[Senate Hearing 108-905]
[From the U.S. Government Publishing Office]


                                                        S. Hrg. 108-905
 
                      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

                               __________

                             APRIL 2, 2003

                               __________

    Printed for the use of the Committee on Commerce, Science, and 
                             Transportation

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       SENATE COMMITTEE ON COMMERCE, SCIENCE, AND TRANSPORTATION

                      ONE HUNDRED EIGHTH CONGRESS

                             FIRST SESSION

                     JOHN McCAIN, Arizona, Chairman
TED STEVENS, Alaska                  ERNEST F. HOLLINGS, South Carolina
CONRAD BURNS, Montana                DANIEL K. INOUYE, Hawaii
TRENT LOTT, Mississippi              JOHN D. ROCKEFELLER IV, West 
KAY BAILEY HUTCHISON, Texas              Virginia
OLYMPIA J. SNOWE, Maine              JOHN F. KERRY, Massachusetts
SAM BROWNBACK, Kansas                JOHN B. BREAUX, Louisiana
GORDON SMITH, Oregon                 BYRON L. DORGAN, North Dakota
PETER G. FITZGERALD, Illinois        RON WYDEN, Oregon
JOHN ENSIGN, Nevada                  BARBARA BOXER, California
GEORGE ALLEN, Virginia               BILL NELSON, Florida
JOHN E. SUNUNU, New Hampshire        MARIA CANTWELL, Washington
                                     FRANK 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 Carolina
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 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
























                            C O N T E N T S

                              ----------                              
                                                                   Page
Hearing held on April 2, 2003....................................     1
Statement of Senator Burns.......................................     1
    Prepared statement...........................................     1
Statement of Senator Brownback...................................     5
Statement of Senator Hollings....................................     2
    Prepared statement...........................................     3
Statement of Senator Smith.......................................     4

                               Witnesses

Abernathy, Hon. Kathleen Q., Commissioner, Federal Communications 
  Commission.....................................................     6
    Prepared statement...........................................     8
Dosch, Matthew, Vice President, External Affairs, Comporium Group    32
    Prepared statement...........................................    33
Gillis, Dr. William R., Director, WSU Center to Bridge the 
  Digital Divide.................................................    38
    Prepared statement...........................................    40
Hughes, Carson, CEO, Telapex, Inc................................    45
    Prepared statement...........................................    46
Lubin, Joel, Vice President, Federal Government Affairs, AT&T 
  Corporation....................................................    13
    Prepared statement...........................................    15
Meade, Thomas R., Vice President of Regulatory Requirements, 
  Alaska Communications Systems..................................    68
    Prepared statement...........................................    70
Orent, Robert, President and CEO, Hiawatha Communications, Inc...    20
    Prepared statement...........................................    23
    Prepared statement of the Rural Telephone Finance Cooperative    21
Rhyner, Jack H., President and CEO, TelAlaska, Inc...............    84
    Prepared statement...........................................    86
Tindall, Dana L., Senior Vice President, Legal, Regulatory and 
  Governmental Affairs, General Communication, Inc...............    75
    Prepared statement...........................................    77

                                Appendix

Renard, Bruce, President, American Public Communications Council, 
  prepared statement.............................................    93


                      FUTURE OF UNIVERSAL SERVICE

                              ----------                              


                        WEDNESDAY, APRIL 2, 2003

                               U.S. Senate,
                    Subcommittee on Communications,
        Committee on Commerce, Science, and Transportation,
                                                    Washington, DC.
    The Subcommittee met, pursuant to notice, at 9:35 a.m. in 
room SR-253, Russell Senate Office Building, Hon. Conrad Burns, 

Chairman of the Subcommittee, presiding.

            OPENING STATEMENT OF HON. CONRAD BURNS, 
                   U.S. SENATOR FROM MONTANA

    Senator Burns. We will call the Committee to order. And I 
must apologize for being a little late. We were at the briefing 
of the operation now going on in Iraq, and so I overstayed my 
time there and I beg the patience of members of this Committee 
and also the witnesses and those who have a high interest in 
universal service.
    I think I am going to forego my opening statement, in the 
interest of time, and submit it for the record.
    Mine is sort of a lengthy statement. But I think it's 
pretty well understood where we are coming from on this issue. 
This is an issue that needs to be addressed right now, and 
there is urgency to it, and working with other members of the 
Committee and working, of course, with the FCC, we can come up 
with maybe a solution to this, but we have to work together to 
do it.
    It is a matter of urgency. We know that there have been 
some abuses. We know that the stream flow into the universal 
services is down and action is necessary if we are to help out 
our high-cost areas and ensure telecommunications for everybody 
in the United States.
    So I am going to put my statement in the record, and I 
thank you for coming today.
    [The prepared statement of Senator Burns follows:]

   Prepared Statement of Hon. Conrad Burns, U.S. Senator from Montana
    Today's hearing concerns a topic which poses an imminent threat to 
the economic future of rural America: the current looming crisis in 
universal service. I have always been a strong supporter of universal 
service during my time in the Senate. Clearly, a solvent and stable 
Universal Service Fund benefits rural consumers throughout America by 
providing the backbone for commercial and educational development.
    It is because of the critical nature of universal service that I 
have become alarmed that it has become seriously endangered. A hard 
look at the numbers reveals the dire nature of the current situation. 
The size of the Universal Service Fund has exploded upward from just 
over $1 billion in 1996 to $5.7 billion in 2002. Universal service 
support for 2003 is estimated to be $6.3 billion, a number that will 
continue to spiral upward to over $7 billion in fiscal year 2004. Such 
a huge increase in the Fund presents the Congress with a stark fiscal 
reality that cannot be ignored.
    Adding to the difficulty of ensuring a sound Universal Service Fund 
is the steady decrease in interstate revenues, the primary revenue 
source from which the Fund draws. Beginning in 2000, interstate revenue 
began to plateau at roughly $20 billion per quarter. Unfortunately, 
from 2000 to today, these revenues have plummeted, to the point where 
estimated interstate revenues for the first quarter of 2003 are 
projected at only $17 billion. The FCC has dealt with this decline by 
simply increasing the contribution rate assessed on providers of 
interstate telecommunications services from roughly 5.7 percent in the 
fourth quarter of 2000 to 7.3 percent in the second quarter of 2002. 
Just yesterday, the contribution rate was raised again to 9.1 percent. 
Ultimately, consumers bear this ever-increasing burden and this trend 
cannot be allowed to continue.
    Beyond the way that universal service is being supported, I have 
also become very concerned at the way that Universal Service Funds are 
being distributed. While the Schools and Libraries Fund, for example, 
was designed to support high-cost rural areas in particular, the 
numbers tell a different story. Since the inception of the schools and 
libraries program, California has enjoyed a bonanza of nearly $1.5 
billion while Montana has received barely $18 million. Something is 
wrong with this picture. Clearly, some significant reforms to the 
universal service contribution and distribution system need to be made.
    I will be carefully reviewing the Commission's work to ensure that 
it adheres to its stated core principles, which include:

   To ensure the stability and sustainability of the Universal 
        Service Fund.

   To ensure that contributors are assessed in an equitable and 
        nondiscriminatory manner.

   To develop a contribution recovery process that is fair and 
        readily understood by consumers.

    My thinking on universal service has been greatly informed by the 
experience that Montanans have had with their small, rural operators. 
The achievements of Montana's small independent and cooperative 
telephone companies are indeed remarkable. Montana's co-ops have now 
rolled out DSL services to over 170 communities across the state with 
populations under 3,000. Examples include what the cooperative would 
consider metropolitan areas such as Glasgow (population 3,572) and 
Absarokee (population 1,067), but also truly rural communities such as 
Opheim (population 145), Guildford (population 250) and Loma 
(population 80). Montana's telephone cooperatives have also deployed 
more than 100 video conferencing studios across the states, primarily 
in K-12 schools and Montana's university system, using both ATM and 
dedicated technology to provide state-of-the-art image and sound 
quality as well as high-speed Internet access to the schools.
    With these and many other contributions of our rural providers in 
mind, I will be examining ongoing actions at the FCC to make sure that 
they are consistent with the Act's requirement that universal service 
support be ``specific, predictable, and sufficient.'' Clearly, 
difficult decisions must be made as we move forward to ensure the very 
survival of universal service. We cannot ignore this harsh reality, 
though, as it is clear that the status quo is unacceptable. I look 
forward to the testimony of the witnesses. Thank you.

    Senator Hollings.

             STATEMENT OF HON. ERNEST F. HOLLINGS, 
                U.S. SENATOR FROM SOUTH CAROLINA

    Senator Hollings. Well, thank you, Mr. Chairman. It is an 
extremely important hearing, and I am glad for your comments 
about the urgency of it. Because we love this dance around the 
fire of being concerned and doing nothing. Let us find out what 
needs to be done to maintain universal service.
    Right to the point, it is now in terrible diminished 
condition, threatened. Number one, the long-distance calls that 
supported it and everything else like that are far less in the 
sense of e-mail and mobile telephones and everything else of 
that kind. The other threat, of course, is that 40 percent 
cushion is gone due to the good competition that has come about 
in long-distance service.
    Otherwise, we have to get on to some kind of solution. I 
have been toying a little bit with this. I understand that the 
best consideration on the table at the moment is perhaps to 
supplant the universal service charge on long distance with a 
dollar per connection, but I understand the country boys that 
you represent, they resist any kind of charge at all. This 
universal service is for the country boys, and they will be 
paying far less, but it will be a really reliable source 
because there are really a plethora of connections, of course, 
within the city system. And if the distinguished Chairman has a 
better solution, fine.
    Let me, although I cannot stay, welcome our distinguished 
member, Ms. Abernathy, here, of the Federal Communications 
Commission, and, in same breath, express my amazement at the 
arrogance of the Commission trying to legislate 
telecommunications as information. That is just outrageous 
nonsense, trying to avoid the responsibility, trying to avoid 
the requirement of the regulation itself, trying to avoid the 
administration of the law, which is clear-cut, to come along 
now and say that broadband communications is all of a sudden 
just information. You can apply that to all communications and 
just abandon and dissolve the FCC and all the law itself.
    So I just think the message ought to get back to that crowd 
that keeps trying to ignore the law and trying to find 
everywhere for market forces. Market forces are the reason that 
we have a Federal Communications Commission. We interfered with 
the market and instituted the Federal Communications Commission 
for the public good.
    Let me stop right there and file my statement, and I thank 
you, again, very much.
    [The prepared statement of Senator Hollings follows:]

               Prepared Statement of Ernest F. Hollings, 
                    U.S. Senator from South Carolina
    Thank you, Chairman Burns. Today's hearing returns our attention to 
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. Over the 
years, our fidelity to this principle of ensuring ``universal service'' 
has served our Nation well and has been instrumental to the economic 
and social well-being of numerous communities across America.
    In the early days of telephone service, AT&T, as the monopoly 
service provider for most Americans, supported universal service 
internally by setting high rates for long distance services in order to 
subsidize below-cost rates for local service. For many years, this 
cross-subsidization worked well to drive the penetration of telephone 
service into rural America. In 1934, only 40 percent of U.S. households 
had access to phone service, but by 1980, the number had risen to 94 
percent.
    Yet, in 1984, when Judge Harold Greene broke up AT&T, these 
internal support mechanisms were no longer tenable and our system of 
universal service was forced to adapt to the realities of a competitive 
telecommunications market. To assist in this regard, Congress enacted 
the Telecommunications Act of 1996, which articulated twin goals of 
preserving universal service and promoting competition in the market 
for local communications services. At that time, Congress made clear 
that it viewed universal service as ``an evolving level of 
telecommunications services'' and tasked the FCC with adopting 
``specific, predictable and sufficient'' mechanisms to support and 
advance universal service.
    Unfortunately, over the past year, 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 local competition and the advent of new technologies 
such as Internet telephony threaten to place added 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 addition, I remain deeply troubled by the FCC's tentative 
decision to define wireline broadband services as ``information 
services.'' Because the statute defines universal service as an 
evolving level of ``telecommunications services,'' such 
reclassification would not only ignore Congress' clear intent to allow 
potential support for broadband through universal service, but more 
importantly, would risk abandoning rural consumers in their efforts to 
reap the benefits of advanced services.
    As a result, today's hearing comes at a critical juncture, not only 
for efforts to reform the current means of collecting support, but also 
for the future of our country in achieving ubiquitous access for all 
Americans to networks with advanced capabilities. As the FCC addresses 
these new challenges, it is my hope that they will keep in mind 
Congress' underlying goal of ensuring reasonably comparable services at 
reasonably comparable prices.
    With this as our guide, I look forward to the testimony of the 
witnesses and to their responses to our questions.

    Senator Burns. Senator, there is nothing wrong in the 
country except the city.
    Senator Hollings. Yes.
    [Laughter.]
    Senator Hollings. But they keep on moving to the city.
    Senator Burns. I know it. We have got to stem that flow 
some way or other. We need to find out a way to make a living 
out there.
    [Laughter.]
    Senator Burns. Well, usually----
    Senator Hollings. They sent you in here.
    [Laughter.]
    Senator Burns. Yes, I know it. Caught them at a low ebb, 
though.
    [Laughter.]
    Senator Burns. Senator Smith?

                STATEMENT OF HON. GORDON SMITH, 
                    U.S. SENATOR FROM OREGON

    Senator Smith. Thank you, Mr. Chairman, for holding this 
important hearing.
    I was not here when the 1996 act was passed, but I remain 
concerned about the FCC's high-cost fund and how it is 
affecting rural America. For example, under one of its current 
FCC rural programs, Oregon, my State, receives no support 
simply because of the way the FCC classifies certain telephone 
companies as rural carriers and non-rural carriers. Under this 
rule, the non-carrier that serves rural Oregon is not 
considered a rural carrier simply because it serves, in 
addition, parts of an urban area, like Portland, Oregon. And 
they are concerned that it has the ability to cross-subsidize 
to support a rural town, like La Grande, Oregon.
    These rural customers should be able to take advantage of 
the Universal Service Funding, and I hope the FCC will take the 
necessary steps to reform universal service and to distribute 
funds more equitably across the Nation.
    Thank you, Mr. Chairman.
    Senator Burns. Well, thank you, Senator. And I would just 
point out, in my statement this morning I said I think we have 
some abuses out there. And one of them is that I am just 
noticing here that since the Schools and Libraries Fund has 
gone in as a result of the 1996 Act, California has collected 
$1.5 billion. Montana has collected $18 million. And it was 
supposed to be for rural States. Now, I realize California has 
some rural areas to it, but it doesn't have that many. So we 
have got to take a look at that, too.
    Senator Brownback?

               STATEMENT OF HON. SAM BROWNBACK, 
                    U.S. SENATOR FROM KANSAS

    Senator Brownback. Thank you, Mr. Chairman, for holding the 
hearing.
    Senator Burns. From a rural State.
    Senator Brownback. From a rural State and the country boys.
    [Laughter.]
    Senator Brownback. I identify with you.
    Let me say this is incredibly important for us to be able 
to maintain and ensure that all Kansans have comparable access 
to basic telecommunications service. I think that is basic, and 
everybody understands that. The question is where we are going 
to get the funds, or can we take some places that the funds are 
currently being dissipated to and get them back to their 
original purposes, I think is what the Chairman is just citing, 
that the funds and the amounts going to California versus a 
State like Montana, because this is meant to be able to make 
sure that the entire country, regardless of population density, 
is able to access basic telephone. That is what the Fund is 
about. And we may, I think, Mr. Chairman, have to look at where 
all the Fund is going to and see if we can consolidate some of 
that to get it back more pointed in the right direction and at 
the primary purpose for which the Universal Fund exists. And 
that has been my big concern.
    I am sorry that Senator Hollings is not here. I would want 
to say that, to the Commission on the decision regarding 
broadband information, I think you were perfectly within your 
right of doing that, and I applaud what the Commission did in 
that area. This is an area that we have been wrestling around 
with for some time up here. It has been holding back the 
expansion of broadband, which clearly we needed to get out, and 
we needed to get it out in rural areas and less economically 
attractive areas. And I think the Commission's ruling is really 
going to help us be able to do that. And so I hope you will 
take that message back with equal fervor, even if I cannot 
express it quite as well or as fervently as Senator Hollings 
can express that. We have been dueling on this topic for some 
period of time.
    Thanks for holding the hearing, Mr. Chairman.
    Senator Burns. Thank you, Senator. And at the danger, at 
the peril, of being trite, I think once you start looking at 
universal service, follow the money and we will probably see 
where some of our problems really lie in this Fund.
    Commissioner Abernathy, thank you for coming this morning, 
and we look forward to your testimony. You will probably be the 
target of a few questions from this panel. So thank you for 
coming this morning.

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

    Commissioner Abernathy. Thank you very much, Chairman Burns 
and Senator Brownback, Senator Smith. And it is a privilege to 
be here, and I appreciate the opportunity to appear before you 
to discuss the FCC's efforts to preserve and advance universal 
service and to listen and learn from you about your priorities 
and ways that we can improve the mechanism.
    The goal of providing high-quality telecommunications 
services to all Americans at affordable rates is a cherished 
principle in U.S. telecommunications policies and one of the 
cornerstones of the Telecommunications Act of 1996. From Alaska 
to Alabama, from Montana to Mississippi, Universal Service 
Funding has guaranteed citizens the ability to communicate at 
reasonable rates across the country.
    I know that every member of this Subcommittee understands 
the importance of universal service, and as chair of the 
Federal-State Board on Universal Service, I also make it a top 
priority for me. Indeed, during my confirmation hearing, I 
pledged to protect universal service, and I reaffirm that 
pledge today.
    Shortly after Congress enacted Section 254 of the Act, the 
FCC then adopted rules regarding the collection and the 
distribution of universal service support. And now, with 
several years of experience under our belts, we are engaged in 
a reexamination of many aspects of the program to ensure that 
each component is administered as fairly, efficiently, and 
effectively as possible. As we engage in this review, the FCC's 
commitment to preserving and advancing universal service 
remains unwavering.
    My written statement provides significant details on the 
various challenges that are confronting the Universal Service 
program and they are outlined in each of our pending rulemaking 
proceedings. So I thought what I would do this morning is touch 
on a representative sample of the issues that we currently have 
under review.
    I will begin with the high-cost support mechanisms which 
are at the core of our efforts to preserve and advance 
universal service. The FCC must ensure that support for 
companies serving high-cost rural areas is distributed in a 
rational and an even-handed manner and that growth in the 
demand for funding does not overwhelm the ability to pay for 
this support.
    We have three proceedings underway that are designed to 
further these objectives. In one of these proceedings, we are 
focusing on how to appropriately support new competitors 
serving high-cost rural areas. This proceeding is important to 
our efforts to harmonize two statutory directives that 
sometimes appear to be in tension. The first is promoting 
competition, and the second is preserving universal service.
    The FCC recently referred this proceeding to the Federal-
State Joint Board for an analysis of the Commission's rules 
that govern how competitive carriers receive high-cost support. 
While new competitors, including wireless providers, currently 
receive less than 2 percent of the total Universal Service 
Funding, this share is growing rapidly. And when you combine 
that trend with the fact that incumbent carriers do not lose 
any support if a customer switches to a new competitor service, 
it becomes apparent that rule changes may be necessary to avoid 
placing unreasonable strains on the high-cost support 
mechanism.
    The Joint Board's task is to review the rules under which 
the States designate competitors as eligible telecommunications 
carriers or ETCs, because, once designated, the carrier then 
qualifies for Universal Service Funding. The Joint Board will 
also be looking at the manner in which competitive ETCs receive 
support. I have long questioned whether supporting competitive 
ETCs based on the incumbent carrier's network costs and not 
their own costs is the right approach. So the Joint Board will 
carefully examine that issue. And last, the Joint Board will 
consider the implications of continuing to provide support for 
multiple lines per household.
    Another issue requiring the FCC's attention is the 
universal service mechanism that provides support for schools 
and libraries, rural healthcare facilities and low-income 
consumers. The challenge in these proceedings is to remove 
unnecessary impediments to the flow of appropriate support 
while continuing to ensure that adequate safeguards are in 
place to prevent waste, fraud, and abuse.
    For each program, I am confident that we can build upon the 
lessons learned over the initial years of operation and find 
ways to cut red tape and make it less burdensome for program 
beneficiaries to obtain support where appropriate. For example, 
in the E-rate program, the Commission likely can simplify the 
appeals process for small schools and rural healthcare program. 
And we are considering a number of proposed changes to enable 
clinics to overcome obstacles. But make no mistake; we are also 
reviewing our rules with an eye toward ensuring that our funds 
are disbursed in an efficient, fair, and carefully supervised 
manner. And while the Commission and USAC have always been 
concerned about combating waste, fraud, and abuse, we now know 
that some entities have apparently sought to manipulate our 
rules to the detriment of other qualifying applicants, and we 
need to make sure that we correct these problems.
    And a final set of challenges relate to the methodology for 
assessing universal service contribution on carriers. As 
pointed out by Senator Collins, we must ensure that sufficient 
funds continue to flow into the system and that the funding 
burden is spread among contributors in an equitable and 
nondiscriminatory manner. We took some steps last December to 
stabilize the universal service contribution factor in order to 
mitigate the growing funding burden, but more fundamental 
reforms may be necessary to ultimately protect universal 
service over the long haul. And that is why we are looking at a 
collection mechanism that may be based primarily on end-user 
connections, as well as several other options, in order to 
ensure the long-term viability of the Fund.
    So, in conclusion, universal service is facing a number of 
challenges, but I am confident that, with your help and 
guidance, the FCC will be able to ensure the sustainability of 
the various support mechanisms and continue to deliver telecom 
services to consumers at just, reasonable, and affordable 
rates. We have a number of proceedings that have been 
initiated, and together I believe we can respond to the 
challenges that lie ahead.
    Thank you very much.
    [The prepared statement of Ms. Abernathy follows:]

    Prepared Statement of Hon. Kathleen Q. Abernathy, Commissioner, 
                   Federal Communications Commission
    Good morning, Chairman Burns, Senator Hollings, and distinguished 
members of the Subcommittee. I appreciate the opportunity to appear 
before you to discuss the FCC's efforts to preserve and advance 
universal service.
    The goal of providing high-quality telecommunications services to 
all Americans at affordable rates is a cherished principle in U.S. 
telecommunications policy and one of the cornerstones of the 
Telecommunications Act of 1996. I know that every member of this 
Subcommittee understands the importance of universal service, and, as 
Chair of the Federal-State Board on Universal Service, I make it a top 
priority to ensure that the Federal support mechanisms fulfill their 
objectives.
    The 1996 Act directed the FCC to promote two key goals that at 
times appear to be in tension with one another: opening local markets 
to competition and preserving universal service. The prior monopoly 
environment enabled regulators to promote universal service by building 
implicit subsidies into local and long distance rate structures. The 
introduction of competition, however, erodes these subsidies as new 
entrants undercut rates that were set well above cost, such as business 
rates in urban areas. Congress accordingly directed the FCC to adopt 
explicit support mechanisms that would be sufficient to ensure that 
rates remain affordable and reasonably comparable throughout the 
Nation. In response, the FCC developed several explicit support 
mechanisms for carriers that provide service in high-cost areas. High-
cost support will total over $3.2 billion in 2003.
    Congress also expanded the scope of universal service by directing 
the Commission to establish support mechanisms for schools and 
libraries and for rural health care facilities. The schools and 
libraries program (often called the e-rate program) provides up to 
$2.25 billion in annual support and has enabled millions of school 
children and library patrons to gain access to advanced 
telecommunications and Internet services. While the rural health 
program generally has been underutilized, the FCC is considering a 
variety of measures to strengthen it, as discussed below.
    In addition to the high-cost support mechanisms and the programs 
supporting schools, libraries, and rural health clinics, the FCC's 
Lifeline and LinkUp programs provide discounts off monthly service 
charges and connection fees to ensure that low-income consumers have 
access to basic telephone service. Last year, these programs provided 
approximately $647 million in support.
    All of these programs promote the universal service goals set forth 
in section 254(b) of the Act, including the availability of quality 
services at affordable rates; access to advanced services in all 
regions of the Nation; comparable access to telecommunications services 
for all consumers, including low-income consumers and those living in 
rural, insular, and other high-cost areas; and access to advanced 
services for schools, libraries, and rural health care facilities. 
Shortly after Congress's enactment of the 1996 Act, the FCC adopted 
rules regarding the collection and distribution of universal service 
support. Now, with several years of experience under our belts, we are 
engaged in a reexamination of many aspects of the program to ensure 
that each component is administered as efficiently and effectively as 
possible. A host of marketplace and technological developments have 
already prompted some course corrections, and may ultimately cause us 
to reassess certain fundamental policy choices made in the initial 
implementation period. As we engage in this review, our commitment to 
preserving and advancing universal service remains unwavering.
    I describe below some of the challenges confronting universal 
service and the efforts the FCC has underway to ensure that each 
component of the universal service program remains faithful to the 
principles set forth in section 254 of the Act. These proceedings aim 
to improve and strengthen all of our support mechanisms, and therefore 
will benefit consumers in high-cost areas, families with low income, 
and patrons of schools, libraries, and rural health care facilities.
High-Cost Support
    The Commission and the Joint Board have three pending proceedings 
that focus on the distribution of support to high-cost areas. First, 
with respect to the support mechanism for non-rural carriers (the Bell 
operating companies and other large independent LECs), the FCC is 
considering a Recommended Decision from the Federal-State Joint Board 
in response to a remand by the Tenth Circuit Court of Appeals. The 
court ruled that the Commission did not adequately explain how the non-
rural support mechanism is sufficient to enable states to set 
affordable rates that are reasonably comparable in both rural and urban 
areas. In particular, the court directed the Commission to consider how 
to induce states to develop their own support mechanisms to fund high-
cost areas within their borders, since the Federal mechanism aims 
primarily to mitigate cost differentials among the states. The Joint 
Board issued its recommendations last October, and the Commission will 
complete its consideration of the issues later this year.
    A second FCC proceeding relating to high-cost support focuses on 
the definition of services that are eligible for universal service 
support. Supported services include voice-grade local service, access 
to 911, access to interexchange services, and other basic local 
services. In a Recommended Decision issued last July, the Joint Board 
recommended maintaining the existing list of supported services. One 
issue that is likely to be of interest to the Subcommittee was the 
Joint Board's discussion of providing direct support for broadband 
services, in addition to the support for underlying loop facilities 
that carriers receive today. The Joint Board recognized the increasing 
importance of broadband services in the lives of American consumers, 
but concluded that broadband fails to satisfy most of the eligibility 
criteria set forth in section 254(c)(1) of the Act. Specifically, the 
Joint Board stated that broadband services are not yet essential to 
education, public health, or public safety, because such resources are 
readily accessible through alternative means, such as voice service or 
dial-up Internet service. In addition, broadband services have not been 
subscribed to by a substantial majority of residential customers. The 
Joint Board further opined that providing direct support for broadband 
services--in addition to already providing support for underlying loop 
facilities--would not serve the public interest, because it would place 
enormous financial burdens on American consumers and threaten the 
sustainability of the Universal Service Fund. Moreover, because ETCs 
must provide all supported services to be eligible for funding, adding 
broadband to the list would threaten to withdraw support from those 
carriers that have not yet upgraded their networks to enable the 
provision of broadband services. The Commission is currently 
considering this Recommended Decision and will issue a final order 
later this year.
    The third proceeding regarding high-cost support will focus on the 
intersection of competition and universal service in rural areas. The 
Commission referred this proceeding to the Joint Board in November 
2002, and the Joint Board issued a public notice seeking comment in 
February. The issues for comment include the impact of providing 
support to competitive eligible telecommunications carriers (ETCs) on 
the growth of the Universal Service Fund, the manner in which 
competitive ETCs receive support (often called ``portability''), and 
the consequences of supporting multiple lines per household. The public 
notice 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). Following the close of the comment period, the Joint Board 
intends to organize a public forum involving rural LECs, wireless 
carriers, consumer groups, and other interested parties to gather 
additional information.
    While this rulemaking is only in its preliminary stages, its 
importance is undeniable and it will accordingly be the Joint Board's 
primary focal point in 2003. Of the 1,400-plus ETCs that received high-
cost support in the fourth quarter of 2002, 63 were competitive ETCs 
(including a number of mobile wireless carriers). Competitive ETCs 
received approximately $14 million that quarter, compared to more than 
$800 million for incumbent LECs. Yet this support flowing to 
competitive ETCs was seven times higher than in the first quarter of 
2001. So while the share of high-cost support distributed to 
competitive carriers remains small (less than 2 percent of the total), 
it is growing quite rapidly. This trend underscores the timeliness of 
the Commission's review of its rules for providing support to 
competitive ETCs.
Schools and Libraries and Rural Health Care Facilities
    Now that the Commission has had significant experience overseeing 
the support mechanisms for schools and libraries and rural health care 
facilities, we are seeking in two pending rulemakings to capitalize on 
this experience by making these programs more effective and efficient.
    The schools and libraries proceeding aims to streamline the 
application and appeals processes by eliminating red tape and any other 
needlessly burdensome requirements. At the same time, this rulemaking 
focuses on potential rule changes to address issues that have been 
identified in the course of the Commission's ongoing oversight of the 
e-rate program. The Commission is fully committed to taking actions 
where necessary to address waste, fraud, and abuse and will consider 
initial rule changes based on the record in the very near future. I 
have also announced that, in cooperation with Chairman Powell and my 
other colleagues, I am organizing a public forum on May 8 focusing on 
several of the oversight issues raised in the rulemaking. To the extent 
that issues remain outstanding following the Commission's upcoming 
Report and Order, I hope that the public forum will enable us to 
quickly develop a consensus on additional means of protecting against 
gaming of the system. Our efforts to improve the Commission's oversight 
will help ensure that funds are disbursed in an efficient and 
evenhanded manner so that deserving school children and library patrons 
continue to have access to critical services.
    The Commission's rulemaking on the support mechanism for rural 
health care facilities likewise seeks to strengthen the program. 
Whereas the schools and libraries program cannot fully fund applicants' 
requests, the rural health program has been underutilized. The notice 
of proposed rulemaking sought comment on ways to modify eligibility 
requirements to eliminate obstacles to rural health clinics' receiving 
support while remaining faithful to the statutory purposes. The 
Commission recognizes that facilitating telemedicine by connecting 
rural health clinics to regional hospitals and universities takes on 
added importance in light of the increased threat of terrorism. We 
accordingly hope to complete this proceeding expeditiously.
Low-Income Support
    The third component of the Federal universal service regime is the 
low-income support mechanism, Lifeline/LinkUp. The Joint Board will 
soon release a Recommended Decision on proposals to bolster the 
effectiveness of this mechanism. 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. As with the e-rate and rural health care programs, 
the goal of the rulemaking is to remove impediments to beneficiaries' 
receiving support while simultaneously preserving the integrity and 
enhancing the efficiency of the program.
Contribution Methodology
    Each of the programs described above draws support from a pool of 
carrier contributions made pursuant to section 254(d). In a series of 
related proceedings, the Commission has been actively exploring changes 
to the methodology for assessing contributions on carriers. Since 1997, 
contributions to the explicit support mechanisms have been assessed on 
carriers as a percentage of their revenues from end-user interstate 
telecommunications services. Several trends have combined to put upward 
pressure on the contribution factor (which is currently 9.1 percent), 
which in turn has increased the funding burden on consumers. While long 
distance revenues grew between 1984 and 1997, they have since been flat 
or in decline as a result of price competition and substitution of 
wireless services and e-mail. Because Federal universal service 
contributions by law may be assessed only on interstate revenues, this 
shrinking of the revenue base has caused the contribution factor to 
rise steadily. Another important trend has been the increasing 
prevalence of bundled service plans. For years, wireless carriers have 
offered buckets of any-distance minutes at flat rates, and now wireline 
carriers such as MCI and Verizon are offering packages including local 
and long distance for a single price. In addition, many carriers offer 
business customers bundles that include local and long distance voice 
services, Internet access, and customer premises equipment. Such 
bundling has been a boon for consumers but has made it difficult to 
isolate revenues from interstate telecommunications services. And the 
problem is likely to get worse as bundling becomes more and more 
popular.
    In December 2002, the Commission adopted a number of measures to 
stabilize the universal service contribution factor in an effort to 
mitigate the growing funding burden on consumers. For example, the 
Commission increased from 15 percent to 28.5 percent the safe harbor 
that wireless carriers may use to determine the interstate percentage 
of their revenues. The Commission also eliminated the lag between the 
reporting of revenues and the recovery of contribution costs, which 
lessened the competitive disadvantages facing long distance carriers 
with sharply declining revenues. And the Commission prohibited mark-ups 
of contribution costs on customers' bills to ensure that carriers 
cannot profit from inflated line charges.
    While these were important steps, more fundamental reform may be 
necessary to ensure the sustainability of Universal Service Funding in 
the long term. Bundling together interstate and intrastate services--
and telecommunications and information services--gives carriers the 
opportunity and incentive to understate the portion of their revenues 
that are subject to assessment and increases the difficulty of 
identifying interstate revenues. Contribution factors therefore are 
likely to continue their ascent under a pure revenue-based contribution 
methodology.
    For this reason, the Commission is continuing to consider whether a 
contribution methodology incorporating a component based on end-user 
connections, in addition to or in lieu of our revenue-based 
methodology, may create a more sustainable model for funding universal 
service in the future. The number of end-user connections has been more 
stable than the pool of interstate revenues, and connection-based 
charges can be adjusted based on the capacity of each connection to 
ensure an equitable distribution of the funding burden among business 
and residential customers. The Commission has sought comment on several 
proposals and will consider additional changes to the contribution 
methodology based on the record now being developed. The Commission 
also has sought comment, in the Wireline Broadband NPRM, regarding the 
possibility of assessing contribution obligations on facilities-based 
providers of broadband Internet access services. We will seek to ensure 
that any modifications to the contribution methodology that are 
designed to promote sustainability will also remain faithful to the 
statutory requirement that contributions be assessed in an equitable 
and nondiscriminatory manner.
    Taken together, the reforms being considered by the Commission 
should ensure the continued vitality of the Federal universal service 
support mechanisms. The Commission has no higher priority than 
delivering on the promise of ubiquitous, high-quality, and affordable 
services. I would like to thank you, Mr. Chairman, for calling this 
hearing, and I look forward to working with you and other members of 
the Subcommittee on these challenging and critical issues.

    Senator Burns. I thank you, Commissioner.
    And I would say that part of the criticism that was 
expressed by Senator Hollings does have basis. And I would say, 
you know, that the law is clear that requires the Commission to 
create a specific and predictable support mechanism for 
universal service.
    We have known for some time now that we are going to have 
to act on universal service, and we have seen no action taken 
by the Commission. And in fact, they have looked at I do not 
know how many approaches down there, but none of them have been 
acted on or recommended to Congress if legislation is required. 
The Commission has already issued over 50 orders in this 
docket. There are still numerous issues awaiting resolution.
    Is a comprehensive solution possible to this admittedly 
difficult and complex problem? And should we expect constant 
tinkering around with the support of the mechanism? In other 
words, let us get something definitive out of the Commission, 
some recommendations, and let us start dealing with it because 
if we do not, we are going to find ourselves in a bigger pickle 
than we are already in.
    Commissioner Abernathy. I agree with you, Senator. And I 
think one of the reasons why before the end of the year I would 
hope we will have an item out on changes to the contribution 
methodology. The current way that we collect funding is under 
tremendous stress, and it is not clear that over the long-term 
it is sustainable and that it will continue to be able to 
support the programs and be collected in a reasonable way 
across all the carriers.
    So we are looking at a number of alternatives, including a 
connection-based approach, where essentially you look at what 
are the connections that each carrier has with customers, and 
you assess in that manner. This helps us with the problem that 
it is now difficult to isolate out interstate revenues. We have 
a lot of carriers that offer bundled services, and it is very 
difficult as a regulator to identify which part of that revenue 
stream is interstate and, therefore, appropriately contributing 
toward the Universal Service Fund.
    And I think it is also appropriate for us to spread the 
Fund across as many telecom services as possible, because then 
the burden on any one group is lessened. Once we make this 
decision, I have no doubt that it will be appealed, and we will 
find out if the court is comfortable with the way that we have 
interpreted our statutory authority. And if a court tells us 
that we cannot get more creative, if a court tells us that we 
cannot collect in a way that we think is necessary for long-
term stability, then we may very well be back in front of you 
asking for some help.
    Senator Burns. Well, it looks like we are almost to that 
point now. In other words, if we think we are going to get 
appealed on any decision that we might make down there, it 
would seem to me that it is time that a dialog is struck 
between Congress and the FCC to sit down at some kind of a 
summit and to get the ideas of what we think we can do up here 
and what has got to be done up here and what your limits are at 
the FCC. In other words, let us not let this just drag out to 
the point where nobody makes a decision.
    Commissioner Abernathy. OK.
    Senator Burns. I think we are at that point now. Despite 
the constant revisions and all of this, I still think that a 
number of carriers have advocated moving to a system with 
larger base revenues. There is no doubt about that. And if we 
are going to stabilize in the long run, then let us identify 
those areas and let us deal with it here with some sort of 
coordinated thought between what the desires of Congress are 
and the challenges you have.
    In other words, let us work together on this thing. Let us 
not get out there and just make a bunch of lawyers rich. Let us 
deal with it here. Of course, I guess it does not make any 
difference to the lawyers downtown or up here. It does not make 
any difference. Somebody is going to get paid for their work. 
And, you know, they ought to have some sort of a--have they got 
a minimum wage for those folks?
    [Laughter.]
    Commissioner Abernathy. I think so.
    Senator Burns. But anyway, what I am trying to do is to 
force us and also force you into a dialog. Let us identify, let 
us see what has to be done. Let us take a look at the testimony 
and the things that you have done. Let us study a little 
history. But I think it is mandatory, it is vital, that we 
solve this thing this year. I just do not want to just keep 
drifting out there and see nothing happen.
    Do you want to comment on that?
    Commissioner Abernathy. Yes. I think it is a great idea.
    Senator Burns. I have lost my supporting cast here.
    Commissioner Abernathy. I know, but you are who matters.
    I think it is a great idea, and certainly what we can do 
through the Joint Board is to get together with you and the 
members of your staff and the Subcommittee and walk through 
each of the proceedings that we have pending, walk through some 
of the challenges that we are facing, the ones we think we can 
address consistent with the statute that exists today, the ones 
that we think are more difficult because of some court orders 
and some statutory language, and see what we can do to work 
together, because I--I have said this, and I think my fellow 
commissioners have said this--if we do not make changes, we 
will have problems.
    The good news is that today, you know, it is still working. 
We are still collecting the funding. We are still distributing 
it across the country. We are still ensuring that rates are 
affordable and reasonably comparable across the country. But 
the pressures are significant, as you have noted, and if we do 
not get ahead of this problem and correct it before it is too 
late, then we will have serious problems in rural America, and 
that is not something that any of us wants to see.
    So I am happy to work together with you and the 
Subcommittee and your staff to, sort of, walk through all the 
various proceedings and identify where we might be able to 
better work together.
    Senator Burns. Well, I just get the notion that the light 
at the end of the tunnel may be a slow-moving freight coming 
our way.
    [Laughter.]
    Senator Burns. And that is what, sort of, excites me about 
this whole thing. I thank you for your testimony this morning. 
I want to get on to my panels. I always like for the fight to 
break out at that table rather than up here. But I think there 
are other questions coming from other members of this 
committee, so if you could respond in writing, I would sure----
    Commissioner Abernathy. Absolutely. I am happy to respond 
to any questions.
    Senator Burns. I can surely appreciate that. And thank you 
for coming this morning.
    Commissioner Abernathy. Thank you, Chairman Burns.
    Senator Burns. We can go to our second panel, which is Joel 
Lubin, Vice President, Federal Government Affairs for AT&T 
Robert Orent, President and CEO of Hiawatha Communications out 
of Munising, Michigan; Matthew Dosch, Vice President, External 
Affairs for Comporium Communications, Rock Hill, South 
Carolina; Carson Hughes, Chief Executive Officer of Telepax, 
from Jackson, Mississippi; and Bill Gillis, Director of Center 
to Bridge the Digital Divide, Washington State University, from 
Pullman, Washington, old Wazoo. What makes me sort of familiar 
with that, I had a daughter that went to UW, so I know all 
about those.
    With that, we will just go kind of in order. Mr. Lubin, who 
is Vice President of AT&T Corporation from here in Washington, 
and we welcome you here this morning and look forward to your 
testimony.

           STATEMENT OF JOEL LUBIN, VICE PRESIDENT, 
          FEDERAL GOVERNMENT AFFAIRS, AT&T CORPORATION

    Mr. Lubin. Thank you, Mr. Chairman.
    Senator Burns. You might pull that microphone up, because 
there are some folks that, in the back, are keeping notes, and 
I do not want them to get the wrong note.
    Mr. Lubin. All right. Thank you, Mr. Chairman.
    I appreciate having the opportunity to speak before this 
Subcommittee today on this very critical subject of universal 
service, on behalf of AT&T. AT&T strongly supports the 1996 
Telecommunications Act's twin goals of promoting competition 
and preserving and advancing universal service.
    Let me go right to the bottom line. The current universal 
service system is broken. The reason it is broken is because 
the current size of the Fund of $6.1 billion, and growing every 
quarter, is being collected on an interstate revenue and 
international revenue base that, unfortunately, is declining. 
For the last 2 years, it has declined 8 percent a year.
    Chart A of my written submission shows what the assessment 
rate will be in the end of 3 years given different assumptions 
about growth rates of the Fund and the interstate retail 
revenues. It is not a pretty picture. If you look at that 
chart, you will see that the assessment rate could rise to 12, 
13, 14, 15 percent based on what you believe the growth of the 
Fund is and how rapidly interstate retail revenues are going to 
decline. That is the bad news. The good news is, my belief is, 
that that can be solved under the existing structure of the 
telecommunications law.
    AT&T has put forward a solution that you contribute based 
on telephone numbers, working telephone numbers for the end 
user, and, to the degree there is not a working telephone 
number, then you assess the special access line or private line 
going to the public network.
    Chart B of my submission shows what illustratively that 
could do. For approximately one dollar you can generate 
significant amounts of funds which would stabilize the overall 
USF fund. That is item one.
    Item two that I would like to highlight to you is the 
concern that AT&T sees access charges in terms of rural areas 
of the country versus the large regional Bell Operating 
Companies. The good news here is, in the last few years, 
interstate access prices have been reduced to approximately 6 
cents per minute per end for Regional Bell Operating Companies. 
Unfortunately, the price of access in independent telephone 
company territories also has been reduced, but it is still 
approximately 2.6 cents per minute on average, and it could be 
as high as 10 cents a minute.
    The dilemma is that Section 254(g) of the law states prices 
in rural areas should be comparable to prices in the urban 
areas. That requires nationwide average toll pricing. 
Unfortunately, there is more and more pressure on long-distance 
prices to not be average prices simply because post-271, when 
Regional Bell Operating Companies entered the marketplace, they 
began serving their own geography, and, as I mentioned, they 
are charging access for about 6 cents a minute. In rural areas, 
however, people are being charged two-and-a-half cents, 2.6 
cents, which is approximately five times greater than what they 
are being charged in the large-company territories, and that is 
a dilemma.
    Again, the Regional Bell Operating Companies have said, and 
some of them have publicly stated, that they are only going to 
serve long-distance where they have local. So they are 
competing on their areas where access is about .6, and AT&T is 
competing in those areas, but AT&T is also competing in the 
areas of rural America.
    We put forth a solution to that problem, as well. If you 
look at the difference between what access is in the rural 
areas and what access is in the urban areas, we are suggesting 
lowering the rate in the rural areas to a target of 
approximately 95 cents and putting the difference in a 
Universal Service Fund. Submission C-1 and C-2, attachments C-1 
and C-2, are showing the problem that exists under the current 
rates and how that problem could be greatly mitigated under the 
proposal I just put forward. Unless a proposal, some version of 
what I have just described, happens, there will be suboptimal 
solutions in rural areas that rural customers should not have 
to bear.
    I appreciate the opportunity to be here today. AT&T 
continues to believe that the Telecommunications Act can meet 
the twin goals of maintaining universal service and promoting 
competition.
    I look forward to answering your questions. Thank you very 
much.
    [The prepared statement of Mr. Lubin follows:]

           Prepared Statement of Joel Lubin, Vice President, 
              Federal Government Affairs, AT&T Corporation
    Mr. Chairman, Senator Hollings, and members of the Subcommittee, 
good morning. I thank you for inviting me to testify today to share 
AT&T's views as you address the important topic of universal service.
    AT&T strongly supports the 1996 Act's twin objectives of opening 
markets to competition and preserving and enhancing universal service. 
We are proud of our history as the Nation's oldest and most far-
reaching long distance carrier. We are proud to connect rural and 
distant parts of America--including states like Montana, Alaska, South 
Carolina, Hawaii, North Dakota and West Virginia that are represented 
on this subcommittee--with the rest of the country. More than any other 
carrier, we tie together all parts of America. On the basis of this 
experience, we understand the importance of universal service.
The Current Assessment System Is Unsustainable and Should Be Replaced
    In 1996, the Congress directed the FCC, with the assistance of a 
Federal-State Joint Board, to charter a new universal service 
mechanism--one that would work with, not against, competition in all 
markets. One that would be specific, predictable, and sustainable as 
competition grew. One that would not distort competition, either in the 
way contributions are collected or support is distributed.
    The FCC has made significant progress in moving implicit subsidies 
into an explicit USF, most notably through adoption of the CALLS plan 
in May 2000 and adoption of the MAG plan in October 2001. Nonetheless, 
seven years after the 1996 Act, we cannot say we have a universal 
service system that meets all of the goals set forth by Congress in 
1996. Instead, we have an ever-increasing Universal Service Fund that 
is being raised from an ever-shrinking funding base--interstate and 
international end user telecommunications revenues. And the mechanisms 
the FCC has in place for collecting universal service support are 
discriminatory and self-defeating. Something has to give.
    It is beyond question that the Fund is increasing. The Fund today 
stands at more than $6 billion per year. Both the Office of Management 
and Budget and FCC staff project additional increases in the size of 
the Universal Service Fund, even if the FCC makes no further policy 
changes that add to the obligations supported through the USF. OMB 
projects total growth at just under 2 percent per year for FY 2004-
2007. Only two parts of the Fund won't grow--the schools and libraries 
fund and the $650 million interstate access support for areas served by 
price-cap carriers. All other parts of the USF can and are likely to 
increase.
    At the same time that the system faces increasing demands for 
support, the Universal Service Funding base--interstate and 
international end user telecommunications revenues--continues to 
shrink. In 2001 and 2002, the Universal Service Funding base shrank by 
an average of 8 percent per year. Chart A, which is appended at the end 
of my testimony, shows the results of the 2 percent fund growth 
predicted by OMB and an 8 percent annual decline in the funding base. 
In three years, the USF contribution factor--the rate carriers are 
assessed and that they pass on to consumers at the bottom of the bill--
would rise from 9.1 percent today to 12.8 percent in 2006. Such a 
result is likely to be both economically and politically unsustainable.
    The competitive inequities built into the current system for 
raising USF support will only speed the shrinkage of the USF funding 
base. These competitive inequities take several forms. For example:

   If a consumer is a high-volume user of long distance 
        service--the customer who traditionally has contributed the 
        most to support universal service--that consumer can pay less 
        into the Fund by migrating his or her long distance calling to 
        a wireless phone.

   If a consumer purchases interstate long distance bundled 
        with local service or information services, he or she can 
        contribute less in universal service if the carrier providing 
        the bundle allocates more revenue to the parts of the bundle 
        that do not contribute to universal service support than to the 
        interstate long distance bill, which supports universal 
        service.

   If a consumer uses service provided by international 
        carriers that carry little or no interstate traffic, he or she 
        can avoid universal service charges altogether on that 
        international calling.

   If a consumer uses Voice over Internet Protocol services, e-
        mail, or instant messaging, it is likely that consumer would 
        not contribute anything to support universal service.

    Each of these outcomes encourages carriers and consumers to seek 
ways to avoid contributing to the Fund, and increasingly, price 
sensitive consumers are moving to services that allow them to avoid 
paying universal service support. As a result, the USF support 
mechanism appears headed for a ``death spiral.'' Put another way, as 
the USF contribution base shrinks, the assessment rate goes higher, 
which causes more customers to figure out ways to minimize their 
universal service charges, which in turn causes the USF contribution 
base to shrink further. As Senator Stevens recently noted, something 
must be done or the system will become unsustainable. Such an outcome 
would be completely at odds with what the Congress directed in Section 
254.
    Because AT&T is deeply concerned about this problem, we have 
proposed a solution to the FCC--a universal service contribution system 
based on telephone numbers for those services that use telephone 
numbers, and on connections to the public network for special access 
and private line services that do not use telephone numbers. Chart B, 
also at the back of my testimony, shows what would happen under this 
plan as the Fund grows, and numbers-based and special access 
connections increase. If numbers/special access connections grow 2 
percent per year, a 2 percent annual increase in the Fund will not 
change at all the $0.93 per number universal service assessment.
    Moreover, a numbers-based solution offers the advantage of being 
``future-proof.'' Voice-over-Internet-Protocol (VoIP) providers give 
their customers a telephone number so that those customers can receive 
calls from the public switched network. This assignment of numbers will 
trigger an obligation to support universal service, with the effect of 
keeping VoIP in the universal service contribution base.
    We believe that a numbers-based solution could be implemented today 
by the FCC under its existing statutory authority. What is needed is 
the will for reform.
Geographic Toll Rate Averaging: Access Reform Is Necessary to Preserve 
        Competition
    As I said at the start, AT&T is proud of its heritage as the 
carrier that truly ties America together. But today, the burden of 
tying America together--of providing long distance service in all 
corners of the country--is being borne substantially by AT&T. AT&T is 
carrying this burden, even as it must increasingly compete in long 
distance with RBOCs that provide long distance service only in their 
largely urban, lower-cost service areas.
    As part of the 1996 Act's universal service provisions, Congress--
and really the members of this committee--ensured that all Americans 
could be tied together affordably by mandating rate averaging and rate 
integration for long distance services.
    But interstate access charges--a significant component of the cost 
of long distance service--are not the same in all parts of the country. 
The geographic toll rate averaging provisions of Section 254(g) make it 
imperative that the remaining traffic sensitive cost disparities be 
removed from interstate access rates and made explicit through the USF.
    In most areas served by the RBOCs, this reform was implemented 
through the CALLS plan, and interstate access charges are now 
approximately .6 cents per access minute. In the areas served by small, 
rural carriers not covered by the CALLS plan, the average interstate 
access charges we face are much higher. For example, the average NECA 
minute of access averages 2.6 cents per minute. When AT&T averages its 
toll rates nationwide, it has to charge its customers in the RBOC 
territory more than it otherwise would, in order to charge the customer 
in the small, rural carrier's service area the average rate.
    This burden was barely bearable before Bell entry into the long 
distance market, when AT&T had to compete with MCI, Sprint, and other 
carriers that could choose not to serve certain geographies or service 
areas. Now, with the Bells having secured 271 approval to enter the 
long distance market in most of the country, this burden has become 
intolerable. Verizon, which is already the third largest long distance 
carrier in the country gets an unfair competitive advantage from the 
Act's toll averaging requirements because it doesn't serve all of 
America. At the back of my testimony, Chart C1 demonstrates this 
problem.
    Fortunately, the 1996 Act allows for a solution that preserves toll 
averaging while restoring a level playing field to long distance 
competition. The local network costs--primarily high switching and 
transport costs--that lead to these high rural company access charges--
which can be as high as 10 cents per minute of use--could be supported 
through explicit universal service support in much the same way as in 
the CALLS plan adopted by the FCC. Chart C2 illustrates the outcome if 
this problem is solved in a manner similar to that employed in the 
CALLS plan.
    Two years ago, AT&T and several other carriers presented just such 
a proposal to the FCC. Unfortunately, the FCC did not implement our 
proposal, and in the two years since that time, the economic challenges 
that led us to file our plan have gotten worse. We need relief.
    Unless the FCC acts aggressively, the marketplace will force AT&T 
and other national carriers to find other, less optimal solutions. 
Those options are not attractive to us, nor should they be attractive 
to policymakers, and rural America should not be forced to bear their 
cost.
Wireless Service and Multiple Connections: How Much Support Is Enough?
    Providing for a sustainable funding mechanism is just part of the 
challenge we face. Decisions also must be made regarding just how many 
network connections universal service will support for each household. 
The miracle of wireless phones is that they make connections truly 
personal. But are we really going to pay universal service support for 
four or five connections for a family of four? Are we ready to foot 
that bill? If policymakers decide that this type of support is 
acceptable, they must be prepared for a significant increase in the 
demands placed on the USF.
    By making this point, I am not suggesting that the FCC's 
implementation of Section 254 should bar wireless carriers from 
receiving USF support. Any decision about how many lines to support to 
a household must be competitively neutral in its application. LEC-
provided multiple lines to a household are no more sacrosanct than 
wireless-provided multiple lines. But how many lines to a household 
constitute universal service?
    It is important to decide what it is really necessary to subsidize 
because no Universal Service Funding mechanism can raise an unlimited 
amount of USF support. This issue needs additional attention from the 
FCC and the Federal-State Joint Board.
    In addition, attention must be paid to the discriminatory advantage 
wireless-based long distance services have with respect to universal 
service contributions. With the wireless ``safe harbor'' set at 28.5 
percent, any wireless carrier whose actual percentage of interstate 
traffic exceeds 28.5 percent will simply elect the ``safe harbor.'' As 
such, it operates as an absolute cap on wireless contributions that is 
not available to wireline long distance carriers. This is highly 
discriminatory and provides an incentive to shift interstate traffic 
from wireline service to wireless service.
    Assume, for example, that a customer has 200 minutes of interstate 
long distance usage at 5 cents per minute. If that customer can shift 
those 200 minutes of usage to a wireless plan, and pay $10 in 
additional wireless charges, he or she will rationally do so. Why? 
Because the effect of the ``safe harbor'' is to substantially reduce 
this customer's obligation to pay universal service support. The impact 
of this incentive is dramatic, and we believe it is flatly at odds with 
Section 254's direction that universal service contributions be 
``equitable and non-discriminatory.'' This inequity should be fixed.
    Mr. Chairman, thank you again for the opportunity to testify here 
today. At AT&T, we believe firmly that competition and universal 
service can go hand-in-hand. But decisions must be made, and some bold 
actions taken to secure universal service for the future. On behalf of 
my company, I hope you agree, and look forward to working with you and 
the members of this subcommittee as you continue your important work in 
this area. 

[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]


    Senator Burns. Thank you, Mr. Lubin.
    And now we will go to Robert Orent, the President and CEO 
of Hiawatha Communications, and thank you for coming this 
morning.

    STATEMENT OF ROBERT ORENT, PRESIDENT AND CEO, HIAWATHA 
                      COMMUNICATIONS, INC.

    Mr. Orent. Good morning, Mr. Chairman. I am a country boy 
who happens to come from Northern Michigan and also just 
happens to be the President and CEO of Hiawatha Communications, 
and I----
    Senator Burns. You do not have to feel bad about that at 
all.
    [Laughter.]
    Mr. Orent. I do not, sir. I love it.
    [Laughter.]
    Mr. Orent. I am particularly pleased to appear before you 
on behalf of hundreds of rural incumbent local exchange 
carriers that are members of ITTA, NRTA, NTCA, OPASTCO, and the 
Western Alliance. I would also like to request unanimous 
consent that a statement by the Rural Telephone Finance 
Cooperative be included as part of today's hearing.
    Senator Burns. They will be included.
    Mr. Orent. Thank you, sir.
    [The information referred to follows:]

     Prepared Statement of the Rural Telephone Finance Cooperative
Introduction
    The Rural Telephone Finance Cooperative submits this statement for 
the record in conjunction with the April 2, 2003 hearing on universal 
service of the Communications Subcommittee of the Senate Committee on 
Commerce, Science and Transportation. The Rural Telephone Finance 
Cooperative (RTFC) is a privately funded, member-owned, cooperative 
finance organization that provides financing exclusively to America's 
rural telecommunications industry. At the present time, RTFC has nearly 
$5 billion of loans outstanding to its approximately 500 member 
telephone companies and their affiliates.
Universal Service Policy Distinguishes the United States
    The policy of universal service and the programs to make it 
possible benefit all Americans. One of the key tenets of the 
Telecommunications Act of 1996 is the principle that quality access to 
advance telecommunications services should be made available to all 
regions of the Nation at rates that are just, reasonable and 
affordable. This is not simply a case of social justice, however. Our 
telecommunications system is unique in that, as a network, the addition 
of another user increases the value of the network to all and the loss 
of a user decreases the value to all. Residents and businesses in 
America's urban centers derive value from their ability to call and be 
called by those in rural and remote areas of the country. Our country's 
commitment to the economic and social benefit of this reality has 
contributed greatly to the creation and sustainability of the world's 
strongest economy.
    RTFC's members are the small telephone companies and cooperatives 
that serve rural America. These companies are, for the most part, 
locally owned and operated. Eighty-five percent of rural telephone 
companies serve 10,000 or fewer customers. Their values are those that 
define rural Americans--hard work, integrity and commitment to service. 
But these values are not enough to build a modern telecommunications 
network. It also takes money. That is where RTFC has been able to make 
a contribution to America's rural telecommunications infrastructure--by 
providing debt capital.
    Rural telephone companies have successfully met the challenge of 
bringing service to America's most sparsely populated areas. According 
to a recent National Exchange Carrier Association (NECA) study, 49 
percent of rural telephone companies serve areas with customer density 
of ten or fewer customers per square mile. Fifty-three percent have 
service areas of over 200 square miles. Large service territories and 
few subscribers translate into high costs--costs that the Universal 
Service Fund (USF) plays an essential part in covering.
Universal Service Funding Is Essential To Keep Rural Americans 
        Connected
    Due to removal of subsidies from access rates, rural Americans have 
seen their telephone bills rise significantly. The NECA has found that 
residential subscriber rates rose 36 percent from 1994 to 2002. With 
the July 2002 increase in the Subscriber Line Charge cap to $6.00 
(going to $6.50 in July 2003), and the initiation of the Interstate 
Common Line Support mechanism, this percentage increase will have risen 
dramatically by the end of 2003. Most rural residents have not seen any 
decrease in long distance rates however, as only 57 percent of rural 
customers have access to discount calling plans.
    These increases to rural Americans' local service rates have not 
added one dollar to rural telephone companies' bottom lines, however. 
These changes were ``revenue neutral.'' Rural telephone companies still 
rely heavily on the USF to recover their costs of putting in place the 
infrastructure necessary to provide modern telecommunications. This USF 
program was originally designed to keep the rates of America's most 
rural and high-cost customers affordable. Expansion of the program to 
fund new advanced services and competitors' services--while its funding 
base of interstate access traffic is declining--has placed USF under 
considerable pressure.
    Rural communities, their residents and all Americans will suffer if 
USF is not adequate to allow rural telephone companies to recover their 
costs. Investment will dwindle and infrastructure will age and decline. 
Alternatively, local service rates will be increased to levels that 
will cause some to discontinue service. Under either scenario, rural 
telephone companies' ability to provide modern service to rural 
Americans will be diminished to the detriment of all Americans.
    RTFC urges the Congress to assure that the commitment to comparable 
and affordable telecommunications service for rural Americans set out 
in the 1996 Act be upheld. The Universal Service Fund is essential to 
continued modern and affordable telecommunications in rural America and 
preservation of the world's most technologically advanced network for 
the benefit of all Americans.

    Mr. Orent. Mr. Chairman, we are very concerned that State 
and Federal policy decisions are threatening the continued 
availability of high-quality modern telecommunication services 
to rural consumers. Many ill-advised decisions in several 
controversial court decisions have put the system of universal 
service support at risk. In addition, a series of critical 
decisions are pending at the FCC that will either make or break 
the cost-recovery mechanisms that make investments in rural 
infrastructure possible. If these issues are not dealt with in 
a manner consistent with the will of Congress when it passed 
the Telecommunications Act of 1996, rural consumers will be the 
unintended victims of a broken universal service system.
    In our view, misguided regulatory decisions have rapidly 
swollen the size of the USF to a level that soon may be 
unsustainable. If the size of the USF reaches a point where 
further growth is unsustainable yet the number of carriers 
receiving support continues to grow, then no carrier will have 
the funding necessary to provide affordable, high-quality 
telecommunications services comparable to that received in 
urban areas.
    More specifically, we firmly believe that a sustainable 
Universal Service Fund is being threatened by the ease in which 
some State commissions and the FCC have granted eligible 
telecommunication carrier designations in spite of the fact 
that competitive carriers do not face many of the same 
regulatory obligations we incumbents do.
    Mr. Chairman, I believe very strongly that something must 
be done to rein in the FCC and the State commissions that have 
failed to accurately interpret the public-interest standard 
before designating ETCs. The current practice of liberally 
designating additional ETCs in the service areas of rural 
telephone companies is not sustainable based on the current 
rate of growth of CET support payments and the overall size of 
the USF fund. Fortunately, the Federal and State Joint Board on 
Universal Service has initiated a proceeding to review the 
Commission's high-cost universal service rules and the process 
for designating multiple ETCs.
    In its public notice, the Joint Board has begun its 
consideration of whether it is advisable to establish Federal 
guidelines for States to use in designating ETCs. I would 
strongly suggest that State commissions and the FCC should 
adopt criteria to guide their consideration of ETC applications 
in rural service areas.
    I hope that the Joint Board will be guided under the 
principle that USF is a scarce national resource that must be 
carefully managed to serve the public interest. By this, I mean 
that the USF should not be used to create artificial 
competition in areas served by rural telephone companies. I 
would also recommend that State commissions be encouraged to 
impose the same service quality standards, reporting 
requirements, and customer billing requirements that are 
imposed on ILECs.
    Finally, ETC designations for competitors should be for the 
entire area that the incumbent carrier is also required to 
serve.
    Mr. Chairman, I am hopeful that this subcommittee will 
convene a subsequent hearing that focuses squarely upon the 
issue of State commission designation of ETCs in areas served 
by rural telephone companies. The impact of these as State 
regulatory decisions on the ability of rural consumers to 
continue to receive high-quality, affordable telecommunications 
services certainly demands such action by this committee.
    Mr. Chairman, we also strongly believe that Congress should 
direct the FCC to follow the law when assessing contributions 
for the Universal Service Fund. We are concerned that the FCC 
will adopt a proposal for revising universal service 
contribution methodologies that does not comply with the act. 
Specifically, the Act requires that every interstate 
telecommunications provider contribute to the Fund on an 
equitable and nondiscriminatory basis.
    Congress should also encourage the FCC to broaden the base 
of contributors to the Universal Service Fund. The Act allows 
the FCC to assess all providers of interstate 
telecommunications if the public interest so requires. We all 
agree that providers who compete with each other and provide 
the same functions should have the same contribution 
responsibilities. Your vigilant oversight of the FCC in this 
area would help to ensure a sustainable funding mechanism that 
provides stable and sufficient universal service support 
throughout rural America.
    Mr. Chairman, in conclusion, there can be no denying the 
critical role that universal service plays in ensuring the 
future of our integrated network, a network that has been 
proven to be crucial and critical to the national and economic 
security of this country. Congress must continue to ensure that 
Federal and State regulators understand our Nation's 
longstanding commitment to a strong universal service policy 
and reaffirm its support for regulatory decisions that 
recognize that USF is a scarce national resource.
    Thank you.
    Senator Burns. Mr. Orent, your full statement will be made 
part of the record. I know you summarized your statement, and I 
appreciate that, and I would hope that the other witnesses 
would, too.
    [The prepared statement of Mr. Orent follows:]

        Prepared Statement of Robert Orent, President and CEO, 
                     Hiawatha Communications, Inc.
                           Executive Summary
    The Senate Commerce Committee, Subcommittee on Communications 
should be commended for convening an oversight hearing to consider the 
current universal service proceedings pending before the Federal 
Communications Commission (FCC). There is clearly much at stake for 
both rural telephone companies and rural consumers within the FCC's 
proceeding pertaining to the universal service contribution methodology 
and universal service portability.
    Today, the Subcommittee will hear from a variety of witnesses that 
are deeply interested in the future of universal service and the 
outcome of both of these proceedings. Witnesses will identify a variety 
of concerns about the current universal service program and offer their 
recommendations on how the FCC should address these important 
proceedings. We believe there are serious threats to the long-term 
sustainability of the Federal Universal Service Fund (USF). If these 
issues before the FCC are not dealt with in a manner consistent with 
the will of Congress when it passed the Telecommunications Act of 1996, 
consumers will bear the costs of a broken universal service system.
I. Greater Oversight and Reform of the ETC Designation Process is 
        Needed
    The sustainability of the USF is severely threatened by the ease in 
which some state commissions have approved universal service support 
for wireless Competitive Eligible Telecommunications Carriers (CETCs). 
In fact, since 1999, universal service support allocated to wireless 
CETCs has increased dramatically from $500,000 in 1999 to a projection 
of approximately $140 million in 2003. This astonishing growth in 
support to wireless CETCs is particularly troubling since these 
carriers are not held to the same regulatory obligations and serve 
standards faced by other carriers.
    We ask that Congress reaffirm its strong admonition about 
financially supporting competition when it crafted section 214(e) of 
the Act. In enacting this section of the law governing the designation 
of multiple ETCs, Congress clearly recognized that supported 
competition would not always be in the ``public interest'' of areas 
served by rural telephone companies. Sadly, some state commissions and 
the FCC have ignored the intent of Congress and have designated 
additional ETCs without thoughtfully considering the factors that 
determine the public interest. Regulators have placed far too much 
emphasis upon the Act's general goal of competition at the expense of 
rural markets and consumers. The result of state government-sponsored 
artificial competition in rural service areas has been a swollen USF 
that has put the entire universal service program at great risk.
II. The Senate Should Direct the FCC to Follow the Law When Assessing 
        Contributions to the Universal Service Fund
    It is very possible that the FCC will adopt a ``connections-based'' 
proposal for revising the universal service contribution methodology 
that does not comply with the Telecommunications Act of 1996's 
requirement that every interstate telecommunications provider 
contribute to the Fund on an ``equitable and nondiscriminatory basis.'' 
We urge the Committee to direct the FCC to follow the law and ensure 
that interstate carriers continue to contribute their fair share to the 
Fund. We also believe the FCC should be strongly encouraged to take 
action that would broaden the base of contributors to universal 
service. The Senate has the opportunity to prevent further erosion of 
the contribution base. Your vigilant oversight of the FCC in this area 
would help to ensure a sustainable funding mechanism that provides 
stable and sufficient universal service support throughout rural 
America.
    There can be no denying the critical role that universal service 
plays in ensuring the future of our integrated network--a network that 
has been proven to be critical to our national and economic security. 
Congress must continue to ensure that Federal and state regulators 
understand our Nation's long-standing commitment to a strong universal 
service policy and reaffirm its support for regulatory decisions that 
recognize the USF as a scarce national resource. We hope that this 
morning's hearing is the first in a series of actions by the Senate 
Commerce Committee to exert better oversight of these complex issues 
that directly impact the receipt of high-quality and affordable 
telecommunications services by millions of consumers nationwide.
                              Introduction
    Mr. Chairman, members of the Subcommittee, my name is Bob Orent, 
and I am the President and CEO of Hiawatha Communications, which is an 
independently-owned telecommunications corporation headquartered in 
Munising, Michigan. Hiawatha Communications is the parent company of 
four local exchange telephone companies, namely Hiawatha Telephone 
Company, Midway Telephone Company, Ontonagon County Telephone Company, 
and Chippewa County Telephone Company, along with other subsidiaries, 
providing telecommunications services in the central and western Upper 
Peninsula region. Hiawatha Communications also owns and operates 
Jamadots.com, a new competitive high-quality Internet service that 
provides broadband services such as Digital Subscriber Line (DSL) 
service. Collectively, the operating companies serve more than 5,000 
square miles of territory and approximately 15,000 customers.
    I am very proud of Hiawatha Communication's commitment to universal 
service by providing top quality telecommunications services at 
affordable prices, contributing to economic development, improving the 
quality of life, and otherwise serving the communities and citizens of 
Michigan's Upper Peninsula. However, Hiawatha's commitment to providing 
universal service is not unique. There are hundreds of independent 
incumbent local exchange carriers (ILECs) nationwide that are as just 
as committed toward fulfilling their universal service obligations on a 
daily basis. This morning, I am particularly pleased to appear before 
you on behalf of those hundreds of other ILECs that are represented by 
the Independent Telephone and Telecommunications Alliance, the National 
Rural Telecom Association, the National Telecommunications Cooperative 
Association, the Organization for the Promotion and Advancement of 
Small Telecommunications Companies, and the Western Alliance.
    Mr. Chairman, we strongly support the goal of our Nation's 
universal service policy: to ensure that every American, regardless of 
location, has affordable, high-quality access to the public switched 
network and thereby benefits from a variety of telecommunications 
services. Rural ILECs are the embodiment of the universal service 
concept, having built the infrastructure that provides ubiquitous, 
high-quality local telecommunications service to some of the country's 
most remote and difficult to serve areas. The provision of a robust 
infrastructure in these areas would never have been possible were it 
not for the Nation's long-established policy of universal service and 
the USF.
    However, we are very concerned that State and Federal policy 
decisions are threatening the availability of such high-quality, modern 
service to rural consumers. Such ill-advised decisions and several 
controversial court decisions have put the system of universal service 
support at risk.
    Nine months ago, rural providers brought a warning to this 
subcommittee about a rural cost recovery system that was facing 
increasingly serious risks on several fronts. I regret to say that in 
the intervening nine months little has been done to effectively respond 
to these threats. Not surprisingly, these threats have not gone away. 
They have grown to the point that we may now be facing a true watershed 
for rural telecommunications.
    A series of critical decisions are pending at the FCC that will 
either make or break the cost recovery mechanisms that make rural 
telecommunications possible. Given early indications, we are not at all 
confident that the FCC will get these decisions right without active 
oversight from Congress.
    For example, in their zeal to meet the Act's goal of promoting 
competition, some state commissions and the FCC have not hesitated to 
allocate Federal universal service support to competing carriers in 
rural areas that clearly cannot naturally sustain more than one 
carrier. Some have even assumed that artificially supporting 
competition in rural areas, in and of itself, meets the Act's ``public 
interest'' requirement. Ignoring the law this way takes advantage of 
consumers nationwide that end up footing the bill when regulators abuse 
their authority.
    Mr. Chairman, the dire consequences of such regulatory decisions 
have become more apparent in recent years. These decisions have rapidly 
swollen the USF to a level that may soon be unsustainable. For example, 
in 1996, the year the Act was passed, total funding for the support 
programs was $1.7 billion. By the end of this year, funding for all 
programs projected to be approximately $6.3 billion. Contributing to 
this dramatic growth in the USF is the fact that universal service 
support going to wireless Competitive Eligible Telecommunications 
Carriers (CETCs) has grown from less than $500,000 in 1999 to a 
projection of more than $147 million in 2003. It is estimated, that if 
all wireless providers nationwide were granted ETC status as part of 
this artificial ``competitive'' model that the annual level of the USF 
would grow by approximately $2 billion. Thus, amazingly, over seven 
years, the Fund would have nearly quadrupled in size!
    Our message this morning is very clear. If the size of the USF 
reaches a point where further growth is unsustainable, yet the number 
of carriers receiving support continues to grow, then no carrier will 
have the funding necessary to provide affordable, high-quality 
telecommunications services.
    Who will suffer if the FCC and state commissions get it wrong? Just 
about everyone. Rural consumers will be denied the benefits of 
reliable, affordable communications service promised by the Act. Rural 
communities will also be disadvantaged. Investment in rural 
communities--both to maintain existing facilities and to deploy 
advanced services--will dry up. The more highly skilled jobs in rural 
communities will disappear. Finally, rural consumers will incur ever-
growing costs for ever-dwindling benefits.
    We are headed on a course for a serious train wreck and precious 
little is being done to avert it. Congress must exercise greater 
oversight of Federal and State regulatory decisions to protect our 
Nation's universal service program from these mounting risks. Without 
Congress' active oversight, the fundamental principles underpinning 
universal service--that all Americans deserve reliable, state-of-the 
art telecommunications and that all Americans benefit when rural 
customers are connected to the network--are likely to be lost in a 
series of piecemeal FCC decisions designed to advance other, unrelated 
policy objectives.
The Economics of Rural Telecommunications
    Mr. Chairman, for more than 100 years, independent local exchange 
carriers have provided local telecommunications service throughout 
rural America. For rural ILECs, universal service support has always 
been, and continues to be, a critical means of cost recovery that has 
made the provision of modern, affordable service possible in high-cost 
areas. Thus, if rural ILECs lose the ability or incentive to continue 
investing in their networks--or worse yet, if their existence is placed 
at risk--then some rural areas may be deprived of basic universal 
service where high-quality, reliable telecommunications services are 
available and affordable for all. Such an outcome would be completely 
at odds with the universal service principles that Congress enacted in 
the 1996 Act.
    The universal service provisions of the 1996 Act indicate that 
universal service support should be used for infrastructure investment 
in areas where it would not otherwise be economically feasible to 
provide service at rates that are affordable and reasonably comparable 
to urban areas of the country. High-cost support should never be 
confused with a program simply to reduce the rates for 
telecommunications service charged to an individual end user.
Major Threats to Affordable Rural Telecommunications
    Mr. Chairman, as I indicated earlier, universal service programs 
have successfully connected rural American households and businesses, 
schools and libraries, low-income families, and others to the public 
switched network. A strong universal service policy also provides other 
economic and social benefits for rural communities served by Hiawatha 
Communications and the hundreds of rural telephone companies 
nationwide. In communities in Michigan's Upper Peninsula and across the 
country, rural Americans have witnessed their communities thrive and 
prosper through rural economic development that depends on modern 
telecommunications. I am absolutely convinced that our Nation has 
already achieved many benefits from pursuing universal service as a 
national public policy goal. But again, it is critical that Congress 
exercises its oversight responsibilities to ensure a sustainable 
funding mechanism that provides stable and sufficient universal service 
support.
    More than 7 years ago, we greatly appreciated the efforts of the 
``Senate Farm Team'' led by Senators Burns, Dorgan, Stevens and others 
to ensure that key universal service provisions were ultimately enacted 
into law. However, from the moment when the Act was crafted until now, 
we have remained very wary of several elements of the provisions. 
Today, we believe that there are major threats facing the 
sustainability of the high-cost program.
States Must Take ETC Responsibilities More Seriously
    First, we believe the sustainability of the universal service 
program is threatened by the ease in which some state commissions and 
the FCC have begun to create potentially vast new liabilities for the 
Fund and the Nation's consumers by approving universal service support 
for wireless CETCs--in spite of the fact that they do not face many of 
the regulatory obligations other carriers face. For example:

   They are not required to serve all customers in the service 
        territory.

   They are not held to the same quality of service and 
        reliability standards.

   They do not have equal access obligations.

   They do not receive support on the basis of their own costs.

    Mr. Chairman, as you know, under the 1996 Act, in order to be 
eligible to receive high-cost universal service support, a carrier must 
first be designated as an Eligible Telecommunications Carrier (ETC) by 
a state commission or, in limited circumstances, by the FCC. In areas 
served by a non-rural ILEC, the Act requires state commissions and the 
FCC to designate additional ETCs, so long as the applying carrier meets 
certain prerequisites. However, in areas served by a rural telephone 
company, the Act provides state commissions and the FCC with the 
discretion to determine whether or not providing more than one carrier 
with universal service support would be in the best interest of those 
communities. More specifically, it requires state commissions and the 
FCC to find that the designation of an additional ETC in a rural 
service area is in the public interest before such a designation is 
made.
    This additional requirement demonstrates Congress's recognition 
that supported competition would not always serve the public interest 
in the areas served by rural telephone companies. Unfortunately, in 
many instances, state commissions and the FCC have not been following 
the intent of Congress and have been quick to designate additional ETCs 
in rural telephone company service areas without thoughtfully and 
thoroughly considering all of the factors that determine the public 
interest. Our concerns are reflected in separate comments made recently 
by Commissioners Kevin Martin and Jonathan Adelstein.
    Commissioner Martin explained how supporting competition in rural 
areas may not always be in the public interest when he stated:

        I have some concerns with the Commission's policy . . . of 
        using universal service support as a means of creating 
        ``competition'' in high cost areas. I am hesitant to subsidize 
        multiple competitors to serve areas in which costs are 
        prohibitively expensive for even one carrier. This policy may 
        make it difficult for any one carrier to achieve the economies 
        of scale necessary to serve all of the customers in a rural 
        area, leading to inefficient and/or stranded investment and a 
        ballooning Universal Service Fund.

    Commissioner Martin's concerns underscore a key concern for rural 
telephone companies--the perfunctory grants of ETC designations by 
various state commissions and the FCC that do not take into 
consideration the potential costs of such decisions to rural consumers 
and to consumers nationwide who are the ultimate contributors to the 
USF. Fortunately, the Federal-State Joint Board on Universal Service 
has recently issued a Public Notice that will examine the process for 
designating ETCs and the Commission's rules relating to high-cost 
universal service support in study areas in which a competitive ETC is 
providing services.
    In case after case state authorities and the FCC have granted ETC 
status to competitive carriers based on extremely loose public interest 
tests or tests that are inconsistent with the language and intent of 
the law. Notably, however, just last year, the Utah Supreme Court 
upheld a decision of the Utah Public Service Commission that denied ETC 
status for Western Wireless Corp. In upholding the PSC decision, the 
Court found that:

         . . . the [Utah Commission] is not against competition per se, 
        but rather, merely recognizes that in some instances 
        competition in rural areas by multiple ETCs receiving state 
        universal service support may not be in the public interest.

    That is precisely what Congress's ``public interest'' requirement 
in rural carrier's areas says and means. Far too often, artificially 
inducing competition--or simply providing windfall payments to carriers 
for services that they are already successfully providing without 
support--has been assumed to be in the public interest. This flatly 
wrong interpretation has no place in the regulatory arena implementing 
the 1996 Act for rural markets. In the case of the rural markets served 
by my companies and those of my rural company colleagues, these entire 
communities are typically already receiving high quality, affordable 
communications services and the existing provider is doing all it can 
to provide advanced capabilities. Owing to the FCC's and the state's 
misguided interpretations and implementation of the 1996 Act, today we 
are at the point where pressures on the high-cost program have grown to 
the degree that we are now very concerned about its long-term 
viability. Clearly, for the public interest to be served, it will be 
necessary to demonstrate that the benefits of supporting multiple 
carriers will exceed the costs created by supporting multiple networks.
    These concerns are also apparently shared by FCC Commissioner 
Jonathan Adelstein, who recently stated:

        The public interest also demands that regulators seriously 
        consider whether a market can support more than one carrier 
        with universal service. If not, then new designations shouldn't 
        be given as a matter of course just because they meet other 
        qualifications.

    Commissioner Adelstein too is simply reading what the 1996 Act says 
and requires.
    Mr. Chairman, although we have never agreed with the concept of 
allowing multiple carriers in a market served by a rural telephone 
company to receive universal service support, we had hoped that the 
safeguards in the law would prevent the duplicative support provisions 
from doing unintended harm. In fact, we have always noted that the 
great majority of rural markets that are served by our members are not, 
and may never be, in a position to sustain more than one carrier. 
Artificial competition--that is competition that is based upon a 
business plan relying on duplicative universal service support--is not 
market driven competition at all and should be discouraged, not 
encouraged. Technically, the statute contemplates multiple carrier 
support in non-rural telephone company areas and even requires it in 
the large urban-centered markets. In our view, however, the provision 
allowing an existing support recipient to relinquish its ETC 
designation voluntarily when a new recipient becomes designated 
indicates that the congressional intent behind the provision was that 
new entrants into a market would be making a genuine, carrier-of-last-
resort commitment to the market in order to receive universal service 
support.
    The legislative history leading to the creation of the section of 
the statute that provides the states with the responsibility of making 
ETC determinations shows that the Congress believed state authorities 
would be in a better position to make ETC determinations than the FCC. 
State policymakers, after all, would have the best information with 
regard to the needs of their respective rural markets and would have a 
vested interest in ensuring such markets were efficiently and well 
served. Unfortunately, to a large extent state policymakers have simply 
followed the direction and directives of the FCC, without a great deal 
of thought being given to their individual, unique circumstances.
    The FCC first tried to prevent states from adopting any additional 
requirements for carriers seeking to qualify for support. The 5th 
Circuit decided that the law did not permit this prohibition. The FCC 
has, since then, issued an unnecessary declaratory ruling threatening 
to preempt state requirements the FCC perceives as obstacles to the 
publicly-supported ``competition'' it wants to foster.
    Mr. Chairman, we urge Congress to work with us and the Federal-
State Joint Board on Universal Service to make it clear that ETC 
designations are to be taken seriously and that the responsibilities 
associated with receipt of this designation must be equal to the 
carrier of last resort level of commitment demanded of incumbent 
carriers. Providing support to a carrier that is unwilling to provide 
true, ubiquitous universal service is wasteful and serves no one well. 
The fact of the matter is that we incumbents have always provided real 
value to our customers and to the nationwide end-user contributors in 
return for our ETC designations, and we would not have it any other 
way. Nevertheless, Congress should no longer sit still and watch others 
take advantage of this critical program.
Providing Support for Multiple Carriers at the Incumbent Carrier's Cost
    Mr. Chairman, I have spoken about my disappointment over state 
commission misinterpretation of the ``public interest'' when 
designating more than one ETC in an area served by a rural telephone 
company. However, the states are not the only ones running up the costs 
for the universal service program without increasing the benefits. The 
FCC is also responsible. One of the most controversial and costly FCC 
actions ``implementing'' Congress's universal service requirements is 
its revision of a pro-consumer policy into a consumer-funded windfall 
for competing carriers in rural areas. This unjustified consumer burden 
came about because the FCC uses the incumbent local telephone company's 
actual costs for providing a line to its customers to calculate the 
universal service support for competing carriers.
    The FCC originally said that it would use its proxy model, based on 
an imaginary state-of-the-art lowest-cost network for rural carriers' 
support. However, its Rural Task Force, made up of representatives of 
consumers and all sorts of carriers, determined that the proxy model 
simply would not work for the extremely varied rural telephone 
companies and the differing conditions in their service areas. And we 
agree. Nevertheless, the FCC still wants to force rural companies into 
its misshapen proxy mold. Fortunately, for now it is still using actual 
costs, which accurately measure the need for support for incumbents 
under the current formulas.
    Mr. Chairman, fixated on the principle of ``competitive 
neutrality'' it had added to the list of principles Congress adopted, 
the FCC decided to make support ``portable.'' By this, the FCC meant 
that universal service support for high cost, rural, and insular areas 
would be shifted to a competitive ETC that ``wins'' or ``captures'' a 
customer from an ILEC. It later spoke of support for ``new'' customers, 
too. The idea is that the new eligible carrier receives the same level 
of universal service support for a customer as the ILEC would have been 
eligible to receive for serving that customer. \1\
---------------------------------------------------------------------------
    \1\ Federal-State Joint Board on Universal Service, CC Docket No. 
96-45, Access Charge Reform, Price Cap Performance Review for Local 
Exchange Carriers, Transport Rate Structure and Pricing, End User 
Common Line Charge, CC Docket Nos. 96-262, 94-1, 91-213, 95-72, Fourth 
Order on Reconsideration in CC Docket No. 96-45, Report and Order in CC 
Docket Nos. 96-45, 96-262, 94-1, 91-213, 95-72, 13 FCC Rcd 5318, 5364-
5365, para. 79 (1997) (4th Order on Reconsideration), citing Federal-
State Joint Board on Universal Service, CC Docket No. 96-45, Report and 
Order, 12 FCC Rcd 8776, 8932-34, 8944-46 (1997) (Order).
---------------------------------------------------------------------------
    The FCC's rationale was that ``paying the support to a competitive 
eligible telecommunications carrier that wins the customer or adds a 
new subscriber would aid the entry of competition in rural study areas. 
\2\ '' The FCC simply brushed aside the statutory language, ignoring 
that section 254's requirements for ``sufficient,'' ``predictable'' 
and, above all, ``specific'' support are totally at odds with basing 
support on another carrier's cost-specific support.
---------------------------------------------------------------------------
    \2\ Order, 12 FCC Rcd 8944, para. 311.
---------------------------------------------------------------------------
    Basing support on the incumbent's actual costs means that the 
competing carrier's subsidy per line has no link whatever to its own 
costs or rates. Thus, the support is not ``specific'' and is almost 
certain to be more than ``sufficient,'' since unlike ILECs, competitors 
can choose where to serve and where to seek support.
    As a result, wireless carriers get support based on the high costs 
of providing a copper or fiber line to a remote ranch in Montana. 
However, the economics of how wireless carriers incur costs are 
entirely different, and they do not need to install lines to the 
customer's premises. They also get support based on the greater costs 
per line for necessarily small switches provided by small incumbent 
carriers in areas with few subscribers, regardless of the size, 
location, or efficiency of their switches or the scope of their service 
areas. The mismatch between support and costs has become even greater 
now that the FCC has adopted Interstate Common Line Support (ICLS) to 
replace cost recovery that ILECs used to get via their access charges 
to long distance carriers. However, while the incumbents lowered their 
access charges to qualify for support, the competing subsidized 
carriers claim that they must get the additional support per line 
without changing their rates or services at all.
    Mr. Chairman, the claim that support is necessary to bring 
competitors into rural areas is not supported by the facts. What has 
generally been the case, for example, is that the additional support is 
claimed by a rural cellular carrier that is already serving the area 
where it draws support. Under current FCC policies, it immediately 
obtains support at nationwide consumers' expense for the service it is 
already successfully providing to paying customers. The lure of support 
for nothing in return is quickly inducing wireless carriers to cash in 
on the consumer-financed bonanza. Recent reports by investment analysts 
of the ``high margin'' subsidies that wireless carriers may obtain for 
their lines in rural areas will further pressure more prudent wireless 
providers to seek this windfall as well.
    Incumbent local phone companies serve as the so-called carrier of 
last resort in their service areas. This means that they must provide 
service in response to any reasonable demand, including, for example, 
when competitors cease to provide service, and cannot discontinue 
service without regulatory permission. These obligations are key 
safeguards against any community or consumer losing the ability to 
connect into the public switched network at just and reasonable rates.
    In contrast, the wireless carriers that are beginning to line up 
for the right to draw support are also the strongest opponents of any 
requirements that competing subsidized carriers provide proven value to 
consumers in return for the support they receive. These carriers claim 
that section 332(c) of the Act, which exempts them from state rate and 
entry regulation, also bars any state from requiring them to meet rate 
level requirements to justify their subsidies under universal service 
support programs. They expect the general public to cover some of their 
costs of providing service under the national policy of providing 
universal service in high-cost markets. But they refuse to recognize 
the difference between state regulation--setting rates or placing 
obstacles that prevent them from providing competing service at all--
and requiring them to provide value to the Nation's ratepayers to 
justify the support they receive. These carriers even complain that it 
is against government policy to ask competing carriers to calculate 
their costs of service to qualify for support from nationwide users of 
the network. It is as if applicants for hurricane disaster assistance 
took the position that they could not be asked to demonstrate that they 
had been affected by hurricane damage because financial information and 
information about the condition of their property is private.
    Under section 253 of the Act, carriers are free to enter and 
provide competing service in markets throughout the Nation without 
regulatory obstacles. However, it is not forbidden ``regulation'' to 
ask that they justify the need for support, and how they use such 
support, under the consumer-centered purposes for which universal 
service support has been established. Nor should the section 332 
prohibition on requiring wireless carriers to provide equal access to 
competing providers of long-distance service mean that they are 
shielded from meeting that requirement if they voluntarily seek high 
cost subsidies. It is absurd to equate regulatory requirements that 
apply as a condition for providing service as a carrier with conditions 
that attach only to carriers that choose of their own volition to seek 
universal service support.
    Mr. Chairman, section 254(e) of the Act requires that carriers that 
obtain Federal universal service support use it only for the legitimate 
universal service purposes for which it is intended. Since the support 
for incumbents is based almost entirely on their own past actual 
investment and expense payments or reductions in other rates, it is 
clear that the support has been used for purposes covered by the cost-
based support formulas. The use to which competitors will put support 
based on the incumbents' actual spending record, cannot be discerned 
from the formulas or records. Their unsupported self-certification that 
they use the support for appropriate purposes is suspect, at best, when 
they need not capture customers, add new customers, change their rates, 
increase their investments, improve their services or make any other 
legitimate use of the windfall payments they receive. Congress owes it 
to the Nation's telecommunications customers that fund the Federal 
universal service programs (a) to base each ETC's support payments on 
its own cost of providing service and (b) to verify that non-cost-based 
payments are actually put to use for the statutory purposes.
    Finally, the argument of wireless carriers that the definition of 
universal service must not be upgraded unless they can meet the new 
standard is a perversion of the pro-consumer foundation on which the 
national universal service policy rests. While competitive local 
exchange carriers (CLECs) have tried to provide broadband in their 
markets, wireless carriers that are entering markets on the basis of 
what universal service subsidy is available put their own interests 
ahead of the consumers Congress sought to benefit. To make the level of 
support available to particular carriers a test for whether and when 
consumers should be able to count on the evolving definition of 
universal service the law requires is an affront to the statutory 
principles of reasonably comparable urban and rural rates and services, 
including advanced telecommunications and information services and to 
the section 706 objective of universally available access to broadband 
services. Although it is too early to change the definition at this 
point in the development of the broadband marketplace, who can qualify 
for support will never be a reasonable standard for evolving the 
supported universal services within the definition.
The FCC Should Follow the Law When Assessing Contributions to the 
        Universal Service Fund
    Mr. Chairman, the FCC is currently considering three different 
``connections-based'' proposals for revising the universal service 
contribution methodology. The first proposal would impose a flat 
monthly fee for each end-user connection and assess a ``minimum'' 
contribution from each interstate telecommunications provider 
regardless of whether the carrier provides connections. The second 
proposal would split ``connections-based'' based contributions between 
switched access and interstate transport providers. The final proposal 
would assess contributions on the basis of telephone numbers assigned 
to end users. We are very concerned that through these proposals the 
Commission is considering possibly adopting a new contribution 
methodology that would violate the requirement set forth in the 1996 
Act that calls for ``equitable and nondiscriminatory'' contributions 
from every interstate telecommunications carrier.
    In addition, we also all strongly believe that any reform of the 
universal service contribution methodology should expand the base of 
contributions to the Fund. As you know, the universal service system 
has been funded by a broad-based national system of industry 
contributions. The traditional contribution base--the long distance 
market--has steadily declined, eroding the funding base for universal 
service. Alternatives to long distance--wireless, e-mail, Internet 
Protocol (IP) telephony and their customers have not been asked to 
contribute their fair share to alleviate the shortfall. We are very 
concerned that the proposals currently pending before the FCC would 
fail to broaden the contribution base sufficiently, and fail to ensure 
the stability and sufficiency of the USF for the long-term.
    Mr. Chairman, the manner in which contributions are assessed for 
the USF is a very complex and controversial issue. In fact, the 
associations that I represent this morning differ on how to solve the 
current universal service contribution dilemma. One view is that only 
the ``connections-based'' proposal which would split contributions 
between switched access and interstate transport providers could be 
made to comply with the Act's requirement of ``equitable and 
nondiscriminatory'' contributions from all interstate 
telecommunications carriers. Since all interstate telephone calls 
require both a connection to a local distribution network and a carrier 
equipped to transport these calls across state lines, splitting 
contributions between both of these carriers would be equitable and 
nondiscriminatory.
    Other telecommunications advocates are not convinced that the 
Commission should give further consideration to any of the 
``connections-based'' USF assessment proposals. Their alternative 
position recommends that the FCC allow sufficient time to determine 
whether the modified revenues-based USF contribution mechanism it 
adopted last year could be sustainable for the future. Some industry 
stakeholders with this view also maintain in part that the FCC should 
refrain from further changes to the USF contribution mechanism until it 
has implemented final rules in its wireline broadband classification 
and universal service portability proceedings.
    Although there is more than one view among the associations about 
whether and how to address the USF contribution issue, I can assure you 
in the strongest possible terms that we are unified in our view that 
any further modifications by the Commission to the contribution 
methodology must be consistent with the statute's clear requirement 
that all interstate telecommunications services contribute to the USF 
on an equitable and nondiscriminatory basis. Regardless of whether the 
FCC adopts the proposal for splitting contributions between switched 
access and interstate transport providers or extends the operation of 
its interim modified revenues based plan, the associations all agree 
that interstate interexchange carriers have to remain principal 
contributors.
    Mr. Chairman, we all agree that universal service support needs to 
be sufficient and sustainable and should be fair to all providers and 
users of all kinds of networks. We are aware of growth in the Fund and 
concerned about shifts in the types of interstate services consumers 
are utilizing. These developments have created a serious issue about 
how to prevent erosion and evasion of support mechanisms. Thus, we 
firmly believe that the FCC needs to assess the broadest possible list 
of contributors to keep each carrier's contribution and the amount it 
needs to recover from its customers as small as possible.
    We need to emphasize that the gradual but ever-growing use of 
broadband platforms and Internet Protocol (IP) networks play a growing 
role in the instability of the contribution base. Consumers use IP 
networks in a variety of ways (access to the World Wide Web, e-mail, 
instant messaging, Internet telephony) and via various platforms 
(cable, wireless, satellite) to substitute for interstate calls on the 
public switched network. As this ``Internet substitution'' grows, 
traditional interstate revenues providing the funding base for 
universal service will diminish. And there will be little offsetting 
gain, since presently only wireline telecommunications carriers are 
required to contribute on the basis of revenues earned from Internet 
access service. All other Internet access providers using other 
platforms remain exempt from the obligation.
    Mr. Chairman, Federal law allows the FCC to assess all providers of 
interstate ``telecommunications'' if the public interest so requires, 
even if they are not common carriers. We all agree that all providers 
that compete with each other and provide the same functions should have 
the same contribution responsibilities. This means that cable modem 
providers and other information service providers that provide their 
own transmission should contribute, just as ILECs presently contribute 
for their transmission role in providing Internet access. This also 
means that wireless carriers need to be assessed on a fairer basis than 
even the ``modified safe harbor'' adopted by the Commission last year.
    More specifically, in reassessing who must contribute to the Fund, 
Congress should insist that interexchange carriers, Internet access 
providers, wireless carriers, bundled service providers, payphone 
providers, dial-around services, and IP telephony providers, as well as 
local exchange carriers all contribute to the USF. Broadband service 
providers, whether considered information service providers or 
telecommunications service providers, also should be included as 
supporters of universal service. Finding an equitable way of assessing 
contributions to universal service support on carriers, and--as I just 
discussed--broadening the base of contributors to universal service are 
significant problems the FCC needs to resolve to make universal service 
support funding sustainable.
Universal Service Is Good Public Policy For America
    Mr. Chairman, the high-cost component of the universal service 
program handles approximately $3.3 billion in annual carrier-to-carrier 
support transactions, which represents slightly more than half the 
amount that is channeled through the overall fund each year. The high-
cost component is a ``safety-net'' of sorts for rural carriers and 
their subscribers, but it is also a tool to ensure that all Americans 
enjoy the benefits and security of a nationwide integrated network. 
Congress and successive Administrations have wisely recognized the 
value of this component of the program and now, above all else, need to 
take steps to ensure its ongoing ability to function according to 
statutory intent.
    The high-cost element of the Fund is used to build 
telecommunications ``platform'' infrastructure. Without a 
telecommunications platform, our schools and libraries, rural health 
care, and lifeline and link-up programs, and millions of rural 
Americans, have nothing. Modern telecommunications infrastructure in 
rural America enables diversity of education, health, and other social 
services comparable to those in urban areas.
    Mr. Chairman, our Nation's first priority for rural areas should be 
to provide a stable environment for continued telecommunications 
investment. Technologies and businesses come and go. But one of the 
most important ways rural Americans have benefited from universal 
service is that it has sustained a telecommunications commitment to 
rural communities for decades. ``Rural telephone companies,'' as 
defined in the 1996 Act, have become an integral part of rural 
communities throughout America and have remained economically viable in 
these high-cost areas due, in large part, to strong universal service 
policy.
    In sum, a strong universal service policy is still needed today to 
ensure a stable environment that encourages continued 
telecommunications investment in rural America. Incumbent rural 
telephone companies have met the challenge of deploying 
telecommunications infrastructure in high-cost rural areas. With a 
strong universal service policy, they can continue to help rural 
communities and rural Americans realize diversity of education, 
improved health and other social services, and economic development 
through modern telecommunications.

    Senator Burns. Mr. Matthew Dosch, of Comporium 
Communications, Rock Hill, South Carolina.

 STATEMENT OF MATTHEW DOSCH, VICE PRESIDENT, EXTERNAL AFFAIRS, 
                        COMPORIUM GROUP

    Mr. Dosch. Good morning, Mr. Chairman.
    My name is Matthew Dosch.
    Senator Burns. See if you can talk like my ranking member 
here.
    [Laughter.]
    Mr. Dosch. I am afraid we do not sound too much alike on 
that score.
    [Laughter.]
    Mr. Dosch. My name is Matthew Dosch, and I am Vice 
President of External Affairs of the Comporium Group based in 
Rock Hill, South Carolina. Comporium is a relatively new trade 
name for us, but we are a group of rural incumbent local 
exchange carriers that have been providing telecom services to 
communities in upstate South Carolina for nearly 110 years. 
Rock Hill Telephone Company, Fort Mill Telephone Company, and 
Lancaster Telephone Company collectively serve 105,000 access 
lines.
    I am very pleased to appear before you today on behalf of 
the United States Telecom Association. As you know, USTA is 
comprised of small, mid-sized, and large telephone companies. I 
currently serve as the chairman of USTA's mid-sized company 
caucus.
    It has been apparent to telephone companies of all sizes 
that while our Nation's commitment to universal service has 
never been more critical, the Federal program that is meant to 
maintain that commitment is in serious jeopardy. This is not 
just an academic interest on my company's part. The country's 
universal service policy has allowed Comporium to extend a 
robust telecommunications network built on digital switching 
and a fiber backbone to rural communities such as Fort Lawn, 
South Carolina, and Heath Springs, South Carolina, each with a 
population of around 850, as well as the much less populated 
rural areas surrounding them.
    Mr. Chairman, Comporium and other telephone companies grew 
to recognize that in the time since universal service policy 
was last addressed by Congress in the Federal Telecom Act of 
1996, several trends have emerged that are straining the 
present system to the breaking point. These trends include, 
first, a limited and shrinking base of interstate telecom 
revenues on which to assess contributions into the existing 
program; and, second, a misguided effort to use universal 
service to incent competition for competition's sake in high-
cost areas with little regard for the overall public interest 
rather than to assist facilities-based infrastructure providers 
to offset the high costs of extending their networks to those 
areas.
    If these trends are not addressed, the entire universal 
service system will simply become unsustainable, and that will 
have dire consequences for our customers who happen to live in 
rural high-cost areas. Recognizing this possibility, USTA 
member companies of all sizes came together last winter in an 
attempt to identify a solution to this problem.
    Mr. Chairman, the principles I am about to outline for you 
represent a true consensus position within the association. 
They are the direct result of serious, good-faith negotiations 
between the Bell companies, mid-sized companies such as my own, 
and USTA's sizable and active small-company community. The 
resulting policies reflect a strong desire on the part of 
telephone companies of all sizes to seek common ground so that 
we can continue to provide affordable universal service to all 
of our customers regardless of where they may live. We believe 
the adoption of these principles by policymakers will result in 
a strong, sustainable, and appropriately targeted universal 
service mechanism.
    First, Congress should direct the States to make reasoned 
public-interest findings before designating additional eligible 
telecommunications carriers. ETCs should be true providers of 
critical infrastructure in high-cost areas. If a State 
determines that designating additional ETCs in a given high-
cost area in order to subsidize competition is in the public 
interest, that State should be responsible for funding that 
competition.
    Second, regulatory status should not affect the carrier's 
ability to receive universal service support. Local exchange 
carriers should be given the option of being deregulated on a 
date certain since increased competition, for the most part, 
has replaced the need to regulate retail and wholesale rates in 
most markets. To the extent that a LEC is deregulated, 
universal service support should help to fund its 
infrastructure platform, not dictate the rates and services 
over that platform.
    Third, Congress should give the FCC the authority to impose 
a universal service fee on a broader base of interstate and 
intrastate telecom products and services and target receipts 
from that fee to high-cost universal service, exclusively.
    Fourth, rates in high-cost areas should be re-balanced 
among composite end-user rates, inter-carrier compensation, and 
universal service. Composite end-user rates should be no lower 
than the statewide average. And additional revenue replacement 
necessary due to inter-carrier compensation changes should be 
accomplished through changes in universal service support.
    Finally, Congress should ensure that support is based on 
actual costs. For large LECs, the FCC has employed a cost-
recovery methodology that does not permit the recovery of the 
actual costs incurred to provide infrastructure in high-cost 
areas. In the future, universal service support should be based 
on actual costs for all companies.
    Thank you, Mr. Chairman. I would ask that my written 
testimony be submitted for the hearing record, and I look 
forward to any questions you may have.
    [The prepared statement of Mr. Dosch follows:]

Prepared Statement of Matthew Dosch, Vice President, External Affairs, 
                            Comporium Group
    Good morning, Mr. Chairman and members of the Subcommittee. My name 
is Matthew Dosch, and I am Vice President of External Affairs of the 
Comporium Group, based in Rock Hill, South Carolina. Comporium is a 
group of rural incumbent local exchange carriers (ILECs) that have been 
providing telecommunications services to communities in upstate South 
Carolina for nearly 110 years. Rock Hill Telephone Company, Fort Mill 
Telephone Company, and Lancaster Telephone Company collectively serve 
105,000 access lines.
    Although ``one-stop shopping'' has become something of an industry 
cliche, Comporium has always sought to make its customers' lives easier 
by providing a wide variety of the latest telecommunications products 
and services. From local and long distance telephone service to high-
speed Internet access, wireless, cable TV, and security, Comporium 
continually strives to provide our customers with affordable solutions 
to their communications needs.
    I am appearing before you today on behalf of the United States 
Telecom Association (USTA). I currently serve as Chairman of the Mid-
Size Company Caucus within USTA. My mid-size company brethren, along 
with the small company and large company members of USTA, have worked 
tirelessly throughout the winter to forge the consensus positions on 
universal service that I am pleased to share with you today.
Charting a Stable, Sustainable Future
    For more than a century, our Nation's telecommunications network 
has helped define the fabric of American life. Like the electrification 
of the countryside, the Nation's commitment to universal service--
seeing essential telecommunications reach every corner of the country--
has played a major role in America's economic and social development. 
The ubiquitous presence of a telephone in virtually every American home 
stands as one of the Nation's landmark achievements of the 20th century 
and a testament to the efficacy and value of the universal service 
program.
    Universal service support exists to bring essential 
telecommunications service to parts of the country where the market 
alone cannot support its presence. By easing the extraordinary costs of 
reaching sparsely populated areas, universal service helps ensure that 
all Americans have affordable, reliable access to a dial tone and the 
security and opportunities it represents. With the Nation's evolution 
from an industrial to an information economy and with the country's 
escalating security concerns, reliable access to essential 
telecommunications has never been more important. Yet the funding 
mechanism that ensures this broad access today is in peril--undercut by 
telecommunications policies that discourage investment, undermine the 
evolution of healthy telecommunications markets, lavish resources on 
companies that do not face the same obligations as incumbent wireline 
providers, and turn a blind eye to new platforms that now regularly 
compete for consumers' communications dollars, but that do not 
contribute their fair share to the universal service support funding 
mechanisms.
    Fortunately, there is growing recognition of the value and 
vulnerability of Universal Service Funding mechanisms. The Federal 
Communications Commission (FCC) recently adopted an interim funding 
mechanism that makes incremental progress. It also has proceedings 
underway to contemplate long-term solutions to perpetuate the program. 
This morning, I would like to examine the trends that have placed 
Federal universal service support in jeopardy today, as well as 
solutions to ensure the fair and fiscally sound continuation of this 
vital program.
The Core Challenge: A Costly, Unsustainable Status Quo
    For most of their existence, universal service mechanisms have 
focused on mitigating the high costs associated with delivering vital 
telecommunications services and infrastructure to rural, insular and 
remote parts of the Nation. With the Telecommunications Act of 1996 
(1996 Act), however, Congress set universal service on a perilous path 
of `mission creep.' Rather than a focused cost-recovery mechanism aimed 
at helping facilities-based infrastructure providers offset 
extraordinary costs toward the public benefit, universal service has 
become a costly and sprawling mechanism rooted in the well-intentioned, 
but overly simplistic philosophy that supporting competition for 
competition's sake must be even better. Unfortunately, this has been 
implemented without a thorough and fair evaluation of the public 
interest.
    Seven years after the passage of the 1996 Act, this policy 
alteration--and how it was executed--has set off a chain reaction that 
now has called the entire program's sustainability into question. As a 
result of this alteration, the number of companies successfully gaining 
universal service support has exploded. In fact, if the trend continues 
unabated, experts predict the high-cost fund will, due to this factor 
alone, grow by $2 billion over the next four years.
Inflating the Balloon
    The primary driver inflating the costs associated with Universal 
Service are provisions of the 1996 Act that open up support to multiple 
providers in the same service area that successfully secure status at 
the state level as Eligible Telecom Carriers (ETCs). For incumbents to 
gain universal service support, they must thoroughly document the costs 
of their telecom infrastructure, promise to deliver a specified list of 
services, and most importantly, continue to fulfill the regulatory, 
public safety, and national security expectations and obligations of 
State and Federal officials. So while incumbent providers have access 
to a cost-recovery mechanism, non facilities-based providers are 
offered what amounts to a windfall. They get the money, regardless of 
whether they are truly fulfilling the obligation of being a critical 
infrastructure provider, and potentially the sole critical 
infrastructure provider, in a particular area. This perpetuates a 
fundamental disparity rampant throughout today's outdated system of 
wireline regulation: rewarding those who fail to assume the full 
obligations of a true carrier of last resort and punishing those that 
actually carry out the Fund's initial purpose of delivering the 
infrastructure that ensures reliable, affordable access to basic 
services in every community across the country.
    The expensive universal service mission creep undermines the 
political viability and economic sustainability of the entire program. 
With far more companies participating at a price tag in the billions of 
dollars, taxpayers and legislators see diminishing returns on their 
rising investments because the benefits of support for multiple 
carriers in each service area rarely outweigh the explosion in costs.
    There also is a strong argument to be made that this subsidy-heavy 
approach undermines the evolution of healthy, sustainable markets in 
rural America, as well as the rollout of leading-edge services. The way 
rural markets develop, typically one business determines that there is 
adequate `critical mass' to support their business. Then, over time, 
the opportunity and the community grow to the point where others are 
attracted into the area and competition ensues. In the case of telecom, 
universal service support has skewed the economics of what attracts 
companies to higher cost areas. A mechanism that lures multiple 
providers and subsidizes inferior service undermines this natural 
evolution, all but ensuring long-term dependence on government 
subsidies and weakening the growth of a sustainable market and the 
investment that typically accompanies it.
Cherry-picking Further Punishes True Carriers of Last Resort
    Another challenge to the current USF structure is the effort in 
some states to reduce the size of USF service areas in places served by 
rural telephone companies. This is yet another attempt to use universal 
service to promote competition rather than simply access to affordable, 
essential services. For example, CenturyTel is fighting such an effort 
in Colorado. States' segmentation of service areas to a granular level 
encourages competitors to selectively enter areas with higher revenue 
customers, leaving incumbents (which have carrier of last resort 
obligations for the broader service area as a whole) with the least 
profitable customers of all.
    Funding competition that cannot be supported by normal marketplace 
economics, and handing out vast amounts of resources to companies 
without the obligations and expectations that accompany service 
provided by the incumbent LEC, clearly call into question the future 
viability of the program. In fact, the purse strings are perceived to 
have become so loose in recent years that organizations that target 
government waste are starting to zero in on high-cost USF support, 
making it imperative that the Fund be operated in a more responsible 
and restrained manner in the future, in order to ensure that its 
important core work continues.
Spreading the Burden Fairly
    The current universal service approach has undermined the program's 
initial purpose--delivering to remote communities the economic 
opportunities and security of a dial tone. However, like U.S. telecom 
policy in general, the universal service program is behind the times in 
making another crucial acknowledgement: In the 21st Century telecom 
marketplace, voice telephony is no longer the sole domain of incumbent 
local exchange carriers.
    Consider these core facts:

        Today, one in five Americans use their cell phone as their home 
        phone; half of all Americans, according to Forrester Research, 
        will follow suit in five years' time;

        The cable industry is adding 100,000 new voice customers every 
        month; and Cox Cable today is the 12th largest phone company in 
        the Nation;

        Internet-based telephony is beginning to go mainstream; in 
        fact, the U.S. Department of Commerce is in the process of 
        transferring its entire telephone system to Internet-based 
        telephony.

        Even in the traditional wireline market, 93 percent of 
        households have at least two local providers serving them.

    Given that the 21st Century telecommunications marketplace has 
diversified, so too must the pool of contributors to universal service. 
This is the only path to ensuring a platform neutral approach in which 
all participants in the marketplace contribute, so no set of companies 
is put at a disadvantage.
The Current Mechanism is Not Sustainable
    The current mechanism used to collect Federal universal service 
support as established in Section 254 of the Telecommunications Act of 
1996 is not sustainable. Congress, when it passed the 1996 Act, had 
multiple goals. First and foremost, however, it wanted to promote local 
telephone competition, even in rural areas where the provision of 
service is extremely costly and without universal service support would 
be prohibitively expensive to the consumer. Density, or more 
appropriately, the lack of density, is the costly rural problem--there 
are more telephones in a typical Manhattan office building than there 
are in the entire service area of many rural telephone providers. 
Nonetheless, Congress specifically provided for the possibility of 
multiple non facilities-based recipients of Federal universal service 
support--this was in furtherance of its primary policy goal of local 
telephone competition in all areas, including rural ones. In other 
words, universal service support would, pursuant to the 1996 Act, be 
used to facilitate the entry of new local telephone providers even in 
areas served by rural telephone companies--this then is the ``mission 
creep''. Section 214 of the Communications Act of 1934 was amended by 
the 1996 Act to authorize multiple ``eligible telecommunications 
carriers'' (ETCs) to be the recipients of universal service support in 
rural areas, with state commission approval. The funding source for 
this universal service support is ``telecommunications carriers that 
provide interstate telecommunications service.'' Consequently, the 
states have no reservations about authorizing additional ETCs, given 
that they have no responsibility for raising the universal service 
support funds that will be distributed in their states. Only the FCC 
has this fundraising duty, and the courts have instructed the FCC that 
only interstate revenues may serve as the basis for assessing Federal 
universal service support contributions.
    This statutory combination of universal service support as a local 
telephone competition facilitation device, coupled with the limitation 
on universal service support contributions to only narrowly based 
interstate revenues, places extreme pressure on these Federal universal 
support mechanisms. In and of themselves, these two factors alone will 
render the existing Federal mechanisms unsustainable, in that demands 
for universal service support funds are increasing far more rapidly 
than interstate revenues are growing. Over the next five years, USTA 
estimates that demands for universal service support will increase 
substantially, from $7.4 billion to $11.9 billion, while the interstate 
service revenue funding base remains flat at best.
    In addition to these two factors, however, there are other 
developments in the telecommunications marketplace that make the 
current Federal universal service support mechanism truly 
unsustainable. First, for decades, states have established a host of 
implicit subsidy mechanisms and telecommunications rate determinations 
that need Federal universal service support in order to be maintained. 
Devices of this sort can exist in the non-competitive 
telecommunications environment that existed when they were originally 
established, but that era has passed. Rates in high cost areas must be 
rebalanced. Second, popular flat rate, all-distance pricing plans for 
voice services are rendering distinctions between interstate and all 
other telecommunications services meaningless and thus unworkable as a 
basis for collecting universal service support funds going forward. 
Third, the FCC is currently examining the regulatory classification of 
a number of ``voice over Internet protocol'' services (VOIP). The 
outcome of its review could have a dramatic effect on the base of 
services which will be available to support the universal service 
programs. If VOIP services are allowed to avoid contributing to 
universal service, this could skew demand in favor of these services, 
making it increasingly costly, if not impractical, for traditional 
telecommunications service providers to continue funding universal 
service support even at existing levels.
    Not only will these developments in the telecommunications 
marketplace impact the base of contributions that fund universal 
service, but the current system of intercarrier compensation, 
particularly access charges paid to local carriers from interexchange 
carriers, is slowly collapsing under the weight of technological change 
and creative arbitrageurs. Many carriers rely on interstate and 
intrastate access charges to recover a significant portion of the costs 
of their networks. The deterioration of the access charge system must 
be recognized and managed in an orderly way so that carriers will still 
be able to recover their costs and continue to invest in their 
networks. An appropriate transition should be developed to move from 
the current system of intercarrier compensation to a uniform 
intercarrier compensation plan under which carriers would recover their 
costs from end users (through affordable and reasonably comparable 
rates) and the universal service mechanism. In many high cost study 
areas, end users will not be able to bear the totality of this added 
burden. The universal service mechanism will be called upon to fill in 
that gap. This necessary extension of the mechanism is consistent with 
its current goals and structure but certainly has the potential to 
increase the demand for Universal Service Funding.
           Universal Service Reform--What Should Congress Do?
Support Recipients Must Have an Equality of Obligations
    The policy of using universal service support as a means to promote 
competition has proven to be an expensive failure. This artificial 
approach simply adds to the cost of the universal service program. 
States should make reasoned public interest findings before designating 
additional ETCs, with full consideration of an equality of obligations 
on carriers and equality of expectations of all of the consumers in the 
subject service area. A recipient should be required to serve an entire 
high cost area--not just the least costly part, as is often the case 
today.
Universal Service Support Should Not Create a Parallel de facto 
        Regulatory Regime
    Universal service support should be used to provide incentives for 
continued investment in and rehabilitation of high cost study area 
infrastructure and to help recover the actual costs of such networks 
(not lines or services). Since increased competition, for the most 
part, has replaced the need to regulate retail and wholesale rates in 
U.S. telecommunications markets, exchange carriers should be given the 
option of being deregulated on a date certain. Regulatory status should 
not affect a carrier's universal service support and such support 
provided to a deregulated carrier should serve to help fund an 
infrastructure platform, not dictate the rates and services offered 
over that platform. This should apply whether a carrier elects the 
deregulation or continued regulation model. Exchange carriers that 
remain regulated should be given the flexibility to package and price 
service to meet consumer needs, and for rate of return carriers, NECA 
(National Exchange Carrier Association) pooling options should 
continue.
Broader Support Base
    Congress should give the FCC the authority to impose a support fee 
on a broader base of telecommunications products and services. By 
broadening the base for universal service support to all 
telecommunications products and services, both technological and 
competitive neutrality will be achieved. The receipts from these fees 
must be targeted exclusively to universal service support purposes in a 
manner similar to the specifically targeted and Congressionally 
mandated assessments for highways and airports.
Rate Rebalancing
    Rates for telecommunications services should be comparable 
throughout a given state. Considerable universal service support is now 
being utilized to maintain telecommunications service rates in some 
areas of states at rate levels that are much lower than those existing 
for equivalent service in other areas of such states. To lessen this 
demand, Congress should provide for rate rebalancing.
    Telephone rates have for decades been based in many instances on 
political and social considerations that could be justified and 
effective in a non-competitive, monopoly environment. Conversely, a 
competitive environment, where all telecommunications products and 
services are legally open to competition, should require state 
regulators to adjust these rates in a manner that reflects this new 
competitive marketplace reality. This rate rebalancing should be 
accomplished without the necessity of extensive and expensive rate 
cases. When accomplished on a revenue neutral basis, the remedy should 
not require extensive regulatory intervention.
Congress Should Ensure that Support is Based on Actual Costs
    Because of the ever increasing demand for Universal Service Funds 
due to the requirement to fund multiple ETCs from a declining 
interstate revenue base, for larger ILECs, the FCC has employed a cost 
recovery methodology that does not permit the recovery of the actual 
costs incurred by such carriers in high cost areas. Universal service 
support is needed in high cost areas to keep telephone rates comparable 
to rates in other parts of the country and thus, widely affordable. 
Consequently, actual cost recovery is a necessary component of any 
universal service reform plan.
Congress Should Address How a New Uniform Intercarrier Compensation 
        Plan Will Impact Universal Service
    The necessary transition from the current intercarrier compensation 
system, including interstate and intrastate access charges, to a 
uniform intercarrier compensation plan under which carriers would 
recover their costs from end user or universal service, will have the 
potential to increase the demand for Universal Service Funding. This 
funding will be necessary to maintain reasonably comparable and 
affordable composite end user rates in high cost study areas and to 
allow continued network investment.
                               Conclusion
    Congress should insist that our universal service support structure 
returns to the core concepts that were in place prior to the passage of 
the 1996 Act, but in a manner consistent with today's converged 
marketplace. Congress should ensure that everyone pays into the Fund on 
technology neutral principles; eligibility for ETC status should be 
based on sound economic and public interest fundamentals; support 
should be based on actual costs; states should not continue to expect 
that designation of additional ETCs is a license to increase the burden 
on interstate ratepayers; and, rationalizing the system of support 
cannot happen if rate rebalancing does not occur. Under these concepts, 
incumbent LECs and their customers will have a more equitable climate, 
while interexchange carriers will receive significant relief as a 
result of continued declines in the access charge regime. The funding 
burden can be relieved on everyone as the base of who contributes is 
broadened. This will promote investment in rural areas because there 
will be a reliable source of Universal Service Funding that keeps rates 
affordable, that gets comparable services out to these parts of the 
country, that encourages providers to invest in facilities and provide 
advanced services and intrastate calling should be much cheaper and 
providers will have more opportunity to creatively bundle their 
services.

    Senator Burns. Thank you, Mr. Dosch. We appreciate your 
testimony.
    And now we will move to Mr. Gillis, who is Director, Center 
to Bridge the Digital Divide, Washington State University at 
Pullman, Washington. Thank you for coming today.

         STATEMENT OF DR. WILLIAM R. GILLIS, DIRECTOR, 
            WSU CENTER TO BRIDGE THE DIGITAL DIVIDE

    Dr. Gillis. Thank you, Mr. Chairman. And this is very much 
a personal issue for me. I do not often brag about this, but I 
graduated in the top ten of my class, but there's only 12 in my 
whole high school class.
    [Laughter.]
    Dr. Gillis. I am one of these rural boys, too.
    [Laughter.]
    Dr. Gillis. And I really do believe--and I am concerned for 
my hometown and my family and friends largely because there 
seems to be a breakdown in the hearing rooms. I am a past State 
commissioner, and the hearing room breakdown comes over a 
conflict between competition and universal service, those that 
say one should take priority over another, and I firmly 
believe, for the benefit of my friends and family, that I want 
to see both competition and I want to see my friends and family 
have access to the best that American telecommunication has to 
offer. And I think congressional leadership is needed at this 
time to make sure we move forward with both those goals, and 
that is primarily what I want to talk to you about today.
    And to set the context a bit, in 1996 when the Act was 
written, a lot of these things, like wireless and broad access 
to the Internet were just emerging. Really, the goal of 
universal service at that time was to give everybody access to 
a telephone, you know, a good connection. But today what has 
happened is that my cousins in Seattle, they have access to a 
wireless system that does not have holes in it, you get E-911, 
they have access to broadband, and they have access to a couple 
of choices of their basic dial tone. Why should it be less for 
my friends or family in my little town? And I think that should 
be a goal, an important goal, and that is where the context has 
changed.
    It has a couple of implications. One is the one that has 
been mentioned by almost everybody, is that because of these 
changes, with the broadening and the change in technology, the 
current collection base just does not work anymore, and that 
needs to be a priority. Second, the whole notion of 
comparability changes. I would ask the question, Is it really 
fair to say comparability now is just connecting the telephone? 
To me, comparability means my cousins in Seattle have access to 
quality wireless services that do not have holes in them, 
connection to E-911, and access to broadband. So that changes 
the context.
    As far as direct recommendations to you and of the 
Congress, one is to deal with broadening the base of the 
collection mechanisms. I think it needs to be a very high 
priority. I think, in the hearing rooms, that is distracting, 
because that just sets up this conflict in competition that 
universal service does not need to happen.
    And I agree with the point that you made, Mr. Chairman, 
that maybe it is time to just move on. If authority is the 
issue, then grant the authority to broaden the base if that is 
what is needed.
    Second, I would ask for your leadership in dealing with the 
tension between supported deployment of mobile wireless 
broadband communication and a manageable fund size. I think it 
can be done. And I think one of the key things to make that 
happen through your leadership is that clearly Congress state 
its principles that, ``Is it true that you want to have both 
competition and universal service? '' And if that is, indeed, 
your intention, make that very clear to the parties.
    And third, in my view, it would be worthwhile for Congress 
to encourage the FCC to set up a stakeholder process to deal 
with this issue of multiple ETC designations, particularly as 
it involves multiple wireless, and I understand the Joint Board 
is considering this issue at this time, and I do not mean to 
suggest to replace that process, but potentially to supplement 
that process.
    There are a lot of very important issues that are out there 
that need to be dealt with, such as what network service 
standards are needed to fulfill the Act's requirement in 
providing reasonable and comparable services within all regions 
of the Nation, should there be standardized review standards 
for States and Federal agencies to follow, should eligible 
competing carriers continue to receive support on all lines, 
and so forth.
    But I had the privilege of serving on the Rural Task Force 
with a couple of your panelists today, Joel Lubin and Jack 
Rhyner being among them. And this group, a very diverse group, 
came up with a consensus recommendation; and those of you who 
know Joel Lubin and Jack Rhyner, that has to give you hope, 
because, I mean, these are very diverse opinions, but they are 
able to work together and to come up with some recommendations 
that are moving things forward. And I think that would be an 
action that you ought to very seriously consider, to encourage 
that kind of stakeholder group to get together again and 
address this critical issue that is part of the meltdown we are 
seeing in the hearing room of multiple ETC designation in areas 
served by rural carriers, particularly as it affects mobile 
wireless, and I personally think there are solutions.
    So I would just summarize with three specific 
recommendations of action to you. First of all, clarify the FCC 
authority to collect Federal universal service on the broadest 
possible base of telecommunications services, whatever that 
requires. I think that should be done as soon as possible. 
Second, provide a clear statement of principle regarding 
Congress' intent with respect to accomplishing both universal 
service and competition. That is your choice, but it would 
certainly be my hope that you would want to accomplish both 
equally. And third, encourage the FCC to undertake a broad 
stakeholder process focused on rethinking the current Federal 
rules for allocating universal service dollars to support 
mobile wireless and the competing provision of services in 
rural locations.
    Again, these are threshold issues causing conflict. They 
are also creating uncertainty for investors, both incumbents 
and competitors, that would invest in my hometown and hometowns 
in your State, Mr. Chairman, and other rural places, and that 
is why I am here today, and thank you for the invitation.
    [The prepared statement of Dr. Gillis follows:]

        Prepared Statement of Dr. William R. Gillis, Director, 
                WSU Center to Bridge the Digital Divide
    My name is Bill Gillis. I serve as Director of the Center to Bridge 
the Digital Divide at Washington State University. \1\ Between 1994 and 
2000, I was a member of the Washington State Public Utility Commission. 
I have substantial experience in regulatory public policy matters 
impacting the availability and use of telecommunications and 
information systems in rural locations. For example, between 1997 and 
2000, I chaired, on behalf of the Federal-State Joint Board on 
Universal Service, a Rural Task Force providing recommendations on 
appropriate reforms of the Federal universal service methodology 
supporting national universal service goals as required by the 
Telecommunications Act of 1996.
---------------------------------------------------------------------------
    \1\ The comments provided in this testimony are mine alone and do 
not necessarily represent the views of Washington State University or 
any financial sponsor of the WSU Center to Bridge the Digital Divide.
---------------------------------------------------------------------------
    While my interest in accepting the invitation to appear as a part 
of today's panel is supported by my specific professional 
responsibilities and expertise, I am motivated also by my own roots in 
rural America.
    The vast majority of the Nation's population resides in large urban 
centers. However, we remain a nation of small towns. Of the 
approximately 220 incorporated cities in the State of Washington, 180 
have a population smaller than 5,000. Demographic and economic 
indicators document that many of these small cities and towns, once 
vital centers of commerce and activity, now struggle to sustain the 
most basic of community functions including viable income 
opportunities, local education, health care, civic participation, 
public facilities and governance.
    I myself am a product of one of these smaller eastern Washington 
communities. My hometown is one of several in the State of Washington 
that are presently considering ``dis-incorporating.'' In effect, 
throwing in the towel and closing the town's doors.
    I am appreciative to this Committee for holding today's hearing. 
Six years after passage of the 1996 Telecommunications Act, I have an 
uneasy sense that resolve to implement the twin responsibilities of 
both competition and universal service as equal responsibilities under 
the 1996 Act is waning. Rural communities such as my hometown depend on 
access to the best telecommunications infrastructure and services 
available if they are to survive as communities and contribute to the 
economic and social strength of our Nation. My neighbors can ill afford 
to have progress in deploying necessary telecommunications investment 
sidetracked by needless conflict over whether regulatory or public 
policy should favor competition or universal service. The answer in my 
view is plainly outlined within the law that we are to accomplish BOTH 
of these essential goals.
    There are some who will suggest to you that competition and 
universal service are fundamentally inconsistent in many rural areas 
and we must make a choice. Frequent are assertions that universal 
service can only be accomplished concurrently with competition in rural 
America at a very high cost. I disagree. I believe there are solutions 
that will enable us to preserve and advance universal service in rural 
America without abandoning the opportunity to make continued progress 
towards offering a greater number of our citizens a choice of 
alternative providers and services. Neither do I agree that this must 
necessarily result in an unacceptable expansion to the size of the 
national fund. Fundamental however, is a renewed commitment among 
regulators and the diverse stakeholders in rural America to focus on 
universal service and competition as goals that must be accomplished 
jointly--not simply balanced as necessary trade-offs.
    My hope is that today's hearing will provide a sense of urgency 
from Congress that there must remain a national commitment to both 
universal service and competition as fundamental principles of the 1996 
Act. Your leadership and directive to regulators and stakeholders in 
the debate, in my view, is essential to keep us on task.
    Before turning specifically to the specific opportunities for 
Congressional leadership, I would like to highlight the significant 
industry changes since the passage of the 1996 Act and the implications 
for achieving national universal service goals.
    The most notable change since 1996 is the explosion of both 
consumer demand and the availability of mobile wireless and Internet 
technologies. At the time of the passage of the 1996 Act, the primary 
universal service challenge was to ensure that the vast majority of 
Americans have access to a quality dial-tone voice telephone 
connection.
    What a difference 6 years makes. In today's world the majority of 
Americans have access to a variety of telecommunications services 
including mobile wireless options, broadband connectivity and in more 
limited cases, a choice of basic dial tone providers.
    While we should celebrate our successes in this regard, our purpose 
here today is to focus on the reality that there remain many Americans 
who currently do not enjoy access to a network providing the full 
benefits of modern telecommunications technologies.
    In today's world it is no longer appropriate to consider the 
universal service challenge as simply connecting rural Americans to 
quality and affordable basic dial-tone. However, a narrow universal 
service focus on raising the standard to ensuring all Americans have 
access to the benefit of modern broadband Internet connectivity also is 
not responsive to the challenge before us.
    What is required to fulfill the principles outlined by Section 
254(b) of the Federal Telecommunications Act is that all regions of the 
Nation have access to a bundle of modern telecommunications services 
and options ``reasonably comparable'' to what is available in much of 
urban America and a growing number of rural locations, including where 
feasible, a choice of alternative service providers. Here lies the 
challenge that I believe is not widely articulated in regulatory 
hearing rooms.
    We need to fundamentally rethink our approach to universal service 
in the modern era to accommodate the need to provide rural Americans 
with access to all the benefits of modern telecommunications including 
a network capable of accessing broadband services, mobile wireless and 
basic voice telephone. We, of course, need to do this responsibly 
without unnecessarily exploding the size of the Nation's Universal 
Service Fund. I believe this is entirely feasible, but we must first 
frame the problem correctly.
    With this context in mind, I suggest there are two areas of Federal 
universal service policy for which Congressional attention is most 
critical at this time:

        (1) Congress should clarify FCC authority to collect Federal 
        universal service on the broadest possible base of 
        telecommunications services.

        (2) Congressional leadership is needed to address the current 
        tension between supported deployment of mobile wireless, 
        broadband connectivity and manageable fund size.
Congress Should Clarify FCC Authority to Collect Federal Universal 
        Service on the Broadest Possible Base of Telecommunications 
        Services
    Section 254(d) of the1996 Act establishes an obligation that 
``every telecommunications carrier that provides interstate 
telecommunications services shall contribute on an equitable and 
nondiscriminatory basis, to the specific, predictable and sufficient 
mechanisms established by the Commission to preserve and advance 
universal service.'' The 1996 Act expressly sets a standard of adequacy 
for the Federal universal support program in that the support ``should 
be explicit and sufficient to achieve the purposes of this section.'' 
Sufficiency of support must be gauged against the standards embodied in 
the universal service principles set forth in Section 254(b).
    It is my view that the current Federal universal service mechanism 
established by the FCC is broke and can not be relied upon to achieve 
the fundamental universal service obligations under the Act. To restore 
stability to the national high-cost universal service program, more 
fundamental reforms of the Federal collection mechanism are needed than 
the current tweaks to the existing mechanism.
    While the FCC took positive steps forward to increase universal 
contribution from the growing number of wireless customers, the 
mechanism still heavily emphasizes collection from a declining base of 
traditional interstate and international long distance minutes of use. 
In addition to evidence of rapid customer substitution of national 
wireless plans for traditional inter-exchange carrier provided long-
distance service, a look at the near future suggests a further 
migration of telecommunications traffic towards the Internet.
    Shifts of customer usage such as these in response to new 
technological developments should be applauded and supported by public 
policy. These are precisely the types of changes we want from a dynamic 
telecommunications economy necessary to keep us among the leaders in 
the world. Unfortunately, the current collection mechanism is a 
distraction as it results in these necessary market transitions 
undermining the fiscal stability of the national Universal Service 
Fund.
    This combination of events plays out in the Commission hearing room 
with polar positions being presented by the different interests, 
particularly those focused on expanding competitive options versus 
those concerned about the provision of quality and comparable 
telecommunications service in high cost rural areas.
    It is time to move on and end the unnecessary drag on further 
regulatory policy reforms needed to encourage access to multiple 
telecommunications options for all Americans, both in rural and urban 
regions. Fundamental change to the current Federal collection mechanism 
is needed to ensure that advances in a dynamic telecommunications 
market do not undermine fundamental high-cost universal service 
principles.
    Among the barriers to the joint advancement of both competitive 
options and universal service in rural America, is a lack of legal 
clarity regarding the extent the current base of services, upon which 
Federal universal service is collected, can be expanded. I believe it 
is important for Congress to find an appropriate vehicle to clarify 
your intent and it would be my hope that your intent would be to 
collect universal service from the broadest base of telecommunications 
customers possible. If it is determined that Congress must act with 
legislation to provide the FCC with additional authority to broaden the 
Federal universal service collection base, I believe it is important 
for you to act quickly and decisively in providing that authority.
Congressional Leadership is Needed to Address The Current Tension 
        Between Supported Deployment of Mobile Wireless, Broadband 
        Connectivity and Manageable Fund Size
    One of the greatest barriers to progress in establishing a 
regulatory and public policy environment supportive of needed rural 
telecommunications investment by BOTH traditional and competing 
carriers is litigious conflict common both in Commission hearing rooms 
and other judicial forums. Uncertainty is the silent cancer of rural 
investment. The common polar positioning of competition and universal 
service and the resulting conflict among rural stakeholders is perhaps 
one of the greatest contributors to regulatory and ultimately investor 
uncertainty.
    I believe Congress can play an important role in lessening this 
unproductive controversy if it is indeed your intent that both 
competitive choice and the deployment of a network providing access to 
the full benefits by all Americans to the benefits of modern 
telecommunications be achieved. While I would hope that this indeed is 
your intent, even if not, a formal clarification from Congress would 
help us all to move forward and end unproductive debate.
    There are some, perhaps many, who may suggest my optimism that it 
is possible to advance both universal service and competitive choices 
without an unacceptable expansion of the national Universal Service 
Fund is naive. The ``devil is in the details'' it will be pointed out 
and while the principle is sound, how is the principle achieved in 
practice?
    I respond here rhetorically to this criticism with an obvious 
observation. In our democratic society, Congress, with the concurrence 
of the President, is responsible for establishing the formal legal 
framework for the implementation of national public policy. The 
delegated administrative authorities and those of us who participate in 
their formal and informal processes must act within that direction. If 
we do not frame the challenge properly in the context of Congress' 
intent, then we will not get to the desired end game.
    The current conflict found in regulatory hearing rooms suggests 
substantial disagreement among stakeholders regarding what was intended 
regarding our responsibility in advancing universal service and 
competition, with various suggestions of which of those two goals 
should have priority for rural America. I appear here today to suggest 
that clarification from Congress on what specifically you do expect may 
go a long ways towards focusing the implementers on the appropriate 
challenge and minimize distracting and unnecessary debate.
    The challenge is illustrated by a tension in regulatory forums over 
a perceived conflict between deployment of mobile wireless 
technologies, broadband connectivity and maintaining the national 
Universal Service Fund at an acceptable level. When cast in the context 
of universal service and mobile wireless competition as being opposing 
goals for rural areas, no apparent solution to this tension is 
apparent.
    However, by reframing the challenge as ensuring rural Americans 
have reasonably comparable access to a range of telecommunications 
services including quality mobile wireless, broadband connections and 
voice grade telephone without expanding the national Universal Service 
Fund beyond an acceptable level, solutions may be possible.
    At the heart of the problem are current FCC rules that award 
Federal universal service on the basis of ``eligible lines'' provided 
by eligible carriers. In the case of mobile wireless carriers this 
means that when awarded status as an eligible telecommunications 
carrier, the mobile wireless carrier receives payment based on the 
number of connections to the network. In the case of mobile 
technologies, those connections are expanding at a rapid rate putting 
substantial pressure on the cost of Federal universal service.
    Some interests will accurately point out that the typical mobile 
wireless technology does not provide access to the modern broadband 
network. It is extended from this observation that we may need to make 
a clear choice between substantially expanding the Fund to support 
mobile wireless and new investment by rural carriers with technology 
capable of a network of providing access to broadband services.
    I would suggest reframing the issue in a different context. First, 
I would observe mobile wireless and traditional telecommunications are 
not for the most part competing services and have been inappropriately 
characterized as such. With the exception of those cases where mobile 
wireless has resulted in the ability of customers to eliminate their 
traditional telecommunications connection, we are discussing 
complementary services, both desired by consumers for different 
reasons.
    A reasonable interpretation of the principles of Section 254(b) of 
the 1996 Act is that all regions of the Nation should have access to a 
quality mobile wireless network without coverage holes, access to 911 
and quality connections. In addition, the standard of ``reasonably 
comparable'' service could (and in my view should) include supporting a 
rural network capable of providing access to broadband services, 
typically associated with wireline technology but also potentially 
fixed wireless solutions.
    The public policy question is whether it is the desire of Congress 
that Federal universal service should support multiple technologies 
offering a broader functionality of service to consumers as well as 
competing providers in rural areas. If the answer to this question is 
yes, then the issue of impact on the size of the Fund becomes key. 
However, when properly framing the issue, the impact of funding 
multiple and potentially competing technologies in rural America should 
not be restricted by current application of Federal rules for 
allocating universal service support.
    I suggest we should refocus the question as, ``What would it cost 
and how do we appropriately allocate available universal service 
support to ensure rural Americans will have a choice to purchase both 
quality mobile wireless service and a service CAPABLE of providing 
broadband connectivity?'' The question should not be answered in the 
context of applying current FCC rules which allocate universal service 
to mobile wireless carriers determined by state commissions as eligible 
to receive universal service. Rather the focus should be on how we 
should support comparable services in all regions of the Nation 
including multiple consumer options with the minimum impact on the size 
of the national Universal Service Fund.
    Towards this end, I recommend Congress encourage the FCC to 
undertake a broad stakeholder process focused on rethinking the current 
Federal rules for allocating universal service dollars to support 
mobile wireless and the competing provision of services in rural 
locations. The question may appropriately be parsed out differently 
with regard to the mobile wireless question than the question of 
appropriate rules for allocating support to ``competing'' providers of 
service.
    In the case of mobile wireless, careful attention should be given 
to whether the present practice of allocating universal service to 
carriers based upon the number of connections to the network makes 
sense. Focusing on the goal of eliminating current holes in the 
wireless network and dependable E-911 service in all locations, a 
distribution based on the number of cell phones supported by the 
carrier may not be appropriate. The costs incurred in meeting the 
objective are the construction new towers and the electronic 
enhancements. The current allocation system does not recognize the 
likely reality that adding new cell phone users only adds marginally to 
the cost of achieving the goal. An alternative basis of allocating 
subsidy supporting desired mobile wireless facility upgrades such as 
targeted grants or low-interest loans may be a more appropriate vehicle 
to achieve the desired end than the current practice of awarding 
universal service to wireless carriers on a per connection basis 
creating a potentially unnecessary expansion to the Federal fund. Other 
carefully targeted universal service options may also be possible.
    In the case of truly competitive services, whether they be wireline 
or wireless, the FCC should consider rethinking a universal service 
portability recommendation originally put forward by the Rural Task 
Force that Universal Service Funds be awarded to eligible competing 
carriers only for those lines that are actually captured from the 
incumbent provider, AND the amount of money available to all providers 
in a given area be frozen at the level available when competition 
emerged with growth in funding tied to inflation and the number of new 
lines in that area.
    The FCC's decision was to reject the Rural Task Force's 
recommendation on appropriate rules for dividing available Universal 
Service Funding between the traditional and competing carriers in areas 
served by rural telephone companies. Rather they chose to continue the 
practice of awarding competing carriers, including mobile wireless, a 
universal service allocation based on the total number of connections 
to the network. They further decided that the Fund would be allowed to 
grow to accommodate the needs of these competing providers.
    Choosing to reject the Rural Task's Force recommendation has had 
unfortunate consequences which are playing out today. For example, 
several parties assert that state public utility commissions have not 
been rigorously considering the public interest ramifications of 
allowing Federal Universal Service Funds to be used for competitive 
provision of services in rural areas. While there are certainly 
differences in process among states, for the most part I agree with 
this observation. However, it is not surprising given the current 
Federal rules. From a state perspective there is little potential of 
harm and there is an opportunity to gain as the amount of money 
available to the traditional rural carriers is not restricted by a 
decision to allow competition. The result is more Federal-sourced money 
flowing into states, but significant pressures on the Federal Universal 
Service Fund without any clear connection to the achievement of 
universal service goals.
Concluding Remarks
    I very much appreciate your invitation today. We are needlessly 
losing ground in progress towards implementing the progressive vision 
of the 1996 Act over an unmerited controversy over asserted conflicting 
goals of universal service and competition.
    At the same time, I remain optimistic that we can be successful in 
providing all Americans with access to the full benefits of the 
Nation's telecommunications system including mobile wireless, broadband 
connectivity, and quality voice grade connections including in many 
cases a choice of alternative providers. I further believe this can be 
accomplished without an unacceptable expansion to the national 
Universal Service Fund.
    I respectfully offer the following specific recommendations to 
advance both universal service and competition in rural America and 
provide for the stability and sufficiency of the Fund:

   Clarify FCC authority to collect Federal universal service 
        on the broadest possible base of telecommunications services.

   Provide a clear statement of principle regarding Congress' 
        intent with respect to the accomplishment of BOTH universal 
        service and competition.

   Encourage the FCC to undertake a broad stakeholder process 
        focused on rethinking the current Federal rules for allocating 
        universal service dollars to support mobile wireless and the 
        competing provision of services in rural locations.

    Senator Burns. You are a native of Washington, the State of 
Washington?
    Dr. Gillis. Yes, sir.
    Senator Burns. Where?
    Dr. Gillis. The town of Washtucna, Washington.
    Senator Burns. I know about where it is.
    Mr. Hughes, thank you for coming today with Telepax. And 
Senator Lott has expressed his regrets he cannot be here today. 
He looked forward to hearing your testimony. Well, I guess we 
have several other things going on. I do not know what they 
would be, but the papers are full of them.
    So we look forward to your testimony. Thank you for coming 
today.

         STATEMENT OF CARSON HUGHES, CEO, TELAPEX, INC.

    Mr. Hughes. Thank you, Mr. Chairman and members of the 
Subcommittee.
    I am Carson Hughes, and I am the CEO of Telapex, Inc. We 
own Cellular South. I appear on behalf of the Wireless 
Independent Group, or WIG, a coalition of four wireless 
providers currently providing wireless service mainly in rural 
areas in communities in 19 States across our Nation.
    I am here to thank the Congress and the FCC for including 
the wireless companies in the USF program and to reassure you 
that your trust and that the people's money have been well 
placed for the benefit of the consumers living and traveling in 
the rural parts of our great Nation. I, in particular, want 
each of you to know that the USF moneys going to Cellular South 
are greatly benefiting our rural areas with construction for 
delivery of facility-based services.
    Cellular South exists today because of two very rural 
wireline telephone companies with 40 years experience in rural 
Mississippi. The Cellular South ETC area is the vast majority 
of Mississippi for which Bell South is the ILEC. This largely 
rural area roughly equates in size to the State of Indiana.
    Both the President of Cellular South and I were born and 
grew up in the rural Mississippi Delta. Our Mississippi owned 
and operated company maintains its customer-service operations 
in a very rural area in our State. We know and we love the 
rural areas we serve, and we know firsthand the advantages that 
good communications services can bring to such areas.
    In the rural areas of our State, we have been hampered when 
competing with the ILEC by, among other things and other 
factors, first, the lack of Cellular South having sufficient 
infrastructure to provide dependable service at all points in 
time, and, second, the lack of a delivery system which would 
allow rates closer to those offered by the ILEC. The $18.5 
million received from USF funding in 2002, when combined with 
our own funds, allowed us to expend over $33 million in and for 
the high-cost areas and, among other things, allowed us to 
greatly improve our coverage in the rural high-cost area with 
34 new cell sites and to install a state-of-the-art CDMA 1X 
system in at least 169 cell sites and in our switching center. 
As a direct result--as a direct result--we can and do now 
provide a $49 a month unlimited service offering which allows 
local calls to all points in Mississippi and Memphis. By way of 
example, it is approximately 430 miles from Gulfport, 
Mississippi, to South Haven, Mississippi, not a bad unlimited 
calling area.
    We thank you, we thank the Congress for allowing our people 
to have this service by allowing us to have USF funding. 
Because you have allowed us to have the USF funding, qualified 
low-income customers now have a choice of Lifeline service 
providers. Your allowing USF funding to be used by us has 
greatly improved the availability of 911 and similar services 
in our rural areas.
    If the John Deere tractor company built your work desk, the 
work desk you drive to the field every day, it is hard to have 
a desk phone installed unless wireless coverage is available. 
Think about what this means in terms of safety and convenience 
to rural users. With your help--with your help--we will turn on 
at least 48 more cell sites in high-cost areas in 2003, 
continue to improve our infrastructure, continue expanding 
capacity and efficiency of the network with expenditures in 
excess of $21 million in our high-cost areas.
    We firmly believe and have shown by our efforts that high-
cost support to wireless providers advances the cause of 
universal service, drives critical infrastructure in the rural 
areas, increases the availability of important 911 services at 
the point of need, and will continue to contribute to the 
economic development of rural areas.
    Use of USF funds by a wireless company provides benefits to 
rural consumers far in excess of the less than 3 percent of the 
USF funds such use represents. Our customers who pay into the 
high-cost fund should benefit from the Fund.
    We urge the Congress to provide the FCC with clear 
direction that they are charged with upholding the 
Communication Act, as well as the court decisions interpreting 
it, and that the rules for qualifying for and drawing from the 
high-cost support mechanism be administered in a competitive 
neutral fashion in a pro-competitive manner.
    I would request that my comments be made a part of the 
record, and I assume the written submitted comments would also 
be made a part of the record.
    Senator Burns. All, both of them.
    Mr. Hughes. Thank you for your indulgence and your 
courtesies extended.
    [The prepared statement of Mr. Hughes follows:]

        Prepared Statement of Carson Hughes, CEO, Telapex, Inc.
    Mr. Chairman and members of the Subcommittee:
    Thank you for this opportunity to testify on behalf of a coalition 
of independent wireless carriers called the Wireless Independent Group 
(``WIG''). Members of the coalition include Cellular South Licenses, 
Inc., Hargray Wireless, L.L.C., Midwest Wireless Communications L.L.C., 
and Rural Cellular Corporation. I am the Chief Executive Officer of 
Telapex, Inc., Cellular South's parent company.
    WIG member companies serve people in communities in 19 states, 
including Alabama, Arkansas, Iowa, Georgia, Florida, Kansas, Maine, 
Massachusetts, Minnesota, Mississippi, New Hampshire, New York, Oregon, 
South Carolina, South Dakota, Tennessee, Vermont, Washington and 
Wisconsin. In each of these states, the vast majority of area served by 
WIG member companies is rural.
    If you examine the operations, the composition and demographics of 
WIG members' service area, the challenges we face in rural areas, and 
our goals, you will likely conclude that we have a great deal in common 
with incumbent local exchange carriers (``ILECs'') serving rural areas 
throughout the country. For example, Cellular South's current ETC 
service area, which is also served by Bell South, roughly 38,000 square 
miles, larger than the state of Indiana. Most of it can fairly be 
described as sparsely populated and remote, with small towns scattered 
throughout. We are locally owned and operated. We live, work and play 
in the communities we serve and believe that investment in these 
communities is one of the best ways to differentiate ourselves from 
large national wireless carriers that we compete with.
    Like all of you, WIG members are committed to the long-term 
sustainability of the universal service support system and have seen 
first hand how it helps the lives of those living in rural and 
underserved communities. As one of the few wireless companies that have 
actually received Universal Service Funds, we hope to provide you with 
our perspective on how high-cost funds are improving rural communities 
we serve.
    For ease of reference, my testimony is divided into three sections. 
Section I describes our company and our experience in Mississippi as a 
competitive ETC (``CETC''). Section II outlines specific policy 
positions that Cellular South supports. Section III provides responses 
to some of the more popular arguments advanced by ILECs in 
presentations made to the FCC and Members of this Committee.
I. A Description of Cellular South and Our Experience as a Competitive 
        ETC
A. Our Company
    Cellular South (or its predecessor) has been licensed to provide 
mobile wireless service in rural Mississippi since 1988. Our company 
philosophy is to provide our customers with the highest quality voice 
service and to differentiate our product from other wireless carriers 
by providing superior network quality and customer service. We believe 
we provide the highest quality service of any wireless company in our 
state and that our CDMA 1X network in rural areas is superior to our 
wireless competition. Our customer quality surveys, our churn rate, and 
our interaction with customers tell us that we have developed a first 
rate wireless system serving many rural areas in Mississippi.
    Since our inception, we have not been able to compete as 
effectively as we would like with Bell South for local exchange 
customers simply because our network is not robust enough to deliver in 
all rural areas the service quality that persons living in urban areas 
such as our state capital, Jackson, have come to enjoy. \1\
---------------------------------------------------------------------------
    \1\ I note here that although the FCC officially classifies Bell 
South as a ``nonrural'' carrier, they nonetheless receive universal 
service support for their operations in Mississippi because of the 
rural character of our state.
---------------------------------------------------------------------------
    Because Bell South was the only carrier receiving high-cost support 
in much of rural Mississippi, it was very difficult for any carrier 
using any technology to achieve network and service quality at price 
points low enough to be competitive. In the 1996 Telecom Act, Congress 
directed the FCC to designate additional ETCs throughout the country. 
Since 1997, the FCC has released a series of rulemaking orders 
implementing the 1996 Act and designating CETCs.
    In 2001, Cellular South applied for and received a grant of ETC 
status from the Mississippi Public Utility Commission for the area 
served by Bell South, which comprises over three quarters of the state 
and includes some of the most rural portions of Mississippi. In early 
2002, we began receiving high cost support from the Federal fund. 
Today, we receive an average of approximately $6.70 per month per line 
in high-cost support.
B. Our Experience
    Federal law requires eligible carriers to use high-cost support 
solely to construct, improve, and maintain facilities and services in 
designated ETC areas. We have done just that and the results have been 
remarkable for Mississippi's rural residents.
1. Network Improvements Have Provided Important Health and Safety 
        Benefits
    High-cost support has enabled Cellular South to significantly 
accelerate its planned upgrade to CDMA 1X digital technology in at 
least 169 cell sites and at our switching center which, (1) provides 
consumers with the highest quality voice service available, (2) 
contains significant additional features that customers want that are 
not available on our old analog or TDMA networks, (3) greatly increases 
the capacity of our system, enabling us to improve the quantity of 
service we can provide to customers, and (4) enables us to meet the 
FCC's E-911 mandates more efficiently. We have also initiated service 
at 34 new cell sites in high-cost areas in 2002, and plan to turn on at 
least 48 more in 2003. CDMA 1X is one of the most advanced digital 
standard and will enable us to deliver high-speed data services to our 
customers as demand for such services increases.
    Most important, each new cell site provides to rural consumers the 
benefit of 911 service. Citizens in rural areas depend on mobile phones 
more and more to provide critical communications needs. Those in need 
may be on farms, on remote roads, in bad weather, or as we witnessed 
only a year ago in Arizona, in firestorms, far from where assistance 
can be summoned by more traditional means, or separated from family or 
home for long periods.
    E-911, which permits a caller to be located and tracked, will be 
useless in areas where signal is weak or non-existent. It is self-
evident that every time Cellular South adds a cell site or increases 
channel capacity, the number of completed 911 calls will increase. 911 
and E-911 services are supported by Universal Service Funds. We can 
think of no more important benefit that can be conferred on rural 
consumers than providing reliable wireless infrastructure on a par with 
that enjoyed in urban areas.
2. High Cost Support Has Improved Consumer Choices
    While generally speaking, the wireless service coverage gap between 
rural areas and urban areas continues to grow, high-cost funding in our 
rural areas is narrowing that gap. The business case for constructing 
quality wireless networks in rural areas is almost as difficult to make 
as the one for constructing a competing wireline network. Attempting to 
compete with long established incumbent wireline carriers in the local 
exchange market is extremely difficult, if not out of the question.
    With high-cost support, a competitor such as Cellular South has an 
opportunity to deploy network facilities that enable service quality 
improvements that enable customers to see wireless as a viable 
alternative to local exchange telephony, while at the same time 
extending the benefits of universal service. Although it is too early 
to measure our progress with any precision, we believe that our CDMA 1X 
overlay and deployment of new cell sites in 2002 is having a 
significant impact on the competitive landscape in Mississippi, to the 
benefit of the citizens of our state. In addition, we believe that the 
deployment of approximately 48 new sites in 2003 will accelerate our 
ability to compete in rural areas.
    For example, our upgraded CDMA 1X network permits us to offer 
customers a larger local calling area (all of Mississippi and Memphis) 
and a lower price. Larger local calling areas are a critical 
competitive factor--because most basic calling plans offered by 
wireline carriers offer very small local calling areas that provide 
toll free calling to only a few thousand, or sometimes only a few 
hundred, numbers. All other calls incur toll charges. Customers in many 
rural areas across the country pay much higher rates for in-state toll 
calls and most interexchange carriers do not offer their discounted 
interexchange toll service rate plans in many rural areas.
    In contrast, we are able to offer customers the ability to make 
unlimited calls throughout the state, and include Memphis, for $49.99 
per month. For Cellular South to be competitive in rural areas, we need 
to deliver a robust and high quality network with both coverage and 
capacity. It is the provision of high-cost support that is enabling us 
to deliver competitive choices to rural consumers.
    ETC status has also enabled us to commence offering Federal 
Lifeline and Link-Up benefits to eligible consumers. Lifeline and Link 
Up provide discounts on service and connection charges to consumers who 
participate in Federal low-income programs. We have advertised the 
availability of Lifeline and engaged in specific outreach efforts at 
local health, welfare, and employment offices, to inform consumers of 
the availability of these benefits. We have freestanding signs in our 
stores to promote Lifeline and Link-Up and have instituted specific 
training for all of our new sales representatives so prospective 
customers can be made aware of the benefits.
    Even low income consumers in rural areas now have a choice of 
service provider. Eligible customers can obtain telephone service from 
us for as little as $7.00 per month. This essential benefit for those 
most in need advances universal service and competitive choices to 
those most in need.
II. Policy Positions
A. High-Cost Support Advances Universal Service and Drives Critical 
        Infrastructure Development in Rural Areas.
    In urban areas, it is taken for granted that in most areas you can 
complete a wireless call in an emergency. In a very short time, 
consumer expectations for wireless have risen enormously, to the point 
where the failure to complete an important health or safety call is 
newsworthy. In many rural areas served by WIG members, expectations are 
often very different. Consumers understand that wireless phones work in 
larger towns and on major roads, and not much beyond that. Unlike urban 
dwellers, many rural Mississippians have traditionally seen mobile 
phones more as ancillary communications tools, rather than one that can 
be counted on to provide primary telephone service.
    While the national press has recently focused on the benefits of E-
911 service and the need to accelerate its deployment, WIG members 
believe the best thing Congress and the FCC can do for rural America is 
to ensure that critical infrastructure is developed to permit callers 
to complete 911 calls. Without a cell site, there is no 911 service. E-
911 system upgrades a carrier can invest in to locate a 911 caller will 
not help someone who cannot complete the call.
    The FCC's rules require all support to be used for the 
construction, provision and maintenance of facilities and services 
within the designated ETC support area. For us, there is no more 
important goal than to improve coverage within our existing service 
area. High-cost support has provided us with an opportunity to achieve 
that goal. Since obtaining ETC status, we have committed to an 
infrastructure development plan that significantly exceeds the amount 
we are receiving from the Fund.
    With respect to universal service, we can think of few achievable 
goals more important than driving investment into rural areas that will 
improve critical infrastructure. At Cellular South, our new cell site 
construction is rapidly filling in service gaps and extending our reach 
in rural areas that we would not have reached for many years, if ever. 
In addition, it is self-evident that the number of important health and 
safety calls, such as those made by doctors, volunteer firemen, police, 
and first responders, is increasing with every new cell site that we 
construct in rural areas.
    For all of these reasons, we urge Congress to ensure that high-cost 
funds continue to be available to wireless carriers.
B. High-Cost Support Will Bring Economic Development to Rural Areas.
    As a rule, our Nation's rural areas have long trailed cities in 
terms of economic development. Use of high-cost support to improve 
infrastructure has significant economic impact on small communities and 
is a key to closing that gap. Today, many companies and people consider 
rural areas as more attractive places to locate and to live. One of the 
major factors involved in selecting a community is the quality of its 
telecommunications infrastructure.
    Wireless service is a very important factor in the equation. In our 
experience, more and more companies and people today rely on wireless 
phones to improve efficiencies and manage their businesses, especially 
in rural areas where the distances between job sites can be large, and 
in the case of farms and ranches, the job site itself can be quite 
large.
    At Cellular South, we believe that a number of small communities 
where we have constructed new cell sites are now better positioned to 
attract and keep business. We urge the Congress and the FCC to 
recognize the substantial economic benefits that can accrue to rural 
America as a result of the provision of high-cost support to wireless 
carriers.
C. Wireless Carriers Pay Into the Fund And Are Entitled To Draw From 
        It.
    For years now, wireless subscribers have been required to 
contribute to the Universal Service Fund, to support wireline service. 
Yet ILECs have generally and vigorously opposed wireless companies' 
efforts to gain ETC status in rural areas, even though under the 
current system they are not harmed as a result of a competitor's 
designation.
    Just this year, the FCC nearly doubled the amount that wireless 
subscribers must pay into the Universal Service Fund. It is completely 
unfair for wireless subscribers to contribute to a fund without having 
a fair opportunity to receive the benefits that both the Congress and 
the FCC have long ago determined are to be made available to 
competitors.
    Over the past seven years, the FCC has implemented a comprehensive 
plan to carry out Congress' mandate to provide high-cost support to 
competitors in rural areas. Virtually every state has followed suit, 
adopting rules and deciding cases to designate new competitors. Still, 
long after being discredited at the FCC and in the courts, many ILECs 
still view the high-cost fund as theirs alone. They see landline 
telephone service as the only ``true'' universal service, which in 
areas where wireless service is available, is no longer the case.
    We, like other WIG members, have played by the rules to apply for 
and obtain support, often enduring a process that is far more 
protracted and expensive than is necessary, opposed by well financed 
incumbents backed by national organizations. Wireless carriers are 
capable of advancing Congress' twin goals of promoting universal 
service and competition in rural areas, if given the opportunity. In 
all fairness, if wireless subscribers are required to pay into the Fund 
and support wireline networks, they must be permitted to obtain the 
benefits that the universal service system was designed to provide.
D. Congress Should Ensure That the FCC Continues To Enforce The 1996 
        Act and Administer All Federal ETC Rules In a Competitively 
        Neutral Manner.
    Following Congressional direction contained in Section 254(h)(2) of 
the Act, the FCC adopted competitive neutrality as a core principle for 
its universal service program, stating, ``competitive neutrality means 
that universal service support mechanisms and rules neither unfairly 
advantage nor disadvantage one provider over another, and neither 
unfairly favor nor disfavor one technology over another.'' Federal-
State Joint Board On Universal Service (Report and Order), 12 FCC Rcd 
8776 (1997) at paras. 47-49.
    In spite of this principle, ILECs have steadfastly urged states to 
adopt eligibility criteria and rules for CETCs that are not 
competitively neutral. In many cases, they have succeeded in turning 
the ETC designation process into an extended litigation that is far 
more arduous than even obtaining a certificate to become an ILEC. Seven 
years after the 1996 Act, only a trickle of CETC designations have been 
made. ILEC opposition at the state level has greatly contributed to 
this long delay.
    The standard set forth by Congress and the FCC is relatively 
simple. In rural areas, a state is required to examine whether a 
petitioner will advertise and provide the nine supported services and 
that a grant will serve the public interest. Some ILECs now urge that 
the public interest bar be raised, suggesting a long list of 
eligibility requirements that were never imposed on ILECs.
    We believe that Congress gave clear direction here and if it wanted 
a lengthy list of eligibility criteria, it would have specified them in 
the Act or directed the FCC to do so. It is not competitively neutral 
to make ETC designations easy for ILECs and difficult for others.
    With respect to ongoing regulation of CETCs, Congress preserved the 
state preemption of rates and entry for CMRS carriers, even when a CMRS 
carrier seeks ETC designation. States are free to regulate ``other 
terms and conditions'' of service. Most states have properly understood 
this, however a few have attempted to impose tariffs and otherwise 
regulate rates that violate the preemption. Some CETCs have assented to 
such regulation as a condition of obtaining ETC status simply because 
it is expensive to litigate and delays in receiving funding mean delays 
in bringing competition to the marketplace.
    Some ILECs have taken the position that it is competitively neutral 
to cause CETCs to be subject to the same regulatory structures as 
ILECs. Not true. Such ILECs ignore the fact that the purpose of ILEC 
regulatory structures is to protect consumers from monopoly abuse, 
which is simply not possible in a competitive market.
    Asymmetrical regulation of a monopoly and its competitors is not 
only appropriate in the current case, it has been implemented before 
with success. For example, when AT&T was broken up in 1984, monopoly 
regulation continued to be applied to AT&T until such time as its 
monopoly grip was broken, after which such regulations were dismantled.
    Cellular South is a prime example of why such regulations are 
unnecessary. We believe that we are already in substantial compliance 
with the state service quality regulations applicable to Bell South--
and that has been accomplished without any special regulatory 
requirements being imposed on us. Like all carriers in a competitive 
market, Cellular South cannot afford to act like a monopoly because its 
customers have a choice of service provider. If a customer does not 
like our service, they may choose another wireless carrier, or the 
ILEC's service. Most ILEC customers in rural America do not have the 
same choice and therefore regulation must take the place of a 
competitor.
E. Portability of Support is Essential to Promoting Competition and 
        Universal Service.
    When a CETC gets a customer, it receives the same amount of ``per 
line'' support as the ILEC receives for serving that customer. This is 
called portability of support. Portability is the lynchpin that levels 
the playing field among competitors. It is the ability to compete for 
customers on a level playing field that drives infrastructure 
investment and improves services for consumers in areas where monopoly 
service would otherwise be the norm for the foreseeable future.
    Portability was a cornerstone of the FCC's policy for providing 
high-cost support to CETCs and the concept was specifically affirmed by 
the 5th Circuit in the Alenco case:

        The purpose of universal service is to benefit the customer, 
        not the carrier. ``Sufficient'' funding of the customer's right 
        to adequate telephone service can be achieved regardless of 
        which carrier ultimately receives the subsidy . . . What 
        petitioners seek is not merely predictable funding mechanisms, 
        but predictable market outcomes. Indeed, what they wish is 
        protection from competition, the very antithesis of the Act.

    The court also stated:

        The Act does not guarantee all local telephone service 
        providers a sufficient return on investment; quite the 
        contrary, it is intended to introduce competition into the 
        market. Competition necessarily brings the risk that some 
        telephone service providers will be unable to compete. The Act 
        only promises universal service, and that is a goal that 
        requires sufficient funding of customers, not providers. So 
        long as there is sufficient and competitively neutral funding 
        to enable all customers to receive basic telecommunications 
        services, the FCC has satisfied the Act and is not further 
        required to ensure sufficient funding of every local telephone 
        provider as well.

    Alenco v. FCC, 201 F.3d 608 (5th Cir. 2000).

    Put simply, portability of support is a core element of the FCC's 
universal service high-cost support mechanism. Without portability of 
support, there is no hope of advancing universal service and bringing 
the benefits of competition to high-cost areas.
F. The High-Cost Fund is Not ``Exploding'' As a Result of CETC 
        Designations.
    For months ILEC lobbyists have proclaimed that the size of the 
high-cost fund is exploding as a result of ETC designations to 
competitive carriers. This is untrue. According to the Cellular 
Telecommunications and Internet Association (``CTIA''), over the past 
three years, high-cost support to CETCs increased by approximately $175 
million. During that same period, high-cost support to rural ILECs 
increased by approximately $2.1 billion. It is my understanding that, 
in 2001, rural ILECs successfully lobbied the FCC to provide them with 
a major increase in high-cost funding through 2006. Prior to that, they 
sued the FCC in Federal court to remove caps on their funding and have 
consistently argued that the size of the Fund must not be considered 
when determining whether funding (to them) is sufficient.
    In short, rural ILEC lobbyists now for the first time argue that a 
$100 million increase in the size of the Fund to competitors threatens 
the Fund's viability. There can be no doubt but that the increase in 
high-cost funds paid to carriers has increased almost exclusively as a 
result of increases to rural ILECs.
    The fund is also increasing because the FCC has properly 
implemented its Congressional mandate to make all universal service 
support explicit--that is--to remove support from ILEC rates so that 
rates are cost-based and support is in plain view. As the FCC has 
removed support from rates and placed it in new high-cost programs, 
such as for example, Interstate Access Support, customers see on their 
bills exactly what they pay for service and what they pay for universal 
service support.
    To be clear, as more support is moved out of ILEC rates and into 
explicit funding mechanisms, the Fund will continue to grow and rates 
will decline. This has been expected and is a good thing. It permits 
all participants to compete for customers and support on a more level 
playing field.
    Finally, we note that most of the growth in the high-cost fund 
generally is within that the Schools and Libraries Program, which is a 
subset of the high-cost support program. We agree with suggestions that 
the Schools and Libraries Program should be severed from the high-cost 
fund, at least for the practical purpose of grouping together only 
those programs that have similar purposes. But make no mistake--in 
response to claims that the viability of the Fund is threatened, CETCs 
are not the responsible party.
G. Fund Growth Must be Managed in a Competitively Neutral Fashion.
    It is self-evident that, as more CETCs are designated, the high-
cost fund is going to grow. WIG supports careful management of the 
high-cost fund, provided that it is done in a competitively neutral 
fashion. An increase is only appropriate if consumers receive 
appropriate levels of support and if carriers are using support for the 
intended purposes. The high-cost fund is not a set aside program for 
incumbents, nor is it the duty of regulators to ensure a market outcome 
in favor of ILECs. Quite to the contrary, if the Fund is to be 
preserved and universal service advanced, then State and Federal 
Government should support efficient technologies and promote 
competition for support so that private industry has an incentive to 
drive infrastructure investment out to rural areas.
    Competition for customers and support will drive costs down, and 
likewise, reduce the overall level of support required nationwide. In 
the meantime, an increase in the size of the Fund is not necessarily a 
negative if the increase is used to improve critical wireless 
infrastructure in rural areas that currently have substandard networks 
and lack reliable 911 service.
    Managing growth of the Fund is a complicated task that is not 
susceptible to a quick fix. As the expert agency, the FCC must work 
within the statutory framework of the Communications Act to ensure that 
wireless companies, which pay into the Fund and currently receive less 
than 4 percent of the total high-cost support, have the same 
opportunity to obtain support in rural areas as do ILECs.
III. WIG Responses to Common ILEC Arguments
    From the WIG perspective, Congress and the FCC set forth laws and 
rules implementing a system for encouraging competitors to obtain ETC 
status. I am advised that rural ILEC lobbyists have asked the FCC to 
reverse policies that have encouraged competition in rural areas. Thus 
far, they have succeeded in getting the FCC to initiate a proceeding to 
reexamine its policies for designating and distributing high-cost 
support to CETCs, without examining how the overall system for 
providing support to all carriers can be improved.
    Here are our positions in response to a few of the more popular 
ILEC misstatements:
A. The Universal Service System Should Not Support More Than One 
        Network in Rural Areas.
    Many ILECs state, without any supporting economic evidence of which 
we are aware, that most rural areas will not support competition and 
therefore the government should not be supporting duplicative networks, 
risking stranded plant and endangering universal service. The common 
argument is that competitive carriers are going to construct five or 
six wireless networks in remote areas that will not today support even 
two competitors.
    This argument directly contradicts Congress' express goal set forth 
in Section 254(b) of the Act that

        Consumers in all regions of the Nation, including low-income 
        consumers and those in rural, insular, and high cost areas, 
        should have access to telecommunications and information 
        services, including interexchange services and advanced 
        telecommunications and information services, that are 
        reasonably comparable to those services provided in urban areas 
        and that are available at rates that are reasonably comparable 
        to rates charged for similar services in urban areas.

    The current system provides exactly the proper incentive for CETCs 
to enter rural areas. We are not aware of any evidence that any 
significant number of rural customers are going to abandon wireline 
service any time soon. We suggest that competitive market forces supply 
a very good discipline on market participants. The long-term economic 
benefits of competition represent the greatest potential gain for 
consumers in rural areas and for rural economic development. Those 
benefits cannot be realized if one carrier is funded to the exclusion 
of all others.
    Reserving support for ILECs harms consumers in rural areas by 
relegating them to second class status indefinitely by locking out 
improvements in service and new services (such as mobile service) that 
can be introduced by competitors. We urge Congress and the FCC to 
reject these and other ILEC arguments that seek market outcomes in 
their favor, especially when such companies are asking the FCC to set 
aside of spectrum for the second time in 15 years, or to adopt 
eligibility rules favoring rural ILECs.
B. High-Cost Support to CETCs Stimulates Artificial Competition.
    We believe exactly the opposite is true--that denying high-cost 
support to CETCs cements artificial monopolies into place. If no high-
cost support were available to any carrier, most of the wireline 
infrastructure that is today in use in high-cost areas would not have 
been constructed. Unfortunately, that infrastructure has been 
constructed at a very high price. A system that only supports one 
carrier artificially keeps a monopoly in place and denies consumers the 
benefits that a competitive system inevitably and surely brings.
    We believe that most every rural area in America can support 
competition, especially if competitors only receive support to the 
extent that they have a customer. Throughout the country, in over 30 
cases, we are not aware that ILECs have been able to demonstrate any 
consumer harms which will arise as a result of competitive entry.
    In northeast Arizona, one of the most remote and sparsely populated 
areas of the country, it is my understanding that a CETC has signed up 
over 25,000 new customers on Native American lands in just 18 months 
since becoming an ETC. I am also advised that in rural northeastern 
Colorado, a new CETC has signed up over 500 new subscribers that have 
``cut the cord'' with their ILEC in just one year, while using high-
cost support to provide improved service and more choices to consumers.
    As a general rule, we believe that consumers throughout this 
country should enjoy the benefits of competition.
C. CETCs Receive Support Based Upon ILEC Costs.
    The FCC properly determined that high-cost support must be made 
available to all eligible carriers, no matter what technology is used. 
ILECs and CETCs receive high-cost support in completely different ways. 
ILECs use cost studies to obtain ``explicit'' support from the high-
cost fund, and receive additional implicit high-cost support within 
their rate structure. A wireless CETC receives no implicit support and 
can only receive the ``per line'' support available to an ILEC when it 
gets a customer.
    In order for a CETC to gain support, it must get and maintain 
customers. Therefore, it is misleading to say that a competitor is 
getting paid on ILEC costs.
    Moreover, it is not by any means clear that a wireline carrier's 
``per line'' costs in remote areas are lower than those of wireless 
carriers. In fact, the opposite may be true because in most rural 
areas, wireless carriers have fewer customers. Their networks are 
relatively young and require much more capital expenditures to extend 
new service than do wireline networks, which are mature and not growing 
rapidly. From all we have observed, allegations that the current system 
provides excess support to wireless carriers are unfounded.
    The current system, which forces market participants to compete for 
customers and support is the right approach. WIG believes that the size 
of the Fund must be managed in a competitively neutral fashion so that 
all carriers can compete for customers and for support on a relatively 
level playing field.
D. The High-Cost Support Mechanism Appropriately Funds All Lines
    From the outset, the high-cost fund has supported all lines because 
the cost of providing all services are spread across an ILEC's entire 
network, including primary lines, second lines, fax lines, lines in 
vacation homes, and lines dedicated to Internet access. Spreading costs 
across the entire network is appropriate because it enables an accurate 
determination of whether the costs of providing that network are above 
the level which triggers high-cost support.
    Some have posited that the Fund should support only one line per 
household. Others advocate only one line per household per competitor. 
A few theorists believe that only the primary line in a household 
should receive support and that the customer should designate its 
primary line for purposes of high-cost support.
    We view all of these approaches as band-aids that provide no 
comprehensive answer to the problem of fund growth. I am advised that 
we may agree with ILECs that these solutions will be arbitrary and 
unlikely to result in appropriate support levels being achieved. 
Moreover, a system where customers designate a primary line will 
undoubtedly lead to a new class of ``slamming'' caused by carriers 
competing over the ``primary'' designation. In the end, consumers are 
likely to be harmed.
    All lines are properly funded under the current system, and if 
change is to be made, it should be done thoughtfully and carefully.
Concluding Remarks
    WIG members and other wireless carriers have played by the rules in 
obtaining ETC status and are now beginning to deliver on the promise 
that Congress made to rural America. Certain rural ILECs seek to cut 
short the process by urging quick changes that favor only them in a 
regulatory area that is more complex than almost any other in 
telecommunications. The Federal-State Joint Board is currently 
requesting comment on well over 100 issues relating to the universal 
service system.
    We urge thoughtful consideration by regulators, industry leaders 
and other experts. WIG believes that another process similar to that 
conducted by the Rural Task Force should be instituted to achieve 
useful and productive recommendations that encompass both CETCs and 
ILECs, so that comprehensive and competitively neutral solutions are 
reached. Piecemeal decisions advocated by some ILECs will be disruptive 
to rural subscribers, or worse yet, deny them the benefits of 
competition that they deserve.
    We do not come here today with all the answers. What we do know is 
that making it harder for ETCs to be designated, imposing onerous 
monopoly-era regulations, and reducing support to competitors but not 
incumbents, all appear to be on the shopping list of certain ILECs. All 
are bad for rural consumers and we believe are contrary to 
Congressional and FCC directives that consumers be the focus of 
universal service policy decisions.
    In our ETC service area, Bell South has both a monopoly on wireline 
facilities and in some areas, a 40 percent interest in a formidable 
wireless network, operating under the Cingular brand name. They have 
enormous capital resources, the highest credit rating, a national 
advertising budget, Section 271 authority to provide long distance 
services, and the ability to bundle wireline and wireless services to 
their existing and potential customers. Their market advantages are 
enormous. It is only the provision of high-cost support which begins to 
level the playing field, providing Cellular South an opportunity to 
construct a network that can challenge their lock on the market and 
more important, give rural Mississippi consumers the advantages of 
quality competitive wireless services enjoyed by their urban cousins. 
If they believe that we are capturing any significant market share, 
they can respond in the marketplace and I'm sure they will.
    We urge Congress to provide the FCC with clear direction that they 
are charged with upholding the Communications Act, as well as Court 
decisions interpreting it--and that the rules for qualifying for and 
drawing from the high-cost support mechanism be administered in a 
competitively neutral fashion and in a pro-competitive manner.

    Senator Burns. Thank you, Mr. Hughes, for coming today, and 
we appreciate that very much.
    And we have been joined by another one of them country 
boys, Senator Dorgan, from North Dakota. Senator Dorgan, did 
you have a statement? We have all just kind of put our 
statements in and we started the testimony early, and this 
panel has already testified and ready for questioning. So would 
you like to do both of them at the same time or one of each 
or----
    Senator Dorgan. Well, Mr. Chairman, first of all, I thank 
you for your courtesy. As is probably the case with you, I have 
three different committee meetings at the same time, and so I 
was unable to be here at the start of this hearing. But I think 
you are right in holding a hearing on universal service, 
because I think whether it is Montana or North Dakota or other 
rural areas of the country, particularly the high-cost areas of 
the country, universal service is a really critical and an 
important issue.
    If I might make just a comment, the issue of universal 
service is about comparable service at comparable prices. And 
we decided some long while ago, as a matter of public policy, 
that if you lived in a very small area--Grenora, North Dakota, 
with 60 or 80 citizens living there, or New York City--the 
availability of a phone in a big city is made more valuable by 
the availability of a phone in a small town. Donald Trump's 
phone in Trump Plaza, New York City, is more valuable because 
he can call somebody in Cut Bank, Montana. I do not know if he 
will want to.
    [Laughter.]
    Senator Dorgan. But the fact is, the presence of every 
telephone makes every other telephone more valuable. So if 
telephone service were not universal in nature, and the issue 
were just, ``Well, whatever it costs, that is what it costs; we 
will not care about driving down high-cost areas so that there 
is universal opportunity to have telephones,'' we would not 
have truly a national system or a universal system by which 
everyone would have affordable service.
    That is the basis of what universal service was when it was 
established. It also stands, for those of us who were involved 
in writing the 1996 Act, for the availability of advanced 
services, advanced telecommunications services--i.e., 
broadband, et cetera.
    But now what is happening with universal service is that 
the entire system, I think, is dramatically threatened, 
interstate revenues are plummeting and the program is under 
assault. And our job, I think--while there are some issues we 
can wiggle around on, I think our job is try to figure out how 
do you have a robust, stable, broad funding base that makes the 
Universal Service Fund available for the long term, and 
supports driving down costs in high-cost areas and also 
especially supports the availability of advanced services in 
all areas, especially high-cost areas.
    So those are the issues that we have, Mr. Chairman. As the 
Chairman knows, I come from a town of--I guess it is now 295 
people. When I left----
    Senator Burns. Is it bigger than Grenora?
    Senator Dorgan. It is bigger than Grenora. But when I left, 
my hometown was roughly 400 people, 380 to 400 people. It has 
now shrunk by about a third. But the analysis by the FCC at one 
point was that if you take a look at the fixed costs, to 
provide a system of telephone service in a town of 350 people 
was dramatically more expensive than to provide telephone 
service in an area where you can spread the fixed costs over 
far more customers. And so the result is universal service 
drives down high-cost areas so that everybody has affordable 
service.
    I just say that by way of pointing out that we must, this 
year, find a way to intercept what is happening to the 
Universal Service Fund. Fewer people are making long-distance 
calls. They are less expensive when they do make them. More 
people are using the Internet, instant messaging, e-mails, and 
so on, and the fact is we are losing the base for this 
Universal Service Fund. That is why I think this hearing is a 
very important first step, Mr. Chairman, in recognizing that. 
And because you come from Montana, I think you are in a very 
important position. I am pleased to be a part of this effort to 
say that we cannot continue down this road. The Universal 
Service Fund will not succeed in the--I should say ``the Fund'' 
will not succeed in the long-term unless we do something to 
provide stable long-term funding for it.
    So that is all I wanted to contribute today, and I 
appreciate the other issues that have been raised by people who 
have testified today. They are not inconsequential, but I must 
say that if we do not solve the longer-term funding issue, we 
will not have much of a fund to debate about. It will just be a 
minimum amount of money, and we can have a robust debate about 
nothing. But, you know, that is not very interesting to me.
    So I hope, in the next 6 months or so, Mr. Chairman, you 
and I and others can engage in trying to figure out how we make 
a U-turn and instead of seeing a shrinking fund, find 
mechanisms by which we can provide resources to have that fund 
become the kind of fund it is supposed to be to drive down the 
costs in high-cost areas.
    Thank you very much, Mr. Chairman.
    Senator Burns. Senator Dorgan, we had Commissioner 
Abernathy here from the Commission, and we were sort of 
critical of the Commission because they have not stepped up to 
the plate and made any recommendations that had any permanence 
to them. And whether it is going to take legislation to do this 
or not, I recommended that it is time that we start talking to 
the Universal Service Board and the FCC and Congress in some 
kind of a summit--it may take a half a day to walk through what 
has been done, what has been recommended--and then sort out the 
situation that if it takes legislation, then we should be 
working on that right now. It should be done this year. We do 
not have a lot of time.
    And I look forward to working with you, and maybe we can 
arrange that, to work together on this thing with those other 
two entities and maybe come to a sort of an agreement where we 
can pass legislation and work together on it.
    Senator Dorgan. Well, Mr. Chairman, I would be happy to do 
that. This problem goes all the way back to the initial 
judgments by the Federal Communications Commission following 
the passage of the 1996 Act.
    Senator Burns. Yes.
    Senator Dorgan. Misjudgments have been made consistently. 
In addition to the misjudgments, which latched us to a funding 
source that has diminished, in addition to that, the 
Commission, the FCC, I believe has some significant authority 
to remedy this, but it has been unwilling to move. So it is 
kind of, you know, you look like a potted plant in some of 
these areas, just sort of sitting around waiting for things to 
happen, and nothing will happen, and you just have this 
diminished pot of funds for universal service. But I think that 
is a great idea, and I look forward to working with you.
    Senator Burns. Well, I like your illustration of a potted 
plant. That means a lot to you.
    [Laughter.]
    Senator Burns. The other day at a committee hearing, you 
brought a plant of leafy spurge to Interior. Everybody is dying 
now to get leafy spurge started in their yard. Did you know 
that? The new flower of Washington, D.C.
    Senator Dorgan. Well, I can help. Just one plant will have 
a yard full in a couple of months.
    [Laughter.]
    Senator Burns. I want to continue along with the 
questioning now, and I appreciate the testimony of Mr. Lubin 
and the recommendations that he has.
    Mr. Lubin, how do you view the concept of the wireless safe 
harbor permitted under the FCC rules? Is this approach fair? 
And does it run the risk of basically destabilizing the Fund?
    Mr. Lubin. Thank you for the question. AT&T is very 
concerned about the safe harbor concept. It is concerned about 
the safe harbor concept for two reasons. The first, by putting 
a ceiling of 28.5 percent on what percentage of the revenue 
would be attributable to interstate, puts a cap. So if I have a 
customer who is making 200 minutes of interstate calling and 
who is being charged, say, 5 cents a minute, they are paying 
$10 of long distance.
    Unfortunately, what I have on my bill, as of April 1, 
yesterday, is 9.1 percent. So, all of a sudden, if that 
customer sees 9.1 percent on my traffic and decides to move to 
a wireless, it is capped at 28.5. So that is one issue, in 
terms of they were getting 9.1 percent on that revenue from 
that customer. All of the sudden it goes to the wireless 
vendor, who is capped at 28.5, and there are no incremental USF 
contributions flowing in.
    But there is a second issue, and the second issue is, What 
does the customer see on their bill? On my bill, they see 9.1 
percent. On a wireless bill, even though they have a cap at 
28.5, or they may even come in and show their own unique study 
and they can have a study that says 20 percent, if 20 percent 
is what percentage of their minutes are interstate and the 
factor is 9.1, 20 percent of 9.1 is roughly 1.8 percent. So on 
a wireless bill, you see 1.8 percent. And if that customer--
because you make your decisions not in the aggregate, not in 
the average, you make your decision, as a customer, customer by 
customer--so that customer sees 1.8 percent on their bill. They 
are a heavy interstate user. What they see on my bill is 9.1 
So, unfortunately, from my point of view, the current system, 
with the safe harbor concept, is an anti-competitive issue with 
regard to long distance carriers.
    Not only that, I just want to highlight international 
exemption. There is an international exemption, such that if 88 
percent of your traffic is international and only 12 percent is 
interstate, then you are assessed on only the 12 percent. So 
that is harmful to me in the competitive marketplace, but it is 
also harmful to the Universal Service Fund, because they would 
have 9.1 on all those international revenues when that customer 
is using me; but when they go to a wireless vendor or another 
vendor who has a niche--I am not saying wireless vendors have a 
niche in the international market; but to the degree there are 
vendors out there, and I can highlight to you who they are, who 
have international disproportionate traffic, the USF fund is 
not going to generate the same level.
    All of these things are reasons of why the bits, the calls 
are still out there, but you have Internet substitution, you 
have wireless substitution, you have safe harbors, all of these 
things are contributing to why this fund is being assessed on 
interstate revenues. And unfortunately, the demand is still 
there; it is just being accommodated in different ways.
    Thank you.
    Senator Burns. Mr. Orent, you have heard his explanation of 
that. Do you agree completely with that view? And what would 
you, on your recommendations--give me an idea on how we solve 
this problem.
    Mr. Orent. Well, I----
    Senator Burns. Pull that microphone over there, by the way.
    Mr. Orent. I do agree with a good deal of Mr. Lubin's 
comments on this issue. From our perspective, it simply is not 
fair to have interstate traffic being allocated in different 
sorts of ways amongst different types of providers. The safe 
harbor, to me, is just not a fair system. It should be 
something that treats all of us with a greater deal of equality 
and parity in terms of how we contribute.
    I could argue that, in the case of my own company, I really 
do not provide any long-distance service. I provide access to 
long-distance providers, but that does not give me any relief 
in terms of the degree of contribution that I have to make. I 
have to make the same contribution that everyone else does, 
because I facilitate access to the long-distance network. So, 
to me, in terms of fairness, we should all be held to the same 
contribution standard, and the safe harbor does not accomplish 
that.
    Senator Burns. Mr. Hughes, would you like to comment on 
that? You are a wireless provider.
    Mr. Hughes. Yes, sir. We think that the safe harbor does 
provide a useful tool, but comes with problems of measuring the 
interstate provisions. And there are a lot of anomalies and 
different things about the Act and the way it is administered 
now that it is one way for one carrier and another way for 
another.
    For example, the ILEC has the opportunity to recover all of 
its costs over a period of time through the Universal Service 
Fund. The wireless provider, while we are grateful to be 
included and while we are thankful for what we have, and were 
it not for what you have given us, we would not be able to do 
what we have done, does not have that same opportunity. There 
is so much talk about--it should be based on the cost of the 
provider. If that were the case, probably the wireless 
providers would be better off. Our return is not based upon the 
same costs that the ILEC uses, but is different. We get a per-
line and we have to have a customer and we get the same amount 
per line, but there is no guarantee, if we build a tower in a 
high-cost area, that we are going to recover that money.
    So there are a lot of things about the Act that probably 
are different from one to the other, and there may be some 
wisdom for having some of those differences. And again, we are 
thankful just to be at the table, and we are thankful for what 
we have had. We are making good use of it. But we think the 
safe harbor is a useful tool because of one of the problems, it 
is so hard to measure what your interstate traffic is, and it 
is just one of the problems that exist out there.
    And maybe there is some better solution. Maybe the FCC 
could come up with something better. But until that happens, we 
think it is a useful tool, and we think it should remain unless 
we are going to go out and we are going to straighten out all 
the other differences in there. Just to focus on that one would 
seem to be--and especially since the wireless providers are 
putting in now 11 percent or so of the USF funds, and they are 
extracting--I think the figure of 2 percent was used by the 
commissioner earlier today--2, 3 percent. We think we are 
contributing our fair share to it, and we just, again, 
appreciate you all letting us come and use it for the benefit 
of our rural consumers. We thank you for that.
    Senator Burns. Mr. Dosch?
    Mr. Dosch. I am wondering which point to address.
    [Laughter.]
    Mr. Dosch. I guess going back to your original question, 
there is a simple, a relatively simple, solution to the problem 
that safe harbor is attempting to address, but it does require 
a legislative solution. But it is quite simple, and that is 
that Congress should go back and allow the FCC to ignore the 
jurisdictional nature of telecom traffic and to simply base its 
estimates into the USF on interstate and intrastate revenue, as 
well as revenue derived from substitute services, competitive 
services. By eliminating the jurisdictional distinction, you no 
longer have to worry about attempting to identify which subset 
of the traffic is truly intrastate versus interstate. And I 
think that its simplicity is compelling and something that 
Congress should definitely consider.
    Senator Burns. Sometimes the simplest answers work the 
best.
    Dr. Gillis?
    Dr. Gillis. That would be my primary statement, is that the 
simplest often works the best. But when I was asked to comment 
to the FCC on the collection mechanism, I used the analogy of, 
really, the choice between fixing up the old truck or buying a 
new one. And in may ways, the whole concept of the safe harbor 
is taking an existing collection mechanism that has been used 
historically in a time when wireless was a fairly small player 
and it was primarily the traditional IXC base for universal 
service. But, as I mentioned in my testimony, the world has 
changed. And I would agree with the points that were made by 
Mr. Lubin, primarily, on the difficulties of that, but I do not 
think that is the solution. I really think it is time to put 
forward a different collection mechanism that provides a much 
broader base than currently, and it needs to be fair.
    I guess the other comment I would make in response is that 
to the extent that we are broadening the base of collection and 
doing it in a manner that is fair, of course, it has to be 
lawful, but those that contribute to the funds should also have 
the ability to collect from the Fund. And so I think that 
involves kind of a more--that we should not look at this issue 
in isolation, that I am completely in agreement that the first 
priority should be fixing the collection mechanism, but that 
should not be where our job stops, because we really have to 
think about the proper way to allocate the Fund afterwards, to 
be fair.
    Senator Burns. Let me also ask another question. The FCC is 
providing sufficient oversight in designated ETC status for new 
carriers. In your opinion, have these additional designations 
had the desired effect of providing better service in the 
public interest? And also, are there issues of fairness that 
require changes in the legislation?
    Mr. Hughes, do you want to respond to that one? We will 
have everybody respond, but----
    Mr. Hughes. Yes, sir. We think that the criteria set out in 
the Act and as it is being administered now is a fair method 
for determining ETC status. We have heard a lot today about 
different things. And maybe additional regulation over the 
wireless provider when it comes to, you know--it seems to me 
that it should be going the other way. Regulation, as I was 
taught it, was when you had a monopoly and there was no 
competition out there.
    We are moving into a competitive situation. The wireless 
provider has significant competition. Its practices and costs 
are regulated because we have to do the things to be able to 
sell the service and compete with the other service provider. 
If the people do not like it, they can always go somewhere 
else.
    But, nevertheless, the suggestion that there is no 
regulation probably is not well founded, in that in our State 
the attorney general's office, consumer practices--plus each 
year we have to have our ETC status approved by the Public 
Service Commission. And the moneys that we spend, we are 
required in a reporting procedure before the Mississippi Public 
Service Commission to tell them where we are going to spend the 
money, and then every quarter we have to provide them a report 
showing them how we spend the money. And while they may not 
have a statutory authority to regulate what we are doing, let 
me assure you, when I get a call from the Mississippi Public 
Service Commissioner suggesting we have a service problem, it 
has a regulatory ring to my ear. I respond to it.
    And tonight I am going to go home to Mississippi, I am 
going to go home to Brandon. Tomorrow, I am going to get up and 
I am going to see those people that we serve, and they have 
found out that since I am in the communication business, I have 
a telephone, and they are calling me.
    So our customers are regulating us. The Mississippi Public 
Service Commission is, de facto, regulating us, and they get 
the call and we respond to it. And also the Mississippi 
attorney general's office, through its consumer affairs.
    So we do have some regulations out there, and we think that 
just the competition alone--instead of looking for more 
regulations, I would suggest that maybe we ought to be moving 
toward less regulations.
    Senator Burns. Mr. Dosch?
    Mr. Dosch. Mr. Chairman, as you know, the handful of 
provisions in the Act that, in the aggregate, go to the idea of 
the competitive ETC, state that the FCC ``shall,'' in the case 
of non-rural areas, and ``may,'' in the case of rural areas, 
``designate additional ETCs.'' It is my opinion that the 
public-interest bar has not been raised high enough in the case 
of competitive ETCs in rural areas that are receiving high-cost 
support. And I think the core question--I have heard this 
referred to as a ``reverse unfunded mandate''----
    [Laughter.]
    Mr. Dosch.--in that there is free Federal money to be had 
by the commission, the State commission, making a very easy 
determination that a competitive ETC would be in the public 
interest in that particular area, but that there is no or very 
little corresponding direction from the FCC or from Congress as 
to how that public-interest determination should be made or 
used.
    I would just point out that we do not have competitive ETCs 
in my area, in the area that my company serves, but we 
certainly face competition from seven very robust wireless 
carriers. My company is actually considering a marketing 
campaign touting the benefits of wireline service, which 15 
years ago would have been silly. It would have been like trying 
to market indoor plumbing or drinking water. I mean, it was a 
non-issue. But now we very much consider the wireless carriers 
in our area very robust competitors and we are seriously 
marketing against them, as they are us.
    That is all well and good, and that is fine, and if that 
competition can be sustained in more rural areas, that is great 
for those customers. And we are certainly not attempting to 
wall off any area from the benefits of competition, if 
competition is sustainable. However, when the issue becomes the 
receipt of universal service support to go to a competitive 
company which is essentially building an overlay network so 
that you have two networks in a particular area where it has 
been previously determined that that area will not support one 
network on its own, that raises a different issue, and I think 
it is incumbent upon Congress and the FCC to make sure that 
Federal revenues going to such situations and flowing to 
competitive ETCs is truly in the public interest, and I do not 
think that has been happening up until now.
    Senator Burns. Mr. Orent, do you agree with that? Do you 
agree with--yes.
    Mr. Orent. Yes, I do, in many respects. And I would also 
like to suggest that in a document that one of the 
organizations I represent prepared, we have specific 
recommendations with regard to criteria that would apply to the 
public-interest standard, to the qualifications, and to the 
requirements that would otherwise treat all of us equally and 
would help ensure that when ETC status is granted, it comes 
closer to trying to meet a public-interest standard, which, 
from my experience in the State of Michigan, has been totally 
ignored.
    Our greatest threat to the universal service, from my 
experience in that one State, is simply a total disregard for 
what Congress intended when it separated non-rural and rural 
areas and recognized that in rural areas, granting additional 
ETC status may not always be in the public interest based on 
the economics of the area in question. And it was appropriate 
to leave that to the States.
    Unfortunately, too many States have looked at this as a 
welfare opportunity to help their States and have adopted an 
attitude that says, ``If I can get free money from the Federal 
Government for my State, that is in the public interest and 
that is good enough.'' And I have seen applications pass 
through the Michigan Public Service Commission quicker than any 
other documents I have ever seen them act upon.
    There has been no assumption of a responsible role to 
ensure that congressional intent with regard to measuring 
public interest has been met. And I am very fearful that that 
type of attitude is being adopted nationwide and is adding to 
the difficulties we are having with regard to managing this 
scarce national resource, the Universal Service Fund.
    And I would also like to clarify, if I may, Mr. Chairman, 
that fact that all too often we hear that State regulators want 
to hide behind the fact that they have no authority to regulate 
some carriers--i.e., wireless carriers. I think it has been 
established clearly that, with regard to universal service, 
States have all the authority they need to impose terms and 
conditions relevant to participating in the Universal Service 
Fund. That has already been established by the courts. 
Unfortunately, it just does not seem to be convenient for them 
to be aware of that.
    So I think this----
    Senator Burns. Why would you say they would duck such an 
issue because most State PUCs do?
    Mr. Orent. Because until the 1996 Act was passed, and this 
is my opinion--in my opinion, until the----
    Senator Burns. That is all we deal with up here is opinion.
    [Laughter.]
    Mr. Orent. Well, thank you.
    In my opinion, until the 1996 Act was passed and codified 
universal service, most State commissions never really had to 
concern themselves with the intricacies of a very complex 
system. And many of them, I am saddened to say, still do not 
fully appreciate or understand the system. And in some cases in 
the State of Michigan, there has been a process by which the 
leadership has been made to believe that a universal service 
system at the State level is bad. Let us not do it. They have 
thumbed their nose and ignored what has been an opportunity 
since 1996.
    So I do not know what else might motivate State commissions 
to want to duck their true responsibilities, as intended by 
Congress. And furthermore, the FCC has exerted not one iota of 
effort to hold any one State accountable for what it is that 
they have delegated to them through their rules and 
regulations.
    So we have a breakdown in terms of the delegation without 
any follow-up for accountability, in terms of 50-some States 
being able to treat things however they find politically 
convenient. There are few States that have addressed this 
issue. But those States, like the State of Utah, which has 
denied multiple ETCs in rural areas, they were motivated to do 
that because they have a State universal service system, and 
this would have had implications on that State's universal 
service system's size. So they are one of the few States that I 
am aware of that has really done a proper job of ensuring that 
the public interest is met.
    And to the extent that--I believe it was Matt's 
recommendation--that States be required to fund some of these 
things, I think it is absolutely a great idea that they get 
some skin in this universal service game and do not just look 
at it as ``free money.''
    Senator Burns. We will come back to that. Have all of you 
had an opportunity to look over what Mr. Lubin, of AT&T--his 
recommendations on some of the solutions, have you had a chance 
to look those over, and can you comment on what they have 
proposed? And if you have not, why just say you have not looked 
it over.
    Mr. Hughes. Mr. Chairman, I have not had an opportunity to 
look it over, but I will be glad to supply you, after a chance 
to read those comments, if the Committee would allow me to do 
that.
    Senator Burns. I would accept your offer on that. I would 
like for you to look at it and give me some sort of a short 
white paper on what you would think about it.
    Mr. Hughes. Yes, sir.
    Senator Burns. Anybody else? I noticed there was--and also, 
when we are talking about your ETCs, portability comes into 
question, I think. USF support is portable to competitive 
eligible telecommunications carriers in concept. It would seem 
that when Customer-A switches from ETC-A to ETC-B, or A should 
lose the USF support on that line, and ETC-B would gain it. It 
is my understanding, however, that the incumbent ETCs do not 
lose any support as a result of this competitive entry. Should 
portability be implemented so the ETCs receive support only for 
the customers that they serve? Anybody want to comment on that?
    Yes, sir. Dr. Gillis?
    Dr. Gillis. Yes, sir. I mean, tying this back to the 
conversation that you were just having a moment ago of why 
State commissions perhaps have not taken a great deal of time 
on some ETC decision--and I actually sat on, I think, one of 
the first--as a State commissioner in the State of Washington--
on one of the first multiple ETC decisions on mobile wireless 
in the country, and that was 1998. And a petition came in in 
December 7, 1998. It was revised December 20th, 1998. And the 
majority of the commission acted in favor of granting multiple 
ETC designation on December 29th. I dissented rather vehemently 
about it not having enough process to look into it, but it was 
a very short process. And as you can tell, it is not because I 
discourage competition, but it is because I think it is a very 
important responsibility.
    But the reason I think perhaps some State commissions have 
not--and I think it varies, because I do not think you can make 
a uniform statement; different commissions are different in the 
amount of effort they have taken in the public interest 
evaluation--but it is partly because of the portability issue 
and the skin-in-the-game issue, that right now, you correctly 
stated, that the rules, the FCC rules, allow the competitor to 
receive ETC support for all the lines that they have, whether 
they are captured from the competitor or not, and, 
unfortunately, at least in my view.
    I mentioned to you about the Rural Task Force, and we did 
have a consensus recommendation on a variety of components of 
universal service, and the Rural Task Force had incumbents, it 
had competitors, it had some wireless, it had IXCs, it had 
consumer representation. For the most part, the FCC accepted 
the Rural Task Force recommendation, except for one provision 
that I think has turned out to be important, on portability. 
The Rural Task Force recommended that, at the time of 
competition, when a State commission grants a multiple ETC 
designation, that the universal service support in that area be 
frozen at the level it is at and it would be allowed to grow 
for both the incumbent and competitor at a growth factor 
which--essentially inflation plus some line growth, but the 
competitor would only receive support for the lines that it 
captures.
    And that, I think, in my view, was an important 
recommendation of the Rural Task Force. It was not followed 
through on, for some good reasons; but, in hindsight, I think 
that is one that could help one put skin in the game, because 
right now if you are sitting on the State commission with many, 
many multiple obligations to take care of--and I think 
commissions, in general, State and Federal, do not have the 
resources they need to do their job in these times where there 
are so many complex things going on. And so I am not bashing 
commissions. I think they do a wonderful job, but if you look 
at it from the standpoint of harm, it is very hard to say you 
are harming an incumbent carrier, because they are not losing 
money out of the deal. And then there is more money flowing 
outside of the cap that is going to the competitors. So there 
is no skin in the game in that sense. And I think that that is 
important that perhaps that be looked at.
    Senator Burns. Mr. Hughes?
    Mr. Hughes. May I just speak from a real-life experience 
that we are currently having? Were we restricted to getting 
Universal Service Fund only on new customers, we would not be 
today offering the $49-a-month, all-you-can-eat unlimited 
across the State of Mississippi. We would not have a new CDMA 
1X system in. We would not be where we can compete with the 
ILEC. It just would not have happened in our case.
    There may be some better answers somewhere, and maybe the 
future will bring it, but for the current time, I think if 
Congress really wants to use the USF fund and really wants to 
promote competition, it is essential that they continue the 
current practice of portability, which, as has been mentioned, 
does not harm the incumbent, but provides sufficient incentive 
and sufficient moneys to the company who is building a new 
infrastructure. And they say it is a second infrastructure; 
well, it is an entirely different infrastructure. It is one 
that allows them the benefits their city cousins have of using 
that wireless phone. And the city cousins benefit because they 
can find their friend when he is out in the field. The farmer 
can have his office on his tractor.
    If the Congress wants competition, and certainly for the 
time being and until some new substitute that is better can be 
found, portability is important. And we do, again, mention that 
the portability in its current configuration does not harm the 
ILEC; it only benefits the rural consumer by making available 
to him something he would not have had before and something 
that may be a long time coming, if ever coming, to his area 
without that portability factor. And that is our real-life 
experience with it.
    Senator Burns. Mr. Lubin?
    Mr. Lubin. Yes, Mr. Chairman. I would like to actually 
comment on the last two questions, because, from my 
perspective, they are wonderful questions because they 
highlight, unfortunately, the complexity in the interaction of 
many of these issues.
    First and foremost, I am going to just try to give you my 
sense of urgency and passion, if you have not seen it yet. And 
that urgency and passion is that the assessment mechanism is 
broken. And so what we are talking now about, an assessment 
mechanism that is broken, where interstate revenues are 
declining. And I just heard the wireless representative talk 
about another example where there is a flat-bundled offer of 
whatever it was, $49. How do you take that $49 and allocate it? 
And it is not just wireless carriers that are doing it; it is 
other wired carriers that are doing it. I am doing it. Right? I 
have a 1995 bundled offer, all you can eat, and I can explain 
the details of it.
    But the issue is, How do we allocate this between 
interstate and intrastate? And what are the incentives for 
people to put more and more of it in the intrastate side where 
it does not pay, and on the interstate side, where it does pay, 
you are getting less and less?
    So my passion here is that the ETC is a wonderful question, 
but it is a complex and confusing question because, on one 
hand, as Mr. Gillis has said a few times already, he sees the 
twin goals of preserving and advancing universal service in 
competition. I am there. I want to see all of those things 
happen. On the other hand, I see an assessment mechanism that 
is broken.
    Let us, for the moment, ask the question, If wireless 
carriers around the country get ETC status--let us assume they 
get it very quickly. Let us assume they are not even going to 
compete for the first line in the household. We can debate 
everything. But let us, for the moment, assume that the first 
line is not competed; and, in fact, what happens, every 
household in the rural areas, because they are getting more 
money from USF, God bless, and they are putting in 
infrastructure so the holes do not exist and you get good 
quality service, such that every individual in a household in a 
rural area now has a wired line and a wireless line. And by the 
way, they may have not just one wireless line, but if they have 
a wife and two daughters, like I do, they may have four 
wireless lines. And so all of a sudden, not for the first line, 
not for the second line, but for every line connection, 
wireless, wired, in a household, if they are in a rural area, 
they get the subsidy.
    Now, for the moment, I am not taking a position of whether 
that is good or bad, but what I am saying is that the quick 
calculation I just did is if that happened, the size of the 
Fund would grow between $1.5 and $2 billion. And my point is, 
first and foremost, we have to fix the assessment and 
collection mechanism. We have to figure out an assessment 
mechanism such that the widgets that we are assessing are not 
declining year over year, but the thing we are assessing is 
growing. My concern about solving it through jurisdictional 
legislation--and I am all for trying to broaden that base, but 
if I use a jurisdictional solution and we do not address 
information services, we do not address the Internet, you are 
going to have leakage.
    Fundamentally, you need a solution that is broad and 
eliminates, to the extent possible, leakage. Because if you do 
not do that, we will be back here when we look at interstate 
and intrastate revenues and, in the aggregate, they start to 
decline.
    Back to my ETC question. The ETC question is, before I get 
to that, I need an assessment mechanism fix. Once we have a 
rational assessment mechanism, then we can ask the question, 
Should we have multiple lines, whether they are wireless or 
wired, in a home, should all of those connections get a 
subsidy? And when you ask that question, you had better be 
looking at what the bottom line is. And if we can fund that and 
support that, that is wonderful. If we cannot because all of a 
sudden--this value in my example is a dollar. Quite candidly, 
you can take it up to a $1.10 and $1.20 and you might be able 
to get coverage virtually everywhere for wireless. You may be 
able to do other things. So what I urge is, take a hard look 
when you answer the question about ETC status.
    And again, I am for competition, I am for giving rural 
customers and urban customers choice, I am for giving them as 
much, but you have to ask the question. When you do that, you 
have to have a principled basis and you have to be looking at 
what the bottom line impact--because it is not these carriers, 
me included, who are paying for this. It is our customers who 
are paying for it. And that is why ultimately we ought to be 
asking the question, What is the simplest thing to do? What is 
the least customer-friendly thing to do? And what is the most 
cost-effective way to manage this?
    Because four out of the five parties up here are saying the 
problem is significant, it is broken, and they are looking for 
a solution. And when I think about that, we all have a 
commonality of interest. We are striving for a solution, we do 
not want leakage, we want to have it done in a timely way. I 
look at that and I say to myself, Why can we not find a 
solution that we all agree to? Because we all see it as a 
problem.
    Thank you.
    Senator Burns. Yes, sir.
    Mr. Hughes. While I am going to respond to the other 
comments he has with AT&T, let me just make my position clear 
in regard to the growth of the Fund. I am not so sure the 
figures he has are accurate. But, nevertheless, there is 
substantial growth in the Fund.
    The point we were trying to make is that the contribution 
to the growth in the Fund and the withdrawals from the Fund by 
the wireless providers is really very small in relationship to 
the 1.1 billion the ILECs got a very short time ago. The chart 
that is provided to me by the OPASTCO company shows that 
relationship, and I will be glad to give that to the Chairman 
if you would like, and to the Committee, but it points out that 
the ILECs were getting 2.05 billion in ILEC support in 2000, 
and they are getting 3.17 billion in ILEC support currently; 
whereas, the wireless support has run from minuscule, almost 
not on this chart, to $120 million currently.
    And our point is, I guess, we hear our name offered so 
often as being the problem, and we just ain't the problem.
    Senator Burns. OK, well, this is----
    Yes, sir. Mr. Orent?
    Mr. Orent. If I could just make one comment on the 
portability issue.
    Senator Burns. Yes.
    Mr. Orent. You so correctly stated when the act was 
initially crafted it did envision, it did intend, for support 
to go from one to another, because it was assumed that there 
would be some obvious way of determining that this customer, 
who used to reside with this carrier, is no longer with that 
carrier, has now gone over to this competing carrier. Well, 
that is not what has evolved, and the rules that have been 
promulgated have really messed up this entire portability in a 
big sort of way.
    We believe that when you look at--using wireless as the 
best example, wireless, in many cases, does not take away a 
wireline customer from an incumbent local exchange carrier. I 
believe that, in many instances, what you have here is this 
notion of not direct substitutability, but of a complementary 
sort of service where it seems, in many instances, a customer 
with both wireline services and with wireless services is 
relying on the wireless forms of services as a substitute for 
long distance, as opposed to a substitute for local service. So 
it is more of a complement to the local service, a substitute, 
in many cases, for the long-distance service.
    What has happened, obviously, is, they are not taking 
support away from us, giving the support, based on our costs to 
the competitor, exasperating the size of the Fund. And part of 
it, I believe, is because there is not a means or a method 
available that would allow those who administer this thing, the 
NECA or USAC organization, to be able to properly verify what 
is happening.
    So, the administrative back-office types of things that 
would have to be dealt with in order to verify that a customer 
has actually discontinued service at one location in order to 
have service with a competing carrier is a huge administrative 
nightmare. And unfortunately, this now allows for an awful lot 
of gaming that sometimes goes on in order to maximum universal 
service receipts by the competitive element.
    So it is a huge, huge problem that the FCC has created by 
its choice of how it administers the rules and directs NECA 
that really needs to be squarely addressed.
    Mr. Hughes. Mr. Chairman, if----
    Senator Burns. Yes, sir.
    Mr. Hughes. I guess, to quote President Reagan, ``There we 
go again.''
    [Laughter.]
    Mr. Hughes. I feel so popular here, because everybody--and 
it may be the bow tie, I do not know----
    Senator Burns. This is the way we learn things.
    Mr. Hughes.--but everybody seems to like me.
    Senator Burns. If we can get this little debate going at 
that table, we'll learn a lot of things here.
    Mr. Hughes. And that is why I wanted to inject here, 
because of the suggestion here that cellular or wireless 
service is just an ancillary service. You can look around here 
in Washington, walking down the street, people are depending on 
this not for--they are not walking down the street on a long 
distance. They are talking to home, they are talking to mama, 
they are talking to caregivers, they are calling their 
children, they are talking to their office. They are doing 
things locally. That is why our all-you-can-eat in 
Mississippi--that is a local service, in Mississippi, all-you-
can-eat, $49--is so very popular, because it is within the 
calling area, it is for the people they are calling.
    So we would strongly suggest that wireless service is not 
an ancillary service. Wireless service today has become a 
necessity. It is important. And it has advantages that the 
wireline service cannot offer in portability, and the ability 
to make that 911 call when you have the accident instead of 
having to get out, limp into wherever a phone is and make the 
call from there. You can call right away. There are some 
tremendous advantages, and it is not merely ancillary, although 
it may be deemed that by some. It is an important necessity in 
the American life today that the rural people of this Nation 
are entitled to have and use and have the benefit of. And that 
is what you have let us do by letting us use the Universal 
Service Fund, and we thank you for it.
    Dr. Gillis. Mr. Chairman?
    Senator Burns. Yes, sir.
    Dr. Gillis. I want to be clear, also, that I agree with 
that assessment, and I think I testified to that, that I view 
wireless service, as part of a comparable bundle of services, 
should be available to rural Americans. I think the issue is 
not should we have quality wireless service available to rural 
Americans, but is the mechanism we have today appropriate to 
accomplish the goals of deployment of a comparable network, 
including quality mobile wireless, access to broadband, and a 
choice of dial tones? And in my view, we have to return to the 
mechanism, but the way that the rules are currently set up for 
portability, in my view, distract from that goal. So we need to 
revisit that.
    Senator Burns. This has been a very enlightening panel. I 
want to thank you for coming this morning. And there may be 
questions by othermMembers of this committee, and they will do 
that in writing. We are going to keep the record open. If you 
would respond both to the Committee and to the individual 
Senator, I would certainly appreciate that.
    I have got more questions here. We have another panel to 
cover. But it has been very enlightening. And thank you for 
your interest in this, because I just think it is very, very 
important that we address this now and take your testimony, 
your recommendations, and also your situations to make it fair 
and to move either legislation or make the recommendations to 
the FCC and the Universal Service Board and to put it in place 
so that we can start getting back to the business of promoting 
competition and also extending those services to areas like 
there is across the country. We kind of like to make everybody 
alike, but then nobody wants to be alike. And thank goodness we 
have that kind of a mindset. But it also adds to the 
complications of making good policy, too.
    So I appreciate you coming today, and thank you, and if 
there are other inquiries, why, please let us know. The record 
will remain open for a couple of weeks yet.
    Mr. Hughes. Mr. Chairman, I have a procedural question. I 
offered this chart.
    Senator Burns. Yes.
    Mr. Hughes. Should I----
    Senator Burns. It will be made part of the record, and the 
clerk will----
    Mr. Hughes. Then I should submit it--you will have it 
submitted?
    Senator Burns. Yes, it will be made part of the record.
    Thank you very much. We will go to panel No. 3 now.
    Panel No. 3 is Tom Meade, Vice President of Regulatory 
Requirements, Alaska Communications Systems, out of Anchorage, 
Alaska; Dana Tindall, Senior Vice President, Legal, Regulatory, 
and Governmental Affairs for General Communications, 
Incorporated, Anchorage, Alaska; and Jack Rhyner, President and 
CEO of TelAlaska, from Anchorage, Alaska. My gosh, we might as 
well be the Alaskan PUC here today.
    [Laughter.]
    Senator Burns. But we are looking forward to your testimony 
on this important thing of universal service and how it applies 
to a State that basically is why universal service was set up 
in the first place, is so that we can get affordable----
    Could we have order, please, in the hearing room?
    The basic reason for universal service in the first place 
was to deal with States just exactly like Alaska and Montana.
    We will start from the top, Tom Meade, who is with Alaska 
Communications Systems out of Anchorage. And thank you, Tom, 
for coming today. We appreciate it very much.

        STATEMENT OF THOMAS R. MEADE, VICE PRESIDENT OF 
     REGULATORY REQUIREMENTS, ALASKA COMMUNICATIONS SYSTEMS

    Mr. Meade. Thank you, Mr. Chairman. I am substituting today 
for our director of Regulatory Affairs. I am sort of a last-
minute substitution, and I apologize if I am not as polished as 
some of the other speakers. But I am essentially the numbers 
guy who has been dealing firsthand with the implementation of 
the regulations from the FCC as they have been required to be 
implemented by our regulatory commission.
    And while I share the concerns of the other ILECs about the 
adequacy of the funds, I would like to focus on how it will 
affect, how the administration of the current fund affects our 
customers, even if it remains fully funded. We face the most 
severe competition in the country, and our situation is likely 
to be a precursor for rural subscribers in the rest of the 
Nation.
    The Universal Service Funding has been very effective. 
Without it, there would not be service in many areas, much less 
competition in many areas. There are areas as small--we have 
exchanges as small as 20 lines, and in many of those areas 
there is no competition for other basic services, such as 
grocery chains or fast food or fuel dealers, et cetera.
    But, unfortunately, the way the FCC regulations have been 
interpreted and implemented by our State regulators, universal 
service is being threatened in many of these areas.
    The adequacy of universal service in our exchanges depends 
upon whether competition is allowed to develop naturally or 
whether we have to subsidize our competitors. And 
unfortunately, that is what is happening today. CLECs can buy 
our loops below what it costs us to provide them, and yet they 
have access to the same revenue per line and the same universal 
service per line that we do. They have no obligation to invest 
in loops, and ultimately this will make it impossible for us to 
provide quality service.
    A lot of the focus that we have had today has been on 
wireless. Our problem is with competition through unbundled 
network elements where we have to sell them to our competitor 
below cost.
    And one of the things that I have seen mentioned here and I 
agree with today is that the rural exemption and ETC status has 
been granted fairly casually by regulators without examining 
the effect on the public interest. In our service area, for 
example, we have lost our rural exemption for communities as 
small as Seldovia, which is not even on the road system; it is 
accessible only by boat or airplane, it has less than 400 
lines, yet we no longer have a rural exemption there. And it 
seems to be based purely on the idea that competition will 
reduce costs and provide better service. And I believe, in many 
cases, the people who are purporting that that is the truth are 
taking credit for technological advancements that really were 
unrelated to the advent of competition in the rural areas, but 
taking credit for the microchip, fiberoptic, and laser 
technology.
    When I first went to Alaska, we had long-distance service 
through 1950's troposcatter systems; and microwave and laser 
technology and fiberoptics have changed all that and reduced 
costs, digital electronic switching, et cetera.
    But once we lose the rural exemption, our USF becomes 
portable to the CLEC. It becomes portable on a per-line basis 
under FCC regulation, and based on our actual cost, that means 
we spend the money and our competitor recovers it. When our 
competitor is granted USF for unbundled loops, the only way we 
get a chance of recovering our cost is when the UNE rates are 
high enough. When the UNE rates are as high as our actual cost, 
then we are made whole, but only then. And with the advent of 
UNE pricing under a, quote, ``forward-looking'' or, in other 
words, ``make believe'' methodology, we never recover our 
costs.
    Our UNE rates in Fairbanks to our competitor are $19. It 
costs us $34. First, we cannot compete by giving our competitor 
a $15 advantage. And second, they get the USF associated with 
that loop.
    Now, I have heard CLECs say that service will not be 
jeopardized if we do not recover our costs, because we have an 
obligation to provide service. It is true, we are a carrier of 
last resort, but our investors do not have an obligation to 
provide money. There is no such thing as an investor of last 
resort. Ultimately, the system has to be self-sustaining.
    I have heard CLECs claim that ILECs are inefficient and 
that is why the Fund is bloated. But in going through UNE 
proceedings, we have found that when GCI has tried to build 
their own facilities, they have actually spent more per loop 
than we have.
    We have heard that competitive neutrality requires equal 
USF. We believe that competitive neutrality requires an equal 
obligation to invest in infrastructure to serve everybody. And 
if competitive neutrality means that we all play by the same 
rules, that means that competition should also bring 
deregulation.
    That is why we are here before you today. We are hoping 
that because of the way some of the Telecom Act has been 
implemented, that you can help cut through some of the problems 
with clarifying legislation or prompt the FCC to act quickly.
    Thank you. I appreciate the opportunity to testify today.
    Senator Burns. Thank you, Mr. Meade, and your complete 
statement, if you summarized part of it--I did not read your 
testimony, but it will be made part of the record. And I 
appreciate that very much.
    [The prepared statement of Mr. Meade follows:]

  Prepared Statement of Thomas R. Meade, Vice President of Regulatory 
              Requirements, Alaska Communications Systems
Introduction
    On behalf of Alaska Communications Systems (``ACS''), I would like 
to offer the following testimony to the Senate Commerce Committee and 
its Communications Subcommittee on the critically important topic of 
the future of Universal Service and the ultimate viability of the 
Federal Universal Service Fund. ACS appreciates the invitation to 
address the Subcommittee. I hope that ACS' comments will prove both 
valuable and provocative. ACS stands ready to respond to any follow up 
inquiry that the Subcommittee Members might have.
    ACS's primary business is that of local service and exchange access 
services via four separate local exchange companies operating in the 
largest urban and some of the smallest rural communities in Alaska. \1\ 
In addition, ACS offers wireless, Internet and long distance services 
through affiliated business units. \2\ While new technologies and 
competition continue to prompt advances in products, services and the 
efficiencies of service delivery, the practical reality of serving 
rural America--and rural Alaska in particular--cannot be overlooked. 
ACS' testimony today will focus on this reality and the need for 
Congress, the FCC and state policy makers to remain vigilant in 
protecting universal service objectives and resources.
---------------------------------------------------------------------------
    \1\ ACS of Anchorage, Inc., ACS of Fairbanks, Inc., ACS of Alaska, 
Inc., and ACS of the Northland, Inc.
    \2\ ACS Wireless, Inc., ACS Internet, Inc., and ACS Long Distance, 
Inc.
---------------------------------------------------------------------------
    We must not lose sight of the ultimate goal of the universal 
service program--that is to provide high quality, reliable and 
affordable telecommunications services to the greatest extent possible 
throughout the country. The desire to enhance opportunities for 
competitive market entry may be laudable, but must never be allowed to 
compromise the overarching goals of universal service. Congress clearly 
had this in mind when it created the delicate balance between 
competition in the local market and the strong endorsement of universal 
service fund in the Telecommunications Act of 1996. Unfortunately, over 
the last seven years, the FCC and the states have opted to tip the 
balance in favor of competitive entry in ways that now threaten 
preservation of universal service principles. ACS has repeatedly 
advanced the caveat that continued growth of the Federal Universal 
Service Fund (``USF') cannot be sustained. While periodic review of 
Universal Service Funding to reflect changes over time is sound policy, 
the idea that the Fund can grow exponentially and indefinitely is 
unrealistic.
    Recent additions of new categories of support have already 
stretched the limits of USF. These additions have prompted new and 
expanded end user fees. When viewed together with other significant 
flow-through charges reflected on the customer's bill, such as the 
successive rounds of increases to the Subscriber Line Charge, the whole 
process is likely to crumble under its own weight. Representatives from 
densely populated ``payer'' states have already drawn a line in the 
sand arguing that they can no longer shoulder the ever increasing 
burden. Congress, the FCC and state policy makers must recognize this 
reality and take steps to properly balance and focus USF resources or 
face the dire consequences of failing to do so. ACS offers some 
specific examples and suggestions in response.
Universal Service in Alaska
    ACS serves numerous rural communities in Alaska. USF funding is 
essential to ensure that rural subscribers have affordable 
telecommunications services that are comparable to the services 
provided in urban areas. Consequently, ACS has a strong interest in the 
integrity and continued availability of USF.
    Unfortunately, existing Federal Communications Commission (``FCC'') 
rules allow USF to be distributed in ways that are inconsistent with 
the purposes of universal service support set forth in Section 254 of 
the Telecommunications Act of 1996. We believe Congress should be 
interested in this misuse of USF. Such improper use results in 
increased pressure on limited resources and creates ``perverse 
incentives'' to compete for subsidies instead of for customers. In 
addition to the direct threat to rural consumers, misuse of USF 
resources creates an impediment to investment and service improvements 
(including both basic telephone and broadband) in rural areas.
    Section 254(e) of the Telecommunications Act of 1996 requires, in 
pertinent part, that a carrier that receives Federal universal service 
support use that support only for the provision, maintenance and 
upgrading of facilities and services for which that support is 
intended. \3\ The FCC has identified the high cost carriers entitled to 
support from the High Cost Loop Fund as those with embedded loop costs 
in excess of 115 percent of the national average loop cost. In other 
words, eligibility for high cost support is directly related to the 
degree to which a provider's loop costs exceed the national average. 
Under current rules, that means a local loop costing in excess of 
approximately $23 per line per month is eligible for high cost support. 
\4\
---------------------------------------------------------------------------
    \3\ 47 U.S.C. Sec. 254(e).
    \4\ 47 CFR Sec. 36.631. The Commission decided to freeze the 
``national average loop cost'' for this purpose at $240 per year for 
the duration of the five-year plan, which became effective on July 1, 
2001. Accordingly, a rural ILEC, whose embedded loop costs exceed 115 
percent of $240 (approximately $276 per line, per year, or $23 per 
month) generally is eligible for financial support. These calculations 
tend to change slightly over time, but the underlying relationships 
described in this testimony remain basically the same.
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Improper Use of High Cost Loop Support in Alaska
    The misuse of funds and inefficient competition for subsidies stems 
from Section 54.307(a) of the FCC rules. \5\ Under 54.307(a), 
competitive eligible telecommunications carriers (``CETC''), including 
wireline CLECs in Alaska, receive Federal high-cost loop support 
(``HCLS'') \6\ for each line served based on the support the ILEC would 
be entitled to receive. This per-line support amount flows to the CETC 
for each line regardless of the competitors' actual cost associated 
with that line.
---------------------------------------------------------------------------
    \5\ 47 C.F.R. Sec. 54.307(a) provides, ``A [CETC] shall receive 
universal service support to the extent that the [CETC] captures the 
subscriber lines of an [ILEC] or serves new subscriber lines in the 
[ILEC's] service area.'' Subsection (1) of this rule further provides, 
in pertinent part, ``[a CETC] serving loops in the service area of a 
rural [ILEC] shall receive support for each line it serves in a 
particular service area based on the support the [ILEC] would receive 
for each such line, disaggregated by cost zone if disaggregation zones 
have been established within the service.''
    \6\ As used here, ``High-Cost Loop Support'' or ``HCLS'' refers to: 
(1) high-cost loop support (formerly known as ``universal services 
fund''); (2) Long Term Support (``LTS''); and (3) Interstate Common 
Line Support (``ICLS'').
---------------------------------------------------------------------------
    The situation confronted in Fairbanks, Alaska offers a vivid 
example of the problem. In Fairbanks, ACS' per line cost is 
approximately $33.50 per month making it eligible for about $10 per 
line per month of support for its local loops. Most of this comes from 
the High Cost Loop Support fund. Alaska's State commission, the 
Regulatory Commission of Alaska (``RCA''), however, has required ACS to 
lease these same Fairbanks loops to its competitor, General 
Communication, Inc. (``GCI''), at the deeply discounted rate of $19.19 
per month. \7\ Despite this low cost of the loop to GCI, a cost 
substantially less than the $23 per line per month threshold otherwise 
required to be eligible for any cost support, current FCC rules appear 
to entitle GCI to the same $10 per line per month support that ACS 
receives.
---------------------------------------------------------------------------
    \7\ See Petition by GCI Communications Corp. d/b/a General 
Communication, Inc., and d/b/a GCI for Arbitration with PTI 
Communications of Alaska, Inc., under 47 U.S.C. Sec. Sec. 251 and 252 
for the Purpose of Instituting Local Competition, Petition by GCI 
Communications Corp. d/b/a General Communication, Inc., and d/b/a GCI 
for Arbitration with Telephone Utilities of Alaska, Inc., under 47 
U.S.C. Sec. Sec. 251 and 252 for the Purpose of Instituting Local 
Competition, Petition by GCI Communications Corp. d/b/a General 
Communication, Inc., and d/b/a GCI for Arbitration with Telephone 
Utilities of the Northland, Inc., under 47 U.S.C. Sec. Sec. 251 and 252 
for the Purpose of Instituting Local Competition, Docket No. U-99-141, 
Order No. 9 (Regulatory Comm'n of Alaska 2000).
---------------------------------------------------------------------------
    In Alaska, then, allowing the CETC to receive the same support as 
the ILEC is a rule that can and does produce absurd and improper 
results. Because GCI does not have high cost loops, as defined by the 
FCC, any high cost loop support received by GCI will necessarily be for 
a purpose other than to purchase, maintain or upgrade high-cost loops 
as required by the Act. Furthermore, Section 54.307(a) can and does 
result in huge windfalls for CETCs, which, by definition, also means 
that USF funds are not being used for the purposes for which they were 
intended.
    Such misuse violates the principle of competitive neutrality \8\ 
and rather than promote efficient competition instead allows 
inefficient carriers to enter the market and compete based on these 
unlawful subsidies. Perhaps more importantly, such misuse puts 
continued stress on finite USF resources, ultimately threatening the 
very viability of a program that has for many years served the 
interests of consumers in high cost rural markets.
---------------------------------------------------------------------------
    \8\ In Fairbanks, ACS has a post-USF cost of approximately $23.50. 
GCI, on the other hand, will have a post-USF cost of approximately 
$9.00. This is not a competitively neutral result and it should be no 
surprise that GCI can offer its services at a lower price when it has a 
significantly lower cost of goods sold than ACS strictly as a result of 
regulatory decisions.
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Congressional Intent Ignored
    Congress should be concerned that its policies, as set forth in the 
Telecommunications Act of 1996, are not being implemented as intended. 
There has been some concern expressed that asking a CETC that provides 
service on its own facilities to submit cost information in support of 
a claim for USF assistance would be overly burdensome. ACS finds this 
argument specious. ILECs have been required to provide such cost 
rationale since the inception of the Fund. It does not appear to be any 
more burdensome for other facilities-based providers to justify their 
need.
    The argument totally falls apart when dealing with a CETC that 
serves customers via UNE loops. Where a CETC's loop costs are known and 
documented, such as when the CETC purchases UNEs at a state-sanctioned 
rate, there is no burden in identifying the CETC's actual loop costs. 
In such cases, USF support should be based on the CETC's own per-line 
costs--that is, the UNE loop price it pays--not on the costs of the 
ILEC. \9\ GCI argues that its loop costs include other elements beyond 
the UNE price it pays to ACS. Although there may be some other costs 
involved, USAC rules limit recovery of certain cost elements associated 
with providing local service. It is reasonable to assume that those 
limitations would also apply to CLECs. More importantly, if CLECs like 
GCI want to be ``credited'' with their additional costs, they should be 
required to detail those costs the same way an ILEC must do. When the 
CETC certifies to the state and the FCC that it is using the support 
for the purpose for which it was intended, it should be required to 
justify the level of support it receives. At the same time the CETC 
should be compelled to substantiate that its loop costs meet the 
minimum cost threshold for high-cost loop support eligibility 
established by the FCC.
---------------------------------------------------------------------------
    \9\ ACS acknowledges the Joint Statement of the Independent 
Telephone & Telecommunications Alliance, the National Rural Telecom 
Association, the National Telecommunications Cooperative Association, 
the Organization for the Promotion and Advancement of Small 
Telecommunications Companies and the Western Alliance. ACS believes 
that the entire question of the designation of wireless providers as 
CETCs needs to be closely examined. However, in those instances where 
CETC designation is genuinely in the public interest, ACS believes that 
the wireless provider's own costs must form the basis for any support 
eligibility and actual high cost support received.
---------------------------------------------------------------------------
    While most of the blame for allowing USF to be used as a regulatory 
crutch to prop up an otherwise inefficient competitor lies with the 
FCC, state commissions, including the RCA, could but have failed to 
prevent this misguided policy. Under Section 214(e) of the 
Communications Act of 1934, state commissions are responsible for 
designating competing carriers as eligible to receive USF. However, the 
Act provides that, ``Before designating an additional eligible 
telecommunications carrier for an area served by a rural telephone 
company, the State commission shall find that the designation is in the 
public interest.'' \10\ (emphasis added.)
---------------------------------------------------------------------------
    \10\ Section 214(e)(2) of the Communications Act of 1934, as 
amended by the Telecommunications Act of 1996.
---------------------------------------------------------------------------
    In the Fairbanks case, the Alaska commission conducted no such 
analysis and offered no basis, in the record or otherwise, to support 
an affirmative public interest finding. Rather, reflecting a profound 
misunderstanding of the issues, the RCA summarily concluded:

        We found no evidence that GCI plans to use 2002 Federal 
        Universal Service Funds in an inappropriate matter [sic]. We 
        also note that GCI's local rates in competitive areas remain 
        comparable to or lower than the incumbents', further suggesting 
        2002 Federal funds will be used appropriately. \11\
---------------------------------------------------------------------------
    \11\ RCA Order U-01-90(2) dated November 13, 2001 at 6.

    This failure to conduct a factual investigation and reach 
conclusions based on a factual record prevents the FCC or the RCA from 
knowing anything about how this funding is being utilized. Congress 
should take steps to ensure that states carefully determine whether USF 
support is in fact being used for the purposes for which it was 
intended. This measured evaluation should apply equally to all CETCs.
Improper UNE Rates Compound the USF Dilemma
    As is true with almost everything associated with implementation of 
the Telecommunications Act of 1996, no one issue stands alone. In this 
congressional hearing the focus has been on the specific operations of 
the Universal Service Fund. In its testimony, ACS has pointed out 
anomalies with CETC eligibility for support and the improper use of USF 
dollars. But, there is more.
    While unquestionably important, USF is but one revenue stream that 
joins others to contribute to the overall financial health of the 
telecommunications industry. In turn, a healthy industry is able to 
offer more and better services and hold rates at affordable levels. It 
was Congress' intent that USF contribute to that end. But, we must 
remember that other revenue streams also make important contributions. 
One source of revenue that has failed to achieve universal service 
objectives is that derived from the sale of unbundled network elements 
or UNEs. The most consequential UNE is the ``loop'' or the connection 
that directly ties the customer's home or office to the rest of the 
phone network.
    Beyond offering a facilities-based opportunity for competitors to 
enter local markets, UNE prices are also supposed to fairly compensate 
incumbents for the use of their networks. These rates should send 
proper economic signals to both incumbents and new competitors to 
prompt new infrastructure investment. These rates should also be set at 
levels that ensure that the Carrier of Last Resort, typically the ILEC, 
has the financial resources necessary to ensure that the network 
continues to meet established universal service standards for safe, 
reliable and affordable basic telecommunications services.
    In addition to redirecting USF support away from meeting Carrier of 
Last Resort obligations, the situation in Alaska has been substantially 
exacerbated by the State commission's approval of unconscionably low 
UNE prices. ACS' experience in the Fairbanks market is a case in point. 
As previously noted, the cost to ACS of providing a loop in Fairbanks 
is approximately $33.50. However, the RCA has deemed it reasonable to 
set the UNE loop price at $19.19. When ACS is forced to lease its loops 
under the state commission's pricing scheme, it immediately loses much 
more than the $14.30 difference between ACS' cost and the price paid by 
the competitor. It also loses all of the retail revenue associated with 
that line, along with the access revenue previously received from long 
distance carriers for use of the local network. And, as already noted, 
it loses the USF support related to that line. The end result is that 
ACS, with ongoing responsibility as Carrier of Last Resort, must 
approach its universal service obligations with only one-third of the 
revenue it previously had available prior to losing the access line to 
a competitor. \12\
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    \12\ ACS estimates that, prior to the onset of local competition, 
its average revenue per line in Fairbanks from all sources was 
approximately $726 annually. With the termination of the rural 
exemption and competitive entry based on leasing UNE loops at state 
arbitrated rates, ACS' average annual revenue per line drops to 
approximately $230.
---------------------------------------------------------------------------
    While low UNE rates may have prompted market entry--in some cases, 
uneconomic market entry--they clearly do not fairly compensate the 
owner of these facilities nor will they incent any industry participant 
to invest. In the final analysis, the aggregate loss of these revenue 
streams will, over time, make it impossible for the incumbent to 
continue to provide reliable and affordable service--the very essence 
of the universal service definition.
Improper Termination of ``Rural Exemption'' Prompts the USF Dilemma
    In addition to the ``UNE factor'' just discussed, the state 
regulator's improper termination of the congressionally mandated 
``rural exemption'' has also severely and negatively impacted the goals 
of universal service in Alaska.
    As Congress is well aware, the express language of the Act 
specifically creates a mechanism to protect the fragile universal 
service balance that has been struck in America's rural markets. The 
Telecom Act confers upon rural customers and the companies that serve 
them an exemption from certain interconnection obligations unless it 
can be demonstrated that it would be in the public interest to 
terminate or otherwise alter those obligations. State commissions have 
generally been tasked with the responsibility to find that terminating 
this exemption will not impose undue economic burdens on the incumbent 
carrier or otherwise do harm to the goals of universal service.
    To date, the RCA has been asked to terminate the ``rural 
exemption'' in several Alaska communities, including some communities 
of less than 1,000 people such as Seldovia, Ninilchik, North Pole and 
Delta Junction. In every instance, with virtually no factual basis to 
sustain its findings, the RCA has granted the petitions filed by 
competitors and has terminated the Federal protections you thought you 
had authorized in the Act. Clearly the balance Congress sought to 
strike between the advent of local competition and the preservation of 
universal service goals in rural America has been lost in practice as 
witnessed by the Alaska experience.
Implications for Congressional Policy
    The combined effect of the improper termination of the ``rural 
exemption,'' the state commission's desire to price UNE loops at the 
lowest possible levels, and the shifting of scarce USF support to a 
competitor that does not even have high cost facilities has placed 
tremendous pressure on ACS' ability to assure universal service to the 
consuming public. Perhaps the RBOCs are big enough and sufficiently 
entrenched that these types of policies can be applied to them without 
threatening their survival, but ACS is a small independent carrier and 
cannot withstand this type of assault on its business. \13\ Just last 
month, Goldman Sachs noted, ``ALSK [ACS] actually faces the most severe 
competition in the country evidenced by its low 50 percent market share 
in Anchorage, mid-70 percent market share in Fairbanks, and mid-80 
percent market share in Juneau.'' \14\
---------------------------------------------------------------------------
    \13\ In December 2002, Legg Mason commented that, `` . . . better 
future results for ALSK (ACS) hinge on improvement to the regulatory 
landscape . . . ALSK cannot be meaningfully compared to its RLEC (RBOC) 
peers . . . ''
    \14\ In January of this year, Standard and Poor's Rating Service 
lowered its corporate credit rating on Alaska Communications Service 
Group, Inc. to BB- from BB. S&P noted, ``ACS' business risk profile has 
declined as the company has lost local retail access lines to 
competition that has taken advantage of low unbundled network element 
UNE loop rates.'' Also in January 2003, Raymond James and Associates 
reported that, ``GCI has taken 60,500 lines, primarily on a UNE basis. 
The ACS UNE rate of $14.92 seems low . . . this has put a significant 
burden on the operations of ACS, . . . ''
---------------------------------------------------------------------------
    Federal policies that encourage our customers to move to competing 
carriers on the basis of artificially low UNE-based cost structures is 
a recipe for disaster. To put it simply, ACS cannot not continue to 
invest in the provisioning, maintenance and upgrading of facilities if 
it cannot achieve a fair return on its investments. Likewise, our 
competitors will not invest in facilities-based service--the ultimate 
goal of the Telecommunications Act of 1996, when they can acquire 
access to facilities less expensively from ACS than it would cost to 
build out the network themselves.
    Congress must be concerned that its legislative intent is being 
ignored or misdirected. ACS is prepared to suggest fair and impartial 
remedies.
    1) Although many of us believe Congress clearly intended USF 
subsidies to flow only to those carriers with unusually high costs, the 
FCC apparently didn't get the message. Congress can fix this problem by 
enacting legislation clarifying that all carriers, not just incumbent 
carriers, must justify their need for subsidies with data demonstrating 
their costs. Congress must also ensure that subsidies flow only to 
those carriers with unusually high costs. This would not prevent 
competition based on price, but would ensure that the USF subsidy flows 
to the competitor which actually incurs the high cost.

    2) To adequately protect its goal of providing universal service to 
consumers in high cost and rural areas, Congress must tighten the laws 
that currently give State commissions wide discretion to terminate the 
unbundling exemption--the ``rural exemption.'' These decisions are just 
as much a threat to universal service as are limitations on the flow of 
USF subsidies.

    3) Congress should clarify that the burden of proof for terminating 
a rural exemption is on the competing carrier--a view adopted by the 
Federal courts and the FCC but misunderstood and rejected by the Alaska 
commission and potentially by other states.

    4) In addition, Congress should clarify that the goals of universal 
service will not be compromised solely to open the doors to 
competition. It is difficult to understand how competition can benefit 
consumers in markets where there would be no service at all but for the 
significant flow of Federal subsidies. In that regard, Congress should 
instruct the states that the statutory ``rural exemption'' should be 
terminated only in unusual circumstances and where CLEC applicants have 
put forth a clear and convincing case that the public interest will not 
be harmed.

    5) Finally, Congress should put an end to the all-to-common state 
practice of denying incumbent carriers their costs when setting UNE 
rates. This practice, particularly when applied to rural carriers that 
have had their rural exemption terminated, significantly compromises 
universal service. ACS does not think this practice was intended by 
Congress, but both the statute and the FCC rules are sufficiently vague 
to allow for this interpretation. Consequently, ACS strongly urges 
Congress to enact legislation making it clear that Carrier of Last 
Resort must be fairly compensated when leasing its facilities to 
competing carriers.
Conclusion
    ACS joins the other witnesses in expressing its concern for the 
ongoing health and viability of the Universal Service Fund. While only 
one of several revenue streams contributing to the preservation of 
basic affordable telephone service, USF remains a critical element in 
the equation. If the issues described in this presentation remain 
unresolved, the Fund will soon spin out of control. At that point, 
policymakers will have no other choice but to substantially expand the 
base of contributors and increase the amount of the contributions. 
Doing so will not only have a direct impact on individual consumers, 
but will also add unexpected burdens on the deployment of new 
technologies. Congress must act soon to minimize the negative effects 
that are likely to occur in the absence of near term action.
    Thank you for this opportunity to raise our concerns. I would be 
happy to answer any questions you might have.

    Senator Burns. I said ``Dana,'' it is probably ``Danna,'' 
is it not?
    Ms. Tindall. No, it is ``Dana.''
    Senator Burns. ``Dana''? Oh, son of a gun. Senior Vice 
President for General Communications, Inc., out of Anchorage, 
Alaska, and thank you for coming down today. We appreciate that 
very much.

  STATEMENT OF DANA L. TINDALL, SENIOR VICE PRESIDENT, LEGAL, 
             REGULATORY, AND GOVERNMENTAL AFFAIRS, 
                  GENERAL COMMUNICATION, INC.

    Ms. Tindall. Good morning. Thank you for inviting me to be 
here today.
    As the largest wireline competitive ETC in the country, I 
believe GCI has a unique perspective to offer you. GCI provides 
competitive telecommunication and cable service to over 220 
communities in Alaska. We have the largest market share for 
facilities-based long distance. Our cable network passes 95 
percent of the homes in Alaska. We offer cable modem service to 
90 percent of those homes. In our most rural markets, we have 
begun providing high-speed Internet services at urban rates. It 
is our plan to provide high-speed service to every rural 
community we serve by year-end 2004, without subsidy.
    According to NTIA, Alaska is the second-most wired State in 
the country. GCI began offering competitive local telephone 
service in Anchorage in 1997. After a lengthy battle to 
terminate rural exemptions, we rolled out service to Fairbanks 
and Juneau in 2002. Today, we have a market share close to 45 
percent in Anchorage, 21 percent in Fairbanks, and 19 percent 
in Juneau.
    Since 1996, GCI has invested over $530 million in its 
telecommunications network. We have our own switching and 
transport facilities. Currently, we lease the copper loop from 
the incumbent. However, we are in the process of testing a 
cable telephony platform in Anchorage and plan to begin 
converting up to a thousand homes per month starting in 2004. 
It is our goal to eventually provide local services on our own 
network wherever feasible throughout the State of Alaska.
    So why are Universal Service Fund's costs spiraling ever 
upward? By far and away, high-cost funding is the largest 
portion of overall universal service cost, at 52 percent. Of 
that, incumbents account for 96 percent of high-cost funds 
while CETCs account for only 4 percent.
    High-cost support is increasing for two primary reasons. 
One, high-cost funds to incumbents and CETCs, alike, are based 
on incumbents' self-reported costs. Two, incumbent carriers 
experience no meaningful incentives to reduce cost, even in the 
face of competition.
    As implemented today, an incumbent telephone company 
receives funding on the basis of its costs. If it loses a 
customer to a competitive carrier, it does not lose high-cost 
funding for that customer. Not only is the cost for funding 
being driven up because both the incumbent and the CETC are 
receiving funds for the same customer, but the incumbent is 
experiencing no incentive to reduce costs in the face of 
competition. It is still getting paid. If you want to reduce 
the need for funding, you must change the incentive structure.
    Schools and libraries make up 35 percent of total high-cost 
funding. And in contrast to loop funds, subsidies per user are 
actually decreasing for the same service. This is true for 
three reasons. One, it is a voucher program with subsidies to 
the end user, making it inherently more efficient. Two, the end 
user must have a plan ensuring that he or she will actually use 
the funds for what they are designed for. And three, service is 
competitively bid. The lowest-cost service provider must be 
selected.
    So what can we do? To control the growth in demand for 
Universal Service Funding, we can, one, cap the support for a 
given study area upon the entrance of a competitor; two, step 
down per-line subsidies over time; three, make subsidies truly 
portable by eliminating double-dipping; four, restrict support 
to the primary line irrespective of the technology used to 
provide that service; five, consolidate study areas in a State 
so that an incumbent cannot game the system by creating high-
cost areas through separate study areas.
    Our proposals to expand the contribution base are, one, 
require all interstate communications providers to contribute, 
including providers that offer comparable competitive services, 
such as cable modem providers; two, assess contributions for 
bandwidth usage as a connection fee to all interstate users on 
a competitively and technologically neutral basis.
    Alaska is the home of some of the most competitive markets 
in the country. We are proud of what we have accomplished. And 
it was competition and universal service working hand in hand 
that brought us here. Competition is essential to universal 
service as it drives down costs and decreases demand for 
subsidies. Both policy tools are necessary for the continuation 
of basic and advanced communications services throughout our 
country.
    Thank you very much.
    [The prepared statement of Ms. Tindall follows:]

 Prepared Statement of Dana L. Tindall, Senior Vice President, Legal, 
    Regulatory and Governmental Affairs, General Communication, Inc.
Introduction
    Good morning. My name is Dana Tindall, and I am the Senior Vice 
President, Legal, Regulatory and Government Affairs for General 
Communication, Inc. (``GCI''). I appreciate this opportunity to appear 
before the Senate Commerce Committee and the Communications 
Subcommittee to share GCI's perspective on how to ensure the 
sustainability of the Universal Service Fund in the face of significant 
growth in demand and reduction in the contribution base.
    In Alaska, the home of the most competitive markets in the country, 
we are at the forefront of these national issues and offer our 
experiences as a window into the near future for other developing 
competitive markets throughout the country. GCI believes that the 
Universal Service Fund is an essential component of national 
telecommunications policy, and the focus should remain on improving 
service to consumers, not on particular carriers. GCI also believes 
that competition will further the goals of universal service, by 
enhancing efficiency and encouraging the development and deployment of 
new services in high-cost areas. As is now evident, without competition 
to discipline carriers and incent them to provide service in a cost-
effective manner, the Universal Service Fund cost structure will grow 
so large that it may become impossible to sustain.
    Today, I will share with you GCI's experiences as a competitive 
eligible telecommunications carrier (``CETC'') that serves all 
customers--residential and business--competes to serve all lines, 
especially primary lines, and provides widespread advanced broadband 
services. Our experiences suggest a roadmap for national policy on 
universal service and shows that competition and universal service go 
hand-in-hand in delivering the maximum benefit for rural consumers. 
Indeed, competition is the most effective tool policymakers have to 
ensure that universal service support flows where it is truly needed 
and in the appropriate amount, regardless of the size of the market. It 
is a real mistake to try to determine in advance whether a particular 
market is ``too small'' for competition. Incumbents will always say 
their markets are ``too small,'' ignoring that consumers win when they 
have a choice of providers. Universal services at affordable rates that 
are reasonably comparable in rural areas to urban rates are best and 
most efficiently preserved and enhanced through competition, not 
monopoly.
    This principle equally applies to the administration of the 
Universal Service Fund itself. Demands on the high cost fund have grown 
significantly over the past several years, as incumbents' expectation 
for full recovery of embedded cost plus a rate of return has gone 
virtually unchecked. At the same time, the contribution pool, from 
which this growing demand must be met, has diminished. GCI proposes the 
following recommendations for a carrier-neutral universal service 
program that is focused on protecting and enhancing service in high-
cost areas in a cost-effective manner:

            Curbing Demand on the High Cost Fund

        1. Restrict support to the customer's primary line.

        2. Cap the per-line support for a study area upon the entrant 
        of a competitor.

        3. Make support truly portable.

        4. Step down per line subsidies when a market can be served at 
        a lower cost.

        5. Consolidate study areas within a state for USF support 
        purposes.

        6. Define ``affordable rates.''

            Expanding the USF Contribution Base

        1. Expand the contribution base beyond telecommunications 
        providers.

        2. Assess a connections-based fee.

    These recommendations offer real solutions to the issues facing the 
Fund. Disadvantaging competitors or prohibiting competitive entry is 
not a real solution to Universal Service Fund issues, and would only 
deny consumers in rural America the quantifiable benefits of 
competition.
GCI's Service Offerings
    GCI provides competitive telecommunications and cable service to 
more than 200 communities in Alaska, and over the past five years 
alone, GCI has invested over $365 million in a facilities-based network 
throughout Alaska. In 1982, we first entered the Alaska market as a 
long distance provider. Today, GCI has the largest market share of any 
long distance provider in Alaska, even though we are prohibited by 
Federal regulation from building our own facilities to provide long 
distance service to some 150 bush villages. \1\ And consumers have 
benefited from competition. In 1983, 83.8 percent of Alaskan homes had 
telephones, the second lowest rate in the country. With the 
introduction of long distance competition, service quality and 
availability began to increase as rates decreased. By March of 2002, 
telephone penetration had reached 96.4 percent, and in all but one year 
since 1996, Alaska's rate of household penetration has exceeded the 
national average. In addition, before the introduction of intrastate 
long distance competition in 1991, a ten-minute call from Anchorage to 
Juneau cost $9.25. Now, as a result of competition, the same call would 
cost $1.40. The Alaska experience demonstrates that universal service 
and competition are an essential partnership.
---------------------------------------------------------------------------
    \1\ See Policies Governing the Ownership and Operation of Domestic 
Satellite Earth Stations in the Bush Communities in Alaska, Tentative 
Decision, 92 FCC 2d 736 (1982); Final Decision, 96 FCC 2d 522 (1984).
---------------------------------------------------------------------------
    GCI began buying cable properties in 1996. Today, our cable network 
passes 95 percent of the homes in Alaska. We offer broadband cable 
modem service to approximately 90 percent of Alaskan homes, and we 
provide 62 percent of Alaska's dial-up Internet access. Alaska is the 
second most wired state in the country, \2\ and Alaskans use the 
Internet more than any other state in the Nation on a per capita basis. 
\3\ These vital connections are not only available in our cities. GCI 
is working to deliver high-speed broadband Internet services throughout 
the smallest villages of Alaska, and we now offer high-speed wireless 
Internet at affordable prices to 12 villages and through DSL to five 
more villages, \4\ located in some of the most rural parts of Alaska. 
For example: Akutan is a village located on Akutan Island in the 
eastern Aleutians and has a population of 713. Fifty percent of 
households in Akutan have subscribed to our high-speed Internet 
offering. We are scheduled to offer high speed Internet service to 
every village and community where we have a point of presence by the 
end of 2004. In both urban and rural areas, GCI is delivering on the 
advanced services deployment that Congress expected when it passed the 
Telecommunications Act of 1996.
---------------------------------------------------------------------------
    \2\ U.S. Department of Commerce: Economics and Statistics 
Administration and National Telecommunications and Information 
Administration, ``Falling Through the Net: Toward Digital Inclusion,'' 
Table 1-B, Percent of Households with Internet Access, By State: 2000 
(Oct. 2000) at 22.
    \3\ U.S. Department of Commerce: Economics and Statistics 
Administration and National Telecommunications and Information 
Administration, ``A Nation Online: How Americans Are Expanding their 
Use of the Internet,'' Table 1-1, Internet Use by Percent of State 
Population (Feb. 2002) at 8.
    \4\ These services are offered in conjunction with the local 
exchange carrier serving the village.
---------------------------------------------------------------------------
    GCI entered the competitive local exchange business in Anchorage in 
1997, and now serves over 40 percent of Anchorage residential and 
business customers combined. Since that time, consumers in Anchorage 
have saved approximately $15 million on local service rates. But GCI 
was blocked for over four years from bringing these same benefits to 
Alaska's second and third largest cities, Fairbanks and Juneau, by 
incumbent carrier claims that these areas were ``too small'' to permit 
competition. They were wrong. After an extensive and costly battle to 
terminate rural exemptions that prevented GCI from leasing incumbent 
local exchange carrier (``ILEC'') unbundled loops to connect to GCI's 
switches, we began offering service to Fairbanks in 2001 and to Juneau 
in 2002. Customers have responded positively to GCI's entry in these 
markets, and GCI now serves over 21 percent of the Fairbanks market and 
over 14 percent of the Juneau market. As a designated eligible 
telecommunications carrier (``ETC''), GCI receives universal service 
support based on the incumbent's costs. Because GCI receives support on 
a per-line basis, rather than an overall cost basis like the incumbent, 
GCI funds its up-front investments of undertaking to serve the market. 
In 2003, GCI is projected to receive $473,229 in high cost support, and 
the incumbent is projected to receive over $27 million in high cost 
support. \5\ Despite the incumbent's claims that competition will bring 
``financial disaster,'' \6\ its local telephone revenues continue to 
grow. \7\
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    \5\ Universal Service Administrative Company, ``Federal Universal 
Service Support Mechanisms Fund Size Projections for the Second Quarter 
2003'' (Jan. 31, 2003) (projections based on 2Q 2003 data provided in 
Appendix HC01).
    \6\ Alaska Communications Systems Group, Inc., Form 10-K, filed for 
the Year ended December 31, 2002 at 33 (summarizing local telephone 
operating revenues for 2000, 2001, and 2002).
    \7\ Letter from Karen Brinkmann, Latham & Watkins, LLP, Counsel for 
ACS, to Secretary, Federal Communications Commission, CC Docket Nos. 
01-338, 96-98, 98-147 (filed Jan. 6, 2003) at 11.
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    GCI has installed its own switch and fiber transport facilities in 
each of the communities it serves. GCI serves the majority of its local 
residential and business customers using UNE loops. GCI is proud of its 
distinction as serving the most competitive markets in the Nation, 
making Alaska a leader in the telecommunications revolution.
    Although GCI can deliver its products using UNEs, the company is 
also making substantial investments in its own loop facilities to free 
us and our customers to the extent possible from the ILEC monopoly in 
these markets. GCI has placed great emphasis on the next stage of 
facilities-based competition, cable telephony deployment. GCI's 
engineers have designed an industry standard platform to connect the 
cable system to our local telephone network. We plan to begin 
converting customers to our cable telephony network at a rate of up to 
1,000 homes per month starting next year. We have set a goal to convert 
all local customers that can be reached via the cable telephony 
network, and we have embarked on a plan to reach that goal.
    Stated simply, competition delivers. It has resulted in the 
deployment of improved technologies, the introduction of new service 
offerings, and the delivery of lower rates to consumers, without any 
credible threat to the core supported services. Maintaining universal 
service is a priority of the highest order, and increasing demands on 
the Fund is an issue that must be squarely addressed. We believe that 
competition is essential to achieving the goals of the Universal 
Service Fund, which cannot be sustained if permitted to continue to 
grow without any discipline on costs. Every carrier must strive to be 
cost efficient, which is simply not likely unless demands for full, 
perpetual recovery of self-reported costs are not kept in check by 
competition.
An Assessment of the Major Components of the Universal Service Fund
    Incumbents and competitors alike agree that the increasing demand 
on USF over the last several years is an important issue that must be 
addressed to ensure that the Fund is sustainable over time. Contrary to 
the claims of some, however, payment of universal service to 
competitive ETCs is not the primary, or even secondary, source of the 
increase in demand. This simplistic view fails to see the importance of 
competition for protecting the Universal Service Fund. GCI urges the 
members of the Committee to look at these claims with a critical eye.
    The two major components of the Universal Service Fund are High 
Cost Support and the Schools and Libraries Program. High Cost Support 
constitutes over 52 percent of the total fund, while the Schools and 
Libraries Program constitutes over 35 percent (with the Rural Health 
Care Program constituting less than 1 percent). \8\ In the case of High 
Cost Support, guaranteed recovery of ILEC costs plus a rate of return 
has resulted in ever skyrocketing demand; in contrast, competitive 
bidding and a cap on the Schools and Libraries fund have imposed 
disciplines on spending for this program, while ensuring delivery of a 
quality product. The comparison of these two programs is instructive 
for considering Universal Service Fund reform.
---------------------------------------------------------------------------
    \8\ The Low-Income Fund constitutes the balance of the Fund (11.7 
percent).
---------------------------------------------------------------------------
High Cost Support
    In 1999, incumbents received $1.7 billion in High Cost Support. 
Just four years later, incumbents are projected to receive $3.2 
billion, almost twice that amount. At the same time, competitive ETCs 
are projected to receive only $106.5 million in High Cost Support this 
year, less than four percent of all High Cost Support. It is not the 
entry of competitors that has produced any profound increase on the 
Fund, but rather, the Fund has expanded to accommodate guaranteed 
revenue requirements including a rate of return for incumbent carriers 
as described below.
    The largest increase in High Cost Support over the last four years 
resulted from the removal of implicit subsidies from access charges, to 
be recovered from the Fund. In two proceedings, the FCC identified what 
it considered to be implicit subsidies, first in price cap access 
charges and then in rate-of-return access charges. Moving these 
subsidies to USF made them explicit, rather than implicit, as Congress 
directed in Section 254(e), but it also resulted in significant 
increases in high cost support. The FCC created two new funds to make 
these subsidies explicit. Subsidies have been made available to price 
cap carriers since 2000 through the Interstate Access Support Fund, and 
the projected 2003 demand is $650 million, the full capped amount. 
Similar subsidies have been made available to rate-of-return carriers 
through the Interstate Common Line Support Fund, and the projected 2003 
demand is $383 million. These access charge reform mechanisms 
constitute over 30 percent of the total high cost fund amount. And 
competitive carriers receive less than four percent of this support.
    At the same time, other high cost fund components have increased 
steadily over the past several years. From 1999 to 2003, High-Cost Loop 
Support has grown by 22 percent, Long Term Support has grown by almost 
7 percent, Local Switching Support has grown by 12 percent, and since 
2000, High-Cost Model Support has grown by 6 percent. And because all 
support, other than High-Cost Model Support, is calculated based on the 
ILEC's embedded costs plus a rate of return, the continued increase in 
fund demand--which far outpaces the rate of inflation--demonstrates 
that guaranteed cost recovery to incumbents has not provided any 
incentive to reduce costs. To the contrary, for rate-of-return 
carriers, the incentive is just the opposite, to maximize cost as a 
means of maximizing guaranteed return. Higher costs yield higher dollar 
returns and more subsidies.
    It is important to realize that, with respect to the four types of 
universal service support received by rural telephone companies 
regulated under rate-of-return regulation, the incumbent receives the 
same amount of universal service support for a given service territory 
no matter how many customers it serves in that area. Competitive entry 
has no impact on the incumbent's total level of support, even when the 
competitor takes customers using all of the competitor's own 
facilities. High cost support is paid to incumbent rural areas based on 
embedded costs. Because ILECs are paid based on total costs, not based 
on the number of lines served, the subsidy paid to the ILEC does not 
change even when it loses customers to the competitor. Therefore, when 
GCI serves a customer with an unbundled loop leased from the ILEC, it 
not only receives the lease rate from GCI but also continues to receive 
the same amount of USF support that it received when it served the 
customer. In this way, USF pays the incumbent an additional amount 
beyond the lease rates paid by the CLEC for the ILEC to sit idle. 
Competitors receive no such payment. If the Fund is skewed, it is 
skewed in favor of incumbents, which have no incentive to reduce costs 
when even the loss of customers does not affect its universal service 
payments.
Schools and Libraries and Rural Health Care Programs
    In contrast, cost reduction incentives have been employed in the 
Schools and Libraries and Rural Health Care Programs. In our opinion, 
these programs have been largely successful for three reasons. First, 
the programs essentially work as a voucher to the eligible school, 
library, or rural health care provider to use with the provider of its 
choice. Providing support directly to the end user, rather than to the 
service provider, is inherently more efficient than delivering support 
to service providers. Second, the school, library, or rural health care 
provider must have a defined need and plan for the services to ensure 
that the support is directed to meet the identified service needs. 
Finally, competitive bidding reduces the cost of individual contracts. 
Schools, libraries, and rural health care providers are required to 
select the most cost-effective bidder, with price being the most 
important criteria in making the assessment. GCI began participating in 
these programs virtually at their inception. GCI has invested in 
technology that reduced the cost per unit of bandwidth delivered over 
satellite by over 80 percent since 1999. As compared to the high cost 
fund, per customer subsidies from the Fund are actually declining for 
the same services, increasing the utility and reach of fund 
disbursements.
    Moreover, these funds produce identifiable results. GCI delivers 
high-speed Internet to 295 schools across all reaches of the state, 
providing broadband Internet access to 80,000 school-age children. In 
1997, only two of Alaska's 53 school districts had access to the 
Internet. Today, 99 percent of Alaska's schools have Internet access. 
GCI also provides services to schools and libraries on a more limited 
scope to Arizona, Montana, and New Mexico. In addition, GCI is 
providing broadband services to over 90 rural health clinics, bandwidth 
that brings technological diagnostic advances to some of the most 
isolated villages in America. \9\
---------------------------------------------------------------------------
    \9\ GCI is also serving five regional hospitals and two Veterans 
Administration medical centers.
---------------------------------------------------------------------------
    We understand there have been reported instances of fund misuse and 
misdealing; however, we expect that any such abuses can be reduced or 
eliminated through tighter audit and control procedures. In addition, 
to the extent that recent shifts in funding away from rural areas have 
been identified, such shifts can be corrected as needed by adjusting 
the criteria for discounts. Based on our experiences in Alaska, 
however, these programs are working well, providing crucial services to 
the areas intended when the programs were initially conceived.
    The comparison of these funds demonstrates that universal service 
and competition go hand in hand. Competition ensures that services are 
delivered to consumers in the most efficient manner at the lowest 
price. In those cases when the lowest unsubsidized price is still too 
high to keep rates affordable and reasonably comparable between urban 
and rural areas, universal service--if constructed correctly--should 
provide targeted subsidies to bring those prices down to the identified 
affordable and reasonably comparable levels. Increasing demands on the 
Fund is an issue that must be squarely addressed, and competition is a 
key element of the solution for preserving universal service in the 
long term. Experience tells us that the absence of competition will 
only ensure that there is no discipline on ILEC costs or their demands 
for full, perpetual recovery of those self-reported costs.
Real Solutions
Curbing High Cost Fund Demand
    This overview of where the real growth in the USF fund lies 
underscores that USF policies simply have not kept pace with the 
development of competition. Competitive entry should discipline costs 
and encourage carrier efficiency. However, under current policies, 
ILECs can avoid the realities and delay the benefits of a competitive 
market by recovering their full embedded costs through the USF fund. 
With this continued dependence on guaranteed recovery and returns, 
ILECs have criticized the presence of competition without offering any 
real solutions to the issues facing universal service. \10\ While 
solutions may not be simple, it is clear that adopting the 
competitively skewed framework advocated by some will not discipline 
incumbent costs and will deny the promise of competition to many rural 
areas of the country.
---------------------------------------------------------------------------
    \10\  See Attachment 1, ``Competitively Neutral Universal Service 
Policies Must Be Preserved.''
---------------------------------------------------------------------------
    Based on these principles developed through our experience as a 
facilities-based competitor, GCI offers the following recommendations 
to curb demand on the High Cost Fund:
    1. Restrict support to the customer's primary line. The Universal 
Service Joint Board recommended that support be available for a single 
connection per principal residence, but the FCC did not adopt it and 
deferred consideration of the proposal. \11\ GCI recognizes that there 
are practical limitations in implementing this proposal in a 
competitively neutral manner that must be resolved and urges industry 
collaboration to develop a workable solution. Successful implementation 
would eliminate additional support amounts to individual households: 
support would be available only for a single designated connection, 
without any bias toward any particular technology or carrier.
---------------------------------------------------------------------------
    \11\ See Federal-State Joint Board on Universal Service, First 
Report and Order, 12 FCC Rcd 8776, 8829-30 (1997); Federal-State Joint 
Board on Universal Service, Recommended Decision, 12 FCC Rcd 87, 132-33 
(1996).
---------------------------------------------------------------------------
    2. Cap the per-line support for a study area for both the ILEC and 
the CETC upon the entrant of a competitor. The Rural Task Force, with 
the agreement of the rural carrier community, proposed such a cap to 
the FCC, but it was not adopted. \12\ The ability to discipline costs 
and efficiency through competition should not be impeded by perpetual 
guaranteed cost recovery through USF.
---------------------------------------------------------------------------
    \12\ Federal-State Joint Board on Universal Service, Recommended 
Decision, 16 FCC Rcd 6153, 6161 (Jt Bd 2000); Federal-State Joint Board 
on Universal Service, Fourteenth Report and Order, Twenty-Second Order 
on Reconsideration, and Further Notice of Proposed Rulemaking in CC 
Docket No. 96-45, and Report and Order in CC Docket No. 00-256, 16 FCC 
Rcd 11244, 11325-27 (2001), recon. pending.
---------------------------------------------------------------------------
    3. Make support truly portable. Today, incumbents do not lose any 
USF support upon competitive entry. Because support to incumbents is 
paid based on total costs and not based on the number of lines served, 
the subsidy paid to an incumbent does not change even when that 
incumbent loses customers to a competitive carrier. If the customer's 
chosen carrier receives support for providing a line, another provider 
should not also receive support for the same line. As long as ILECs are 
permitted to receive support where they have no customer, they will not 
experience any incentives to control cost, and the demand for USF 
support will continue to spiral upwards.
    4. Step down per line subsidies. All providers, especially those 
that are inefficient (or less efficient), should be subject to market 
discipline, even if subsidies are necessary to maintain affordable 
rates. If an ETC can serve the market at a lower price, per line 
support to that market should be decreased accordingly.
    5. Consolidate study areas within a state for USF support purposes. 
Today, carriers serving ``rural'' study areas that have non-rural 
characteristics and density receive support based on embedded costs, 
even when that carrier (or commonly owned carrier) also serves non-
rural study areas. Companies who bought separate properties are able to 
game the system by maintaining multiple study areas in the same state 
under common ownership, even though they benefit from their statewide 
economies of scale. Universal service support should be determined for 
these carriers based on statewide operations and line counts.
    6. ``Affordable rates'' must be defined. USF should not subsidize 
comparably lower rates unless the provider can demonstrate that rates 
must be kept at that level in order to be affordable and reasonably 
comparable.
    These solutions are each aimed at disciplining and reducing 
incumbent costs--the costs on which high cost support is calculated--
and thus, directly address the threat of uncontrolled escalation.
Expanding the USF Contribution Base
    Addressing fund demand only reaches one side of the issue. The 
other issue to be addressed is the declining contribution base. There 
has been considerable debate before the FCC concerning changing the 
manner in which carrier contributions to USF are assessed. On this 
matter, GCI offers the following proposals to ensure that an 
appropriately sized USF is fully funded:
    1. Expand the contribution base. The contribution base should be 
expanded to ensure that all beneficiaries of the network contribute to 
universal service and that contributors are not competitively 
disadvantaged vis-a-vis other providers of functionally equivalent 
facilities-based services by inequitable or discriminatory contribution 
requirements. Expanding the contribution base may require amending 
Section 254(d), which currently limits contributions to 
``telecommunications carriers,'' or may require a public interest 
finding by the FCC extending contribution requirements to other 
providers of interstate telecommunications. For example, the term 
``telecommunications carriers'' includes DSL providers but does not 
require contribution by cable modem providers, which do not provide 
telecommunications to end users, but which use telecommunications to 
provide cable modem service to end users.
    2. Assess a connections-based fee. Contributions to the Fund should 
be based on a per-connection fee (which could include telephone 
numbers-based proposals). \13\ This approach should ensure competitive 
neutrality, in that one technology is not favored over another.
---------------------------------------------------------------------------
    \13\ For those providers that do not connect with the public 
switched telephone network but are required to contribute to USF, a 
suitable proxy for the connections-based fee should be applied.
---------------------------------------------------------------------------
The Future of Universal Service and Competition
    GCI is moving steadily toward fulfillment of its plans to deploy 
full facilities-based competition through cable telephony. GCI is now 
testing IP-based cable telephony and has commenced service trials that 
will continue over the next several months. Cable telephony deployment 
will enable GCI to reach the majority of its local service customers 
entirely over its own facilities, and the ILEC has given GCI every 
incentive--from discrimination of its customers to seeking 
unprecedented relief from UNE loop unbundling obligations--to do so. 
The competitively neutral universal service policy in place today is 
the right approach, and it is the only approach that makes sense in a 
market where two facilities-based carriers provide functionally the 
same service.
    GCI believes that its continued strides toward full facilities-
based competition is just the type of competitive evolution that 
Congress expected when it passed the Telecommunications Act of 1996. 
\14\ Indeed, facilities-based competition is the very mechanism that 
will discipline universal service demand by reducing over time the 
make-whole subsidy that ILECs in competitive markets still expect to 
receive. In this regard, the competitive advancements in the Alaska 
market serve as a blueprint for the Nation and underscore that 
competition and universal service work in tandem to satisfy the goals 
of the Act. Competitively neutral universal service policies are 
essential to ensuring the development and delivery of services that are 
reasonable comparable in price and quality throughout all regions. 
Thus, the continued availability of universal service on a 
competitively neutral basis will ensure both the sustainability of the 
Fund and that the benefits of competition will be available for all 
consumers.
---------------------------------------------------------------------------
    \14\ See Attachment 2, ``GCI Proposal for Shared COLR and Pricing 
Flexibility in Competitive Local Markets.''
---------------------------------------------------------------------------
    Thank you for the opportunity to present GCI's views on this 
important issue.

                              Attachment 1
Competitively Neutral Universal Service Policies Must Be Preserved
    The FCC requires that competitive eligible telecommunications 
carriers (``CETCs'') are entitled to universal service high cost 
support on a per-line basis based on the incumbent local exchange 
carrier (``ILEC'') costs, up to the UNE price. This is a competitively 
neutral approach for issuing universal service to competitive carriers, 
consistent with the goals and purposes of the Act. It is clear that a 
level playing field can only be maintained if ILECs and CETCs have 
access to universal service support in the same amount for the same 
quality service. ILECs as a group, however, have attempted to tilt the 
playing field in their direction by seeking to deny USF support to 
CETCs.
    ACS, the Alaska ILEC, has raised similar arguments. ACS has claimed 
that CETC loop costs, measured by UNE rates, should be used to 
determine CETC high cost loop support. According to ACS, its monthly 
loop costs for Fairbanks are $33, and GCI's are $19.19, the UNE loop 
rate. Because high-cost loop support is paid for costs in excess of $23 
per month, ACS claims that GCI should receive no support for its 
Fairbanks customers. The FCC previously rejected the basis for ACS' 
discriminatory proposal in implementing Section 254 in order not to 
discourage competition in high cost areas, and ACS' latest efforts to 
change this policy must likewise be rejected.
    Using CETC costs as a separate basis for CETC high cost loop 
support would undermine positive competitive pressures. Calculating 
CETC support based on CETC costs while subsidizing the ILEC based on 
its embedded costs eliminates incentives to control costs and rewards 
inefficiency by giving the CETC the same inappropriate incentive to 
inflate costs that has existed for ILECs under rate base/rate-of-return 
regulation. If a CETC simply loses USF support when it cuts costs 
through efficiencies, the CETC has no incentive to implement such 
measures. Even worse, the system championed by ACS would destroy the 
appropriate price signals that drive competition and force 
competitors--CETCs and ILECs, alike--to strive to deliver the highest 
value product at the lowest price. In the end, the ACS plan would have 
American consumers--who ultimately pay for universal service--forego 
the opportunity for higher quality and lower priced service by 
disadvantaging competitive service, particularly in rural areas.
    Issuing support on differing cost bases would disrupt the 
competitive market environment. A high-cost subsidy should not 
eliminate the healthy competitive battle to reduce costs and be the 
most efficient provider. An essential element of any competitively 
neutral universal service support system is that support payments in 
the same market for the same service not differ based on the identity 
of the carrier providing the service. Further, under a system of uneven 
support where the ILEC is paid more than the CETC in the same market, 
the CETC would be required not only to be more efficient than the 
ILEC's costs, but also the ILEC's costs as reduced by the subsidy. This 
approach would tip the competitive balance in favor of the ILEC, while 
the current system maintains the competitive balance.
    ACS has mischaracterized GCI's loop costs. ACS' claim that GCI's 
loop cost consists solely of the $19.19 monthly UNE loop rate is not 
accurate. A CETC's costs do not consist solely of the price paid for 
ILEC UNE loops, even for those CETCs that rely extensively on UNE 
loops. For example: in Fairbanks, the ILEC UNE loop rate of $19.19 per 
month comprises only a portion of GCI's loop facilities and costs. GCI 
also provides facilities, including digital loop carriers, fiber 
terminals, DSX cross connects, cable and ducts. GCI estimates that 
these additional per line costs are more than $11 per month. Using an 
``apples to apples'' cost comparison, therefore, ACS' reported loop 
costs is $33 per month, and GCI's is about $30 per month. Moreover, GCI 
also provides service entirely with its own loops. ACS' narrow focus on 
UNE loop rates ignores these other costs of facilities-based 
competition.
    ILEC-reported embedded costs are not inherently ``real'' costs. ACS 
presents the embedded cost of a loop as carried on its regulatory books 
as ``actual'' costs, but these costs are not objective, unavoidable 
costs. These embedded book ``costs'' are a bookkeeping creation, grown 
out of years of State and Federal ratemaking decisions and ILEC 
investments in a rate base rate-of-return environment that provides 
little incentive for cost discipline. For example, in July 2002, ACS 
reported its average loop cost in Fairbanks to be $33.51, but just 
months later, in October 2002, that same loop cost was reported to be 
$29.50. The ACS loop cost has been a moving target.
                              Attachment 2
GCI Proposal for Shared COLR and Pricing Flexibility in Competitive 
        Local Markets
    GCI currently serves over 40 percent of the local market in 
Anchorage, Alaska. ACS, the incumbent local exchange carrier (ILEC), 
retains a monopoly over the loops that serve virtually all the 
customers in Anchorage. In accordance with these market conditions, GCI 
has submitted the following proposal to the Regulatory Commission of 
Alaska to revise local market regulations:
    Carrier of last resort responsibilities: A competitive local 
exchange carrier (CLEC) would be required to share in carrier of last 
resort (COLR) responsibilities when that competitor serves more than 35 
percent of the market over its own facilities and/or with UNEs obtained 
from the incumbent. Sharing COLR responsibility in some cases may 
involve the CLEC contributing capital to the ILEC to extend facilities 
or extending facilities itself to unserved areas such as a new 
subdivision. In addition, to the extent a CLEC contributes to COLR 
responsibilities, it would receive corresponding discounts or credits 
on UNEs purchased from the ILEC. This balanced approach toward shared 
carrier responsibilities demonstrates that the advancement of 
competition need not place with ILECs the sole obligation to bear COLR 
responsibilities.
    Reciprocal Unbundling: Once a CLEC is required to share COLR 
responsibilities, the CLEC will also provide reciprocal unbundling of 
its network to the ILEC at the UNE rates set by the state commission 
for the market. Telecommunications, by its very nature, requires 
continuing interconnectivity between providers. This continues to be 
true even when competition has fully matured in a market. Given this, 
it is in the public interest to require mutual interconnection and 
leasing obligations on all providers as competition progresses and 
matures, rather than eliminating ILEC obligations. GCI currently offers 
to ACS unbundled access to loop plant that GCI has installed, at the 
same rate at which GCI leases unbundled loops from ACS.
    Retail pricing flexibility: Retail rate flexibility (upward and 
downward) would be made available to any carrier that has a retail 
market share of less than 65 percent in a service area. This proposal 
would give ILECs in competitive retail markets greater flexibility to 
raise and lower rates, more quickly, with less regulatory burden. An 
ILEC that asserts a ``rural exemption'' from competition, however, 
would not be eligible for rate flexibility; by claiming exemption, the 
ILEC is challenging the very basis of the competition that supports the 
rate flexibility.
    Two conditions apply for retail pricing flexibility: (1) the rate 
for basic residential dialtone is capped at the existing level, with 
increases permitted only upon a showing of good cause; and (2) the 
state commission may disapprove rates that are not just and reasonable. 
In addition, rate flexibility would not be available for access, 
wholesale resale, or UNE markets, because the ILEC retains a monopoly 
in these wholesale markets that is not diminished by competition for 
local retail services. In Anchorage (as in other markets), CLECs are 
dependent on ACS for loops for the vast majority of customers. Without 
continued access to these loops, local exchange competition would 
virtually disappear.

    Senator Burns. Thank you for your testimony.
    We have, now, Jack Rhyner, of TelAlaska, out of Anchorage, 
and thank you for making the trip today. We appreciate that.

STATEMENT OF JACK H. RHYNER, PRESIDENT AND CEO, TelAlaska, INC.

    Mr. Rhyner. Good morning, and thank you for the opportunity 
to address the Committee.
    Mr. Chairman, if I could make only one point perfectly 
clear in my appearance before you today, it would be that there 
is a ``perfect storm'' gathering squarely in the path of the 
course we are on. If we do not quickly reverse course or, at 
the very least, change course, we will soon be in the eye of 
that storm with rural America isolated from the promise of the 
1996 Telecommunications Act. And I am not referring only to the 
promise of the same advanced services currently available to 
most urban customers, but to the continued provision of the 
most basic universal services.
    Congress gave equal weight to the two pillars of 
maintaining universal service and promoting competition in the 
Telecommunications Act. Yet, in practice, regulatory 
initiatives vigorously promote competition at the expense of 
universal service. We must begin to peel back the layers of 
regulatory fiat that threaten to unravel 67 years of history of 
universal service.
    One place to begin is with an understanding of the two 
needs that USF supports--cost recovery for the rural LEC to 
provide basic telephone service in high-cost areas, and funding 
for social subsidy programs that provide and enhance additional 
services.
    Universal Service Funding for rural LECs is not a subsidy; 
it is a cost-recovery mechanism. It is how the rural LEC 
recovers its actual cost of building and maintaining rural 
America's critical communications infrastructure. This part of 
the USF program is generally known as the high-cost fund.
    The other side of USF, social subsidy programs, provides 
Lifeline and Link Up connections to the economically 
disadvantaged and discounted access to schools, libraries, and 
rural healthcare.
    I point this out to try and restore a lost sense of 
proportion and priority. Throughout the process of implementing 
the 1996 Act, it has been the rural high-cost recovery 
mechanism that has been relegated to last place on the list of 
priorities. The social subsidy program of USF was fully funded. 
The non-rural high-cost support was fully funded. The funding 
for rural high-cost support has only been sufficient two of the 
last 8 years.
    Without an adequate cost-recovery mechanism, critical 
infrastructure for these important additional services would 
not exist. There would be no reliable Lifeline and Link Up 
connections, nor would there be connections to provide access 
to schools, libraries, and rural healthcare providers.
    I am very happy to hear that the Federal-State Joint Board 
on Universal Service is finally going to address the issue of a 
national standard for certifying ETCs. However, that same 
inquiry contains a whole list of proposals any number of which, 
if they were enacted, would provide less support to the rural 
LECs than they are currently getting under the Fund. Proponents 
of some of those proposals apparently overlooked the simple 
fact that the total amount of the high-cost fund is no more and 
no less than exactly what it costs to maintain the existing 
critical infrastructure.
    In conclusion, the base upon which USF contributions will 
be assessed must be expanded or the future of universal service 
in rural high-cost America is in real jeopardy. Simply by 
adhering to the intent of the 1996 Act and adding all 
telecommunications service providers who connect to and make 
substantial use of the public switched network, we could expand 
the base considerably.
    Congress should act to expand the base to more than $200 
billion by clarifying its original intent that all revenues, 
interstate and intrastate, should be assessed. This would also 
put an end to the ability of some carriers to arbitrage 
services between jurisdictions. And finally, the FCC should 
adopt a standardized set of minimum qualifications, 
requirements, and policies for State PUCs and the Federal 
commission to apply to potential and existing ETCs in rural 
service areas.
    Thank you.
    [The prepared statement of Mr. Rhyner follows:]

  Prepared Statement of Jack H. Rhyner, President and CEO, TelAlaska, 
                                  Inc.
Introduction
    Mr. Chairman, members of the Committee, my name is Jack Rhyner. I 
am the President and CEO of TelAlaska Inc. My company provides 
telecommunication services to some of the America's most remote rural 
locations, most of which are accessible only by air or water. Only 
three of the 25 rural communities we serve are on the road system. Our 
service areas range from above the Arctic Circle to well out into the 
Aleutian Islands, a distance roughly equivalent to that between San 
Francisco and Chicago.
    I have 36 years of experience in the provision of rural telephony 
and am the third generation of my family to be so involved. I am 
appearing before you today in my capacity as the Chairman of the 
Government Affairs Committee of the Alaska Telephone Association.
Opening Remarks
    Universal Service Funding (USF) is growing at an alarming rate. At 
the same time, a traditional source of funding is quickly evaporating, 
jeopardizing the integrity of a ubiquitous communications network upon 
which our Nation and her people critically depend.
    Congressional action must be taken quickly to stem a tide of 
devastating regulatory and legal decisions. Those decisions, coupled 
with changes in technology and new competitive initiatives, could leave 
remote rural Americans totally estranged from the great promise of a 
good life in this great country.
    Universal Service Funding (USF) springs from an assessment on 
revenues produced from the sale of interstate (long distance) services, 
a too-narrow and too-quickly-evaporating revenue stream.
    The Federal Communications Commission (FCC) has made rural local 
exchange carriers (RLECs) even more dependent on USF by acting 
adversely on controversial court rulings about what constitutes 
implicit support that should be made explicit by substituting universal 
service support for access charge cost recovery.
    State public utility commissions (PUCs) for the most part have done 
nothing but exacerbate the situation by failing to accurately assess 
the detrimental impacts to the public interest when granting eligible 
status to competitive local exchange carriers (CLECs) when such action 
produces relatively little compensating benefit.
    The results of these actions are clear: USF is growing at an 
alarming rate. We must make at least the cost recovery side of USF 
sufficient and predictable as required by the 1996 Act. The relentless 
over-burdening of any resource--or the failure to provide adequate 
maintenance of a public resource--is known to economists as the tragedy 
of the commons. Unrestrained freedom in the commons results in ruin. It 
is not difficult to postulate real disaster in the very near future if 
action to find solutions is not started today.
Cost Recovery Versus Subsidy Elements
    Congress gave equal weight to the two pillars of maintaining 
universal service and promoting competition in the Telecommunications 
Act. Yet, in practice, regulatory initiatives vigorously promote 
competition at the expense of universal service.
    We must begin to peel back the layers of regulatory fiat that 
threaten to unravel the 67-year history of universal service. One place 
to begin is with an understanding of the two areas of need that USF 
supports:

   cost recovery for RLECs to provide basic telephone service 
        in high cost areas, and

   funding for social subsidy programs that provide and enhance 
        additional telecommunications services.

Cost Recovery for Basic Telephony
    Universal Service Funding for the RLECs is not a subsidy. It is a 
cost recovery mechanism.
    USF has been broken into smaller small pieces and labeled with new 
names like high cost loop support (HCLS), long-term support (LTS), 
local switching support (LSS). Most recently added to the list is 
interstate common line support (ICLS), which is the transfer of what 
was the legitimate cost recovery from access charges to USF.
    Whatever the FCC calls it, it is only important to understand that, 
in total, this mechanism is how the RLECs recover the actual cost of 
building and maintaining rural America's critical communications 
infrastructure. This part of the current USF is more generally known as 
the high cost support side of the Fund.
Social Subsidy Programs
    The other side of the USF, the social subsidy programs, provides 
Lifeline and Link Up connections to the economically disadvantaged and 
discounted access to schools, libraries, and rural health care.
    I point this out to try to restore a lost sense of proportion and 
priority. Throughout the process of implementing the 1996 Act, it has 
been the rural high cost recovery mechanism that has been relegated to 
last place on the list of priorities.

   The social subsidy part of the USF was fully funded.

   The non-rural high cost support was fully funded.

   The funding for rural high cost support has only been 
        sufficient two of the last eight years.

    Without an adequate cost recovery mechanism, critical 
infrastructure for these important additional services would not exist. 
There would be no reliable Lifeline and Link Up connections nor would 
there be the connections that to provide the access to the schools, 
libraries, and rural health care providers.
New Proposals Worsen the Outlook
    Rather than seeking ways to insure that funding for the critical, 
underlying infrastructure in rural areas is sufficient, the Federal-
State Joint Board on USF is now seeking comment on a list of proposals 
that can only erode that support further. Proponents are apparently 
overlooking the simple fact that the total amount of the high cost fund 
is no more, and no less than exactly what it costs to maintain the 
existing critical infrastructure.
Contribution Methods
    Discussing contribution methodology without knowing key relevant 
factors is analogous to rearranging the deck chairs on the Titanic to 
stave off unforeseen disaster. Without knowing the size of the fund 
that must be supported or the base upon which the contribution will be 
assessed, it is impossible to test any methodology for long-term 
sufficiency and sustainability.
    Since the size of the Fund is controlled by legislative mandate, 
regulatory fiat, and the legal interpretation of both, we should first 
discuss the base that will be assessed.
Revenue Methodology
    The current methodology of assessing interstate revenues has been 
called into question because interstate revenue is in decline. There 
are a number of contributing factors to this decline:

   Arbitrage of jurisdictional separation by bundling local, 
        intrastate, and interstate services is probably the largest 
        contributor today.

    Virtually all of the major wireless carriers offer bundled local 
and national long distance services for one flat rate.

   While not nearly as extensive, the transitioning of services 
        to providers and technologies that are exempt from contributing 
        also is becoming an ever-increasing problem.

    An example of this would be the use of voice over Internet.
Congressional Clarification Would More than Double the Base
    All other factors aside it is the Circuit Court of Appeals' 
interpretation of the 1996 Act that limits the base of this methodology 
to only interstate revenues that is at the heart of its trouble.
    Congress could act to clarify the original intent of the 1996 Act 
that all revenues of any carrier providing interstate services should 
be assessed. This alone would increase the base from the mid-$70's to 
over $200 billion. It would end the ability of some carriers to escape 
contribution by arbitraging jurisdictional separation and it might well 
slow the growth of fund size, which I will address further on in my 
comments.

   The use of the FCC's discretionary authority to exempt 
        certain carriers that provide interstate services has played no 
        small part in limiting the size of the base that could be and 
        should be contributing to USF.
    Satellite, cable, some wireless and Internet service providers--
even though they make extensive use of the public switched network--
contribute nothing. These providers do not manipulate the content of 
the data they carry; they merely transmit interstate communication from 
one point to another. Therefore, they are not information service 
providers as defined in regulation. They are interstate 
telecommunication service providers. As such, they should be 
contributing to the Fund that sustains the network they extensively use 
to provide their services.
    Their contribution would be nothing more than the fulfillment of 
the 1996 Act's mandate that all providers of interstate services 
contribute on an equitable and nondiscriminatory basis. Whether using 
revenues or connections, this would be a sizable increase in the 
contribution base.
Connections Methodology
    As I have already tried to point out--as reflected in comments 
filed with the FCC by the Western Alliance (WA), Organization for the 
Promotion and Advancement of Small Telecommunications Companies 
(OPASTCO), National Telecommunications Cooperative Association (NTCA) 
and in Senator Stevens own remarks while addressing an NTCA meeting 
only last Tuesday--expanding the base of contributions is the real 
solution for a sustainable USF.
    Very simply stated, any provider that connects to the network 
should pay into the Fund that supports that network. Rather than fixing 
the underlying problems and expanding the base, the FCC is attempting 
to stabilize the base by choosing something to assess that is not 
declining. A severed artery cannot be healed with a compression 
bandage; it requires surgery to repair the damage. The number of 
connections--at least at this time--is still increasing. However, the 
growth rate of connections will in no way keep pace with the growth 
rate of the USF.
    Of the three connections-based methodologies that have been noticed 
for comment, the one that splits contribution responsibilities between 
providers of interstate transmission and switched access services 
(proposal #2) would seemingly attempt to comply with the 1996 Act's 
mandate of equitable and nondiscriminatory contribution. The assessment 
is based on a fairly nominal monthly flat rate for single line 
residential connections and a doubling of that rate for single line 
business and wireless connections to generate in total roughly 40 to 60 
percent of the total fund. The residual would be born by multiple line 
business and private line customers.
    It is the recovery of this residual that may have unintended 
consequences especially if the Fund--and therefore the assessment--
continue to grow. Sophisticated businesses will quickly realize that 
with up-to-date technology and connection through an exempt provider 
they can have a virtual private network and access to the rest of the 
public network without having to contribute. This inevitably results in 
yet another reduction in the contribution base.
Growth of the USF
Cost Shifting Impacts
    FCC decisions to resolve interstate access pricing have shifted the 
local exchange carriers' revenue requirement--and corresponding cost 
recovery--from access to the high cost side of the USF.

   CALLS and MAG initiatives have shifted more than $1 billion 
        from access to USF over the last two years. The second phase of 
        MAG will be implemented July 1, 2003 and another $450 million 
        will shift from access to USF.

    The FCC's staff report on alternative contribution methodologies 
factors in a growth rate of two percent per year and the second phase 
of MAG. However, what is not accounted for is the resolution of the 
intercarrier compensation issue.

   A bill and keep regime will shift an additional $.5 billion 
        to USF. States will not be able to maintain an access charge 
        system in the intrastate jurisdiction after the FCC has 
        determined to move to bill and keep in the interstate 
        jurisdiction.

   There is $1.5 billion that is recovered through intrastate 
        access. Some states may not have the ability to generate 
        sufficient state Universal Service Funds to recover all of this 
        revenue. Potentially, some of those $1.5 billion may have to be 
        recovered from the Federal USF. Thus, another $1 billion is 
        added to the size of the Fund--and maybe much more.
Portable Support Impact
    What is totally being left out of the equation is the growth in USF 
from wireless CLECs being made eligible telecommunications carriers 
(ETC) to receive portable USF. This part of the Fund is growing at an 
explosive rate of from $11 million in the first quarter 2002 to over 
$100 million in the first quarter of 2003.
    Most of these support funds are being paid to wireless carriers for 
large numbers of their existing low-cost customers.

   It is estimated that if all wireless providers were granted 
        ETC status nationwide it would increase the size of the Fund by 
        an additional $2 billion dollars.

    Continuation of this trend, in conjunction with the FCC's 
determination to make all interstate cost recovery explicit through 
USF, could drive the Fund to an unsustainable level.
    There's one more critical factor to consider. State PUCs were given 
the authority to grant ETC status in the 1996 Act. However, with that 
authority came the responsibility to make an affirmative finding that 
such a grant was indeed in the public interest.
    The public interest is a fairly nebulous concept in the absence of 
any definition contained in the Act. Such a determination of the public 
interest likely would at least contain:

   some sort of cost/benefit analysis,

   a structured, verifiable time line within which the CETC 
        will provide some new service, or expand its service coverage, 
        to all customers within a service area,

   and some objective, verifiable measurements to prove that 
        the funds are being used for the intended purpose.

    Left to discretionary interpretation, the vast majority of state 
PUCs--and the Wireline Competition Bureau, for that matter--has granted 
CETC status on little more justification than ``it furthered the goal 
of competition.''
    A serious investigation into the creation of uneconomic 
competition, supported by USF in the areas served by RLECs, would 
clearly show that it will not further the goal of universal service. 
The facts will show that the loss of even a small percentage of 
customer base may seriously impede the RLECs ability to continue to 
carry out their carrier of last resort responsibilities and may 
threaten their financial viability.
Conclusion
    The base upon which USF contributions will be assessed must be 
expanded or the future of universal service in rural high cost America 
is in real jeopardy. Simply by adhering to the intent of the 1996 Act 
and adding all telecommunications service providers who connect to and 
make substantial use of the network we could expand the base 
considerably.
    Congress should act to expand the base to more than $200 billion by 
clarifying its original intent that all revenues (interstate and 
intrastate) should be assessed. This would also put an end to the 
ability of some carriers to arbitrage services between jurisdictions.
    The FCC should adopt a standardized set of minimum qualifications, 
requirements, and policies for state PUCs and the Federal Commission to 
apply to potential and existing ETCs in rural service areas. I 
wholeheartedly endorse the proposed standards in the OPASTCO report 
Universal Service in Rural America: a Congressional Mandate at Risk.

    Senator Burns. Thank you very much. Those are interesting 
observations.
    I want to ask you about public-interest funding on the 
rural high-cost areas. You say that those dollars are just 
meant to maintain the infrastructure of those areas, is that 
correct?
    Mr. Rhyner. The total amount of the Fund----
    Senator Burns. Yes.
    Mr. Rhyner.--the high-cost fund, is based on the cost of 
the ILEC already having constructed the total network. The 
problem comes when you try and get that number down to an 
individual customer. What you are doing is taking the costs for 
a complete network, and then dividing the number of customers 
in that and calling that per-customer support. Well, even if 
you lose that customer, that does not mean you have lost the 
cost for maintaining that entire network. And the ILEC is the 
only carrier so far that has been designated as carrier of last 
resort. So even in the case where the customer substitutes a 
different service, the ILEC is still tasked with maintaining a 
network as the carrier of last resort.
    Senator Burns. Then how do we--in those high-cost areas, 
how do we foster competition if there is not portability?
    Mr. Rhyner. Well, I would agree with Bill Gillis, in that 
we have to take a look at what it is that you actually want to 
do. If you want to foster the competition, if we want to have 
two different networks out there in rural locations, then we 
have to be able to provide enough funding to pay for both of 
those networks.
    Senator Burns. Mr. Meade, you are saying that new 
technologies--fiber, wireless, broadband--all of these things, 
have come, and that sometimes your collections on universal 
service are necessary to make some of those things happen. Had 
it not been for competition, and you still collected universal 
service, would you have installed those new technologies, and 
when would they be deployed?
    Mr. Meade . If it were not for universal service, in 
certain areas we would not be----
    Senator Burns. Maybe I have misquoted you. I have a habit 
of doing that every now and again.
    Mr. Meade. Well, I am sorry if I was not clear, sir.
    Senator Burns. Yes.
    Mr. Meade. One of the arguments that we have faced 
repeatedly from our competitors is that competition will 
automatically lower the prices to the end user and look, see 
what happened before. And simply because they happened at the 
same time does not mean there was a cause and effect. But lower 
prices in toll, for example, from Alaska, or to and from 
Alaska, was the result of new technology, not just because 
competition was introduced, but because people from Intel to 
NASA to Bell Labs to JDS Uniphase were working feverishly to 
make things cheaper, faster, more compact. And while this 
happened at the same time and as a result of competition in the 
Lower 48, it was not competition, per se, that is going to 
drive prices down in Egegik, for example. There are places out 
there where it costs us $150 a month to provide local telephone 
service, and competition might drive prices toward cost, but 
out in Egegik, that is not a good thing.
    So my concern is that we had people confusing cause and 
effect. We would, indeed, try to deploy whatever the latest 
technology is, the most effective, most efficient technology, 
and that in turn will keep the size of the Fund down. But we do 
have investors, and we do have to recover the cost of providing 
service, and that means if we invest in a technology at a 
particular point in time, we have to try to get that back.
    Mr. Rhyner was telling me the other day that he has been 
trying to price DSLAMs, digital subscriber line access modules, 
to provide broadband to his customers. And a few years ago, the 
cheapest he could get to serve--what was it, eight to twelve 
customers, was $40,000. He believes he now has a vendor that 
will provide him that same module for about $2,000. It is not 
a----
    Senator Burns. Big difference.
    Mr. Meade.--it is not competition that is driving that 
down; it is technological development, economies of scale for 
manufacturers in the Lower 48 for technologies and services 
that have been taking hold in broadband.
    So I was simply trying to clarify what the cause and effect 
was on----
    Senator Burns. Well, I sort of----
    Mr. Meade.--cost drivers.
    Senator Burns.--I sort of looked at it as, you know, had it 
not been for competition or something to drive you to new 
services, new equipment, new way of doing things, that would 
not have happened had there not been some competition out 
there, because usually that is what causes us to make changes.
    Mr. Meade. Well, we have actually--I am almost reluctant to 
say this, but we have actually seen situations where it has 
been regulations and regulators who have prevented us from 
putting in new services.
    Senator Burns. Well, I think that is true. I would agree 
with some of that in some areas. But I also would agree that if 
there is robust competition out there in the marketplace, then 
even the universal service has a point of diminishing returns 
as far as the growth in the industry. You could also make that 
case in some instances.
    Mr. Meade. There are probably some areas of the country 
where that is true. I am not sure it is true in the extremely 
rural areas.
    Senator Burns. I do not think it is true in Alaska, and I 
know it is not true in Montana, but when you look at this 
theoretically, you know, in this town where we live, you know, 
it is 17 square miles of logic-free environment, we deal in 
theories here----
    [Laughter.]
    Senator Burns.--most of which do not work----
    [Laughter.]
    Senator Burns.--you know, when you get out on the ground. 
But, nonetheless, we deal in those.
    All your testimony will be made part of the record. I think 
the Alaskan situation is really a great example of why we have 
the Fund, the weaknesses of the Fund, and why it becomes also 
very important as a fund. And it may be, in the Alaskan 
example, where we find out answers to make sure that the Fund 
is healthy, viable, and does what it is supposed to do.
    I think there are some abuses in the Lower 48 that we have 
to take a look at. We are way out of whack as far as the 
intention of libraries and schools. I think some people have 
jumped on that thing and taken advantage of it, and there is 
terrible--I am hearing of terrible abuses. And we are going 
to--we may have to extend a hearing on that, but I am still 
going to stay with the idea that it is time that the three 
entities here--the legislature, the FCC, and the board of the 
Fund--should have some sort of a joint meeting and to come to 
some conclusion or at least identify the direction we should go 
to find a solution.
    Your testimony here is very important today, let me tell 
you that right now, because I think it is a prime example and 
an argument made for all the entities that are working in 
Alaska for us to take a look at and to absorb. And I know you 
will have more questions as we go back and forth and even in 
coming out of what we think this meeting is very, very 
important.
    So if you get a telephone call from some of us, why, we 
will be calling you and we want you to be very open, very 
frank, and very candid, as you have been here today, and I 
think we can find a solution to universal service. So that is 
what makes your contribution here very, very important today 
and one that I think will finally get us to--may take that 
giant step in finding a solution.
    So thank you very much for coming, and we are going to keep 
the record of this committee open for a couple of weeks for 
comments.
    On that, we are recessed.
    [Whereupon, at 11:50 a.m., the hearing was adjourned.]
                            A P P E N D I X

            Prepared Statement of Bruce Renard, President, 
                 American Public Communications Council
    The American Public Communications Council (``APCC'') is a national 
trade association of over 1,300 independent (i.e., non-telephone 
company) providers of payphone equipment, services and facilities. Of 
the approximately 1.8 million payphones currently deployed nationwide, 
approximately 500,000 payphones are operated by independent providers 
and the remaining 1.3 million payphones operated by the incumbent local 
telephone companies.
    This statement explains the role that public pay telephones have 
played in contributing to ``Universal Service'' and describes how the 
Federal Communications Commission's recent universal service assessment 
system proposals would adversely impact that role. This statement also 
offers thoughts on the future relationship between payphone service and 
the Universal Service Fund.
The Unique Role of Payphones in our Communications Network
    Payphone service is an ``on demand dial-tone/per use'' wireline, 
high-quality communications service readily available to all members of 
the public twenty-four hours a day, seven days a week, 365 days a year. 
Users are not required to make an initial investment in equipment, 
await activation of the service or pay recurring monthly charges. Any 
member of the public can place a call anywhere at any time. Users have 
the option of paying for calls with coins or by use of calling cards, 
prepaid cards or other access code arrangements.
    In many instances, payphones provide access to the communications 
network at no cost to the consumer. Emergency 911 calls are available 
at all the payphones in the country free of charge to the caller, 
around the clock. Users also can place calls using 800 and similar 
``toll free'' numbers at no charge to the caller at the payphone. These 
numbers provide a variety of services to callers including access to 
public services such as: Social Security; Women, Infants, and Children 
Nutrition (WIC) programs; the Internal Revenue Service; Veterans 
Benefits hotlines; and domestic violence hotlines. \1\ By providing all 
Americans, no matter what their income level, with readily available, 
affordable and reliable access to the telephone network, including free 
access to 911, 800 and other services, the public communications sector 
(also known as ``payphone service'') constitutes a vital contributor to 
universal service on a national scale.
---------------------------------------------------------------------------
    \1\ A recent study shows the large percentage of ``social service'' 
calling that takes place on payphones.
---------------------------------------------------------------------------
    As Congress recognized in mandating the FCC to encourage widespread 
deployment of payphone service, payphones are important to all 
Americans regardless of their income or where they reside. Users of 
wireless service need ready access to payphones when their wireless 
phones are out of a service area (such as in many rural areas), lose 
battery power or are not otherwise available for use. Additionally, the 
significant remaining percent of Americans that do not own wireless 
phones deserve readily available access to the communications network 
when outside their homes.
    Payphone users exist in every strata of society and in every 
neighborhood and region of the country. They rely on widespread access 
to payphones to meet both every day and critical needs. In addition, 
payphone service is vitally important to low income Americans, 
particularly the more than five and a half million without a home 
phone. Payphones are also critical in rural areas where a significant 
number of poor Americans lack basic home telephone service. Not only is 
the percentage of poor rural Americans without phones greater than in 
other areas but fewer citizens in rural America own wireless phones and 
wireless service is often not available in rural areas. Those without 
home or wireless phones need access to payphones not only in the 
communities in which they live but also in the many communities in 
which they commute to work each day.
    The value of readily available, reliable, high-quality public 
wireline service cannot be underestimated as the events of September 11 
clearly demonstrated. New Yorkers were lined up to access payphones 
when other forms of communication were unavailable. In these uncertain 
times, the public needs to know that in case of emergency whether 
local, regional or at the national level, they have access to 
dependable, reliable and readily available payphone lines through which 
they can contact their families, alert authorities, or access 
information.
The Current Situation: Decreasing Payphone Deployment
    Delays in resolving payphone revenue issues, such as the 
compensation payphone service providers receive for non-coin calls, and 
a range of regulatory uncertainties have resulted in significant 
erosion in the number of payphones deployed in the Nation. At the same 
time, the expansion of wireless services since 1998 has had a dramatic 
effect in reducing the overall volume of calls made at payphones. As 
call volume has declined, payphone service providers have been under 
pressure to remove payphones from locations where they still are needed 
by the public but may no longer attract a sufficient number of calls to 
offset costs. Payphones with as many as 250 to 350 calls per month have 
been, or are at high risk of being, removed from service as 
unprofitable. If a payphone with 250 calls a month is removed, callers 
must find some other way, or place, to connect to our communications 
network or must wait to make these calls. Unfortunately, this holds 
equally true for ordinary as well as emergency calls.
    According to data published by the Federal Communications 
Commission, between March 2000 and March 2001 the number of payphones 
in the U.S. decreased overall by approximately seven percent. While 
Commission data is unavailable for the period since 2001, data 
available from states that track payphone deployment indicates that the 
decline in payphone deployment is accelerating. For example, in 2002, 
West Virginia payphones decreased by about 11 percent compared with an 
8 percent decline in 2001, New Jersey had a decrease of 23 percent in 
2002 and California had a decline of about 10 percent. These figures 
comport with APCC's estimate that over half a million phones have been 
removed from service nationwide, in the past three years alone. And 
looking ahead, the announcement by BellSouth that it plans to exit the 
payphone market at the end of 2003, will almost certainly have an 
impact on the 145,000 payphones that it has previously operated 
throughout the southern United States. \2\
---------------------------------------------------------------------------
    \2\ If the FCC delays in responding to the petitions filed by 
independent PSPs and Regional Bell Operating Companies to update the 
current dial around rate, which was established based on a cost 
recovery model, that will result in a further decline in payphone 
deployment. These petitions, which use virtually the exact cost 
recovery methodology approved by the Court of Appeals, clearly identify 
that the existing rate is significantly below a reasonable and 
compensatory rate for these non-coin calls. While regulatory delays are 
problematic for all businesses, they are particularly difficult for the 
many small businesses that comprise a significant portion of the 
independent payphone service provider industry. These businesses run on 
small margins and dial-around compensation payments comprise a 
significant portion of their revenue.
---------------------------------------------------------------------------
Current Universal Service Fund Payphone Assessments and the FCC's 
        Proposed Connections-Based System
    Under the current revenue-based system, payphone service providers 
are assessed by the Universal Service Fund (USF) on the basis of their 
revenues from interstate coin calls. In addition they pay local 
exchange carriers a monthly USF surcharge. Although calling patterns 
vary from phone to phone, the average monthly payphone universal 
service assessment is approximately $.60 per month per payphone line 
($.50 for the local exchange carrier surcharge and $.10 for interstate 
coin calling). Moreover, PSPs have no rational way to pass through 
these assessments to customers. These assessments, contribute, on a 
percentage basis, a very small amount of support to the USF, but 
constitute a significant burden on payphone deployment and the unique 
form of universal service that payphones provide. PSP assessments, on 
both a direct and pass-through basis, contribute approximately $13 
million, or approximately two-tenths of one percent of the $6 billion 
USF. Importantly, payphones do generate substantial revenue for the 
IXCs, which are able to recover these costs from customers, and are 
then able to make significant contributions to the USF fund for dial 
around calls made from payphones. The net effect of payphone line 
assessments on PSPs is that universal service, in the broad sense of 
broad public access to the network for voice grade services, suffers 
more than it would benefit if payphones were not accessed.
    If, however, the Commission determines in their current rulemaking 
that payphone lines are to be assessed, the lines should be assessed a 
rate that reflects payphones' role as a ``lifeline service,'' the 
Congressional mandate for widespread deployment, and payphones' unique 
characteristics (e.g., a very small number of coin-paid interstate 
calls from which to recover universal service contributions, 
predominantly one-way outbound calls, and an access line that is shared 
by many public users). Just as the Commission has proposed a lower 
connection-based rate for pagers than for other categories of 
telecommunications services, so too should it establish a lower rate 
for payphone lines. Regardless of what long-term action the Commission 
adopts on universal service assessment methodology, the assessment 
rate, if any, for payphone lines should, at a maximum, be no higher 
than the current average level of payphone line assessments (i.e., no 
higher than a total assessment of $.60 per line per month).
    An FCC decision that could result in raising the rate paid by 
payphone service providers would greatly accelerate the removal of 
payphones. To help stabilize the deployment of payphones, the FCC can 
and should refrain altogether from burdening payphone service providers 
with these per-line charges.
Conclusion
    PSPs provide a readily available, reliable, low cost connection to 
the communications network. This is a valuable service that should be 
exempt from universal service fees. If the FCC decides not to exempt 
payphones, they should look carefully at any assessment levied. Any 
assessment that would increase costs beyond the current average $.60 
per line charge would by necessity be absorbed by these small 
businessmen who are unable to pass on these costs. At a time when 
consumers are already experiencing a diminution in services, any 
increase in costs would further accelerate the decline in available 
payphones. If fewer payphones are available to pay into the Fund, 
increasing the assessment would not ultimately meet the goal of 
increasing the size and viability of the USF. Universal Service ``on 
the street'' for our citizens will suffer measurably in both respects.

                                  
