[Senate Hearing 108-996]
[From the U.S. Government Publishing Office]
S. Hrg. 108-996
THE FUTURE OF UNIVERSAL SERVICE
=======================================================================
HEARING
before the
SUBCOMMITTEE ON COMMUNICATIONS
of the
COMMITTEE ON COMMERCE,
SCIENCE, AND TRANSPORTATION
UNITED STATES SENATE
ONE HUNDRED EIGHTH CONGRESS
FIRST SESSION
__________
OCTOBER 30, 2003
__________
Printed for the use of the Committee on Commerce, Science, and Transportation
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
U.S. GOVERNMENT PUBLISHING OFFICE
20-149 PDF WASHINGTON : 2016
_________________________________________________________________________________
For sale by the Superintendent of Documents, U.S. Government Publishing Office,
Internet:bookstore.gpo.gov. Phone:toll free (866)512-1800;DC area (202)512-1800
Fax:(202) 512-2104 Mail:Stop IDCC,Washington,DC 20402-001
SENATE COMMITTEE ON COMMERCE, SCIENCE, AND TRANSPORTATION
ONE HUNDRED EIGHTH CONGRESS
FIRST SESSION
JOHN McCAIN, Arizona, Chairman
TED STEVENS, Alaska ERNEST F. HOLLINGS, South
CONRAD BURNS, Montana Carolina, Ranking
TRENT LOTT, Mississippi DANIEL K. INOUYE, Hawaii
KAY BAILEY HUTCHISON, Texas JOHN D. ROCKEFELLER IV, West
OLYMPIA J. SNOWE, Maine Virginia
SAM BROWNBACK, Kansas JOHN F. KERRY, Massachusetts
GORDON H. SMITH, Oregon JOHN B. BREAUX, Louisiana
PETER G. FITZGERALD, Illinois BYRON L. DORGAN, North Dakota
JOHN ENSIGN, Nevada RON WYDEN, Oregon
GEORGE ALLEN, Virginia BARBARA BOXER, California
JOHN E. SUNUNU, New Hampshire BILL NELSON, Florida
MARIA CANTWELL, Washington
FRANK R. LAUTENBERG, New Jersey
Jeanne Bumpus, Republican Staff Director and General Counsel
Robert W. Chamberlin, Republican Chief Counsel
Kevin D. Kayes, Democratic Staff Director and Chief Counsel
Gregg Elias, Democratic General Counsel
------
SUBCOMMITTEE ON COMMUNICATIONS
CONRAD BURNS, Montana, Chairman
TED STEVENS, Alaska ERNEST F. HOLLINGS, South
TRENT LOTT, Mississippi Carolina, Ranking
KAY BAILEY HUTCHISON, Texas DANIEL K. INOUYE, Hawaii
OLYMPIA J. SNOWE, Maine JOHN D. ROCKEFELLER IV, West
SAM BROWNBACK, Kansas Virginia
GORDON H. SMITH, Oregon JOHN F. KERRY, Massachusetts
PETER G. FITZGERALD, Illinois JOHN B. BREAUX, Louisiana
JOHN ENSIGN, Nevada BYRON L. DORGAN, North Dakota
GEORGE ALLEN, Virginia RON WYDEN, Oregon
JOHN E. SUNUNU, New Hampshire BARBARA BOXER, California
BILL NELSON, Florida
MARIA CANTWELL, Washington
C O N T E N T S
----------
Page
Hearing held on October 30, 2003................................. 1
Statement of Senator Brownback................................... 4
Statement of Senator Burns....................................... 1
Statement of Senator Dorgan...................................... 3
Statement of Senator Lautenberg.................................. 15
Prepared statement........................................... 15
Statement of Senator Smith....................................... 16
Statement of Senator Stevens..................................... 2
Statement of Senator Sununu...................................... 5
Witnesses
Hon. Michael K. Powell, Chairman, Federal Communications
Commission..................................................... 6
Prepared statement........................................... 8
Appendix
Hollings, Hon. Ernest F., U.S. Senator from South Carolina,
prepared statement............................................. 35
Inouye, Hon. Daniel K., U.S. Senator from Hawaii, prepared
statement...................................................... 35
THE FUTURE OF UNIVERSAL SERVICE
----------
THURSDAY, OCTOBER 30, 2003
U.S. Senate,
Committee on Commerce, Science, and Transportation,
Washington, DC.
The Committee met, pursuant to notice, at 10 a.m. in room
SR-253, Russell Senate Office Building, Hon. Conrad Burns,
presiding.
OPENING STATEMENT OF HON. CONRAD BURNS,
U.S. SENATOR FROM MONTANA
Senator Burns. Good morning. Today we'll hear testimony
about the Universal Service Program which is an extremely high
priority.
The Committee faces the stark reality that Universal
Service is in grave and immediate danger. The size of the fund
has exploded upward from $1 billion in 1996 to $6.3 billion in
2003. Interstate revenues have plunged dramatically, however,
from over $20 billion a quarter to only $17 billion a quarter,
so we've got a drastic drop.
The FCC has dealt with this decline by simply increasing
the contribution rate assessed to providers of interstate
telecommunications services from 3.9 percent in 1998, to 7.3
percent in the second quarter of 2002, to the current rate of
9.2 percent. Simply put, this trend is unsustainable.
To address the crisis facing Universal Service, Senator
Dorgan and I have recently hosted two very informative
Universal Service summits in which we heard from a broad cross-
section of the parties interested in Universal Service and its
reform. The summit provided an outstanding opportunity for a
frank and open exchange with good give and take, and they were
candid, and I felt all the stakeholders were at the table.
To the extent that it's possible to boil down what we heard
at the session and put it into a simple message, it is this.
The status quo system is fundamentally broken, and without
reform the Universal Service system is in peril. Having
identified the problem and the urgent need to resolve it, the
question is what we do to replace the current assessment
mechanism.
At the summit, participants suggested that we move to a
system based on total revenues, to a system based on
connections, to a system based on assigned working telephone
numbers. The Federal-State Joint Board unanimously recommended
a solution to us, with the legislation granting the Commission
authority to include intrastate revenue in its fund support
base. I understand that Chairman Powell strongly supports this
move, which would provide for the near-term stabilization of
the fund, but I'm not going to put words in his mouth.
To this end, I've been working on draft legislation with my
colleagues that would grant the Commission the authority while
ensuring that it move forward and complete an overall plan
within the next 6 months. In my view, the touchstones for
reform must include competitive and technological neutrality,
predictability, and sustainability.
I understand that the Commission's agenda over the next
year has been crowded with vital issues, which have deservedly
occupied a great deal of its time and resources; however,
Universal Service reform needs the same attention that has been
devoted to crafting items in those other important proceedings.
Finally, we need to ensure that any solutions which
ultimately range from the decisions surrounding Universal
Service reform bear in mind that the ever-changing technology
landscape changes every day. The devices that our citizens use
to communicate with one another today may not be the
instruments of tomorrow. In this context, the shift to new
technology, such as Voice over Internet Protocol is
particularly critical.
Clearly, the Members of this Committee care a great deal
about Universal Service and will do everything it takes to
ensure its viability. Rural America can afford no less.
And I welcome the Chairman here today, and I look forward
to his testimony. And now, Senator Stevens, the Chair
recognizes you.
STATEMENT OF HON. TED STEVENS,
U.S. SENATOR FROM ALASKA
Senator Stevens. Thank you very much, Mr. Chairman. I hope
not to carry forward your prediction.
[Laughter.]
Senator Stevens. We've got to go to a vote on the floor
now, and as soon as that's over I will have to go back to the
appropriations process. I do have, as you know, a great
interest in the subject of Universal Service. And working with
my staff, we've developed a set of principles we believe are
important to us, as Alaskans. So I just thought I'd like to put
that in the record, particularly while the Chairman is here,
and it'll be short. So I hope we'll be able to hear the
Chairman's comments.
I believe we should direct the FCC to conduct a rulemaking
to require all users of public telephone switched networks,
long distance, local companies, cellular, satellite, cable,
Blackberry, Voice over Internet, to contribute to the Universal
Service Fund in some manner and authorize the FCC to consider
interstate revenues, telephone numbers, and individual
identifiers in a way that will provide competitive neutrality.
We should direct the FCC to develop a national standard for
determining who is an eligible telecommunication carrier, with
specific timelines. We should allow cell phone companies who
would pay more into the system with either an interstate
revenue or a telephone number system, to get additional price
support to expand cell phone towers into rural areas. Allow
cable and high-speed Internet providers as well as Blackberry-
type networks, who would be paying in, to receive support for
expanding their high-speed networks into rural America. Direct
the FCC to develop a procedure to be used by the states to
begin reining in the Universal Service Fund in any market with
two or more carriers. The Universal Service Fund should be
limited overall, or new carriers could be denied entry. Require
new eligible telecommunications carriers to quality for high-
cost support when the loop is over $24 in cost, based upon
their own cost, not derivatively through incumbents' costs.
Those are very basic, but we're getting down to the point
where we're going to have to make some basic decisions. I
believe the Universal Service Fund cannot continue much longer
with one major portion of the industry paying in and so many
receiving funds out or finding ways to avoid being included in
the future. There seems to me to be too much attention given to
how to avoid paying Universal Service Funds, rather than how to
make it a universal system that's fair and competitively
neutral for all.
I look forward to being with you.
Senator Burns. Thank you, Mr. Chairman. I appreciate that.
And your suggestions are well taken as we work on this fund.
Senator Dorgan?
STATEMENT OF HON. BYRON L. DORGAN,
U.S. SENATOR FROM NORTH DAKOTA
Senator Dorgan. Mr. Chairman, thank you very much. Chairman
Powell, thank you for being here today.
Mr. Chairman, I have worked with you and the Senator from
Alaska, Senator Stevens, on this issue. The issue of Universal
Service is very, very important to rural areas of the country,
to rural states especially. When we wrote the legislation in
1996, we created a Universal Service that we said, at that
point, would provide comparable service at affordable and
comparable rates.
Now, after 7 years of neglect--and I go back all the way to
the FCC at the start of the development of the new law and the
administration of the new law--the Universal Service Program is
in significant trouble. We find that the contribution base is
in decline, the industry is in the midst of a digital
transformation, and that transformation is challenging
regulatory rules and challenging, in many ways, the way we
think about all of this. But while I think this migration to
digital has been a great success for consumers, as new forms of
communications--cell phones, e-mail, instant messaging, voice
over the Internet--are invented and popularized, they present
some real new challenges for us, as well.
And I agree with you, Mr. Chairman, that we should not
stunt the growth of progress in the migration to the advanced
networks from the circuit-switched networks. I don't think we
ought to try to stunt the growth of that, but we have to
embrace the change and be flexible about how we deal with it.
But none of that, in my judgment, means that we should ignore,
or can ignore, the issues of Universal Service, because
Universal Service is central to the question of whether we have
a system of communications in this country that provides
opportunities to all.
The fact that there is a telephone in Regent, North Dakota,
my little hometown, makes Donald Trump's telephone more
valuable. Doesn't mean he's ever going to call Regent, but it
means that his telephone instrument on his desk in New York
City is made more valuable because someone in Cutbank, Montana,
has a telephone that he can call if he wants to. That's the
universality of service that all of us care a great deal about.
Now, I will not repeat what my colleague from Alaska said.
I don't know what my colleague from Montana said. I could
hardly even guess, as a matter of fact.
[Laughter.]
Senator Dorgan. At least sometimes you can hardly guess.
But I suspect both of them have covered, in some detail, the
need to broaden the base. I know I heard my colleague from
Alaska say that.
We need to find a mechanism to broaden the base so that we
have the resources necessary to have a Universal Service system
that works. And does that mean finding a new collection
mechanism? Does it mean doing as the Joint Board has suggested,
including intrastate revenues in the contribution base? Is that
enough? Or should the contribution base be broadened to include
services like DSL, cable modems, VoIP?
We really need, finally, to put all the spotlights on the
same spot here and get an answer. We just can't any longer
linger for 12 months, or 24 or 36 months, and keep watching
this problem grow larger and see that solutions are not coming.
So, Mr. Chairman, you have, I think, a significant burden
here, as well. We do, in Congress. We need, together, to solve
this problem, and I hope that a year from now, or 2 years from
now, we're not here still talking about this problem. I think
we will have taken whatever decisive action is necessary to fix
that which is wrong, and we know that this fund is in decline,
we know that that can't continue, and we know that we have to
put these pieces together and make it work.
Once again, just finally, I'm pleased that Senator Burns,
Senator Stevens, and I have held two gatherings, summit
gatherings, with stakeholders in all of this, and I think it's
been a great exchange of information. I'm very pleased by the
leadership of my colleagues, and I look forward to the rest of
this hearing.
Senator Burns. Well, Senator Dorgan, I want to thank you. I
think you and Senator Stevens, in those summits, I think we
come out of there with a very good exchange of information. And
really, under those circumstances, wish it could have been a
broader representation of the Senate. But, nonetheless, I think
they were very good.
Senator Brownback?
STATEMENT OF HON. SAM BROWNBACK,
U.S. SENATOR FROM KANSAS
Senator Brownback. Thanks, Mr. Chairman, and thank you for
holding the hearing. And, Chairman Powell, good to see you. I
enjoyed visiting with you on the phone yesterday. I suppose in
the future we'll visit over the Internet with the way things
are converging and taking place.
I just want to add my voice to the chorus. I agree with the
things that I've heard said here today. The Universal Service
Fund is very important to my state, but we're seeing explicit
and implicit portions of it are under tremendous strain, a
shrinking pool of resources, increase in demand. We're seeing
the convergence in inter-platform competition that was promised
by the Telecom Act of 1996 that a lot of people think has been
a long time in coming, but we're seeing it, and we're now
dealing with the impacts of that. This is one of the areas that
we're going to have to deal with.
I do look forward to working with the Chairman, Chairman
Stevens and Senator Dorgan and others, in earnest on
discovering and implementing reform on the Universal Service
Fund, including contribution and distribution methodologies and
ways of ensuring competition and Universal Service are no
longer at odds with each other. And I think we're really going
to have to look at that comprehensive reform that others have
already spoken about, and I look forward to joining in that
effort.
Thanks, Mr. Chairman.
Senator Burns. Thank you, Senator Brownback.
Senator Sununu?
STATEMENT OF HON. JOHN E. SUNUNU,
U.S. SENATOR FROM NEW HAMPSHIRE
Senator Sununu. Thank you, Mr. Chairman. And welcome,
Chairman Powell.
I'm interested in this issue, obviously, because it has a
big impact on the future of the telecommunications industry,
but I'm also trying to ensure that, as we look at the issue, we
approach it from a sense of consistency and fairness, not just
in an arbitrary way that's driven by our desire to get our
hands on more revenue.
The phrase was used that ``the fund is in decline.'' I
don't necessarily agree with that. Certainly the revenue base,
the size of the revenue base, may be in decline, and the rate
of assessment may be increasing, but, you know, I think the
phrase ``the fund is out of control'' is maybe more
appropriate.
In an age where the cost of transmitting data and the cost
of service and the cost of bandwidth is declining at a
significant rate, the cost of the fund has increased 300
percent in just 6 years. Now, that may well be partly due to
the way that the legislation was written, the number of
mandates that we've put onto the fund, and I think that's what
we need to look at. We shouldn't just be approaching this from
a sense of, ``We need more money. We wrote a lot of regulations
requirements mandates into the law that are costing a lot of
money, so let's find a way to increase the taxes on
telecommunication.'' I think that could well be
counterproductive if you broaden the base, but in the long run
leave all the mandates, all the requirements in place, all the
complexity in place, and do nothing to rationalize the system,
then you may well be hurting those people in rural parts of the
country that are trying to get access to modern services.
So I think we need to look at the Universal Service
Program, first, from the perspective of what are we trying to
accomplish, and ask the question of whether legislation that
was written only 8 years ago is really appropriate for the
telecommunications industry and the goals of the fund five or
10 years from now, because times certainly are a-changing.
Thank you, Mr. Chairman.
Senator Burns. I don't think there's anybody on this
Committee that doesn't understand that we have to take a look
at the fund itself and how it makes disbursements, along with
the running base.
Chairman Powell, thank you for coming this morning, and we
look forward to your testimony.
STATEMENT OF HON. MICHAEL K. POWELL, CHAIRMAN, FEDERAL
COMMUNICATIONS COMMISSION
Mr. Powell. Thank you, Senator, in your capacity as the
Chair. I'm pleased to be here with you. Senators, it's always a
pleasure to be here on this important topic.
Providing high quality telecommunications services to all
Americans at affordable rate is unquestionably a cornerstone of
the Telecom Act. The act directed the FCC to advance two
critical objectives, to open local markets to competition and
to preserve and advance universal service.
To promote these dual goals, the FCC is currently
reexamining virtually every aspect of the Universal Service
Program to ensure that the program is administered efficiently
and remains sustainable as it confronts widespread marketplace
and technological developments that have occurred since the
Commission first adopted its rules.
We are in the throes of major changes in communications.
And as I've discussed with this Committee before, the telecom
industry has embarked on a great digital migration. Traditional
telecommunications services are migrating from old circuit-
switched networks to new and advanced Internet protocol
networks. The demand pull of consumer choice and technological
push of network innovation mean that this migration is
inevitable. Indeed, regulators cannot stop it, nor should we
want to, for it promises new competitive choices and
spellbinding innovation for consumers. Our efforts to reform
the Nation's Universal Service Program must embrace change and
provide sufficient forward-looking flexibility to ensure that
supported services remain affordable and ubiquitous.
Digital migration should not be seen as a threat to our
universal service objectives, but an opportunity. Indeed, the
fact that schools and libraries program has succeeded in
connecting 99 percent of public schools is an example of
universal success in the digital age.
And there is good news among the many challenges for
advancing our goals of ubiquity and affordability. As Senator
Sununu mentioned, new technology can reduce the cost of
providing supported services, particularly in the higher cost
areas of our country. The introduction of technologically
advanced lower-cost networks also can have a disciplining
effect on the high cost of the fund over time, thereby limiting
the burden on our policies that it places on consumers.
Deployment of network infrastructure to high-cost areas
directly benefits consumers. And as many of you are aware, a
high-quality network can serve as the basis for economic
development and job creation in rural America.
However, as we progress further in our digital journey, we
will have to confront significant challenges, both in the short
and long term. Fully recognizing this challenge, the FCC is
currently examining every aspect of the Universal Service
Program to ensure that it is administered effectively and
remains sustainable as major marketplace and technological
developments take root.
At the center of the effort, as I have mentioned, are the
goals of ubiquity and affordability. And to advance those
goals, we must do a number of critical things.
First, we must reform the FCC's contribution methodology
for collecting Universal Service funds to address changes in
the market and to ensure a more stable funding base. Several
trends have put pressure on the contribution factor. Interstate
revenues have been flat or in decline since 1999 as a result of
price competition, bundled packages, and technology
substitution. Moreover, expanding the base to include
interstate revenues may, indeed, be needed to stem the
declining tide.
Second, we must control the growth of the Universal Service
Fund, mindful that consumers ultimately are the ones that pay
for achieving our Universal Service objectives. Particularly,
we need a more rational method of distributing Universal
Service support that promotes competition, but preserves the
fund. To this end, the Joint Board will very soon make
recommendations to the Commission on ETC eligibility and
portability, two of the objectives that I think Senator Stevens
mentioned in his principles at the outset.
Third, we must improve the administration of our vast and
sometimes unnecessarily technical rules in many of our
programs. Clarifying and simplifying eligibility criteria in
the schools and libraries program, Rural Healthcare Program,
and low-income programs has been a priority. Indeed, at our
next meeting, in November, we will present to the Commission an
item that will advance the important homeland security and
public safety interests of rural America by unlocking funds
that Congress has designated for rural healthcare providers.
And, finally, we must continue to diligently enforce the
Universal Service rules that are currently on the books if we
are to sustain Universal Service in a digital age, as well as
maintain the accountability of these programs. Our recent
enforcement activities are designed to ensure that every
responsible entity pays their fair share. And today I'm
actually quite happy to announce that because of stepped-up
enforcement efforts at the Commission, the contribution factor
for the first quarter of next year is likely to drop below 9
percent, as opposed to increase to near 10 percent, as was once
feared.
But to get things right, unquestionably this has to be a
joint effort, a joint effort of Congress, the FCC, and state
commissions. Recently, Senator Burns, in partnership with
Senators Stevens and Dorgan, have hosted a second industry
summit on Universal Service in an attempt to find consensus on
the critical question of which contribution methodology will
best support the statutory goals. The summits, which have been
very well attended, play a critical role in informing the
debate and reaching fair and equitable solutions. And I really
want to thank the Senators for their leadership on this issue,
and look forward to partnering with them as we solve these
problems.
I thank you for very much for your indulgence this morning,
and I look forward to your questions.
[The prepared statement of Mr. Powell follows:]
Prepared Statement of Hon. Michael K. Powell, Chairman,
Federal Communications Commission
Summary
Providing high-quality telecommunications services to all Americans
at affordable rates is a cornerstone of the Telecommunications Act. The
1996 Act directed the FCC to advance two key objectives--opening local
markets to competition and preserving and advancing universal service.
To promote these dual goals, the FCC is currently reexamining nearly
every aspect of the program, to ensure that the program is administered
efficiently and remains sustainable as it confronts widespread
marketplace and technological developments that have occurred since the
Commission first adopted its rules.
We are in the throes of major changes in communications. As I have
discussed with this Committee before, the telecommunications industry
has embarked on a great Digital Migration. Traditional
telecommunications services are migrating from old circuit-switched
networks to new and advanced Internet protocol networks. The demand
pull of consumer choice and technological push of network innovation
mean that this migration is inevitable. Indeed, regulators cannot stop
it, nor should we want to for it promises new competitive choices and
spell-binding innovation for consumers. Our efforts to reform the
Nation's universal service programs must embrace change and provide
sufficient, forward-looking flexibility to ensure that supported
services remain affordable and ubiquitous.
Digital migration should not be seen as a threat to our universal
service objectives, but an opportunity. Indeed, the fact that our
Schools and Libraries program has succeeded in connecting 99 percent of
public schools to the Internet is an example of universal service
success in the Digital Age. And there is good news, among the
challenges, for advancing our goals of ubiquity and affordability. New
technology can reduce the costs of providing supported services,
particularly in the higher-cost areas of our country. The introduction
of technologically advanced, lower-costs networks also can have a
disciplining effect on the high-cost fund over time, thereby limiting
the burden our policies place on consumers. Deployment of network
infrastructure to high-cost areas directly benefits consumers, and as
many of you are aware, a high-quality network can serve as the basis
for economic development and job creation in rural America.
However, as we progress further in our digital journey, we will
have to confront some significant challenges in the short and long
term. Fully recognizing this challenge, the FCC is currently
reexamining nearly every aspect of the universal service program to
ensure that the program is administered effectively and that it remains
sustainable as major marketplace and technological developments take
root.
At the center of our efforts to reform universal service are the
goals of ubiquity and affordability. To advance these goals, we must do
a number of critical things.
First, we must reform the FCC's contribution methodology for
collecting Universal Service Funds to address changes in the market and
to ensure a more stable funding base. Several trends have put pressure
on the contribution factor: Interstate revenues have been flat or in
decline since 1999 as a result of price competition, bundled packages
and technology substitution. Moreover, expanding the base to include
intra-state revenues may be needed to stem the declining tide.
Second, we must control the growth of the Universal Service Fund,
mindful that consumers ultimately pay for achieving our universal
service objectives. Particularly, we need a more rational method of
distributing universal service support that promotes competition, but
preserves the fund. To this end, the Joint Board will soon make
recommendations to the Commission on ETC eligibility and portability.
Third, we must improve the administration of our vast and sometimes
unnecessarily technical rules in our programs. Clarifying and
simplifying our eligibility criteria in the Schools and Libraries
program, Rural Health Care program and low income programs has been a
priority. Indeed, at our November meeting, I will present to the
Commission an item that will advance the important homeland security
and public health interests of rural America by unlocking the funds
that Congress designated for rural health care providers.
And, finally, we must continue to diligently enforce the universal
service rules that are currently on the books if we are to sustain
universal service in a digital age, as well as maintain the
accountability of these programs. Our recent enforcement activities are
designed to ensure that every responsible entity pays their fair share.
I am happy to announce that because of our stepped up enforcement
efforts, the contribution factor for the first quarter of next year
likely will drop below 9 percent, as opposed to increase to 10 percent
as was feared.
To get things right, this must be a joint effort of Congress, the
FCC and the State Commissions. Recently, Senator Burns, in partnership
with Senator Stevens and Dorgan, hosted a second industry summit on
universal service in an attempt to find consensus on the critical
question of which contribution methodology will best support the
statutory goals. The summits, which have been very well attended, play
an important role in informing the debate and reaching fair and
equitable solutions, and I thank the Senators for their leadership on
this issue.
Thank you and I look forward to your questions.
______
Good morning, Mr. Chairman and distinguished members of the
Committee. It is my pleasure to come before you today to discuss the
Federal Communications Commission's (the ``FCC'' or the ``Commission'')
efforts to preserve and advance universal service.
Introduction
Providing high-quality telecommunications services to all Americans
at affordable rates is a long-held telecommunications policy goal and a
cornerstone of the Telecommunications Act of 1996 (the ``1996 Act'').
The 1996 Act directed the FCC to further two key objectives--opening
local markets to competition and preserving and advancing universal
service in high-cost areas. Section 254 of the 1996 Act represents this
country's shared social policy of ensuring ubiquitous and affordable
service. Seven years after the passage of the 1996 Act, the Commission
remains committed to furthering both these goals.
We are in the throes of major changes in communications. As I have
discussed with this Committee before, the telecommunications industry
is immersed in a great Digital Migration. Traditional
telecommunications services are migrating from old circuit-switched
networks to new and advanced Internet protocol networks. The demand
pull of consumer choice and technological push of network innovation
mean that this migration is inevitable. Indeed, regulators cannot stop
it, nor should we want to for it promises new competitive choices and
spell-binding innovation for consumers. Our efforts to reform the
Nation's universal service programs must embrace change and provide
sufficient, forward-looking flexibility to ensure that supported
services remain affordable and ubiquitous.
Too often regulators and carriers alike try to conform the new to
the old, whether for competitive reasons or simply because it is
familiar. In cooperation with our state colleagues, we must evolve our
universal service programs to be in sync with the exciting, and
unstoppable, changes in the competitive digital communications
landscape.
Digital migration should not be seen as a threat to our universal
service objectives, but an opportunity. There is good news, among the
challenges, for advancing our goals of ubiquity and affordability. New
technology can reduce the costs of providing supported services,
particularly in the higher-cost areas of our country. The introduction
of technologically advanced, lower-costs networks also can have a
disciplining effect on the high-cost fund over time, thereby limiting
the burden our policies place on consumers. Deployment of network
infrastructure to high-cost areas directly benefits consumers, and as
many of you are aware, a high-quality network can serve as the basis
for economic development and job creation, two things that are sorely
needed in rural America.
However, as we progress further in our digital journey, we will
have to confront some significant challenges in the short and long
term. Fully recognizing this challenge, the FCC is currently
reexamining nearly every aspect of the universal service program, not
only to ensure that the program is administered as efficiently and
effectively as possible and that the overall program remains
sustainable, but also in response to widespread marketplace and
technological developments that have occurred since the Commission
first adopted its rules.
At the center of our efforts to reform universal service are the
goals of affordability, ubiquity and sufficiency. To meet these goals,
we must do a number of critical things:
First reform the FCC's contribution methodology for
collecting Universal Service Funds to address changes in the
market.
We must control the growth of the Universal Service Fund,
mindful that consumers ultimately pay for achieving our
universal service objectives.
We need a more rational method of distributing universal
service support to promote competition, but preserve the fund.
We must streamline the administration of our vast and
sometimes unnecessarily technical rules in this area.
And, finally, we must continue to diligently enforce the
universal service rules that are currently on the books if we
are to sustain universal service in a digital age.
To get things right, this must be a joint effort of Congress, the
FCC and the State Commissions. Recently, Senator Burns, in partnership
with Senators Stevens and Dorgan, hosted a second industry summit on
universal service in an attempt to find consensus on the critical
question of which contribution methodology will best support the
statutory goals. The summits, which have been very well attended, play
an important role in informing the debate and reaching fair and
equitable solutions, and I thank the Senators for their leadership on
this issue.
II. Background on Current Universal Service Programs
As always, the Commission's work in the universal service arena is
guided by the public interest and the principles set out by Congress in
the 1996 Act. Section 254 of the 1996 Act directs the Commission to
base universal service policies on several fundamental principles,
including: (1) promoting the availability of quality services at just,
reasonable, and affordable rates; (2) increasing access to advanced
telecommunications and information services throughout the Nation; and
(3) providing comparable access to telecommunications services to all
consumers, including those in low income, rural, insular, and high-cost
areas. In addition, the 1996 Act expanded the scope of universal
service by directing the Commission to establish support mechanisms for
schools and libraries and for rural health care facilities for advanced
services.
In its present form, universal service consists of several programs
which provided some $5.96 billion in support in 2002 and are projected
to provide some $6.34 billion in support in 2003. The largest part of
the fund goes to support service in high-cost areas. The monopoly
environment once enabled regulators to promote universal service by
building implicit subsidies into local and long distance rate
structures. In a competitive environment, however, these implicit
subsidies cannot be sustained, since the monopoly era rates that
provided surplus funds--such as business rates in urban areas--are
undercut by new entrants and are driven towards a cost-based level. In
the 1996 Act, Congress directed the FCC to adopt explicit support
mechanisms that would be sufficient to ensure that rates remain
affordable and reasonably comparable throughout the Nation.
High-cost Programs
Accordingly, the FCC's high-cost mechanisms provide support to
eligible telecommunications carriers for a portion of the costs of
providing telephone service in rural and high-cost areas where such
services otherwise might be prohibitively expensive. In 2002,
approximately $2.9 billion in high-cost support was provided to
approximately 1,500 carriers in all 50 states, American Samoa, Guam,
the Northern Mariana Islands, Puerto Rico, and the Virgin Islands. In
2002, Alaska, Wyoming, Montana, and North Dakota were among the top
five states, in terms of amount of Federal high-cost support per line
received.
Schools and Libraries Program
The schools and libraries program, or the E-Rate program, provides
discounts to eligible schools and libraries for telecommunications
services, internal connections, and Internet access. The program
provides up to $2.25 billion in annual support and has enabled millions
of school children and library patrons to gain access to advanced
telecommunications services, internal connections, and Internet
services. As a direct result of the e-rate program, 99 percent of
America's schools are connected to the Internet.
Lifeline and LinkUp
Other components, the Federal Lifeline and LinkUp programs, provide
discounts off monthly service charges and connection fees to ensure
that low-income consumers have access to basic telephone service. This
year, these programs will provide approximately $691 million in
support.
Rural Health Care
And finally, the rural health care mechanism provides support to
rural health care providers. While, as many of you are aware,
participation in the rural health care mechanism has fallen short of
the $400 million annual program cap, I am pleased to report that the
Commission will be considering a variety of measures designed to
strengthen this program at the FCC's November Open Meeting. In
addition, I am going to be joined by members of Congress next week to
tour a major rural health care facility to see how we can continue to
improve this program.
The Commission is constantly striving to ensure that the Federal
universal service programs remain effective in a changing
telecommunications marketplace. Indeed, we are currently engaged in
proceedings regarding nearly every aspect of the universal service
program, from contribution to distribution, to ensure that each
component is administered as efficiently and effectively as possible
and that the overall program remains sound. As the Commission engages
in our ongoing review, our commitment remains steadfast to improve and
strengthen all of our support mechanisms for the benefit of all
consumers--especially consumers in high-cost areas, individuals with
low incomes, and patrons of schools, libraries, and rural health care
facilities. I will begin by discussing one of our biggest challenges--a
reexamination of how we collect the monies used to support universal
service.
III. Ongoing Challenges and Proceedings
Contribution Methodology
Our first task in the area of universal service reform must be in
the area of contribution methodology. The Commission collects funds for
the various universal service support programs pursuant to section
254(d) of the 1996 Act. Service providers must pay a percentage of
their revenues from interstate end-user telecommunications services to
the Universal Service Fund. This percentage, called the contribution
factor, changes on a quarterly basis depending on the demand for
funding and the base of reported revenues. The contribution factor for
the fourth quarter of 2003 is 9.2 percent.
Several trends have combined to put upward pressure on the
contribution factor, which in turn has increased the funding burden on
some consumers. While interstate telecommunications revenues grew
between 1984 and 1999, they have since been flat or in decline as a
result of price competition and migration to bundled services and new
technologies. For years, wireless carriers have offered buckets of any-
distance minutes at flat rates, and now wireline carriers are offering
packages including local and long distance for a single price. In
addition, many carriers offer business customers bundles that include
local and long distance voice services, information services such as
Internet access, and customer premises equipment. Such bundling has
been a boon for consumers, but has made it difficult to isolate
revenues for interstate telecommunications services. Additional
competitive pressures lie ahead on the technological horizon, as
communications become more Internet-centric, as is the case with e-
mail, instant messaging and voice over IP applications.
Because Federal universal service contributions under existing
rules are assessed only on interstate revenues from end-user
telecommunications services, this shrinking of the applicable revenue
base has contributed to a steady, incremental rise in the contribution
factor over time. And this trend is likely to continue as these new
products and technologies become more and more popular.
In December 2002, the Commission adopted a number of measures to
stabilize the universal service contribution factor in an effort to
mitigate the growing funding burden on consumers:
The Commission increased the safe harbor that wireless
carriers may use to determine the interstate percentage of
their revenues from 15 percent to 28.5 percent.
The Commission also adopted an interim regime that
eliminated the time lag between the reporting of revenues and
the recovery of contributions, which lessens the relative
burden facing long distance carriers with declining interstate
telecommunications revenues.
And the Commission prohibited mark-ups of contribution costs
on customers' bills to ensure that carriers cannot profit from
inflated line charges (at least one major long distance carrier
was assessing a ``Universal Service Connectivity Charge'' for
residential customers of 11 percent when the relevant
contribution factor was 7.28 percent).
While these are important steps, serious issues remain that the
Commission must address to ensure the sustainability of universal
service funding. Bundling together interstate and intrastate services
and telecommunications and information services gives carriers the
opportunity and incentive to understate the portion of their revenues
that is subject to assessment and increases the difficulty of
identifying interstate revenues. As a result, contribution factors over
time are likely to continue their ascent given a contribution
methodology based solely on interstate telecommunications service
revenues.
The Federal-State Joint Board (the ``Joint Board'') has recommended
that Congress amend section 254 of the 1996 Act to provide the FCC with
authority to assess intrastate revenues, in addition to interstate
revenues. I heartily support this recommendation. At the Commission, we
have begun considering the effect such a change would have on universal
service. A total revenue assessment would make it easier for carriers
to identify what revenues are counted for contribution purposes.
Moreover, such an assessment would be lower and more stable than one
based on interstate telecommunications revenues alone, although it
bears mentioning that it is still the consumer that ultimately pays for
universal service, and none of the proposals reduces the overall size
of the fund.
The FCC has also been contemplating whether to make substantial
changes to the current methodology under existing statutory authority
and is actively considering different contribution approaches. The
Commission has sought comment on alternative methodologies based (in
whole or in part) on end-user connections, including an approach that
would collect based on assigned telephone numbers.
These approaches arguably could create a more sustainable model for
continuing universal service in the future as the digital migration
marches on. The number of end-user connections has been more stable
than the pool of interstate revenues, and connection-based charges can
be adjusted based on the capacity of each connection to ensure an
equitable distribution of the funding burden among business and
residential customers. Additionally, proponents of a contribution
methodology based on telephone numbers (with connection-based charges
for high-capacity business lines) argue that it would not only be more
stable but also promote number conservation.
Critics of these proposals--including carriers that would face
increased assessments based on a connections-based methodology--argue
that the effect of these proposals would be to reduce significantly the
contributions of long-distance carriers (which have very few assigned
telephone numbers or end-user connections) in violation of the
statutory requirement that all carriers contribute on an equitable and
nondiscriminatory basis.
I am convinced that reform of the Commission's contribution
methodology is required in the short-term if we are to ensure the
sufficiency and predictability of support. To that end, I hope to forge
a consensus so that this proceeding can be completed in the first half
of next year. As the market for telecommunications and information
services continues to evolve, I believe that a purely revenues-based
contribution methodology may no longer be the best way to promote
Congress's universal service mandate. Our overriding goal is to ensure
that universal service funding remains stable. I have challenged the
industry and the Commission's staff to continue to explore flexible and
forward-thinking options that meet this test. Rest assured that the
Commission will leave no option unexplored.
As more communication services move to the Internet, questions will
persist as to whether information service providers should be required
to contribute to the fund. Fortunately, Congress has afforded the
Commission with discretionary authority to assess those that are not
telecommunication service providers, but do use telecommunications. The
Commission has sought comment, in the Wireline Broadband Notice of
Proposed Rulemaking, on whether all facilities-based providers of
broadband services should be subject to the same contribution
obligations as providers of telecommunications services.
While a total-revenue methodology or one based on end-user
connections or telephone numbers would address problems arising from
the blurring of the line between interstate and intrastate
telecommunications services, such changes would not necessarily broaden
the contribution base to include all broadband providers. The
Commission accordingly sought comment on whether it should exercise its
permissive authority and require all facilities-based broadband
Internet access providers to contribute to the universal service
mechanisms.
Throughout our analysis, of course, we must balance the needs of
funding these programs against the real burden that our contribution
requirements could impose on consumers if we do not manage those
requirements carefully.
Distribution of Support
The incremental increases in the contribution factor have resulted
not only from the shrinking of the interstate revenue base, but also
from the marked increases in the demand for money from the fund. Much
of the increased demand has resulted from the FCC's reform of the
interstate access charge system, which has removed the implicit support
in interstate access charges and created two explicit universal service
mechanisms. As a result of these changes, many incumbent LECs
(``ILECs'') now recover costs from the Universal Service Fund that
previously were recovered through access charges from long distance
carriers.
This reform was required by the 1996 Act's requirement that the
Commission eliminate implicit funding of universal service and create
explicit funding mechanisms instead. In addition, the designation of
wireless carriers and other competitors as eligible telecommunications
carriers (``ETCs'') is increasing program demand. Growth on the demand
side has been less of an issue with respect to the schools and
libraries, rural health clinics, and low-income mechanisms,
particularly since the first two mechanisms are capped under our rules,
but the Commission must ensure that they remain efficient and effective
as well.
High-Cost Support
1. ETC/Portability Issues
Before enactment of the 1996 Act, only incumbent LECs received
universal service support. In recent years, however, wireless carriers
and competitive LECs have been designated ETCs. While competitive ETCs
receive a very small percentage of high-cost funds overall, their share
has been increasing noticeably in the last year and there has been a
coinciding surge in the number of ETC applications as competition
blossoms. Indeed, there are 27 pending applications at the FCC.
Competitive ETCs receive support under the ``identical support'' rule
(also called ``portable support''), which provides per-line support
based on the incumbent carrier's costs. Incumbents do not lose support
when a competitive ETC captures a line, because they just receive more
support per line for their remaining lines. Meanwhile, the competitive
ETC gets support for every line it has as well. Rural LECs have argued
that this regime creates uneconomic arbitrage opportunities and
threatens the viability of universal service, while competitive ETCs
generally contend that providing identical support--whether based on
the ILEC's embedded costs or based on forward-looking economic costs--
is essential to competitive neutrality.
In November 2002, the Commission asked the Federal-State Joint
Board on Universal Service to consider the intersection of competition
and universal service in rural areas. The Joint Board, under
Commissioner Abernathy's able leadership on the Federal side and
Commissioner Nan Thompson's leadership on the state side, subsequently
sought comment on several key issues, including the manner in which
competitive ETCs receive support and the impact of providing support to
competitive ETCs on the growth of the Universal Service Fund. The Joint
Board also sought comment on the process for designating ETCs and
whether the FCC should establish guidelines for consideration by the
state commissions that make these determinations under section
214(e)(2) of the 1996 Act. In July, the Joint Board held a public forum
on these issues, and a wide range of industry representatives, consumer
advocates, and state commissioners provided valuable insights.
Parties have advanced a wide variety of proposals regarding
portability in their comments and at the public forum. Several groups
of ILECs argue that competitive ETCs should receive support based on
their own embedded costs. Some competitive ETCs argue that incumbents
and competitors should receive support based on forward-looking
economic costs. One proposal to control growth would be to continue
basing support for all ETCs based on the incumbent's costs, but cap
per-line support amounts upon entry of a competitor and consider
supporting only a single connection per customer. ILECs generally
oppose this proposal, arguing that reforming the ETC-designation
process--in particular, making the public interest analysis more
exacting--would suffice to keep the Universal Service Fund from growing
too large.
When it has finished considering the record, the Joint Board will
make its recommended decision to the FCC, which we anticipate receiving
in early January 2004. I look forward to reviewing it then.
2. Support for Non-Rural Carriers
While rural carriers receive the lion's share of high-cost funding,
``non-rural'' carriers (the Bell operating companies and other large
LECs) also receive high-cost support. Whereas rural carriers receive
support based on their embedded costs, non-rural funding is determined
based on forward-looking economic costs. Non-rural carriers receive
support in a particular state if the statewide average cost per line,
as determined by a forward-looking cost model, exceeds the national
average cost by a certain margin. Currently, non-rural carriers receive
support in eight states (Alabama, Kentucky, Maine, Mississippi,
Montana, Vermont, West Virginia, and Wyoming). While non-rural carriers
in other states serve many high-cost wire centers, their statewide
average costs are not sufficiently high to receive support.
Nonetheless, rural carriers receive substantial support in each of the
states for which non-rural support is unavailable under the other
portion of the high-cost mechanism. Non-rural carriers in these states
also receive Federal support under the interstate access support
mechanism, which distributes approximately $650 million annually to
replace implicit support from interstate access charges.
I realize that this Committee is considering legislation that would
alter the distribution of non-rural support. The Commission recently
completed its own review of this support mechanism in response to a
remand by the Tenth Circuit Court of Appeals of an earlier FCC
decision. The court ruled that the Commission had not adequately
explained how the non-rural support mechanism is sufficient to enable
states to set rural rates that are reasonably comparable to those in
urban areas. In addition, the court directed the Commission to consider
how to induce states to ensure rural and urban rate comparability
within their borders, since the Federal mechanism aims primarily to
mitigate cost differentials among the states and states have
jurisdiction over local rates.
Here again, the Commission has taken action. I am pleased to report
that at the Commission's October Open Meeting the FCC took another step
toward addressing the outstanding legal challenges to the non-rural
mechanism. In the Tenth Circuit Remand Order, the FCC adopted a
national threshold to determine when non-rural, high-cost support
should be available by balancing the legitimate state need against the
risk of excessive support. Importantly, in that proceeding the
Commission asked a range of questions designed to make available
additional, targeted Federal support as a means of inducing states to
adopt explicit support mechanisms that will be sustainable in a
competitive market.
Low-Income Support
As I have described, a separate component of the Federal universal
service program is the low-income support mechanism, Lifeline/LinkUp.
These programs provide funding that enables low-income consumers to
receive discounts on monthly service and installation charges. An
additional layer of discounts is available for eligible consumers
living on Indian tribal lands. Earlier this year, the Joint Board
released a Recommended Decision on proposals to bolster the
effectiveness of Lifeline and LinkUp. This Recommended Decision
suggests new ways for low-income consumers to qualify for support and
also addresses questions regarding states' efforts to engage in
outreach and to verify program eligibility. The goal of the pending
rulemaking is to remove impediments to beneficiaries' receiving support
while simultaneously preserving the integrity and enhancing the
efficiency of the program.
As always, the Commission will also continue its universal service
related outreach efforts. Announced in August of this year, ``Project
Heartland'' is aimed at building connectivity in rural areas and
specifically targets three regions for additional FCC efforts: Alaskan
Native Villages, the Appalachian region and the Mississippi Delta
region. The Commission will continue our work with groups such as the
Appalachian Regional Commission, the Delta Regional Authority, the
Alaskan Rural Development Council and the National Congress of American
Indians.
Schools and Libraries and Rural Health Care Facilities
Finally, the Schools and Libraries support mechanism (``E-Rate'')
and the support mechanism for rural health care facilities provide
additional support that enables these institutions to receive discounts
on basic and advanced telecommunications services (as well as internal
connections in the E-Rate program). Now that the Commission has had
significant experience overseeing these programs, we are considering a
variety of rule changes in pending proceedings. These rulemakings, like
the Lifeline/LinkUp rulemaking, aim to eliminate red tape while
ensuring continued program integrity.
As I mentioned previously, at the Commission's Open Meeting on
November 13, 2003, the Commission will consider an Order to modify the
rural health care mechanism. This support mechanism has been
underutilized, so the notice of proposed rulemaking sought comment on
ways to alter eligibility requirements to eliminate obstacles to rural
health clinics' receiving support, while remaining faithful to the
statutory purposes. Facilitating telemedicine by connecting rural
health clinics to regional hospitals and universities is perhaps one of
the greatest applications enabled by advances in telecommunications
technology, and it takes on added importance in light of the increased
homeland security threats--including bioterrorism--that our Nation
confronts today.
Enforcement
Finally, there is an important and perhaps underappreciated
component of our universal service work that I would like to call to
your attention. In recent months the FCC has taken significant steps to
bolster its Universal Service Fund enforcement. The FCC has taken swift
and decisive enforcement action against wrongdoers and has streamlined
its process for identifying future violations. For example, in
September, the Commission proposed a forfeiture against Globcom, Inc.,
a long-distance reseller, for violating the Commission's rules by
failing to pay universal service contributions and to report accurate
revenue information. The Globcom Notice of Apparent Liability is the
largest forfeiture the Commission has ever proposed for such
violations.
Indeed, officials at USAC report that, in the wake of our
enforcement action, USAC has experienced a notable increase in entities
complying with our rules by paying their fair share into the fund.
Through enforcement, the Commission is ensuring that the contribution
burden is spread as widely as our rules currently require. This effort
has contributed directly to slowing the rapid increase in the
contribution factor and may well lead to a measurable decrease in this
quarter's number.
The FCC's Enforcement Bureau is also actively enforcing the
Commission's new debarment rules, which establish procedures to prevent
persons who have defrauded the government or engaged in similar acts
through activities associated with or related to the schools and
libraries support mechanism from receiving the benefits associated with
that program. Finally, the FCC has developed a formalized process for
coordinating and referring apparent violations of our USF rules to
other government agencies, such as the Department of Justice, where
appropriate.
IV. Conclusion
I would like to thank you, Mr. Chairman, for calling this hearing,
and I look forward to working with you and other members of the
Committee on these challenging and critical issues.
Senator Burns. Thank you, Mr. Chairman.
And despite the Commission's early constant tinkering, we
might say, the current assessment mechanism has not resulted in
sufficient funds to preserve and advance these goals that you
spoke of. In fact, the base of the funds that are collected are
constantly shrinking, as noted by just about every Member on
this Committee, and clearly the system is in bad need of
expanding the base of contributors for those revenues and a
system based on factors that interstate revenues and end users.
You might want to think about that. Senator Lautenberg has
joined the Committee this morning. Do you have a statement,
before we start the questioning here?
STATEMENT OF HON. FRANK R. LAUTENBERG,
U.S. SENATOR FROM NEW JERSEY
Senator Lautenberg. That's very generous of you, Mr.
Chairman, to permit me to do that. In order to expedite things,
I'll ask that the full statement be included in the record.
Senator Burns. Without objection.
Senator Lautenberg. Thank you very much.
[The prepared statement of Senator Lautenberg follows:]
Prepared Statement of Hon. Frank R. Lautenberg,
U.S. Senator from New Jersey
Mr. Chairman,
Thank you for holding this hearing on the Universal Service Fund.
``Universal service'' is the Federal Government's commitment to the
American people that they would have access to ``a rapid, efficient,
nation-wide, and worldwide'' communication service with ``adequate
facilities at reasonable [rate.]''
We need to keep this commitment.
We all know that the Universal Service System faces increasing
demands for support and that the Fund is actually growing in dollars.
Today, the Fund stands at more than six billion dollars, compared
to just 1.7 billion in 1997.
While this indeed is a lot of money, Universal Service's funding
base--fees and charges assessed on interstate and international end
user telecommunication revenues--continues to decline.
In 2001 and 2002, the universal service funding base declined by an
average of 8 percent per year.
The decline in universal service's funding base will continue
unless we stop carriers from finding ways to avoid contributing to the
Universal Service Fund.
I would like to briefly point to two specific funds within the
Universal Service Fund that I believe are critically important to all
Americans, particularly people in my part of the United States.
First, the low income support fund is very important to children,
single mothers and low income families in high-cost of living areas,
like my home state of New Jersey.
Second, ``E-Rate'' fund is important to thousands of school and
libraries throughout America. I know there have been some problems with
the problem, but the goals and contribution of the E-Rate funds to
school and libraries are worth preserving.
So while we discuss the future of the Universal Service Fund, we
should keep the long-term viability and proportionate funding of these
two important programs intact.
Thank you, Mr. Chairman. I look forward to hearing from our
witness.
Senator Burns. Senator Smith, of Oregon, thank you for
joining us this morning. Do you have a statement?
STATEMENT OF HON. GORDON H. SMITH,
U.S. SENATOR FROM OREGON
Senator Smith. I do, Mr. Chairman. And, if I may, I'd
actually like to present it, because I think it's very
important to this hearing.
And so I thank you for holding this hearing on the
Universal Service Program. I believe it's a critical issue to
rural America. In my opinion, universal service strikes at what
is good about our form of government. It's a partnership
between government and private sector to ensure that families
in all parts of America have access to basic telecommunications
service to improve their quality of life and provide economic
opportunity. And it's fundamentally about fairness. Rural
Americans are entitled to telephone service at fair rates and
quality, as compared to telephone service provided in cities.
But the Universal Service Program has challenges. The
revenue base, as you've noted, is declining, while demands for
funds are growing. And I think fundamentally what my testimony
says is that we are not meeting the test of fairness and
equity.
I'll try to abbreviate, Mr. Chairman, because I want to
point out that the Chairman of this Committee, his state of
Arizona, his telephone users pay $4 million into this fund, and
yet they don't receive one dime from this. Not one dime.
Residents of South Carolina, the Ranking Member, South
Carolinians pay three million into this non-rural program. They
get nothing in return. Texas pays nearly $13 million into the
non-rural program, and they get nothing back. Residents in New
Hampshire pay more than one million and receive nothing.
Virginia, they pay six million and receiving nothing. Louisiana
pays $2.5 million into the non-rural fund and get nothing back.
In my state of Oregon, we pay $2.5 million into the non-rural
fund. We receive nothing in return. Yet Oregon has many remote
rural areas, just like Montana does.
Mr. Chairman, I would ask, in the interest of time, that my
whole statement be included in the record.
Senator Burns. Without objection.
[The prepared statement of Senator Smith was unavailable at
time of printing.]
Senator Smith. But I think it is critical that S. 1380, the
bill I've introduced with Senator Bayh, of Indiana, at a
minimum be adopted by this Committee, and ask that our chairman
help us figure out how to make this fair.
There are three states that receive money from this,
significant money. Eighty-five percent of the United States get
nothing, and that cannot be fair.
And so I don't want to take all of the time this morning,
but my plea to Chairman Powell is to help us to fix a program
that is clearly broken. It is also to address the concerns some
may have that we have a broader approach to solving this
problem. That may take a long time, and, frankly, we need to
fix this soon.
All you have to do to see where the money is going, it's
going to Mississippi, Alabama, and West Virginia. Eighty-five
percent of the money is going to those three states. And a few
states--Montana gets a little, Wyoming gets a touch, Kentucky,
New Hampshire, Maine, or rather Vermont, not New Hampshire. The
rest of the states, all of which have rural areas, all of which
have ratepayers paying into the program. They get absolutely
nothing for this. And I just think that that is a mistake, and
the evidence is behind me, and we ought to fix it.
Thank you, Mr. Chairman.
Senator Lautenberg. Mr. Chairman.
Senator Burns. OK. Senator Lautenberg?
Senator Lautenberg. We have spent $1.7 billion in 1997. And
while this is, indeed, a lot of money, Universal Service's
funding-base fees, charges assessed on interstate and
international end-user telecommunication revenues, continue to
decline. In 2001 and 2002, the Universal Service funding base
declined by an average of 8 percent per year. The decline in
the service base, the funding base, will continue unless we
stop carriers from finding ways to avoid contributing to the
Universal Service Fund.
And I'd like to briefly point to two specific funds within
the Universal Service Fund that I believe are critically
important to all Americans, and particularly people in my part
of the country. First, the low-income support fund, very
important, children, single mothers, low-income families in
high cost-of-living areas, like my home state of New Jersey.
Second, the e-rate fund. It's a critically important fund at
thousands of schools and libraries throughout America. And I
know there have been some problems with it, but the goals and
the contribution of the e-rate funds to schools and libraries
are worth preserving. So while we discuss the future of the
Universal Service Fund, we should keep the long-term viability
and proportionate funding of these two important programs.
And I'm quick to mention, since we, in New Jersey, are
noteworthy, about the difference that we generally get back on
the dollars we send down to Washington. We're about 49th in
return on those dollars, and, in particular, with all the
Universal Service funds, we sent in 219 million, and we got
back 43 for our poor and remote people. We have them, in New
Jersey. We have--unfortunately, every state has them, but we
have more than our share.
So, Mr. Chairman, I thank you very much and commend you for
holding this hearing, and I enjoyed hearing from the
commissioners.
Senator Burns. I'm going to recognize Senator Stevens. He's
got other duties to perform over in Appropriations. And so I'd
recognize the Senator at this time.
Senator Stevens. Well, I do appreciate the comments that
the Chairman has made, but I think it would be good for us to
focus a little on history here before we go into the question
of what should be the future of the fund.
When I came to the Senate, for instance, in Alaska, the
Army provided all of the service for telephones in Alaska. It
was completely a government system. We traveled through to a
private system. And Hawaii at that time had a very poor system.
Senator Inouye and I asked for a concept of equalization of
costs. ``Rate integration'' is what we called it. And that
started a concept of developing a fund, on a private basis, by
the carriers themselves. It was not government money at all.
The interstate rate pool was not administered by the FCC at
all.
It wasn't until 1996, the demands of that fund, having
grown and grown and grown, that we decided that we ought to
find a new title, and we called it the Universal Service Fund.
It still was not Federal money, it was not taxed money; it was
contributions from those people who used the basic interstate
service into a fund to assure that every portion of the country
could receive a call from the interstate fund. But the 1996 Act
added to that the concept of the e-rate, the concept of
providing service to schools, libraries, and health facilities,
no matter where they were. And the concept that you're calling
low-income fund was really that e-rate started in this
Committee, as a matter of fact, by Senators Snowe and
Rockefeller, put in an amendment to require this.
The demands from that fund are now what is causing the
enormous increase in demand for Universal Service
contributions. So I think we ought to look back and wonder a
little bit whether the users of communications services should
continue to provide the assistance to schools, libraries, and
health facilities, and have us be willing not to call it a tax.
There still is an enormous demand to assure that the
telecommunications system, really the total communications
systems now, it's no longer used, it shouldn't be called
telecommunications, telephones aren't involved in a lot of it.
The communications system of the country demands unification to
the point where no matter where you are, from Key West to Point
Barrow, or from a northern port in Maine to the border of
California down by San Diego, no matter where you are you
should be able to freely access any other place in this
country. And, as far as that's concerned now, you should be
assured we're working to make certain that our people could
reach anywhere on the globe as inexpensively as possible so we
can continue to be the dominant partner in the global economy.
Now, we're at the place now where Universal Service has to
be reformed, but I think we need really a conference of this
Committee to say where are we going. Should we turn to the
financial Ways and Means Committee and say maybe you should
devise a way that we meet these demands for the schools,
libraries, and health facilities without putting the burden on
communications systems. I'm not saying we should or shouldn't,
but maybe we should, because that's a considerable increasing
burden that has nothing to do with communications. And in my
state, it demands a significant portion of that contribution,
and I applaud it. We now have connections to all of our
schools, and we now have connections to all our health
facilities, and we've developed what we call telemedicine
because of it.
But the policy question we have here today is what to do
with Universal Service in the future, and I think it demands
more than a review of what you have under your jurisdiction,
Mr. Chairman. It demands more of a review of what social
concerns are we going to require the users of communications to
pay for. And once we get that decided, then we can decide what
system the communications system itself should contribute to
make sure that it is ubiquitous, that it will meet any part,
any demand from any American anywhere for communications.
I'll close by saying I hope you heard about the two young
snow machiners that were going across Mount McKinley, the area
south of Mount McKinley. Now, some people don't believe snow
machiners should be in that area, but they were going there,
having a grand time racing across, and they didn't see a
crevasse. And, lo and behold, one of them went down the
crevasse, and his partner, when he got his machine stopped, he
looked down the crevasse, and there, down there about 120 feet,
is his partner, standing on the skis that were wedged in the
ledge in this crevasse. And they shouted and argued for awhile.
And finally, the gentleman down in the crevasse pulled out his
cell phone and dialed 911. A satellite happened to be going
over, picked it up and notified the local nearest 911, which
was in Anchorage, and within 35 minutes a National Guard
aircraft picked him out of the crevasse.
Now, that may not mean much to you, but it does to me. But
beyond that, that's ubiquitous coverage. The capability of
getting a call from anywhere in the United States, even down
the bottom of a crevasse, to assure health and safety and the
ability to get aid. Now, I think that's what we ought to do. We
ought to concentrate more on that.
But I urge you to start thinking about what are these
increasing demands on this system before and should we find
some way to limit those, or should we find some way to pass
them off before we decide who should start contributing to
overall Universal Service Fund.
Thank you very much.
Senator Burns. You weren't the young man at the bottom of
that crevasse, were you?
Senator Stevens. If I was, you would have left me there.
[Laughter.]
Senator Burns. Yes, he was the man at the bottom of the
crevasse.
Mr. Chairman, you've heard the comments up here. And I
would ask you, and I guess we're talking this morning about
broadening the base of revenues and how they're derived. And
let this Committee know, if you believe the lack of necessary
statutory authority to adopt appropriate contribution
mechanisms, what changes in the law would you recommend?
Mr. Powell. Well, I think the first and most obvious thing,
which I think you have introduced legislation to deal with is
the fact that we currently are legally forbidden from assessing
on intrastate revenues. And I think that as we struggle through
what solutions we might make and to the method in which
contributions are assessed, that is a significant impediment,
not only because it's a source of funding, which I think is the
obvious reason, but because more and more converged services
make very little distinction between a long distance or an
interstate communications and an intrastate communications.
So, for example, in wireless technology, you see buckets of
minutes. They're just buckets of minutes, as far as consumers
are concerned. There's little difference between local and
long. That's causing an enormous difficulty in separating out
what constitute the interstate revenues and what constitute the
intrastate revenues. And it's also an incentive for carriers to
under-represent what portion of their revenues are actually
interstate. And you start, in essence, estimating and sometimes
guesstimating what that is. If all sources of revenue were
available to the program and the Commission, that significant
allocation challenge would be removed, and I think you would
probably get a fairer representation of contributions and the
methodology.
Senator Burns. When you talk about telecommunications, and
we talk about the different ways that we communicate, and in
your statement you talked about those new services that have
come online that maybe should be a participant in that revenue
base, would Voice over Internet Protocol fit in that category?
Mr. Powell. I think that there's nothing that prevents you
from asking the question about whether any new services that
comes along, like that one----
[Laughter.]
Mr. Powell.--could or couldn't be in the base. I think that
that judgment has to be something in which you're balancing the
various objectives that you achieve. I do believe there are
times when Congress and the Commission have provided incubation
periods for new and emerging technologies, because it wants to
promote the competitive objectives of the statute or the
innovation objectives, in which it doesn't impose that
assessment for some period of time, as a part of fostering
that.
But I do think that nothing should, per se, be off the
eligibility list.
Senator Burns. Senator Dorgan?
Senator Dorgan. Mr. Chairman, thank you very much.
Again, Chairman Powell, thank you for being here and
participating in this. Specifically, if you can, what services
do you think should and should not contribute in the future,
just as a policy matter?
Mr. Powell. I do believe that what's going to happen over a
decade or more is that basically all services are going to
become IP protocol-based, which means, in essence,
communications are going to be the Internet. And I think that
as that metamorphosizes, we are going to have to metamorphosize
the Universal Service Program to operate in that environment.
So I think that there is a legitimate question about if and
when those services begin to meet the principles that are
themselves outlined by the Congress in this statute, when is it
being subscribed to by a substantial portion of the community,
et cetera, et cetera. But I do believe that probably the
largest category in the migration that ultimately we'll have to
ask the question about assessing.
Senator Dorgan. You describe in your testimony that perhaps
we should look at systems that are not necessarily revenue-
based, but isn't a revenue-based system a system that would
make the most sense, generally?
Mr. Powell. Well, I'm not sure of that. I mean, what we're
finding is that, you know, when a system is revenues-based,
you're very dependent on the throes of the marketplace. And for
a long time, interstate revenues were very stable, but they've
become very tumultuous because of the changes in the market. So
we have, for example, just long-distance-carrier decline,
interstate revenues there have declined dramatically over time.
We have a service innovation that is combining services in ways
that's very difficult to determine the actual revenues.
I think the key to the program is stability, and one of the
reasons I think it's worth examining some of the connection-
based proposals is, I believe that they're a little more stable
as a factor than whether a company has a good revenue quarter,
or is projected to have a good revenue quarter, in a market
that's likely to remain relatively tumultuous over this digital
transition period.
Senator Dorgan. Let me ask, just for a moment, about the
decision by the FCC that wireline broadband service is an
information service and not a telecommunications service. As
you know, when that decision was considered by the FCC, there
were concerns about that. When we wrote the Telecommunications
Act, it seems to me that we would not have--of course, that was
1996, and what has happened is the world has changed. It
changes and then changes again, there's this metamorphosis in
communications. But I don't know that--I don't believe any of
us would have imagined a day when the newest invention for
communication over a phone line that is broadband would not be
called a telecommunications service. Can you go through for me
your thinking or reasoning there?
Mr. Powell. Well, I do want to be clear, the Commission has
yet to rule that wireline services are information service.
It's just a proceeding that's underway. We do so with respect
to cable modem services, but we have yet to complete our
proceeding on DSL or wireline services, just to----
Senator Dorgan. Right.
Mr. Powell.--just to make the record accurate.
I think what we are facing, just to put it in a nutshell,
the challenge for the Commission is, all communication services
are rapidly metamorphosizing to things that look more and more
like Internet, more and more like information services, and
less and less like telephone services, of the traditional
variety, which is creating all kinds of gray areas in which new
services have to be classified.
Congress does have definitions of telecom services, but it
also has explicit policies associated with Internet and
information services policies. I think those decisions were
made at a time when those categories were more clearly defined,
and those categories are becoming more and more ambiguous. I
think the Commission is facing factual challenges, as it sees
new services emerge, as to what their nature is under this
statute, and I think that's going to continue.
Senator Dorgan. Yes, I understand a final decision hasn't
been made, but my understanding of the announcements was that
that was a direction you were heading, or you had tentative
conclusions. Maybe I'm missing----
Mr. Powell. That's accurate, yes.
Senator Dorgan.--part of that. And if that's the case,
under the 1996 Act, only, ``telecommunications services,'' are
eligible for Universal Service support. Is that right? And if
that's the case, if your tentative conclusion becomes a
permanent conclusion, then broadband can never be supported by
Universal Service. And if we migrate telephone service to
broadband, for example, if we're moving in this direction, are
we moving in a direction where your determination at the FCC
will preclude a significant amount of service from ever being
eligible for Universal Service, and how do you reconcile that?
Mr. Powell. Let me take a moment with that question,
because I think the answer is, not necessarily, not really.
Because, first of all, on the contribution side, I think
Congress, in its wisdom, gave the Commission permissive
authority to assess contributions for those who use
telecommunications, even if they're not telecommunications
services. So I, personally, am strongly of the view that we do
have legal authority to assess Universal Service contributions
against information service providers that use telecom.
On the receiving side, here's what the Joint Board has
moved toward and the Commission has moved toward. The Universal
Service funds don't actually go for services; they go for
network costs and infrastructures. And the advantage that we
have is, the vast majority, if not all, of the infrastructures
on which broadband services are provided are integrated
networks that are also part of telecommunications
infrastructures. And so it is the case today that our policies
are that there are no barriers. We don't attempt to require
people parse what portions of their network are being used for
information services and what portion of their networks are
being used for telecom services, in receiving Universal Service
funds.
So to try to put that in a nutshell, a typical DSL network
is being used for telephone services and information services,
and the Universal Service receipts that they are obtaining can
be used for investing in and improving the network, under our
rules, regardless of what services on the service layer are
ultimately going over that. And so I think what we try to do is
be careful to say the funds are for network costs and
infrastructure investment and are less tied to specifically
what services run over them, to the greatest extent the law
permits, and so a lot of money, Universal Service money, is, in
fact, being used for infrastructure modification and upgrade
that provides broadband services in rural America.
Senator Dorgan. Mr. Chairman, I see my time is expired, but
let me just mention that in Section 254, the call in that
section for Universal Service explicitly in the 1996 Act had it
covering advanced telecommunications and information services.
So whatever we do as we move in this direction, it's critically
important that we provide universal service support for that
technology that represents the basis for telephone service for
people who live in high-cost areas.
Mr. Chairman, thank you.
Senator Burns. Senator Sununu?
Senator Sununu. Chairman Powell, in your statement you
talked a little bit about portability. I know this was
something that Senator Stevens mentioned in his opening
remarks. I did not hear his ``opening'' opening remarks. And I
would like for you just talk a little bit more about this issue
of portability and ways that we should be mindful not to
undermine portability as we look at changes to the Universal
Service Fund.
Mr. Powell. I think that's right. The one thing I would say
is, what makes this challenge is, I think, Congress and the
Commission have lots of goals, and many of them put strains on
other goals. And so one of the things we see happening is, the
fruits of success of the 1996 Act are part of what presents the
challenge. So what we've had is an increasing amount of
competition, an increasing amount of carriers, facility-based
carriers and other type of carriers, entering markets and
competing for consumers. We also have had successful technology
migration and substitution. So we are seeing dramatic increase
in uses of new technologies to provide communications systems,
where once we only had the landline telephone system.
We shouldn't be upset about that. That, to me, is a
wonderful accomplishment. But what it means is there are a
whole lot more supplicants showing up to the Universal Service
trough looking to access that money as a way of lowering their
costs, as well. And so one of the issues associated with
portability is, as carriers begin to come into markets and
you're dealing with more than just the traditional incumbent
that's providing service, but others who are competing at it,
now you have issues of technical neutrality to concern
yourself. Are you biasing one technology over the other by the
movement of the funds? Are you biasing competitive entry or
preventing competitive entry, depending on the policies you
adopt? So this a problem that has been presenting itself
because of the successes of our other policies.
And so what do we have to get right here? I think what we
have to get right here it to make sure that the availability of
funds and the allocation of them do not inadvertently bias one
competitive alternative over another, because I don't think the
Government should be in the business of picking the winners and
losers in a market. And I think competition is for rural folks,
too. I don't want a policy that would discourage entry or
investment into rural America to offer competitive choices to
rural consumers.
The problem is, we're coming out of a relatively monopoly
environment in which these problems wouldn't have been
presented. So what portability is about is, if you win a
customer, what do you get? Do you get all the Universal Service
funds that the incumbent got? Do you get them based on the same
cost that the incumbent had, or your own costs, or some other
model of costs? And so those are the hard questions. And I'm
happy to say these are very well teed up. This is something the
Joint Board has been working on for a very long time, had a
series of hearings in the summer, and are about to give us a
recommendation on both eligible telecommunication carrier
policy and portability policy. So this is pretty ripe for a set
of decisions on the Commission's part.
Senator Sununu. What are the critical concerns or critical
issues, in your mind, or in the collective mind of the board,
in comparing the advantage and disadvantages of assessments
based on telephone numbers versus number of connections or the
number of lines?
Mr. Powell. Well, in many ways both are connection-based
approaches. They're administered differently. One uses
telephone numbers, one uses pure connections, but they're both
basically connection-based approaches.
The general benefit of the connection-based approaches is
that it tends to be a more stable basis on which to assess. It
tends to be a somewhat more technology-neutral basis on which
to assess. But the critics would say what it potentially does
is dramatically shift away certain classes of carriers from
being contributors. The telephone approach is the most
egregious in that regard, in this sense, that right now the
biggest burden probably rests on long-distance interchange
telephone carriers. Under a telephone-connection based, most
long-distance carriers don't have telephone numbers associated
with their customer relationships, and they could arguably be
free completely, under the wrong kind of connection-based
system, from contributing at all.
And so the statute also tells us that the burden has to be
equitably distributed among providers. So if you had a system
that might make sense but left some out or shifted the burden
dramatically to other classes, we could be challenged as not
meeting the statute's requirement of equitable distribution. So
that has been one of the great criticisms of the contribution
method, and specifically the one associated with numbers.
Now, if you'll indulge me, there's a way to deal with that.
One of the things the Commission is looking at is the
possibility of hybrid approaches; that is, a basic connection
approach that also uses revenues to supplement that approach in
some creative way so that some of those abuses are mitigated.
But we're still working through that.
Senator Sununu. Finally, are there any specific
technologies that have caught your attention that you would
want to highlight that you think have the greatest potential to
reduce the cost of Universal Service as we look out over the
next 5 or 10 years?
Mr. Powell. Yes. You know, this is why I tried, in my
statement, to make clear that we should see this as an
opportunity and an exciting moment for Universal Service,
because one of the great advantages of a lot of the new high-
technology stuff is, it's dramatically lower in cost to deploy
and utilize than some of the cost structures that we've had to
administer in the traditional wireline telephone system.
I always like to use, just as a dramatic example, you know,
a satellite, at 28,000 feet sees Butte, Montana, just the way
it sees Manhattan, and it may make no distinction in its
technological solution as to the way it delivers services.
Wireless, even wireless terrestrial services, enjoy certain
costs and geographic advantages that a company that has a
string of wire over a mountain, down the hill, and 600 miles to
the next house doesn't have.
And so the key, to me, if we get our policies right, is
that these things are colors on a palette of paint, and we can
use them and apply them where they're optimal, given the
demographics or the geographics of particular parts of the
world.
But one reason I think the leading agenda at the Commission
right now is wireless technology is because we think it holds
some of the greatest advantages for ubiquity, affordability,
and lower-cost services for all consumers in all regions. And,
as the Senator said, it was a wireless technology that would
get the guy out of a crevasse. Nobody strung a twisted copper
wire down there in case someone happens to fall in that
location. There's no phone booth down there.
Senator Burns. Thank you, Senator.
I'll tell you what I'm going to do. I'm going to just
recess the Committee. We've got about four or 5 minutes on this
vote, and everybody can go vote, and then everybody can come
back. Is that fair enough? And we'll stand in recess until we
get back.
[Recess.]
Senator Burns. Senator Smith is next. Well, Senator
Lautenberg was, but Senator Smith is here. I'm going to ask him
just to take the gavel just for a second. I've got about a 15-
minute thing I've got to take care of, and so, Senator Smith,
the Committee recognizes you, and you've got the gavel to do
anything that you want to do at this time.
[Laughter.]
Senator Smith [presiding]. Now, what do I do with all this
power?
Senator Burns. It could be fleeting, you know.
[Laughter.]
Senator Smith. Thank you, Mr. Chairman.
And, Chairman Powell, thank you for coming today. It's
always a pleasure to see you. And you heard my abbreviated
opening statement. Obviously, when it comes to the
disbursement, I think these are your charts. We didn't prepare
them, we got them from the FCC. And I think they speak for
themselves in that, at least as to the distribution formula,
there are a lot of people in rural areas, a lot of people
everywhere, from all areas, making payments into this fund that
get nothing back for it. And I understand that where they're
served by long-distance carriers, they're somehow excluded, but
then they also ought to be excluded from the charge, it seems
to me. And I'm wondering if you can help us come up with a
fairer distribution formula than this represents.
Mr. Powell. Of course we can always do our best to help. I
think there's something very, very important, though, that we
have to also put on the table, because I think these charts are
accurate, to the extent of what they are.
The Universal Service Program is multiple programs,
multiple pots of money that are expended for similar purposes.
These numbers represent only the non-rural high-cost fund, only
the money that is paid to the largest carriers in a state,
which represents about $230 million. But we also have the rural
high-cost fund, which represents more like $3 billion, which is
distributed to every one of the 50 states in the United States.
So, for example, a state like Virginia, that you mentioned,
that does not get non-rural high-cost support for its large
carrier, does get $70 million in rural-cost support, so that
every state is receiving a fairly decent amount of high-cost
Universal Service support, the difference being which carriers
are receiving it. So a state like Virginia, their large
incumbent may be getting no high-cost support, but their rural
carriers throughout the state are getting a significant amount.
I only say that because I think as we wrestle through what
the fair distribution is, we have to look at what everybody's
getting from all the pots of money. Moreover, the large
incumbents also get money from other funds, like the state
Universal Service Fund and the interstate access fund of $650
million, which they draw from, as well.
So that only makes the picture more complex, and so we
wouldn't want our data to suggest that states are getting
nothing. They're getting nothing from that bucket of money, but
the huge bucket of money in high-cost, the $3 billion bucket,
almost all of those states are getting pretty significant
amounts of money.
But we wrestle with how to make the distribution fair.
Senator Smith. I love Mississippi and Alabama and West
Virginia, but do they benefit from those other pots of money,
too?
Mr. Powell. They absolutely do. I wouldn't argue that there
aren't states that get substantially more high-cost support
than other states, but I think one of the things we're, I
think, either by design or handicapped by is the essential
premise of Universal Service is shifting money from some states
to other states, to call it like it is. And that's just an
absolute natural and automatic part of the program.
Senator Smith. Well, it just seems to me that giving so
many states nothing out of that pot of money just, on its face,
seems unfair. And they may have large carriers, but it seems to
me if they're paying into that pot, they ought to get something
back out of it in some distribution formula that includes them.
Mr. Powell. Well, again, I think the one thing I may
slightly disagree with is, I think that, you know, people pay
into the Universal Service Fund, and they are getting something
back. I don't know how dramatic it is that it comes out of
bucket A instead of bucket B, if it's real money, for the
citizens of that state. And then there are states who aren't
getting anything. You know, a state like Virginia that doesn't
get the support that you mentioned, is getting $70 million from
the other fund; but a state like Senator Lautenberg's New
Jersey, is--or high-cost, high-paying states like Florida--are
paying into both of these programs and getting very little from
either.
But some of that, I don't know how to completely cure, in
that the fundamental premise of the program is to move money
from some states, actually have them pay and have that money
distributed elsewhere where it's more needed. But I suppose we
can always work on a fairer distribution, so I wouldn't want to
foreclose----
Senator Smith. Have you seen the bill that Senator Bayh and
I have introduced, or do you have any comment on it?
Mr. Powell. I think my only--I haven't studied it, but I do
know the basics, and I think my only comment would be in terms
of the Congress making an assessment if one of its motivating
concerns is equitable distribution. But to do that fully and
fairly would be to also honestly take into account the full
range of the programs and what states are getting, as opposed
to look at only one fund in isolation. That would only be a
recommendation and a caution.
The other thing is, the proposal to do it based on high-
cost rate centers, which I think I understand to be the
proposal, as long we understand that if we did that today that
would be a massive increase in universal funding requirements.
You would have to help me, but I think the statute probably--
the proposal recognizes the need to cap that at some point,
because if it weren't capped, you would be talking about, I
think, a very, very serious increase in the Universal Service
funding requirements on a high-cost rate-center basis.
And then if we're going to have a cap, then you have a
whole issue about what happens when demand exceeds the cap and
how do you distribute when you don't have enough money to meet
the formula. I apologize for not knowing the details well
enough to----
Senator Smith. Well, currently rural states are penalized
by what's called ``state averaging'' because they have a larger
city in them, in that the carrier in the larger city serves
those rural areas, but they're penalized by having a larger
city. And what our bill does is focus on rural wire centers and
allows the SEC to determine the costs fairly on that basis.
Does that make sense to you?
Mr. Powell. It makes sense that I understand what the
concern is and what's trying to be addressed. You know, we have
been fairly comfortable with the state-averaged system, but I
think there are legitimate arguments about doing it
differently. But the only thing I would also caution is, there
are a lot of major carriers who--the reason that they have this
problem is that they've sold off their rural exchanges. And if
a company is going to sell off its rural exchanges to rural
companies so that increasingly it is serving fewer people in
those rural communities, and then wants the same universal
service recovery from that, that's at least something, to be
sure, that we want to embrace. But that's why we think, you
know, sometimes when you have a large company, the averages
help capture the full range of what they're serving. But I
don't argue with you that the fact of averaging always has an
over or under inclusive consequence.
Senator Smith. Well, understanding averaging, I'm not
asking for dollar-for-dollar payment, a dollar back for every
dollar put in, but it does seem to me that when you have
roughly 44 states that get absolutely nothing out of this pot
of money into which they contribute, that, on its face, it just
speaks of unfairness.
And so we're going to push this and see if we can't give
you the authority to modify that formula or perhaps--I know
your Commission has addressed it already and have kept the
status quo, as it's been. Obviously, I'm hoping to incentivize
you to do something different. But I appreciate very much your
considering it.
I think my only additional comment is, in the FCC's
decision last month it sought comment on how states should be
given the opportunity to request additional funds. When do you
expect the FCC to conclude this proceeding? And even if the FCC
is capable of finishing the proceeding next year, which is
probably optimistic, do you realize that it would have taken
the FCC 8 years to implement the Universal Service Provision
Act of 1996? I guess, again, it comes down to, is that really
fair for rural customers served by larger carriers?
Mr. Powell. Well, I would have a difficulty saying exactly
when the proceeding would be completed, since we just initiated
the rulemaking. I don't know the amount of comments we will
receive, the breadth of them, the depth of them, or the
complexity of them, but I will promise you it will not be 8
years. And I certainly won't be here for it----
[Laughter.]
Mr. Powell.--if it's 8 years long.
But I think this is a very--you know, I can only commit to
you that I think we understand the importance you and others
attach to it, and we'll commit the Commission to try to get it
done as quickly as possible and have it be a priority.
Senator Smith. Very good. Is Senator Lautenberg coming
back, do you know?
Well, those are my questions. OK, while we're waiting for
Senator Lautenberg----
Mr. Powell. OK.
Senator Smith.--I'll take up your time, Michael. Appreciate
it.
In your written testimony, you state that, quote, ``We must
evolve our Universal Service programs,'' and that, quote, ``We
need a more rational method of distributing Universal Service
support.'' The FCC was recently given an opportunity to
equitably spread non-rural funds throughout the Nation. But,
instead, they again adopted for the status quo. It goes to the
fairness again, and our hope is that you meet again and decide
differently.
In most of its recent decisions, the FCC goes to great
lengths to state that the Commission's role in Universal
Service should be limited to supporting states that, ``that do
not have the resources within their borders to support all of
their high-cost lines.'' Recognizing this theory, the FCC has
chosen to put the burden on 40 states with the responsibility
to implement the 1996 Act, while it chooses to implement the
Act for the remaining eight to ten states.
And I think your point to me is that, as to that pot of
money, that's an accurate description, but as to others, it may
not be.
Can you speak to what sort of fairness would be represented
if you included all the pots of money that are involved here?
Mr. Powell. Well, I just think if you include all pots of
money, the gap between them is shrunk substantially, and you
might still come to the same conclusion. I haven't done the
math of exactly how people would line up. But I think if
Virginia goes from it-gets-nothing to it-gets-70-million, and
Colorado goes from it-gets-nothing to 60 million, if Montana
goes from nothing to 60 million, then, the fairness gap
between, their getting nothing and they would get more, I
think, is shrunk. And so you may still conclude that there
needs to be adjustments if fairness is the objective.
But I think that you would find states are closer than our
data would suggest by looking at a single bucket. That is, a
state that looks like zero isn't really zero. If you're
focusing on what the state receives, it's usually substantially
higher. And then, whether that compared to a state that's
getting, looking at your chart, something like Mississippi
that's also getting more from this, looking at the delta
there----
Senator Smith. Well, on this--your chart shows Mississippi
from this one pot as getting $120 million. And, you know, if
Virginia gets 70 from a different pot, but they're getting $120
million from this pot that is of concern to me, how much does
Mississippi get from that other pot? In other words, why is
Mississippi so high? I mean, I love Trent Lott, but why is it
so high?
[Laughter.]
Mr. Powell. Now you're really going to get me in trouble.
[Laughter.]
Mr. Powell. I think that you always just--you know, the
challenge of Universal Service is that you always have to look
at what its first principles are, and I think it's above my pay
grade as to whether people support a system that's meant to
export money from some states to other states who have higher
cost infrastructures. But that is what the system is. That's
what it's been for a very long time. That's the way the statute
works. And so the idea that all states would somehow equally
receive or get the same amount that it pays in, I would only
challenge that that's, sort of--it's a great notion, except for
it's the opposite of the Universal Service Program. If
everybody got what they paid in, then it wouldn't be the
Universal Service Program, it would be some program where we
just raise, collect, and distribute money. I don't know what
its purpose would be.
Senator Smith. No, I don't disagree with that, but every
state has a rural aspect to it. Some, like mine, have a lot of
rural aspects, and Montana, as well. And it just seems to me if
Mississippi is getting $120 million from this pot, and
Oregonians are contributing to that pot and getting nothing for
it, that, on its face, that just doesn't seem right.
So I've made my point, and I'd sure appreciate your help on
it, Michael.
Mr. Powell. Thank you.
Senator Smith. Thank you very much for being here.
Mr. Powell. Good talking to you.
Senator Smith. You bet.
Senator Burns [presiding]. Thank you, Senator Smith.
And with your line of thinking, I think you stated, Mr.
Chairman, that the Joint Board's going to make their
recommendations back to you fairly quickly. When will they make
those recommendations?
Mr. Powell. Well, the ones we were speaking of is--the
Joint Board is currently considering the ETC designation
questions and the portability questions, and we anticipate that
they will submit a recommendation to us probably sometime in
early January.
Senator Burns. Well, it's my thought right now that we
should wait on those recommendations before we take a look at
disbursements. And also I think they're going through an
exercise where they're doing that now.
Mr. Powell. Yes.
Senator Burns. And those recommendations--I think right now
what we have to deal with is to broaden the revenue base to
limit--to bring down the load on just those folks who use long
distance to ensure its viability.
Whenever we start looking at the schools and libraries, we
know we've had an explosion, we know that over 90 percent of
the schools are wired now. I'm asking why should there be any
more of a drawdown. When does that fund start to--that curve
start down as far as expenditures are concerned, because we've
done basically what we would say that we were going to do?
Mr. Powell. Yes, it's a good question, actually. It's hard
to say exactly when in time, but it would seem to me, at least
in concept that the biggest part of the schools and libraries
fund, in terms of money, is connections. And, you know,
connections are something tangible that, they're either in now
or they're not.
Services, support of services is something that is, sort of
ongoing, right? Every year you have an Internet service bill or
a telecommunications service bill. So that component of the
program seems to me to be more ongoing and dynamic. But I think
the tough question for us, and perhaps even for Congress, is at
what point, do you declare, that connections portion of it is
beginning to diminish? Because there will be those who argue
that now that you have connections, you need a strong
maintenance program for those connections, you need expensive
help desks for those connections.
One of the challenges in a program like this, even though I
happen to believe the program's goals are absolutely worthy,
and have no problem with them and have no problem with the
program, at some point you're going to have the courage to say
it's not a program that can continually creep. Because with
technology, I can always make you an argument where there's
something else that would make it better. And so at what point
do we start to say that begins to get into the realm of that
should be the state's responsibility or the school system's
responsibility? It's hard to know exactly where that line's
going to be drawn. We're not quite there yet. I want to be
clear about that. But I do think it's worth starting to talk
about. What are the indicia of beginning to scale back on
certain things. And then there are still swaths of schools that
just haven't really fully been gotten to that we still have
important work to do.
Senator Burns. And I would also--putting in that same
category, the business of telemedicine.
Mr. Powell. Oh, yes.
Senator Burns. We've tried----
Mr. Powell. Well, the----
Senator Burns. We've tried--I will tell you, Mr. Chairman,
we have tried to do business with the healthcare financing
system, as far as Medicare is concerned, for reimbursements for
electronic consulting and this type of thing. When I look at my
state of Montana, and I don't think we're any different than
any other state, we look at our demographics in our rural
areas, the age is going up. In other words, our amount of
seniors are in rural areas where there's considerable distance
between them and their healthcare providers. That trend will
continue in my state for quite some time, so we're kind of
concerned. We know healthcare will be delivered in a different
way than has been done in the past. And the medical community
in rural areas, such as Montana--I don't think we're rural, I
think we're frontier, that's one step beyond rural--they have
responded to that very well. Now, Universal Service did play a
role in that. But also I think it's time that the healthcare,
the system itself in healthcare, should start assuming some of
those costs of delivering healthcare into rural areas and to
energize that community that we're going to do things
differently.
And I would also--you recently commented on one thing the
FCC needed to do to reform Universal Service, was to end
regulatory arbitrage opportunities. Can you explain to this
Committee what that statement means?
Mr. Powell. Well, I'm not sure where it comes from, but
I'll do my best. And I'll just answer broadly, because I think
this is a challenge for regulators all the time.
Let's just be blunt. When the government throws out a pot
of money, people go after it. And it will incent behavior. It
will incent private actors who are in the business of making
money for figuring out how to get as much of it for themselves
as possible and to keep others from getting as much of it as
possible. So I think the government has a very, kind of,
special regulatory responsibility when it is administering
programs that include government-mandated pots of money,
because I think you can distort behavior or drive things in
directions that you may or may not mean to. You can bias
competition, you can frustrate the arrival of different kinds
of technology because those aren't profitable, not because the
market says so, but because money is paid for one, but not the
other.
So, when I say that, I'm sometimes talking about
intercarrier compensation, the way carriers compensate each
other in a technology-changing world--sometimes I think that
issue's raised in Universal Service--both of which are where
regulators are saying a lot about who gets paid and how, and
who gets their costs recovered and how, because the minute you
get into that business, you're in the business of very smart
companies figuring out how to position their business model to
maximize their advantages.
Sometimes that does not mean they will do the thing that's
best for consumers of the market, because they're not really
acting in a market; they're acting in a regulatory system, and
they're arbitraging the opportunities. And I think we've seen
that in things like the misuses of reciprocal compensation,
intercarrier compensation, Universal Service, even schools and
libraries. Some of the fraud actions that the government's
bringing, you know, you put it out there, and they will come.
And there are people with some unsavory stuff who showed up. So
you have to be particularly disciplined about protecting that.
Senator Burns. And I'm also hearing that in some cases, as
far as the Universal Fund is concerned, there is--and as far as
contribution, societal contribution, what is good for the
majority of the people, that there is a point of diminishing
returns.
Mr. Powell. Oh, I think so, or that at least we have to
have an honest willingness to ask that question repeatedly,
which I think is what, you and some of your colleagues were
getting at. As we go through this great migration to Internet
light technology, I think it's an important moment to be, sort
of, reinitializing, what are we really trying to do with
Universal Service, who is it really for, what are we trying to
actually achieve. It's actually a fairly old--this is a
hundred-year-old program, in essence, and its original
conception, I think the purposes are, unassailable, but what
you're trying to achieve and the best way to achieve it seems
to me to be constantly--should be subject to reexamination.
So, for example, like we were talking about, if satellites
were suddenly an optimal platform for voice communications,
you'd have a very different set of questions associated with
satellite-deployed voice communications than you did with
copper-deployed ones. And I think if we just act like the
Universal Service objectives are the same thing as the fund,
we're going to make mistakes.
The fund is a means to an end. It's not the only one, but
it is a means to an end. So protecting the fund for its own
sake shouldn't be the question. Protecting the goals and the
role of the fund in protecting those goals seem to me the way I
challenge our staff to think about it, because I'm scared we'll
miss other innovative ways to make sure the citizens of these
rural areas are served.
Senator Burns. Well, we've got sizable challenges ahead of
us----
Mr. Powell. Yes, sir.
Senator Burns.--and quite a lot of dialogue. And I don't
think our accumulation of testimony and material to read before
we finally get to bottom line--because we know this difference
now, we see long distance as just a different kind of a world
now, it's all you can eat in 49 minutes or whatever, and you
buy so much time. And I know that probably causes great
heartburn for auditors and this type thing on how do we
collect, and I know we have to look at that, as far as the
revenue base.
But when carriers have to allocate costs between
jurisdictions, I think probably this is the greatest challenge
that we have, without resorting to burdensome audits, how in
the world does the Commission ensure that those carriers are
paying their fair share in the USF and the markets? I'd have to
ask if the markets don't move forward toward, they're moving
toward bundling, and they argue for a new assessment kind of
mechanism, I think they're crying for it. Is that a proper
assessment?
Mr. Powell. I think that's right. It's just a matter of
what. And what's the answer to that question?
In many ways, I think the future has enough clarity now
that we know things are going to look very, very different, in
terms of the system of communications that we have, who the
players in that system of communications are going to be, and
how they're going to be more similar than different. I mean,
all the buzz words about convergence are basically right.
You're going to have communications companies and
communications services, and they are not going to be, as a
technical matter, particularly different from other kinds. I
mean, it may be a visual picture, but it's still just bits.
And so what I try to think about is, we all have short-term
things we need to do, mid-term things we need to do, but we
need to be crystal clear about where we think we're going to
be, and understand that what we should really be saying to
ourselves is, ``What's Universal Service in 10 years, when
everything's IP or all the companies in the communications
sector have reordered themselves into large communications
services and provide suites in buckets?'' And so every
incremental decision we make may be for the moment. Maybe it's
to save the contribution factor for this quarter. But it should
always be done in a way that's moving productively in the
direction of where you think the trends are taking you anyway,
and not choose ones that might work for the corridor but are
going at cross-purposes of where you have to probably
ultimately get to.
Senator Burns. Well, if the 1996--and with all of its
imperfections, the 1996 Act that deregulated a lot of areas--
and I would say that part of the great economy that we
experienced in the 1990s was due, quite a lot of that--we
didn't know how much venture capital was out there ready to
come into the telecommunications industry until we did dereg a
good part of it. Did we do it right? I'm not going to go into
that. But what it did, it allowed those investments to come in,
and it has clarified. You are right, we see the future now a
lot better. Had we not passed the 1956 Act, if we were still
operating under the 1995 Act, it would be as cloudy out there
now as it was in 1996, and with not too many changes, to be
right honest with you, that would have happened in the
telecommunications industry. So I think you're exactly right.
I want to thank you for coming this morning and sharing
your thoughts on this. There will be other dialogue and other
opportunities. And, Mr. Chairman, I was told awhile ago, with a
little phone number, that there will be some more questions
forthcoming, and if you could respond to them and the
Committee, we could certainly appreciate that.
And I thank you for coming this morning, and this hearing
is closed.
[Whereupon, at 11:45 a.m., the hearing was adjourned.]
A P P E N D I X
Prepared Statement of Hon. Ernest F. Hollings,
U.S. Senator from South Carolina
Thank you, Mr. Chairman. Once again, today's hearing focuses
attention on one of the cornerstones of U.S. telecommunications
policy--namely, our commitment to ensuring that all Americans have
access to quality communications services at reasonably comparable
prices. While the promise of universal service began in the 1930s as a
justification for the continuation of AT&T's monopoly, this principle
has endured past the break-up of AT&T in 1984 and was explicitly
articulated by Congress in the Telecommunications Act of 1996. As a
result, our commitment to ensuring ``universal service'' continues to
serve our Nation well in today's ever-changing communications
marketplace by promoting the economic and social well-being of numerous
communities across America.
Unfortunately, over the last few years, the long-term viability of
our current mechanism for supporting universal service has come into
question. Recent increases in the size of the Universal Service Fund
and the shrinking base of interstate revenues have resulted in calls
for major modifications to the current contribution mechanism. In
addition, growing wireless substitution and the rapid evolution of
``voice-over-the Internet'' technologies threaten to place even further
pressures on our current system of supporting ubiquitous, nationwide
access to communications services. And while proposals to change the
current contribution methodology have been under review by the FCC
since May 2001, the FCC has yet to adopt significant changes that would
ensure the long-term stability of the Universal Service Fund.
In an attempt to address the logjam at the FCC, Senators Burns,
Stevens, Dorgan and others have held a series of roundtable discussions
with industry stakeholders to try and highlight differences and
identify common ground. I want to commend my colleagues for their
efforts in this regard. I look forward to working with them in the days
ahead to draft legislation that will improve our current system.
In undertaking this task, it is my hope that our friends in
industry will join with us in recognizing that time is of the essence.
Unless we are able to construct a system where all who benefit from the
communications network help to support its universal availability, the
continued evolution of new Internet-based communications technologies
will only increase the strain on an already creaking system.
As a result, today's hearing comes at a critical juncture, not only
for our efforts to create an equitable and sustainable means of
collecting support, but also for our understanding of what level of
service should be supported in a society that will increasingly be
dependent on advanced communications capabilities. As the FCC addresses
these new challenges, it is essential that it keep in mind Congress'
underlying goal of ensuring that consumers in all regions of the Nation
have access to reasonably comparable services at reasonably comparable
prices.
With this as our guide, I look forward to the testimony of Chairman
Powell and to his responses to our questions.
______
Prepared Statement of Hon. Daniel K. Inouye,
U.S. Senator from Hawaii
Our discussion this morning revisits critical issues regarding the
sufficiency, stability and viability of the Universal Service Fund.
Indeed, today's examination follows earlier hearings conducted by this
committee during the 107th Congress and this past April specifically
focused on our current mechanism for funding universal service. This
matter has also been under consideration at the FCC for some time. As a
result, we are pleased to welcome Chairman Michael Powell and look
forward to his testimony, which we hope will further illuminate these
important issues.
At its foundation, our commitment to universal service is founded
on the belief that basic communications services should be available to
all Americans at reasonable rates. Under the Telecommunications Act of
1996, Congress reaffirmed its commitment to this principle, explicitly
stating that the definition of universal service would be sufficiently
flexible to capture ``an evolving level of telecommunications
services'' so that all Americans might enjoy the promise of advances in
communications technology. Additionally, Congress expanded the
universal service commitment to include schools, libraries and rural
health care providers as well as other eligible telecommunications
carriers with the understanding that as telecommunications services
reach more and more individuals, all Americans benefit.
While our fidelity to these principles remains resolute, there is a
growing recognition that out current method of funding universal
service, which today relies on assessments to a telecommunications
carrier's interstate and international voice revenues, is under
increasing pressure. The evolution of new communications technologies
such as Voice-over-Internet-Protocol (VoIP) communications as well as
the increasing popularity of bundled wireless and competitive service
offerings threaten to further diminish an already shrinking funding
base. At the same time, the cost of providing universal service support
continues to increase. Total universal service disbursements have
increased from $1.8 billion in 1997 to $5.3 billion in 2002, and the
fund is estimated to reach $7.1 billion by 2008. The rapid increase in
the size of the fund coupled with the decline in interstate revenues
has prompted the FCC to institute stopgap measures to temporarily
stabilize the collection mechanism.
There appears to be growing consensus that the question before us
is no longer whether the universal service funding mechanism should be
changed, but how it should be changed. The Commission is currently
considering several proposals. While some proposals seek to modify the
existing revenue-based mechanism, others propose instituting a ``per
connection'' or ``per telephone number'' approach. Each of these plans
would affect the proportionate share of contributions that each sector
within the telecommunications industry collects as well as the relative
share contributed by residential and business subscribers.
In the end, there is a growing awareness that the pressures on
universal service being brought to bear by a rapidly changing
communications marketplace will require action, perhaps congressional
action, sooner rather than later. As a result, I look forward to our
discussion today with Chairman Powell, and to working with my
colleagues in the days ahead toward placing our universal service
system on firmer footing.
This page intentionally left blank.
This page intentionally left blank.
This page intentionally left blank.