[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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_____________________________________________________________________________
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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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