talked to Coach Osborne?
    Mr. Pickering. He is going to give me 14 points. Mr. Terry 
I am having a hard time getting ten points.
    I would say, in all seriousness, I don't know if regional 
approaches are going to work. So I would like to sit down with 
Nebraska and Michigan, not in a way to look at which regions 
get more. We would argue that Michigan and Nebraska give more 
than Mississippi in energy assistance. I think it would be 
counterproductive and wouldn't be what will eventually pass, 
but if we look in a broad, comprehensive way, I do think that 
we can modernize it, simplify it, and increase participation 
and sustain the fund for the long term.
    With that, I yield back. Thank you, Mr. Chairman.
    Mr. Upton. I would just remind the gentleman from 
Mississippi that I think Southern Mississippi played the 
Wolverines in a ball game a couple of years ago. And I could 
give you 40 points and still win.
    Mr. Pickering. I think it was 35 points.
    Mr. Upton. The gentleman from Nebraska.
    Mr. Terry. Yes. Times have changed over the last few years, 
especially for us Huskers.
    In listening to Chip's discussion here, frankly, we were on 
the same page until he said that Mississippi should be able to 
keep all of that money. That's the only part that I disagreed 
with.
    Mr. Chairman, maybe I should be so bold to suggest that 
Chip and I even start a task force on your behalf with your 
guidance as chairman to start looking into this.
    I appreciate all the senators that have gone on the Stupak-
Terry or Terry-Stupak bill, but I would really like to see the 
House drive the discussions on universal service reform.
    Again, I want to come back to the point that I still have--
--
    Mr. Upton. If the gentleman would yield just for 1 second?
    Mr. Terry. Yes.
    Mr. Upton. I would note that today, despite a lot of things 
going on, a health conference on prescription drugs and a host 
of other things, we have had 22 members of this subcommittee 
come at some point----
    Mr. Terry. It shows the importance.
    Mr. Upton. [continuing] to discuss. And they have been very 
engaged and involved and concerned about where we are going. 
Clearly, it is, as I said in my opening statement, the engine 
is broken, sort of like the Fram oil filter commercial, the 
bottom line being if not now, when are you going to pay, 
something like that, right, pay me now, pay me later, pay me 
now or pay me later.
    So we are going to continue this good dialog listening. I 
look forward to your input. We have had a good amount of your 
interest for sure. And it's one of the reasons why we're having 
the hearing today.
    Mr. Terry. And I greatly appreciate that you are having 
this hearing today.
    In that respect, I would like to take it from listening to 
action at some point in time. But I worry, as we have seen here 
just in the series of questions that Chip asked the panel, out 
of the nine people up there to each panel, we saw people 
nodding their heads ``Yes'' and ``No'' to the same questions.
    And I think that shows the difficulty that it's going to be 
to simplify the system in the long run. That certainly would be 
my goal as long as rural areas are treated uniformly and 
fairly, which brings me back to the question that I couldn't 
get to, Chairman Abernathy. And that's you recognize that there 
are these types of discrepancies up here, just the States that 
I think are inherently rural, although may have some 
metropolitan area, that receive nothing from the fund, Arizona, 
Arkansas. No one of us would think of Arkansas as just highly 
cosmopolitan and metropolitan. They've got a significant rural 
population but receive nothing. Georgia, Iowa, Kansas, 
Kentucky, Minnesota. I've been to northern Minnesota, not 
northern Michigan, but there is nothing but rural population up 
there.
    So my question is just, in a personal sense, do you think 
that's fair that eight States under this fund share the entire 
pool where States that do have significant rural populations 
that are serviced by the Bell receive nothing?
    Ms. Abernathy. I guess, again, I would go back to say, are 
these States receiving universal service support? They are. 
Now, the non-rural companies are not. You're absolutely right. 
The non-rural companies are not. So I just want to distinguish 
between----
    Mr. Terry. Sure.
    Ms. Abernathy. [continuing] do the States go, do they not?
    Again, I can only tell you historically why this has 
existed and is it fair. I guess when I look at the USF system, 
there is very little about it that I think any one person would 
say, ``Oh, well, this seems eminently fair.''
    Most of it seems unusual or somewhat convoluted. I know why 
we are where we are with the non-rural. Again, the idea was, 
let's funnel most of the money to the rural carriers. And these 
big companies that were the spinoffs from AT&T, they can move 
the money around as long as they have enough low-cost 
customers.
    This premise was based on a pre-competitive environment. 
And so now the question is, can that model survive in a world 
where everyone is facing competition? And is this fair to the 
customer base that they serve? I think it is a question we are 
going to have to answer.
    I look, for example, at the District of Columbia. You know, 
this is not a needs-based system. So there is no money flowing 
into the District of Columbia. Are there people who live in the 
District who are supporting universal service who don't make a 
lot of money? Yes, there are. So, you know, we have a lot of 
challenges in front of them.
    And I don't dispute that the inherent equities of the 
system are questionable in some respects. What we are trying to 
do through the joint board efforts and through meeting with all 
of you is to slowly peel back at these issues and try and 
rationalize them in as best a way we can given the technology 
of the day and the competitive market of today.
    Mr. Terry. Thank you.
    My time is up unless you want to yield me some more.
    Mr. Upton. You can ask another question if you'd like.
    Mr. Terry. No. Go ahead.
    Mr. Upton. Well, this concludes the hearing for today. I 
appreciate your time. I know Mr. Rowe had to leave early to 
catch a plane. Actually, he had to leave on time to catch a 
plane. But we appreciate your testimony and the members' 
participation. We look forward to seeing you in the days ahead. 
Thank you.
    [Whereupon, at 5 p.m., the hearing was adjourned.]
    [Additional material submitted for the record follows:]
    Prepared Statement of F.J. Pollak, President and CEO, TracFone 
                             Wireless, Inc.
    I am F.J. Pollak. I am President and CEO of TracFone Wireless, Inc. 
TracFone is a wireless telecommunications company headquartered at 
Miami, Florida. It differs from other wireless providers in that it 
offers primarily prepaid services. Consumers purchase wireless phones 
(which we subsidize) from retail outlets (including, for example, 
WalMart, K-Mart and others) and usage cards which provide quantities of 
wireless service usage that vary depending on the price of the card 
selected. Unlike traditional wireless providers, TracFone customers 
purchase service on a ``pay-as-you-go'' basis. There are no credit 
checks; no minimum volume or term commitments; no early termination 
fees. Many of TracFone's customers are lower volume, often lower 
income, users for whom wireless service would otherwise be either 
unavailable or at least impractical. TracFone service also is popular 
with families who want wireless phones for their own or their 
children's safety but who do not need and possibly cannot afford a 
traditional service plan. Currently, TracFone has more than 2.6 million 
customers and its business continues to grow. TracFone service is 
available throughout the United States, including offshore locations.
    TracFone is profoundly concerned about certain proposals before the 
Federal Communications Commission (FCC) to change the manner in which 
telecommunications service providers contribute to the Universal 
Service Fund. TracFone believes that the fairest, most competitively 
neutral and most appropriate way to assess universal service 
contributions is based on each service provider's revenues. TracFone 
believes that cries by certain providers that interstate revenues are 
decreasing are unsupported and are factually inaccurate. While it may 
be true that certain carriers' revenues are decreasing, total 
interstate revenues are increasing as consumers migrate their services 
to those of wireless providers, Voice over the Internet Protocol (VoIP) 
providers and others.
    In December 2002, the FCC took several significant steps to address 
shortcomings in the universal service contribution methodology. First, 
it raised the wireless safe harbor from 15% to 28.5%. This was a step 
in the right direction, but the FCC should not stop there. We believe 
that several of the major wireless providers' interstate usage levels 
are well above 28.5% and there is no reason why wireless carriers--like 
other telecommunications carriers--should not be assessed on their 
actual interstate usage revenues. Their interstate usage is measurable. 
Second, the FCC wisely has prohibited service providers from ``marking 
up'' their pass through of universal service contribution charges. By 
eliminating the opportunity for certain providers to turn their 
universal service contribution obligations into ``profit centers,'' the 
FCC has reduced the impact of those consumers who pay to support 
universal service without reducing the amount of support for the 
Universal Service Fund.
    Neither the connection-based nor the telephone number-based plans 
which have been proposed by the FCC and supported by a few carriers 
should be adopted. Those plans would violate the statutory requirement 
that ``every'' telecommunications carrier that provides interstate 
service must contribute on an equitable and nondiscriminatory basis to 
support universal service. Moreover, those plans would result in lower 
volume users (who are often lower income consumers) paying a 
disproportionate share of the universal service burden. Simply put, it 
is neither equitable nor nondiscriminatory for a consumer who makes 
$1.00 of interstate calls per month to now be charged $2.00 per month 
while a large volume user who makes $1,000 of interstate calls per 
month would be charged $1,001.
    TracFone recommends that a revenue-based contribution methodology 
be maintained, but that the methodology should include all revenues 
derived from telecommunications. Specifically:

 The wireless safe harbor should be eliminated as no longer being 
        necessary and each wireless provider should contribute based on 
        its actual interstate revenues;
 The FCC should use its existing statutory authority to assess all 
        providers of telecommunications. This would include cable modem 
        services, other broadband services, and Voice Over the Internet 
        Protocol (VoIP) telephone services.
 Congress should grant the FCC the authority to assess intrastate 
        revenues, but only to the extent needed to generate sufficient 
        funding to meet requirements of the Universal Service Fund.
    Thank you for affording TracFone the opportunity to present its 
views on universal service to the Subcommittee.
                                 ______
                                 
                                                       AARP
                                                     April 28, 2003
The Honorable Michael K. Powell
Chairman
Federal Communications Commission
445 12th Street, S.W.
Suite 8B201
Washington, DC 20554

Re: Reply Comments to Federal-State Joint Board on Universal Service, 
        CC Docket 96-45; and CC Dockets 98-171, 90-571, 92-237, 99-200, 
        95-116, 98-170

    Dear Chairman Powell: As the FCC prepares to issue a final ruling 
on proposed changes to the way in which the Universal Service Fund 
(USF) is collected, AARP would like to reiterate and reemphasize views 
submitted to the Commission in August of last year. AARP has been a 
strong supporter of the universal service fund, recognizing its 
importance in providing essential telecommunications services to 
traditionally underserved communities. We are firmly on record 
supporting the elimination of surcharges and line items as a means to 
collect universal service funds. Absent elimination of such charges, 
however, the existing system of collecting contributions is preferable 
to the contemplated move to a per-line charge.
    AARP has lent its support to the implementation of the Universal 
Service Fund, particularly the assistance it provides to low-income 
consumers, since its inception. We have actively promoted the Lifeline/
Link-Up programs within the community. In fact, the Commission 
participated in an event AARP sponsored with the Florida Public Service 
Commission in Tallahassee last year to educate consumers about the two 
telephone savings programs. Therefore, we have a clear understanding of 
the need to adequately fund the program. We believe that a mechanism 
that levies contributions from every consumer equitably, based on a 
percentage of the charges assessed for long distance calls, would 
provide the monies needed to implement the USF without having to make 
any changes to the existing formula. By ``equitably'', we mean that 
special exemptions or preferential rates should not be afforded certain 
classes of consumers, as is currently the case. The carriers who employ 
this practice continue to unfairly discriminate against residential 
consumers, and AARP believes that now is the time to discontinue the 
practice.
    We are concerned that the move to a per-line charge would further 
institutionalize the universal service line-item charge. Such a change 
in regulation now would diminish chances of eliminating the per-line 
charge from consumer's monthly bills, as we have contended it should be 
in previous filings with the Commission. However, the existing funding 
mechanism at least does not penalize consumers who make few or no long 
distance telephone calls. Under the proposed funding mechanism, these 
low-volume long distance service callers would be required to pay the 
bulk of the funding for Universal Service. Based on comments filed with 
the Commission during its review of low-volume long-distance users in 
1999, some 44% of consumers fall into this category. While the goal of 
the Universal Service Fund is to maintain affordable rates for all 
consumers, this proposal appears to ask those who most need help to 
provide a disproportionate amount of the funding.
    Ideally, all consumers should see their monthly USF charges decline 
to $.00 through a system that would allow carriers to recover their 
cost in rates as a legitimate cost of business. AARP believes that the 
elimination of line-item charges would advance universal service and 
ultimately benefit more residential consumers. Absent that fundamental 
shift, however, we support maintaining the existing system of funding 
the Universal Service Fund based on a percentage of the cost of long 
distance phone calls a consumer makes. We commend the Commission for 
increasing the ``safe harbor'' percentage for wireless carriers in your 
interim ruling as a means to better capture the true percentage of 
long-distance calls. We hope that you maintain this system so that 
carriers can assign the percentage recovery equitably preventing 
residential consumers from being further disadvantaged.
    In summary, adequate funding of the universal service program is of 
critical importance. AARP commends the Commission for seeking the 
appropriate means with which to implement the program. However, we 
believe that the move to a per-line charge would be harmful to the very 
population the fund seeks to help. Therefore, we reiterate our request 
that the Commission not adopt a per-line cost recovery mechanism and 
offer our assistance in continuing to seek more suitable alternatives.
    If you have any further questions, feel free to call me, or have 
your staff contact Jeff Kramer of our Federal Affairs staff at 434-
3800.
            Sincerely,
                                              David Certner
                                          Director, Federal Affairs
                                 ______
                                 
                              American Council of the Blind
                                                      June 27, 2003
Marlene H. Dortch
Office of the Secretary
Federal Communications Commission
445 12th Street, SW
Washington. DC 20554

Re: Federal-State Joint Board on Universal Service, CC Docket 96-45; 
        and CC Dockets 98-171, 90-571,92-237,99-200, 95-1 16,98-170

    Dear Ms. Dortch: As the FCC prepares to issue a final ruling on 
proposed changes to fund the Universal Service Fund (USF), the American 
Council of the Blind (ACB) would like to share with you our thoughts. 
As the nation's leading membership organization of blind and visually 
impaired people, ACB is concerned about how proposed changes in the USF 
funding mechanism could disproportionately harm low and fixed income 
consumers, many of whom are blind and visually impaired.
    Universal service is very important to people with disabilities. It 
helps ensure the delivery of affordable and accessible 
telecommunications services to all Americans, including those who live 
in high-cost areas and/or on limited incomes, as well as to schools, 
libraries and rural health providers. As many Americans with 
disabilities live on fixed or limited incomes and are more likely to be 
unemployed than Americans without disabilities, ensuring the 
maintenance of the USF is very important to our organization.
    We are very concerned that the current proposal to switch from a 
revenue-based universal service funding mechanism to a connection-based 
one would be harmful to the very population the fund seeks to help. 
Under a connection-based methodology, customers would be charged the 
same amount for universal service whether they make one interstate 
phone call or 100, e.g., a low volume residential customer would 
contribute the same amount as a high-volume business customer. So 
rather than helping provide affordable service to those that need it 
most, this proposal appears to ask them to contribute a 
disproportionate amount of the funding.
    We are also concerned about the impact of this connection-based 
funding mechanism on users of pre-paid wireless services. For the blind 
and visually impaired, wireless phones provide significant benefits 
including safety, security and convenience. Pre-paid wireless services, 
in particular, are an important product to many people with 
disabilities. Pre-paid wireless gives people who cannot afford or 
cannot qualify for regular cell phone service the opportunity to enjoy 
its benefits. We are troubled that changing the USF mechanism to 
connection-based would significantly increase the cost of pre-paid 
wireless companies' USF contributions which would force companies to 
increase the usage charges for such services. We urge you to ensure 
that any changes to the USF mechanism do not inadvertently raise the 
cost of pre-paid wireless service to the detriment of consumers who 
need it most.
    We appreciate the opportunity to share with you our concerns and 
urge you to ensure that any changes to the universal service funding 
mechanism do not unintentionally hurt the very people universal service 
was created to help.
            Sincerely.
                                           Charles Crawford
                  Executive Director, American Council of the Blind
                                 ______
                                 
Reply Comments of Community Action Partnership, American Association of 
  People with Disabilities, Consumer Action and Rainbow-Push Coalition
                             april 18, 2003

Re: Reply Comments to Federal-State Joint Board on Universal Service, 
        CC Docket 96-45; and CC Dockets 98-171, 90-571, 92-237, 99-200, 
        95-116, 98-170

    The following organizations jointly provide these reply comments 
addressing a proposal under consideration by the Federal Communications 
Commission (Commission) that focuses on how universal services are 
funded:
                       i. statement of interests
    Community Action Partnership (CAP) is the national association 
representing the interests of the 1,000 Community Action Agencies 
(CAAs) organized to change people's lives, embody the spirit of hope, 
improve communities, and make America a better place to live. CAP 
serves as a national forum for policy on poverty and to strengthen, 
promote, represent and serve its network of member agencies to assure 
that the issues of the poor are effectively heard and addressed. CAP 
works to advance the economic condition, educational attainment, 
political influence, health and civil rights of low-income Americans. 
CAP works hard to ensure that low-income Americans are not left behind.
    American Association of People with Disabilities (AAPD) is the 
largest national nonprofit cross-disability member organization in the 
United States, dedicated to ensuring economic self-sufficiency and 
political empowerment for the more than 56 million Americans with 
disabilities. AAPD works in coalition with other disability 
organizations for the full implementation and enforcement of disability 
nondiscrimination laws, particularly the Americans with Disabilities 
Act (ADA) of 1990 and the Rehabilitation Act of 1973.
    Consumer Action is a San Francisco-based education and advocacy 
organization that has worked on telephone, banking and privacy issues 
for more than 30 years. Consumer Action works through a national 
network of more than 6,500 community-based organizations that serve low 
and moderate-income consumers, recent immigrants and people of color.
    Rainbow/PUSH Coalition is a progressive organization that advocates 
for social change. With a membership of nearly 300,000, Rainbow/PUSH is 
a national coalition of under-served employees, consumers, and 
entrepreneurs committed to securing equal protection, opportunity, and 
access under the law. Consistent with this mission, Rainbow/PUSH seeks 
to ensure equal access to services, employment and ownership 
opportunities in the telecommunications industry. The connection-based 
methodology proposal (CBM) being reviewed at the Commission will pose a 
disproportionate financial burden on low-income and low-volume 
consumers. Rainbow/PUSH has a substantial interest in this proceeding, 
because of the adverse impact that the CBM will have on many of our 
constituents.
                              ii. comments
    Under the current system, telecommunications firms are required to 
use a percentage of their interstate revenue to support the Universal 
Service Fund (USF). Under the proposed system, contributions would be 
based on a flat monthly connection-based fee. Considering that many of 
the Commenters' members/affiliates are eligible for the universal 
service programs, we are strong supporters for the Universal Service 
Fund, and the need to provide a reliable source of funding for 
universal service programs. We also endorse the Commission's recent 
changes to the universal service contribution methodology. However, we 
are wary about radical changes to this revised contribution methodology 
that may negatively affect the populations we ultimately serve.
    We believe that a connection-based mechanism unfairly and adversely 
impacts lower income and lower volume users of interstate services, and 
on carriers who provide services to such consumers. The Commenters 
point out that a connection-based mechanism is neither equitable nor 
nondiscriminatory to carriers who provide services to our members/
affiliates, which violates Section 254(d) of the Communications Act 
which states that ``[e]very telecommunications carrier that provides 
interstate telecommunications services shall contribute, on an 
equitable and nondiscriminatory basis, to be specific, predictable and 
sufficient mechanisms established by the Commission to preserve and 
advance universal service.'' 1 The implementation of a 
connection-based mechanism would present a significant, unnecessary 
change in the way in which USF contributions are collected.
---------------------------------------------------------------------------
    \1\ 47 U.S.C. Paragraph 254(d)
---------------------------------------------------------------------------
    We recommend that the Commission consider alternative modifications 
to the contribution methodology. The Commenters bring to the 
Commission's attention some example modifications noted by TracFone 
Wireless, Inc.'s recent comments in which they
        ``. . . urges the Commission to consider additional changes to 
        the revenue-based contribution methodology, such as eliminating 
        the wireless safe harbor and ensuring that broadband Internet 
        access services, particularly Internet based telephony 
        services, contribute to the Universal Service Fund.'' 
        2
---------------------------------------------------------------------------
    \2\  Comment Letter of TracFone, Inc. CC Docket Nos. 96-45, 98-171, 
90-571, 92-237, 99-200, 95-116, and 98-170, February 28, 2003
---------------------------------------------------------------------------
    We concur that such changes could provide significant additional 
resources for universal service programs. Additionally, these suggested 
changes would most likely not have a negative effect on lower income 
and lower volume users of interstate services.
                               conclusion
    In summary, the Commenters believe that radical changes to the 
revised contribution methodology may have unintended negative 
consequences on consumers. We believe that the best available 
alternative to ensure the continued viability of the universal service 
programs is to consider alternative modifications to the contribution 
methodology, such as eliminating the wireless safe harbor and ensuring 
that Internet based telephony services contribute to the Universal 
Service Fund. Hence, we respectfully request that the Commission more 
carefully review proposed changes to the universal service funding and 
request that the Commission discard the proposal for a connection-based 
funding system.
            Sincerely,
                           Derrick Span, National President
                                       Community Action Partnership
                         Ken McEldowney, Executive Director
                                                    Consumer Action
                      Andrew J. Imparato, President and CEO
                   American Association of People with Disabilities
                               Cleo Fields, General Counsel
                                             Rainbow/PUSH Coalition
                                 ______
                                 
                   League of United Latin American Citizens
                                                     April 18, 2003
Marlene H. Dortch
Office of the Secretary
Federal Communications Commission
445 12th Street, SW
Washington, DC 20554

Re: Federal-State Joint Board on Universal Service, CC Docket 96-45; 
        and CC Dockets 98-171, 90-571, 92-237, 99-200, 95-116, 98-170

    Dear Ms. Dortch: The League of United Latin American Citizens 
(LULAC) appreciates this opportunity to provide additional comments in 
the aforementioned proceedings. In particular, we would like to 
reemphasize our view that adoption of a connection based proposal will 
have negative consequences for Hispanic consumers who are low volume 
long distance customers and those that utilize prepaid wireless 
services. We believe that a radical shift in the universal service 
contribution methodology from one based on interstate revenues to one 
based on connections or telephone numbers is not only ill-conceived, it 
is unwarranted.
    The assertion that interstate revenues are on decline does not 
entirely ring true when one considers that interstate communication is 
simply shifting from wireline to wireless, instant messaging, e-mail 
and voice-over Internet. Indeed, even the FCC acknowledged this shift 
in the December 13, 2002 Interim Rule when they lifted the wireless 
safe harbor from 15 percent to 28.5 percent. LULAC supports this 
revenue-based refinement and looks forward to assessing the outcome of 
this change on universal service contributions when data becomes 
available. We encourage the FCC to continue along this path and to 
explore other refinements to the current methodology.
    As we mentioned in our earlier filing, LULAC takes a special 
interest in this proceeding because we want to ensure all Hispanic 
Americans have access to affordable wireless telephone service. While, 
almost half of U.S. Hispanics, or approximately 16 million Latinos, 
have mobile phones, according to Cheskin Research; we also know that 
there is a unique population of the Hispanic market that relies on 
prepaid wireless service as their only wireless option. These types of 
individuals include:

 young people who cannot meet credit or security deposit requirements;
 migrant and seasonal workers without a permanent address or other 
        institutional prerequisites;
 people who are unwilling to enter into a long-term contractual 
        commitment;
 senior citizens or public assistance recipients who are on fixed 
        incomes;
 individuals who want to control their telephone costs; and
 women and others who use them primarily for emergency or security 
        purposes.
    Since this population tends to be low-volume, low cost customers, 
they are often overlooked by wireless carriers who prefer high volume, 
high cost customers. Yet, we understand, there are nearly 10 million 
pre-paid wireless customers nationwide that are being served by 
companies such as TracFone and Verizon Wireless thereby documenting the 
critical role pre-paid service plays in meeting the needs of consumers. 
LULAC urges the FCC to pay particular attention to how the connection-
based proposals will adversely affect pre-paid telephone providers who 
serve this unique audience. The goal of universal service must include 
fostering a marketplace that encourages providers to serve all 
customers; and the FCC must prevent obstacles from being erected. In 
addition, changes to the universal service funding mechanism must not 
impose a regressive charge for universal service on low-volume 
customers such as those mentioned above.
    LULAC notes that a number of other public interest groups that 
represent large constituencies of low-income consumers, such as the 
Community Action Partnership, Rainbow-PUSH and the NAACP, share our 
concern about negative consequences of abandoning the revenue-based 
methodology. We also note industry groups, including mobile wireless 
carriers, small local exchange carriers, and state public utility 
commissions find fault with the various connection-based proposals on 
different grounds. Consequently, we urge the FCC to conclude that 
retention of the revenue based system, with the interim changes of 
December 13, 2002, is the correct path to follow.
    Thank you for taking our views into consideration and please do not 
hesitate to call upon us if we can be of further assistance.
            Sincerely,
                                           Hector M. Flora,
                                           LULAC National President
                                 ______
                                 
                                                      NAACP
                                                     April 18, 2003
Marlene H. Dortch
Office of the Secretary
Federal Communications Commission
445 12th Street, SW
Washington, DC 20554

Re: Reply Comments to Federal-State Joint Board on Universal Service, 
        CCDocket 96-45; and CC Dockets 98-171, 90-571, 92-237, 99-200, 
        95-116, 98-170

    Dear Ms. Dortch: I am writing this letter to reiterate my concern 
regarding proposed reforms to the contribution methodology for the 
Universal Service Fund (USF). As I mentioned in my February 27, 2003 
letter, the NAACP's principal objective is to ensure the political, 
educational, social and economic equality for racial and ethnic 
minority groups of United States and to eliminate race prejudice. The 
USF has been instrumental in ensuring that all Americans have access to 
affordable, comprehensive telecommunications services, particularly 
consumers in high-cost service areas, low-income consumers, schools, 
libraries and rural health providers.
    Presently, telecommunications firms are required to use a 
percentage of their interstate revenue to support the Universal Service 
Fund. The fund is used to help compensate telephone companies for 
providing access to services at reasonable and affordable rates 
throughout the country, including rural, insular and high cost areas, 
and to public institutions. Many of the consumers who benefit from the 
USF are our constituents.
    We strongly support the Federal Communications Commission's (FCC) 
laudable goal of maintaining the viability of the USF. However, the new 
proposal to shift from a revenue-based system to one based on 
connections--meaning USF contributions would be based on a flat monthly 
connection fee--raises concerns. Under this proposal, consumers who 
make few or no interstate calls would be assessed the same as 
consumers, especially businesses, who make more interstate calls. Low-
volume and primarily residential customers could unfairly bear the 
burden of contributing to the universal service fund. Additionally, 
studies have concluded that telephone providers who service the low-
volume population will be at a competitive disadvantage under a 
connection-based methodology.
    Consumers who utilize products such as pre-paid wireless services 
could be adversely affected by the connection-based proposals. As the 
FCC is aware, pre-paid wireless provides service to portions of the 
African American community, including: low-income users or young people 
who cannot meet credit or security deposit requirements; migrant and 
seasonal workers without a permanent address; people who are unwilling 
to enter into a long-term contractual commitment; senior citizens or 
public assistance recipients who are on a fixed incomes; individuals 
who want to control their telephone costs; and women and others who use 
them primarily for emergency or security purposes among others. The 
connection-based methodology would significantly raise the cost of this 
particular type of telephone service at the expense of consumers such 
as those mentioned above.
    I urge the FCC to carefully weigh the impact of any intended 
reforms to the universal service funding methodology to our nation's 
most vulnerable as we work together to find better ways to increase 
funding to such a valuable program.
    If there is anything I can do to help advance this process, I can 
be reached by telephone at (202) 638-2269.
            Sincerely,
                                          Hilary O. Shelton
                                                           Director
                                 ______
                                 
   Before the Federal Communications Commission, Washington, DC 20554
                                                     April 16, 2003
Marlene H. Dortch
Office of the Secretary
Federal Communications Commission
445 12th Street, SW
Washington, DC 20554

Re: Reply Comments on Federal-State Joint Board on Universal Service CC 
        Docket 96-45 CC Dockets 98-171, 90-571, 92-237, 99-200, 95-116, 
        98-170

To: The Commission
   reply comments of the national grange of the order of patrons of 
                               husbandry
    The National Grange of the Order of Patrons of Husbandry (the 
``Grange'') hereby submit these reply comments to encourage the 
Commission to adopt equitable and non-discriminatory regulations 
related to assessments for the Universal Service Fund.
    The Grange is the oldest general farm and rural public interest 
organization in the United States. Founded in 1867, today the Grange 
represents nearly 300,000 individual members affiliated with 3,000 
local, county and state Grange chapters across rural America. More than 
70% of all local Grange chapters are located in communities of 2,500 
persons or less.
    The Grange recognizes the importance of the Universal Service Fund 
(USF) to the public welfare, especially in rural communities. In rural 
America, there is an admitted lack of overall communications services. 
Rural areas with many small towns and villages are considered to be on 
the wrong side of the ``last mile'' of telecommunications services. A 
major purpose of the USF is to help rural areas achieve parity in 
telecommunication standards that is comparable to the more densely 
populated metropolitan areas of the United States. The National Grange 
also believes that full and fair competition is the only way to provide 
state-of-the-art telecommunications services to rural populations, 
especially those contained within the ``last mile.''
    Section 254(d) of the Communications Act requires that ``[every 
telecommunications carrier that provides interstate telecommunications 
services shall contribute, on an equitable and nondiscriminatory basis, 
to the specific predictable and sufficient mechanisms established by 
the commission to preserve and advance universal service.]''
    Today, all telephone companies that provide telephone service 
between states or internationally contribute to the USF. The exact 
amount is adjusted every quarter, based on the projected universal 
service needs and the projected revenues generated by interstate and 
international calls. Currently, each company makes a business decision 
regarding whether and how to assess customers, in order to recover 
their USF costs. Wireless service providers have a special provision 
that is based on a flat rate calculation of estimated total revenues 
rather than actual revenues generated by interstate telephone calls. 
The Study estimates that wireless connections will grow by more than 50 
million between 2002 and 2007 while land line connections are expected 
to grow by fewer than six million over the same time period.
    Current, proposals that have been submitted to the FCC suggest that 
major changes are necessary in the collection of universal service 
funds. One comment period for that topic has already passed. Following 
that, the FCC issued a public notice seeking reply comments on a staff 
study (the study) regarding alternative contribution methodologies. The 
study undertakes to project the effects that alternative collection 
based methodologies would have on the universal service fund.
    The Grange strongly disagrees with the assumptions that major 
changes are necessary in the revenue-based methodologies used to 
currently collect funds for the USF. The following observations and 
comments are submitted by the Grange in response to the study and in 
support of our position.
    Various methodologies used by the Commission staff project 
significant shifts in the burden of payment among long distance 
carriers, local exchange carriers and wireless carriers. Under the 
baseline projection for revenue based methodology the share of 
contributions by industry segment would shift from 59% for long 
distance carriers, 26% for local carriers and 15% for wireless carriers 
in 2002 to 41%, 32% and 27%, respectively, by 2007. However, all 
baseline projections for connection or telephone number based 
methodologies shift a disproportionate share of the USF funding 
responsibility away from long distance carriers to local carriers and 
wireless carriers. In 2002 the long distance carriers were responsible 
for 59% of USF revenues. Under Proposals 1, 2, and 3, respectively, 
that responsibility would fall to 22%, 29% or 13%. The financial 
responsibility for maintaining the USF would shift dramatically to 
local carriers and wireless carriers under any of the connection based 
methodologies examined in the study. With this shift would come 
significant shifts in the financial burden on individual consumers, 
especially in rural areas, with no apparent benefit to consumer 
populations that are dependent on USF funding to maintain telephone 
service.
    In contrast, The National Grange believes a modified revenue based 
methodology is the most reasonable alternative for funding the USF 
because it will result in the fewest disruptions in the long-standing 
relationships among various companies and their consumers.
    We do not see how any of the connection or phone number based 
methodologies fit the intention of the Telecommunications Act of 1996 
Act or Section 254(d). Connection based methodologies would fail to 
meet the requirement that every telecommunications carrier contribute 
to the USF. Connection based methodologies will disproportionately 
affect low volume long distance callers, residential customers, and 
customers on fixed incomes. All of these customer groups are 
disproportionately represented in rural communities. Since one of the 
major purposes of the USF is to provide or enhance telephone services 
in high cost rural residential areas the Grange do not see the logic in 
any methodology that would effectively increase USF contributions from 
consumers who already reside in high cost rural areas.
    Connection based methodologies would also significantly reduce the 
responsibility of high volume, business users of long distance 
telephone services to financially support the USF by effectively 
imposing additional USF charges on intrastate telephone calls.
    Connection based methodologies would remove the current 
responsibility that each company has to decide whether and how to 
assess customers to recover USF costs. Instead it would replace those 
business decisions with de facto USF surcharges on every telephone 
connection. In the best interest of fairness in competition, the 
consumer-driven marketplace should dictate the success or failure of a 
business plan, not the manner in which the government structures its 
fees. To shift the burden of payment from one type of business model to 
another in a seemingly arbitrary manner would be inequitable and unfair 
treatment of private business entities.
    On December 12, 2002, the Commission issued an interim rule 
regarding modest changes to the current revenue based methodology. The 
interim rule modified the current revenue base to increase the minimum 
assessment that wireless carriers pay USF charges on from 15% to 28.5% 
of revenues. This change better captures the industry wide proportion 
of wireless calls that involve long distance service, but is still an 
imperfect measure of the contribution that the individual wireless 
carriers make to overall interstate service. The interim rule also 
changed the assessment base from ``revenues accrued'' to ``projected 
revenues'' to address concerns by some long distance carriers related 
to the declining customer base that some carriers are experiencing. 
Finally, the interim rule prohibits telecommunications carriers from 
charging customers any ``mark-up'' above their relevant contribution 
factor for their USF assessments. The National Grange believes that 
these changes are sufficient to maintain the solvency of the USF for 
several years on a basis that is equitable and nondiscriminatory to the 
various segments of the telephone industry.
    As a group whose membership is overwhelmingly from rural America, 
the National Grange views the universal service fund as a necessity in 
the achievement of parity of services to all segments of the United 
States. Therefore, we support the current revenue-based methodology as 
the most fair and least market intrusive manner in which funds are 
collected.
    The National Grange encourages the Commission to continue to study 
the issues surrounding this proceeding and to make small changes to 
correct minor inefficiencies or inequities, as done in the recent past. 
For example, the Commission should move away from ``safe harbor 
assessments'' for the wireless carrier industry and replace them with 
methodologies that accurately reflect each wireless company's 
proportion of the long distance market. In addition, we respectfully 
urge the Commissioners to allow an adequate passage of time between 
implemented changes, to allow valid observations of the results.
    For the reasons explained in these comments, the Grange urges the 
Commissioners to reject the connection-based methodologies to fund the 
USF. We oppose any drastic changes to the method of collection of 
universal service funds. Instead the Grange urges the Commission to 
retain the basic structure of the current revenue based methodology for 
assessing USF contributions. In addition, the interim changes put in 
place in December of 2002 should be given a chance to work. Additional 
modifications to fine-tune the existing revenue based methodology 
should be explored to assure both sufficient USF revenues and an 
equitable distribution of USF fees across various segments of the 
telephone industry as well as across the various segments of the 
consumer population, including rural consumers.
            Respectfully submitted,
              Leroy Watson, Director of Legislative Affairs
                                                The National Grange
                                 ______
                                 
                      National Indian Education Association
                                                     April 18, 2003
Marlene H. Dortch
Office of the Secretary
Federal Communications Commission
445 12th Street, SW
Washington, DC 20554

Re: Federal-State Joint Board on Universal Service, CC Docket 96-45; 
        and CC Dockets 98-171, 90-571, 92-237, 99-200, 95-116, 98-170

    Dear Ms. Dortch: The National Indian Education Association submits 
this letter as a reply comment to express our trepidation about the 
Federal Communications Commission's (FCC) consideration of an 
alternative funding mechanism for universal service. Under the proposed 
mechanism, contributions would be based on a flat monthly connection 
fee as opposed to the current system based on a percentage of 
interstate revenue.
    The National Indian Education Association (NIEA) supports 
traditional Native cultures and values, to enable Native learners to 
become contributing members of their communities, to promote Native 
control of educational institutions, and to improve educational 
opportunities and resources for American Indians, Alaska Natives, and 
Native Hawaiians throughout the United States. NIEA has promoted the 
interests of Native Americans in telecommunications to Congress, before 
the FCC and in the courts.
    Because the majority of Native Americans live, work, and learn in 
rural areas, many participate in the Lifeline and Link-up programs. 
Additionally, many Native American libraries, schools, and universities 
are beneficiaries of the E-rate program. E-rate is a vital program 
providing numerous Native American K-12 public schools and libraries 
with significant discounts on telecommunications services, Internet 
access, and internal connections costs; thereby ensuring our teachers, 
students and families have access to the richness of the world wide 
web. Hence, NIEA is an avid supporter the Universal Service Fund, and 
the need to generate reliable sources of funding for universal service 
programs.
    NIEA is instrumental in working with Native American schools and 
libraries to apply for E-rate discounts, and we support the FCC's goal 
of ensuring the USF is positioned to meet future demands. We advocate 
not only for the continuance of the USF but also for the expansion of 
base contributors as well. An expanded base of contributors will assure 
the availability of affordable, accessible telecommunications services. 
However, in the case of the connection-based proposal, NIEA is 
concerned that prepaid wireless carriers that service rural localities, 
such as TracFone, Inc., would be disproportionately impacted, resulting 
in a higher fee assessment for Native American consumers of such 
services. Prepaid wireless service offers Native Americans an 
affordable accessible communication option. Prepaid wireless service is 
an off-the-shelf, pay-as-you-go, service that offers consumers wireless 
service with no contracts, no credit checks, no monthly fees, no 
activation fees, no security deposits and no age limits. Such features 
provide Native Americans with true costs for services. Because of 
living in rural localities, many calling plans hit Native Americans 
with hidden roaming fees and various other charges that are financially 
burdensome. With prepaid wireless services, there are no surprises. 
Native Americans pay for minutes that are expended.
    As iterated in our previous comments on this matter, under this new 
connection-based proposal, carriers whose services are designed for 
customers that make fewer calls would carry a greater payment burden. 
Such a burden would also be levied on the prepaid wireless customers. 
In short, customers who make few interstate calls would be assessed the 
same cost as customers who make many interstate calls. This would be a 
major financial cost to Native Americans, who generally are low-volume 
interstate callers. The result would be low-volume, residential 
customers disproportionately contributing to the universal service 
fund. The connection-based proposal does not live up to a primary 
statutory principle that guides universal service fund policy: quality 
services should be available at just, reasonable, and affordable rates.
    NIEA urges the FCC to consider alternative modifications to the 
contribution methodology. We would like to point out that other 
commenters have identified additional contribution methodologies--such 
as, eliminating the wireless safe harbor and ensuring that broadband 
Internet access services contribute to the Universal Service Fund--as 
viable alternatives. We agree that such changes could possibly provide 
significant additional resources for universal service programs. 
Additionally, these suggested changes would most likely not have a 
negative effect on Native Americans.
    NIEA asks that the FCC take a closer look at the connection-based 
proposal. We are confident that you will find that it is not in the 
interest of consumers, especially Native American prepaid wireless 
consumers. Nor do we believe that adoption of this methodology is 
necessary to ensure a robust USF. We, instead, encourage the FCC to 
retain the current revenue-based mechanism and to carefully explore 
fair and equitable ways to expand the base of contributors as a means 
for generating additional revenues.
                             John Cheek, Executive Director
                              National Indian Education Association
                                 ______
                                 
               Organization Concerned about Rural Education
                                                      July 17, 2003
Marlene H. Dortch
Office of the Secretary
Federal Communications Commission
445 12th Street, SW
Washington, DC 20554

Re: Ex Parte Comments to FCC Staff on Study of Universal Service Fund 
        CC Docket Nos. 96-45, 98-171, 90-571, 92-237, 99-200, 95-116, 
        98-170, NSD File No L-00-72

    Dear Ms. Dortch: The achievement of parity in telecommunications 
standards in rural America is a major purpose of the universal service 
fund (USF). Rural schools, libraries and homes deserve to have equal 
access to telephones and other telecommunications services when 
compared to those located in more densely populated areas of the United 
States. In rural America, some great strides have been made in the 
delivery of telecommunications services. For example, it is estimated 
that 89% of rural homes have wireline telephone service and the e-rate 
program, paid for by the Universal Service Fund, has made some progress 
in bringing services to our rural schools and libraries.
    The very formation of the Organization Concerned about Rural 
Education (OCRE) was predicated on the belief of equality in 
educational standards with respect to the condition of physical 
structures, quality teachers and the access to technology. As a result, 
OCRE has long been a staunch advocate for the sustainability of the 
universal service fund. Yet, recently, some concerns have been 
expressed that the future holds a decline in funds available to sustain 
the universal service fund. Among the reasons cited for this trend are 
a decline in interstate revenues, the bundling of local and long 
distance calling packages and customer demand for universal service 
programs.
    Consequently, there are those who believe that the current 
collection system simply needs minor modifications while others believe 
a major change in the collection methodology is necessitated. To that 
end, and much to the credit of the FCC, a Staff Study was done that 
attempted to project the effects various proposals would have on the 
universal service fund. The FCC seeks to ensure the full funding of the 
USF by changing collection methodology. Three of the four proposals 
would drastically change the method of collection from a revenue-based 
system to a connection-based system.
    In all of the connection-based proposals presented in the study, 
there seems to be a significant shift in the burden or payment from 
interstate and international business community calls to the 
residential customer base. Can such a radical change in the formula for 
collection methodology be justified if the people, including families 
with school-aged children, who are to benefit from the universal 
service fund are those who must shoulder the greatest burden of 
payment? In addition, the ever-protected reserve fund, considered to be 
an absolute necessity by industry and consumer groups, although briefly 
mentioned, is conspicuously absent from the staff study. This leads to 
questions revolving around the reserve fund, and its subsequent 
condition if this radical change in collection is made.
    As an organization whose focus is on the success of rural 
education, OCRE views the universal service fund as a necessity in the 
achievement of parity of services to all segments of the United States. 
Therefore, we support the current revenue-based methodology as the most 
fair and least market intrusive manner in which funds are collected. In 
that way, the FCC avoids taking the inevitable blame for capriciously 
changing collection methodologies that disproportionately affect 
customers who make few or no long distance calls. With that in mind, 
OCRE suggests that the FCC seriously considers an expansion in the base 
of contributors to the USF. This would be more inclusive of all types 
of telecommunications providers, would solve the existing concern of 
decline in interstate revenues, as well as thwart the potentially 
inequitable result that a connection-based methodology will cause. 
Furthermore, it certainly would conform with market trends.
    In another decision, the FCC increased the safe-harbor rate used as 
the basis for wireless providers to contribute to the USF from 15% to 
28.5%. OCRE commends the Commission for its ability to timely recognize 
shifting market trends and act accordingly. As time progresses, this 
will likely prove to be a wise decision on the part of the FCC that 
will help the USF to remain sustainable and predictable.
    OCRE views the proposed connection based changes as unnecessarily 
extreme, and opposes any drastic changes to the method of collection of 
universal service funds. We encourage the Commission to make small 
changes to correct minor inefficiencies or inequities, as done in the 
recent past. In addition, we respectfully urge the Commissioners to 
allow an adequate passage of time between implemented changes, to allow 
the results to be observed fully.
    We urge the Commissioners to retain the current revenue based 
mechanism for assessing universal service fund contributions.
            Sincerely,
                                               Dale Lestina
                                                          President
                                 ______
                                 
                Telecommunications Research & Action Center
                                                     April 18, 2003
Marlene H. Dortch
Office of the Secretary
Federal Communications Commission
445 12th Street, SW
Washington, DC 20554

Re: Reply Comments to Federal-State Joint Board on Universal Service, 
        CC Docket 96-45; and CC Dockets 98-171, 90-571, 92-237, 99-200, 
        95-116, 98-170

    Dear Ms. Dortch: The Telecommunications Research & Action Center 
(TRAC) submits these reply comments to the Federal Communications 
Commission (Commission) to express once again its concern regarding the 
above-captioned proceedings. As noted in our February 27, 2003, letter 
to the Commission, TRAC is a non-profit membership organization based 
in Washington, DC, that, since its inception in 1983, has promoted the 
interests of residential telecommunications customers. TRAC staff 
researches telecommunications issues and publishes rate comparisons to 
help consumers make informed decisions regarding their long distance 
and local phone service options. TRAC can be found on the web at http:/
/www.trac.org.
    TRAC strongly urges the Commission to carefully measure the adverse 
impact on residential consumers before the Commission drastically 
alters how it assesses contributions to the universal service fund 
(USF). TRAC notes that other Commenters and even Commission's staff 
have found that should the Commission change from the current revenue-
based methodology (RBM) to a connection-based methodology (CBM), ``such 
a change would shift much of the responsibility for USF funding from 
business users to residential users, and would increase USF rates for 
many average-use and low-use residential customers.'' 1
---------------------------------------------------------------------------
    \1\ See Comments of Consumers Union, Texas Office of Public Utility 
Counsel, Consumer Federation of America, Appalachian People's Action 
Coalition, Center for Digital Democracy, Edgemont Neighborhood 
Coalition and Migrant Legal Action Program at page I (April 22, 2002). 
See also Projected Assessments under Proposal 2 of Connection-Based 
Methodology published in Federal Communications Commission Public 
Notice FCC 03-31, Commission Seeks Comment On Staff Study Regarding 
Alternative Contribution Methodologies, February 26, 2003.
---------------------------------------------------------------------------
    TRAC highly recommends that the Commission consider how the 
proposed CBM runs afoul of the clear mandate of the Telecommunications 
Act of 1996 (1996 Act) to assess every telecommunication carrier for 
USF contributions. Under the CBM, the assessment would shift from the 
carriers to the end-users. As TRAC previously remarked, the Commission 
is tasked with assessing contributions in an equitable and non-
discriminatory manner. Under the proposed CBM, high-volume and low-
volume consumers would be charged the same flat fee. This is hardly 
equitable or nondiscriminatory, given that business consumers, who 
typically make many interstate calls would be assessed the same as 
residential consumers, many of whom are low-income and low-volume 
callers. Low-volume residential consumers would have to contribute the 
same to the USF as high-volume residential or business consumers.
    Finally, TRAC stresses the twin hardship faced by low-income and 
low-volume users who use pre-paid wireless services should the 
Commission adopt the CBM. Low-income users of pre-paid wireless 
services are ineligible to receive the FCC's ``Lifeline'' exemption 
from USF contributions. Sadly, low-income and low-volume consumers will 
be charged a flat connection fee regardless of the number of calls they 
make as well as being ineligible for the Lifeline exemption.
    The connection-based methodology disparately impacts low-income and 
low-volume residential consumers. In addition, the CBM is contrary to 
aims of the 1996 Act. Accordingly, TRAC highly recommends that the 
Commission abandon any further consideration of the proposed 
connection-based methodology.
            Sincerely,
                          Dirck A. Hargraves, Esq., Counsel
                        Telecommunications Research & Action Center
[GRAPHIC] [TIFF OMITTED] 99965.016

[GRAPHIC] [TIFF OMITTED] 99965.017

                                   - 
