[House Hearing, 109 Congress]
[From the U.S. Government Publishing Office]


 
  THE FUTURE OF RURAL TELECOMMUNICATIONS: IS UNIVERSAL SERVICE REFORM 
                                NEEDED?
=======================================================================

                                HEARING

                               before the

      SUBCOMMITTEE ON RURAL ENTERPRISES, AGRICULTURE & TECHNOLOGY

                                 of the

                      COMMITTEE ON SMALL BUSINESS
                        HOUSE OF REPRESENTATIVES

                       ONE HUNDRED NINTH CONGRESS

                             SECOND SESSION

                               __________

                      WASHINGTON, DC, MAY 3, 2006

                               __________

                           Serial No. 109-50

                               __________

         Printed for the use of the Committee on Small Business


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


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                      COMMITTEE ON SMALL BUSINESS

                 DONALD A. MANZULLO, Illinois, Chairman

ROSCOE BARTLETT, Maryland, Vice      NYDIA VELAZQUEZ, New York
Chairman                             JUANITA MILLENDER-McDONALD,
SUE KELLY, New York                    California
STEVE CHABOT, Ohio                   TOM UDALL, New Mexico
SAM GRAVES, Missouri                 DANIEL LIPINSKI, Illinois
TODD AKIN, Missouri                  ENI FALEOMAVAEGA, American Samoa
BILL SHUSTER, Pennsylvania           DONNA CHRISTENSEN, Virgin Islands
MARILYN MUSGRAVE, Colorado           DANNY DAVIS, Illinois
JEB BRADLEY, New Hampshire           ED CASE, Hawaii
STEVE KING, Iowa                     MADELEINE BORDALLO, Guam
THADDEUS McCOTTER, Michigan          RAUL GRIJALVA, Arizona
RIC KELLER, Florida                  MICHAEL MICHAUD, Maine
TED POE, Texas                       LINDA SANCHEZ, California
MICHAEL SODREL, Indiana              JOHN BARROW, Georgia
JEFF FORTENBERRY, Nebraska           MELISSA BEAN, Illinois
MICHAEL FITZPATRICK, Pennsylvania    GWEN MOORE, Wisconsin
LYNN WESTMORELAND, Georgia
LOUIE GOHMERT, Texas

                  J. Matthew Szymanski, Chief of Staff

          Phil Eskeland, Deputy Chief of Staff/Policy Director

                  Michael Day, Minority Staff Director

     SUBCOMMITTEE ON RURAL ENTERPRISES, AGRICULTURE AND TECHNOLOGY

SAM GRAVES, Missouri, Chairman       JOHN BARROW, Georgia
STEVE KING, Iowa                     TOM UDALL, New Mexico
ROSCOE BARTLETT, Maryland            MICHAEL MICHAUD, Maine
MICHAEL SODREL, Indiana              ED CASE, Hawaii
JEFF FORTENBERRY, Nebraska           RAUL GRIJALVA, Arizona
MARILYN MUSGRAVE, Colorado

                   Piper Largent, Professional Staff

                                  (ii)


                            C O N T E N T S

                              ----------                              

                               Witnesses

                                                                   Page
Terry, Honorable Lee (NE-2), Congressman, U.S. House of 
  Representatives................................................     3
Williams, Mr. Robert, OPASTCO, Owner, Oregon Farmers Mutual 
  Telephone Company..............................................     5
Johnson, Mr. Johnie, Chief Executive Officer/GM, Nex-Tech 
  Wireless.......................................................     7
Merlis, Mr. Edward, Senior Vice President, Government and 
  Regulatory Affairs, U.S. Telecom Association...................     9
Henagan, Mr. Raymond, CEO/Manager, Rock Port Telephone...........    11
Schulte, Mr. Don, Missouri NEA...................................    12
Black, Mr. Ed, President & CEO, Computer and Communications 
  Industry Association...........................................    14

                                Appendix

Opening statements:
    Graves, Hon. Sam.............................................    26
    Barrow, Hon. John............................................    28
Prepared statements:
    Williams, Mr. Robert, OPASTCO, Owner, Oregon Farmers Mutual 
      Telephone Company..........................................    30
    Johnson, Mr. Johnie, Chief Executive Officer/GM, Nex-Tech 
      Wireless...................................................    35
    Merlis, Mr. Edward, Senior Vice President, Government and 
      Regulatory Affairs, U.S. Telecom Association...............    49
    Henagan, Mr. Raymond, CEO/Manager, Rock Port Telephone.......    52
    Schulte, Mr. Don, Missouri NEA...............................    57
    Black, Mr. Ed, President & CEO, Computer and Communications 
      Industry Association.......................................    59

                                 (iii)
      



  THE FUTURE OF RURAL TELECOMMUNICATIONS: IS UNIVERSAL SERVICE REFORM 
                                NEEDED?

                              ----------                              


                         WEDNESDAY, MAY 3, 2006

                   House of Representatives
Subcommittee on Rural Enterprises, Agriculture and 
                                         Technology
                                Committee on Small Business
                                                     Washington, DC
    The Subcommittee met, pursuant to call, at 10:00 a.m., in 
Room 2360 Rayburn House Office Building, Hon. Sam Graves 
[Chairman of the Subcommittee] presiding.
    Present: Representatives Graves, Sodrel, and Barrow.
    Chairman. Graves. We will call this hearing to order. Good 
morning, everyone, and welcome to the Small Business 
Subcommittee on Rural Enterprises, Agriculture and Technology. 
Today we are going to be examining the sustainability of the 
Universal Service Fund and whether reform of this program is 
needed.
    The bedrock of rural telecommunications was a commitment by 
the federal government to provide universal service to all 
parts of America, including areas that are scarcely populated 
and expensive to serve.
    The ultimate goal of the Universal Service policy is to 
ensure that every citizen, regardless of location, has 
affordable high-quality access to the public telecommunications 
network. The government planned to accomplish this by enacting 
a cost recovery mechanism for providers that invested in 
network expansion in rural communities.
    In 1996, when our nation's telecommunication laws were 
overhauled, the Universal Service Fund was expanded to provide 
a cost recovery service to low-income families, rural 
hospitals, schools, and libraries. Providing service comparable 
to urban centers was a major objective of the program.
    For rural telecommunications companies, the Universal 
Service Fund support is a critical means of cost recovery, but, 
more importantly, it has afforded rural America the same 
technology and service as urban centers.
    Additionally, its contributions have helped ensure that 
schools and libraries have access to affordable 
telecommunications and information services. This allows our 
children in rural communities access to resources important to 
their education. It further encourages folks to stay in rural 
communities, further helping spur economic growth in these 
areas. That's very important.
    After a decade, Congress is again looking at rewriting the 
nation's telecommunications law. I think it is very appropriate 
to look at reforming the Universal Service Fund. New services 
have been introduced, including broadband and voice-over 
internet protocol. Broadening the base of contributors and 
encompassing new technologies is important to the long-term 
sustainability to the Universal Service Fund.
    My district is very much a rural district, and the 
Universal Service Fund is extremely important to so many of my 
constituents. I am going to work to ensure that all of our 
citizens have the same access to telecommunications options.
    I applaud Representative Terry for introducing his 
legislation, H.R. 5072, the Universal Service Reform Act of 
2006, and feel this discussion is important to have considering 
the recent developments on telecommunications matters.
    Hopefully, with continued conversations about the Universal 
Service Program, we can encourage others to take a closer look 
into this matter and help make the necessary reforms to 
continue its contributions in our rural communities.
    Now I am going to turn to Representative Barrows. I know he 
has an opening statement. And then we'll let Representative 
Terry give his testimony.
    [Chairman Graves' opening statement may be found in the 
appendix.]
    Mr. Barrow. Thank you, Mr. Chairman.
    It's critical folks in rural areas have full access to 
telecom services, and I'm glad and I appreciate your calling 
this hearing to make sure that these services are both fair and 
effective and can reach everybody that we serve.
    Americans need access to phone and internet services at an 
affordable rate, and this access needs to include both rural 
and urban areas. The Universal Service Fund has been critical 
in achieving these goals.
    Unfortunately, it appears that we've reached a point where 
the Universal Service Fund is paying out more than it's taking 
in. We need to make sure that the fund remains solvent and 
continues to allow rural telephone companies to do their job. 
The fund, the businesses, and the consumers are all critical 
factors in the continued economic development of America's 
rural areas.
    I want to thank all of the witnesses for coming in today. I 
want to apologize because I am not able to stay, but don't 
worry. We get to read all of your testimonies very carefully. 
And my staff makes sure that I do just that.
    Working together, we need to identify the problems and the 
solutions related to the Universal Service Fund and make sure 
that we're taking care of rural consumers without placing an 
unnecessary burden on the backs of small providers.
    Mr. Chairman, once again I thank you for calling this 
hearing. And I look forward to the results. Thank you.
    [Ranking Member Barrow's opening statement may be found in 
the appendix.]
    Chairman. Graves. Thanks, Mr. Barrow. All the statements of 
the witnesses and members will be placed in the record in their 
entirety.
    Representative Terry, glad you came over, looking forward 
to hearing about your legislation. Please go on.
    Mr. Terry. Thank you, Chairman Graves.

  STATEMENT OF THE HONORABLE LEE TERRY (NE-2), U.S. HOUSE OF 
                        REPRESENTATIVES

    Mr. Terry. I want to thank you for not only holding this 
hearing on universal service has been making me feel at home 
with the great Midwestern presence here. Ranking Member Barrow, 
I appreciate your interest in this bill.
    I will stick to the text, but I do want to say that the 
beauty of this reform bill is that it is a true bipartisan 
bill. Rick Boucher and I have worked on this bill for nearly 
two years. Rick has been involved in this for the last year, 
all the way from our meetings to the drafting and improvements. 
And so this is truly an example of bipartisan effort. In fact, 
in our Committee, it will be a great bipartisan bill, mostly 
breaking down on urban/rural more than Republican/Democrat.
    Now, nobody knows the importance of the Universal Service 
Fund better than those of us who represent rural America. Some 
of our colleagues believe that the marketplace will deliver new 
telecommunication technology to rural areas without the need of 
Universal Service Fund, but the Universal Service Fund is so 
important to the future of our rural districts and our states 
it is critical that Congress take the initiative and reform the 
current Universal Service Fund before rural America is left 
with no broadband deployment.
    Reform of the fund is necessary. And I have drafted along 
with Rick Boucher of Virginia H.R. 5072, the Universal Service 
Reform Act of 2006, that will guarantee the future of the 
Universal Service Fund while delivering more broadband services 
to rural America.
    America is in the midst of a technology transition that is 
critical to our nation staying competitive in a high-speed 
global economy. As telephony migrates to internet protocol and 
wireless systems, many areas of our country, especially in 
rural areas, could be left without access to new broadband 
technologies.
    The Universal Service Reform Act of 2006 will keep rural 
America competitive with the rest of the country, and it will 
meet the needs of our rapidly changing telecommunication 
environment. H.R.5072 is technology-neutral, which means it 
does not discriminate between platforms. It doesn't matter if 
you're using fiber, wire, or a digital internet platform.
    Being technologically neutral will ensure continued 
investment by all participants in the telecommunication 
infrastructure that will benefit rural America. What we say is 
if you are primarily voice, then you will pay into the system.
    This bill seeks to broaden the base of contributors to the 
fund and change the current system, where more providers are 
offering broadband services but not paying into the fund.
    This bill will make it explicit that if you provide access 
to the public switch, regardless of your technology, you will 
pay under the fund or if you offer a service in which voice is 
your primary component, you will pay into it. This is just 
simply a fair concept of if you're playing in the voice market, 
you will pay under universal service.
    Now, this failure to not broaden the base will lead to the 
eventual bankruptcy, as referenced by Ranking Member Barrow, of 
the fund and will create a technology gap across our country, 
making it impossible to complete a call or even deliver a data 
packet.
    These are just a few of the reasons why H.R. 5072 is 
necessary to restore the financial future of the Universal 
Service Fund. The legislation Mr. Boucher and I drafted 
provides fair remedies to the inequalities that now exist and 
will meet the challenges of today's new technologies.
    With the last few seconds, I have referenced broadband. 
What we do in this bill is not only reform Universal Service 
Fund to make sure that it survives in this new generation and 
new pressures but also explicitly say for the next five years 
that you can use your universal service dollars for the rollout 
of broadband in your area.
    Then after five years, it is actually a requirement. So 
this is how we get a ubiquitous rollout of broadband throughout 
rural America and all of America.
    With that, again I want to thank your Committee for looking 
into what I think is one of the crucial issues of how we are 
going to compete in a Twenty-First Century global economy.
    Chairman. Graves. What do you think the chances are that we 
are going to see comprehensive Universal Service Fund policy 
this year?
    Mr. Terry. Well, a couple of months ago I would have said 
it was near certain, but the reality in our Committee is that 
our chairman is looking in other directions right now and is 
not a supporter of Universal Service Fund. We will have 
hearings but no promises now of an actual markup.
    So we need to educate some of our members yet in how 
important Universal Service Fund is to rural America, that 
there isn't a competitive market yet that exists to the point 
that we can do away with Universal Service Fund.
    It is I think as relevant today as it was in 1930, in 1935. 
So, you know, we're continuing to pressure, and we will have 
hearings like you're holding.
    Chairman. Graves. Thank you, Mr. Terry. I appreciate it. We 
normally don't question members, but I appreciate that. And I 
appreciate you coming in. I know that I know what the 
ramifications are going to be for rural America if we don't do 
something, if we don't expand it.
    And you're right. It's just as important now as it ever 
was. And we're going to get left behind if we don't move 
forward. It's hard to keep up.
    Mr. Terry. Yes.
    Chairman. Graves. Thank you very much.
    Mr. Terry. Thank you.
    Chairman. Graves. We'll go ahead and seat the second panel. 
If everyone will come up and get started on that. And I will 
introduce everybody, and then we will get started.
    We have got a fantastic second panel and kind of looking at 
a broad range, obviously, of interests in the Universal Service 
Fund. For starters, we have Bob Williams, who is with the 
Oregon Farmers Mutual Telephone Company in Oregon, Missouri, 
which is in northwest Missouri; Johnie Johnson, who is with the 
Cellular Telecommunications Industry Association. He's the 
Chief Executive Officer from Hays, Kansas. Edward Merlis, US 
Telecom Association, Senior Vice President. He obviously does 
government and regulatory affairs here in Washington, D.C. Ray 
Henagan with the National Telecommunications Cooperative 
Association. He's also CEO and Manager of the Rock Port 
Telephone Company in Rock Port, Missouri. Don Schulte with the 
Missouri NEA from St. Louis, Missouri, obviously very 
interested in the educational aspects of the Universal Service 
Fund. Mr. Ed Black, President and CEO, Computer and 
Communications Industry Association here in Washington, D.C. 
Thank you all for being here, looking forward to this.
    Bob, we are going to start with you if that is all right. 
And what we will do is go through all of the witnesses, and 
then we'll have questions after that.
    The timer system, the way it works is it's five minutes on 
the testimony. There is a yellow light after one minute, but 
don't worry about that so much. If you have got something to 
say, I want you to say it. I don't pay a whole lot of attention 
to the lights.
    So we'll go ahead and start. Bob?
    Mr. Williams. Thank you, Chairman Graves--and Ranking 
Member Barrow is not here--and members of the Committee.

 STATEMENT OF ROBERT WILLIAMS, OREGON FARMERS MUTUAL TELEPHONE 
                            COMPANY

    Mr. Williams. I am Bob Williams, President of Oregon 
Farmers Mutual Telephone Company in Oregon, Missouri and Vice 
President of External Affairs for American Broadband of 
Charlotte, North Carolina. I am also the immediate past 
Chairman of the Organization for the Promotion and Advancement 
of Small Telecommunications Companies, OPASTCO. I am here today 
to testify today on behalf of the Coalition to Keep America 
Connected. I thank you for the opportunity to testify before 
you.
    The Coalition to Keep America Connected effort is organized 
by Independent Telecommunications and Telephone Alliance, the 
National Telecommunications Cooperative Association, the 
Western Telecommunications Alliance, and OPASTCO, whose 
memberships include more than 700 small and mid-sized 
communications companies. Together, these companies serve 
millions of consumers and 40 percent of the landmass across 
America. The coalition also includes a vast number of rural 
consumers, small businesses, and local policy-makers.
    The coalition's mission is to ensure that all consumers 
have access to affordable telecommunications services and the 
latest technologies, no matter where they live.
    We are guided by three main principles. They are: fairness, 
affordability and access. Fairness means that urban, suburban, 
and rural consumers alike deserve to stay connected to their 
families, friends, and the world through communications 
technologies. Affordability means that technology is only 
useful when it's affordable to consumers. Congress must ensure 
that all Americans can receive communications technologies at 
affordable prices. Lastly, access means that every American 
should have access to the latest modern technologies, no matter 
where they live.
    The Coalition has developed several universal service 
principles that we believe must be incorporated into universal 
service legislation. Those priorities are: the Universal 
Service Fund must continue to be an industry-funded mechanism 
and neither supported through general tax revenues--and I want 
to emphasize tax revenues--nor subjected to the federal Anti-
Deficiency Act.
    The base of contributors must be expanded to include all 
providers utilizing the underlying infrastructure, including 
but not limited to all providers of broadband connections and 
all providers of voice communications, regardless of the 
technology used.
    Support shall be made available for the cost recovery needs 
of carriers deploying broadband-capable infrastructure. The 
contribution methodology must be assessed on all revenues or a 
revenues hybrid that ensures equitable and nondiscriminatory 
participation.
    Support must be used to construct, support, and maintain 
networks to benefit all consumers and must not be a voucher, 
auction, or block grant-based. Support must be based upon a 
provider's actual cost of service. And support must not be used 
to artificially promote competition.
    The coalition is very pleased that Congressmen Lee Terry, 
who was just here, and Rick Boucher have taken such a 
bipartisan leadership role through their legislation, H.R. 
5072, which contains many provisions endorsed by the coalition 
that would modernize the highly successful Universal Service 
Program.
    In particular, the coalition supports the expansion of the 
pool of providers and services that pay into the fund. The bill 
would require all providers that use telephone numbers, IP 
addresses, or offer a network connection for a fee to the 
public to contribute to the fund. This is long overdue. Changes 
in technology have created loopholes that have allowed many new 
providers to evade contributing into the fund, even though they 
benefit from the resulting network upgrades and investment.
    Second, the coalition supports the provision to eliminate 
the Federal Communications rule that allows competitors to 
receive support based on the incumbent carrier's costs. 
Requiring all Universal Service Fund recipients to receive 
support based on their own costs will increase program 
accountability as well as reduce the demand for funds.
     Third, the bill would implement stricter ETC designation 
requirements, such as demonstrating the ability to remain 
functional in emergency situations, satisfying customer service 
quality standards, offering local usage comparable to other 
telecommunications service providers in that service territory, 
and meeting the newly required broadband speed requirements.
    The coalition, however, does not support the provisions 
contained in the Terry/Boucher bill that would cap the high-
cost Universal Fund. A cap by its very nature means a carrier 
will not receive the support it is due and thus is antithetical 
to the very goal of universal service and is a disincentive to 
network investment. The cap will inhibit the bill's goal of 100 
percent broadband deployment.
    We believe the principles discussed here go a long way 
towards meeting Congressmen Terry's and Boucher's goal of 
limiting growth in the Universal Service Fund and make the 
proposed caps unnecessary. But we also feel as though there is 
a way that we can work to maybe find a cap that is acceptable.
     The Coalition to Keep America Connected stands ready and 
committed to working with all of you on these issues so 
critical to rural consumers. Thank you for the opportunity to 
testify today. And I will be happy to address any questions.
    [Mr. Williams' testimony may be found in the appendix.]
    Chairman. Graves. Thank you, Mr. Williams.
    Mr. Johnson.

         STATEMENT OF JOHNIE JOHNSON, NEX-TECH WIRELESS

    Mr. Johnson. Good morning. I appreciate the fact, Chairman 
Graves and honorable Chairman Barrow, that I am here as a rural 
telecom provider and also a rural small business person that I 
am here today in front of the Small Business Committee talking 
about something that is very important to the long-term 
sustainability of our business.
    I am Johnie Johnson. I am CEO and General Manager of Nex-
Tech Wireless, which is a wireless service provider providing 
wireless coverage in rural Kansas. We're based in Hays, Kansas 
and owned by a group of independent local exchange carriers.
    Nex-Tech Wireless launched its wireless services in October 
2005 and now serves approximately 9,000 wireless customers 
throughout western and central Kansas and eastern Colorado. And 
we currently employ about 50 people in the central and western 
Kansas area. The vast majority of our service area is rural and 
very sparsely populated. Some of those cities included in that 
area are Hays; Hoxie, Kansas; Rexford; Colby; Victoria, just to 
name a few.
    In the Telecommunications Act of 1996, Congress recognized 
that the future of rural America depends largely on deployment 
of wireless telecommunications infrastructure that allows 
consumers to have choices in advanced services that are similar 
to those available in urban areas.
    By permitting wireless carriers to access Universal Service 
Funding to construct network infrastructure in areas that would 
not otherwise support the investment, Congress has opened the 
door to rural consumers having the health, safety, and economic 
development opportunities that are critical to bridge the 
technology gap between urban and rural America.
    As a member of CTIA and the Rural Cellular Association, we 
welcome the opportunity to provide comments on the draft bill 
by Congressmen Lee Terry and Rick Boucher. This testimony will 
examine the current USF system and explore ways in which it can 
be improved. In particular, Nex-Tech Wireless' ability to 
participate in the Universal Service Fund high-cost program 
will bring overwhelming benefits to the rural residents we 
serve. My testimony today will highlight some of those 
benefits, dispel some of the outstanding myths concerning the 
USF high-cost fund, and make policy recommendations about 
universal service we believe will benefit rural communities.
    One point is under the current system, rural wireless 
consumers who contribute to the fund are not seeing the 
benefits that they want and they deserve. Wireless consumers 
now contribute roughly $2.5 billion per year to the federal 
universal service system, or 34 percent of the total fund. 
Wireless carriers that are designated as competitive eligible 
telecommunications carriers, or CETCs, have drawn approximately 
$1 billion in aggregate since 1996.
    Incumbent local exchange carriers, ILECs, draw roughly $3 
billion per year, or roughly 50 percent of the total fund, to 
maintain networks that are not growing. In the aggregate, we 
believe that the consumers have spent roughly $19 billion since 
1996 to subsidize high cost support to wireline networks. 
Consumers served by rural wire line carriers pay in only 3.8 
percent of the total fund.
    Bottom line, Congress must make it a priority to provide 
federal high-cost support to fund wireless infrastructure 
development for rural consumers who desperately want high-
quality networks. The health, safety, and economic development 
benefits that flow from investing in mobile wireless 
communications infrastructure are precisely what universal 
service should be funding in rural America. Wireless is truly 
the answer, not the problem.
    CETCs are demonstrating to the states that support is being 
used to build infrastructure in areas that would not otherwise 
see investment. Anybody who uses a wireless phone services in 
rural America understands the huge difference in service 
availability and service quality compared in urban areas.
    I know many of you as you are out visiting your 
constituents, you like the convenience of your Blackberry and 
having mobile access to your internet and staying in contact 
with your offices. And you understand that a lot of rural areas 
that, Chairman Graves, you serve don't have that same luxury as 
you would have here in D.C. or St. Louis or Kansas City. With 
the Universal Service Fund, we are able to bring that 
technology out to the far most rural areas.
    CTIA and RCA members understand how important it is for 
consumers to have access to mobile wireless services. CTIA 
members and RCA members have constructed new cell sites serving 
under-served and unserved communities in their ETC service 
areas that would not have been constructed without support.
    Nex-Tech Wireless is a great example of that. We are a 
green field bill. As I mentioned earlier, we launched our 
company October of this past year and have approximately 9,000 
total subscribers in just a short 6-month time frame.
    The vast majority of our states now require CETCs to report 
how support is being used. Vermont, West Virginia, and now 
Minnesota provide good examples of states that have gotten the 
reporting requirement right.
    Bottom line is wireless carriers are demonstrating that 
their support is being used to drive infrastructure investments 
in rural areas that would not otherwise receive such 
investment. Again, wireless is the answer, not the problem.
    The third point, the current system of providing support 
requires wireless carriers to make efficient investments. 
Wireless carriers can only get support after two factors: one, 
we build facilities; and, number two, we get customers. 
Wireless carriers are not guaranteed a return. So if we make a 
poor investment and only get a few customers, we are punished.
    Support to wireless carriers in all areas is currently 
capped by the number of available customers in a particular 
area. In states like Washington that have targeted support to 
rural areas, several wireless carriers are fighting for a 
limited pool of support dollars in rural wire centers but 
receive no support for serving urban wire centers.
    The bottom line is wireless carriers are concerned that all 
carriers be accountable. Moreover, consumers should only 
subsidize efficient investments. Again, wireless is the answer, 
not the problem.
    Our last and final point is consumers are increasingly 
demanding wireless services and deserve access to the services 
they have paid for. In 2006, businesses will spend more on 
wireless services than on other wire line according to a study 
released in January by In-Stat. It is estimated that the demand 
for wireless data will grow at an average of 18 percent per 
year through 2009.
    The bottom line is Congress should consider policies that 
guarantee rural communities keep pace with urban areas in the 
technology race, much like the example I gave with the 
Blackberry, being able to use that in the rural areas. Again, 
wireless is the answer, not the problem.
    That concludes my testimony. I would be happy to take any 
questions.
    [Mr. Johnson's testimony may be found in the appendix.]
    Chairman. Graves. Thanks, Mr. Johnson.
    Mr. Merlis.
    Mr. Merlis. Thank you, Mr. Chairman.

      STATEMENT OF EDWARD MERLIS, U.S. TELECOM ASSOCIATION

    Mr. Merlis. I am Edward Merlis, Senior Vice President, 
Government and Regulatory Affairs, of the United States Telecom 
Association. On behalf of our more than 1,200 innovative member 
companies, ranging from the smallest rural telecoms to some of 
the largest corporations in the U.S. economy, I want to thank 
you for this opportunity to discuss the need for universal 
service reform.
    Our member companies offer a wide range of services across 
the communications landscape, including voice, video, and data 
over local exchange, long distance, wireless internet, and 
cable networks. We are united in our belief that it is time to 
update the nation's communications laws to reflect the dramatic 
technological and marketplace changes all consumers have 
witnessed in recent years.
    In late 2004, our board unanimously adopted twin principles 
that we believe should serve as the foundation for updating our 
nation's telecom laws: one, ensuring a strong and sustainable 
universal service system to provide affordable, reliable 
telecommunications for all Americans in the Twenty-First 
Century; and, two, establishing consumer-controlled, market-
based competitive environment by eliminating government-managed 
competition.
    The current universal service funding system is eroding at 
a rapid pace and must be reformed. These key steps will help 
strengthen and preserve universal service: broaden the base of 
contributors; target recipients carefully; and provide 
universal service support to networks in order to speed 
broadband deployment, without placing an undue burden on fund 
contributors.
    In your letter of invitation, you asked that we comment on 
several questions addressed in legislation recently introduced 
by Representatives Terry and Boucher. And I am pleased to do 
so.
    First let me say that USTelecom applauds the comprehensive 
approach to universal service taken in H.R. 5072. On the 
contributions side of the ledger, the bill has sound policies 
that should improve the stability of universal service funds 
by: assessing intrastate revenues; allowing the FCC flexibility 
to assess numbers, revenues, or both; assessing VoIP; and 
assessing broadband.
    Broadening the base of contributors to include intrastate 
services, cable modem, and VoIP will help to ensure that 
Universal Service Funds are available to meet the important 
goal of making voice service available to all Americans.
    On the distribution side of the ledger, the bill takes a 
number of prudent steps to ensure universal service support is 
better targeted. These include: utilizing actual costs as the 
basis for universal service support; increasing support for 
high cost areas for non-rural companies; imposing greater 
accountability for use of funds; making broadband eligible for 
Universal Service Funds; and requiring communications providers 
that originate traffic to provide sufficient identification in 
order to stop phantom traffic.
    The bill also fixes a problem with the application of the 
Anti-Deficiency Act. Another provision that should be of 
particular interest to this Committee would prohibit the FCC 
from restricting universal service support to a single, primary 
connection to the public telephone network.
    Our companies construct and maintain networks in some of 
the most expensive service areas in the country, characterized 
by low population densities and difficult terrain. A primary 
line restriction would undermine their ability to sustain and 
to modernize these communication networks. And the cost of 
doing business in those areas would skyrocket, particularly for 
small businesses.
    Mr. Chairman, we believe offering video over our broadband 
networks will be a key driver for broadband deployment across 
the nation. As local telecom companies deploy video services, 
broadband penetration rates will grow and, thus, provide the 
benefits of broadband deployment to ever-increasing numbers of 
citizens and small businesses across the country.
    That is why USTelecom is committed to establishing a 
consumer-controlled competitive marketplace for video and 
eliminating unnecessary and burdensome government barriers to 
advanced services.
    As Congress moves toward updating our nation's telecom 
laws, no segment of our country has more to gain and more at 
stake in this debate than rural America. It is critical that we 
have policies that encourage investment and head-to-head 
competition throughout the country, policies that speed new 
services, choices, and value to consumers while upholding vital 
social objectives that remain important to the nation, chief 
among them our commitment to ensuring affordable, reliable 
access to a dial tone for all Americans, an objective that is 
met through a sustainable universal service program.
    Again, Mr. Chairman, thank you for the opportunity to 
appear today. I would be pleased to respond to any questions 
you may have.
    [Mr. Merlis' testimony may be found in the appendix.]
    Chairman. Graves. Thank you, Mr. Merlis.
    Raymond Henagan. Thanks, Ray, for coming in.
    Mr. Henagan. Thank you, Mr. Chairman.

       STATEMENT OF RAYMOND HENAGAN, ROCK PORT TELEPHONE

    Mr. Henagan. Good morning. I am Raymond Henagan, CEO and 
Manager of Rock Port Telephone Company in Rock Port, Missouri. 
I am here today to testify on behalf of the National 
Telecommunications Cooperative Association. We thank you for 
this opportunity to testify.
    Rock Port Telephone serves three exchanges in northwest 
Missouri, 189 square miles. It's 1,823 access lines, or about 
9.6 customers per square mile. In 2005, we lost over 7 percent 
of our access lines. This is the first time in the history of 
Rock Port our local service actually went down this much. We 
have been losing access lines but not at the rate of seven 
percent. In contrast, to Washington, D.C., there are 
approximately 16,000 access lines per square mile. There are 
vast differences between the numbers of subscriber that we 
service.
    Rock Port Telephone is a full-service provider. We provide 
local, long distance, dial-up, and broadband internet. I am 
proud to say that as of the end of 2005, we serve 72 percent of 
our territory with the DSL services.
    Mr. Chairman, to answer your question directly, we believe 
universal service needs to be reformed. There are many elements 
in the H.R. 5072, the Universal Service Reform Act of 2006, 
that are the exact steps that need to be taken to ensure the 
sustainability of the critical fund.
    Let me take a moment to mention some of the most critical 
elements that the policy-makers must keep in mind to reform the 
Universal Service Fund. The Universal Service Fund to 
construct, maintain, and upgrade the network to benefit all 
consumers.
    In the infancy structure of telecommunication that larger 
companies decided they didn't want to serve the partially 
populated areas, the rugged terrain, they went ahead and served 
only the larger. It left the rural companies or the independent 
companies to serve out there in the high-cost areas.
    Universal service was set up to help us serve these areas. 
And we have built networks out there today to sustain that and 
give them good voice-grade services.
    The second thing is the base of the contributors must be 
expanded to include all providers who benefit from the network. 
Broadening the base of contributors to include all 
communications providers is vitally important to sustainability 
of the Universal Service Fund. The Universal Service Fund is 
wholly funded through the telecommunications industry. No 
federal appropriated money is used in this.
    All service providers must benefit from the robust national 
network infrastructure. The current structure of the Universal 
Service Fund enabled us to achieve an impressive 94 percent 
penetration rate as of today. In order to achieve those same 
penetration rates with broadband or for whatever new technology 
will be offered after broadband, we need to modify the existing 
regime to broaden the base and expand the fund to include 
broadband services. Support must be based upon the provider's 
actual cost and not to be used to artificially incite 
competition.
    Requiring all Universal Service Fund recipients to receive 
support based on their actual costs will increase the program's 
accountability. Rock Port, as small as we are, we pay into the 
fund. Everybody that is using the service should pay into the 
fund.
    Additionally, many rural areas in our nation can't support 
more than one gas station, grocery store, or other commodities, 
let alone multiple communications providers out there.
    The Universal Service Fund must not be capped. 
Unfortunately, this is something that is not in the House 5072. 
We believe that is very vital and very important on that.
    Again, I would like to restate my support and NTCA's 
support for the Terry/Boucher bill. We believe it is an 
excellent start to reform our nation's universal service 
policy. We very much agree with many of the provisions in the 
bill, such as: expanding the scope of the Universal Service 
Fund to include broadband, broadening the base of contributors 
to the fund, tightening up the ETC status process, eliminating 
the identical support rule, permanently exempting the fund from 
the Anti-Deficiency Act, and eliminating the parent trap rule. 
We would like to work with the Representatives Terry and 
Boucher and members of the Committee to remove the cap on the 
fund.
    Thank you again for allowing me to testify.
    [Mr. Henagan's testimony may be found in the appendix.]
    Chairman. Graves. Thank you, Mr. Henagan.
    Don Schulte.

             STATEMENT OF DON SCHULTE, MISSOURI NEA

    Mr. Schulte. Good Morning, Chairman Graves. Thank you and 
the other members of the Subcommittee for allowing me to 
testify today about the benefits of the e-rate program and the 
need to ensure that it remains vital and stable.
    My name is Don Schulte. I am currently a high school social 
studies teacher at Pattonville High School in Maryland Heights, 
Missouri. I have been a teacher for 19 years. And in that time, 
I've seen enormous changes in the technology infrastructure of 
our schools and the ways in which we use technology to teach, 
enhance curriculum offerings, strengthen parental involvement, 
and improve administrative efficiency.
    Back in the dim ages, when I began teaching, there was not 
a single computer lab in the school. In 1992, we established 
our first lab with 12 computers. The students had to sit two 
students per computer, two students per computer. There was one 
AOL account that I could use to show students what the internet 
looked like.
    Now every classroom has at least one computer in it, and 
every computer is wired to the internet. We have five computer 
labs for technology-related courses. More and more content is 
Web-based these days, which makes the maintenance of 
connectivity not a luxury but a necessity in today's schools.
    Thankfully, we are beginning to see more and more textbooks 
placed online. This helps combat a significant trend of back 
and hip injuries in our young people caused by carrying 
overweight backpacks full of books. My students have offered, 
by the way, not to carry those books. Anyway, that's different. 
We incorporate internet-based research skills into our lesson 
plans and homework assignments.
    My school district is a suburban district with many course 
offerings. However, there are places in our state, in Missouri, 
that can only, only, offer a rich, well-rounded curriculum by 
using distance learning and internet connectivity. In fact, one 
of the first distance learning courses I remember was a 
Japanese course being offered online.
    Currently, for instance, there are four school districts in 
southwest Missouri can only offer physics via distance 
learning. With the recent push in the business community and by 
the administration to place more emphasis on math and science, 
this simply will not be possible in many rural areas without 
internet connectivity. And I know that this is typical of rural 
areas across Missouri and across the country.
    Parents have more ways to get involved in their children's 
education due to the e-rate program and what it has allowed our 
school districts to do. For instance, in Pattonville, parents 
can log onto a secure database to check their children's grades 
on assignments, check whether they attended a class, check 
whether they turned in their homework, and what the current 
class assignments are.
    Routine, administrative functions are also made more 
efficient by the power of the e-rate program. Library card 
catalogs are now all electronic, as is the rest of the 
inventory of the library. So I can sit in my classroom and find 
out whether a particular book or resource material is currently 
in the library or whether it's been checked out.
    My school district receives roughly $71,000 per year in e-
rate funds. These funds help us pay for our T-1 lines, our 
emergency and alarm lines, and our long distance. Our 
superintendent's office indicates that without the e-rate 
funds, we would also likely loose access to library and media 
services offered through a company called MoreNet.
    Given the importance of this funding, I am concerned, 
however, about the viability of the Universal Service Fund, 
which funds the e-rate program. As you know, the 
Telecommunications Act of 1996 requires traditional long-
distance carriers to pay into the fund. But as other types of 
service increases, such as wireless and voice-over internet 
protocol, the stability and long-term viability of the fund is 
jeopardized.
    That's why I along with the 2.8 million members of the 
National Education Association, support the Terry-Boucher bill, 
H.R. 5072, to ensure that e-rate funding continues to flow to 
schools and libraries across the country.
    As I have indicated, internet connectivity is no longer a 
luxury. It is an absolute necessity if we're going to 
adequately prepare our young people to compete in the Twenty-
First Century workforce.
    Thank you very much for allowing me to provide an 
educator's viewpoint today.
    [Mr. Schulte's testimony may be found in the appendix.]
    Chairman. Graves. Thanks, Mr. Schulte.
    Mr. Black.

  STATEMENT OF ED BLACK, COMPUTER AND COMMUNICATIONS INDUSTRY 
                          ASSOCIATION

    Mr. Black. Good morning, Chairman Graves, members of the 
Subcommittee. I am pleased to come before you today to discuss 
the pressing issue of universal service reform and Congressmen 
Terry's and Boucher's Universal Service Reform Act of 2006.
    I am President and CEO of the Computer and Communications 
Industry Association. We're an association that represents a 
very wide range of hardware, software services, computer, 
telecom, internet companies, total revenues about $250 billion. 
So while we're involved in the building process, we're usually 
involved in the use of broadband in this country as well.
    The century-old concept of universal service reflects a 
very noble and economically legitimate goal of promoting 
ubiquitous access to affordable communication service for all 
Americans, regardless of their geographic location. This 
commitment helped establish a communications network on which a 
social and economic fabric of the Twentieth Century was know.
    However, in the Twenty-First Century, we're now witnessing 
increasingly swift and exciting changes in the technology of 
communications. The '96 Telecommunications Act sought to 
codify, preserve, and expand universal service. However, 
technological convergence has shattered the underlying 
assumptions of the act. Cable companies now offer voice. Phone 
companies are ready to roll out video services.
    The telecommunications landscape has been dramatically 
altered, but the Universal Service Fund has not been changed. 
It has not adapted to encourage the more efficient, higher-
quality technologies that could provide an exciting array of 
new services. It remains, instead, focused on promoting old 
copper wire telephone networks.
    Traditional telecommunications services are migrating from 
old circuit switch networks to new and advanced internet 
protocol networks. This new technology can reduce the cost of 
providing services, especially in high-cost areas, and provide 
more advanced services, such as high-speed internet access. 
Access to advanced information services is essential for 
sustained economic development.
    A small business in rural Missouri, Georgia, Oklahoma, or 
Alaska with access to a reliable high-speed internet connection 
can market and distribute their products globally as easily as 
a competitor in a large city.
    The industrial revolution concentrated economic growth and 
expansion in large urban areas, but the information revolution 
makes physical location much less relevant. A correctly 
reformed Universal Service Program can help usher in a new age 
of prosperity and growth for small businesses everywhere, 
especially rural America.
    Universal service reform proposals tend to fall into two 
camps. One side sees universal service as a legacy system whose 
time has passed and seeks to gradually reduce the size and 
scope of the fund over time with an ultimate goal of its 
eventual termination. The other wishes to expand contribution 
base to a variety of new way communication services and provide 
new subsidies targeted at advanced services.
    We believe we can both modernize the distribution mechanism 
and subsidize new technologies, not legacy ones, while 
carefully expanding the contribution base in a completely 
neutral manner while limiting the unchecked growth of the fund.
    The perverse market distortions created by the current fund 
need to be corrected. Universal Service Funds were designed to 
support basic telephone service provided over a twisted-pair 
networks and exclude advanced services and networks, such as 
fiber optics and broadband internet access.
    For decades, well over 90 percent of U.S. households have 
had basic telephone service. Thus, the fundamental goal of 
basic service has been met and been met for a while. Only about 
20 percent of U.S. households, however, have broadband internet 
access. And the U.S. ranks about 12th or lower in the world in 
terms of broadband penetration.
    To the extent the USF funds can be applied to support the 
development of rural broadband services, they are poorly 
targeted and inefficient. Many rural carriers actually realize 
a reduction in USF funding when their customers take broadband 
service. USF subsidies have lost their focus and have been 
morphed into a set of entitlement payments to a large or to a 
small group of largely rural income and telephone companies.
    The application of other USF funds has created certain 
bizarre market distortions, one we call the Vail effect, where 
the largest portion of USF subsidies service the high-cost, 
typically rural areas. This means towns such as Vail, with very 
high real estate prices and some of our wealthiest citizens, is 
subsidized at the same rate as a poor Appalachian community or 
poor rural farm towns in Kansas.
    We have also seen what we call the Nevada effect, in which 
the high-cost support funds are distributed according to total 
population on a statewide basis. So for a state like Nevada, 
which is extremely rural in most of its area but has two large 
urban areas, the statewide averaging means little or no support 
is assigned. As a result, a rancher in a very rural part of 
Arizona or other state would not be subsidized by USF but in 
the same type of geographic area in Montana would be.
    We strongly applauds Congressmen Terry's and Boucher's 
legislation. It's a comprehensive bill designed to reform USF. 
Specifically, it updates the fund to promote broadband 
services, attempts to cap the fund to at least limit unchecked 
growth, and imposes a greater accountability for the use of 
fund monies. As the House moves forward in crafting the 
universal service reform, this bill could serve as a good 
framework for more extensive reform.
    We do have a few specific concerns I would want to mention. 
One, the current fund is running a $700 million surplus from 
2004. Any metric used to cap the fund should employ the amount 
of funds used in the previous year, not funds collected.
    An eligible telecommunications carrier can only be a 
carrier that uses its own facilities. The vast majority of 
support from the fund will, therefore, be directed only at 
ILECs. We think some flexibility to experiment with other 
distribution mechanisms is worth doing at the state level.
    We need information on the costs of building and 
maintaining a network in order to curb the growth of the fund 
and target the funds properly. That information for anyone who 
cares about efficient government spending is essential. And, 
yet, we don't have any requirement to gather that kind of 
information right now.
    Finally, the targeting in the bill by wire centers is a 
very good approach to dealing with what we call the Nevada 
effect, but the Vail effect still is not actually addressed 
adequately in the bill. And we think you need to add, in 
addition to the wire center approach, some kind of a means 
test.
    In conclusion, we want to stress that we care deeply about 
the important issues of communications ubiquity and economic 
competitiveness, both domestically and internationally, but 
unless restructured in the new context of today's rapidly 
evolving telecommunications and technology markets, universal 
service in America threatens to retard the very objectives it 
has traditionally served. We think correcting the disconnect 
between universal service policy and economic imperative to 
create a ubiquitous American broadband infrastructure is a 
major policy and legislative challenge that we cannot afford to 
not meet.
    Thank you very much for the chance to testify and for your 
leadership in this area.
    [Mr. Black's testimony may be found in the appendix.]
    Chairman. Graves. Thank you.
    I've heard mention the cap now three times, Mr. Williams, 
Mr. Henagan, and Mr. Black. You have all mentioned it. Can you 
talk to me a little bit more about that? You mentioned the cap 
is obviously designed to keep the fund from growing too much, 
but we also had testimony about removing the cap. In fact, Mr. 
Williams said we might be able to find a cap that is 
accessible. Could you explain that a little bit more and what 
would be acceptable?
    Mr. Williams. Let me take a shot at that. And I think what 
I said was that the cap is antithetical to the scope of the 
bill that says we want to get a ubiquitous broadband network 
out there. And if there's a cap on the fund, there may not be 
enough dollars there to get the broadband network out there.
    What I was referring to--and we have been working with 
Congressman Terry and Congressman Boucher trying to come up 
with some type of a cap that understanding that due to the 
politics involved, there may need to be a cap in whatever the 
House comes up with because of Chairman Bardin's opposition to 
USF.
    And a couple of things we thought about as the fund, 
Universal Service Fund, as you know, now is capped. And as 
costs have grown and in some cases in the base of people 
receiving those monies has expanded companies are no longer 
receiving their actual costs based on that they should be 
receiving because of the cap. So, in other words, in some 
cases, the monies they're receiving have been going down, maybe 
a reindexing of the fund to make sure that everyone is 
receiving the dollars that they should be, including the CETCs.
    The wireless carriers, et cetera, who are in the fund, as I 
said in my testimony, if they receive dollars based on their 
own costs--and I think we can go along with that.
    So that is just a couple of the ideas that we had when we 
were talking about it.
    Mr. Henagan. What I was talking about was capping of the 
fund. I believe that if we take the right accountability of the 
fund today, it will seek its own level. If everybody reports on 
their own cost and we have some type of accountability of it, 
it will have adequate costs into the fund without a cap on it.
    Mr. Black. I guess I would point out that the percentage, 
if you will, the fund is, in essence, a tax on providers. It 
has gone from its inception, I think, of about 4 percent up to 
about 12 percent. And some people are predicting that it may go 
in a few years up to about 17 percent of revenues of people 
inputting.
    We want the fund. We want it to be used. We want it to be 
directed properly. But it is dangerous to have something which 
is just always expanding and taking more. The 
telecommunications industry at this point is at least close to 
being, if not the most, tax segment of the economy. And, yet, 
it has such dynamic potential.
    So we're nervous about we're much better when we put good 
cost accounting, when we're making sure it's being well-used, 
but at some point the level of tax, in essence, is high enough. 
If we need extra money, frankly, we would be willing to have 
general revenues go into supplement if you need more.
    The industry itself, the core industry, here should not be 
bearing a burden beyond a certain reasonable level. And I think 
we're concerned that it has seemed to have just been able to 
grow, mushroom its growth. And some kind of cap makes sense
    Chairman. Graves. Let's talk about expanding it more, 
paying into it. And I'll just direct this to everybody. Can 
somebody give me an idea who at this point is not paying in? 
Obviously I think everybody has kind of mentioned expanding the 
folks that ought to be paying into it. And that is going to 
have an effect on the fund. But I will kind of throw that out 
there.
    Give me an idea of who isn't at this point and how much it 
could be expanded. Bob?
    Mr. Williams. Well, I mean, just a few that come to mind 
right now are VoIP providers, cable providers, broadband 
providers in some cases depending on what type of broadband. 
Those are three or four that come to mind, anybody that uses 
the network. And all those people use the network.
    I might say here one of the things that concerned me about 
what Mr. Black had to say was he was talking about how we have 
no more need for this wired infrastructure out there because of 
the internet and the broadband that is available in these 
areas. Well, I don't know how it gets there if we don't have a 
network to take it over.
    Mr. Johnson. And, Chairman Graves, one thing that I would 
like to clarify is that wireless carriers don't pay their fair 
share into the high-cost fund. Wireless consumers drew just 
over 10 percent of the total fund, approximately 330 million, 
but we now contribute over 34 percent to the total fund, or 
about $2.6 billion per year.
    Mr. Williams. And, if you'll notice, I didn't mention 
wireless carriers.
    Mr. Johnson. Okay. I just wanted to clarify any myth, 
though, that may be out there.
    Chairman. Graves. We're kind of moving through, but you 
might expand it. How much could the fund be expanded if we 
opened it up? What is it going to do to the fund? Anybody can 
answer again.
    Mr. Williams. Well, I think if you put it on--a couple of 
things that it does in this bill is it talks about when Mr. 
Black again is talking about the contribution level going to 17 
percent, that is on interexchange carriers a percentage of 
their revenue--it's 17 percent--because that revenue base 
continues to shrink as long distance and interexchange carrier 
traffic goes down. And this network is used for all of these 
other means of communications that are not being there.
    So I think part of the thing--and in the bill, it says, 
``Connections: IP Addresses,'' et cetera. If you take the 
amount of all of those -- and I'm talking off the top of my 
head now, and don't hold me to this. But I think if you fully 
funded today's fun on a per-connection, per-IP address, per-
number basis, it may be a dollar per number or per connection.
    So when you put it in those things and you talk about all 
the connections to our network out there, I think it becomes a 
much more manageable way of doing it.
    Chairman. Graves. Mr. Henagan?
    Mr. Henagan. Mr. Chairman, one thing I would like to 
mention on paying into the fund is phantom traffic. Today Rock 
Port Telephone gets 17 percent today coming in as phantom 
traffic. I cannot track that.
    Chairman. Graves. Expand on that. Talk to me about phantom 
traffic.
    Mr. Henagan. Okay. Phantom traffic is--and I'm going to use 
towns in Missouri as how it gets into. Today people out of Rock 
Port, we get our traffic from Kansas City, goes into Stanberry. 
It goes into Maryville, Missouri.
    My tandem is Maryville. Out of Maryville, I have what we 
call common trunks, which means all of my traffic goes 
together, two-way trunks. Everything that goes in and out of 
Rock Port is on common trunks. I have 117 common trunks. Out of 
that, the only way I can record it is that I get sufficient 
information to know what carrier it is over these common 
trunks.
    Somebody is today stripping off what we call kit codes or 
how I know who to bill for it. They strip off the kit codes or 
strip off the billing data off of it where I cannot get it. So 
whenever I get the traffic and I record it in my switch, 17 
percent my traffic for terminating in Rock Port, I cannot bill 
to anybody.
    So we have to have accountability out there today so that 
we know who we need to bill. If we could keep on expanding and 
keep on doing things as far as bringing more traffic in and 
opening this up without the right accountability, still it's 
going to be expanding up to a greater where we will have what 
we call phantom traffic, where there is no accountability to 
it. Does that--
    Chairman. Graves. How widespread is that? You talked about 
in your particular area, but how widespread is that, phantom 
traffic? Is it happening everywhere?
    Mr. Henagan. In Missouri. I have talked to other companies 
in Missouri, and it is happening in Missouri for sure because 
today we are getting traffic in without the right 
accountability on it to be able to do it.
    Mr. Williams. I think it is an issue throughout the 
country. I know Mr. Merlis has probably got something to say 
about this.
    Mr. Merlis. Mr. Chairman, if I may, we have filed a 
petition with the Federal Communications Commission calling 
upon the commission to impose a rigorous tracking methodology 
in order to ensure that this phantom traffic is no longer 
phantom traffic.
    The telecom carrier receives revenues from three sources: 
the end user; inter-carrier; that is, the traffic which needs 
to be tracked and billed; and universal service. If the traffic 
is not properly identified and the phone company cannot bill 
the phone company that sent the traffic, then the costs have to 
be borne by someone else in order to remain whole.
    It is essential that the phantom traffic problem be 
resolved. Otherwise, increased demands will be placed on the 
Universal Service Funds, demands which at the current rate in 
the current environment further erode its long-term 
sustainability.
    Mr. Black. Mr. Chairman, if I could, we agree that having 
accounting and costs in tracking this and we recognize phantom 
traffic is a problem, but I should point out it is really not. 
It's an inter-carrier issue.
    What we are fundamentally talking about is the amount taxed 
to the Universal Service Fund itself. And, frankly, from one 
angle or perspective, what happens inter-carrier is very 
important to companies, but it is not that important in what 
amount of service is delivered to citizens and does not affect 
how much money goes into the fund.
    I think those are really the core issues still that are out 
there: who pays into the fund, for whom does it go, what 
formula is used.
    Mr. Henagan. Mr. Chairman, I believe that if we have 
everybody paying into the fund, the percent on the fund is 
going to go down, which I'm at the percent going up to 17 
percent, but then if we have everybody paying with 
accountability or phantom traffic for the VoIP, for the cable, 
for all the others, that percent is going to go down. So out of 
this, if we get everybody paying in the right amount, it will 
seek its own level. And it will have a level that everybody 
will be pleased with, I believe.
    Chairman. Graves. I don't want to completely dominate. Mr. 
Sodrel, do you have questions?
    Mr. Sodrel. Thank you, Mr. Chairman. I guess first I would 
just like to say there was a 100-year-old gentleman in our 
neighborhood. On his birthday--he lived in a rural area. And 
they asked him what was the most important thing that happened 
in his lifetime that made life better in the rural area. And he 
said highways, the fact that they could get to market and the 
markets could get to them. I think being on the super highway, 
the information super highway, is going to be important for 
rural America in the coming century.
    This really is interesting to me, Mr. Henagan, about this 
phantom traffic. I was in a bus business and trucking business 
before I got here. Obviously I wasn't in the communications 
business. If somebody used one of my vehicles or my facility 
and didn't pay me, I would really be upset. As a matter of 
fact, I look at that as theft, at the very least trespassing.
    What is the penalty for somebody? If somebody sent phantom 
traffic on your trunk line and you knew who the person was, 
what is the penalty?
    Mr. Henagan. Today because we have common trunks, I do not 
have a tandem and I have no direct connections with me, I 
cannot do anything with that traffic today. I cannot cut them 
off. I can't do anything. They can send phantom traffic to me 
today, and I have to accept it because it's coming over common 
trunks as they can send it in and I cannot put it in my switch 
to deny it because it is already in me and it's part of the 
system, the public switch network.
    So somebody at Kansas City or somebody in Dallas can take 
it out, strip it out. And immediately it goes on the public 
switch network. And it gets delivered to me, and there is 
nothing I can do about it.
    Every morning we record all the minutes that we have first 
thing. 8:00 o'clock every morning, we record every minute from 
the last 24 hours. We have been doing this since 1999.
    I have all of the records involved of all of the phantom 
traffic. And we look at what we are losing on a daily basis and 
a monthly basis whenever we sum it up to see what we are 
losing.
    And out of that, there is nothing I can really do. The 
theft is there. There's no doubt. But because it's common 
trunks, unless I go in and put a tandem in where I can have 
direct trunks come in to me and each carrier come in--and it's 
not feasible to do that because I have 1,800 access lines. 
Tremendous costs would go into the fund to do it.
    Mr. Sodrel. So, even if you knew somebody was doing this to 
you, you don't really have any recourse?
    Mr. Henagan. That's correct. I cannot cut them off.
    Mr. Sodrel. You know, that not only affects the Universal 
Service Fund. I mean, that affects the prices people are paying 
in the rural area for the service. If you had 17 percent more 
traffic, obviously you wouldn't have to charge as much per 
minute for the existing customers.
    Now, we a little earlier talked about the subsidies 
distorting markets. And, frankly, subsidies always distort 
markets. I mean, by their nature, they distort markets. So the 
question is, how do we want to distort the market? In what 
direction do we want to distort the market?
    And I have always had an attitude the companies are not 
taxpayers or tax collectors. The ultimate payer is the customer 
of the company that's paying the tax. I mean, if you follow the 
string back to the end, it's actually the customer who pays the 
tax. So everybody who uses the communications network anyplace 
is paying a tax for this Universal Service Fund.
    So it seems to me that trying to find the common ground 
here, the goal being to keep rural people on the information 
super highway, the goal being to make sure they have access to 
markets and markets have access to them. And in doing that in a 
fashion that they can afford ought to be the goal, it seems to 
me. We ought to be able to get all of the parties together and 
figure out how we are going to do that.
    Mr. Chairman, I was just amazed that somebody could 
basically steal your service and there's no recourse. You know, 
it's mind-boggling to me.
    And I understand. See, I was in the service business as 
well. Sometimes people get the attitude when they steal service 
they're not really stealing because it's intangible. They can't 
put their hand on it. You know, if you go in the grocery store 
and you come out with 12 apples and you only paid for 6, it's 
tangible. People know they stole six apples. When you're in the 
service business, it's a little more difficult to convince 
people they stole something.
    You know, if they agreed to pay for 100 miles and they took 
120 miles, it's kind on intangible. They really couldn't see 
it, touch it, and feel it. But they are shoplifting. And that 
really troubles me. There ought to be some accountability in 
this system.
    I don't really have any further questions, Mr. Chairman. 
Thank you.
    Chairman. Graves. Mr. Merlis.
    Mr. Merlis. Thank you, Mr. Chairman.
    Congressman, just to amplify what Mr. Henagan said, this is 
a situation which is very, very grave for the industry. As 
technology advances, there could be more of this forthcoming. 
And, as opposed to being in other services business--you 
mentioned the trucking business--you know from whom you receive 
that truckload.
    What Mr. Henagan was describing is we don't know from whom 
we received that call in order to bill the person. So there is 
no remedy at law or in any other fashion other than to put the 
call through because you're not going to deprive the consumer 
of the call that had been made to him. And you're stuck with 
the bill. That's really what it comes down to.
    The commission must act, the FCC must act, in this area in 
order to impose appropriate requirements and appropriate 
remedies so that phantom traffic is diminished. Now, there 
could be inadvertent dropouts of some of this information, but 
clearly at this level it is a conscious effort by some people 
in this network system to strip out the information.
    Mr. Sodrel. Thank you, Mr. Chairman. I don't have any 
further questions.
    Chairman. Graves. Changing gears a little bit,--and I do 
want to ask Mr. Schulte because I can specifically deal with 
Missouri. What kind of service is there from the Universal 
Service Fund for, say, Missouri. I mean, how much do we get in 
terms of we have a state that has some very rural areas.
    And we obviously have some very urban areas, St. Louis and 
Kansas City for starters, and then, of course, some pretty 
affluent areas in some of the smaller cities around. But just 
how much do we get? You know, how much bang for the buck is 
there in a state like ours?
    Mr. Schulte. Well, I was given advice, if I were asked a 
question I didn't know the answer to, to say, ``We'll get that 
to you in writing.'' And I may just have to fall back on that.
    I can give you something other than an exact number. We use 
something called MoreNet. Most every school in this state does. 
And the money that we receive helps pay for that and helps 
subsidize it, especially for rural districts.
    You know how rural some of our districts are. I mean, it's 
miles and miles before you get to a school building. And 
there's no way they're going to get the access they need 
without some kind of subsidy from somewhere.
    Chairman. Graves. Well, let's expand on that just a little 
bit because I know in some areas, we still don't have service. 
I mean, in my district, my Blackberry, for instance, only works 
in a very few places.
    Obviously, you know, some of my friends, some of my 
constituents, you know, they don't have high-speed internet. So 
we're obviously still expanding and we're still going through 
the process of providing a lot of service to a lot of 
individuals.
    My question to everyone is, if we don't expand or overhaul 
the Universal Service Fund, if we don't continue that service, 
then what does that leave? Where does that leave some of these 
schools? Where does that leave some of these customers?
    I mean, it's just going to, as technology continues to 
advance, they're going to fall further and further behind. And 
in some cases, they're still behind because we just haven't 
been able to get service to them.
    Mr. Williams. I think that's a good lead-in to what I 
wanted to say. So I think one of the things maybe we haven't 
emphasized up here today--and I think it goes back to the 
purpose for the Coalition to Keep America Connected. And we 
need to focus on the consumer, consumer and the school 
district, so be it, if you want to focus on both.
    The important thing is that all of those consumers have 
access to the latest technologies, no matter where they live. 
And while I'm going to sit here and I may think that the wire 
line infrastructures to do that, my wireless friend thinks that 
the wireless infrastructure is the way to do that, I think at 
the end of the day, we have to have a system where the most 
economically efficient and the person best able to provide 
those services to everyone, no matter where they live, is going 
to need some support in rural areas and maybe even in urban 
areas because there are urban areas in your district that can't 
get broadband service to their house because of the way the 
infrastructure is.
    So I think overall it's important that the consumer have 
those access to those services. And I think economically as 
this thing plays out, we've got to find out which is the most 
economically efficient way to do that.
    And you're right. The job is not done right. It's not done 
yet, but we're working on it. We're working to expand it every 
day. And it's going to take some money. And that's why we're 
here. And that's why we're talking about universal service.
    Mr. Johnson. We were talking earlier about capping the fund 
and what the impact of that would be, negative or positive. 
From my chair, I think it would be a negative impact, simply 
because, as Congressman Lee mentioned earlier, we're in a 
technology transition, more so in the rural areas, where 
experiences, such as yours, Chairman Graves, where your 
Blackberry works in St. Louis and Kansas City but you go to 
Sedalia, Missouri or Lexington, Missouri and it's not going to 
work.
    You know, capping the fund would limit and prevent people 
in the rural areas for taking advantage of these emerging 
technologies. You know, people demand and want the same 
technology that they have in the urban and rural areas.
    And I think a situation recently, where we're working with 
the Ellis County Management Association, the ambulance service, 
where Ellis County Management Association is covered by the 
26,000 population area, primarily rural. Hays is a population 
center, but Victoria, Ellis, and some of the smaller 
communities are in that area of Kansas.
    But they are looking at our technology to be able to 
transfer lifesaving critical data to the hospital as they pick 
up a victim from a car accident or an industrial accident and 
transfer those vitals via a wireless network to the hospital to 
save minutes and possibly save somebody's life. But without the 
fund or capping the fund, I think that, capping the fund, would 
have a negative impact on bringing those types of technologies 
and services to the rural areas. And those services are 
available in the urban areas currently.
    Mr. Henagan. Mr. Chairman, I would like to make a statement 
concerning what services. Currently we have six wireless 
carriers in our service area. Five of them are using what we 
call the traditional land line service. Either I'm feeding them 
with five or I'm feeding them with copper paired depending on 
what type of services they want.
     For us to bring broadband out there, either wireless or it 
needs to be under some type of land line system depending on 
what they want, and to bring economic development in rural 
America, for us we need to look at all of the technologies. We 
need to be able to provide whatever the customer wants out 
there at affordable price. The customer is the primary thing.
    We currently have a new company that is moving in to Rock 
Port, Rural Source, Incorporated, trying to bring jobs in from 
overseas. And we are providing them broadband access. They want 
to have at least a T-1 starting out with a DS-3 real near to 
the future. They're talking about bringing up to 50 jobs to 
rural America, to Rock Port. I need the funds to be able to 
build out in fiber to that building and to light that fiber.
    And also providing good cellular service out there is very 
vital. We're mobile people today in a mobile society. So we 
need both sides. But it should be on accountability work. The 
cellular gets their costs, and we get our costs along with 
bringing the lowest cost available to the subscriber. 
Subscriber is the main thing.
    For us to sustain northwest Missouri, that we can provide 
it out there with our loss of population, our loss of 
subscribers, we are doing economic development to bring that 
in. And universal service is very vital for us to do this.
    Mr. Black. Maybe without rehashing some of the broad 
points, I'll mention a word that hasn't been really used in 
terms of who pays in and pays out, which is symmetry. If we're 
going to expand the base of who pays in, we ought to realize 
that companies who pay in and categories of companies also need 
to be--those categories need to be expanded on to pay out. They 
may be high-quality services that can be provided that will 
provide various benefits to citizens that also need to be on 
the receiving end to build those.
    So it's just we really want to see universal service and 
see it strong. The cap I think is a recognition of political 
reality. We don't believe unended entitlement programs are 
growing and growing. But I think the restructuring of it can 
make sure that the funds when they are expended are really 
bringing the high level of technological advantages that will 
make people able to compete economically.
    That's what we're after. We're not just after a physical 
thing. We're after a whole range of high technology capability 
that we want people to have at their fingertips. And I think 
that's why a rethinking of the formulas, both in and out, is 
very important and needs to be at a good level of funding 
that's tied to real cost, but it can't be totally open-ended.
    Chairman. Graves. Mr. Sodrel.
    Mr. Sodrel. I don't have any further questions. Thank you, 
Mr. Chairman.
    Mr. Schulte. Could I just tell one quick story--
    Chairman. Graves. Yes.
    Mr. Schulte. --that I think applies here just to illustrate 
what this means? And I think everyone here might already agree. 
I am a speech and debate coach, done it 19 years now. I was 
talking with a coach at a tournament about five years ago, and 
there were a bunch of us. One of the other coaches said to this 
coach--I believe he teaches in McDonald County, which is about 
as rural as you can get in the mountains of the Ozarks. And 
they said, ``Your teams have just been doing great these past 
couple of years. They have just gone from being also ran, 
canon, fodder kind of teams to winning and doing great.''
    And he said, ``Well, about two years ago, we got the 
internet, like you all have already always had. And that has 
made all the difference.'' See, when we're teaching, we're busy 
with the kids and the girl whose boyfriend--I spent an hour 
with her the other day. Her boyfriend broke up with her on 
Monday, and prom is Friday and all of that.
    We're focused on other things. And we really appreciate, 
and we need you to have our backs when it comes to things like 
this to keep the internet and to keep the connectivity going so 
that we can focus on the kids.
    Thank you for all you do here.
    Chairman. Graves. Well, one of the main purposes for this 
hearing--and Representative Terry stated it--is to bring as 
much emphasis to this issue as possible to continue to try to 
push so we can move some legislation.
    And I do believe we need to expand the Universal Service 
Fund. I think we need to do it in such a way that it accounts 
for technologies in the future. You know, we don't want to have 
to come back because you all have a much better idea on where 
things are going than I do. But we know for a fact that 
technology is going to continue to change. There are going to 
be more and different ways of providing service and better ways 
of providing service.
    And I think we need to update. I do think we need to 
overhaul the Universal Service Fund. We need to continue to 
provide technology to those rural areas. We have just got to 
figure out how to do that and how best to do it.
    I appreciate everybody coming in. I know many have come 
from a long distance. But this is important. This issue is 
important. And the more pressure we continue to, the more 
attention we continue to bring to this issue, the better. And 
you all have helped out with that in a great deal. And we have 
had some great opinions. I appreciate you coming in.
    Thank you very much. The hearing is adjourned.
    (Whereupon, at 11:29 a.m., the foregoing matter was 
concluded.)

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