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



                                                   S. Hrg. 102-000 deg.

   THE FUTURE OF RURAL COMMUNICATIONS: IS THE UNIVERSAL SERVICE FUND 
                             SUSTAINABLE?

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

                                HEARING

                               before the

      SUBCOMMITTEE ON RURAL ENTERPRISE, AGRICULTURE, & TECHNOLOGY

                                 of the

                      COMMITTEE ON SMALL BUSINESS
                        HOUSE OF REPRESENTATIVES

                      ONE HUNDRED EIGHTH CONGRESS

                             FIRST SESSION

                               __________

                   WASHINGTON, DC, SEPTEMBER 25, 2003

                               __________

                           Serial No. 108-38

                               __________

         Printed for the use of the Committee on Small Business


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


                                 ______

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                      COMMITTEE ON SMALL BUSINESS

                 DONALD A. MANZULLO, Illinois, Chairman

ROSCOE BARTLETT, Maryland, Vice      NYDIA VELAZQUEZ, New York
Chairman                             JUANITA MILLENDER-McDONALD,
SUE KELLY, New York                    California
STEVE CHABOT, Ohio                   TOM UDALL, New Mexico
PATRICK J. TOOMEY, Pennsylvania      FRANK BALLANCE, North Carolina
JIM DeMINT, South Carolina           DONNA CHRISTENSEN, Virgin Islands
SAM GRAVES, Missouri                 DANNY DAVIS, Illinois
EDWARD SCHROCK, Virginia             CHARLES GONZALEZ, Texas
TODD AKIN, Missouri                  GRACE NAPOLITANO, California
SHELLEY MOORE CAPITO, West Virginia  ANIBAL ACEVEDO-VILA, Puerto Rico
BILL SHUSTER, Pennsylvania           ED CASE, Hawaii
MARILYN MUSGRAVE, Colorado           MADELEINE BORDALLO, Guam
TRENT FRANKS, Arizona                DENISE MAJETTE, Georgia
JIM GERLACH, Pennsylvania            JIM MARSHALL, Georgia
JEB BRADLEY, New Hampshire           MICHAEL MICHAUD, Maine
BOB BEAUPREZ, Colorado               LINDA SANCHEZ, California
CHRIS CHOCOLA, Indiana               ENI FALEOMAVAEGA, American Samoa
STEVE KING, Iowa                     BRAD MILLER, North Carolina
THADDEUS McCOTTER, Michigan

         J. Matthew Szymanski, Chief of Staff and Chief Counsel

                     Phil Eskeland, Policy Director

                  Michael Day, Minority Staff Director

                                  (ii)
?

                            C O N T E N T S

                              ----------                              

                               Witnesses

                                                                   Page
Abernathy, Kathleen, Federal Communications Commission...........     3
Williams, Robert, Oregon Farms Mutual Telephone Company..........    14
Attar, Tom, Rural Cellular Association...........................    16
Staihr, Dr. Brian K., Sprint Corporation.........................    18
Balhoff, Michael J., Legg Mason Wood Walker Inc..................    19
Brown, Glenn H., McLean & Brown..................................    22

                                Appendix

Opening statements:
    Graves, Hon. Sam.............................................    32
Prepared statements:
    Abernathy, Kathleen..........................................    35
    Williams, Robert.............................................    47
    Attar, Tom...................................................    56
    Staihr, Dr. Brian K..........................................    72
    Balhoff, Michael J...........................................    81
    Brown, Glenn H...............................................    91
    Gregg, Billy Jack, Public Service Commission of West Virginia   101

                                 (iii)

 
   THE FUTURE OF RURAL COMMUNICATIONS: IS THE UNIVERSAL SERVICE FUND 
                              SUSTAINABLE?

                              ----------                              


                      THURSDAY, SEPTEMBER 25, 2003

                  House of Representatives,
                       Committee on Small Business,
         Subcommittee on Rural Enterprise, Agriculture and 
                                                Technology,
                                                   Washington, D.C.
    The Subcommittee met, pursuant to call, at 10:07 a.m. in 
Room 2360, Rayburn House Office Building, Hon. Sam Graves 
[chairman of the Subcommittee] presiding.
    Present: Representatives Graves, Ballance, Capito, Bordallo 
and Miller
    Chairman Graves. Good morning, everybody. I appreciate 
everybody being here, and I want to welcome you to the Small 
Business Subcommittee on Agriculture, Rural Enterprise and 
Technology. I appreciate everybody's flexibility with moving 
the hearing time. We have a little bit or possibly a conflict 
with votes later on, so we wanted to make sure that we could 
get in a straight run because it messes up so many hearings 
when you have a big vote right in the middle of your hearing.
    Our purpose today is to examine the Universal Service Fund, 
and its administration, and analyze the designation of eligible 
telecommunication carriers, ETCs. The stated goal of the 
universal service policy is to provide every American, 
regardless of location, affordability and high-quality access 
to telecommunication and information services.
    Today, we bring together a variety, and we truly have a 
variety of telecommunication providers to discuss the 
effectiveness and efficiency of the Universal Service Fund, and 
the designation of telecommunication carriers, eligible 
telecommunication carriers, again ETCs.
    As first outlined in the Communications Act of 1934, all 
Americans, both urban and rural, should have access to quality 
telecommunication services at affordable rates, and that is 
what is stated in the act. The goal is to increase the value of 
the network for Americans by ensuring a continued increase in 
its use.
    The Universal Service Fund provides financial support to 
designated carriers. This cost recovery mechanism promotes 
infrastructure investment in underserved and high-cost areas. 
Today, we are going to be discussing the way state commissions 
and the Federal Communications Commission designate eligible 
telecommunication carriers.
    I look forward to today's expert testimony, and hope that 
his hearing serves as a forum to explore and challenge the 
future of the Universal Service Fund. The Universal Service 
Fund is very complex. The entire issue is extremely complex. By 
concentrating on ETC designation, I hope to focus our efforts 
and become better educated on this issue.
    This is, again there is no real agenda here today. I am 
trying to learn more about it. We do get a lot of interest in 
my district, and I know in districts all across the nation 
about the future of the Universal Service Fund, and making sure 
that we continue with obviously the original stated goal of the 
telecommunications act back in 1934, and that is to make sure 
everybody has high-quality and modern service.
    [Mr. Graves' statement may be found in the appendix.]
    Chairman Graves. Now I would like to turn to the ranking 
member, Frank Ballance, for an opening statement. Frank.
    Mr. Ballance. Thank you, Mr. Chairman, and good morning.
    With 90 percent of the rural economic base, small 
businesses, the small farms, barber shops, main street store 
fronts, and offices, an indispensable component of the national 
economy, they provide services upon which communities rely and 
thrive, as well as local jobs.
    Unfortunately, the rural small business community faces 
economic threats soon to rival conditions of the Great 
Depression. We are headed backwards, ladies and gentlemen, when 
we should be moving forward.
    Rural towns across America are already suffering from 
double-digit unemployment, now see routine plant closings, 
pushing the job loss numbers up to record heights. Rural 
America needs our help by reviewing the challenges with the 
Universal Service Fund. During today's hearing, we can 
hopefully move closer to finding a workable solution to help 
rural small businesses.
    The Universal Service Fund was established during the Great 
Depression to ensure telephone service was and is affordable to 
every American. Phone service is a right for every American, 
not a luxury for some.
    This simple program subsidized the cost of providing 
telecommunications access in rural America by charging a couple 
of bucks on every phone bill. Without this assistance, many 
businesses, schools and citizens in rural communities would be 
unable to afford access to basic telephone services.
    Disparity in access to the Internet already hurts small 
rural businesses, and would only expand with the help of the 
Universal Service Fund. Fairly priced phone service is critical 
for rural communities and businesses to be part of the nation's 
economic success. No longer do small companies in rural 
communities only do business in their local economies. With the 
held of the Internet and phones, small rural businesses now can 
serve clients across the country and around the world, 
bolstering their local communities while enhancing the national 
economy.
    In 1996, Congress helped rural communities in a digital age 
when the Universal Service Fund was expanded to help rural 
schools and libraries provide Internet service. Citizens cross 
our nation's countryside can now harness the knowledge power of 
the Internet.
    However, these added benefits have come at a price. The 
added demands on the system, combined with an aging 
infrastructure, require more money from the Universal Service 
Fund. This is taking place as dollars into the fund are 
declining.
    Some believe we must instead do the following: Drop the 
provisions added in the nineties that have benefitted millions 
of school children; have new industries such as cellular and 
cable users shoulder the burden, a solution that is still open 
to debate; raise overall costs already charged to your phone 
bills.
    However, none of these solutions are viable. I hope that 
after today's hearing we can find an option that ensures that 
benefits continue without hurting America's consumers.
    Thank you, Mr. Chairman.
    Chairman Graves. Thanks, Mr. Ballance.
    Our first witness today is Commissioner Kathleen Abernathy. 
She is a federal and state board commissioner with the FCC, and 
I appreciate very much, Ms. Abernathy, you being here, and I 
apologize for the change in time.

   STATEMENT OF KATHLEEN Q. ABERNATHY, COMMISSIONER, FEDERAL 
                   COMMUNICATIONS COMMISSION

    Ms. Abernathy. Not a problem at all, and I am very happy to 
be here today because this is an issue that is important across 
all of America, not just in rural America, but, frankly, we all 
benefit from universal service.
    So again, Chairman Graves, thank you----
    Chairman Graves. Thank you.
    Ms. Abernathy [continuing]. For inviting me here today, and 
distinguished members of the Subcommittee. I do appreciate the 
opportunity to talk about an issue that I have been spending a 
lot of time in since coming to the FCC.
    The goal of providing high-quality telecom services to all 
Americans at affordable rates is a cherished principle in U.S. 
telecom policy, and it is one of the cornerstones of the 
Telecommunications Act of 1996.
    I think all too often we forget that in the not too distant 
past phone service was a luxury that few in rural America could 
afford. But fortunately today Universal Service Funding has 
guaranteed citizens throughout the country the ability to 
communicate at reasonable rates. As Chair of the Federal-State 
Joint Board on Universal Service, I make it one of my top 
priorities.
    Now, I have submitted a written statement that provides 
details on a lot of the challenges that are confronting 
universal service and the various rule-making proceedings that 
are pending. But what I would like to do this morning is 
highlight a key issue that was in my written statement, and 
that is the issue of 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 have to ensure that sufficient funds continue 
to flow into the system, and then that the funding burden is 
spread among contributors in an equitable and nondiscriminatory 
manner, and then we have to determine once we get this funding 
pool of money who has rights to it, and how much should each of 
the carriers be entitled to, and what sort of cost basis or 
cost justification goes into being authorized to access this 
fund.
    One primary source of instability in the universal service 
regime that we believe is growing is how do you define the 
support mechanism for carriers that are serving rural areas.
    This component has grown substantially over time. This 
increase in demand for the funds, together with the fact that 
we have a decreasing revenue base for universal service, is 
responsible for the fact that we now have a contribution factor 
that is approaching double digits that consumers see on their 
long distance bills.
    One of the funding issues that has received particular 
attention is the intersection of competition and universal 
service in rural areas. So while new competitors, including the 
wireless providers, currently receive a very small percentage 
of overall USF support, their share has been growing rapidly 
along with a surge in what are called ETC applications; that 
is, eligible telecommunication carrier applications. That is 
where a carrier says I now believe that I am qualified and 
should receive funding from USF.
    This trend, together with the fact that incumbent carriers 
do not lose any support if a customer switches to a new 
competitor service, suggest that rural changes may be necessary 
to avoid placing too great a strain on our high-cost support 
mechanisms.
    The FCC has therefore asked the USF Joint Board to consider 
a variety of issues that relate to the designation of 
competitive ETCs, and the manner in which these carriers 
receive support. The comment cycle has closed, and the joint 
board held a very productive public forum in July.
    What we did there is after the comment cycle closed we 
found in the past that it is very helpful to bring in--we had 
several different panels, parties on all sides of the issues, 
and let them debate and talk about it in front of us all the 
pros and cons before we actually start writing an item.
    A range of interested parties proposed significant changes 
to our portability rules and we are hard at work analyzing 
those various proposals.
    I want to assure you that as Chair of the joint board I 
have made this proceeding our top priority, and we are 
committed to providing a recommended decision as expeditiously 
as possible.
    The way this process works administratively is the FCC 
refers this issue over to this joint board composed of both 
federal and state public utility regulators. We then analyze 
the issues, we come up with a recommended decision, the joint 
board does, and then that recommended decision comes back to 
the Federal Communication Commission who puts it out for 
comment, and then by statute has to within a year to resolve 
the issues that have been brought up.
    So in closing, while universal service is facing a number 
of challenges, and I know that I am confident though that the 
FCC, with your help and guidance of Congress, that we will be 
able to initiate the various rule-making proceedings, we will 
be able to figure out ways to ensure that the fund is 
sustainable, and we will continue to be able to ensure that all 
Americans across the country have reasonable, affordable rates, 
and that they can call anywhere they want.
    So again I thank you for the opportunity to testify, and I 
am happy to answer any questions that you might have.
    [Ms. Abernathy's statement may be found in the appendix.]
    Chairman Graves. Thank you very much, Commissioner. I do 
have a question on specifics as far as an ETC. Can you kind of 
walk through what the criteria is?
    Ms. Abernathy. Sure.
    Chairman Graves. And be as specific as you can be, too.
    Ms. Abernathy. Sure. There are a couple of ways where a 
carrier could become an ETC. It is in the 1996 Telecom Act, 
Section 214. And basically it says that a carrier may be 
designated as an eligible telecommunications carrier if it 
offers all of the supported services that are supported by the 
USF, the basic services; and that if it advertises the 
availability of such services throughout the service area.
    And then in accordance with another section of 214, such 
designation must also be in the public interest, convenience 
and necessity. So it is not only that you are capable of doing 
it, at the same time, it is usually the state PUC has to 
determine whether or not this is in the public interest.
    Now, to the extent that some of these ETC applications do 
come to the FCC, that happens if a state determines that they--
the state commission determines it does not have jurisdiction 
over ETC designation, and it wants to refer it to the FCC, or 
if we are dealing sometimes with tribal lands.
    Most of the ETC designations, frankly, go through the state 
public utility commissions, of course, pursuant to the 
guidelines I just spoke about that is in the communications 
act.
    Chairman Graves. Now, you mentioned that you are going to 
be taking a look at those guidelines.
    Ms. Abernathy. Yes. Absolutely.
    Chairman Graves. What changes do you perceive?
    Ms. Abernathy. Well, there is a number of changes that are 
being recommended. When this whole process came into being 
right after the 1996 act, I think that people did not really 
know what made the most sense, and so some decisions were made 
that are not up for debate.
    For example, multiple lines are supported. There are some 
very real questions about whether or not a government funding 
mechanism should bring down costs for multiple lines to a 
consumer's home, or should we only be supporting a single line 
to the consumer's home with the idea that, yes, the act 
entitles you to reasonable, affordable service, but it is a 
single line, it is not multiple lines.
    Another issue that came up is should funding remain the 
same for the incumbent even when lines are taken away by the 
new competitor.
    What happens today is the incumbent continues to receive 
the same amount of support that they received before even if 
they are no longer serving some of these customers, the ETC is. 
So you are giving money both to the incumbent and to the ETC.
    There are arguments on both sides about which makes sense, 
but the reality is today, even when the--the fund will only go 
up, it will never go down, because with each new ETC you are 
funding yet another entity, and the prior entity is not 
receiving any reducing funding at all.
    A question is, how does the new carrier calculate the 
amount of support that they are entitled to?
    Previously, when the previous FCC after the 1996 act 
implemented this statute, the FCC decided that it should be 
based on the incumbent's costs, not the new competitor's costs. 
So however much support per line that the incumbent receives 
from the USF Fund, that is how much support the new competitor 
will receive, so it is not cost-based for the new competitor.
    One of the arguments is, well, maybe it should be based on 
costs. Would it be embedded? Would it be forward-looking? Is 
there some proxy model that you could use instead? That is 
another issue.
    And then a final issue is perhaps it is appropriate and in 
fact many parties have urged the FCC to establish guidelines 
for the states to follow in designating ETCs. The reason for 
this is that it varies dramatically from state to state.
    So the ETCs and the carriers themselves do not really know 
what the rules of the road might be from state to state, and it 
might for consistency purposes and for purposes of 
understanding what it means for the ETC application to be in 
the public interest, it may be very appropriate for the FCC to 
come up with some guidelines that should be followed when 
analyzing whether or not a particular carrier should be 
designated as an ETC.
    So those are all of the debates on the table today. There 
is probably more, but that just gives you an example of some of 
the issues.
    Chairman Graves. Do you have any time table on how soon?
    Ms. Abernathy. Yes. Our goal at the joint board, because we 
do think this is a very important proceeding, is our goal has 
been to provide the FCC with our recommended decision by the 
end of the year. Staff is working hard on our proposal.
    I recently heard that thanks to Isabel they lost about, you 
know, three - four days of work, and they are concerned now 
about the timing. I think the latest would be January because 
again all of the joint board members are very strongly 
committed to moving this out.
    So once that referral comes back to the FCC, that means the 
FCC by statute must act within a year.
    Chairman Graves. Mr. Ballance?
    Mr. Ballance. Thank you very much, Ms. Abernathy.
    As you know, the FCC's February 20, 2003 review of network 
elements involved several highly controversial votes. In 
effect, the FCC ruled to essentially allow Bell companies to 
deny competitors access to their local telephone networks when 
the Bell companies upgrade from copper to fiber.
    I am concerned about how this is going to affect small 
businesses whose innovations have allowed true competition as 
mandated in the 1996 act.
    Could you comment on that?
    Ms. Abernathy. Sure. Sure. The way it will work is most 
companies will continue to get access to all the facilities and 
the DSL capabilities that they receive access to today.
    In greenfield situations, brand new builds of broadband 
where competitors go in and compete for that new build 
opportunity, then if an RBAC puts in a new build, then they do 
not have to sell that capacity at TELRIC prices, but they still 
continue to make the----.
    Mr. Ballance. May I interrupt? At what prices?
    Ms. Abernathy. I am sorry. I live this stuff every day. At 
TELRIC prices. These are the prices that by statute are defined 
as forward-looking costs that are effectively a discounted 
price for the new competitors to be able to come in and 
compete.
    So they will still provide access to this service on a 
competitive basis, to the new capacity on a competitive basis, 
but they would no longer sell it at this TELRIC price, which is 
the forward-looking reduced price, but it is only for new 
broadband builds.
    So what we are talking about is that throughout the country 
today you will continue to get access to all of the capacity 
that is out there today, and you will continue to get it at 
what are called these TELRIC prices.
    The goal in all instances is to encourage new competition, 
and where the new competitors lack the scale and scope to be 
able to effectively compete with some part of the incumbent's 
network, so for example the loop, it is very unlikely, given 
the technology we have today, that entities can go out and 
build a loop to everyone's home.
    It is a barrier that cannot be surmounted because of the 
historical monopoly position of the Bell companies, and that is 
why they can get access to the loop from the phone company at 
these, you know, effectively reduced prices as compared to if 
it were a true competitive environment where you had multiple 
providers who could give you access to a loop, you would get 
the best price. You would go and bargain your best price. You 
cannot do that.
    So all of that remains in place. What we are really talking 
about is new broadband deployment, and what we were trying to 
do is balance two competing, sometimes two competing goals in 
the act that are sometimes in tension.
    One goal says under the unbundling provision says unbundle 
access for new competitors. Another provision of the act says 
continue to encourage and promote investment in new broadband 
deployment.
    What helps one does not necessarily help the other, and so 
what we are always doing is trying to balance those two goals.
    Mr. Ballance. Are you satisfied that there will be true 
competition?
    Ms. Abernathy. Yes. You know why?
    Mr. Ballance. In the new----.
    Ms. Abernathy. You know why I think yes? And not because I 
think any other regulators are particularly brilliant people, 
necessarily. I'll tell you why I truly believe there will be 
competition, because we have in the United States some of the 
best new technologies available. And every single day I see new 
opportunities for consumers to be served by competitive 
providers.
    And at the end of the day, once these new competitors are 
out there offering wireless access to the homes, satellite 
access to the home, the incumbent, Bell Telephone companies 
then have to ask themselves do I want to price my facilities in 
a way that attracts people to them, or do I want everyone to 
ditch me and go to wireless, or go to satellite.
    So at the end of the day we will see competition, partly 
because I think we are crafting a reasonable regulatory regime, 
but primarily because technology continues to move forward and 
offer us choice.
    Mr. Ballance. My time is about up, but would you support a 
legislative initiative that require contributions to the USF 
based on total telecommunications revenues?
    Ms. Abernathy. Yes, I do actually. That is one of the 
issues about how do you collect sufficient funding. And right 
now, because of a court decision, we are expected to try and 
distinguish between interstate and intrastate revenues, and 
only target interstate revenues.
    With bundled service offerings today, it makes it very 
difficult for anyone to isolate the right amount of funds. Not 
only that, we know that the long distant funds are decreasing. 
So what we really need to do is be able to spread the tax 
across as many players as possible just basically for 
telecommunication services, whether they are inter or 
intrastate.
    Mr. Ballance. Thank you.
    Chairman Graves. Ms. Capito.
    Ms. Capito. Yes, thank you, and welcome.
    In your statement that you submitted, you make the 
statement that certain nonrural carriers receive support in 
eight states, one of which is my state, West Virginia, because 
their cost exceeds the national average.
    What do you think the future for those kinds of--those 
states in particular are in terms of being able to get the 
competition and to keep our prices within reach?
    Ms. Abernathy. Well, I think the Universal Service Fund is 
here to stay, regardless of how far technology goes, unless and 
until we reach nirvana, I guess, where it does not matter that 
you live in rural America, the costs have been driven down so 
low that there is competition everywhere.
    I do not see that necessarily happening anytime soon. So 
the Universal Service Fund is a critical part of the funding 
for rural America, and it will remain in place, and our job is 
to make sure that it remains stable, and that it is 
appropriately distributed among the parties who are serving 
high-cost rural America.
    I guess I have to make it clear, if you are low-cost rural 
America, and there are some places where it is denser, you do 
not need the support. What we are really trying to identify and 
support are the higher cost areas of the country.
    Ms. Capito. So is my understanding correct then that that 
fund helps like say--I am assuming this is Verizon--helps 
service the more rural areas in a state like West Virginia; is 
that correct?
    Ms. Abernathy. That is correct. It would help whose ever is 
serving the high-cost areas. There was a debate yesterday about 
who gets what amount of money. It really has to do with are you 
serving a high-cost part of the state or are you serving a 
larger city where you may not need USF.
    Sometimes the Bell companies are serving high-cost areas, 
sometimes it is smaller rural carriers.
    Ms. Capito. Okay.
    Ms. Abernathy. So it just depends.
    Ms. Capito. Okay. I am interested in the E-Rate. You 
mentioned that also in your opening statement.
    How is that program, is it growing? Is it reaching the 
rural areas? Is it meeting the expectations where more monies 
are being given for, or a lower rate is being given to school 
and library programs?
    Ms. Abernathy. You know, the E-Rate program has been a 
tremendous success in my opinion. It is growing. I think over 
95 percent, somewhere between 90 and 95 percent, maybe more, of 
all schools are connected to the Internet. And what the E-Rate 
program then allows is to build a very robust broadband system 
in the schools with USF dollars.
    And I think we are obligated, again, because USF dollars 
are fundamentally coming from you, and me, and everyone else in 
this room, we need to show the value of it, and this program in 
my mind is a tremendous value.
    Like any other program that is a pool of money distributed, 
you know, via a bidding process, there is ways to improve it. 
There is ways to make it easier to apply and also ways to 
ensure that there is no waste, fraud or abuse so that the same 
school does not get it over again, and some of the less 
sophisticated schools find that somehow there is never enough 
money left for them.
    So we are continuing to look at ways to improve it, but I 
think the program has been a tremendous success.
    Ms. Capito. And my final question is, under the Department 
of Agriculture, they have what used to be the Rural Utility 
Service where part of their mission, is my understanding, of 
course, is to deliver those utilities in all forms to the rural 
areas, and which, I think, there is a more heightened emphasis 
on the telecommunications facet of that in terms of funding.
    Do you integrate your programs, or I mean, what can you 
tell me about the way you are working with that?
    Ms. Abernathy. We coordinate with the RUS in Ag. Department 
because what they do that we do not do, they have money that 
they actually give as loans to many smaller companies so that 
they can provide brand new products and services primarily to 
rural America.
    Sometimes it is wire lines, sometimes it is wireless. A new 
program is trying to figure out what some of the new YFI 
applications are.
    We coordinate with them around our regulatory environment 
and how it complements their funding environment. When it comes 
to the E-Rate program, though, that is strictly administered 
through what is called USAC, and the funding comes from the 
Universal Service Fund, so it is just a different pool of 
money. But we are very well aware of the folks over there, Ms. 
Legg, and we work with them because, again, it has been a 
tremendous benefit to rural America. We deal with the 
regulatory environment, they deal more with the funding aspects 
in some respects, but they need to complement each other and be 
coordinated with each other.
    Ms. Capito. Thank you.
    Chairman Graves. I have another question. You mentioned 
that obviously we continue to see a rise in the cost to the 
consumer on their phone bill.
    Ms. Abernathy. Yes.
    Chairman Graves. And what worries me, is there an end to 
that? I mean, can it just continue to go through the--you know, 
is there a point where there is a limit on that?
    Ms. Abernathy. Well, I think several of the funds are 
capped. For example, the E-Rate funding is capped. That cannot 
grow. We distribute the funds that we have across X number of 
providers.
    The high-cost fund is not capped. And to the extent that we 
do not get a handle on all the parties that should qualify for 
high-cost funding, and accountability about how they spend that 
money, we will continue to see upward pressure.
    The other issue is that because today the revenues are only 
assessed on interstate minutes, long distance minutes, and long 
distance minutes are in decline in the sense that most people 
do not even think about long distance. Many of us just get 
bundled service minutes, or voice over IP, for example. Those 
minutes do not count.
    So all of a sudden you are seeing a decline in total 
interstate minutes. Even if the fund remains stable and does 
not grow, guess what? Your assessment of contribution on long 
distance minutes has to go up as you have fewer minutes that 
you can assess.
    So what we are looking at, at the FCC, is a way to spread 
this cost across--in a different way other than just simply 
targeting interstate revenues for interstate carriers.
    We have looked at two different proposals. One is a 
connection-based approach where every telecom carrier that has 
a connection to a consumer or a business pays per connection. 
Another approach is to numbers, based on numbers that you use. 
You then spread the cost across a greater number of entities. 
It is then a lesser hit on any single customer's bill.
    And there are legal issues associated with all of these 
proposals, but the Commission is committed to a change because 
fundamentally we know that this upward pressure on just long 
distance minutes cannot continue.
    Chairman Graves. Well, you know, obviously for small 
businesses to compete in the rural area, so we have got to 
continue to get, you know, the best and the latest technology 
if at all possible to those rural areas, so if we continue to 
dilute this fund, you know, what worries me is we are going to 
have--we are just not going to be able to provide that service. 
And the incumbent carrier tends to be the one that is trying to 
stay ahead, trying to continue to provide that service, and we 
keep having more and more ETCs.
    In fact, you know, is there a surge, are we continuing to 
see a growing number of designations? And if we continue to 
dilute that, are we ever going to get that technology that you 
stated, you know, the best and new technology for small 
business to be able to compete on a global market?
    Ms. Abernathy. Well, you know, it is not clear that in 
every instance you do not want an ETC, because in some 
instances they are coming to the table with new technology, 
cheaper technology and deployed very effectively.
    The real question is for rural America where you are 
subsidizing the competition, in other words, you are using the 
high-cost fund to bring down the cost because it is so high 
cost, how many of those folks are you going to be willing to 
subsidize? How much competition is enough subsidized 
competition?
    Because I think you are right, it cannot be that five or 
six different companies can come to a single location and get 
subsidized because we know that that will cause the downfall of 
the fund. It is just too much stress on the funding of USF.
    So again, what we are looking at in the ETC context is what 
is the right balance. Competition in rural America, even where 
it requires subsidies, is part of the statutory act. It says we 
will promote competition in rural America. But what we need to 
make sure is are we managing that in a way that the money that 
is being spent by the new ETCs is going back into the 
infrastructure for that community; that we are not funding, 
maybe we do not want to be funding multiple lines, maybe we 
want to be only funding a single line; and giving greater 
guidance about when competition is in the public interest for a 
community or not.
    I think all those are very important questions that we have 
got to address so that rural America does see all the new 
technology, but at the same time it does not put such a great 
stress on the fund that the whole basis for how we deliver 
service across the U.S. starts to become endangered.
    Chairman Graves. I will look forward to the 
recommendations. Thank you, Commissioner. I appreciate it.
    And I also want to welcome Congresswoman Bordallo to the 
panel today. She services on the Small Business Committee in 
general. She is our delegate from Guam to the Congress, and she 
has an opening statement. I appreciate you being mere, and 
welcome.
    Ms. Bordallo. Thank you very much, Mr. Chairman, for 
allowing me to be a guest, and of course, to our ranking 
member, Frank Ballance, and to the other members of the 
Committee, and my statement would be actually geared to you, 
Ms. Abernathy, with the FCC.
    I do have a longer statement, Mr. Chairman, if I could have 
unanimous consent.
    Chairman Graves. Absolutely, and I do want to tell everyone 
too that everyone's statement, witnesses, and members, their 
statements will be placed in the record in their entirety. So 
yes, absolutely.
    Ms. Bordallo. Thank you, Mr. Chairman.
    I would like to take the time to compliment the FCC in its 
efforts to bridge the telecommunications gap in rural and high-
cost areas. The FCC has implemented programs designed to assist 
residents in rural and high-cost areas in obtaining equitable 
technology and reasonable prices.
    As the Chairman stated, I am the representative from Guam, 
so hailing from a designated rural and high-cost area I can 
attest to the virtues of this program that has helped small 
businesses to compete in the telecommunications market and 
offer technology comparable to that in urban areas in the 
United States.
    For example, one business wireless provider on Guam used 
Universal Service Fund reimbursements to build three new cell 
sites. In addition, this same small provider plans to build ten 
new cell sites that would give better access to the entire 
Island of Guam. And furthermore, the provider is now offering 
special low-cost rates through the Lifeline program.
    So the USF has been critical to helping telecommunication 
providers to increase competition and provide equitable 
technology in rural and high cost areas. Congress should ensure 
that the USF is maintained in changing telecommunications 
environment.
    The USF brings equity for callers everywhere. 
Unfortunately, when it comes to wireless calling Guam is denied 
that equity.
    Section 254 of the Telecommunications Act of 1996 
stipulates that the FCC should adopt rules to require that the 
rates charged by providers of interexchange telecommunication 
services to subscribers in rural and high-cost areas shall be 
no higher than the rates charged by each such provider to its 
subscribers in urban areas.
    Furthermore, Section 254 states, ``Such rules shall also 
require that a provider of interstate, interexchange 
telecommunication services shall provide such services to its 
subscribers in each state at rates no higher than the rates 
charged to it subscribers in any other state.''
    It appears clear that the congressional intent of this 
statute was to create equitable rates for call originating from 
any point in the United States to any point in the United 
States.
    Furthermore, under the Telecommunications Act of 1996, the 
term ``state'' is generally defined to include the District of 
Columbia, and the territories, and the possessions. In fact, 
the FCC ruled that these provisions in Section 254 should apply 
to commercial, mobile, radio services, CMRS, which includes 
cellular and PCS wireless service.
    Unfortunately, the FCC decision was challenged in court on 
the basis that wireless communication does not meet the 
definition of a telephone exchange service. Thus, it is still 
not clear whether these important consumer protections in 
Section 254 apply to wireless customers. This has repercussions 
for Guam.
    Two major service providers to Guam have proposed 
increasing rates between the continental United States and the 
territories to make it an international call. The apparent 
difference of the definition of telephone exchange service has 
allowed for a loophole to exist, which could impose 
unreasonable costs on rural and high-cost territories such as 
Guam.
    So it is important that we review these provisions in the 
Telecommunications Act of 1996 to ensure that customers in 
rural and high-cost areas have access to the same technology at 
the same prices as their urban counterparts. It seems clear to 
me that Congress had intended for the consumer price protection 
measures embedded in Section 254 to apply to wireless, and it 
is clear that the FCC has interpreted it as such. So I look to 
the panel for guidance on this issue.
    And basically I would like to wrap it up, it is not fair 
that Guam and the territories be denied equal call rates in 
Section 254 just because of confusion over the definition of 
telecommunications and wireless. So this issue I am looking 
forward to be fixed, and I am looking for your guidance in 
this.
    Thank you, Mr. Chairman.
    Chairman Graves. Thank you very much. We appreciate it very 
much you coming in today, Ms. Abernathy. Thank you very much.
    Ms. Abernathy. Thank you. And again, we will be touch with 
your office.
    Ms. Bordallo. Thank you.
    Chairman Graves. We will go ahead and set our second panel, 
so if those folks want to go ahead and come forward, and we 
will set it up.
    I want to thank our second panel for being here, and I will 
run down through our panelists, and Ms. Capito is going to 
introduce one of our panelists. But our first one today is Bob 
Williams, who is the owner of the Oregon Farmers Mutual 
Telephone Company in Oregon, Missouri, and I appreciate you 
coming all the way out here for that.
    Also, Dr. Brian Staihr, who is a senior regulatory 
economist with Sprint; Michael Balhoff, who is a managing 
director of telecommunications research at Legg Mason; and 
Glenn Brown, President of McLean & Brown.
    We were not able to get, evidently make contact with Mr. 
Gregg who was supposed to be here today, but I apologize for 
that, but I will now turn it over to Ms. Capito for her 
introduction.
    Ms. Capito. Thank you. I just want to extend a very warm 
welcome to one of my fellow West Virginians, and one who is in 
absentia but maybe he will come while we are here. It always 
gives me great pleasure to have mountaineers here. Tom Attar is 
the vice president for corporate development for Highland 
Cellular. He has ever eight years of experience in this field 
and has developed a very successful growth plan that has helped 
to transform Highland's business. So welcome.
    Mr. Billy Jack Gregg, who is not here, unfortunately, but 
maybe will be later, is the director--but I know his statement 
will be very--he is a long-time consumer advocate in the State 
of West Virginia, and very well known in his field. He is the 
director of the West Virginia Consumer Advocate Division of the 
Public Service Commission (PSC), yes. His division is 
responsible for representing our state's utility rate payers in 
all state and federal proceedings. He is also a former member 
of the board of directors of the universal service 
administrative company, and currently serves on the Federal-
State Joint Board of Universal Service.
    Welcome. Thank you.
    Chairman Graves. I will now call on our first panelist, 
again, Bob Williams, who is a friend of mine from Oregon 
Farmers Mutual Telephone Company there in Oregon, Missouri. And 
you are also, I did not realize this, but a member of the 
Organization for the Promotion and Advancement of Small 
Telecommunications Companies.
    I appreciate your being here, Bob. Bob is one of the first 
people that brought this attention to me, and we kind of 
started looking into it from that point, and I appreciate you 
being here and coming out.
    Mr. Williams. Thank you, Mr. Chairman.
    Chairman Graves. I might too real quick explain the lights, 
the way those work for those of you that may not know. There is 
five minutes on each testimony, green, and I think when there 
is one minute left it turns yellow, and then red. We want to 
stay as close to those as possible because we will have a vote 
coming up in about an hour. But I mean, if you run over, I am 
not going to cut you off or anything like that, but I 
appreciate your being here.
    Bob, go ahead.

STATEMENT OF ROBERT WILLIAMS, PRESIDENT, OREGON FARMERS MUTUAL 
TELEPHONE COMPANY, ON BEHALF OF THE NATIONAL TELECOMMUNICATIONS 
COOPERATIVE ASSOCIATION AND THE ORGANIZATION FOR THE PROMOTION 
     AND ADVANCEMENT OF SMALL TELECOMMUNICATIONS COMPANIES

    Mr. Williams. Thank you, Congressman. Chairman Graves, 
members of the Subcommittee, my name is Bob Williams, and I am 
the president of Oregon Farmers Mutual Telephone Company, which 
is a family-owned, directed, and managed rural local exchange 
carrier located in Oregon, Missouri. We are a true small 
company serving approximately 165 square miles of territory and 
1,000 customers.
    Mr. Chairman, I greatly appreciate this opportunity to 
discuss the future of the rural telecommunications, and the 
future of the federal Universal Service Fund. On behalf of my 
fellow small businesses in your district and throughout 
Missouri, thank you for helping small telecommunication 
providers communicate our views about regulatory decisions that 
threaten the sustainability of the USF and the ability of rural 
consumers to remain connected to the network.
    I am very pleased today to testify on behalf of the 
National Telecommunications Cooperative Association and the 
Organization for the Promotion and Advancement of Small 
Telecommunications Companies.
    Collectively, these national trade organizations represent 
hundreds of locally owned small, rural telecommunications 
companies and cooperatives nationwide.
    The high-cost universal service program has been put at 
great risk largely due to ill-advised decisions made by federal 
and state regulators governing eligibility for high-cost 
support.
    As you know, the Federal-State Joint Board on universal 
service is currently reviewing whether to recommend that the 
FCC adopt more stringent requirements for the competitive 
eligible telecommunication carrier designation process. For the 
sake of hundreds of small business and millions of consumers 
nationwide, I strongly urge this Committee to support such 
action by the FCC.
    As a small business owner and consumer, I fear that absent 
the adoption of federal CETC guidelines and principles for use 
by regulators the Universal Service Fund will continue to grown 
at an unsustainable level.
    This means that rural subscribers will lose. Your 
constituents, including many of our friends and neighbors in 
Missouri, may no longer have access to the affordable and 
reasonably comparable services and rates that are called for in 
the Telecommunications Act of 1996.
    In recent years, the number of CETC study areas and the 
support received by CETCs have skyrocketed. The total amount of 
support going to CETCs has increased from $3.1 million in 2000, 
to more than $250 million by the end of this year. Changes to 
the CETC designation process are desperately needed to ensure 
the long-term sustainability of the USF.
    Mr. Chairman, a substantial number of the decisions on ETC 
applications for rural service areas have placed an 
overemphasis on the benefits of--the perceived benefits of 
competition, and have equated the introduction of financially 
supported competition to serving the public interest. Far less 
attention has been paid to ensuring that all consumers in the 
area will retain and gain access to affordable, high-quality 
services, including advance services that are reasonably 
comparable to the services and rates offered in urban areas.
    Simply put, these regulatory decision have overlooked or 
ignored the often significant costs and detriment to rural 
consumers that Congress recognized could result from 
financially supporting competition in rural service areas. 
Notably, FCC Commissioners Kevin Martin and Jonathan Adelstein 
have expressed similar views.
    Mr. Chairman, I am pleased that both NTCA and OPASTCO have 
developed recommendations to strengthen the public interest 
standard governing the CETC designation process. NTCA has 
proposed a seven-point public interest test for evaluation of 
the ETC designation in rural telco service areas.
    The NTCA test would require regulators to evaluate ETC 
designations in rural telco service areas based on more 
thoughtful criteria. This includes whether the carriers 
requesting ETC designation is willing to demonstrate its cost 
to provide universal service to consumers living in rural ILEC 
service territory.
    Also, states would have to consider whether the potential 
benefits of a CETC designation outweigh the ultimate burden on 
consumers that will occur through the growth and added 
Universal Service Funds.
    I have also worked very hard within OPASTCO to develop an 
industry white paper entitled ``The Universal Service, a 
Congressional Mandate at Risk.'' And this is that paper, I have 
a copy of it here.
    This paper recommends that the FCC should adopt universal 
service public interest principles, qualifications, and 
requirements to guide state commissions in their consideration 
of ETC applications for rural telephone companies service 
areas.
    Among its recommendations the OPASTCO paper recommends that 
state commissions and the FCC require that any service quality 
standards, reporting requirements, and customer billing 
requirement should be applied equally to all ETCs in the state. 
Furthermore, a requesting carrier must demonstrate its ability 
and willingness to provide all of the services supported by the 
high-cost program throughout the incumbent's entire service 
area.
    Both NTCA and OPASTCO firmly believe that regulators should 
ensure that high-cost support mechanisms will not be used to 
incent uneconomic competition in the area served by rural 
telephone companies. Above all else, regulators should treat 
the USF as a scarce national resource that must be carefully 
managed to serve the public interest.
    Mr. Chairman, in conclusion, the perfunctory designation of 
CETCs by various state commission and the FCC does not take 
into consideration the potential cost of such decisions to 
consumers, the ultimate contributors to the USF. It is 
imperative that the House of Representatives support the 
adoption of additional standards that will guide regulators 
throughout the ETC designation process.
    Thank you.
    [Mr. Williams' statement may be found in the appendix.]
    Chairman Graves. Thanks, Mr. Williams.
    We are now going to hear from Tom Attar who Ms. Capito 
introduced earlier, but representing the Rural Cellular 
Association.
    Thank you, Tom for being here. I appreciate it.

STATEMENT OF TOM ATTAR OF HIGHLAND CELLULAR, INC., ON BEHALF OF 
                 THE RURAL CELLULAR ASSOCIATION

    Mr. Attar. Thanks for this opportunity, Mr. Chairman, 
members of the Subcommittee, thanks for the opportunity to 
testify on behalf of the Rural Cellular Association.
    The RCA represents a group of close to 100 locally focused 
operators who provide wireless services to 14 million people in 
135 rural and small metropolitan markets. Highland Cellular is 
a locally-owned and operated cellular telephone company in 
southern West Virginia, and Virginia. We provide service to 
approximately 40,000 customers, and are licensed to provide 
service to an area covering eight counties, with a total 
population of 300,000 people.
    As one of the wireless companies that has recently started 
receiving USF support, we hope to provide you with our 
perspective on how high-cost funds are improving and will 
continue to improve the rural communities that Highland serves 
in West Virginia.
    In addition, I would like to review some of the commonly 
discussed policy issues as they relate to wireless company use 
of USF monies.
    Our experience in southern West Virginia tells us that 
there is a critical need for both competition and wireless 
coverage within small towns. Access to the USF helps us 
accomplish both. In our case, without high-cost support 
Highland would not find it economically feasible to expand its 
network into the most rural parts of southern West Virginia. 
While you may think that wireless competition within our 
markets would encourage this type of investment, the fact is 
that competition is focused on the larger towns where USF is 
not available.
    Today, we are using these funds to plan and construct five 
to seven additional sites in rural communities which do not 
have any wireless coverage. This is extremely significant when 
you consider that we have built 50 sites over the past 12 
years. New wireless coverage enables crucial wireless services 
such as public access to 911 and fire department use of 
wireless.
    One other commonly overlooked area is the impact of 
competition on the service options available to low-income 
consumers. We have identified low participation in the Lifeline 
program in West Virginia. We hope to change this trend with an 
aggressive Lifeline program which will allow eligible 
subscribers to access wireless services for less than $5 per 
month. We are within weeks of bringing this plan before the 
West Virginia State PSC.
    With regard to policy issues, I would like to touch on a 
few key issues.
    First, high-cost support advances universal service and 
drives critical infrastructure development in rural areas.
    Second, high-cost support will bring economic development 
to rural area. In our experience, more and more companies and 
people today rely on wireless phones to improve efficiencies 
and manage their businesses, especially in rural areas where 
the distances between job sites can be large, and in the case 
of farms and ranches, the job site itself can be quite large.
    At Highland, we believe that new cell sites will result in 
rural communities being better positioned to attract and keep 
business. We urge the Congress and the FCC to recognize the 
substantial economic benefits that can accrue to rural America 
as a result of the provision of high-cost support to wireless 
carriers.
    Third, wireless carriers pay into the fund and are entitled 
to draw from it.
    Fourth, Congress should ensure that the FCC continues to 
enforce the 1996 act and administer all federal ETC rules in a 
competitively neutral manner.
    We believe that Congress gave clear direction here, and if 
it wanted a lengthy list of eligibility criteria, it would have 
specified them in the act, or directed the FCC to do so. It is 
not competitively neutral to make ETC designations easy for 
ILECs and difficult for others.
    Fifth, portability of support is essential to promoting 
competition and universal service.
    Sixth, the high-cost fund is not exploding as a result of 
CETC designations.
    And seventh, fund growth must be managed in a competitively 
neutral fashion. According to CTIA, over the past three years 
high-cost support to CETCs increased by approximately $175 
million. During that same period high-cost support to rural 
ILECs increased by approximately $2.1 billion. It is my 
understanding that in 2001, rural ILECs successfully lobbied 
the FCC to provide them with a major increase in high-cost 
funding through 2006.
    In conclusion we can think of few achievable goals more 
important than driving rural investment in areas that need this 
critical infrastructure. We request the understanding of this 
Subcommittee that high-cost support to wireless carriers allows 
improvements to infrastructure. Better infrastructure is a key 
component to attracting small business and capital investment 
in rural communities. Business development provides jobs, jobs 
promote economic stability, and economic growth provides 
quality of life for rural residents and helps keep young people 
interested in remaining in their communities.
    We urge the members of this Subcommittee to support the 
continuation of the current USF system that allows wireless 
carriers to qualify for and draw high-cost support in a 
competitively neutral fashion, and in a pro-competitive manner.
    We appreciate the fact that when Congress enacted the 
Telecommunications Act of 1996 it had the foresight to provide 
for competition in rural areas. Allowing wireless carriers to 
receive USF support is central to that goal.
    Thank you for this opportunity to testify.
    [Mr. Attar's statement may be found in the appendix.]
    Chairman Graves. Thank you, Mr. Attar, appreciate it.
    Next is Brian Staihr, who is the senior research economist 
with Spring. I appreciate you being here. We just met, and 
thank you for coming over.

  STATEMENT OF BRIAN K. STAIHR, SENIOR REGULATORY ECONOMIST, 
                       SPRINT CORPORATION

    Mr. Staihr. Thank you very much.
    As the Chairman said, I am Brian Staihr. I am an economist 
and I work for Sprint.
    Now, Sprint has kind of a unique position in this industry. 
We are a long distance telephone company. We are also a local 
company. We are a wireless company. We are also a wireline 
company. We are an incumbent local carriers. We are a 
competitive local carrier. We are the local telephone company 
in some of the most rural parts of this country; places like 
Pickering, Missouri; places like Norline in North Carolina; 
places like Possum Kingdom, Texas, Sprint is the local 
telephone company.
    What this means is we draw money from the high-cost fund, 
but because we are all these other things too, we pay in a lot 
of money. We pay in a lot more than we draw out. We pay in 
about a half a billion dollars a year.
    What this also means is we can understand everybody's 
position on this panel because we are all of these things. And 
when we take these competing interests in Sprint and balance 
them, just like policymakers have to do, we come up with four 
conclusions regarding sustainability of this fund.
    First, sustainability is going to be affected by who can 
draw out and what they can draw out for, and who pays in and 
what those payments are based on.
    Second, competition and universal service cannot be 
considered competing goals. The Fifth Circuit Court has 
dictated that the FCC must see to it that one is not sacrificed 
in the name of the other.
    Third, the contribution mechanism which Commissioner 
Abernathy talked about is broken, it has to be fixed, but it 
has to be fixed in a competitively neutral way.
    Fourth, and more importantly for this proceeding here, in 
terms of who can receive from the fund, people are worried 
about the fund growth. Understandably. If we need to do 
something about that, we need to do something about that in a 
competitively neutral way.
    Fixing the contribution side is easy. The FCC has a 
proposal in front of it to base contributions on telephone 
numbers. It makes great sense. It is competitively neutral. It 
is administratively workable. Absolutely, they should do it.
    Fixing the receiving side is more difficult. Who can 
withdraw from this fund and what for? Right now everybody who 
meets the criteria for being an ETC can get money. Wireline 
carriers, wireless carriers, incumbent carriers, competitive 
carriers, if they meet the criteria, they can get money. What 
that means is right now it is competitively neutral.
    But the fund is growing. People are concerned we need to 
find a way to limit the growth. Unfortunately, some of the 
suggestions with regard to how we should limit that growth have 
the effect of making this not competitively neutral, and have 
the effect of essentially excluding wireless carriers.
    Now, Sprint, as I said, pays a lot of money into this fund. 
You would think we are interested in controlling the fund size. 
I guarantee you we are, but in a way that is competitively 
neutral. And some of the suggestions that are floating around 
there simply are not.
    There is a suggestion to base things on primary lines. 
First off, who knows what a primary line is? As a person who 
works for a telephone company, it is not administratively 
feasible, it is not technologically neutral, and there are 
questions of whether it is consistent with the act.
    There are other proposals that say let us limit the funding 
just to the incumbent because the incumbent has the network 
there. Well, that is fine if you want to relegate large 
portions of rural America to a monopoly environment for telecom 
services.
    Personally, Sprint thinks that people who live in rural 
America should have the same choices that people in urban areas 
have.
    There are alternatives. There are alternatives to limiting 
the growth of the fund that are not competitively un- or non-
neutral. There are things like capping study area totals. There 
are things of looking at calculating costs in different ways. 
To this point, I am not sure the FCC has invested these 
alternatives as well as they should have.
    Sprint's concern is competitive neutrality. Sprint's 
concern is that we limit the size of the fund, but we do it in 
a way so that rural residents are not disadvantaged, that they 
have the same choices, and the same benefits from competition 
that their urban counterparts have.
    With that I will stop, and I appreciate being able to be 
here.
    [Mr. Staihr's statement may be found in the appendix.]
    Chairman Graves. Thank you very much, Brian. I appreciate 
it.
    Next is Michael Balhoff who is the managing director of 
telecommunications research with Legg Mason. I appreciate you 
being here. Thank you for testifying.

 STATEMENT OF MICHAEL J. BALHOFF, CFA, LEGG MASON WOOD WALKER, 
                              INC.

    Mr. Balhoff. Thank you very much, Chairman Graves, and 
Ranking Member Ballance, and members of the Subcommittee. Good 
morning.
    I am very privileged to have the opportunity to be here. 
The real reason I am here is because we have published more 
extensively on rural issues and your universal service issues 
than any other financial analysts that are out there on the 
street, or at least that is my opinion.
    I do head equity research at Legg Mason, and I am a 
financial analyst covering the incumbent telephone companies, 
including the rural carriers. There are various ways I could 
have offered my testimony, but I would like to limit my 
testimony not to get into issues of policy as to which CETCs 
should be approved and what the various criteria and so on 
should be, but I want to give you the benefit of the expertise 
that I think that we have, or at least the experience that we 
have, and that is that we talk to fidelity funds, and banks, 
and pension plans, and we know what the interests are of the 
financial community.
    They want predictability and stability within this area, 
whether it is for wireless carriers or for incumbent carriers 
or whatever, because that is the way in which they can make 
money for their clients who are you and your constituents.
    So what I am attempting to do here is to parse my remarks 
to give you some insight into what the financial community 
thinks about this. If you want my opinions, I am happy to 
respond in the question period on that.
    Basically, there appear to be three problems that the 
investment community is worried about. One of them is 
relatively straightforward, it has already been articulated; 
that is, that the Universal Service Fund requirements continue 
to go up, and the revenues from which they are drawn continue 
to shrink year over year because of what is going on in long 
distance; that is, the so-called contribution methodology 
difficulty.
    In many ways, I do not think that there really is an issue 
there. I agree with Mr. Staihr that that can be resolved 
ultimately, and can be resolved in a way that is constructive 
for the various constituents that are out there.
    Does that mean that it is not complex and thorny problem? 
No. There are real issues that people are going to need to deal 
with in the contribution system, especially whether or not you 
have cable providers for their high-speed data or voice-over 
IP, provide universal service monies into the fund, so-called 
taxing the Internet. But my constituencies by and large do not 
really care that much about it. They want to know what the 
rules are and they want them to be predictable.
    The second issue is the one that you have explicitly raised 
here, which is the CETC question. And in this particular case, 
I will tell you that the financial community's concern is that 
there is an arbitrage that is being created, and the difficulty 
is that it really is not tied to real costs and real 
businesses.
    So when they look at this particular situation right now 
they can analyze the rural telephone companies and say that the 
legacy system has basically said here is what the costs are 
that are fairly carefully well analyzed, and here are 
comparable rates and comparable services that we have talked 
about, and therefore the government has chosen to make up the 
difference in the universal service monies that are out there.
    So that is the way in which the system has worked and it is 
analyzable by the investment community.
    The CETCs, however, have been approved without a real 
regular criteria that goes from state to state, and actually it 
is not cost-based, and that is extremely troublesome to my 
constituents, because they are saying will this be there, will 
it not be there, how can it continue to grow at this particular 
rate.
    So my constituencies candidly are saying is there a system 
that we can really invest in and believe that it will be there 
next year and the year after and so on, and among others, how 
does it affect the incumbents in whom we have invested in the 
past. So portable universal service issues, the CETC question 
is extremely important.
    There is a third issue that has not really been raised very 
satisfactorily here today, and in some ways it is more 
complicated. I am hesitant to bring it up. It is in my written 
testimony. But it is about the subject of intercarrier 
compensation, which is access charges.
    I talked to a lot of the regional Bell companies and they 
want access charges to be changed because they see the Internet 
and voice-over IP not being taxed, not having access charges 
associated with it. And the Bell companies want to push to 
eliminate access charges so that the arbitrage between one type 
of business that is offering the same types of service looks 
like the others. They want this arbitrage eliminated, and so 
the Bell companies are pushing hard.
    The problem is that access charges in urban areas are very 
different from what they are in rural areas. So in urban areas 
that are about a half a penny per minute, and in rural areas 
the federal numbers are 2.2 cents, and the intrastate numbers 
are even higher than that.
    Can we bill the customer for the half-cent? Yes, we can in 
the urban markets. Can we bill the customer for the larger 
amounts in the rural areas? The answer is probably not, because 
the bill would go through the roof. In certain extreme 
instances, it could go as high as an additional $170 per month.
    So the real question that people are beginning to ask is if 
we begin to go through this necessary change in this new IP 
world, how in the world are we going to deal with the CETC 
question where we are automatically doling out money to 
incumbents and also to wireless carriers. Will the fund grow at 
a meteoric rate?
    In my testimony what I basically say to you is that the 
financial community believes that it has got a dog in this 
fight, and that is, its capital is at work here. It wants to be 
part of the discussion because it wants to believe that there 
is a predictable regime that is here that is cost-based that 
makes sense, and that provides for a fundamental business 
environment.
    I basically say establish the reform based upon real cost. 
Do not disassociate them from costs. Make the environment 
predictable so that the financial community can understand what 
it is dealing with, and ultimately draw us into the discussion 
because we care about the capital investment that all of you 
care about.
    Mr. Ballance, you were very articulate in talking about the 
small businesses, and the importance of those small businesses. 
We want to make capital available to those small businesses, 
but we cannot do it if it is not a predictable environment.
    I thank you for the opportunity to make this presentation, 
and I look forward to working with you in the future.
    [Mr. Balhoff's statement may be found in the appendix.]
    Chairman Graves. Thank you, Mr. Balhoff.
    We are going to recess for 15 minutes. We have got final 
passage on H.J.R. 69 on the floor right now.
    Mr. Brown, we will be back. Give us 15 minutes for one 
vote, run over real quick, and then we will be right back. But 
we will recess for just a few minutes.
    [Recess.]
    Chairman Graves. Thanks everybody for your patience. I 
appreciate it.
    Next, we are going to have Glenn Brown who is president of 
McLean & Brown. Mr. Brown, I appreciate you being here today. 
Thanks for your testimony.

     STATEMENT OF GLENN H. BROWN, PRESIDENT, MCLEAN & BROWN

    Mr. Brown. Thank you very much, Chairman Graves, and 
Ranking Member Ballance.
    My name is Glenn Brown, and I am president of McLean & 
Brown, which is a telecommunications research and consulting 
company specializing in universal service and rural telephony 
issues. And I want to commend you for having this hearing. I 
think this is a critical topic, and I think it is very 
important that Congress weigh in on it, particularly as to the 
intent of the 1996 act.
    The title of this hearing is ``The Future of Rural 
Telecommunications: Is the Universal Service Fund 
Sustainable?'' And as I detail in my written testimony, I 
believe, and I have been looking at this for many years, that 
unless something is done and done soon to restore some 
rationality to the process indeed the fund as we know it will 
not be sustainable, and the losers are going to be the small 
businesses and the consumers in rural America.
    In January of 2002, my firm published a paper titled ``The 
Coming Trade Wreck in Universal Service Funding: Why is it 
coming--and how do we avoid it?''
    And what we saw back then is what others have been talking 
about in this hearing. You have rapidly increasing demands on a 
fund that is funded by a declining revenue source, and train 
wreck is indeed coming.
    One of the other things, and the reason why I think this 
hearing is so important is I think there is imbalance in the 
way the current program is administered. I do not think there 
is a proper balancing of benefits and costs, and I really do 
not think that the public interest test is applied to the right 
question.
    What we see a lot is that decisions get made this way. 
Someone comes in an applies for ETC status. They say we 
complete, competition is in the public interest, and therefore 
approving me for ETC status is in the public interest. What is 
missing here, however, is what are the goals we are trying to 
get for spending this public money, because we are talking 
about a scarce public resource here. And really, part of the 
problem is twofold.
    First of all, there really are no requirements that you 
expand out to serve the unserved areas, and most of rural 
America the towns where people are clustered are relatively 
economical to serve. It is out in the hinterlands where it gets 
expensive, but someone can apply, and they probably have a 
customer base in that town, they get funding for that customer 
base, and there is no requirement to go out and serve. So, in 
essence, they get funds.
    And the second problem is that the funding is based upon 
the incumbent's costs that does the serve the whole area. So if 
you only stay in that relatively low-cost area, you get support 
based upon the cost of somebody that does without necessarily 
having to.
    So I think that is a prescription for people--I know there 
are companies such as Mr. Attar's company, and situations in 
Guam where there are areas that are not served, and where 
companies are coming in and saying we are going to serve this 
area if you give us the money.
    I think what has to be done--I have made four 
recommendations in my written testimony.
    Number one is we need to have much more focus on what are 
the goals that we are trying to accomplish with the funding. If 
you go back historically, the Universal Service Fund as we know 
it had its genesis in driving wireline telephony throughout 
rural America so everyone had a telephone, and the current 
system has been very successful in that respect.
    I think that probably an equally valid public goal is to 
get wireless ubiquity. In other words, you have everyone 
everywhere has access to wireless service, but the way we have 
got the funds set up now does not accomplish that, because 
there is no requirement. You do not say if you give me this 
money, I will serve this area. You get the money for what you 
are doing today with the hope that you will serve it, and I 
think that is part of the problem.
    The second thing I would recommend is that there be 
accountability. Wireless companies are not regulated. Mr. 
Williams talked about some recommendations that OPASTCO has 
made. I will endorse those. I think there needs to be assurance 
that they are using the money for the purpose it was intended; 
that service quality, service ordering, and that is well taken 
care of.
    Third, I think that the funding ought to be based upon the 
reasonable costs of achieving a defined public objective, not 
necessarily--and if companies do not serve the same service 
areas, if they do not provide the same services, if they do not 
have the same data rates, if they do not have the same disaster 
survivability, they probably ought not get the same funding. 
The funding ought to be based on the cost for determining the 
public goal.
    And then finally, to address this problem of the declining 
interstate revenue, I would recommend that Congress do what is 
necessary to clarify that the fund can be assessed on both 
intrastate and interstate revenues.
    Thank you, Mr. Chairman. I will look forward to your 
questions.
    [Mr. Brown's statement may be found in the appendix.]
    Chairman Graves. I want to follow up on what you just 
brought up, and for that matter, anybody can answer this 
question, but one of the things that we do continue to hear 
about is there is, you know, companies applying for ETC are not 
regulated the same as maybe the incumbent carrier, or by the 
same token do not have the same standards, or do not have to 
follow the same standards.
    Can you elaborate on that a little bit more? Give me a 
specific or two.
    Mr. Brown. Well, yes, sir, a couple of things.
    First of all, I think another misconception is that 
wireless and wireline are direct competitors. I think for most 
customers they are complementary. They serve different needs. 
Customers need mobility. The wireless offers a bigger calling 
area. Wireline has advantages of data speeds that is available 
ubiquitously now, and their costs are different.
    So to say that somebody who has an obligation to serve a 
large area that someone else that can serve a small areas gets 
the same funding, I think that is problematic.
    And the other thing that I think is the real problem is the 
system lacks incentives to do what I think is the ultimate goal 
we are trying to achieve, which is to get ubiquity of different 
technologies: wireline, wireless. So let us define the goal, 
and then let us have the regulatory community find ways to 
incent people to achieve that goal.
    In many communities, we see one carrier get ETC status. 
There are four or five other competing wireless carriers. They 
all come in and get money. But we have lost sight of what is 
the goal we are trying to achieve, so refocusing that public 
interest standard to be goal focused, I think, would go a long 
way.
    Chairman Graves. Dr. Staihr.
    Mr. Staihr. We need to be clear about two things. There are 
criteria established to be an ETC, and every ETC has to meet it 
whether it is wireless, wireline, the incumbent or a 
competitive wireline carrier, with regard to voice grade access 
to the network, E-911, discounts for low-income customers, 
these criteria are there.
    It just happens that incumbent telephone companies are also 
required to do some other things. It is not that the ETC 
criteria is different for a wireless or wireline carrier. That 
is not correct. They are the same. It is just that incumbents, 
because they have historically been government-supported 
monopolies, have additional requirements. So we need to make a 
distinction between the two.
    And then just very quickly to address the second point in 
terms of whether wireless and wireline are complements or 
substitutes. A couple of years ago I might have agreed with Mr. 
Brown, but lately we have been finding that the number of 
people cutting the cord, getting rid of their wireline phone, 
just keeping their wireless, not only is it growing, but it is 
growing faster in rural areas than it is in urban areas. We 
were shocked to find that out, but it is true.
    So apparently the advantages of mobility that are there for 
rural residents are in some cases outweighing the advantages of 
the fixed wireline service. So in that case I would not 
consider them complements at all but absolute substitutes.
    Mr. Williams. I would just like to comment on what he said 
about the criteria being the same for the wireline and the 
wireless.
    One of the prices I pay for being able to draw from that 
fund is I am regulated, and the regulator requires me to do 
certain things to continue to draw that fund. I am reviewed 
yearly by the Missouri Public Service Commission. Also, while 
those requirements in the act are spelled out, we do not think, 
or I do not think personally that they are stringent enough, 
and I think that there needs to be some more accountability out 
there. But having said that I think what has happened is the 
state commissions, as in the designation process, have in some 
cases just said, as Mr. Brown said, this is competition, 
competition is good, and by the way, the feds are paying the 
bill. The states have no skin in the game.
    And when they designate an ETC carrier in a lot of places 
states think we are bringing money into our state from the 
federal government, or from the federal fund. It is not--you 
know, we can argue all day whether it is a tax or whether it is 
a surcharge. But in the end they look at it as it is free money 
coming into our state, and that is just a comment that I would 
make on that.
    Chairman Graves. Mr. Attar.
    Mr. Attar. A couple of comments on that.
    First, as it relates to regulation, our state, the State of 
West Virginia, both the public service commission and the 
consumer advocate division has been very proactive in making 
sure that the monies are going to consumers in rural areas 
where there is a lack of coverage.
    The state legislature is reviewing coverage within the 
state, and there is a huge push within the state to have more 
coverage, so that body is going to be making sure that the 
monies that come in go out to the people who do not currently 
have service.
    Another comment as it relates to cutting the cord so to 
speak, you know, we are finding people in the larger towns 
where we do not have access to universal service, that they are 
doing that. We are offering an unlimited rate plan that 
encourages that. We are not able to offer that product to the 
folks that live in the very rural areas.
    So the incentive for us to go out there and build that 
coverage is we have got competition, and expanding our network 
into those areas and building a high-quality network allows us 
to more effectively compete with the other four or five 
carriers in our market.
    So as it relates to regulation, again, I think the force we 
have regulating our behavior is the competition we face. I 
think some of the other folks do not have that same force 
against them, so there is a little bit difference in 
circumstance.
    Chairman Graves. We keep hearing about competition, but, 
you know, we do seem to have this differentiation when it comes 
to regulation or differences in regulation.
    Mr. Brown. And it differs between states, Mr. Chairman. I 
am sorry my friend Billy Jack Gregg cannot be here, because I 
respect him greatly, and I know he has done a lot to ensure 
that the money is used wisely, and managed, I think somebody 
else on the panel said a scarce national resource.
    I can tell you though my business takes me all over the 
country, and I wish other states were as rigorous as West 
Virginia has been. I can tell you many are not.
    Chairman Graves. Mr. Ballance.
    Mr. Ballance. Thank you.
    Mr. Brown, I want to just follow up a bit. How does it 
happen? You say that less than thorough consideration of the 
public interest impact, and in many cases carriers are 
receiving scarce high-cost dollars for primarily serving low-
cost customers. How is that occurring if we have regulators who 
the application is being made to, and it is being reviewed?
    Mr. Brown. Right. First of all, Mr. Ballance, I would say 
that I think the regulators have tried to do their job well. I 
think they have been focusing on the wrong issue. They are 
saying the issue is competition. There is competition 
throughout rural America. What they are not looking at is a 
balancing--in my opinion--is a balancing of the public benefits 
that come from supporting multiple competitors against the 
public costs.
    I am aware of a number of states where commissions for the 
same service area have approved ETCs for two, three, four, and 
in some cases even more competitors in the same area without 
putting any requirements that they also build into the areas 
that currently aren't served.
    If you think of a rural community, the town where people 
are clustered, that is inexpensive to serve, and there is 
probably competition there today. Where there is not 
competition is between towns and areas that are not on 
interstate highways, and there is nothing--what we ought to be 
doing is encouraging people to build into those areas. The 
current system is not set up to do that. Under the current 
system, in many cases, companies only serve the low-cost areas, 
but receive funding as though they were.
    So that is why I came up with my four recommendations.
    Mr. Ballance. We heard from Kathleen Abernathy. What is the 
FCC's response going to be to your recommendation number four, 
that we broaden the base? How is that going to be received, in 
your opinion?
    Mr. Brown. Well, I think it will be received favorably. A 
letter was sent by the joint board members, three of whom are 
FCC commissioners, to the--I forget what, oh, I believe it went 
to Senator Burns, endorsing the concept of broadening the base.
    There is debate though. I know that Commissioner Martin, 
for example, has been advocating a telephone numbers-based 
approach. So I guess I had better not say what they would 
think. I would recommend it.
    Mr. Ballance. Does anybody else on the panel feel that 
there is adequate room to broaden the base so that we can build 
the fund or keep the fund sustained?
    Mr. Williams. I would comment, and to take a step further, 
I think Commissioner Abernathy, before she left, said that she 
did support broadening the base. I think broadening the base is 
important. I think it can help sustain the fund.
    Again, I do not think we want the fund to explode or to 
continue to grow exponentially because I think that is a recipe 
for disaster, and the train wreck that Mr. Brown referred to.
    Mr. Ballance. Mr. Attar.
    Mr. Attar. Yes, sir.
    Mr. Ballance. Do you think wireless companies are paying 
their fair share?
    Mr. Attar. You know, I am not well versed in the 
methodology per se, but I look at what we bill each customer, 
and I believe it is on a per line basis. It is over a dollar, I 
believe. I have not checked that number recently. So, you know, 
I do not know how that compares with other, the amount paid for 
line for other telecom services, but that seems a reasonable 
amount when you look at the entire wireless industry with 140 
million customers. That would be over $150 million a month.
    So I do not know if that is fair or not, but that seems 
like a pretty tidy amount of money.
    Mr. Ballance. All right.
    Mr. Balhoff. Mr. Ballance, my understanding of what occurs 
for virtually all these carriers is that they are not exactly 
accessed based upon their revenues, but they are told in the 
case of wireless that they pay 28.5 percent related to their 
revenues, because most of them have the flat rated plans, and 
you do not know what is long distance and what is local, and so 
they say 28.5 percent.
    And then that amount goes on the bill, and is simply a 
pass-through from the consumer to the Universal Service Fund, 
so it is not as if it comes out of the wireless carrier nearly 
as much as the wireless carrier is told how much they have got 
to come up with, and then they bill the consumer for that.
    Mr. Ballance. Brian.
    Mr. Staihr. If I could, first off, every carry, it is just 
a pass-through. I mean, carriers only get money from customers 
for two reasons. I mean, we do not get money from anybody else 
except investors. So a local company, a long distance company, 
a wireless company, it is a pass-through on the bill for 
everyone.
    If you are a local customer, you do not have any long 
distance, right now you pay on average somewhere between 50 and 
60 cents.
    Mr. Ballance. Okay.
    Mr. Staihr. That is because there is a little part of your 
local bill called the SLIC, subscriber line charge, and they 
call that interstate charges. And because the current fund is 
just based on interstate charges, that is what you get assessed 
on, and it is somewhere between 50 and 60 cents.
    Chairman Graves. Fifty or 60 cents per month?
    Mr. Staihr. Per month.
    Chairman Graves. Per month.
    Mr. Ballance. Per month.
    Mr. Staihr. So if an average wireless customer is paying 
over a dollar, and I am talking just a person with just local 
is paying 50 to 60 cents, we could probably say wireless is 
probably contributing their share.
    The long distance companies, because all of their reviews 
are interstate, you pay a lot more based on your long distance 
bill. And because all these companies are merging, local 
companies are now offering long distance, long distance 
companies are offering local, et cetera, it is getting harder 
and harder to tell what is an interstate revenue. That is why 
we need to broaden the base and do it in a way to where you do 
not have to make these distinctions.
    That is why Sprint likes the numbers-based plan because you 
have got a telephone number on your wireless phone, you pay. 
You have got a telephone number on your local phone, you pay, 
and you pay about a buck.
    So broadening the base, absolutely. But in terms of 
burdening the share of the burden, it is shifting, but what we 
need to do is spread it evenly.
    Mr. Ballance. Yes, sir.
    Mr. Williams. I would just like to comment on the wireless 
piece because I also manage or I am chairman of a wireless 
company partnership that we work on.
    I think when we talk about broadening the base and we talk 
about is wireless paying their fair share, the trouble, one of 
the problems we have with wireless is trying to get our hands 
around is what is interstate and what is intrastate. Like they 
said, they have the flat rate plans.
    By broadening the base to include both inter and intrastate 
revenues, we exacerbate that--we take care of that problem 
because we no longer have to decide what is interstate and what 
is intrastate.
    So I think that is, from a wireless point of view, and I am 
speaking as an ILEC, but I got my wireless hat on for a minute, 
I am saying broadening the base, including both revenues, takes 
that away, because today we have a hard time distinguishing 
what is interstate.
    Mr. Ballance. I see my light is on. I just want to ask one 
more question.
    Dr. Staihr, in rural eastern North Carolina, District 1, we 
have a lot of Sprint customers. What is it that causes you to 
penetrate in this rural area? What motivates your penetration?
    Mr. Staihr. With regard to local service where the 
incumbent were obligated to serve, okay, with regard to 
Sprint's wireless service----.
    Mr. Ballance. Yes, more wireless because we need more 
towers.
    Mr. Staihr. Right. Oh, I understand.
    To the extent that the federal Universal Service Fund 
continues to be available to wireless carriers, when we apply 
to be an ETC, we have to sign an affidavit, and it is my 
affidavit, and I say we have guaranteed that the funds we 
receive will go back to enhancing our network in North 
Carolina, or whichever state it happens to be. I have to 
testify to that.
    So this fund is one of the key drivers on whether or not we 
will be able to enhance our network in a place like eastern 
North Carolina and Warrenton, wherever.
    Mr. Ballance. Thank you.
    Mr. Balhoff. I would like to answer a question that has not 
been asked, and that is, as I listen to this discussion, I am 
struck that the constituencies that I represent would probably 
sell their stocks immediately, and try to get out of the way of 
what they consider to be a very dangerous situation, and the 
reason is because we are dealing with a bunch of the trees and 
we are not really dealing with the forest, and the trees are 
competitive, neutrality, and whether or not there are going to 
be more towers that are going to be built, and exactly who is 
the carrier of last resort, and all that kind of thing.
    The real issue, I think, out there is, is there real 
stability for businesses in high-cost region? Is there a goal, 
a set of goals that we have carefully defined? Glenn Brown has 
already pointed out the fact that we need to understand where 
it is that we are going.
    The amount of money that we are talking about for 3.5 
wireless carriers in rural regions plus the incumbent is an 
astronomically large amount of money, and that is unsustainable 
as far as I am concerned.
    The real issue is are we going to have a sustainable plan 
for supporting telecommunication services of whatever type that 
is out there so that we know where it is going and whether or 
not in fact it can be funded. And as I hear this discussion 
going on, my fear is that the political football is going to 
prove to be we are going to give a little bit to you, and we 
will give a little bit to you, and we will screw up the whole 
system, and that really is the fear of the financial community.
    The system becomes unpredictable and unsustainable and a 
mess like some of the stuff that we have come to experience in 
some of the other markets that are out there. We cannot make 
this just about political football. We have got to figure out 
what our goals are for rural regions in this particular case, 
or small businesses, and we have got to figure out whether or 
not the dollars, once we begin to extrapolate, whether it is 
going to work or not. And I think that sometimes when we fight 
over the individual issues we miss that longer term set of 
issues.
    Chairman Graves. I will kind of use that to dovetail into 
another question, which is a little bit of a shifting of gears.
    When the money comes in, when you access money from the 
Universal Service Fund, I mean, obviously originally in the 
original communications act it was to make sure that we had 
service in rural areas, that every American had communication 
service. So obviously they tapped into those funds. The 
incumbent or whoever became the incumbent uses that money to 
improve infrastructure, bring infrastructure out to those 
areas.
    Well, now, when you have got competition, you have got 
other companies applying and getting status, you know, where 
does that money go? Is there any requirement out there that 
says they have to improve their network, improve their 
infrastructure, or does that just go to the bottom line in 
their company? Is it just injected into their revenue stream? I 
mean, I am curious as to that.
    And anybody can answer.
    Mr. Brown. The act has a fairly simple requirement, that 
companies must attest annually, and that is what Dr. Staihr was 
talking about, that the money is used for the purposes for 
which it is intended.
    But this is where, you know, it stops. There is no 
definition. We want to assure that there is coverage throughout 
the territory. It needs to be invested in infrastructure, we 
know that. But where? Invested where, you know, it is low cost 
or where it is high cost?
    And I think the goal is to get ubiquity, but I do not think 
the current system is going to get us there.
    Chairman Graves. Go ahead.
    Mr. Williams. The incumbent, and I am speaking as the 
incumbent now, we are required to file a Part 69, Part 32 cost 
study every year that shows that our calculation of what we 
received from a Universal Service Fund or what we received out 
of the pools is based on what our costs are as an incumbent 
exchange carrier, and that changes from year to year.
    I will not draw the same amount of dollars from USF next 
year as I drew this year, the year after that. That is a moving 
target because, you know, the fact that by being a regulated 
company I am required to file cost data.
    And I think what we are saying is, is if there are going to 
be CETCs, they need to file some type of cost data to receive 
based on their costs. I think in some states they are required 
to make a showing where they are spending the money and where 
it is going, and in some states I do not think they are.
    So I will let me good friend Tom.
    Mr. Attar. As it relates to us, as noted earlier, we have 
just started receiving these funds, and in our receipt of ETC 
status in West Virginia it was very clear with both the public 
service commission and the consumer advocate division that they 
were going to be looking at that.
    The CAD has just recently initiated a general investigation 
into what carriers need to do in order to become an ETC, and 
what they need to file annually, similar to what the IBOCs and 
the ILECs file annually to show how they spend those dollars.
    So I think in our case the system is clearly working where 
the state regulatory body is managing and ensuring that the 
funds are spent properly.
    Mr. Staihr. And actually, I was just going to say something 
along the same lines. I think the state commissions are doing a 
much better job than you may have been led to believe with 
regard to making sure this money is targeted to where it is 
supposed to go.
    Recently in South Carolina's principal local provider in 
South Carolina, Nextel had a hearing about being an ETC, a 
wireless ETC, and they were pummelled with questions: what are 
you going to do with this money, where are you going to put 
your towers, how much are you getting, how will we know that we 
have benefitted from this process. It is not just the rubber 
stamp.
    So in my experience, in Sprint's experience, the state 
commissions are much more diligent that some might believe in 
terms of making sure this money goes to where it is needed.
    Chairman Graves. Given my experience at least in state 
government in the past too, it concerns me a little bit when 
you do have a state regulating, you know, those federal dollars 
coming in, because there tends to not be nearly as much 
oversight when they are not writing the check.
    But the problem is, again, we have got 50 states and 50 
different criteria. And Michael, you pointed out to us some 
interesting things. You are looking at it from an investor's 
standpoint. I am, obviously, looking at it a little bit 
differently too from the rural aspect.
    What concerns me is this, you know, this train wreck as Mr. 
Brown alluded to, you know, where we are headed with this 
thing, and getting to a point where we no longer have 
investment in the rural areas, and small business able to 
access, you know, high-quality communications. And we have 
already got problems in many of the rural areas now, you know, 
just with Internet service and trying to bring high-speed 
Internet in.
    You know, I understand this is a very complex issue. We are 
trying to find out more and make sure that the small business 
has the ability to compete, particularly in the rural areas, 
and that is our area of jurisdiction, you know, rural 
enterprise and technology, and it is a big concern of mine as 
we dilute this thing out.
    And it is also a concern of mine of how far we go, when is 
it going to end if we continue to draw down, you know, or add 
ETCs to this equation, and also, you know, looking at 
specifically those small businesses that operate phone 
companies out there such as the Oregon Mutual Company, and 
being able to compete because those are viable businesses in 
our rural areas.
    I appreciate everybody being here today and helping shed 
some light on this issue. We obviously have a long ways to go 
trying to sort this out, and there has obviously been a lot of 
work done in the last decade trying to sort this thing out, and 
I do not know if we will ever come to a conclusion.
    But I do know the Universal Service Fund provided a very 
important service and we just have to figure out now what the 
direction is, and where we are going to go and what the--you 
know, what we are trying to shoot for, just as Mr. Balhoff 
pointed out.
    But I want to thank everybody for being here today. The 
hearing is adjourned. Thank you.
    [Whereupon, at 12:07 p.m., the Subcommittee was adjourned.]

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