[House Hearing, 109 Congress]
[From the U.S. Government Publishing Office]
UNIVERSAL SERVICE: WHAT ARE WE SUBSIDIZING
AND WHY?
PART 1: THE HIGH-COST FUND
HEARING
BEFORE THE
SUBCOMMITTEE ON TELECOMMUNICATIONS AND THE
INTERNET
OF THE
COMMITTEE ON ENERGY AND
COMMERCE
HOUSE OF REPRESENTATIVES
ONE HUNDRED NINTH CONGRESS
SECOND SESSION
JUNE 21, 2006
Serial No. 109-109
Printed for the use of the Committee on Energy and Commerce
Available via the World Wide Web: http://www.access.gpo.gov/congress/house
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COMMITTEE ON ENERGY AND COMMERCE
JOE BARTON, Texas, Chairman
RALPH M. HALL, Texas JOHN D. DINGELL, Michigan
MICHAEL BILIRAKIS, Florida Ranking Member
Vice Chairman HENRY A. WAXMAN, California
FRED UPTON, Michigan EDWARD J. MARKEY, Massachusetts
CLIFF STEARNS, Florida RICK BOUCHER, Virginia
PAUL E. GILLMOR, Ohio EDOLPHUS TOWNS, New York
NATHAN DEAL, Georgia FRANK PALLONE, JR., New Jersey
ED WHITFIELD, Kentucky SHERROD BROWN, Ohio
CHARLIE NORWOOD, Georgia BART GORDON, Tennessee
BARBARA CUBIN, Wyoming BOBBY L. RUSH, Illinois
JOHN SHIMKUS, Illinois ANNA G. ESHOO, California
HEATHER WILSON, New Mexico BART STUPAK, Michigan
JOHN B. SHADEGG, Arizona ELIOT L. ENGEL, New York
CHARLES W. "CHIP" PICKERING, Mississippi ALBERT R. WYNN, Maryland
Vice Chairman GENE GREEN, Texas
VITO FOSSELLA, New York TED STRICKLAND, Ohio
ROY BLUNT, Missouri DIANA DEGETTE, Colorado
STEVE BUYER, Indiana LOIS CAPPS, California
GEORGE RADANOVICH, California MIKE DOYLE, Pennsylvania
CHARLES F. BASS, New Hampshire TOM ALLEN, Maine
JOSEPH R. PITTS, Pennsylvania JIM DAVIS, Florida
MARY BONO, California JAN SCHAKOWSKY, Illinois
GREG WALDEN, Oregon HILDA L. SOLIS, California
LEE TERRY, Nebraska CHARLES A. GONZALEZ, Texas
MIKE FERGUSON, New Jersey JAY INSLEE, Washington
MIKE ROGERS, Michigan TAMMY BALDWIN, Wisconsin
C.L. "BUTCH" OTTER, Idaho MIKE ROSS, Arkansas
SUE MYRICK, North Carolina
JOHN SULLIVAN, Oklahoma
TIM MURPHY, Pennsylvania
MICHAEL C. BURGESS, Texas
MARSHA BLACKBURN, Tennessee
BUD ALBRIGHT, Staff Director
DAVID CAVICKE, General Counsel
REID P. F. STUNTZ, Minority Staff Director and Chief Counsel
SUBCOMMITTEE ON TELECOMMUNICATIONS AND THE INTERNET
FRED UPTON, Michigan, Chairman
MICHAEL BILIRAKIS, Florida EDWARD J. MARKEY, Massachusetts
CLIFF STEARNS, Florida Ranking Member
PAUL E. GILLMOR, Ohio ELIOT L. ENGEL, New York
ED WHITFIELD, Kentucky ALBERT R. WYNN, Maryland
BARBARA CUBIN, Wyoming MIKE DOYLE, Pennsylvania
JOHN SHIMKUS, Illinois CHARLES A. GONZALEZ, Texas
HEATHER WILSON, New Mexico JAY INSLEE, Washington
CHARLES W. "CHIP" PICKERING, Mississippi RICK BOUCHER, Virginia
VITO FOSSELLA, New York EDOLPHUS TOWNS, New York
GEORGE RADANOVICH, California FRANK PALLONE, JR., New Jersey
CHARLES F. BASS, New Hampshire SHERROD BROWN, Ohio
GREG WALDEN, Oregon BART GORDON, Tennessee
LEE TERRY, Nebraska BOBBY L. RUSH, Illinois
MIKE FERGUSON, New Jersey ANNA G. ESHOO, California
JOHN SULLIVAN, Oklahoma BART STUPAK, Michigan
MARSHA BLACKBURN, Tennessee JOHN D. DINGELL, Michigan
JOE BARTON, Texas (EX OFFICIO)
(EX OFFICIO)
CONTENTS
Page
Testimony of:
Marron, Dr. Donald B., Acting Director, Congressional Budget Office 18
Navin, Tom, Chief, Wireline Competition Bureau, Federal
Communications Commission 32
Clark, Tony, President, North Dakota Public Service
Commission, on behalf of National Association of
Regulatory Utility Commissioners 39
Frantz, Skip, Chairman, United States Telecom Association 44
Cimerman, Richard, Vice President, State Government
Affairs, National Cable and Telecommunications Association 49
Crothers, David, Executive Vice President, North
Dakota Association of Telephone Cooperatives, on
behalf of National Telecommunications Cooperative
Association 54
Garnett, Paul, Director, Regulatory Affairs, CTIA - The
Wireless Association 58
Pies, Staci, Vice President, PointOne Communications,
on behalf of Voice on the Net (VON) Coalition 65
Feiss, Geoff, General Manager, Montana
Telecommunications Association 72
Cooper, Dr. Mark, Director of Research, Consumer
Federation of America 81
Additional material submitted for the record:
Marron, Dr. Donald B., Acting Director, Congressional
Budget Office, response for the record 109
Navin, Tom, Chief, Wireline Competition Bureau,
Federal Communications Commission, response for
the record 112
Clark, Tony, President, North Dakota Public Service
Commission, on behalf of National Association of
Regulatory Utility Commissioners, response for the
record 114
Frantz, Skip, Chairman, United States Telecom
Association, response for the record 116
Cimerman, Richard, Vice President, State Government
Affairs, National Cable and Telecommunications
Association, response for the record 119
Crothers, David, Executive Vice President, North
Dakota Association of Telephone Cooperatives, on
behalf of National Telecommunications Cooperative
Association, response for the record 122
Garnett, Paul, Director, Regulatory Affairs, CTIA - The
Wireless Association, response for the record 128
Pies, Staci, Vice President, PointOne Communications,
on behalf of Voice on the Net (VON) Coalition,
response for the record 135
Feiss, Geoff, General Manager, Montana
Telecommunications Association, response for the
record 139
Cooper, Dr. Mark, Director of Research, Consumer
Federation of America, response for the record 149
UNIVERSAL SERVICE: WHAT ARE WE SUBSIDIZING
AND WHY? PART 1: THE HIGH-COST FUND
WEDNESDAY, JUNE 21, 2006
HOUSE OF REPRESENTATIVES,
COMMITTEE ON ENERGY AND COMMERCE,
SUBCOMMITTEE ON TELECOMMUNICATIONS AND THE INTERNET,
Washington, DC.
The subcommittee met, pursuant to notice, at 2:03 p.m., in
Room 2123 of the Rayburn House Office Building, Hon. Fred
Upton (Chairman) presiding.
Members present: Representatives Stearns, Gillmor, Cubin,
Shimkus, Wilson, Pickering, Radanovich, Bass, Walden, Terry,
Sullivan, Blackburn, Barton (ex officio), Wynn, Gonzalez, Inslee,
Boucher, Stupak, and Dingell (ex officio).
Staff present: Howard Waltzman, Chief Counsel for
Telecommunications; Anh Nguyen, Legislative Clerk; Jaylyn
Jensen, Senior Legislative Analyst; Will Nordwind, Policy
Coordinator; Johanna Shelton, Minority Counsel; David Vogel,
Minority Research Assistant; and Chris Treanor, Minority Staff
Assistant.
MR. UPTON. Good afternoon.
Thank you all for being prompt. We are expecting votes at
about 2:30, so I am hoping that we can finish the Members'
opening statements and get into our large panel's opening
statements, or at least get into them before we have the votes. And
then it is my understanding that these will be the last votes of the
day, so hopefully the hearing will proceed well.
And I would like to say that with ten witnesses, I am going to
be brief with my opening statement.
Today's hearing is focused on the High-Cost Program of the
Universal Service Fund. The High-Cost Program makes payments
to eligible local telephone companies that serve customers in rural
areas where the cost of providing service comparable to that
available in urban areas is substantially greater than the national
average.
As a member who represents a number of rural communities in
southwest Michigan, I have seen the tremendous upside of the
universal service funding by way of the affordable
telecommunications services provided in those rural communities
by companies like the Bloomingdale Telephone Company in
Bloomingdale, Michigan.
But, as we all know, the High-Cost Program and the Universal
Service Fund is paid for, in large part, by mandatory payments
from all providers of interstate and international
telecommunication services, and those providers pass those costs
on to their consumers, all of our constituents.
Today, we will hear from CBO about its recent report which
highlights that outlays and receipts flowing through USF have
grown substantially in recent years. The CBO suggests that
disbursements for the High-Cost Program have doubled since
2000, from $1.9 billion to $3.8 billion. CBO estimates that such
spending could continue to increase rapidly depending upon
legislative and regulatory decisions. To the extent that all of this
cost gets passed along to the consumer--that is a grave warning
sign that we can no longer ignore as legislative and regulatory
decisions get made here in Washington, D.C.
This is the first, and perhaps, not the last hearing which the
subcommittee will hold on the Universal Fund. I look forward to
hearing from today's witnesses, and I thank them for their
participation, particularly in sending their statements up last night
so we could take them home.
And I would yield, at this point, to the gentleman from
Virginia, Mr. Boucher, for an opening statement.
[The prepared statement of Hon. Fred Upton follows:]
THE PREPARED STATEMENT OF THE HON. FRED UPTON, CHAIRMAN,
SUBCOMMITTEE ON TELECOMMUNICATIONS AND THE INTERNET
With 10 witnesses, I will be brief with my opening statement.
Today's hearing is focused on the High Cost Program of the
Universal Service Fund. The High Cost Program makes payments
to eligible local telephone companies that serve customers in rural
areas where the cost of providing service comparable to that
available in urban areas is substantially greater than the national
average.
As a Member who represents a number of rural communities, I
have seen the tremendous upside of Universal Service funding by
way of the affordable telecommunications services provided in
those rural communities by companies like the Bloomingdale
Telephone Company.
But, as we all know, the High Cost Program of the Universal
Service Fund is paid for, in large part, by mandatory payments
from all providers of interstate and international
telecommunications services, and those providers pass these costs
on to their customers - all of our constituents.
Today, we will hear from CBO about its recent report which
highlights that outlays and receipts flowing through USF have
grown substantially in recent years. The CBO suggests that
disbursements for the High Cost Program have doubled since
2000, from $1.9 billion to $3.8 billion. CBO estimates that such
spending could continue to increase rapidly depending on
legislative and regulatory decisions. To the extent that all of this
cost gets passed along to the consumer -- this is a grave warning
sign that we can no longer ignore as legislative and regulatory
decisions get made here in Washington.
This is the first, and not the last, hearing which the
Subcommittee will hold on the Universal Fund. I look forward to
hearing from today's witnesses, and I thank them for their
participation.
MR. BOUCHER. Well, thank you very much, Mr. Chairman. I
appreciate your scheduling this very important hearing on a subject
on which it is my hope that the Congress will act before the end of
this year.
Universal service support is more needed now than ever before.
In an era when electronic communications are at the heart of the
national economy, it is more essential than ever before that all
Americans remain connected. Affordable telephone service not
only benefits the individual users of the service, but at a time when
electronic commerce is central to national economic growth,
affordable telephone service for all is essential for our national
economic success. And so all of us, urban, suburban, and rural
residents alike, have a stake in assuring that everyone can afford
basic telephone service.
Now the importance of affordable rural service has increased.
The Universal Service Fund that assures it has come under
increasing pressure, and reform of that fund across a broad basis is
now necessary. New technologies and new business plans are
combining to diminish the long-distance revenues that have been
relied upon historically for the Universal Service Fund's support.
In reforming the Universal Service Fund, other funding sources
must now be tapped and new controls must be placed on
distributions from the fund.
In an effort to achieve these goals in a manner that is fair to
both the rural telephone companies who are the major beneficiaries
of Universal Service Fund financing and to the large regional
telephone companies who are the net contributors into the fund,
my colleague from Nebraska, Mr. Terry, and I have engaged in a
long consultative process with dozens of interested parties and
have introduced, following that long series of conversations, H.R.
5072, which we believe reflects a consensus among the various
competing interests. No one will agree with all of the bill's many
provisions, but most will agree that it meets the principal needs of
virtually all of the parties. For those who are looking for a middle
line between the Bell companies and the rural carriers, H.R. 5072
occupies that middle ground. For those who seek a sensible
modernization of the Universal Service Fund to account for the
dramatic changes that have transformed telecommunications
during the past decade, we offer H.R. 5072 for your consideration.
It will promote broadband deployment, helping to lift our
Nation's currently unenviable international ranking. It expands the
revenue base to Voice over Internet Protocol, to a connection to the
Internet and to, for the first time, intrastate revenues. But it also
imposes strict limitations on Universal Service Fund growth,
assuring that the only growth is in accordance with an inflationary
growth factor. We fixed the phantom traffic problem. We make
rural exchanges more marketable for telephone companies who
may desire to sell them. And we base payments from the fund on
the carrier's actual cost, rather than upon the cost of the incumbent
telecommunications provider in that region, which inevitably will
be higher than those of the new entrant.
I would like to thank Mr. Terry for his excellent work in the
partnership that we have embarked upon to reform universal
service, and I hope that members will consider our bill as the
subcommittee looks for practical answers to the challenges that we
currently face.
Thank you, Mr. Chairman.
MR. UPTON. Mr. Gillmor.
MR. GILLMOR. Thank you, Mr. Chairman.
And I am glad to see that we are moving forward on looking
into this important subject. Over the last several months, the
debate over the Universal Service Fund has greatly intensified, and
many different reform proposals have been proposed. And I am in
agreement with those that say the system needs to be fixed;
however, it is more difficult to say exactly what reforms are best to
employ in order to assure that districts like my rural northwest
Ohio district, receive the best telecommunication service possible.
These funds are an important part in helping rural Americans
gain access to mainstream telecommunication services that they
might otherwise not have due to the high costs associated with
reaching these areas of the country.
Additionally, the USF funding is an important part in spurring
economic development in rural areas, especially in the global
economy that is relying on telecommunications technology to
rapidly share information to meet consumer demands. Just as the
telecommunications industry continues to evolve, so too should the
Universal Service Fund. And before measures are discussed and
debated, it would be wise to take into account the fact that
traditional telephony service is becoming less and less the service
of choice. As Americans continue to migrate to more advanced
telecommunication services, we need to take a hard look at the
stated function of the USF and if it still serves its intended purpose
or if we have to adapt it to meet future telecommunication needs
and technologies. Access to advanced telecommunication services
is a key component to a strong economy to the effect of sharing of
ideas and increased access to essential information.
I look forward to legislation to assure that the
telecommunication needs of rural America are met in order to
prevent the divide from rapidly increasing, and I appreciate all of
the expert knowledge and testimony that we have before the
subcommittee.
Thank you, Mr. Chairman.
MR. UPTON. Thank you.
Mr. Dingell.
MR. DINGELL. I thank the Chairman for this series of hearings.
This committee has a vital responsibility to ensure that proper
implementation and ongoing integrity and sustainability are there
for Universal Service Programs. Providing high quality
telecommunication services affordable for all Americans,
regardless of geographic differences or income, has long been a
cornerstone of our Nation's telecommunications policies. But
universal service imposes a significant and growing cost on
consumers and also on the economy. It has grown by 50 percent in
the past 5 years and now exceeds $7 billion. The main source of
growth is the High-Cost Program, which we are examining today.
Much has changed in the telecommunications landscape since
1996. The revenue, subject to universal service fees has declined.
This has caused the assessment on consumer bills to rise from less
than 6 percent in 2000 to more than 10 percent now. Indeed, the
Federal Communication Commission's, FCC's, decision that could
drop telephone broadband revenue out of the funding pool in
August leaves consumers paying more or at least looking at the
prospect of doing so.
Given the increasing consumer costs, we are appropriately
focusing on ways to restructure and to improve the program.
There are a number of questions that we need to focus on, and
amongst them, Mr. Chairman, first, who should contribute to the
Universal Service Fund? All companies who offer telephone
services, whether over the Internet or through a traditional network
should carry the same obligation to support universal service. The
FCC took an interim step this morning to broaden the base by
requiring VoIP providers to pay and raising the safe harbor for
wireless carriers.
But let me be clear. Even with the debate over the proper
percentages, the FCC has done only the easy part. The true test
will be whether the FCC could muster the will to require questions
amongst industry participants who have benefited handsomely, and
to do so without finding consumers' pockets easy prey.
Second, who should be subject to the Universal Service Fund
and who should be subsidized by it? The hefty increase in the
High-Cost Fund is attributable to the competitive eligible
telecommunications carriers, typically wireless companies.
Federal and State regulatories have grappled with the proper
mechanisms and the eligibility requirements to fund carriers who
enter rural areas to compete against incumbent providers.
With multiple providers, how can we ensure that the program
is properly disciplined or that the monies are properly spent? With
different technologies, how can we guarantee that providers offer
the service quality and the coverage that the American public
should expect of those it is funding? Another important question is
whether to subsidize broadband service. Broadband networks are
integral to a company's economic development. But funding
broadband would represent a massive new commitment of
resources, and we are not sure whether those resources are or can
be made available there. Can the program support broadband
without skyrocketing consumer contributions or jeopardizing the
affordability of basic telephone services for rural or working poor
Americans?
Third, how can we best protect the integrity of the High-Cost
Fund? As with other Universal Service Programs, the High-Cost
Fund must be rooted in rigorous accountability. We have seen
clear examples of abuse and goal-cutting of businesses across rural
American. To remain worthy of the taxpayers' trust, universal
service expenditures must have tough accountability measures,
including regular audits, detailed reporting requirements, and other
things showing that the American public is having their support
used for its proper and intended purposes. Universal
telecommunication service has been fundamental to this country's
economic and social development and growth. It will be equally
important in the coming decades.
Again, Mr. Chairman, I thank you for this hearing today. I
thank the witnesses for their testimony. And I hope we will get to
some answers to the questions that concern me in this committee.
Thank you, Mr. Chairman.
MR. UPTON. Mr. Barton.
CHAIRMAN BARTON. Thank you, Mr. Chairman, for holding
this very important hearing. I have looked forward to this for
several months now, and I am glad that we have our expert panel
of witnesses here today.
The Universal Service Fund, as we know it today, consumes
more than $7 billion, "b," as in boy. In 1996, when we passed the
Telecommunications Act, that same fund spent less than $1 billion,
so it has grown 7,000 percent, or something seeming like that, in
the last 10 years.
In just one aspect of the program, the E-Rate Program, we have
held numerous hearings in this committee and our Oversight an
Investigations Subcommittee where they detailed the waste, fraud,
and abuse of that particular party, the Universal Service Fund, and
that is only a $2 billion program. The E-Rate Program is probably
the one program in Universal Service that is in most need of
reform, but it is not the only one.
The High-Cost Fund has swollen considerably since the
passage of the 1996 Telecommunications Act. In 1998, the fund
distributed approximately $1.5 billion. This year, it is expected to
distribute $4.2 billion, and that is almost a $3 billion increase in
less than 8 years. We are probably going to hear from the
Congressional Budget Office today that that particular fund is in
jeopardy of growing even larger unless effective reforms are put
into place.
More importantly, reforms are necessary to rein in the High-
Cost Fund. In my opinion, only one connection per household or
business should be eligible for Universal Service Fund support.
There is no reason that telephone users who pay into the fund
should have to subsidize extra phone lines in the house or a mobile
phone in addition to a wireline connection.
Second, communications providers should receive support, if at
all, based upon the cost of the lowest cost provider of telephone
service in a particular area. Wireless carriers should receive
universal service support, but they should do so based on the cost
of putting up towers in rural areas and getting connections back,
not based on the cost to the existing wireline provider who has no
incentive to control their costs. There is a perverse incentive today
that exists in the High-Cost Program in which wireless carriers gets
as much money as the wireline carriers to provide telephone
service, even though their cost of service is considerably less.
In my opinion, this policy should be reversed. No provider
should receive more support than what is necessary for the lowest-
cost provider in an area to provide basic, voice-grade service. This
should be about making certain that anyone in rural America can
have at least one telephone. It shouldn't be about making sure that
they have a gold-plated system and multiple subsidies on that one
system. It is not about providing every house with cell phones,
computer hookups, and the opportunity to chat on two or three
lines at once.
What has occurred in the High-Cost Fund is unacceptable,
unsustainable, and unnecessary. With the right reforms, that
particular program could be brought under control. This would
ensure that the program can continue to do what it is supposed to
do: provide people in rural areas with affordable voice-grade
telephone service over one telephone line.
I look forward to working with the Chairman and the rest of
my colleagues to determine the best way to reform this program.
Before I yield back, Mr. Chairman, let me give you some
examples from my State of Texas. Sometimes I am accused that I
don't pick on the hometown team too much, so I asked the staff to
research Universal Service Funds in Texas.
Let me give you some examples.
Big Bend, Texas. Big Bend is out in West Texas. It is in
Alpine, Texas. One of my former football players from Waco
High School has a ranch out there. Big Bend Telephone has 6,000
customers. Last year, Big Bend Telephone Company, with 6,000
customers, got $9.6 million in Federal Universal Service Funds,
$3.3 million in State Universal Service Funds, and $18 million in
access fees. That is $28 million dollars. Less than 5 percent of
their revenue came from the local 6,000 subscribers. That utility
posted a 12.8 percent return on equity last year. It paid its
shareholders a $3 million dividend. That is a pretty good dividend.
However, in 2002, it shelled out $13 million in dividends that also
runs a hunting ranch to entertain rural phone lobbyists at the cost
of $80,000 a year.
That is in West Texas. Let us go up to the panhandle of Texas
where we have XIT, a rural telephone cooperative. It serves 1,500
ranchers, farmers, and others in the Texas panhandle. And I am
sure it does an excellent job. It did so well last year that it paid
back in dividends more than the cost it charged its phone
subscribers. And it got by on only $2.6 million in Federal
subsidies last year.
I could go down to Houston, Texas. There is a subdivision out
near Katy, Texas, which is one of the most affluent areas of West
Houston. The subdivision set up its own telephone company so
that they qualify for rural telephone subsidies in a high-cost area.
These are homes that go between $250,000 and $1 million, and
they have their own cooperative there. They are getting huge
Federal and State subsidies. That is in my home State. Now I am
not saying that we shouldn't have some Universal Service Fund,
but the current system is game-able. It is not fair. It is out of date.
If we can't kill it, we ought to really, really work together on a
bipartisan basis to seriously reform it.
With that, Mr. Chairman, I yield back.
[The prepared statement of Hon. Joe Barton follows:]
THE PREPARED STATEMENT OF THE HON. JOE BARTON, CHAIRMAN,
COMMITTEE ON ENERGY AND COMMERCE
Mr. Chairman, thank you for holding this hearing today. The
federal universal service support system now consumes more than
$7 billion. This system is bloated, it is growing, and it is not
sustainable.
The Energy and Commerce Committee has held multiple
hearings on the waste, fraud, and abuse that permeate the $2.25
billion e-rate program, which is part of the federal universal
service support system. While the e-rate program is also in need of
reform, today's hearing will focus on the federal high-cost fund.
The high-cost fund has swollen considerably since the passage
of the 1996 Telecommunications Act. In 1998, the fund
distributed approximately $1.5 billion. In 2006, the fund is
projected to distribute $4.2 billion. As we will hear from the
Congressional Budget Office today, the high-cost fund is in
jeopardy of growing even larger unless effective reforms are put in
place.
There are important reforms that are necessary to rein in the
high-cost fund. First, only one connection per household or
business should be eligible for support. There is no reason that the
telephone users who pay into the fund should have to subsidize
extra phone lines in the house or a mobile phone in addition to a
wireline connection.
Second, communications providers should receive support, if at
all, based upon the costs of the lowest-cost provider of telephone
service in a particular area. Wireless carriers should receive
universal service support. But they should do so based on the costs
of putting up towers in rural areas and getting connections back to
the local loop. There is a perverse incentive that exists today in the
high-cost program in which wireless carriers get as much money as
wireline carriers to provide telephone service in a rural area.
This policy should be reversed. No provider should receive
more support than what is necessary for the lowest-cost provider in
an area to provide basic, voice-grade service. This is about making
certain that anyone in rural America can call the doctor when
they're sick. It's not about providing every house with cell
phones, computer hookups, and the opportunity to chat on two or
three lines at once.
The growth that has occurred in the high-cost fund is
unacceptable, unsustainable, and unnecessary. With the right
reforms, the program can be brought under control. This would
ensure that the program can continue to do what it is supposed to
do: provide people in rural areas with affordable voice-grade
telephone service.
I look forward to working with the Chairman and the rest
of my colleagues to determine the best way to reform the universal
service system. I yield back.
MR. UPTON. Mr. Wynn.
MR. WYNN. I waive my opening.
MR. UPTON. Mr. Gonzalez.
MR. GONZALEZ. I waive opening.
MR. UPTON. Mr. Terry.
MR. TERRY. Thank you, Mr. Chairman.
I appreciate you holding today's hearing on the Universal
Service Fund. I especially appreciate that you have limited it to
one panel. I just hope that we have more members than panelists
today.
But for our full committee Chairman, my friend, Mr. Barton,
let me just say, that as you outlined through your opening
statement, you actually gave me room to be enthusiastic about our
bill for the first time, because many of the reforms that you suggest
by principle are actually part of the bill that Mr. Boucher and I
have been working on. And I will also just state that I have talked
with probably literally 100 different rural telephone companies,
and I have yet to run across one example as egregious as that in
West Texas, in the Texas panhandle, so perhaps it is just a Texas
thing.
Sorry, Mr. Chairman.
But certainly, none of us would agree, on the surface of the
report that Mr. Barton wrote, that we would, in any way agree with
that: shareholders getting millions of dollars back in their
dividends. I would say that that is the rare exception, but certainly
one that we should look at reforming.
But let us talk about this in the general sense, and in today's
economy, geographic boundaries for business are limitless. A
smart business owner in western Nebraska can do business with a
person across town as easily as doing business with someone in
Kalamazoo, Michigan or India. The only obstacle preventing them
from opening new markets is the lack of broadband access.
Broadband is as important today as the rail lines and roads
through the western half of America from the 1800s to 1950s that
opened up commerce. A failure to deliver broadband to rural
America is like holding out the promise of opportunities for
economic growth and prosperity but instead denying them the
ability to succeed. As elected officials, we have the public duty to
make sure that all of our constituents are given every tool to
participate and succeed in this 21st Century global economy.
The Universal Service Fund is the answer to ensuring that
broadband is delivered to rural America. USF has provided
universal telephone service to all Americans in all the corners of
our Nation for the past 80 years. Now it is time to revisit that
program and modernize it for the 21st Century.
My bill, or what is H.R. 5072, the Universal Service Reform
Act of 2006, which I think has been more eloquently dubbed the
Terry-Boucher bill, which we introduced, does not discriminate
against platforms that makes broadband an eventual requirement
for receiving USF monies. In addition, this bill demonstrates the
fiscal constraint mentioned by our good chairman by capping the
fund to not exceed the current level. This bill has been carefully
vetted with the industry for well over a year. Mr. Boucher and I
have worked very hard to take all interested parties' comments into
consideration. Much of the feedback has been incorporated into
this final version.
I am also pleased that Chairman Stevens has used H.R. 5072 as
the base for his USF legislation in the Senate rewrite bill now
being considered by the Senate Commerce Committee this week.
It is my hope that the committee will also act promptly on H.R.
5072.
I look forward to hearing from today's witnesses and want to
especially thank our Chairman, Mr. Upton, for moving this process
forward.
MR. UPTON. Thank you.
Mr. Stearns.
MR. STEARNS. Thank you, Mr. Chairman.
There are ten witnesses here, and I hope to hear a lot of
information this afternoon.
You know, in light of this program not being sustainable, and I
think we all realize that this is not a program that is costing the
taxpayers, so to speak, in terms of us voting on it. It does not
increase the Federal budget deficit, but it imposes costs on
consumers, on the economy. It creates rising charges to telephone
companies, which, in turn, are reflected to the customers, and these
costs continue to go forward. And as Chairman Barton has pointed
out, we have egregious examples where people are gaming the
system. And the system is unsustainable in terms of its funds, so
the question is what are we going to do. And that is why we are
having this hearing.
In light of the recent FCC actions, they adopted two
modifications to assessing contributions which are going to make
more costs. First of all, the Commission raised existing wireless
safe harbor percentage from 28.5 percent to 37.1 percent. The
second, the Commission expanded the base of the Universal
Service Fund by extending universal service contribution
obligations to providers of interconnected VoIP service. Now here
we have VoIP providers that are now going to be involved. Their
safe harbor percentage of interstate revenue is at 65 percent of total
VoIP service revenue. So this is a program that is going to cost the
consumers more money, whether they are going to be through the
Internet or not.
And we all know what the universal service originally was
designed for: to establish and help the people in the rural areas that
were difficult to get these services so that people who were
providing it would go into those areas. There would be some
incentives. But again, over the years, this has just continued to get
more and more expensive, and now it is no longer sustainable.
You know, I have partial rural Florida, north central Florida in
my district, and I am sensitive to this, but we need to examine,
frankly, how this service is currently defined, how the policies are
funded, who should receive the funding. Again, go back and look
at it to ensure our proper management and oversight of the fund.
The FCC has taken these two actions. We need to understand the
ramifications of those.
So I think, Mr. Chairman, it is appropriate that we have this
hearing. And I commend you for having it.
Thank you.
MR. UPTON. Thank you.
Mrs. Blackburn.
MRS. BLACKBURN. Thank you, Mr. Chairman.
I did want to thank you for holding the hearing today and
allowing us the opportunity to look at the USF, and I thank our
witnesses for being with us.
You know, I have heard from a lot of the stakeholders in this
situation. Our rural providers are telling me about the necessity for
a fund. They want more of it for enhanced services and
broadband. Our wireless service providers believe that they
contribute far more than they receive, so they want to be able to
access funds and enhance their wireless capabilities in underserved
areas. Then I hear from consumers who want to know exactly
what is the universal service line item on their telephone bill. They
want to get rid of it just like they are getting rid of the excise tax.
They are waiting for this to disappear. And they do not see
enhanced telephone systems, enhanced telecommunications as a
right. And they don't think that it is something that should be paid
for in their tax dollars.
Now you will have some who want to scrap the program
altogether and start over while others want to put a disbursement
cap on overall expenditures and shift the funding to a numbers-
based system. There are those who have asked us to even expand
the contribution base. So as you can see, the people that are
talking with me all have opinions, and there are more opinions to
go around than there probably are solutions and ways to use this
fund, but that is normal when you have got the pot of money that
we have before us, and anything that grows from $955 million
annually to $7 billion in 10 years is a big pot of money, and that is
why people are fussing about it. A 633 percent increase over 10
years is pretty healthy, even by Federal government standards.
This coupled with the FCC's Office of Inspector General and
the GAO reports stating the difficulty associated with auditing the
program, the waste, fraud, and abuse, the mismanagement of E-
Rate, as our Chairman said, I think that it could be time to stop, to
do a very good inventory, to get someone to help them audit their
books, and then to start over with a clean slate when it comes to
this program.
So thank you for your input.
Mr. Chairman, thank you for the hearing.
[The prepared statement of Hon. Marsha Blackburn follows:]
PREPARED STATEMENT OF THE HON. MARSHA BLACKBURN, A
REPRESENTATIVE IN CONGRESS FROM THE STATE OF TENNESSEe
Mr. Chairman, I want to thank you for holding this hearing
today about the future of the Universal Service Fund. I've heard
from many of the stakeholders in this debate.
Our rural ILECs are telling me about the necessity of the fund.
Our wireless service providers believe they contribute far more
than they receive.
Consumers want to know what exactly the Universal Service
line item on their telephone bill is for.
Some want to scrap this program all together and start
over, while others want to put a disbursement cap on overall
expenditures and shift the funding to a numbers based system.
There are those who have asked us to expand the contribution
base.
I know there are concerns that the funds growth has increased
from $955 million annually to $7 billion in ten years.
A 633% increase over ten years is pretty healthy even by
federal government standards.
When I see this coupled with the FCC's Office of Inspector
General and GAO reports stating the difficulty associated with
auditing the program and the waste, fraud and abuse -- I think it
could be time to with a clean slate when it comes to this program.
MR. UPTON. Thank you.
Mr. Shimkus.
MR. SHIMKUS. I will waive.
MR. UPTON. Mr. Sullivan. Mr. Bass.
MR. BASS. Mr. Chairman, I have a 15-minute opening
statement, but in the interest of time, I will submit it for the record.
MR. UPTON. Good.
I would ask unanimous consent that all members have the right
to put into the record an opening statement.
[Additional statements submitted for the record follow:]
PREPARED STATEMENT OF THE HON. BARBARA CUBIN, A
REPRESENTATIVE IN CONGRESS FROM THE STATE OF WYOMING
Thank you, Mr. Chairman.
I am pleased that you have scheduled this important hearing on
an issue that so directly affects my constituents. That the
Universal Service Fund is facing a financial crisis is not in dispute,
and neither is the need for some type of reform that would bring
financial solvency back to this important program. It is the goal of
this subcommittee to improve the Universal Service Program.
Improvement, however, should not mean the abandonment of
the original intent of Congress regarding Universal Service - that
every American should have access to telecommunication services
at reasonable prices. We have decided that the policy of universal
service only serves to benefit the entire nation as a national
network of telecom services is desirable for every citizen.
Fundamentally altering the program to the detriment of rural
communities in my home state of Wyoming and elsewhere would
erode that intent.
As technologies continue to advance at a breathtaking pace,
America has entered into a new era of telecommunications that
includes much more than just picking up a phone attached to the
kitchen wall when it rings. Communities of every size must
embrace this information age to remain vibrant, and we should
renew our commitment to a truly national network by ensuring
universal access to these new technologies at a reasonable price.
The entire nation is served by such a policy as it encourages
community improvement and allows for the freedom of living in a
sparsely populated state without being unduly punished with high
rates or no service at all.
I look forward to hearing the opinions of the witnesses today
on how best to improve the Universal Service Fund. I am
particularly interested to hear any proposals offered by the
advanced telecom industry about how, if they continue to receive
USF dollars, they plan to ensure those funds are used to improve
service to rural America. Secondly, I am interested to know what
contribution level the advanced telecom industry feels is
appropriate to pay into the USF.
I am hopeful that today's hearing will bring us to at least a few
points of common ground so we can begin the difficult task of
reforming this critical program. Again, thank you Mr. Chairman
for holding this important hearing. I yield back the balance of my
time.
PREPARED STATEMENT OF THE HON. ANNA G. ESHOO, A
REPRESENTATIVE IN CONGRESS FROM THE STATE OF CALIFORNIA
Thank you Mr. Chairman for holding this hearing.
I welcome the Subcommittee embarking on an effort to
examine the Universal Service Fund and look for ways to improve
the program and make it more responsive to the modern
telecommunications marketplace.
The questions before us are fairly simple:
1. Who should pay?
2. Who should benefit?
3. How do we assure accountability in the program?
There is a wide range of ideas about the answers to these
questions, however, and I'm eager to hear from the witnesses today
about their views on these issues, as well as in the weeks ahead as
we hold additional hearings.
I think the key issue will be what policies we can adopt that
will promote the adoption of advanced telecommunications
nationwide.
This is exactly what our predecessors did in the 1934
Communications Act when the adopted the concept of universal
service and made it a priority for our country.
Their vision and their commitment helped us develop the most
advanced, expansive communications infrastructure in the 20th
Century.
In the 21st Century, however, we've fallen behind and the U.S.
is now 16th in the world in broadband penetration.
As the country that has led the world in innovation for the past
century, invented the telephone and developed the Internet, this is a
sad state of affairs.
Telecommunications is the "central nervous system" of the
Information Age economy, and high-speed, always-on broadband
Internet communications will enable a vast array of advanced
Internet applications and services including Voice over IP, video
on-demand, electronic health, and distance education.
The United States' ability to deploy this advanced
communications infrastructure is crucial to our future productivity
and will in large part determine our ability to succeed in the global
information economy.
We need to change course drastically. We have to develop
policies that will keep us competitive and ensure that our
telecommunications system is on the same level as our economic
competitors.
Universal service policies could play a significant role in
ensuring broadband access and adoption in areas that are not now
being served.
I look forward to the witnesses' testimony and I'm eager to
work with my colleagues on the Committee to create effective
universal service policies for the 21st Century.
This now concludes the opening statements. As we all heard
the many buzzers, votes have occurred, and I think, at this point,
we will adjourn and come back in about 20 minutes. We have two
votes. This is a 15-minute, so we will be able to vote, vote quickly
on the second vote, and then come back and we will start with Dr.
Marron at that point.
We stand adjourned.
[Recess.]
MR. UPTON. Just for the record, I note 13 members were here
for opening statements, so we beat Mr. Terry's number of
members on the panel.
We are done voting on the House floor for the day, so we
shouldn't be interrupted, and I know Members have a number of
different things. I walked back with a couple of them who are
doing a quick little errand here or there and many of them will be
back. But I will note that we are joined on our panel by: Dr.
Donald Marron, Acting Director of CBO; Mr. Tom Navin, Chief
of the Wireline Competition Bureau from the FCC; Mr. Tony
Clark, President of the North Dakota Public Service Commission;
Mr. Skip Frantz, Chairman of the USTelecom Association; Mr.
Richard Cimerman, Vice President, State Government Affairs of
the NCTA; Mr. David Crothers, Executive VP of North Dakota
Association of Telephone Cooperatives, North Dakota is well
represented today; Mr. Paul Garnett, Director of Regulatory
Affairs of the CTIA; Ms. Staci Pies, Vice President of PointOne
Communications in Austin, Texas on behalf of the Voice on the
Net Coalition; Mr. Geoff Feiss, former member of the Great State
of Michigan team, the General Manager now for the Montana
Telecommunications Association; and Dr. Mark Cooper, Director
of Research for Consumer Federation of America.
Ladies and gentlemen, your statements were made part of the
record in their entirety, and we would like it if you could take no
more than 5 minutes to summarize those, and then we will go to
questions of members of the panel.
Dr. Marron, please start.
STATEMENTS OF DR. DONALD B. MARRON, ACTING DIRECTOR, CONGRESSIONAL BUDGET
OFFICE; TOM NAVIN, CHIEF, WIRELINE COMPETITION BUREAU, FEDERAL COMMUNICATIONS
COMMISSION; TONY CLARK, PRESIDENT, NORTH DAKOTA PUBLIC SERVICE COMMISSION, ON
BEHALF OF NATIONAL ASSOCIATION OF REGULATORY UTILITY COMMISSIONERS; SKIP
FRANTZ, CHAIRMAN, UNITED STATES TELECOM ASSOCIATION; RICHARD CIMERMAN, VICE
PRESIDENT, STATE GOVERNMENT AFFAIRS, NATIONAL CABLE AND TELECOMMUNICATIONS
ASSOCIATION; DAVID CROTHERS, EXECUTIVE VICE PRESIDENT, NORTH DAKOTA
ASSOCIATION OF TELEPHONE COOPERATIVES, ON BEHALF OF NATIONAL TELECOMMUNICATION
COOPERATIVE ASSOCIATION; PAUL GARNETT, DIRECTOR, REGULATORY AFFAIRS, CTIA -
THE WIRELESS ASSOCIATION; STACI PIES, VICE PRESIDENT, POINTONE COMMUNICATIONS,
ON BEHALF OF VOICE ON THE NET (VON) COALITION; GEOFF FEISS, GENERAL MANAGER,
MONTANA TELECOMMUNICATIONS ASSOCIATION; AND DR. MARK COOPER, DIRECTOR OF
RESEARCH, CONSUMER FEDERATION OF AMERICA
DR. MARRON. Thank you, Mr. Chairman, members of the
subcommittee.
It is a pleasure to be here today to discuss CBO's recent report
on the Universal Service Fund.
Mr. Chairman, as you mentioned in your opening statement,
spending by the High-Cost Program has increased rapidly in recent
years. Outlays in the program grew from $1.9 billion fiscal year
2000 to $3.8 billion in fiscal year 2005. That doubling of High-
Cost support accounted for more than 80 percent of the overall
USF spending growth during that period.
Looking backward, two main factors have accounted for most
of the spending growth that we have seen in the High-Cost
Program in recent years. There has been a rapid increase in the
number of carriers, particularly wireless carriers that are eligible
for High-Cost subsidies, and there was also a regulatory change
that transformed some subsidies that were previously implicit in
telecommunications prices into explicit subsidies that are now paid
through the High-Cost Program.
Looking ahead are a variety of forces: growth of competitive
providers, possible regulatory changes, and possible legislative
changes could cause High-Cost spending to continue to grow
rapidly in the future. One key factor is the potential for further
increases in the number of competitive telephone carriers that are
eligible through a sea of universal service subsidies in high-cost
areas. Funding for incumbent service providers has been nearly
constant in the past 3 years while funding for competitive entrants
has more than quadrupled, rising from $130 million in 2003 to
about $640 million in 2005. That growth has been driven by a
rapid increase in the number of competitive telecommunications
carriers, primarily wireless ones.
That growth appears likely to continue. In the absence of
policy changes, more cellular providers in rural areas may choose
to become eligible for High-Cost support and, at the same time, the
number of wireless customers in those areas is likely to increase.
Taken together, these factors suggest that under current policies,
payments to competitive providers could double or triple in
coming years, raising annual costs by $600 million to $1.2 billion
per year by 2011.
Regulatory changes may also increase USF spending. The
FCC is considering proposals to reduce payments for intercarrier
compensation, the rates telephone companies charge one another
for the interconnection and transferring of calls. Such rates are
currently set above the cost of providing those services. In
practice, this provides a significant subsidy for local telephone
companies for whom intercarrier compensation is an important
source of revenue. If the FCC lowers intercarrier compensation,
the impacts on rural telephone companies could be offset to some
degree by increasing support through the USF. This is exactly
what happened when a previous regulatory change reduced long
distance access charges, another important revenue source for local
telephone companies. The cost of such compensation would
depend on the size of the new support. Based on a review of
several proposals by industry groups and State regulators, it
appears that the costs could be in the range of $800 million to $2.9
billion per year.
And thirdly, legislative changes may also increase USF
spending. Most notable in this regard are legislative proposals to
add broadband to the list of services covered by the Universal
Service Fund. CBO has not estimated the potential cost of adding
broadband to the High-Cost Program at this time. The potential
cost would ultimately depend on the specifics of any such
legislation.
As a final point, it is important to note that even though the
USF does not increase the Federal budget deficit, revenues are
aligned with costs over time, it does impose costs on the economy.
The benefits provided by the Universal Service Fund come at the
cost of higher charges to telephone companies which are then
reflected in higher charges to consumers for some services. Such
costs will continue to increase if the funding needs of the USF
continue to grow.
Thank you. I would be happy to answer any questions.
[The prepared statement of Dr. Donald B. Marron follows:]
PREPARED STATEMENT OF DR. DONALD B. MARRON, ACTING
DIRECTOR, CONGRESSIONAL BUDGET OFFICE
MR. UPTON. Thank you.
Mr. Navin.
MR. NAVIN. Good afternoon, Chairman Upton and members
of the subcommittee.
Thank you for the opportunity to speak about the Universal
Service High-Cost Program.
As you know, in Section 254 of the Communications Act,
Congress directed the Commission to promote universal service to
ensure that all Americans have access to affordable, quality
telecommunications services. In particular, in Section 254,
Congress articulated a national goal that consumers in all regions
of the Nation, including consumers in rural, insular, and high-cost
areas, shall have access to telecommunication services at rates that
are affordable and reasonably comparable to those provided to
consumers in more urban areas.
Today, I will provide a brief overview of the Commission's
actions implementing the Universal Service High-Cost Support
Program in response to Section 254 of the Act and pending
proceedings in which the Commission is examining ways to
improve the High-Cost Program.
In implementing the Universal Service High-Cost Support
Program, the Commission has taken into consideration the
differences between large, price-cap regulated non-rural carriers
and small, rate-of-return rural carriers. Universal service support
is provided today to defray both the intrastate and interstate
network costs through the following five mechanisms: high-cost
loop support, local switching support, high-cost non-rural support,
interstate access support, and interstate common line support.
Consistent with Section 254 of the Act, the rural and non-rural
support mechanisms support the intrastate network costs of carriers
to ensure that those in high-cost and rural areas have access to
telecommunication services at rates that are affordable and
reasonably comparable to those customers in urban areas.
Although incumbent local exchange carriers may qualify as rural
carriers based on other criteria, a carrier generally is eligible for
high-cost loop support if it serves less than 100,000 lines in a
service area.
The rural high-cost loop support mechanism, which was last
modified by the Commission in 2001, provides support for
embedded intrastate network costs to rural incumbent local
exchange carriers in service areas where the cost to provide service
exceeds 115 percent of the national average cost per line. The
Commission has recognized that rural carriers serve more sparsely
populated areas, serve fewer subscribers, and do not typically
benefit from economies of scale and scope. In addition to high-
cost loop support, carriers with 50,000 or fewer access lines are
also eligible to receive local switching support, which provides
intrastate support for switching costs. In 2005, approximately $1.2
billion was distributed in rural high-cost loop support and $445
million was distributed in local switching support.
The non-rural high-cost mechanism was established by the
Commission in 1999 to support intrastate network costs for non-
rural carriers based on forward-looking economic costs. The non-
rural mechanism determines the amount of Federal High-Cost
support to be provided to non-rural carriers by comparing the
statewide average non-rural, forward-looking cost per line to a
nationwide cost benchmark. In 2005, approximately $292 million
was distributed in the non-rural, High-Cost support program.
Consistent with Congress's directive that universal service
support be explicit, in July 2000, the Commission adopted the
interstate access support mechanism to provide explicit universal
service support to price-cap carriers to replace implicit subsidies
that were eliminated from the access charge rate structure. The
precise amount of interstate access support provided each year may
vary but is targeted to be $650 million for all carriers, both
incumbents and competitors. In 2005, approximately $691 million
was distributed in interstate access support.
The interstate common line support mechanism, which was
implemented beginning July 1, 2002, provides explicit universal
service support to rate-of-return carriers in exchange for removing
implicit subsidies from access charges. Each rate-of-return carrier
receives enough support to ensure that it can recover its interstate
loop costs while charging subscriber line charges no higher than
the cap, which is $6.50 for residential customers and $9.20 for
multi-line business customers. In 2005, approximately $1.18
billion was distributed in interstate common line support.
As a final matter, I would like to note that the Commission has
initiated various proceedings to consider potential reform of the
High-Cost Program. For example, the Commission is examining
rural high-cost reform, changes to the non-rural high-cost
mechanism, and changes to the administration and oversight of the
entire Universal Service Fund, including the High-Cost Program.
Again, thank you for the opportunity to discuss Universal
Service High-Cost issues. I look forward to working with this
subcommittee, other Members of Congress, Chairman Barton, and
the Commission as further reform to the High-Cost Program is
considered.
[The prepared statement of Thomas J. Navin follows:]
PREPARED STATEMENT OF THOMAS J. NAVIN, CHIEF, WIRELINE
COMPETITION BUREAU, FEDERAL COMMUNICATIONS COMMISSION
MR. UPTON. Thank you.
Mr. Clark.
MR. CLARK. Thank you, Mr. Chairman and subcommittee
members. It is a pleasure to testify before you today.
I am Tony Clark, President of the North Dakota Public Service
Commission and Chairman of the Telecommunications Committee
of the National Association of Regulatory Utility Commissioners.
NARUC represents state commissions in all 50 States, the District
of Columbia, U.S. Territories with jurisdiction over
telecommunications, electricity, natural gas, water, and other
utilities.
This particular hearing is especially important to me because of
the impact that Universal Service Programs have on rural States
like mine. North Dakotans are eager to embrace the power and
promise of VoIP, new video services, wireless, broadband, and
other innovative products, but we know that all of these
technologies require underlying infrastructure, wires, switches,
towers, and routers, and those require real investments to build and
maintain, especially in rural markets.
We are here today because universal service is at a crossroads.
On the contribution side, there is a growing chasm between the
services and carriers that sustain the fund and those who
interconnect to the network supported by it. The end result is that
the contribution requirement is falling ever more heavily and
unfairly on a shrinking number of carriers. This means that the
charge the end user has to pay on interstate and international toll
calls has risen to close to 11 percent recently, which is a result of
the growing demands on a shrinking revenue base of interstate and
international calls. On the distribution side, Universal Service
Fund has grown tremendously in the past few years, and these two
trends are on a crash course, making the status quo unsustainable.
On both sides, the Universal Service Funds faces a number of
existential questions, and I have outlined a number of those in my
written testimony. Perhaps we can get into that during the
question-and-answer period.
Each of these choices carries both costs and opportunities, and
a decision on any one of them will have a ripple effect on all
others. To be perfectly frank, the costs and benefits of different
options will vary from State to State, as will the individual State
Commissions' advice that they give you. But at the end of the day,
we must all find common ground. Each of your home State
Commissions is an excellent resource for you and your staff to
utilize in researching the impact of Universal Service Funds on
your districts. It is a contact that is well worth making.
On a practical level, NARUC believes that whatever the
Federal Universal Service Fund is intended to accomplish, it
should be done as efficiently as possible, and to that end, we
support a permanent exemption of the Federal Universal Service
Programs from the Antideficiency Act.
Under Section 214(e) of the Act, State Commissions help the
FCC administer the Federal Universal Service Fund by designating
eligible telecommunications carriers, ETCs, in each State that
receives support. In March 2005, acting on a recommendation of
the Federal-State Joint Board on Universal Service, the FCC issued
a set of permissive guidelines for the States to use in their ETC
designations, partially in response to the growing role and
prominence of competitive ETCs. A major policy goal of those
guidelines was to ensure that all ETCs used any Universal Service
disbursements to invest in infrastructure and defray consumer costs
in the appropriate service area.
At this writing, at least 24 State Commissions have either
implemented the new guidelines or initiated rulemakings to
incorporate some or part of these suggested guidelines. There are,
of course, some natural tensions to work through. One such
potential major tension is currently contained within Chairman
Stevens' Senate draft of the telecom bill, which, in its current
iteration, would preempt all State oversight of terms and conditions
of wireless carriers.
Many State Commissioners are asking how a State can
possibly certify compliance with service quality and consumer
protection standards for wireless competitive ETCs if Federal
legislation ultimately puts jurisdiction over the terms and
conditions of these carriers beyond our reach. Put another way, if
wireless carriers want to be treated like all other carriers when
receiving Universal Service Fund money, then they should not
expect to receive special exemptions from consumer protection
laws that all other ETCs follow.
NARUC supports efforts to more equitably distribute the
funding base of the Federal Universal Service Fund in a
technology-neutral manner, and we appreciate the provisions in
H.R. 5072, the Universal Service Reform Act of 2006, that would
empower the FCC to do so. Broadening the contribution base for
universal service is not a question of how much is collected but
rather fairness in how it is collected. We also believe that such
efforts at the Federal level must be accommodated by similar
efforts to ensure the long-term sustainability of State programs.
Today, universal service is a jointly-shared responsibility
between States and the Federal government. This joint approach
benefits both net donor and net recipient States because it lessens
the burden on an already sizeable Federal program and permits
another option when Federal disbursement programs do not work
in a particular State or community.
Ultimately, we believe the best solution is to stabilize the
contribution base of the State Universal Service Programs at the
same time that the base is stabilized for the Federal program.
Finally, I would be remiss if I didn't say just a few words about
intercarrier compensation, an issue that is joined at the hip with
universal service.
NARUC's leaders have been brokering a dialogue among
every segment of the industry for almost 2 years designed to
produce an approach with as much consensus support as is
possible, especially since this plan governs largely how these
carriers will relate economically to each other. For today, my only
caution to members of this subcommittee is to be aware that
whatever approach is ultimately adopted by the FCC or Congress,
it is likely to, once again, have a big impact on universal service.
Thank you.
[The prepared statement of Tony Clark follows:]
PREPARED STATEMENT OF TONY CLARK, PRESIDENT, NORTH
DAKOTA PUBLIC SERVICE COMMISSION, ON BEHALF OF NATIONAL
ASSOCIATION OF REGULATORY UTILITY COMMISSIONERS
Chairman Upton, Ranking Member Markey and members of
the Subcommittee, thank you for the opportunity to testify today. I
am Tony Clark, President of the North Dakota Public Service
Commission and Chairman of the Telecommunications Committee
of the National Association of Regulatory Utility Commissioners
(NARUC). NARUC represents State commissions in all 50 States,
the District of Columbia and US territories, with jurisdiction over
telecommunications, electricity, natural gas, water and other
utilities.
This particular hearing is especially important to me because of
the impact that Universal Service programs have on rural States
like mine. North Dakotans are eager to embrace the power and
promise of VoIP, new video services, wireless broadband and
other innovative products, but we know that all of those
technologies require underlying infrastructure: wires, switches,
towers and routers - and those require real investment to build and
maintain, especially in rural markets.
In his recent book, "The World is Flat," author Thomas
Friedman writes about how an interlocking network of undersea
optical fiber cables and global satellite connections has, for
business purposes, erased the distance between New York, Los
Angeles, Bangalore and Beijing, creating new types of both
collaboration and competition among professionals in every part of
the globe. In North Dakota, we like the idea of Fargo, Valley City
and even tiny Mandaree (pop. 558, on the Fort Berthold Indian
Reservation) being part of that global information economy too - a
concept that would be unthinkable without a first class
communications infrastructure. So the Telecommunications Act's
promise of reasonably comparable rates and services for high cost
areas means a lot to States like mine.
Beyond their economic value, telecommunications networks
are also critical infrastructure. As telephone companies in the Gulf
Coast region issue press releases now about their readiness for the
2006 hurricane season, we are reminded of how the importance of
reliable communications was magnified during past disasters,
when first responders and relief organizations had to coordinate
thousands of volunteers in real time.
An existential question for USF.
The title of this hearing, "What are we subsidizing and why?"
raises a good point, which is that a national dialogue about the
purpose and scope of universal service is appropriate as Congress
seeks to update many of its communications laws.
We're here today because Universal Service is at a crossroads.
On the contribution side, there is a growing chasm between the
services and carriers that sustain the fund, and those that
interconnect to the network supported by it. The end result is that
the contribution requirement is falling ever more heavily, and
unfairly, on a shrinking number of carriers. This means that the
charge the end user has to pay on interstate and international toll
calls has risen to close to 11 percent recently, which is a result of
the growing demands on a shrinking revenue base of interstate and
international calls. On the distribution side, the Universal Service
Fund has grown tremendously in the past few years. These two
trends are on a crash course, making the status quo unsustainable.
On both sides, the Universal Service Fund faces a number of
existential questions:
Should it explicitly fund broadband infrastructure and
services?
What is the optimal size of the fund and does it need to
be capped?
Should it fund competition in high cost markets?
How many networks should it be used to fund in high
cost markets?
On what cost basis should carriers be reimbursed?
How many access lines per customer should be funded?
Is it intended for networks or for individuals?
Should contributions be pegged to network usage, use of
numbers, connections or some other methodology?
Should Universal Service continue to be a shared
Federal-State responsibility, or should the federal
government take on the entire burden?
Each choice carries both costs and opportunities, and a decision
on any one of them will have a ripple effect on all the others. In
addition, Universal Service programs are inextricably intertwined
with intercarrier compensation and larger impacts on the entire
communications market. To be perfectly frank, the costs and
benefits of different options will vary from State to State, as will
the advice of your individual State commissions, but at the end of
the day, we must all find common ground. Each of your home
State commissions is an excellent resource for you and your staffs
to utilize in researching the impact of universal service on your
districts. It is a contact that is well worth making.
On a practical level, NARUC believes that whatever the federal
Universal Service Fund is intended to accomplish, it should be
done as efficiently as possible. That is why we support a
permanent exemption of federal Universal Service programs from
the Antideficiency Act.
State designation of Eligible Telecommunications Carriers
Under Section 214(e) of the Act, State commissions help the
FCC administer the federal Universal Service Fund by designating
eligible telecommunications carriers (ETCs) in each State that
receives support. The Act requires a finding that each designated
carrier will offer the services supported by Universal Service
throughout the service area, through its own facilities or with a
combination of its own facilities and resale of another carrier's
facilities, and that it will advertise the availability of those services
using media of general distribution.
The Act also requires an ETC designation to be consistent with
the public interest, convenience and necessity, but did not set forth
specific criteria to be applied under the public interest tests in
Sections 214 and 254 of the Act. For service areas already served
by a rural telephone company, the Act specifically requires a
public interest determination to be made before a State commission
designates a competitive ETC for that service area.
In some States, standards were interpreted to allow a degree of
latitude in ETC designations. Our experience in North Dakota
allowed for very little. Prior to my tenure, the Public Service
Commission (PSC) once denied ETC status to a competitive
applicant, citing the public interest standard and a number of
policy concerns, including impact on the federal fund. The carrier
sued the PSC, and the court ruled that questions of federal fund
sufficiency were outside the scope of any State PSC inquiry.
Lacking the ability to take into consideration this factor, the public
interest standard became a relatively easy burden for a competitive
ETC to meet.
In March 2005, acting on a recommendation of the Federal-
State Joint Board on Universal Service, the FCC issued a set of
permissive guidelines for the States to use in their ETC
designations, partially in response to the growing role and
prominence of competitive ETCs. A major policy goal of those
guidelines was to ensure that all ETCs used any Universal Service
disbursements to invest in infrastructure and defray consumer costs
in the appropriate service area. Specifically, the guidelines call for
each carrier seeking ETC status to do the following:
a. Provide a five-year plan demonstrating how high-cost
Universal Service support will be used to improve its
coverage, service quality or capacity in every wire center
for which it seeks designation and expects to receive
Universal Service support;
b. Demonstrate its ability to remain functional in emergency
situations;
c. Demonstrate that it will satisfy consumer protection and
service quality standards;
d. Offer local usage plans comparable to those offered by the
incumbent local exchange carrier (ILEC) in areas for which
it seeks designation; and
e. Acknowledge that it may be required to provide equal
access if all other ETCs in the designated area relinquish
their designations pursuant to Section 214(e)(4) of the Act.
The Order also encouraged States to apply a public interest
standard, including consideration of a cost-benefit analysis and
potential "creamskimming" effects in instances where an ETC
applicant seeks designation below the study area level of a rural
incumbent LEC. And to make sure the guidelines were applied
uniformly, the FCC encouraged States to require annual
certifications from all ETCs, even those previously designated,
including progress reports on coverage and service quality
improvements.
At this writing, at least 24 State commissions have either
implemented the guidelines or initiated rulemakings to incorporate
some or part of these suggested guidelines. There are, of course,
some natural tensions to work through, such as how a State can
certify compliance with service quality and consumer protection
standards for some competitive ETCs if federal legislation
ultimately puts jurisdiction over the terms and conditions for some
carriers beyond our reach.
Contributions to Federal and State universal service.
NARUC supports efforts to more equitably distribute the
funding base of the federal Universal Service Fund (USF) in a
technology-neutral manner, and we appreciate provisions in HR
5072, the Universal Service Reform Act of 2006, that would
empower the FCC to do so. Broadening the contribution base for
universal service is not a question of how much is collected, but
rather of fairness in how it is collected.
We also believe such efforts at the federal level must be
accommodated by similar efforts to ensure the long-term
sustainability of State programs. Today, Universal Service is a
jointly shared responsibility between the States and the federal
government, with 26 State programs distributing about $1.3
billion, or nearly 20 percent of the overall national commitment to
Universal Service. This joint approach benefits both "net donor"
and "net recipient" States because it lessens the burden on an
already sizable federal program and permits another option when
federal disbursement formulas that "work" in the aggregate do not
adequately serve a particular State or community.
Unfortunately, State universal service funds face the same
structural funding challenges as the federal program, with many
new services that rely on a ubiquitous network (and exchange
traffic with the PSTN) failing to contribute equitably to either one.
For this reason, we believe that any efforts to expand the federal
contribution base, especially to include intrastate revenues, must
also clarify State authority to assess against the same broad base,
including total revenues for subscribers within a State.
Preserving State programs is also a question of fairness between
the states. The 1996 Act explicitly contemplated that universal
needs would be met by both State and federal programs and, for
this reason, did not attempt to accomplish everything through the
federal program. For that reason, I suspect that if Congress ever
chose not to preserve State programs, those 26 States would expect
to be made whole in the federal distribution formula, creating even
more upward pressure on the fund, especially on "net donor"
states.
Ultimately, we believe the best solution is to stabilize the
contribution base of State universal service programs at the same
time the base is stabilized for the federal program, by making State
USF assessment authority co-extensive with that of the federal
program, allowing for the use of numbers, connections, total
revenues or whichever approach is ultimately chosen. We
appreciate the provisions in HR 5072 that would hold State
programs harmless when the federal fund is expanded to include
intrastate revenues and we look forward to working with all the
members of this Subcommittee on those issues.
Intercarrier compensation: Inseparable from USF.
Finally, I'd be remiss if I didn't say a few words about
intercarrier compensation, an issue that is joined at the hip with
universal service and one that some people call the "elephant in the
room." As the members of this Subcommittee know, the federal
Universal Service Fund was created as a vehicle to eliminate
implicit subsidies in the telecommunications industry and make at
least some of them into explicit subsidies that could be sustained in
a competitive environment. Perhaps the single largest source of
those subsidies was above-cost charges to originate and terminate
calls - intercarrier compensation.
Many of the accounts within Universal Service were created as
part of past plans to lower access charges, such as the "CALLS"
plans and the "MAG" plan, and many State universal service funds
were created to reduce or eliminate implicit subsidies in intrastate
access charges. Even today, the collective amount of funds
received from intercarrier compensation is estimated to be around
$10 billion, more than State and federal universal service programs
combined.
NARUC's leaders have been brokering a dialogue among
every segment of industry for almost two years, designed to
produce an approach with as much consensus support as possible,
especially since this is a plan that governs largely how these
carriers will relate to each other economically. For today, my only
caution to members of this Subcommittee is to be aware that
whatever approach is ultimately adopted by the FCC or Congress,
it is likely to once again have a big impact on universal service.
Conclusion:
Beyond universal service programs, States have also taken
numerous measures to encourage expeditious availability of
broadband and telephonic infrastructure, including numerous bills
that deregulated incumbent phone companies in return for
promises to offer broadband, cooperative agreements to purchase
broadband services in return for commitments to build out to
surrounding business and residential areas, and in some cases,
public builds of broadband infrastructure.
Ultimately, NARUC's members share each of your concerns
about delivering the best, most efficient, advanced and affordable
communications services to each of your communities. As you
consider changes to Universal Service, both State and federal, we
offer ourselves as partners, especially when it comes to impact of
national policies on each individual State.
MR. UPTON. Thank you.
Mr. Frantz.
MR. FRANTZ. Good afternoon, Mr. Chairman and members of
the committee.
My name is Skip Frantz. I am the chairman of the newly-
formed Windstream Corporation. This company is the result of the
pending spin-off by Alltel Corporation of its wireline, voice, data,
and video business and the concurrent merger of that business with
Texas-based Valor Communications Group. Upon completion of
this transaction, Windstream will be the largest
telecommunications provider focused on delivering voice, data,
and entertainment services to rural America.
I am proud of this new company. I appear before you today,
however, as Chairman of USTelecom. USTelecom represents
more than 1,000 companies, from small, rural phone companies to
some of the largest communications providers in the world.
I appreciate the opportunity to speak with you today on behalf
of USTelecom about the continuing importance of universal
service.
Allow me to begin by thanking this committee, particularly
Chairman Barton, Subcommittee Chairman Upton, and
Congressmen Pickering and Rush for your efforts toward updating
the Nation's communications laws.
Our members' companies and our customers appreciate your
efforts to advance video choice legislation. Real video choice will
deliver billions of dollars in consumer savings and incentivize
vigorous investment in the Nation's broadband infrastructure.
As this committee well understands, the communications
landscape is undergoing rapid and dramatic change as previously
distinct technologies evolve and platforms come into direct
competition.
In this environment, our members are unified in their
commitment to two legislative principles: first, market-based
competition that ensures that consumer choices, rather than
outdated government policies, determine marketplace success; and
second, universal service reform to ensure affordable, reliable
telecommunications for all Americans in the 21st Century.
This hearing is significant. USTelecom is unique in its diverse
membership. We represent providers of all sizes, including
companies utilizing multiple technology platforms and companies
serving urban, suburban, and rural America. Our members have
differences, but we share a commitment to working with Congress
to advance video choice and a secure future for universal service.
Universal service ensures that all Americans, regardless of
geography or income, have access to affordable, reliable
communications. The High-Cost Fund is essential to this vision
because it makes possible the availability of affordable service in
sparsely populated areas. Rural markets have much lower
population densities than urban markets, which creates a
straightforward challenge: the significant expense of building,
maintaining, and upgrading a large geographic network and few
customers from which to recover costs. The result, in the absence
of universal service support, would be phone bills that are anything
but reasonable and affordable. In a very real sense, universal
service is more important today than ever before, given the
information age in which we now live.
In spite of its urgent importance, however, universal service is
in peril. The historic core of funding, long-distance revenues, is
shrinking as consumers reap the benefits of low-cost nationwide
calling plans, not to mention free alternatives, like e-mail, instant
messaging, and PC-to-PC calling.
At the same time, demand on the High-Cost Fund is rising as a
result of needed reform of intercarrier compensation as well as
increased use by many States of universal service to subsidize not
only service but competition in areas where just one company
would struggle to exist in the absence of subsidies.
USTelecom believes that the current system needs immediate
reform. Our suggestions are: first, broaden the base of
contributors; second, carefully target recipients; and third, cap
government resources to speed broadband deployment. Overall,
both the Boucher-Terry legislation and the universal service
provisions in Senator Stevens' legislation are consistent with
USTelecom principles.
Mr. Chairman, we appreciate your time and attention today.
We are grateful for the hard work of the committee and staff. We
believe universal service has a vital ongoing role advancing rural
America, and we look forward to working with you on sound
policies that ensure that all Americans have access to affordable
and reliable communication services.
Thank you very much.
[The prepared statement of Skip Frantz follows:]
PREPARED STATEMENT OF SKIP FRANTZ, CHAIRMAN, UNITED
STATES TELECOM ASSOCIATION
USTelecom thanks the committee, particularly Chairman
Barton, Subcommittee Chairman Upton and Congressman Rush,
for its efforts toward updating the nation's communications laws.
Real video choice in America would deliver more than $8 billion
in consumer savings in the first year alone. Removing barriers to
competition in this area also would incent further vigorous
investment in the nation's broadband infrastructure.
The communications landscape is undergoing rapid change. In
this competitive environment, our diverse membership is united
behind two guiding legislative principles:
(1) Market-based competition that ensures consumer
choices, rather than outdated government policies,
dictate marketplace success; and
(2) Universal service reform to ensure affordable, reliable
telecommunications for all Americans in the 21st
century.
Universal service is a shared commitment to ensuring that all
Americans-regardless of geography or income-have access to
affordable, reliable communications.
High-cost support offsets the exceptional expense of serving
sparsely-populated areas. Rural markets have much lower
population densities than urban markets. The challenge: The
expense of building, maintaining and upgrading a large geographic
network-and few customers from which to recover costs. The
result, in the absence of universal service support, would be phone
bills that are anything but "reasonable and affordable."
Universal service is more important today than ever before
given the information age in which we now live. However, it is in
significant peril. The historic core funding base-long-distance
revenues-is rapidly shrinking. At the same time, demand on the
high-cost fund has increased both from needed reform of
intercarrier compensation and rising use of the fund to subsidize
not only service, but competition.
The increasingly precarious revenue base and the concurrent
rising demand for resources have combined to drive the USF
contribution factor from 5.9% in the first quarter of 2000 to 10.9%
in the first quarter of this year. USTelecom has long believed that
the current system needs immediate reform. Our primary
suggestions include: (1) broadening the base of contributors; (2)
carefully targeting recipients; and (3) tapping government
resources to speed broadband deployment.
Overall, both the Boucher-Terry legislation and universal
service provisions in Sen. Stevens' communications legislation are
consistent with the principles embraced by the USTelecom Board.
We also thank Chairman Barton for accepting the
Gutknecht/Stupak amendment to the COPE Act and express our
appreciation for this acknowledgement of the broad support in the
House for sustaining universal service.
Good afternoon, Mr. Chairman, members of the committee.
My name is Skip Frantz. I am Chairman of the newly-formed
Windstream Corporation. This company is the result of the
pending spin-off by Alltel Corporation of its wireline voice, data
and video business and the concurrent merger of that business with
Texas-based Valor Communications Group. Upon completion of
this transaction, which is scheduled to occur in mid-July,
Windstream will be the largest telecommunications provider in the
U.S. focused on delivering voice, data and entertainment services
to rural America. I am proud of the new company, its mission and
its plans to deliver innovative services to customers across our
market areas in 16 states.
But I appear before this committee today in a different
capacity-as Chairman of the USTelecom Association.
USTelecom represents more than 1,000 communications
companies-from the smallest rural telephone cooperatives in
America to some of the largest communications service providers
in the world. I feel privileged to appear in that capacity on behalf
of our industry trade association and to have this opportunity to
speak with you today about the future of communications in our
country and the ongoing value of universal service.
Allow me to begin by thanking the members of this committee,
particularly Chairman Barton, Subcommittee Chairman Upton and
Congressman Rush, for your efforts toward updating the nation's
communications laws. Our companies, our customers-and, I
suspect, even many of the cable companies, as well-appreciate
your efforts to advance video choice legislation. The House floor
vote two weeks ago was a beneficial, bipartisan vote in favor of
competition and consumer choice and has helped generate real
momentum, particularly in the Senate, where a mark-up now
appears likely on video choice legislation this month.
It is estimated that real video choice in America would deliver
more than $8 billion in consumer savings in the first year alone.
Removing barriers to competition in this area also would incent
further vigorous investment in the nation's broadband
infrastructure.
As this committee well understands, the communications
landscape is undergoing rapid and dramatic change as previously
distinct technologies evolve and platforms come into direct
competition. In this competitive environment, our member
companies are united in our commitment to two guiding legislative
principles:
(1) We believe in reforms that advance market-based
competition to ensure consumer choices, rather than
outdated government policies, dictate which
technologies and companies succeed in the
marketplace; and
(2) We believe the time has come to reform universal
service to ensure affordable, reliable
telecommunications for all Americans in the 21st
century.
Mr. Chairman, this unity is significant and, I believe,
noteworthy in terms of your efforts today. USTelecom is unique in
the breadth and diversity of its membership. We are the industry's
central forum, representing small, mid-sized and large
communications providers, including companies utilizing multiple
technology platforms and companies serving urban, suburban and
rural America. Although our member companies have differences,
we stand united in our commitment to working with Congress to
achieve these two objectives of delivering video choice to
consumers and ensuring a stable, sustainable future for universal
service.
Mr. Chairman, your hearing today asks a central and timely
question: What are we subsidizing and why? In its purest form,
universal service is a shared commitment to ensuring that all
Americans-regardless of geography or income-have access to
affordable, reliable communications. As our transition into an
information-based society accelerates, this basic access becomes
more and more important to the nation's economy and the
opportunities it affords to our citizens.
The high-cost fund is essential to this vision of a ubiquitous
network across a landscape as vast as the United States. It is a pact
between the government and the private sector:
Telecommunications companies provide essential communications
services at reasonable and affordable rates.and high-cost support
makes that possible by offsetting the exceptional costs of serving
sparsely-populated areas.
In targeting sparsely-populated rural areas, high-cost support
advances the goal of universal service in communities with costs
that are significantly above the national average. Rural markets
have much lower population densities than urban markets, often as
little as 13 phone lines per square mile. This, of course, creates a
straightforward economic challenge: The significant expense of
building, maintaining and upgrading a large geographic network-
and very few customers from which to recover its costs. The
result, in the absence of universal service support, would be phone
bills that are anything but "reasonable and affordable." Prices in
many parts of rural America would skyrocket and in a number of
areas, service would be cost-prohibitive.
So if you believe in the goal of keeping the country connected
through affordable, essential communications services, then
universal service is, in a very real sense, more important today than
ever before given the information age in which we now live. In
spite of its urgent importance, however, it is in significant peril.
Traditional sources of revenue are in steep decline. The historic
core base of funding-long-distance revenues-is rapidly
shrinking as consumers reap the benefits of much lower national
and international calling plans-not to mention free alternatives,
such as email, instant messaging and PC-to-PC calling. From
2000-2004 alone, long-distance revenues declined by $5 billion in
the U.S.
At the same time, demands on the high-cost fund have
increased. These demands result from needed reform of
intercarrier compensation as well as the more expansive view
taken by many states in recent years that universal service should
subsidize not only service in remote areas-but competition. This
latter view has often left the fund to subsidize not one provider, but
two or more competing providers in areas where one provider
would struggle to exist in the absence of subsidies.
The increasingly precarious revenue base of universal service
and the concurrent rising demand for resources have combined to
drive the USF contribution factor from 5.9% in the first quarter of
2000 to 10.9% in the first quarter of this year. USTelecom,
alongside many on Capitol Hill, has grown increasingly concerned
with the fund's diminished financial stability. We have long
believed that the current system needs immediate reform. Our
primary suggestions include: (1) broadening the base of
contributors; (2) carefully targeting recipients; and (3) tapping
government resources to speed broadband deployment.
Overall, both the Boucher-Terry legislation and universal
service provisions in Sen. Stevens' communications legislation are
consistent with the principles embraced by the USTelecom Board.
And, Chairman Barton, we also thank you for accepting the
Gutknecht/Stupak amendment to the COPE Act and express our
appreciation for this acknowledgement of the broad support in the
House for sustaining universal service.
The amendment, as you know, preserves the FCC's authority
to require VoIP providers to contribute to universal service
alongside their other voice competitors. Just a few years ago, very
few people had even heard the acronym VoIP. Today in North
America, there are more than 1,100 VoIP providers offering
service and more than 7.4 million VoIP subscribers. It is important
that all providers contribute in the same way to this shared national
commitment to universal service.
Mr. Chairman, we appreciate your time and attention today.
We appreciate the hard work of the committee and the staff on
updating the nation's communications laws. We believe universal
service has a vital, ongoing role to play ensuring that rural America
has every opportunity to reap the full benefits of this new world of
communications, and we look forward to working with you on
sound policies that will ensure all Americans have access to
affordable and reliable communications services.
MR. UPTON. Thank you.
Mr. Cimerman.
MR. CIMERMAN. Thank you.
Mr. Chairman, members of the committee, thank you for
inviting me to testify here today.
My name is Rick Cimerman. I am the Vice President of State
Government Affairs for the National Cable and
Telecommunications Association, NCTA, which is the principal
trade association representing the cable industry in the United
States. Our members include cable operators serving more than 90
percent of the Nation's cable television subscribers as well as more
than 200 programming networks. Our members also include
suppliers of equipment and services to the cable industry. We are,
as an industry, the Nation's largest broadband provider of high-
speed Internet access after investing $100 billion of private risk
capital over the last 10 years to build out a two-way interactive
network with fiber optic technology. We also provide state-of-the-
art digital telephone service to millions of American consumers.
We appreciate your giving the cable industry the opportunity to
share our views. We strongly support the goals and purposes of
the Universal Service Fund, but at the same time, we share the
concerns of policymakers, industry stakeholders, and the public
that, in its current form, the Universal Service Program is not
sustainable. There appears to be a general consensus that all
aspects of the system, including contributions, eligibility, and level
of support are in need of reform.
But at the outset, I want to be clear that cable operators that
offer VoIP services pay millions of dollars into the current
Universal Service Fund and we support making that obligation
clear in the law. In addition, cable companies that offer traditional
circuit switched service pay into the fund exactly the same as all
other incumbent and competitive local exchange carriers that offer
circuit switched service.
So in discussing High-Cost Universal Service reform today, I
want to make three main points. First, we believe that a telephone
number-based contribution mechanism should be adopted for
Universal Service assessments. Broadband services, however,
should not be assessed for universal service purposes. And all
Universal Service distributions should be competitively and
technologically neutral and encourage efficiency.
So as for a number-based system, we understand that the
current contribution mechanism, which relies on the assessment of
interstate telecommunications revenues only, virtually guarantees
that the fund will continue to shrink. To address that problem, we
have long advocated a telephone number-based system, a simple
yet effective reform that we believe will sustain the long-term
health of the fund while adapting to the evolving technology and
economics of voice telephony. Using phone numbers would be a
relatively simple means of determining who should contribute as
well as when contributions were owed and in what amount. There
will be no need to apportion provider revenues into interstate
versus intrastate or determine which portion of a bundled offering
represents interstate telecommunications or telecommunication
services versus information services or which portion of the bundle
is telecommunications versus video versus data. So it would make
no difference which way these services were defined. Also, under
a telephone number-based system, all that would matter is whether
the service uses a phone number or not. It would be simple to
understand for consumers, unlike today's system.
We don't believe, however, that universal service fees should
be imposed on broadband service, particularly at the same time as
policymakers seek to encourage more widespread deployment and
service penetration. We believe such a fee would be
counterproductive and would raise the price of high-speed Internet
services for current and potential broadband customers. An
appropriately crafted number-based plan would raise the revenue
necessary to put the Universal Service Fund on solid and stable
ground. According to the FCC, there are now 565 million
telephone numbers in use. If each number were assessed $1 a
month, we would raise $6.8 billion a year, an amount that exceeds
the 2005 expenditures of $6.3 billion. But all of the various
number-based proposals before the FCC also call for retaining an
appropriate contribution from non-number-based services, most
particularly special access and private line services used by
businesses. Now there are various proposals on how to assess
those services: capacity base, connections base, revenue base. In
any case, as long as those contributions were retained, the revenue
raised would reduce the required number-based assessment below
$1 per month. So the assessment of broadband service is
unnecessary to the goal of a stable, sufficient, and predictable fund.
Finally, I want to say just a few words about USF distributions.
We believe that any reform must address disbursements as well as
contributions, and that disbursements ought to be fair, equitable,
and efficient. So in terms of the eligibility to receive funds, we
believe that VoIP service providers ought to be eligible to receive
funds, even if the service is classified as an information service.
There are additional restrictions on ETC, or eligible
telecommunications carrier, eligibility. For example, offering local
usage plans comparable to those offered by the incumbent, or
matching the service area of the incumbent local exchange area.
We don't believe that competitors should have to mimic the
service offerings of an ILEC in order to receive funds.
Finally, Congress should consider the possibility of promoting
more efficient use of universal service funds by establishing a cost
benchmark and supporting no more than one line per household.
So, Mr. Chairman, thank you for inviting me here to testify,
and I will be happy to answer any questions.
[The prepared statement of Richard Cimerman follows:]
PREPARED STATEMENT OF RICHARD CIMERMAN, VICE PRESIDENT,
STATE GOVERNMENT AFFAIRS, NATIONAL CABLE AND
TELECOMMUNICATIONS ASSOCIATION
Chairman Barton and members of the committee thank you for
inviting me to testify today. My name is Rick Cimerman and I am
the Vice President of State Government Affairs for the National
Cable & Telecommunications Association (NCTA), which is the
principal trade association representing the cable industry in the
United States. Its members include cable operators serving more
than 90% of the nation's cable television subscribers, as well as
more than 200 cable programming networks. NCTA's members
also include suppliers of equipment and services to the cable
industry. The cable industry is the nation's largest broadband
provider of high speed Internet access after investing $100 billion
over ten years to build out a two-way interactive network with
fiber optic technology. Cable companies also provide state-of-the-
art digital telephone service to millions of American consumers.
The Cable Industry Supports Universal Service
Thank you for inviting me to comment on universal service
issues. We appreciate your giving the cable industry the
opportunity to share its views. The cable industry strongly
supports the goals and purposes of the universal service fund
(USF). Universal service is a longstanding component of national
telecommunications policy and we share the concerns of
policymakers, industry stakeholders and the public that, in its
current form, the universal service program is not sustainable.
While there is general consensus that all aspects of the system,
including contributions, eligibility and level of support are in need
of reform, there are a wide range of views as to how the program
should be restructured.
At the outset I want to be clear that cable operators that offer
VoIP services pay millions of dollars into the current universal
service fund and we support making that obligation clear in law.
In addition, cable companies that offer traditional circuit switched
service pay into the fund exactly the same as all other incumbent
and competitive local exchange carriers that offer circuit switched
service.
In discussing high cost universal service reform today I will
make three main points:
a telephone number-based contribution mechanism should
be adopted;
broadband services should not be assessed for universal
service purposes;
all universal service distributions should be competitively
and technologically neutral and encourage efficiency.
A Number-Based Assessment Mechanism Should Be Adopted
The current USF contribution mechanism, which relies on the
assessment of interstate telecommunications revenues only,
virtually guarantees that the fund will continue to shrink. There
are several reasons for this. An increasing number of companies
offer consumers voice telephone service for a fixed monthly rate
that does not differentiate between local or long distance calls.
Companies also offer bundled packages of digital services that
include voice telephony. Most consumer VoIP services are
offered without regard to intrastate or interstate distinctions. The
fact is that interstate telecommunications revenues have been
declining and are predicted to continue declining for the
foreseeable future. As the line between what is a local and long
distance call continues to blur, the existing USF contribution
mechanism will become increasingly obsolete which threatens the
viability of the program itself.
To address this problem, the cable industry has long advocated
the adoption of a telephone numbers-based contribution
mechanism, a simple yet effective reform that will sustain the
long-term health of this fund while adapting to the evolving
technology and economics of voice telephony. Using telephone
numbers would be a relatively simple means of determining who
should contribute as well as when contributions were owed and in
what amount. There would be no need to apportion provider
revenues into interstate versus intrastate or to determine which
portion of a bundled offering represents interstate
telecommunications. It would also make no difference whether a
service was defined as a telecommunications service or as an
information service. Under a telephone number-based system, all
that matters is whether or not the service uses a phone number.
Adoption of this approach would promote competitive neutrality
among all voice telephone providers - those who offer their
services as a replacement for plain old telephone service (POTS) -
and would avoid assessments on services that only include a voice
component but are not a substitute for POTS. Few would argue,
for example, that applications, or devices, where voice
functionality is ancillary to the actual purpose of the service or
device-such as voice enabled gaming-should be assessed for
USF purposes.
Some have expressed concern that a numbers-based system
would collapse as proposals to map telephone numbers to Internet
addresses, such as ENUM, become a reality. However, ENUM
requires that a subscriber have an active telephone line. If
someday in the distant future a non-number based system were
developed and widely implemented, the telephone number- based
contribution mechanism could easily be adapted, as some form of
unique identifier or address will always be necessary to route
various types of voice communications.
Mr. Chairman, the reality is that interstate telecommunications
revenues are declining and will continue to decline. Conversely,
an FCC staff analysis shows that the number of active telephone
numbers is expected to grow for the foreseeable future, from 554
million numbers in use in 2004 to nearly 600 million numbers in
use in 2007. Moving to a numbers-based USF contribution
mechanism embraces this reality and will ensure the universal
service fund remains solvent well into the future. Furthermore, it
would create a more predictable and equitable split between
assessments collected by providers of local and long distance
telephone services, and between residential and business
subscribers. Residential telephone subscribers would generally
pay less under a numbers-based plan. Assuming an appropriate
assessment amount, even most one-line households with low long
distance usage would pay the same or less under a numbers-based
system than they do under the existing interstate revenue model.
This is a particularly important point. Some who oppose a
numbers-based assessment mechanism, because it's in their
business interest to do so, claim that low-income and low volume
long distance users will be unfairly burdened by a numbers-based
system. They fail to note that proponents of such a system have
proposed that low-income users be exempt from USF assessment.
And, perhaps more misleadingly, they fail to note that even local
telephone subscribers that make no long distance calls pay at least
$.54 per month into USF based on assessments on the interstate
federal subscriber line charge. Given that the various proposals
before the FCC call for at most an assessment of $1.01 per number
per month, and other proposals call for something less than $1.00,
arguments that low volume users will be unduly burdened ring
hollow.
New Government Fees Should Not Be Imposed on Broadband
Service
The imposition of new fees on broadband service at the same
time policymakers seek to encourage more widespread deployment
and service penetration would be counter-productive and would
raise the price of high-speed Internet services for current and
potential broadband customers. An appropriately crafted numbers-
based assessment plan that avoids assessing broadband service will
raise the revenue necessary to put the universal service fund on
solid and stable ground. According to the FCC there are now 565
million telephone numbers in use. If each telephone number were
assessed a universal service contribution of $1.00 per month then
$6.8 billon per year would be raised - an amount that exceeds the
2005 expenditure of $6.5 billion. But the various number-based
proposals before the FCC also call for retaining an appropriate
contribution from non-number based services, most particularly
special access and private line services used by businesses.
Whether such services are assessed on a capacity-based
connections basis, or a revenue basis, the revenue raised would
reduce the required number-based assessment well below $1.00
per month. Thus, the assessment of broadband service is
unnecessary to the goal of a stable, sufficient and predictable fund.
USF Distributions Should Be Competitively and
Technologically Neutral and Encourage Efficiency
It is essential that any high cost universal service reform
address disbursements as well as contributions. The goals of
reform should be to ensure that contributions are assessed fairly,
eligibility and distributions are determined equitably, efficiently,
and support is targeted to the appropriate services.
Eligibility to Receive Funds. Existing statutory requirements
impede the eligibility of new entrants to receive universal service
funds, even if they are the most efficient provider of basic services.
For instance, current law requires that a recipient must be an
"eligible telecommunications carrier" (ETC), potentially
excluding VOIP service providers if VOIP is classified as
information service. The FCC imposes additional restrictions on
ETC eligibility, including the requirement to offer local usage
plans comparable to those offered by incumbent local exchange
carrier (ILEC) in the area and to provide equal access to long
distance carriers if all other ETCs in area relinquish their
designations.
Competitors should not have to mimic ILEC service offerings
or network architecture or geographic coverage to qualify for
universal service support. Cable telephony providers should be
eligible if they offer supported services throughout their cable
franchise areas, without regard to the historical ILEC study area or
technology.
Promoting Efficiency. High cost universal service reform
should attempt to introduce more efficiency into the rural and high-
cost support mechanisms. As competitive options become
available to rural consumers, it may be possible to cap the existing
funds or even reduce them. Congress should also consider the
possibility of promoting more efficient use of universal service
funds by establishing a cost benchmark for awarding support and
limiting support to one line per household.
Finally, while we agree that it is critically important to ensure
that providers of supported services to consumers in rural and
high-cost areas have adequate funding, as universal service
contributors we also believe that funding must be subject to
reasonable and regular oversight including assurances that
universal service funds are being spent for their intended purpose.
Mr. Chairman, thank you for inviting me to testify today. I
would be happy to answer any questions you or the members of the
committee may have.
MR. UPTON. Thank you.
Mr. Crothers.
MR. CROTHERS. Good afternoon, Mr. Chairman.
My name is David Crothers. I am here today to testify on
behalf of the National Telecommunications Cooperative
Association. We thank you for the opportunity to appear before
you today.
Universal service has remained the cornerstone of our Nation's
telecommunications policy for more than 6 decades. It ensures
that we enjoy the benefits of a nationwide integrated
communications network. It is arguably one of the most successful
programs in American history and has played a key role in our
Nation attaining a near ubiquitous telephone subscribership level
of 94 percent.
Mr. Chairman, the subject of this hearing is USF, what we are
subsidizing and why. Let me begin my testimony by saying what
USF is not. It is not a subsidy, and it is not a tax. USF is an
industry-funded, cost-recovery mechanism that offsets the higher
cost to build and maintain a vital communications network in rural,
sparsely populated areas. No Federal monies are appropriated to
this fund. Carriers that made the commitment to invest and deploy
networks in high-cost areas receive support, which in turn allows
them to offer service to rural consumers at a rate comparable to
that offered to customers in lower cost urban areas.
As to the question why, Mr. Chairman, we believe the answer
is evident. It is in the national and public interest for all Americans
to have affordable access to communication services. Some
question the continued need for universal service. To those that
doubt, I would invite you to visit my State of North Dakota and see
the incredible accomplishments of this program for yourself. I can
assure this committee that universal service is still needed and is
even more essential now as the Nation transitions to a digital and
broadband world. Likewise, this does not alter the fact that the
cost to serve rural areas is, always has been, and always will be
more expensive than in urban and suburban areas.
For ILECs, the High-Cost Universal Program is a highly
accountable, cost-based program. Rural carriers with costs
exceeding 115 percent of this national average cost per line receive
support from the fund to offset these elevated costs. Incumbents
file immense amounts of data that is reviewed and vetted at many
levels, including the fund administrator, the Universal Service
Administrative Company, and the FCC.
H.R. 5072, the Universal Service Reform Act introduced by
Representatives Terry and Boucher contains provisions that meet
the policy goals of NTCA. It has two goals: spur deployment of
broadband services, and control growth in the Universal Service
Fund. Broadband is an integral part of the commercial, economic,
and social viability of any community. A community that lacks
access to broadband and advanced services will not have pride and
may not even survive.
While there are concerns that adding broadband to the
Universal Service Program will cause the size of the fund to
increase, this bill takes several steps to limit potential growth. We
believe several of the cost-saving provisions in the bill will be
extremely effective and may offset much of the additional cost of
deploying broadband. In particular, NTCA supports the expansion
of the pool of providers and services that pay into the fund. The
bill would require all providers that use telephone number, 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 abate contributing even though they benefit from the
resulting network upgrades and investment.
We fully understand and appreciate the political realities of
compromise in this legislative process, Mr. Chairman, and the need
to control expenditures and growth of USF. If a cap is necessary to
secure House passage, we stand willing to work with you to ensure
that rural carriers are not negatively affected. NTCA is very
pleased that Congressmen Lee Terry and Rick Boucher have taken
a leadership role through their legislation to ensure the vital policy
of universal service remains solvent and forward-looking. The
Universal Service Fund is critical in reaching the near ubiquitous
telephone subscriber rate currently in the United States. This bill
will put the Universal Service Fund on course to bring the same
level of broadband subscribership to all Americans. We urge the
committee to continue with the process and push for the passage of
H.R. 5072 by the full House this year. NTCA stands ready and
committed to working with Representatives Terry, Boucher, and
the Energy and Commerce Committee to see that America takes
this crucial step forward towards a broadband America.
Thank you.
[The prepared statement of David Crothers follows:]
PREPARED STATEMENT OF DAVID CROTHERS, EXECUTIVE VICE
PRESIDENT, NORTH DAKOTA ASSOCIATION OF TELEPHONE
COOPERATIVES, ON BEHALF OF NATIONAL TELECOMMUNICATIONS
COOPERATIVE ASSOCIATION
Good afternoon. I am David Crothers, Executive Vice
President of the North Dakota Association of Telephone
Cooperatives. I am here today to testify on behalf of the National
Telecommunications Cooperative Association. We thank you for
the opportunity to testify before you today. My comments today
will focus primarily on the high-cost program within the universal
service fund.
Universal Service has remained the cornerstone of our nation's
telecommunications policy for more than six decades, ensuring
that we enjoy the benefits of a nationwide integrated
communications network. It is arguably one of the most successful
programs in American history playing a key role in our nation
attaining a near ubiquitous telephone subscribership level of 94%.
Mr. Chairman, the subject of this hearing is "USF, what are we
subsidizing and why?". Let me begin my testimony by telling you
what USF is not. It is NOT a subsidy and it is NOT a tax. USF is
an industry funded cost recovery mechanism that offsets the higher
cost to build and maintain vital communications networks in rural,
sparsely populated and insular portions of our Nation. No federal
monies are appropriated to this fund what so ever. Carriers that
made the commitment to invest and deploy networks in high-cost
areas receive support which in turn allows them to offer service to
rural consumers at a rate comparable to that offered to consumers
in lower cost urban areas.
As to the question "why", Mr. Chairman my answer is simple:
it is in the national and public interest for all Americans to have
affordable access to communications services. Some question the
continued need for universal service. To these doubters I invite
you to visit my state of North Dakota and see the incredible
accomplishments of this program for yourself. I can assure this
committee that the universal service fund is still needed and I
believe that it is even more essential now as the nation transitions
to a digital and broadband world. While it is true that advances in
technology may in some cases bring down the cost of providing
communications services this is an over generalization. Likewise,
this does not alter the fact that the cost to serve rural areas is, and
always will be, more expensive than in urban and suburban areas.
That, Mr. Chairman, is a fact that no one will dispute.
For ILECs, the high-cost universal service program is a highly
accountable cost-based program. Support out of the fund is based
on a national average cost per line calculated by the FCC. Rural
carriers with costs exceeding 115% of this national average may
receive support from the fund to offset these elevated costs.
Incumbents file immense amounts of data outlining their costs and
network investments to receive cost recovery support from the
fund. This data is reviewed and vetted at many levels, including
by the fund administrator, the Universal Service Administrative
Company (USAC), and the FCC.
However, new competitive carriers are treated differently.
Under the guise of competitive neutrality the FCC unwittingly
undermined the accountability of the fund by allowing new
competitive carriers to receive support from the universal service
fund without the same stringent reporting and accounting
requirements mandated of the incumbents. Instead of filing their
own cost and investment data, these new competitive entrants
receive support based on incumbents costs. The vast majority of
growth in universal service is due to competitive eligible
telecommunications carriers (ETCs). Universal service support to
competitive ETCs grew by over 115% in 2004 . During this same
period ILEC support grew by only 0.6%. Requiring all universal
service fund recipients to receive support based on their own costs
will increase program accountability, reduce demand for funds and
ensure that funds are being used for their intended purpose.
NTCA's Communications Act Re-write Policy Course is
attached to my testimony. In the interest of time I will not go over
it but I would like to briefly go over its key universal service
policy positions. NTCA strongly believes:
The universal service fund must continue to be an industry-
funded mechanism, and neither supported through general
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 2-way communications
regardless of 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 based upon a provider's actual cost of
service and must not be used to artificially incite
competition.
If enacted, these policies will ensure the long term
sustainability of the universal service fund, bring it in line with
technological and market realities of today and position the fund to
meet the communications needs of the future. The Universal
Service Reform Act of 2006 (H.R. 5072) introduced by
Representatives Terry and Boucher, contains provisions that meet
the policy goals of NTCA. H.R. 5072 has two goals: spur
deployment of broadband services and control growth in the
universal service fund.
In regard to expanding the universal service program to cover
deployment of broadband networks, I don't think anyone would
dispute the growing importance of broadband. Broadband is an
integral part of the commercial, economic and social viability of
any community. A community that lacks access to broadband and
advanced services will not thrive and may not even survive. It is
simply that important.
While there are concerns that adding broadband to the
universal service program will cause the size of the fund to
increase, this bill takes several steps to limit potential growth. We
believe several of the cost saving provisions in the bill will be
extremely effective and may offset much of the additional cost of
covering broadband. In particular, NTCA supports 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.
NTCA however, does not support provisions contained in the
bill that would institute a statutory cap on the universal service
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. A cap is a disincentive to network investment.
The FCC has maintained a regulatory cap on the fund for a number
of years, and while we are not supportive of it, it is evidence to this
committee that the Commission takes its role as steward of
universal service monies seriously. In addition, a regulatory cap
allows for flexibility to adjust in the future should circumstances
change. We believe the many other positive provisions in H.R.
5072 discussed here go a long way towards achieving the goal of
limiting growth in the universal service fund and thus make the
proposed statutory cap unnecessary.
NTCA is very pleased that Congressmen Lee Terry and Rick
Boucher have taken such a leadership role through their legislation
in working to ensure the vital policy of universal service remains
solvent and forward looking. H.R. 5072 contains many provisions
recommended by NTCA that would continue and expand upon the
highly successful universal service program.
The universal service fund was integral to reaching the near
ubiquitous telephone subscriber ship rate that currently exists in
the United States. This bill will put the universal service fund on
course to bring the same level of broadband subscriber ship to all
Americans.
America stands at a crossroads between a narrowband and
broadband world. The choice is clear. We must move forward
aggressively with a national plan to bring broadband to all
Americans, as envisioned by President Bush in his goal of
ubiquitous broadband by 2007. To NOT move forward would
imperil the global economic competitiveness of the United States.
We urge the committee to adopt H.R. 5072 and push for its
passage by the full House of Representatives this year.
NTCA stands ready and committed to working with the Energy
and Commerce Committee, and the entire congress, to see that
America takes this crucial leap forward towards a broadband
America. Thank you.
MR. UPTON. Thank you.
Mr. Garnett.
MR. GARNETT. Good afternoon, Chairman Upton and
members of the subcommittee. I want to thank you for focusing
your attention on the important and timely issue of High-Cost
Universal Service reform. CTIA is grateful for the opportunity to
present its views in this important area on behalf of more than 200
million wireless subscribers.
Over the last decade, wireless industry contributions to
universal service have been steadily rising while Universal Service
distributions remain primarily directed to wireline carriers.
Wireless carriers and their customers are responsible for about
one-third of contributions to Universal Service. The wireless
industry's payment into the Universal Service Program will likely
exceed $2.5 billion this year.
Meanwhile, the vast majority of universal service subsidies are
directed to wireline carriers. Wireless carriers continue to receive
only about 13 percent of universal service funding overall and less
than 20 percent of the High-Cost Universal Service support. And
to add a little clarity to some comments made earlier about growth
in the size of the fund, from 2000 through 2005, incumbent carriers
accounted for roughly two-thirds the growth in the size of the
High-Cost Universal Service mechanisms. Since 1997, of $22
billion spent on High-Cost Universal Service subsidies, $20.9
billion has gone to incumbent wireline carriers and only $1.1
billion has gone to wireless carriers and other competitors. This
inequity exists even as consumers are demanding more and more
wireless services. In fact, there are now more mobile wireless
service subscribers than wireline switched access lines in the
United States.
As Congress considers the important question of how to reform
the Universal Service system, we believe there are important
lessons that can be learned from the incredible growth of the
wireless industry over the last decade. In December of 1995, there
were approximately 34 million mobile wireless subscribers in the
United States. By December of 2005, there were over 200 million
mobile wireless subscribers, and that number continues to grow.
That growth has occurred even as consumers have received lower
monthly bills, cheaper minutes, and new and innovative services.
This result is due, in large part, to an environment of regulatory
constraint that rewards efficiency and innovation.
Although most of the wireless industry's growth has occurred
with the benefit of universal service subsidies, universal service
can and does play a critical role in improving wireless services in
high-cost, rural areas. For example, on the Pine Ridge Indian
Reservation in South Dakota, Alltel has used universal service to
increase telephone penetration rates from only 27 percent to 92
percent in 5 years. Centennial Wireless has used support to bring
mobile wireless services to communities like Shaw and
Blackhawk, Louisiana that previously had no telephone service at
all, wireless or wireline. The public safety benefits of wireless
deployment to these and other areas became obvious in the wake
of Hurricanes Katrina and Rita last year when wireless services
often were up and running long before wireline services were. We
are proud of that track record, but we really do believe the best is
yet to come.
As I mentioned to you before, efficiency and innovation have
been the hallmarks of the wireless industry's success. We believe
universal service distribution policy should replicate those values
as much as possible. Unfortunately, the current High-Cost
Universal Service mechanisms are frozen in a time of guaranteed
profits for monopoly providers of wireline services. And I lament
the very examples that Congressman Barton gave us earlier are not
limited to Texas and are probably not even limited to three pockets
in Texas. So unlike the competitive market in which wireless
carriers operate, the High-Cost Universal Service mechanisms and
intercarrier compensation actually reward incumbent carrier
inefficiency.
In practice, the FCC's High-Cost mechanisms compound
incentives for inefficiency, inherent in any kind of actual cost
support mechanism. For example, the High-Cost mechanisms
discourage carriers from taking advantage of economies of scale
normally associated with combining operations. The High-Cost
mechanisms also are designed to guarantee a prescribed level of
profit for incumbent wireline carriers. Taken together, these
problems have resulted in the bloated fund that disserves
consumers.
At the FCC, CTIA has put forth detailed market-oriented
proposals to address these problems. CTIA has supported efforts
to reduce demand for universal service while ensuring that support
continues to be available to both incumbent and competitive ETCs,
or eligible telecommunications carriers, on a non-discriminatory
basis. Specifically, CTIA has proposed transitioning over a
number of years from the current five High-Cost Universal Service
mechanisms to one that calculates support based on the most
efficient technology for a particular geographic area. CTIA is
open to other market-driven proposals such as reverse auctions that
would reward those carriers that bid down the price of universal
service.
We also think that there are changes that can occur within the
existing system as well. For example, CTIA supports eliminating
profits in high-cost mechanisms. We think carriers should get their
profits from their own customers, not from other carriers through
universal service payments and certainly not from other carriers'
customers. Increased accountability also has to be central to any
reform. CTIA supports a "carrier of last resort" obligation for both
incumbents and competitors. ETCs also need to show that the
money that they spend is money well spent, and we support
stringent reporting requirements for ETCs to show that that has
happened.
We are open to other proposals, and we look forward to a
continuing dialogue with the committee and Congress on these
important issues.
Again, thank you for the opportunity to share our views on the
universal service reform, and I welcome your questions.
[The prepared statement of Paul W. Garnett follows:]
PREPARED STATEMENT OF PAUL W. GARNETT, DIRECTOR,
REGULATORY AFFAIRS, CTIA - THE WIRELESS ASSOCIATION
CTIA is grateful for the opportunity to present its views on
high-cost universal service reform on behalf of the more than
200 million wireless consumers. Efficiency and innovation
have been hallmarks of the wireless industry's incredible
growth. Universal service distribution policies should replicate
those values as much as possible.
The wireless industry is a significant net payer into the
universal service system. Wireless carriers contribute one-third
to the overall fund, while receiving only about 13% of
payments. Since 1997, of the $22 billion spent on high-cost
universal service subsidies, $20.9 billion has gone to
incumbent wireline carriers and only $1.1 billion has gone to
wireless carriers and other competitors. Wireless carriers
continue to receive less than 20% of high-cost payments.
Universal service plays a critical role in improving access to
wireless services in high-cost, rural areas. In a few short years,
wireless carriers have developed an incredible track record of
using support to improve service quality and coverage in rural
areas. In some cases, wireless carriers have brought services to
communities that previously had no telephone service at all.
We are proud of that track record. But, we believe the best is
yet to come.
The wireless industry shares Congress's commitment to the
goals of universal service and its concerns about growth in the
size of the universal service fund. Wireless carriers have
strong incentives to ensure that the universal service fund is no
larger than necessary, while ensuring that support is available
to committed eligible telecommunications carriers (ETCs) on a
non-discriminatory basis.
There are numerous problems with the high-cost universal
services mechanisms: (1) incentives for incumbent carrier
inefficiency; (2) enrichment of incumbent carrier profits; and
(3) a lack of accountability. Any reforms must address these
issues. For the sake of consumers, who are the intended
beneficiaries of and ultimately fund universal service, the high
cost universal service mechanisms must demand more
efficiency and accountability from fund recipients. In many
instances, that would mean less "per-line" support for both
incumbents and competitors.
CTIA has proposed combining the current five high-cost
universal service mechanisms into one mechanism that
calculates support based on the most efficient technology -
whether wireline or wireless - in a small geographic area.
CTIA is open to other market-driven proposals (such as reverse
auctions) that would reward more efficient carriers that
compete away the cost of universal service. CTIA also has
proposed shorter term reforms within the context of the current
mechanisms that would reduce support for carriers that do not
need it and potentially increase support to those carriers with
legitimate needs.
Incumbent and competitive ETCs also must be held
accountable for the universal service funds they receive. CTIA
has supported technology neutral "carrier of last resort"
obligations for both incumbent and competitive ETCs. CTIA
also has supported requirements that both incumbent and
competitive ETCs achieve measurable results - for example,
showing how universal service dollars have been used to
improve service quality and coverage.
Chairman Upton, Ranking Member Markey and Members of
the Subcommittee, on behalf of CTIA-The Wireless Associationr,
I want to thank the House Subcommittee on Telecommunications
and the Internet for focusing its attention on the important and
timely issue of high-cost universal service reform. CTIA is
grateful for the opportunity to present its views in this important
area on behalf of the more than 200 million wireless consumers.
As a significant net payer into the universal service system, the
wireless industry is uniquely positioned to comment on proposals
to reform the universal service system.
Over the last decade, wireless industry contributions to
universal service have been steadily rising, while universal service
distributions remain primarily directed to wireline carriers.
Wireless carriers and their customers are responsible for about
one-third of contributions to universal service. The wireless
industry's payment into the federal universal service programs may
exceed $2.5 billion this year.
Meanwhile, the vast majority of universal service subsidies are
directed to our competitors - wireline carriers. Wireless carriers
receive only about 13% of universal service support overall and
less than 20% of high-cost universal service support. Since 1997,
of the $22 billion spent on high-cost universal service subsidies,
$20.9 billion has gone to incumbent wireline carriers and only $1.1
billion has gone to wireless carriers and other competitors. So, to
answer the Committee's threshold question, the universal service
mechanisms are primarily subsidizing wireline carriers. This
inequity exists even as consumers - the only intended beneficiaries
of universal service - are demanding more and higher quality
wireless services in high-cost areas.
The wireless industry shares Congress's commitment to the
goals of universal service and its concerns about growth in the size
of the universal service fund. Wireless carriers have strong
incentives to ensure that the universal service fund is no larger than
necessary, while ensuring that support is available to committed
eligible telecommunications carriers (ETCs) on a non-
discriminatory basis. Non-discrimination is a critical element of
our universal service proposals. Consumers never benefit from
regulations that distort the competitive market. Both incumbents
and competitors should have the same opportunities to obtain
universal service support.
Although we believe that a greater share high-cost universal
service support clearly should be directed to deployment of more
efficient wireless networks, the universal service reform debate
must be more than about whether wireless or wireline carriers get
the support. Policy-makers must address the more difficult
question of how that support should be calculated. Otherwise,
consumers will be faced with ever-increasing universal service
costs. CTIA supports reforms that will ensure both incumbents
and competitors receive no more support than is necessary to
achieve the goals of universal service. As I will discuss, any
reforms to the high cost universal service mechanisms must
demand more efficiency and accountability from fund recipients.
In practice, that would mean less "per-line" support for both
incumbents and competitors.
Lessons Learned from the Wireless Industry Experience.
As Congress considers the important question of how to reform
the universal service system, there are important lessons that can
be learned from the incredible growth of the mobile wireless
industry over the last decade. In December 1995, there were 34
million mobile wireless subscribers in the United States. As of
December 2005, there were over 200 million mobile wireless
subscribers. There are now more mobile wireless subscribers than
wireline switched access lines.
Mobile wireless customers are in both rural and non-rural
areas. According to the Bureau of Labor Statistics, the household
wireless penetration rate in urban areas is 53.9%. The wireless
household penetration rate in rural areas is not far behind - at
50.5%. The FCC has found that 97% of wireless customers live in
counties with a choice of three or more wireless carriers and 87%
of wireless customers live in counties with a choice of five or more
wireless carriers.
Wireless carriers have been so successful, in part, because they
have operated in an environment of regulatory constraint that
rewards efficiency and innovation. The result has been lower
monthly bills, cheaper minutes, and new and innovative service
offerings. The average cost of wireless services has declined over
time - even as wireless service offerings have expanded. In June
2002, before the Omnibus Budget Reconciliation Act of 1993, the
average wireless bill was $68.51 per month. As of June 2005, the
average wireless bill was less than $50 per month. In fact, in 1992
dollars, the average wireless bill in 2005 was equal to $35.57 -
slightly more than half the earlier bill. For many customers,
nationwide bucket of minute plans have made wireless the service
of choice for making local and long-distance calls. In 1995, the
average wireless customer had about 115 minutes of use per
month. In 2005, the average wireless customer had almost 700
minutes of use per month. In 1995, there were 37 billion minutes
of use on wireless networks. In 2005, there were approximately
1.5 trillion minutes of use on wireless networks.
Now, wireless carriers are in the midst of rolling out mobile
broadband services. An alphabet soup of wireless broadband
technologies is being deployed: Wi-Fi, Wi-Max, EV-DO,
WCDMA, UMTS, to name just a few. Verizon Wireless has
launched a broadband network based on evolution data only ("EV-
DO") technology available in 171 metropolitan markets covering
more than 140 million people. Sprint Nextel began to roll out its
EV-DO technology in mid-2005 and now offers wireless
broadband services in 208 markets. In December, Cingular
Wireless announced that subscribers could access its
BroadbandConnect service through Cingular's new 3G network.
Alltel offers its Axcess Broadband service, which provides data
rates comparable to wireline broadband, in nine metropolitan areas.
In addition to its extensive network of wireless hotspots, T-Mobile
offers mobile Internet access through its GPRS service.
Deployment is not limited to the nationwide wireless providers.
U.S. Cellular, Alaska Communications Systems, Cellular South,
Cellular One of Amarillo, Dobson Cellular, First Cellular of
Southern Illinois, Midwest Wireless, and many others are rolling
out mobile wireless broadband services.
Although most of the wireless industry's growth has occurred
without the benefit of universal service subsidies, universal service
can and does play a critical role in improving access to wireless
services in high-cost, rural areas. Deployment of wireless services
in rural markets is more costly on a per-customer basis than
serving a more densely populated area. As with wireline networks,
factors such as lower population densities, topography, and
geographic isolation make the average cost of providing mobile
wireless services in rural areas significantly higher than in urban
areas.
Wireless deployment in some rural areas has occurred because
of wireless carrier access to universal service support. In a few
short years, wireless ETCs have achieved a great deal. In many
cases, wireless ETCs have used universal service dollars to bring
service to rural and insular areas. For example, on the Pine Ridge
Indian Reservation in South Dakota, Alltel has used universal
service to increase telephone penetration rates from 27% to 92% in
only five years. Cellular South serves 380,000 square miles of
rural territory in Mississippi and is using high-cost support to
significantly expand its network capacity. Centennial Wireless has
brought mobile wireless services to communities, such as Shaw
and Blackhawk, Louisiana, that previously had no telephone
service at all, wireline or wireless. These are areas where the
incumbent carrier - the "carrier of last resort" - was unwilling or
unable to serve all customers. The public safety benefits of
wireless deployment to these and other customers became obvious
in the wake of Hurricanes Katrina and Rita when wireless services
were often available long before wireline services. We are proud
of this track record. But, we believe the best is yet to come.
Market-Based Universal Service Reform.
As I mentioned before, efficiency and innovation have been
hallmarks of the wireless industry. Universal service distribution
policies should replicate those values as much as possible. Policy-
makers should not repeat the mistakes of the past by supporting
universal service policies that distort the competitive market or
create incentives for both incumbents and competitors to develop
business models premised on receipt of greater and greater
subsidies. If the experience of the wireless industry can be any
guide, simplified regulations that encourage and reward efficiency
will best benefit consumers by ensuring that universal service is
targeted only to where it is most needed and is no more than is
necessary. To turn the tables on a popular wireline carrier analogy,
instead of guaranteeing a "three-legged stool" of universal service,
access charges, and end-user revenues in perpetuity, universal
service laws and regulations should be designed to enable carriers
serving high-cost areas to eventually stand on their own two feet
and compete in the marketplace.
Unfortunately, the current high-cost universal service
mechanisms are frozen in a time of guaranteed profits for
monopoly providers of wireline services. Unlike the competitive
market in which wireless carriers operate, the high-cost universal
service mechanisms (and intercarrier compensation) actually
reward incumbent carrier inefficiency. They also allow incumbent
carriers to keep support even as they lose customers. Absurdly, the
high-cost mechanisms subsidize incumbent carriers based on what
they spend (i.e., their "actual" or "embedded" costs), not
necessarily based on whether they actually serve customers located
in a rural, high-cost area.
In practice, the FCC's high-cost support mechanisms
compound incentives for inefficiency inherent in actual cost
support mechanisms. For example, the high-cost support
mechanisms discourage carriers from taking advantage of
economies of scale normally associated with combining
operations. The high-cost universal service mechanisms also are
designed to guarantee a prescribed level of profit for incumbent
wireline carriers. Based on an estimated average cost of debt of
only 5.46%, the average rural incumbent carrier earns a 15.06%
return on equity from the universal service mechanisms. To make
matters worse, many incumbent wireline carriers have reported to
the FCC that they had profits far in excess of the prescribed rate-
of-return. These elevated universal service profits do not translate
to improved telecommunications services in high-cost areas.
Instead, they simply enrich carriers, while increasing the overall
size of the fund to the detriment of other carriers and consumers
who end up paying higher universal service pass through charges.
Taken together, these problems result in a bloated fund that
does not effectively target the appropriate levels of support to
different high-cost areas. As a result, the high-cost support
mechanisms do a poor job of ensuring that all Americans have
access to high-quality, affordable telecommunications and
information services. Moreover, the high-cost support
mechanisms undermine the efficient development of competition
as envisioned by the Congress in the Telecommunications Act.
At the FCC, CTIA has put forth market-oriented proposals to
address these problems. CTIA has supported efforts to reduce
demand for universal service, while ensuring that support is
available to both incumbent and competitive ETCs on a non-
discriminatory basis. Specifically, CTIA has proposed combining
the current five high-cost universal service mechanisms into one
mechanism that calculates support based on the most efficient
technology - whether wireline or wireless - in a small geographic
area. Under this proposal, incumbent and competitive ETCs would
receive the same level of "per-line" support based on the most
efficient wireline or wireless technology for a given area. As in
the competitive market, ETCs would only receive support to the
extent that they win customers. More customers would equate to
more support. At the same time, incumbents and competitors that
lose customers would lose support (a novel concept under the
current mechanisms).
Although CTIA has suggested that a cost model could be used
to calculate support, CTIA is open to other market-driven
proposals (such as reverse auctions) that would reward more
efficient carriers that compete away the cost of universal service.
CTIA also has proposed shorter term reforms within the context of
the current mechanisms that would reduce support for carriers that
do not need it and potentially increase support to those carriers
with legitimate needs. For example, CTIA has supported:
(1) Eliminating profit guarantees in high-cost mechanisms (We
think carriers should get their profits from their own
customers, not through the universal service mechanisms);
(2) Requiring carriers to combine study areas in a given state
(The current rules allow large, low-cost incumbents to appear
small and high-cost by balkanizing their operations within a
state); and
(3) Transitioning larger rural incumbent carriers to the non-
rural high-cost mechanisms.
Increased accountability must be central to any universal
service reforms. That's why CTIA has supported technology
neutral "carrier of last resort" obligations for both incumbent and
competitive ETCs. CTIA also has supported requirements that
both incumbent and competitive ETCs achieve measurable results
- for example, showing how universal service dollars have been
used to improve service quality and coverage. We are open to
other proposals and look forward to a continuing dialogue with this
Committee and Congress on these important issues. Again, thank
you for the opportunity to share the wireless industry's views on
universal service reform. I welcome your questions.
MR. UPTON. Thank you.
Ms. Pies.
MS. PIES. Thank you, Chairman Upton, Ranking Member
Markey, and members of the subcommittee.
My name is Staci Pies. I am Vice President of PointOne, a
VoIP provider, and President of Voice on the Net, or VON,
Coalition, the voice of the VoIP industry.
On behalf of the VON Coalition, I thank the subcommittee for
the opportunity to testify about this important issue.
We are pleased to be here today to encourage you to ensure
that every American can benefit from broadband communications
choices. With the right policy framework, VoIP has the potential
to revolutionize the way all Americans communicate. Consumers
throughout the country will be able to use VoIP to do things never
thought possible. Businesses may increase efficiency and
productivity and transform the way they operate. Importantly,
VoIP can ensure that rural and low-income Americans have access
to a vast array of exciting communications choices at prices that
are more economical than plain old telephone services.
America's universal service system has been a cornerstone of
our telecommunications policy, we say 70 years, I have now heard
60 and 80, we will go with 70, enhancing the value of the network
and increasing our quality of life in immeasurable ways.
Yet for all its past success, USF today is at a crossroads. I wish
to make three points today about reform of our universal service
system. First, the VON Coalition supports modernizing USF and
encourages you to establish a contribution approach that is based
on a measurement of network connections that is equitable and
non-discriminatory. Such a system would explicitly assess
interconnected VoIP providers. Second, Congress should adopt
distribution policies that create incentives rather than disincentives
for efficient network deployment. And third, Congress should
adopt forward-looking approaches that empower consumers and
extend VoIP-driven benefits to rural Americans. This means
reforming both USF and the polices that determine the cost and
availability of exchanging traffic between Internet networks and
the legacy phone network.
First, to accelerate the benefits of broadband-enabled voice
services to all Americans, we have long supported adoption of a
USF contribution methodology that broadens the base to ensure the
sustainability of the funds and reduces price distortions caused by
the current system. As articulated in H.R. 5072, new technologies
and all-distance pricing have rendered regulatory distinctions
based on geography irrelevant and unsustainable. Therefore, we
recommend that Congress require the FCC to adopt expeditiously a
contribution methodology that is based on a measurement of end-
user connections rather than the arbitrary and irrelevant approach
of attempting to assess interstate revenues. Assessment of VoIP
provider revenues leaves open the possibility that USF could be
assessed on all applications, including instant messaging, e-mail,
and other IP addresses. It could lead to double payments for the
same service, enable broadband blocking, and it would be difficult,
if not impossible, to ascertain the appropriate contribution amount
with any certainty. We believe a numbers- and/or connections-
based approach would best meet the objectives of effectively
sustaining the Universal Service Fund while ensuring that
assessments are equitable and non-discriminatory.
Second, in addition to lowering the cost of communication
services through direct subsidies, Congress should focus on
accelerating VoIP-driven benefits to consumers and businesses by
establishing incentives for carriers to make cost-effective
investment decisions while increasing the availability of broadband
services. We agree that all Americans benefit from the fact that
residents of rural areas have access to high quality communication
services. However, the incentives for providers to improve
economic efficiency by deploying IP-based networks are adversely
impacted by the manner in which the Fund is currently
administered. With the advent of more efficient, lower-cost
technologies, such as VoIP, the cost of providing service in rural
and high-cost areas can decrease significantly. Not only does
VoIP enable robust, innovative communications experiences for all
Americans, it significantly lowers the cost of network deployment
and the provision of services to enterprises and residential
consumers for a cost savings of 40 to 60 percent.
And third, as this subcommittee has recognized, reforming
USF is only part of the solution for ensuring that consumers have
access to innovative and affordable communication services.
Universal service reform must go hand-in-hand with
comprehensive intercarrier compensation reform. Piecemeal fixes
that address only a small subset of compensation issues actually
undermine the potential for comprehensive reform. For example,
the "phantom traffic" solution in H.R. 5072 perpetuates implicit
subsidies rather than directly resolving USF funding issues. We do
not support onerous "phantom traffic" legislation at this time,
especially legislation that would apply retroactive compensation on
providers as well as have the unintended consequence of giving
network operators explicit authority to block an Internet user's
ability to use the Internet communications application of their
choice. Legislation must help accelerate the transition to IP
networks by eliminating implicit subsidies, removing
interconnection barriers, and modernizing old policies for the new
world.
In summary, reform of universal services should focus on
bringing all consumers affordable and innovative communication
services. The VON Coalition respectfully recommends that
Congress reform the USF contribution mechanism towards an
equitable, technologically-neutral, and easy-to-administer system
that will ensure the sustainability of the Fund. The distribution
process must also be reformed to make support explicit, funding
fair, and provide the proper economic incentives for efficient
network deployment. And finally, Congress should be conscious
about harming innovation and address only those VoIP services
that are substitutes for existing telephone services.
The VON Coalition would again like to thank the
subcommittee for its leadership on VoIP, and with your continued
leadership, we believe VoIP is positioned to make innovative
communicating more affordable for all Americans.
Thank you, and I am happy to answer any questions.
[The prepared statement of Staci L. Pies follows:]
PREPARED STATEMENT OF STACI L. PIES, VICE PRESIDENT,
POINTONE COMMUNICATIONS, ON BEHALF OF VOICE ON THE NET
(VON) COALITION
Thank you, Chairman Upton, Ranking Member Markey, and
members of the Subcommittee. My name is Staci Pies. I am Vice
President, Governmental and Regulatory Affairs, of Point One, a
VoIP provider, and President of the Voice on The Net or VON
Coalition - the leading U.S. organization representing the VoIP
industry on critical legal and regulatory issues. On behalf of the
VON Coalition, I thank the Subcommittee for the opportunity to
testify about the important issue of the Federal Universal Service
Fund and subsidizing high cost areas.
This Subcommittee has led in facilitating the deployment of
VoIP in recent years. Your actions to tread lightly when it comes
to Internet regulation have helped enable the timely delivery of
innovative, competitively priced, voice services to Americans all
over the country.
We are pleased to be here today to encourage this
Subcommittee to ensure that every American can benefit from
broadband communications choices. With the right policy
framework, VoIP has the potential to transform the way all
Americans communicate. Consumers throughout the country will
be able to use VoIP to do things never thought possible, businesses
may increase efficiency and productivity and transform the way
they operate. Importantly, VoIP can ensure that rural and low
income Americans have access to a vast array of exciting
communications choices at prices that are more economical than
plain old telephone services.
Congress has an unparalleled opportunity to help launch a new
era of broadband-enabled benefits. You can facilitate
transformative improvements in the way we communicate that
harness the power of the Internet. VoIP is not just another flavor
of telephone service. In contrast to traditional plain old telephone
service ("POTS"), VoIP voice is an application, just like e-mail,
streaming audio, streaming video, and web browsing and can occur
over any packet data network, including the Internet. Accelerating
VoIP adoption can mean cost savings for consumers and
businesses, reduced operational costs for providers, advanced
features unavailable with traditional phones, increased competition
among network and service providers, increased infrastructure
investment, accelerated broadband deployment, improvements in
emergency services, lower cost communications for rural and
government users, increased access for persons with disabilities,
and increased worker productivity.
To, to ensure that every American can benefit from broadband
communications choices, I wish to make four points today about
reform of our Universal Service system.
First, the VON Coalition supports modernizing our
Universal Service system and encourages the
Subcommittee to establish a contribution approach that will
be equitable, technologically neutral, understandable, easy
to administer and will ensure the sustainability of the fund.
Second, to help accelerate the transition to a nationwide
broadband network, Congress should adopt policies that
create incentives rather than disincentives for efficient
network deployment and exchanging traffic between
Internet networks and the legacy phone network -- thus
geometrically increasing the value of both of America's
communications networks.
Third, rather than automatically applying yesterday's rules
to tomorrow's technologies, the Subcommittee should
adopt forward looking approaches to Universal Service and
intercarrier compensation that empower consumers, extend
VoIP driven benefits to rural Americans, and boost
productivity in the economy. This means strengthening
and reforming both the Federal Universal Service system
and policies that determine the cost and availability of
interconnection, regardless of the underlying technology.
And fourth, to the extent that the Subcommittee acts, it
should take a light regulatory approach to VoIP and address
only those services that are substitutes for existing
telephone service.
America's Universal Service system has been a cornerstone of
our telecommunications policy for over 70 years - enhancing the
value of the network and increasing our quality of life in
immeasurable ways. Yet for all its past success, Universal Service
support today is at a crossroads. The VON Coalition shares the
concerns of this Subcommittee, industry stakeholders, and rural
consumers that the current contribution mechanism is inadequate,
the funding mechanisms may not provide network operators with
proper economic incentives, and the system does not ensure a
sustainable USF.
First, the VON Coalition believes that every American should
have the opportunity to benefit from broadband enabled voice
services. We have long supported modernization of the Universal
Service fund contribution methodology to move away from
yesterday's revenue based system, to a broader connections or
working telephone number based contribution mechanism that is
competitively and technologically neutral. As articulated in The
Universal Service Reform Act of 2006, H.R. 5072, new
technologies and all-distance pricing have rendered regulatory
distinctions based on geography irrelevant and unsustainable.
There is a growing consensus that a revenue-based contribution
methodology will not be sufficiently durable to withstand the
broad transition to VoIP and other technological change.
Moreover, a revenue-based contribution methodology is
inconsistent with the goals of ensuring that universal service
support be sufficient and predictable.
This Subcommittee should focus on legislation that ensures the
contribution mechanism is simple enough for the average
consumer to understand, and to minimize transaction costs for
consumers. Therefore, we recommend that Congress require the
FCC to adopt immediately a Universal Service contribution
methodology that is based on a measurement of end user
connections such as working phone numbers rather than the
arbitrary approach of attempting to assess revenues or identifier
protocols other than working phone numbers. Assessment of VoIP
provider revenues leaves open the possibility that USF could be
assessed on all applications including every Instant Message, E-
mail, or other IP address. It could lead to double payments for the
same service, enable broadband blocking, and would be difficult if
not impossible to ascertain the appropriate contribution amount
with any certainty. We believe a numbers and/or connections-
based approach would best meet the objectives of effectively
sustaining the Universal Service Fund while ensuring that
assessments are equitable and non-discriminatory.
Second, in addition to lowering the cost of communications
services through direct USF subsidies, Congress should focus on
accelerating VoIP driven benefits to consumers, businesses, and
the economy by establishing incentives for carriers to make cost-
effective investment decisions while improving service to
consumers in their areas by increasing the availability of
broadband services. The VON Coalition agrees that all Americans
benefit from the fact that residents of rural areas have access to
high quality telephone service. However, the incentives for
providers to improve economic efficiency by deploying IP-based
networks and services are adversely impacted by the manner in
which the fund is currently administered given that high cost
carriers generally receive subsidies based on their costs.
High-cost support provides subsidies to make carriers whole,
regardless of their investment decisions or business models by
guaranteeing 'reasonable' rates of return. Utilizing traditional,
circuit switched technology, it is generally agreed that in those
areas, basing end-user retail prices strictly on the cost of service
would likely create a barrier to subscription and frustrate the
achievement of Universal Service goals. However, with the advent
of more efficient, lower cost technologies such as VoIP, the cost of
providing service in rural and high cost areas can decrease
significantly. Not only does VoIP enable robust, innovative
communications experiences for all Americans, it significantly
lowers the cost of network deployment and the provision of
services to enterprises and residential consumers. Consumers and
businesses are flocking to VoIP because it can do what plain old
telephone service can - and much, much more - at a competitive
price. Indeed, VoIP is cutting phone bills by as much as 40
percent and enabling the kind of voice competition that this
Committee envisioned when it passed the 1996 Telecom Act. In
some cases VoIP can replace a home or business phone system, in
many other cases it is integrated into existing software
applications, and voice recognition systems. In the workplace,
businesses, small and large, are tapping into VoIP for cost savings
of 40 to 60 percent, and at the same time boosting productivity by
as much as 15 percent through smarter communications systems.
VoIP provides breakthrough new features that enable businesses to
function more efficiently and respond more effectively to the needs
of consumers.
Third, reforming the federal Universal Service system is only
part of the solution for ensuring that consumers have access to
innovative and affordable communications services. Despite
minor steps towards access charge reform, a significant portion of
non-traffic sensitive costs of the local network are still assigned to
interstate calls. This cross subsidy exists today despite the fact that
the 1996 Act called for elimination of implicit subsidies in part
because these costs do not vary with minutes of calling in any
jurisdiction. Legislation enacted by Congress must help accelerate
the transition to IP-enabled networks by reforming intercarrier
compensation to eliminate implicit subsidies, removing
interconnection barriers and modernizing old polices for the new
world. We commend this Subcommittee for ensuring that VoIP
providers can interconnect with the public switched telephone
network ("PSTN") to provide consumers with new voice
alternatives.
As this Subcommittee has recognized, Universal Service
reform must go hand-in-hand with comprehensive intercarrier
compensation reform. To ensure that consumers and businesses
can take advantage of this global medium that spans geographic
boundaries, intercarrier compensation reform must speed the
transition to broadband-enabled communications. IP networks and
the gateways that enable the transition between broadband
communications and the PSTN are critical links for empowering
consumers and driving economic benefits. By focusing on overall,
complete reform, in a timely fashion, you will ensure continued
investment in IP-enabled networks, and avoid piecemeal decisions
that can stifle innovation, technology investment, and slow the
transition to broadband communications.
Piecemeal fixes and stand-alone decisions that only address a
small subset of intercarrier compensation issues actually
undermine the potential for comprehensive reform. For example,
the "phantom traffic" solutions in H.R. 5072 perpetuate implicit
subsidies rather than directly resolving USF funding issues. The
VON Coalition would support the need to ensure that, where
technically feasible, all providers that interconnect with the PSTN
pass the call identifying information they receive without
alteration, if Congress finds it necessary to impose such a
requirement; however, we do not support onerous phantom traffic
legislation at this time, especially where such legislation would
apply retroactive intercarrier compensation on providers as well as
have the unintended consequence of giving network operators
explicit authority to "block" an Internet users' ability to use the
Internet communication applications of their choice.
A broad range of parties have recognized that there is a
difference between identifying traffic and reforming Universal
Service and intercarrier compensation. Addressing traffic
identification by itself is only a half-measure. The only real
solution is comprehensive Universal Service and intercarrier
compensation reform that eliminates today's artificial distinctions
between different types of traffic, and puts Universal Service on a
more stable footing than does implicit subsidies through access
charges. Accordingly, we recommend that rather than attempt to
resolve USF through the continuation of implicit subsidies inherent
in the phantom traffic solutions of H.R. 5072, you provide the FCC
a 180-day deadline by which to complete their long-pending
Universal Service and intercarrier compensation proceedings,
consistent with Section 254 of the Communications Act.
And fourth, the VON Coalition urges the Subcommittee to
recognize the distinction between innovative IP-based services that
do not connect to the public network and those services that are
substitutes for existing telephone service. For example, VoIP
services that offer consumers the ability to make and receive calls
from the traditional phone network could be subject to traditional
social regulation such as Universal Service contributions. These
are the types of voice services that may rely on the public phone
network and which consumers may consider substitutes for
traditional phone service. One example of a web-based service
that does not constitute telephone replacement services is the
innovative help line available on the Gerber baby food web site
(https://www.gerber.com/contactus). If a new mother has an
urgent question at 3am, she can today click on the web site using a
click-to-dial, one-way VoIP service that immediately connects the
parent to an infant care specialist 24/7. However, if legislation
imposing Universal Service obligations would apply to innovative,
one-way VoIP services, this potentially life-saving service for new
moms would presumably have to be shut down because it would
not be able to sustain the economic cost of contributing.
In summary, reform of Universal Service should focus on
bringing consumers affordable communications services. The
VON Coalition respectfully recommends that Congress reform the
Universal Service contribution mechanism towards an equitable,
technologically neutral, understandable, easy to administer system
that will ensure the sustainability of the fund. The distribution
processes must also be reformed to make support explicit, funding
fair and provide the proper incentives for efficient network
deployment. To do this, Universal Service support should be
distributed in ways that reward providers for economic
efficiencies. Moreover, Universal Service and interconnection
costs and policies must be reformed to ensure that implicit
subsidies are eliminated and support is distributed in a
competitively and technologically neutral manner so that
consumers are able to make purchasing decisions based on
economically rational pricing signals and their communications
needs rather than having government pick technological winners
and losers. Finally, Congress should be cautious about harming
innovation and continue to maintain a hands-off approach to the
delivery of IP-enabled services, especially those that are not
substitutes for traditional voice services.
The VON Coalition would again like to thank this
Subcommittee for its leadership on VoIP. With continued
leadership, we believe VoIP is positioned to help make innovative
communicating more affordable for all Americans, businesses
more productive, jobs more plentiful, the Internet more valuable,
and Americans more safe and secure.
Thank you very much. I am happy to answer questions.
MR. UPTON. Thank you.
Mr. Feiss.
MR. FEISS. Mr. Chairman and members of the committee, it is
an honor to be here. I remember fondly my years as a resident of
Michigan, and I only moved to Montana--
MR. UPTON. Just remember, it is the great State of Michigan.
MR. FEISS. The great State. And I only moved to Montana
because it started with an "M" as well.
It is an honor for me to be here to discuss what universal
service is and the benefits it provides to all Americans, no matter
where they live.
First, to answer the title of this hearing, what are we
subsidizing? Simply put, all Americans should have access to
quality, affordable, advanced telecommunications services. Much
in the same way that the National Highway System has enabled
transportation of goods from one coast to another and all points in
between, so has our Nation's telecommunications infrastructure
enabled the transportation of information to all corners of the
Nation and, indeed, to the world. Without universal service,
investment in this infrastructure in high-cost parts of the Nation, in
particular, may not be possible. And rates in Montana, for
example, would increase by $330 to $600 a year. That is real
money in a State like Montana whose per capita income ranks near
the bottom of the Nation.
Montana provides an excellent illustration of why we have
universal service. Our State is the fourth largest, in terms of
geography, in the country, yet our population is less than one
million people. In telecom terms, we average only three access
lines per mile.
Congress and the President have called for broadband
deployment throughout the United States as an important means by
which to advance our country's worldwide economic
competitiveness. Here is a sampling of what we have done in
Montana. Over 250 rural Montana communities have access to
broadband. When the largest city is 100,000 people, we are talking
about scores of towns with populations of less than 1,000.
Montana's rural telcos have deployed broadband access to between
80 percent and nearly 100 percent of their service areas. That is
better than what is repeated often to be the number one connected
country in the world, South Korea. We have deployed
videoconference, telemedicine, and distance learning access sites
to over 130 rural Montana communities, including sites on all of
the Native American reservations in the State.
As a result of the investment that Montana's rural telecos have
made in advanced telecommunications infrastructure, a nationally-
certified software engineer can live in Canyon Creek, Montana and
serve her clients anywhere in the world. A programmer from Los
Angeles who designs video graphics for national professional
exams directs plays in the summer from Virginia City, Montana.
He continues to operate his graphic design business from Virginia
City, thanks to a DSL connection that he has in that town. I should
point out that I had a board meeting in Virginia City recently, and
there was a 4-H Club there, and a bunch of fourth and fifth grade
children were there from the metropolis of Twin Bridges,
Montana, and they didn't know who their phone company was, but
they did know who their Internet provider was. At the Great
Divide Ranch near Philipsburg, Montana, the suburbs of
Philipsburg, the non-profit Project Vote Smart provides online
access to information on about 40,000 political candidates in every
State. Project Vote Smart's access to advanced broadband services
makes the non-profit's databases available to 45,000 members and
voters nationwide. And the list goes on.
Investment in the national information infrastructure enables a
panoply of telecommunications-related applications, services, and
businesses that rely on advanced underlying telecommunications
infrastructure. For example, we have heard today from wireless
providers. Wireless capabilities depend on a reliable, wireline
infrastructure. Indeed, wireless communication are wireless only
from the consumers handsets to the nearest point of presence on
the wireline network. Similarly VoIP, Voice over Internet
Protocol, relies on a broadband connection. The VoIP service
itself is a software program. That broadband connection is
dependent on a broadband connection to the underlying
telecommunications infrastructure.
Additionally, we have heard about efficiencies. A continual
investment in the national telecommunications network creates
efficiencies that save universal service outlays in the long run. For
example, modern fiber optic backbone technology and soft
switches have resulted in carriers receiving less universal service
support today than they have in the past. For example, Blackfoot
Telephone Cooperative in Missoula, Montana is deploying an
Ethernet backbone, and it receives $500,000 less in universal
service from the efficiencies it has created. Similarly, Three
Rivers Telephone Cooperative in Fairfield, Montana is receiving
$1.5 million less in universal service support than it did in 2004
versus 2005. And meanwhile, these technologies are deploying
more robust services, faster speeds, out to the edges of these
telecommunications networks and creating efficiencies and saving
the Universal Service Fund.
However, reasons for universal service are as valid today, if not
more, than they were 70 years ago. The number is about 70, by the
way. The Universal Service Funding mechanism is facing a
financial squeeze, as you have heard. Designation of wireless and
newly-eligible telecommunications carriers, or ETCs, has grown
the distribution side of the fund exponentially. The growth of the
fund, as you have heard from CBO, is mostly from transfers of
revenues or revenue streams that existed in one place, and they
have been shifted over. But the new growth of the fund is in
wireless ETCs, which have gone from zero to nearly $1 billion in 5
years. Some question whether universal service is supposed to
subsidize competition by awarding financial windfalls to new
ETCs.
Finally, H.R. 5072 introduced by Congressmen Terry and
Boucher addresses these financial pressures on the Universal
Service Fund by broadening the base of contributions to include all
voice communications and by more rationally governing the
designation of newly eligible telecommunications carriers. We
support H.R. 5072 and encourage this committee to pass it and use
that as a benchmark with which to guide its deliberations with the
Senate should they pass a bill, too.
I appreciate very much this committee's attention to universal
service and look forward to any questions you may have.
[The prepared statement of Geoff Feiss follows:]
PREPARED STATEMENT OF GEOFF FEISS, GENERAL MANAGER,
MONTANA TELECOMMUNICATIONS ASSOCIATION
Rural telcos have met the goals of universal service: to
preserve and promote access by all Americans to affordable,
quality, advanced telecommunications capabilities on which our
economy increasingly depends.
Congress and the President have called for broadband
deployment throughout the United Sates as an important means by
which to promote and preserve our country's worldwide economic
competitiveness. Despite significant distance and density
challenges (Montana's rural carriers average less than 3 access
lines per mile) Montana's rural independent telcos are meeting the
broadband challenge:
Over 250 rural Montana communities have access to
broadband
Montana's rural telcos have deployed broadband access to
between 80% and nearly 100% of their service areas (better
than S. Korea!)
Videoconference, telemedicine and distance learning access
in 130 rural Montana communities
Continual investment in upgrading underlying telephone
networks enables advanced capabilities to be deployed on a
modern telecommunications platform. Like the federal highway
system, universal service provides for ubiquitous transfer of
information from coast to coast and all points between. Modern
automobiles and trucks would be of little use today if the
underlying highway system built in the 1950s weren't able to
support modern vehicular traffic.
Investment in a national information network infrastructure
enables a panoply of telecommunications-related applications,
services, and businesses:
Wireless capabilities depend on a reliable, redundant,
quality underlying wireline (or fiber) infrastructure;
Similarly, VOIP relies on a broadband connection;
Examples abound regarding economic development
opportunities enabled by advanced telecommunications
infrastructure.
Continual investment in national telecommunications
infrastructure creates efficiencies that save universal service
outlays in the long run; e.g., modern fiber optic backbone
technology and softswitches, have resulted in carriers receiving
less universal service support today than they have in the past.
Telcos rely on rates, intercarrier compensation (access) charges
and universal service support (the "3-legged stool") to recover
their significant network investment costs. Universal service and
access comprise as much as 50% or more of rural telcos' revenues.
Rates in Montana (with one of the lowest per capita incomes in the
U.S.) would be between $330 and $600 more without universal
service support.
The federal Universal Service Fund is being squeezed by the
dual problem of insufficient, and diminishing revenues and
increasing distributions. Designation of newly eligible carriers
(mostly wireless) has grown the distribution side of the fund
exponentially. Some question whether universal service is
supposed to subsidize competition with windfall to new ETCs.
HR 5072 (Terry-Boucher) addresses the financial pressures on
the Fund by broadening the base of contributions to the Fund to
include all voice communications and by more rationally
governing the designation of newly eligible carriers (ETCs) to
receive support from the Fund.
Mr. Chairman and distinguished members of the Committee,
my name is Geoff Feiss, General Manager of the Montana
Telecommunications Association. It is an honor to be invited to
share with you my perspectives on the reasons why we have
universal service and the benefits it provides to all Americans, no
matter where they may live.
I will address what universal service means to residential and
business consumers particularly from a Montana perspective, and
how universal service is integral to deploying a national
infrastructure on which all Americans derive direct economic
benefits. I'll close by addressing some of the deficiencies that
have evolved in the universal service program today and
discussing some more common criticisms of universal service,
and-hopefully-I'll mitigate those concerns.
In brief, universal service is vital for ubiquitous access to
affordable, quality, telecommunications capabilities on which our
economy increasingly is dependent. That is not to say that
problems don't exist. They do. And it's encouraging to see this
Committee address the problems-and the substantial, tangible
benefits-of universal service at this hearing.
Universal Service in Montana
Montana is the nation's fourth largest state. If you were to
superimpose Montana over the eastern part of the United States, the northwest
corner of the state would overlie the suburbs of Chicago, and the
southeastern corner would touch the suburbs of Washington D.C.
Yet, we have fewer than one million residents. Our largest city is
Billings, with a population of about 100,000. We also rank
somewhere between 45th and 49th in per capita income, depending
on whose statistics you use.
From a telecommunications network point of view, Montana's
independent rural telecommunications providers serve about one-
third of the telecom consumers of Montana, but our networks
cover roughly 80% of the state's geography: about 120,000 square
miles. On average we serve three access lines per mile. Western
Montana is relatively more populated than Eastern Montana, where
the average access line per mile is less than one.
Despite the significant barriers to development posed by
tremendous distances between very few customers, commonly
referred to as the "distance and density" dilemma, Montana's
independent rural telcos are key drivers for economic development
throughout the state. With an annual payroll of over $50 million,
these companies employ over 1,000 Montanans with well paying
jobs and competitive benefits. They often are the largest taxpayer
in counties where they operate.
As important, Montana's rural telcos have deployed modern,
efficient, affordable, advanced telecommunications capabilities
throughout the state for the direct benefit of Montana's residential
and business consumers. They are doing exactly what Congress
intended universal service to do, as outlined in the principles of
universal service under Sec. 254(b). (See below.) The quality of
these networks is unquestioned. Consumers simply assume calls
will go through, 911 will work, etc.
Montana's rural telcos have deployed well over 5,000 miles of
fiber optic backbone facilities throughout the state. They have
pushed high-quality, secure broadband capabilities out to the edges
of their networks so that between 80% and nearly 100% of
Montana's rural telco consumers have access to broadband service.
That's better than South Korea, the world's most connected
country by some accounts. Broadband service is available to over
250 Montana communities, and that's saying something when the
largest city in our state has a population of 100,000. The vast
majority of Montana's broadband-capable towns has fewer than
1,000 residents. (It's interesting to note that broadband's popular
support continues to grow: many Montana rural telcos report that
over 50% of their Internet customers subscribe to broadband
service.)
Montana's rural telcos also have formed consortia, to leverage
resources and better serve their markets. One such consortium is
VisionNet, which provides advanced videoconference and Internet
access services. Over 130 video conference sites are deployed
throughout the state. There is at least one, and often more than
one, VisionNet site on each of Montana's Native American
reservations. On an average school day, 60 to 80 hours of K-12
classes are taught using VisionNet's videoconferencing network.
VisionNet also facilitates Telemedicine applications connecting
rural health clinics to urban medical centers on a real time basis.
Vital health care services now are reaching rural consumers as a
result of broadband applications made possible by rural telcos.
As a result of the investment that Montana's rural telcos have
made in advanced telecommunications infrastructure, a Cisco
software engineer can live in Canyon Creek, Montana, and serve
clients anywhere in the world, thanks to investment made by her
local telecom provider, Lincoln Telephone Company. A
programmer from Los Angeles who designs video graphics for
national professional exams, directs plays in the summer from
Virginia City, Montana. He continues to operate his graphic
design business from Virginia City, thanks to access to DSL
technology provided by 3 Rivers Telephone Cooperative. At the
remote Great Divide Ranch near Philipsburg, Montana, the non-
profit Project Vote Smart provides online access to factual and
unbiased information about 40,000 political candidates in every
state. Project Vote Smart's access to advanced broadband
telecommunications services from Blackfoot Telephone
Cooperative makes the non-profit's databases available to its
45,000 members and voters nationwide. And Pixar Entertainment,
the movie company responsible for Toy Story and other hits, is
putting a studio in Kalispell, Montana, thanks to the combination
of an unbeatable quality of life, and the quality of
telecommunications facilities provided by CenturyTel.
National Telecommunications Infrastructure
Much as the national highway system makes it possible for
goods to get from one place to another efficiently, the national
telecommunications infrastructure enables information to get from
one place to another. While the volume of traffic may be greater in
Los Angeles or New York than in Forsyth, Montana, it is still
essential that our nation's information highways reach from one
coast to another, and all points between. Ubiquitous access to
telecommunications is essential so that the rancher in Montana can
sell beef on a real time basis on the Chicago Board of Trade so that
diners in Boston can benefit from efficiencies realized in the
distribution of the steak they purchase at their supermarket.
Similarly, consumers and businesses benefit from products and
services from other states. Amazon.com and E-bay are just to
examples of how information technology has influenced our
economic lives.
It is an economic policy given that ubiquitous deployment of
advanced telecommunications capabilities is essential to national
competitiveness. Policy-makers frequently have noted the less-
than-enviable position of the United States in relation to its
international trading partners regarding deployment of broadband
capability. The President and members of Congress on both sides
of the aisle have called for nationwide deployment of broadband
capabilities; and as noted above, Montana's rural telcos are
committed to such broadband deployment throughout their service
areas.
The investment made by rural telecom providers into a national
information network infrastructure enables a panoply of
telecommunications-related applications, services, and
businesses-the network isn't just for telephone calls anymore.
For example, much attention is paid to wireless capabilities. The
fact remains, however, that wireless capabilities are wireless only
for the "last mile" connection from a network point of
interconnection to the end-user. In other words, "wireless" traffic
relies on an underlying wireline (or fiber) infrastructure.
Similarly, the newest kid on the block, voice over Internet
protocol, or VOIP, is nothing more than a software application that
is installed on a computer that acts as a telephone. VOIP relies on
a broadband connection, which itself relies on an underlying
advanced telecommunications infrastructure.
In short, telecommunications is the foundation of modern
economies. Universal service supports the nation's investment in
ubiquitously-accessible underlying telecommunications
infrastructure. Does universal service pay for broadband assets,
per se? No; not directly. But continual investment in upgrading
underlying telephone networks enables advanced capabilities to be
deployed on a modern telecommunications platform.
Returning to the highway analogy, modern automobiles and
trucks would be of little use today if the underlying highway
system built in the 1950s weren't able to support modern vehicular
traffic.
Three-Legged Stool
How is investment in advanced telecommunications
infrastructure possible? All local exchange carriers rely on three
main sources of revenue from which to recover their substantial
investments in telecommunications plant: revenues from
ratepayers/customers; revenues from intercarrier compensation
(what telecom networks charge one another for access to their
networks by other carriers completing calls to or from one
another); and universal service, designed to ensure that consumers
have access to affordable, quality telecommunications service. All
providers of interstate telecommunications are supposed to
contribute to the universal service support mechanism, and
companies whose costs exceed a benchmark cost are able to
receive support from the Universal Service Fund in order to
maintain access by consumers to affordable, quality service.
Access (intercarrier compensation) revenues and universal service
together comprise between 50% and as much as 80% of rural
telcos' revenues. In contrast, urban carriers rely far less on either
access or universal service since their networks in general are
lower cost and serve more densely populated areas. Moreover, the
larger carriers rely less on access payments since they effectively
pay themselves access to originate and terminate long distance
traffic on their own networks; so access revenue does not
constitute as significant a revenue stream as it does for rural
carriers, who rely on other carriers to complete long distance
traffic.
Without universal service, Montanans would pay an additional
$330 per year on average. Nearly 100,000 Montanans (10% of our
population) would face increases of between $300 and $600
annually. Given the fact that we are one of the nation's lowest per
capita income states, this is real money. Moreover, it is entirely
likely that even with tremendous rate increases, rural telcos' ability
to maintain adequate investment in advanced telecommunications
networks capable of supporting modern applications, services and
features, would be severely threatened.
In other words, the "three-legged" stool must remain standing
if Americans are to continue to benefit from a ubiquitously
available, affordable, quality telecommunications infrastructure.
What's Wrong with Universal Service Today?
The reasons for, and benefits of, universal service are as valid
today as they were when Congress passed the Telecommunications
Act of 1934, and codified universal service policy in 1996. As
provided in Section 254(b) of the Telecommunications Act of
1996, universal service is based on the following principles:
1. quality services available at just, reasonable and affordable
rates;
2. access to advanced services;
3. access in rural and high cost areas;
4. equitable and non-discriminatory contributions;
5. specific and predictable support;
6. Such other principles that may be determined appropriate
for the protection of the public interest.
So why is universal service attracting such negative attention
lately? Briefly, it's getting squeezed from both ends. More and
more voice communications traffic is circumventing universal
service contributions mechanisms, while more and more
companies (mostly wireless carriers) are being designated as
eligible telecommunications carriers (ETCs), eligible to receive
universal service support. And to make matters worse, it is
apparent that current policy provides a windfall to most new ETCs
by allowing the new ETCs to receive the same level of universal
service support as incumbent ETCs, regardless of the new ETC's
costs of providing service. This policy is referred to as the
"identical support" rule. Part of the incumbent's universal
service support which a new ETC "inherits" is "new money" to the
new ETC resulting from previous regulatory policies that replaced
a portion of access revenues for incumbent telcos. Thus, universal
service support to wireless carriers is growing substantially and
dramatically, while support to incumbent wireline companies has
remained essentially constant.
The following chart illustrates the shrinking universal service
contribution base.
Source: FCC
Meanwhile, universal service distributions are accelerating,
mostly as a result of designation of additional wireless ETCs. In
2000, non-incumbent ETCs received $1.5 million in universal
service support. By 2006, funding to competitive wireless ETCs is
expected to approach $1billion.
The following chart shows the relative growth of the universal
service fund by competitive ETCs (CETCs), while incumbent local
exchange carriers (ILECs) support has remained relatively stable,
with the exception of access revenue replacement rulings which
simply moved existing ILEC revenues from access to universal
service.
In summary, ninety-seven percent of new ETCs are wireless
carriers. They receive 100% of the incumbent carriers' universal
service support, even though part of the incumbent's support is due
to regulatory policies which shifted implicit support from access
payments to universal service support. Wireless carriers never
received access payments, but they receive access replacement
through universal service. Further, to the extent that new ETCs'
costs are lower than incumbents', receipt of incumbent universal
service support constitutes a windfall, as noted above. The
identical support rule, in other words, needs to be eliminated.
As FCC Chairman Kevin Martin noted last October at a
meeting of USTelecom,
The current fund totals nearly $7 billion dollars and a
lot the fund's growth in recent years is attributable to new
competitive eligible telecommunications carriers (or
CETCs), particularly wireless CETCs, that have begun to
receive funding.
The number of CETCs is increasing dramatically and is
one of the primary drivers of fund growth. Since 2000,
CETC high cost payments have grown from about $1.5
million annually to about $333 million annually.
Over the past few years, I have repeatedly expressed my
concerns with the Commission's policies of using universal
service support as a means of creating competition in high
cost areas.
I do not believe it is viable in the long term to continue
subsidizing multiple competitors to serve areas in which
costs are prohibitively expensive for even one carrier.--
Kevin Martin, Chairman, FCC. Speech to USTelecom.
10/26/05. [Emphasis added.]
Clearly, while the intent and benefits of universal service
remain valid, universal service funding is threatened by the dual
problems of: 1) diminishing contributions to the Universal Service
Fund by voice communications providers who should be, but are
not necessarily, contributing their share to the Fund; and, 2)
distribution of support to an ever-growing number of new ETCs-
as exacerbated by the identical support rule.
As FCC Chairman Martin and many others have noted, when
designating additional ETCs, it is important to distinguish between
promoting and advancing access to affordable, advanced
telecommunications capabilities (i.e. universal service), on the one
hand; and subsidizing competition, particularly in areas where
even the existence of a single telecommunications provider
requires support. Returning to the highway analogy, we do not
need to build parallel, redundant highways, especially in areas
where infrastructure is sufficient to carry all traffic.
How to Put the Universal Service Fund Back on Track
Universal service, like the highway system, works; and it
works well. It should not be considered a rural subsidy, any more
than the national highway system is a rural subsidy. In fact, most
of the largest beneficiary states in terms of universal service dollars
are not necessarily commonly identified as rural states. All
Americans, no matter where they live, depend on an
interconnected, robust interstate communications infrastructure.
That said, the squeeze on revenues and disbursements needs to
be addressed. Broadening the base of contributions not only will
enhance the Fund's revenues, but will address regulatory arbitrage
issues in which some carriers seek to avoid contributing to the
Universal Service Fund.
On the distribution side, requiring greater scrutiny of the ETC
designation process, and eliminating the identical support rule will
go along way toward returning the Fund to balance without
burdening telecommunications consumers.
H.R. 5072, introduced by Energy and Commerce Committee
members Lee Terry (R-NE) and Rick Boucher (D-VA) proposes a
series of remedies for the contribution and distribution pressures
faced by the Universal Service Fund. Briefly, the bill expands the
base of contributors to the fund to include all providers of voice
communications; and it rationalizes distribution of funds by
providing for more scrutiny over the designation of ETCs. MTA
endorses H.R.5072 and encourages this Committee to pass and
report this important legislation expeditiously so that the House
can use H.R.5072 as a benchmark going into conference with the
Senate which planning to mark up S.2686 this week amending
universal service statutes among other things.
Universal Service Promotes Network Efficiencies
Some critics of universal service allege that telecom providers
"gold plate" their networks, and lack incentives to invest
efficiently in their networks. Such accusations are not borne out in
reality. Rural telcos are exemplary in their commitment to service,
investment, and support of their local communities. Rural
communities, and likely all business managers, know the value of a
dollar. Moreover, contrary to the allegations, their continual
investment in modernization of their networks is creating
efficiencies that reduce the distributions from the universal service
Fund. For example, a digital switch, traditionally the principal
brains of a telecommunications network cost somewhere in the $1
million range. Modern Internet protocol (IP) based "softswitches"
can deliver the same functionality-and more-for a fraction of
the cost. Similarly, fiber optics provide far more capacity and are
easier to maintain (once installed-at considerable expense),
thereby creating long term efficiencies and cost savings over the
life of the asset.
Consequently, Blackfoot Telephone Cooperative of Missoula,
Montana, for example, is investing in an Ethernet broadband
backbone which will enable it to push faster, more robust service
options to the edges of its network. Simultaneously, the company
is drawing $500,000 less in universal service support. 3 Rivers
Telephone Cooperative of Fairfield, Montana, received $1.5
million less in universal service support in 2005 than the year-
earlier period for similar reasons.
Conclusion
Universal service continues to contribute substantially to on-
going investment in America's affordable, quality
telecommunications infrastructure which enables consumers and
businesses to expand their economic and social horizons through
access to world wide information. Congress has an opportunity
this year to preserve and advance universal service while
addressing stresses, strains and abuses that have developed since
1996. A healthy, balanced universal service program will ensure
that Americans will benefit from access to a quality, affordable,
advanced telecommunications network that supports America's
worldwide competitiveness for years to come.
MTA looks forward to working with the Energy and
Commerce Committee and other interested parties in developing
policies that can preserve universal service's laudable goals while
mitigating deficiencies in the program.
Suggested Reading
"Universal Service: Rural Infrastructure at Risk." Release 2.0.
McLean & Brown. April, 2006.
http://www.mcleanbrown.com/usf_406.pdf
"The Rural Difference." White Paper #2. Rural Task Force.
January, 2000.
http://www.wutc.wa.gov/rtf/old/RTFPub_Backup20051020.ns
f/?OpenDatabase.
Findings include:
RLECs serve 8% of nation's access lines; 38% of U.S.
geography
- [In Montana, RLECs serve 32% of lines; 80% of land.]
Ave. urban density = 134 customers/sq. mi.
- National rural average is 10.5/square mile
- [Montana average is less than 3 per mile.]
Ave. urban customers per switch: 13,314
- National rural average: 2,201
Ave. cost to serve urban customer: $240/yr.
- National rural average cost/customer: $337/yr.
Rural carriers lack economies of scale and density
- Fewer customers, and fewer high-volume customers
Rates recover less investment cost for rural providers than
urban providers
- 50% to 75%+ of all rural providers' revenues come
from "access" fees and universal service (i.e., NOT
rates)
About the Montana Telecommunications Association
The Montana Telecommunications Association (MTA)
represents independent telecommunications service providers
throughout Montana, offering local and long distance residential
and business phone services, as well as a full spectrum of other
services including broadband and dial-up Internet; satellite TV,
and competitive local exchange services.
MR. UPTON. Thank you.
Dr. Cooper.
DR. COOPER. Thank you, Mr. Chairman and members of the
committee. I greatly appreciate the opportunity to testify on
universal service.
Although the questions posed in the title of this hearing are
what are we subsidizing and why, in an era of technology change,
the real questions facing the Congress are what should we be
subsidizing and how. The answers are clearly the Communications
Act and its history.
The cornerstones of communication policy in America for the
past three-quarters of a century is stated clearly in the first sentence
of the Act: "to make available, so far as possible, to all people of
the United States, without discrimination on the basis of race,
color, religion, national origin, or sex, a rapid, efficient,
nationwide, and worldwide wire and radio communication service
with adequate facilities at reasonable charges."
In 1934, when this goal was adopted, two-thirds of the
households in America did not have telephone service. It was a
progressive, forward-looking policy.
In 1996, when over 90 percent of households in America had
telephone service, the Congress wisely sought to give specificity to
this goal for the information age and reaffirm our national
commitment to progressive universal service policy by articulating
universal service principles, two of which are of paramount
importance: quality services should be available at just, reasonable,
and affordable rates; and consumers in all regions of the Nation,
including low-income consumers and those in rural, insular, and
high-cost areas, should have access to telecommunication and
information services, including interexchange and advanced
telecommunication and information services that are reasonably
comparable to those services in urban areas that are available at
rates that are reasonably comparable to rates charged for similar
services in urban areas.
Reasonably comparable services available at reasonable
comparable rates for all Americans is the right goal. It remains the
right goal. Broadband facilities, wire or wireless, are the facilities
that must be defined as adequate in the 21st Century. By that
standard, today, the 1996 Act has failed miserably. Rural, high-
cost areas and low-income consumers do not have broadband
services available at affordable rates, and as a Nation, we are
falling behind other advanced economies in the adoption of
broadband.
Now is the time to reaffirm our commitment to universal
service and declare broadband to be the dial tone of the 21st
Century. The competitive telecommunications market will not
lead us to that goal. It needs help. Congress should begin a
transition plan leading to a phase-in where universal service
eligible carriers must be offering a full broadband-compatible
platform to convert Internet protocol platform that carries voice
and data is more efficient, more robust, and not substantially more
expensive than a dial-up world. We have to transition to that
world. The FCC's definition of broadband at 200k is unacceptable
and backward-looking. It must be revised to ensure appropriate
levels of service, and that level must continuously be expanded, as
the 1996 Act said, an evolving level of service over time.
Universal Service Fund should be available to the most
efficient technologies to meet the needs of the uniquely
underserved groups in our society. Thereby, we will be investing
in technology that promotes the least cost-efficient system. We
must broaden the base of universal service support, as we
advocated in the very first proceeding. We said include all of the
revenues in the system. And the court said, "No, Congress needs
to fix that." We should tighten the reins of oversight to be sure.
We should increase data collection to be sure. We should
discipline the size of the growth with rigorous oversight. But let us
not let the foibles of the current USF system be used to undermine
and abandon our commitment to what is a fundamental and correct
commitment in our society, very traditional value embodied in the
Communications Act that has served our society well: available
service for all Americans at affordable rates. Now is the time to
reaffirm that commitment and look forward to our 21st Century
communications network.
Thank you.
[The prepared statement of Dr. Mark Cooper follows:]
PREPARED STATEMENT OF DR. MARK COOPER, DIRECTOR OF
RESEARCH, CONSUMER FEDERATION OF AMERICA
Mr. Chairman and Members of the Committee
My name is Mark Cooper. I am Director of Research of the
Consumer Federation of America. I appear to on behalf of the
Consumer Federation of America, Consumers Union and Free
Press.
The Consumer Federation of America, Consumers Union,
and Free Press appreciate the opportunity to testify on the issue of
universal service. As consumer advocates, we strongly support the
Universal Service programs that have delivered essential
communications services to low-income households, rural areas,
schools, libraries, and rural health clinics. We recognize the fiscal
crisis of falling receipts and expanding expenses in the program
demands reform. Yet we view the current predicament as both a
threat and an opportunity. We believe that as communications
technologies evolve, universal service must evolve with it. We
support the expansion of the Universal Service Fund (USF)
support to broadband as the organizing principle to overhaul its
contribution and distribution systems.
As Congress looks to resolve the thorny problems of reforming
the Universal Service system, we urge Members to start with the
principles that lie at the base of the Communications Act. The
purpose of the Act was to regulate communications networks "so
as to make available, so far as possible, to all the people of the
United States, without discrimination on the basis of race, color,
religion, national origin, or sex, a rapid, efficient, Nationwide, and
world-wide wire and radio communications service with adequate
facilities at reasonable charges."
The goal of the Communications Act of 1934, as amended by
the Telecommunications Act 1996 is "to make available, so far as
possible, to all the people of the United States, without
discrimination on the basis of race, color, religion, national origin,
or sex, a rapid efficient, nationwide and world-wide wire and radio
communications service with adequate facilities at reasonable
charges.
The Act goes on in Section 254 to specify this Universal
Service Principles as follows:
Quality services should be available at just, reasonable an
affordable rates.
Access to advanced telecommunications and information
services should be provided in all regions of the country.
Consumers in all regions of the nation, including low
income consumers and those in rural, insular and high cost
areas, should have access to telecommunications and
information services, including interexchange and
advanced telecommunications and information services that
are reasonably comparable to those services in urban areas
and that are available at rates that are reasonably
comparable to rates charged for similar services in urban
areas.
Reasonably comparable services available at reasonably
comparable rates for all Americans are the right goals. Broadband
facilities are the facilities that must be the goal of universal service
in the 21st century. By that standard, the 1996 Act has failed
miserably. Moreover, if enacted into law, the COPE Act, which
was recently passed by the House of Representative would make
matters worse.
Instead of reaffirming that commitment to universal service,
the COPE Act turned its back on low-income consumers, and
consumers in rural and high cost areas by excusing network
operators from their obligation to provide universal service and
allowing them to redline high cost areas. By allowing network
operators to discriminate against applications, service and content
providers, it opens the door to anti-competitive bundling that raises
the threshold of prices far beyond the affordable level for low
income Americans. Earlier this week AT&T announced a brutally
anti-competitive, anti-consumer price for stand alone DSL, which
it agreed to offer as a merger condition. AT&T charges $29.85 for
DSL and required customers to have local service for about $16
per month. The mandatory bundled cost is $46 per month. Forced
to break the bundle, AT&T announced that it will charge $44.95
for stand alone DSL service. Giving network operators the
freedom to exercise their market power will increase the threshold
costs for gaining access to the broadband network.
This principle-strongly reaffirmed in 1996-is the simple,
powerful, and fundamentally progressive commitment to universal,
affordable access to communications services for all Americans. It
is this policy that has brought telecommunications to schools,
libraries, rural health facilities, low-income households, and rural
areas at reasonable rates and adequate quality of service. The vital
importance of this program is clear to anyone who has ever lived
rural America or struggled to make ends meet. The economic case
for affordable access is clear, and research produced by consumer
groups has been documenting it for many years.
The public policy commitment to ubiquitous communications
has never been more important than now. Standing at the threshold
of an information technology revolution, we cannot and should not
abandon or weaken our guarantee of universal, affordable access.
Granted, the communications marketplace has changed
substantially since 1996-the last time USF was comprehensively
addressed. The needs of our society and economy have evolved,
and USF must evolve with them. The labyrinthine complexity of
USF distribution-with both its successes and shortcomings-
must not be allowed to blind us from the bottom line: Broadband
is now, undeniably, the essential communications medium of the
21st Century. Broadband networks are the "adequate facilities" that
we must provide to all Americans at "reasonable charges."
Yet, as in past technological paradigms shifts, rural
communities and low-income groups have been left behind. The
economic costs of this digital divide are severe-curtailing the
educational, economic, and social opportunities for a significant
sector of our society. It is no secret to this Committee that the
United States lags badly behind other nations in broadband
penetration. The longer we wait for universal deployment of
broadband to every region of the country, the further behind our
global competitors we will fall. Not only should we apply USF to
broadband, we can't afford not to. This is the only way to get back
on track toward the President's stated goal of universal affordable
broadband by 2007.
The current financial crisis in the USF programs and the
difficulty in ensuring USF support delivers a strong return on
investment have been readily identified as threats to a successful
policy. But needed reform is equally an opportunity. We should
look to reform USF both to address its long term stability and to
use it to bridge the broadband digital divide. The cornerstone of
this policy historically, and now, must be a commitment to
bringing affordable service to average citizens. At the time of the
Communications Act of 1934, telephone penetration rates were
around 40%-very similar to where we currently stand with
broadband. The vision that inspired a policy that brought that
telephone penetration rate above 90% must now be applied to
high-speed Internet access.
The USF system does have a checkered track record and some
serious problems. There is virtual consensus that we need reform.
The program faces a financial crisis at present because of declining
receipts and expanding outlays. If broadband becomes an explicit
part of USF, these issues must be immediately addressed. To do
this, there will be a significant number of tough questions this
committee will face in an effort to overhaul the system of
contributions and distributions. But this is no time to turn from the
principles that have proven so successful. Nor is it time to lose
sight of the real problems that USF is meant to solve-our
communications inequalities.
Diagnosing the US Broadband Problem
The crisis in USF is severe, but the crisis it is intended to
address is arguably much worse, and certainly portends more dire
consequences to the health of the US economy. As this Committee
has heard ad nauseum in hearing after hearing this year, the US has
fallen out of the top 15 nations in broadband penetration. It bears
repeating here because this testimony will bring new data to the
question. This new research directly ties our global broadband rank
to the issue of Universal Service.
Defenders of current broadband policy have argued that
America's low global ranking is misleading because our
population density is so low compared to smaller nations such as
Japan, South Korea, and Sweden. Noting that Canada outperforms
us in broadband penetration despite its size and population density,
we investigated this question. We analyzed the data from the
OECD study of broadband in 30 nations and specifically controlled
for population density. The results are striking. [See Appendix.]
Population density turns out to have very little impact on our
relative broadband performance compared to other nations. Far
more important are median household income, the poverty rate,
and exposure to Internet technologies inside and outside the home.
Rural areas are indeed underserved-broadband penetration
rates in urban areas are nearly double those of rural areas. Yet, our
research indicates that geography is a factor in depressed
broadband penetration because of two higher order causes that are
characteristic of rural areas-the price of service and the low
income levels of potential subscribers. It costs more (per customer
served) to build rural infrastructure, which limits competition and
raises prices, and the disposable income of the average rural family
is lower than average. Additionally, rural areas tend to have a
disproportionate number of retired Americans on fixed incomes.
These factors result in depressed broadband penetration. These
conclusions comport with the findings of a study by the Pew
Internet and American Life Project. Our research also confirms a
recent survey showing that over 45% of broadband non-
subscribers in the US do not subscribe because of high prices. A
further 10% report that service is unavailable. The combination of
high prices and poor people results in lower technology exposure
and adoption in rural America.
On the question of exposure to the Internet, another key factor
in promoting broadband penetration, Pew found that 32% of the
adult population does not use the Internet-a figure that held
steady for the first half of 2005. But our problem is not only with
adults, it is also children. Of the 30 nations in the OECD study, the
US ranked 26th (ahead of only Mexico, Turkey, and Slovakia) in
the percentage of 15-year olds that have used a computer. Other
nations are winning the broadband race because they are bringing
technology and services to low-income areas.
The USF program is specifically designed to address these
problems and is uniquely suited to do so if we apply its support to
broadband. There are plenty of rural communications providers.
The issue is finding the right balance of subsidies to incent
investment and to make their products affordable to low-income
Americans. Expanding USF support to broadband is a logical step
to correcting the negative trends in our broadband markets. First,
USF brings service to rural and low-income areas at affordable
rates. Perhaps no other single policy is more important to our long
term broadband prospects. Second, USF supports discounted
Internet access in schools and libraries, which frees resources to
buy PCs for the computer labs that connect to these lines. These
public institutions serve to expose our young people to technology
and catalyze the residential market for home computers and
broadband services.
Other nations have used strategic direct investment in
broadband infrastructure in low-income and rural areas to
outperform us across the board. We should take note and plan
accordingly. Policies that stimulate low-income consumer demand
will improve the U.S.'s broadband situation. Universal Service
policy applied to the broadband market will play a positive role in
bridging the economic and rural digital divides. This in turn will
significantly improve U.S. broadband performance relative to other
leading nations.
General Principles of Implementation for USF Reform
As consumer representatives, we look to USF reform as an
opportunity to extend the burden of contributions more equitably
and to broaden the scope of distributions more effectively. The
principles for implementing USF reform in 2006 must carry the
same spirit as the principles for implementing USF in 1996. The
functions, however, must be more forward looking. USF reform
should:
Explicitly expand USF to broadband and set a level of
service and a target price comparable to dominant
technology in urban areas. The FCC's broadband
definition of 200 kbps is unacceptable and backward-
looking. It must be revised to ensure appropriate levels of
service.
Broaden the base of USF contributions, equitably assessed
and technology neutral, to stabilize the financial future of
the Fund.
Tighten the reigns of oversight and control that ensure
disclosure of how the Fund's distributions are spent, who
qualifies to spend them, and what the results of that
spending yield. Increased data collection to make these
assessments, including determining the capacity of lines in
service areas, will be a key component to understanding
how and where to make strategic investments in
infrastructure.
Find the right balance for USF subsidy. If the subsidy is too
big, investment does not flow to the most efficient provider
and rate paying consumers are overly burdened without a
commensurate benefit. The inter-industry wrestling over
revenue must be exposed to scrutiny and untangled fairly.
Consumer contributions to the Fund must produce a
tangible social and economic benefit in the form of a more
robust network and catalyzed economic growth. We have
real success stories with broadband provision by carriers of
all kinds-we should identify those blueprints and
duplicate them.
Invest in a technology neutral manner that promotes the
least costly, most efficient systems that meet robust quality
of service standards.
Begin a transitional phase leading to a point when all USF
eligible carriers offer broadband compatible networks. The
converged IP platform that carries both voice and data is
more efficient, more robust, and not substantially more
expensive than PSTN upgrades. As the PSTN equipment
depreciates and requires replacement, it should be replaced
with an IP platform.
Discipline the size of the fund through rigorous oversight,
realistic maximum allocations, forward-looking cost
assessments where appropriate, and sliding scales of
eligibility and reimbursement. The FCC and state utility
commissions should work in tandem to develop new
protocols that make sense for a USF that supports 21st
Century communications services.
Reform USF in conjunction with a comprehensive set of
broadband policies. These should include:
Opening more of the spectrum for unlicensed wireless
broadband,
Focusing on competition inducing policies that
counterbalance mergers,
Strategic direct investment in rural broadband
infrastructure,
Reinstatement of the Technology Opportunities
Program at NTIA,
Encourage community development programs as
broadband partners in order to expand access to low-
cost equipment and technology training.
Conclusion
There are no easy solutions to correcting to the problems of the
Universal Service. But they must be addressed based on the same
principles that have always guided progressive communications
policy-a commitment to ubiquitous, affordable access to the most
important technologies of the era. Broadband unquestionably
qualifies as the dominant communications service of the 21st
century. The benefits of applying USF to broadband outweigh the
costs by a wide margin. Without a strong, comprehensive policy
commitment to developing our broadband markets, we cannot
hope to correct the problems that have plunged us down the ranks
of global competitiveness. We need policies that give the "green
light" to investment in communications infrastructure in rural and
low-income America with a strong commitment to accountability,
efficiency, and oversight. We strongly encourage this Committee
to uphold the remarkable and progressive commitment to
Universal Service that is the foundation of our communications
policy.
MR. UPTON. Well, thank you all very much. I appreciate your
testimony, that is for sure. And I have to say that as I listened and
read your testimony and have been thinking about this issue for a
long time, particularly as we begin to engage with the Senate on
the COPE Act, which we passed by a broad margin 2 weeks ago in
the House and look forward to the Senate's action in full
committee this week. I am one that, at least as it relates to USF,
believes that the status quo is simply not acceptable because of the
continued increasing cost, even though it is neutral as it relates to
the government budget. Doubling the cost every couple of years is
not a trend that I, certainly as a fiscal conservative, want to
continue to see. So I am looking for ways that we can reform the
system, not one for eliminating USF. I realize the importance,
particularly in rural areas, and my State is one of those that has a
pretty good balance of urban and rural. I know the importance of
connections, certainly in our district and the good work that they
do. But simply times two every 3 or 4 years is not the course that I
want to be on.
And I guess my first question is for Dr. Marron, and I noted
that in your testimony, you noted that the growth in the High-Cost
Fund has come largely because of the dramatic increase in the
wireless carriers, which have become eligible, of course, to receive
the High-Cost support. And I would note concerns that stress that
the wireless carriers receive such support based on the wireline
carriers' costs, which are often higher, I believe, than the wireless.
If we are to change the program to limit wireless carriers' support
to their own costs rather than wireline costs, what do you think the
savings would be within a few years?
DR. MARRON. I am sorry, Mr. Chairman; that is not an
analysis that we have had an opportunity to attempt. As you
know--
MR. UPTON. Well, I mean you do everything else.
DR. MARRON. Well, yes, we analyze many, many, many
questions, as you know. On that one, one of the key issues is that,
as you know, in the current structure of the program, the program
is structured to generate very good data about the cost of the
incumbents and so that that can be tracked for purposes of
implementing the program, but similar data are not collected for
the entrants since, as you said, they are paid based on the
incumbents' costs. And so the first data that you would want to go
to to answer that question isn't immediately available. We want--
MR. UPTON. And yet--go ahead.
DR. MARRON. I was just going to say that we would be happy
to go back and take a look and see what we could find, but I am
not entirely sure what we would find there.
MR. UPTON. That might be available for us to look at. And I
want others to comment on that as we go.
The other question that I have relates to something that Ms.
Pies indicated and that would be that to limit it to one connection
and one telephone line. Have you done an analysis in that regard?
DR. MARRON. Sir, we haven't yet done that specific analysis,
but we do, as I mentioned earlier, have one number, which is a
good starting point for thinking about that, which you mentioned
for fiscal year 2005, the entrants, the competitive providers, their
compensation in the system was about $640 million. And that is
going to be an upper bound, but if you adjust that down so
whatever customer base has two lines, it would seem that that
would be kind of the right order of magnitude for what the effect
would be of going to one line.
MR. UPTON. And the comment that it would limit it to about
$1 a month per line, do those numbers equate with you in terms of
where we are today that was indicated in the testimony? I think it
was Mr. Cimerman.
DR. MARRON. Yes. Yes.
MR. UPTON. Does anybody else on the panel want to comment
on either of those questions that I posed?
Okay. Mr. Clark.
MR. CLARK. Yes. Mr. Chairman, I would just add that
something to understand also about the identical support rule, it
actually has even a little bit more harmful effect than has been
presented today, because remember that it is based on the
incumbents' costs, but it is based on their average per-line cost, so
to the extent that you have two ETCs in an area and the wireline
company may be losing customers to the wireless company, their
average per-line costs go up at the same time, so both carriers end
up receiving more money because they are both eligible for that
money. So when we talk about sometimes the "death spiral" of
universal service, because of the way that identical support rule
operates, that is what people are referring to.
MR. UPTON. Well, are you not concerned about the level of the
Fund as we have seen these costs double over the last 4 or 5 years?
MR. CLARK. I certainly am. Speaking for myself and not
necessarily the Association, I mean, to me, the identical support
rule is probably the largest single problem that we have. I am not
as enamored with the primary line restriction for a number of
reasons that we can get into later, but I think that the identical
support rule would certainly be something worth looking at.
MR. UPTON. Okay. My time has expired.
MR. GARNETT. Can I just quickly dovetail off of what
Commissioner Clark was saying?
I think the problem is not the identical support rule. The
problem is that we are subsidizing carriers based on their actual
costs plus profit. We don't think either the incumbent or the
competitor should get support based on actual costs plus profit.
We need to get to a system where both incumbents and
competitors are rewarded for being efficient just as wireless
carriers and other competitors are rewarded in the competitive
marketplace.
MR. UPTON. But we would do that if we went to one money,
would we not?
MR. GARNETT. We may.
MR. UPTON. Dr. Cooper.
DR. COOPER. Chairman Upton, I want to offer an observation.
All of this talk about numbers and lines is very backward-looking.
We are in a world where some people won't have numbers; they
will go to ISPs. And we have heard a lot about the growth of the
size of the Fund, but think about the volume of traffic that has been
flowing over those lines. It has been exploding. Even if you did
revenue in the sector, it is growing, not as fast as the Universal
Service Fund, but pretty darn fast over that 10-year period. So I
would encourage that we think about this as a connection and the
capacity that is being used, because if we understand, as I have
suggested, that broadband is the adequate facility for the 21st
Century, it gives us a different perspective on the one-line issue. It
is a one-connection issue. And that connection will be doing lots
of things. It will be supporting voice, video, and data, and I think
that that is the way we need to think about it rather than comparing
it to this line and numbers context, which is last century's
framework.
MR. UPTON. Mr. Stupak. Oh, excuse me. I didn't see Mr.
Boucher come back.
Mr. Boucher.
MR. BOUCHER. Go ahead, Bart.
MR. UPTON. Mr. Stupak.
MR. STUPAK. Well, thank you. And thanks for holding this
hearing, Mr. Chairman.
You know, we are investing in a first rate telecommunications
network that is affordable for all Americans and without universal
service, my constituents would pay anywhere between $100 and
$700 more per year for basic phone service. So as we look for
ways to reform the Fund, we have to make sure that the end goals
of affordable universal service are not compromised. I look
forward to working with you, Mr. Dingell, Mr. Boucher, Mr.
Terry, and others on the committee for this endeavor. And
Chairman Barton said today that if we can't get rid of it, and I
assure you we do not want to get rid of it, we need to reform it, and
so I stand ready with you guys ready to work with you to try to
reform and modernize it, because as I said, I assure you, we cannot
get rid of it.
Mr. Cimerman, I appreciate the investment that cable
companies that serve rural areas are making in VoIP technology.
In fact, I am a VoIP customer myself through a cable company.
Are you aware of any cable company that does not pay in the USF
today?
MR. CIMERMAN. No, my understanding is that all cable
companies that are offering VoIP service, as well as those that
offer traditional circuit-switched service, do pay into Universal
Service.
MR. STUPAK. Well, we note today the FCC just came out with
their ruling saying that VoIP providers or cable companies should
pay in, that VoIP providers must pay in. Why were they paying in
before required to do so?
MR. CIMERMAN. Well, back in February of 2004, we issued a
white paper with a rights and responsibilities framework. That is
the same framework that we have advocated on the video side,
that, as providers providing whatever service, on the one hand,
they seek certain rights, for example the right to interconnect. On
the other hand, there are certain social obligations, e-911, working
with law enforcement, paying into Universal Service that, from the
beginning, we felt was an important part of offering our service to
pay into Universal Service.
MR. STUPAK. We are getting to Mr. Cooper's statement there
at the end that we should be looking at each connection and
capacity as a different way of looking at paying into USF.
MR. CIMERMAN. Well, I appreciate the opportunity to respond,
because we actually have several concerns. The first, the
connections, is how you measure a connection. There are still a
number of people that don't have, for example, a broadband
service today. They choose not to subscribe. It is available to
them. But if you do have broadband service and you have a phone
line and you have, let us say, a wireless phone, how are we
measuring connections? Are people double paying, triple paying?
It is unclear exactly how a connections-based plan would work.
And on a capacity-based plan, we have an even bigger concern,
because generally we give the most capacity bang for the buck, but
Verizon and others are rolling out new services. As we are
increasing speeds, increasing capacity, the idea that you would pay
more into Universal Service just because you are getting increased
capacity doesn't necessarily seem to make sense. We think the
number-based plan, as Dr. Marron, I think, agreed in the question
from Chairman Upton, would provide a sufficient revenue basis for
universal service because there are so many numbers in use. And
we don't think that people are moving away from numbers. We
have advocated that if people were to get into some regime to
numbers, that the FCC ought to have the authority to use that
addressing system. But we are always going to need some kind of
a unique addressing system to figure out who is who, and so we
think a number-based plan would be quite robust.
MR. STUPAK. Okay. Mr. Crothers, thanks for your testimony
today. As a representative of the North Dakota
Telecommunications Association, can you tell me how much more
North Dakotans would pay without Universal Service Fund and
why?
MR. CROTHERS. Mr. Chairman, Mr. Stupak, I do not have the
specific number. We have an average rate in North Dakota of $18
for local service. It is generally acknowledged that it will be $25,
$35, $45, $50, $150 a month in some instances to provide service.
So it is extremely costly to serve rural North Dakota. It is one of
the least dense areas of our country. The State is 350 miles from
east to west. One-third of our population lives in the six counties
adjacent to the Minnesota border, so we have a density of less than
two subscribers per square mile in North Dakota. It is
phenomenally expensive to serve. Sir, I can get the specific
number for you for an average family, if you wish.
MR. STUPAK. How about quality of service? Would you be
able to afford wireless service in North Dakota, especially in that
western part without universal service?
MR. CROTHERS. Mr. Chairman, Mr. Stupak, there is wireless
service in western North Dakota. That low density in the
southwestern portion of the State of North Dakota is about 0.6 of
an individual per square mile. But the wireless service is very,
very spotty. You can literally go the majority of counties and not
have any service. You can drive 10 miles south of Bismarck,
North Dakota, the capital of North Dakota, and not have service. It
is a very difficult area to serve with wireless.
MR. STUPAK. One more, if I may, and the Chairman has been
generous with his time, but there seems to be this myth that rural
customers do not pay as much as their urban customers for phone
service. Isn't it true that on an average, rural consumers pay on
average more for their phone service than urban customers? Let us
see. From 1994 to 2002, it was increased, in the urban rates, about
145 percent to $22.65 while the rural areas had only gone up 36
percent, but that is still $28.08, so we still paid more in rural areas
than we do in urban, is that true?
MR. CROTHERS. Mr. Chairman, if I may, Mr. Upton, that
makes exact sense to me, tremendous sense to me. In rural areas,
especially these very low density areas, you find that individuals
make an increasing number of long-distance calls, of toll calls.
They need additional connections. They do their business, whether
it be education, their business, their entertainment, it is frequently a
toll call. We believe the costs are much higher. Yes, sir.
MR. STUPAK. Thank you.
MR. UPTON. Mr. Barton.
CHAIRMAN BARTON. Thank you, Mr. Chairman.
So many questions, so little time.
Let us see. Mr. Frantz, do you think a subdivision in suburban
Katy, Texas, where the medium home price is over $400,000 and
there are four or five homes per block on half-acre to acre lots with
lakefront property qualifies as a high-cost, low-density area for
Universal Service Fund applications?
MR. FRANTZ. That is difficult to answer that question, because
I don't know really much about that area. I think I understand.
CHAIRMAN BARTON. Well, I am not exaggerating.
MR. FRANTZ. I think I understand your point, and I guess I
would respond this way. Any complex compensation system is
susceptible to gaming in some manner to some degree, and I think
that is the challenge, really, that we are discussing today.
CHAIRMAN BARTON. But in any reauthorization of the
Universal Service Fund, would your association support a reform
that excluded those types of communities from the Universal
Service Fund program?
MR. FRANTZ. Again, it is difficult for me to conceptualize how
that would be designed or structured, Congressman.
CHAIRMAN BARTON. Well, it is a true example. I mean, I am
not making these things up.
Let me go to my friend from CBO, who I always have an
interesting dialogue with.
If we were to pass a bill that reduced the outlays for the
Universal Service Fund, how would that be scored, if at all, in a
budget reconciliation package?
DR. MARRON. Sir, the budgetary treatment of the USF
program, as you know, is that both the revenues to it and the
spending of it are both considered being part of the budget. The
revenues show up on the revenue side and the spending shows up
on the spending side, so if you do reduce the spending, it would
show up as a spending reduction.
CHAIRMAN BARTON. So it would score?
DR. MARRON. Yes.
CHAIRMAN BARTON. All right. And can I quote you on that to
the Speaker?
DR. MARRON. Oh, well, let me check to make sure I haven't--
CHAIRMAN BARTON. That is the answer I wanted, but I just
want to make sure.
DR. MARRON. I just want to make clear, as you know, I have
been Acting Director only for 6 months and occasionally there are
nuances of scoring that confuses even me.
CHAIRMAN BARTON. Okay.
DR. MARRON. I mean, I should emphasize that the way USF is
structured is that the spending and the revenues are such that they
tend to track one another, and so whatever spending change there
would be would automatically, in essence, be offset possibly by
some--
CHAIRMAN BARTON. At least for today's hearing, if we were to
reform the program and have less outlays, that would score as a
positive, a revenue savings for reconciliation purposes?
DR. MARRON. I am sorry. It would be a savings on the
spending side, and it would, under the current construction result in
a revenue reduction.
CHAIRMAN BARTON. Yes, sir. Okay. Well, I am going to quit
while I am ahead with that one.
The gentlelady from Texas, Ms. Pies, the FCC today, I think,
did something that taxes at 64 percent of revenues. What is your
group's position on that particular decision by the FCC? I am not
sure they have the authority to do it, but besides that, do you think
your group is going to be happy to hear they are going to get their
revenues taxed at 64 percent?
MS. PIES. Well, we haven't seen the details of the order yet. I
am sure that the Commissioner and the General Counsel's Office
have done a good job supporting the jurisdictional authority. The
one--
CHAIRMAN BARTON. I am not so sure as you are of that, but--
MS. PIES. Well, I have a friend who worked there, so I think
there are some quality employees there.
CHAIRMAN BARTON. Well, I will admit there used to be at
least one.
MS. PIES. Thank you.
CHAIRMAN BARTON. No, I believe there are quality employees
at the FCC. They are good people.
MS. PIES. We actually support, very strongly, the goals of the
Universal Service Fund and have long supported changing the
contribution methodology so that VoIP providers do contribute on
an equitable, non-discriminatory basis. Our concerns about the
FCC's action today are probably three-fold.
First, there is going to be a tremendous funding gap when DSL
stops contributing at the end of July. We have not taken a position
on whether or not broadband should continue to contribute, but
that was the basis of the FCC's actions today. Estimates have been
close to $350 million.
CHAIRMAN BARTON. But should you set a percentage based on
expected revenue gap from another medium?
MS. PIES. I don't believe that would be consistent with the
goals of Section 254. We are also concerned that a tremendous
number of VoIP providers and users are small businesses and are
anxious to see the FCC's analysis of the impact on the small
businesses of this tremendously high percentage. It is almost twice
of what wireless carriers are required to contribute. And we are
also concerned because a large number of VoIP users are low-
income users and dramatically increasing their phone bills, even
for the interim, hurts the very consumers that the FCC is supposed
to be protecting.
CHAIRMAN BARTON. Okay. Mr. Chairman, if I could, I have
got two more questions. I know my time has expired.
I want to ask Mr. Cooper, who is one of our more frequent
visitors here to testify, does your group support a reform in
Universal Service Fund that whatever it is and however it is
distributed, it should be based on the least cost alternative as
opposed to the existing cost model regardless of what the costs
are?
DR. COOPER. Absolutely, we have since the Act was passed.
CHAIRMAN BARTON. Okay. Thank you.
DR. COOPER. It should be the broad base. We were the first
people to argue that. The People's Council in Texas was one of
the vigorous supporters of that and unfortunately lost that.
CHAIRMAN BARTON. I tried to look hard to find an answer that
you and I would agree on, and I am glad that I got that.
My last question is, again, to Mr. Frantz.
In my opening statement, I eluded to several rural telephone
cooperatives that paid more out in dividends than their subscribers
paid in charges. Again, as part of any Universal Service Fund
reform, should one of the reforms be that we subtract dividends
paid out from the costs reported in?
MR. FRANTZ. Conceptually, the USF subsidizes networks.
The companies that receive the subsidies can have varying
financial effects or results from the receipt of those subsidies,
depending on many factors, including their cap structure, et cetera.
So again, it would be difficult for me to really be able to venture a
thought on that without really further analysis.
CHAIRMAN BARTON. Well, does it seem fair that apparently,
and I have to say apparently because I have evidence of specific
companies, but I don't know to what depth it is. I don't know if
that is 10 percent or 5 percent or 100 percent, but there are a
number of these smaller telephone companies. There is one in
particular that prides itself for so many consecutive years paying
out more in dividends every year than the subscribers have paid in
line charges. And conceptually, should the general telephone
interstate users that are paying an average of 11 percent tax
subsidize a telephone company that is routinely paying more out in
dividends than it charges its subscribers in service charges, line
charges?
MR. FRANTZ. I understand the thrust of your question, I
believe, but your question implies that the source of the dividends
distributed is either predominantly or totally attributable to the
subsidies--
CHAIRMAN BARTON. Well, in the specific instance that I
mentioned on the record in Alpine, Texas, that record shows that
they get 5 percent of their revenues from subscriber charges and
yet last year they got $28 million in subsidies from the Federal
system and the State system. And I don't know their dividend
stream every year, but in 2003, they paid out $12 million and in
2004 they paid out, I think, $3 million. So in that case, 95 percent
of their revenue is coming from subsidies, and yet they are paying
these huge dividends. I am out for dividends. I don't think
dividends are bad. I think they are good, but when 95 percent of
your dividend structure is coming from a Federal or State subsidy,
it would seem to me to be a fair reform to limit. If you are paying
that much out in dividends, you should subtract that from the costs
that are used to calculate the rate of return it is guaranteeing under
the Universal Service Fund. That is all.
MR. FRANTZ. Well, clearly it doesn't seem right nor is it
consistent with the purposes of the program for that type of
excessive situation to occur. And I think I can safely venture the
view that the trade association would not support any situation
where the system could be gamed to that extent.
CHAIRMAN BARTON. I appreciate that answer. I yield back,
Mr. Chairman.
MR. UPTON. Mr. Boucher.
MR. BOUCHER. Thank you very much, Mr. Chairman.
And I want to thank our witnesses today for spending time with
us here and for their patience. This has been a long hearing. Your
information has been very enlightening to us.
Mr. Frantz, Mr. Crothers, and Mr. Feiss, let me give you an
opportunity to talk a little bit about why universal service is so
important. And let me just kind of paint a picture, and tell me what
would happen were this picture real.
Let us suppose that the worst occurs and that Congress perhaps
is not capable or not able or doesn't have the will to stabilize the
Universal Service Fund and that it meets its demise, so we really
no longer have the Universal Service Fund available for the rural
companies that are using that funding today. What would happen
to that rural service? Could those companies continue to survive?
And as an adjunct to that question, how would you rank the
importance of universal service today as compared to its
importance historically? Is it more important today, less
important? Is it of diminishing importance over time or of
growing importance over time?
Who would like to begin? Mr. Frantz?
MR. FRANTZ. Although it is difficult to generalize because
there are enormous variations among the various companies
comprising the USTelecom membership, I think it is fair to say
that the companies that predominantly serve the low density areas
are very significantly dependent upon subsidies. Would they go
out of business? I think, in some cases, they clearly would; in
other cases, they would hold on. But I think the consequence, the
effect, in the case of many of the companies that serve low density
areas, Congressman, would be very adverse.
In terms of the relative importance, in my comments, I
ventured the point of view that this program is more important
today than ever, mainly because we, in this country, as I think we
all know, are competing not just against various of the other
segments or parts of the country, but in a very real sense, we are
competing against the world. And without a very robust
telecommunications infrastructure, we are going to be very hard
pressed to compete.
MR. BOUCHER. So stated another way, if we lose universal
service, we lose connectivity in a lot of rural America, and if that
happens, that injures the national economy, which depends upon
the entire country being connected to drive economic progress. Is
that a fair statement?
MR. FRANTZ. Yes, sir; it is.
MR. BOUCHER. Okay. Would you like to comment, Mr. Feiss
or Mr. Crothers? Mr. Crothers, I see you reaching for the
microphone.
MR. CROTHERS. Mr. Boucher, thank you. In response to your
question, what if the worst occurs, it would be devastating for
North Dakota, the overwhelming majority of which is rural. In
North Dakota, we have approximately 290 communities. The 12
largest of those communities may be 5,000 people. The rest are far
below that. The exchanges are tremendously large. We serve a
tremendous amount of communities where there are literally 200
and 300 people, but the exchange that that encompasses goes 25,
35, 40, 50 miles in some instances. So the rates would be
phenomenal for those that are served by those rural companies.
And because of those high rates, in the affordability, it would be
very helpful, to the very last point that was made, that an
individual could participate in what we refer to as today's economy
or a 21st Century economy. There are educational opportunities.
We use that tremendously in North Dakota: long-distance learning
opportunities to our universities. Our hospitals and technicians are
frequently trained through long-distance technologies. That robust
infrastructure is absolutely critical, and not for just some or some
in the highest density areas, but also our elderly in our rural areas,
which the elderly are disproportionately large residents of, have the
opportunity to be in their homes. So if that infrastructure is so
critical, that is what the universal service dollars have done in rural
North Dakota. It is also critically needed for VoIP services and
cellular services. If they are to exist in these rural areas, the
capacity they need to deliver their services, it is absolutely
essential that this USF program be as healthy and robust as
possible.
MR. BOUCHER. And let us hit those, Mr. Crothers and Mr.
Feiss. And I think Mr. Feiss actually may have had a number
answering this question in his testimony. But let us suppose the
Fund goes away and the rural subscriber has to pay the entire cost
of delivering the service to him. What would that mean in dollar
terms, do you think, perhaps on a monthly bill or an annual bill, in
terms of the addition to that bill for the typical rural subscriber
having to carry the entire cost of delivery of the service to him?
Mr. Feiss, I think you had a number.
MR. FEISS. Yes, Mr. Boucher, I do. I did have in my
testimony a $330 additional annual cost if just the universal service
were to be eliminated for the average Montana consumer and as
much as, for 10 percent of the consumers, $600 additional cost. In
combination with the low per capita income in Montana, it could
be devastating for numbers of residents. And as Mr. Crothers
pointed out, it is the infrastructure which, as Dr. Cooper points out,
is migrating toward a totally IP Internet-based platform. And it is
that platform that enables the people I have cited in my testimony,
and there are hundreds and thousands more who are living and
working in rural America who have access to the world now
because of an advanced infrastructure. And if that infrastructure
were to become dramatically more costly, there are people who
would drop off the network and network investment would be
more difficult and even questionable in large parts of the country.
MR. BOUCHER. I am going to say thank you to these witnesses.
My time has expired. I appreciate your answers.
MR. UPTON. Mr. Terry.
MR. TERRY. Thank you, Mr. Chairman.
And I do want to say that I respect and appreciate Chairman
Barton's position. I don't think anyone, no matter whether you
have a rural telecom business or you are a State regulator, wants to
support anyone who is gaming the system. And certainly the intent
of universal service is not to provide free but simply, as Dr. Cooper
stated, that it is reasonable. I forget the term right off hand, but
that they are paying, essentially, the same rate, and not 300 percent
or up to 600 percent more. But on the cost aspect of the overall
Fund, what we are talking about, at least with the Terry-Boucher
bill, is the high-cost rural aspect, not E-Rate or some of the other
categories. So I guess this will be to our CBO friend, but a couple
of questions here. Under our bill, we have capped the Fund at its
current rate. Then the FCC has a specific telephone inflationary
formula, what we then adapt. But we also then regulate, and a
good portion of the new costs for this Fund have been on the ETC,
or the new entrant, side. And we control that more. Have you, in
your testimony here today, looked at how this formula would work
or, i.e., score when it is capped and you now controlling new
entries?
DR. MARRON. Yeah. No, we haven't looked at that.
MR. TERRY. All right. Thank you.
In regard to whether or not it reduces spending or not, my view
is that how the FCC works it is they determine what they have to
send out by way of the dollars to the entities receiving USF and
then they send out a bill to the payers. Isn't that generally the way
it works, Mr. Feiss?
MR. FEISS. Pardon me.
MR. TERRY. Well, we are trying to go through the scoring of
this, and I am helping our people from CBO. Understand that the
FCC bills out to the payers the amount that is needed by the FCC.
Is that generally accurate?
MR. FEISS. The way I understand how it works is that the
revenue requirements by high-cost companies are submitted,
actually, to, I think, NECA, the National Exchange Carriers
Association. And they have a figure of how much Universal
Service Fund is needed. And then the FCC quarterly adjusts.
MR. TERRY. Yes. Then they adjust and the FCC then notifies
the companies that pay.
MR. FEISS. Right. And there is actually a 2-year lag in this
process, so the revenues that a company in 2006 receives is, at
least in the wireline business, different in the wireless business,
2004 cost reimbursement.
MR. TERRY. No, I appreciate that because it is a really unique
way in which they derive both the revenue and then the
disbursements which is why the antideficiency aspects are so
important.
I have a thought or a question, Ms. Pies. And I really
appreciate your statement. I think it shows why we need a bill like
the Terry-Boucher bill so that these rural telephone companies can
upgrade their systems as we move toward VoIP or an Internet-
based exchange. Which I think then once we get all of rural
Montana and Iowa and Nebraska and Wyoming with access to
broadband and they can then use VoIP. So I think that enhances
your position.
MS. PIES. Yes.
MR. TERRY. Then the issue of paying in, you mentioned
something about the "phantom traffic," and that is actually part of
our bill because we only want to make sure that those that are
using voice are the ones that are paying in and not ones that are
doing data transfers or gaming or something like that, which is
why we think it is necessary to identify the traffic, so if a VoIP
user, when they are providing a voice service that they are paying
in. Do you think then identifying that traffic is injurious? Because
it sounded like you say that if we try to identify the traffic, then
that is going to cause all of the problems. But I think it eliminates
the problem.
MS. PIES. With respect, Mr. Terry, the VON Coalition views
the "phantom traffic" issue not as a universal service issue but as
an intercarrier compensation issue. We recognize that the two go
hand-in-hand; when one goes up, the other tends to go down and
vice-versa.
MR. TERRY. So on the universal service side, you would
support "phantom traffic" in our bill, the language?
MS. PIES. We do support requirements that providers pass the
call identifying information that they receive. We would support
any requirements that would prohibit the alteration of call
identifying information. What we don't support are provisions that
require an originating carrier to generate some type of artificial
designation. By doing so, what you are doing is adding costs
solely for the purpose of beating some sort of arbitrary regulatory
goal. In addition, the way that the "phantom traffic" solution is
addressed in your bill, it also allows the terminating carrier, at their
discretion, to block the traffic because they have the ability to
determine whether or not that type of labeling is accurate. I
believe that is the word. And it is their choice whether or not it is
accurate. If a call originates IP, it is not naturally going to
originate with a traditional phone number, and the terminating
carrier may decide that that is not accurate and block the call. And
certainly we would be opposed to anything that would enable
terminating carriers to block traffic, whether it is a VoIP call that is
911 or a VoIP call to a friend or loved one.
MR. TERRY. Constructive. I appreciate that.
MR. UPTON. Mrs. Blackburn.
MRS. BLACKBURN. Thank you, Mr. Chairman, and thank you
all for your patience today.
I have got a few simple questions, and I am going to tell you
what they are, and then I am going to let you vote by raising your
hands so that we can finish this up and get you all on your way.
You have been mighty patient.
And we do have concerns, and we want to look at this. We are
very concerned. One of you mentioned a couple of times concerns
about individuals or companies that game the system. When you
are looking at a pool of money this large, as I said in my opening
remarks, that is something that is of incredible concern to us. And
while we have been sitting in this hearing, I got a Blackberry
where some folks in one part of the country, my part of the
country, don't want to be subsidizing Amtrak. And then, just as I
said in my opening remarks, there are folks maybe on this side of
the country or in urban areas that say, you know, "Why should I be
subsidizing broadband? Why should I be subsidizing more than
one connection to a household?" This is a tax that has outlived its
usefulness. And Ronald Reagan said it well when he said, "There
is nothing so close to eternal life on earth as a Federal government
program." And our constituents believe that. I do, too. And once
you get attacks against something, maybe it has outlived its
usefulness, you can't get rid of it.
So I am going to give you all the questions and then we will
come back and vote. These are the things I am going to want to
know. Do you support subsidizing more than one connection per
household? Question number two: how many of you are for
expanding or increasing the USF? How many of you are for
reducing the USF is number three? And number four, how many
of you would like to completely eliminate the USF? How many
favor disbursement caps would be number five? And number six,
and your last question, short test, how many think broadband
deployment should be left to the private sector?
Okay. Real short test, and there are no grades except my
answers are all right and whoever agrees with me makes 100, so
here we go.
Okay. How many of you are for subsidizing more than one
connection per household? Let me see your hands.
DR. MARRON. Well, for the record, I have to, given my job,
abstain from all of the votes.
MRS. BLACKBURN. Spoken like a true bureaucrat.
MR. FEISS. Are we allowed to put footnotes on our hands?
MRS. BLACKBURN. Only if you want to submit them in
writing. And I will take any footnotes submitted in writing. How
about that?
MR. FEISS. I appreciate that. Yes.
MRS. BLACKBURN. I know Dr. Cooper is going to give me a
lot of footnotes in writing. Dr. Cooper is good at that.
Okay. Let me see those hands again for subsidizing more than
one connection per household. One, two, three, four.
MR. FEISS. My left hand is a footnote.
MRS. BLACKBURN. So submit it in writing. We are moving for
speed.
How many would like to expand the USF? Two.
Okay. How many would like to see the USF reduced? One.
How many would like to eliminate the USF? Zero.
How many favor disbursement caps? Two.
Ms. Pies, you have no opinions?
MS. PIES. Not really. My opinions on--
MRS. BLACKBURN. You have to submit it in writing.
Okay. How many think broadband deployment should be left
to the private sector? Three.
None of you made 100, I can tell you that, because not any of
you are in complete agreement with me. Is that a hand up for
being in agreement? Okay. Four. Or a comment? In agreement?
Leaving it to the private sector? All right. So we got a four on that
one.
Thank you all very much for your time, for your patience, for
your interest in the issue, and I yield back, Mr. Chairman. Thank
you.
[Response for the record follows:]
July 12, 2006
The Honorable Marsha Blackburn
509 Cannon House Office Building
Washington, D.C. 20515
Dear Congresswoman Blackburn,
I want to thank you for taking such an active interest the hearing
on universal service in the Telecom and the Internet Subcommittee
on June 21. I was honored to testify and pleased to respond to
Members' questions and comments.
In this regard, as promised, I'd like to provide you with greater
detail on the "footnotes" I attached to the six questions you asked
the panel at the end of the hearing. (I also apologize for the delay
in responding to you. I had a long-scheduled vacation planned
immediately after the hearing and wasn't able to attend to this
letter until my return.)
1. Should universal service support more than one
connection?
My answer was "yes-with a footnote." There is widespread
opposition to a "primary line restriction" for universal service
support. In fact, Congress twice has enacted one-year moratoria on
imposition of any primary line restriction, and rural companies
support a permanent moratorium/prohibition on the primary line
restriction. One problem with a primary line restriction lies in its
practical (or should I say "impractical) implementation. First, it
would be very difficult to determine which line is "primary," and
which one(s) is (are) not. There would be tremendous opportunity
to game the system; to slam, cram, or otherwise attempt to
characterize line(s) as primary. If one of the intentions for
universal service reform is to reduce arbitrage and "gaming," this
potential reform may go in the opposite direction. For example,
wireless companies offer each member of a household a separate
phone and number-each of which receives universal service
support if the wireless carrier is an ETC. (This is one reason why
the primary line concept is attractive.) Wireline households may
have multiple phones but only one universal service-supported
line, but wireless carriers provide separate lines per individual in a
household. If there were a primary line restriction, would each
member of the family choose a "primary" line, or would one
"household" choose a primary line? And then how would you
determine what a household is, and who in the household gets to
chose the primary line? And so on.
A second problem with the primary line restriction is if only the
primary line receives universal service support, then all other lines
would be priced according to their actual costs. (Remember,
wireless carriers do not even account for their actual costs today.)
Presumably, non-primary lines would then be more expensive. In
Montana, they could be hundreds of dollars more expensive. This
would be a significant deterrent to small business (i.e., multi-line
commercial enterprises) development in rural areas, and I do not
believe Congress intends to thwart rural economic development.
2. Should we expand universal service?
I think my answer was "yes-with a footnote." I believe that the
approach taken by H.R.5072 is a reasonable, conservative
approach to "expanding" universal service to include investment in
broadband technology. On the one hand, it is widely
acknowledged that access to affordable, ubiquitous broadband
capabilities will expand economic opportunity for Americans
throughout the nation, and enhance America's worldwide
competitiveness. This is why the President and Members of
Congress on both sides of the aisle have endorsed nationwide
broadband deployment. On the other hand, Members of Congress
appear concerned about the cost of such a policy. Indeed, it's
obvious that to accelerate deployment faster than the market allows
requires "incentives," e.g. money. Depending on how fast you
want to accelerate beyond normal market forces, and how fast you
want "broadband" to be defined, the cost can vary. If we want
gigabit speeds to be delivered by the end of 2006, it likely would
cost billions. If we seek megabit speeds in 5 years, it'll cost less.
In fact, at the current rate of network investment and technology
advancement, most networks may be able to deliver megabit
bandwidth to most of their customers in 5 years without significant
"new" support from universal service. H.R.5072 allows broadband
investment costs to be supported by universal service, but
authorizes the FCC to determine the level of broadband that can be
supported, thereby providing a reasoned, incremental approach to
broadband support.
Second, while allowing broadband to be supported by universal
service "expands" universal service, it does not necessarily
increase the cost to the Universal Service Fund if other reforms,
such as a broadened contribution base and more disciplined
distribution (e.g., elimination if identical support), are
implemented.
Finally, as noted above, universal service already is providing
support for network investments which facilitate deployment of
advanced services without directly supporting specific broadband
facilities. That is, universal service supports underlying
investment in network upgrades like replacing copper with fiber
backbones. Once fiber is deployed, bringing broadband service to
residential and business consumers is more cost effective.
So it's a matter of timing: if you support bringing ubiquitous
broadband capacity to America's consumers sooner, you may want
to consider including the provisions contained in H.R.5072 as a
rational, incremental approach to such a policy. If you want to
wait for the market and normal investment in modernization of our
nation's telecommunications markets to bring broadband to
America's consumers, then you may not support "expanding"
universal service specifically to include broadband investment.
3. Should we reduce universal service?
My answer was "no-with a footnote." Currently the size of the
high-cost Universal Service Fund is determined by the level of
investment in supported services by high cost carriers. As I noted
in my testimony, incumbent wireline carriers are actually reducing
their universal service support by investing in more efficient,
modern network technologies. (Also, as noted above, investment
in fiber technologies facilitates more efficient broadband
deployment, enabling greater efficiencies for the Fund.) Two
Montana companies alone received $2 million less in 2005 than in
2004. In this regard, the Universal Service Fund is self regulating,
and demand on the Fund from certain carriers is diminishing.
However, consumers' line items on their phone bills now are in the
10% range, which is historically high. (That's 10% of the
interstate-revenues portion of a phone bill, not of the entire
telecom bill.) I should note, too, that this quarter's contribution
assessment went down from 10.9% to 10.5%, further indicating the
"self-governing" aspect of the Fund and its contribution
mechanism. But as noted during the hearing, new ETCs-mostly
wireless carriers-are receiving universal service windfalls as they
receive universal service support based on incumbent ETCs'
support, and not on their own costs, which generally are considered
less because they don't have the level of infrastructure investment,
quality, ubiquity, etc. that the incumbent has. (Wireless facilities
need only reach from the end user to the nearest point of presence
on the wireline network, thus saving them considerable expense;
yet, wireless carriers receive the wireline carriers' same level of
universal service support.)
So to return to your question, should we reduce universal service?
It's possible that as carriers invest in more efficient technologies
and with the right reforms (e.g., elimination of identical support),
we can "reduce" universal service distribution costs, while not
reducing the effectiveness of universal service or the legitimate
services and investments which universal service is intended to
support.
4. Should we eliminate universal service?
No. Ubiquitous access to affordable, quality advanced
telecommunications capabilities is as valid today, as it has ever
been. Indeed, it is more valid in today's worldwide economy, with
the importance of Internet connectivity to our economic
competitiveness. Again, I return to the highway analogy in my
testimony. We continue to invest in our nation's transportation
system as a vital national economic infrastructure. Continual
investment in our nation's ubiquitous information "transportation"
system is equally, if not more important.
5. Should we cap universal service?
No-with a footnote. Obviously a cap, by definition, will mean
that certain legitimate investment is not recovered. The current
regulatory cap already negatively affects investment decisions as
well as prices. Remember, as CBO points out, most of the so-
called growth in the Universal Service Fund has resulted from
regulatory cost shifting, as directed by Congress, from "implicit"
support mechanisms (i.e., intercarrier compensation or access
revenues) to "explicit" support (i.e., universal service).
Economically speaking, consumers are paying no more to support
investment in ubiquitous, affordable, advanced
telecommunications infrastructure. (This is not so, however, with
regard to "new" support created by designation of new, mostly
wireless, ETCs.) While the Fund (explicit support) has grown,
intercarrier compensation (implicit support) has shrunk, and the
next intercarrier compensation reform proposal in the pipeline will
bring more of the same shift from implicit support to explicit
support. Capping universal service without taking into account the
regulatory cost shift from implicit to explicit support would
significantly harm investment in our national telecommunications
infrastructure.
Moreover, the Telecommunications Act requires affordable rates,
quality and advanced capabilities, and predictable and sufficient
support. A cap violates these statutory principles.
6. Should broadband deployment be left to the private sector?
Yes. The only reason I hesitated to raise my hand was that I was
not certain I understood the intent of the question. I inferred,
perhaps mistakenly, that the question may have implied whether
universal service should support (private) investment in broadband
deployment. I've discussed the merits of H.R.5072's treatment of
universal services support for broadband above in question #2.
If the question meant whether we support municipal or other
government broadband network deployment, our answer is almost
unequivocally no. The private sector under nearly all
circumstances is a superior investor of scarce resources.
I hope this addresses adequately your questions and I hope I have
not burdened you with my lengthy "footnotes." Please do not
hesitate to contact me if you have any questions or if you'd like
further elaboration.
Again, it was an honor to testify before the Telecom and the
Internet Subcommittee, and I look forward to working with you in
the future.
Best regards,
/s/
Geoffrey A. Feiss, General Manager
[email protected]
406.442.4316
MR. UPTON. Mr. Bass.
MR. BASS. Thank you, Mr. Chairman. And I want to thank
you for holding this hearing. I think it is a very important issue in
the overall debate as to how we update and modernize
telecommunications in this country.
To some extent, the debate that we are having today is
reminiscent of the kinds of debates that we have had on other
issues in the recent past on larger issues throughout the modern
history of this country. The reality of it is that we are a United
States, and the taxpayers of this country have subsidized, to a great
extent, economic development in all sections of the country, be it
the power marketing associations, the Tennessee Valley Authority
or out in the far West to develop electricity at very, very low cost
for people, be it the subsidized mass transit systems for urban areas
in the northeast corridor with Amtrak in order to provide for a
more diverse and strong economy there, be it the excise taxes, the
Federal excise tax that everybody pays on gasoline that was a State
contribution, but there are some States that donate more money
and there are some States that don't. In the case of
telecommunications, it is really no different.
Now we passed a telecommunications bill a few weeks ago that
had, in my opinion, two of the three principal components of a
good, balanced telecommunications reform act. It has a national
franchise that would create a lot more competition and availability
for telecommunications in rural areas, and everywhere, for that
matter. It also contained a municipal broadband provision, which
would allow the municipalities to get together and provide services
in areas where the traditional carriers weren't willing to do so.
And thirdly, I think we have to retain and maintain a fund that
could be used to meet the needs of rural areas where competition
simply can't exist. I opposed amendments that were opposed to
the telecom bill that would have required a build-out requirement
because I see that it would have the exact opposite effect of what
its original intent was. But without universal service and without
build-out, in my opinion, you will never have good, high-quality,
broadband service in rural parts of America, and America will not
be as strong as it could be if people living in small towns and in
rural areas can not get the same access to market as have people
who live in suburban and urban areas in this country. This is a
debate that has been going on in America ever since it was created.
And I guess my only question to the panel here is if there were
a critical change that we could make to the Universal Service Fund
that is outside of either expansion or limitation but to make it work
better and to make it work fairer, what would that be? And I am
not requiring everybody to answer that question. A single change
to the Fund, what would we do?
Yes, go ahead. There is no order here.
MR. GARNETT. The single change that I would propose would
be to go from the current system that calculates support based on
the costs of the most efficient technology for a particular
geographic area.
MR. BASS. Fair enough.
Anybody else? Dr. Cooper.
DR. COOPER. I would second that with one additional
observation, that we really do need to make broadband the dial
tone of the 21st Century. So we have to look at least-cost, forward-
looking technology and stop looking backward at numbers and
lines and so forth. But clearly, the least-cost, most-efficient
broadband technology is what this Congress ought to be shooting
at.
MR. FEISS. Again, since I seem to be liking footnotes today, I
think that one of the issues that is both on the distribution side and
the contribution side of universal service is the disparate treatment
of similar voice services. So if I could, in one sweep sort of
comprehensively say what we need to do is ensure that voice
communications are treated similarly, whether they are wireless or
wireline. That would mean that I am actually not too far away
from the wireless group in that the costs of any voice provider
should be taken into account in what they receive. And then
similar voice communication services should all contribute. So
that is kind of a regulatory arbitrage, the elimination of different
treatment of similar services.
MR. CROTHERS. Sir, the NTCA would recommend a provision
that is actually found in the Boucher-Terry bill and that is that all
connections, all telephone numbers, all IP addresses be included as
contributors to the fund. There is too much arbitrage today, and
that is the system of universal service, who can game the system
the most in either the contribution or the distribution side. And so
that contribution side, which is actually found in the bill, is
tremendously helpful and will go a long way towards making it
equitable.
MR. BASS. Anybody else? I know we are running out of time,
but one more.
MR. CIMERMAN. Just, I think, reasonable and regular
oversight, including assurances that Universal Service Funds are
being spent for their intended purpose, because I am not sure that
on the High-Cost side of the Fund that that oversight has really
taken place.
MR. BASS. Thank you. And I note we don't have any time for
any more response, so I just want to just thank the Chairman for
this hearing and hope that we can move forward with legislation.
This isn't the end of it.
Thank you. I yield back.
MR. UPTON. Mr. Gillmor.
MR. GILLMOR. Thank you, Mr. Chairman.
I had a question for Mr. Garnett. One of the major points of
contention with the USF is its method for administrating funding.
In your opinion, is the current system fair to all eligible
telecommunication providers who receive funding, and if not, why
not?
MR. GARNETT. As Commissioner Clark mentioned earlier, the
FCC adopted very specific guidelines two years ago for ETCs'
designations, requirements for both incumbent and competitive
carriers. And a requirement that those carriers, whether they are
incumbent or competitive, prove that the dollars that are being
given to them are being spent wisely. We think that that is the
fairest way to do it. We think that is happening, and we would
hope that that continues.
MR. GILLMOR. Thank you. I yield back.
MR. UPTON. Mrs. Cubin.
MRS. CUBIN. Thank you, Mr. Chairman. I am glad I am the
last questioner, and I know you are, too.
I just have two quick questions. Mr. Navin, could you explain
to me why the FCC has not chosen to base support from USF on a
carrier's own costs rather than on the incumbent costs? I am most
interested in seeing that Wyoming citizens have access to a full
array of telecommunication services at a reasonable price, as
everyone is, but we are here today to analyze where the growth in
USF is coming from. And it seems clear to me, from Mr. Marron's
testimony, that the growth is primarily coming from the entrants of
wireless companies that don't share the same obligations and they
don't share the same expenses of the incumbents. So can you
explain the rationale for me?
MR. NAVIN. What I can tell you is that you are correct that the
growth in the Fund, at least the High-Cost Fund, has been, in large
part, as result of wireless ETC access to funding based upon the
incumbents' costs. In 2000, I believe that the Fund distributed
approximately $1.5 million to competitive ETCs, and in 2005, that
number had grown to approximately $500 million. I also know
that that issue has been teed up for the Federal-State Joint Board.
They are looking into this issue today, and the Commission
recently extended that referral past the end of June, so those
deliberations continue, and we look forward to getting the
recommendations from the Federal-State Joint Board on this issue.
I know that the Chairman, in the past, has questioned whether it
was Congress's intent to use the Universal Service Program to
subsidize multiple competitors in an area that may not
economically support a single provider. I believe in the Virginia
Cellular case, when he was a commissioner, he laid out his
thinking, and he was of the belief then, and I believe it to be true
today, that the primary purpose of the Universal Service Program,
was to make sure that all consumers in rural areas of the country
were able to obtain services, communication services, at affordable
rates.
MRS. CUBIN. Okay. That was going to be my next question.
Should we be subsidizing competitors as well? Well, would you
agree that the cost for the incumbents is higher than it is for the
new entrants?
MR. NAVIN. They use different technology.
MRS. CUBIN. Well, of course they do.
MR. NAVIN. The wireless carriers coming in to the market
today have completely different network architecture. The
incumbents are oftentimes required to provide a wireline service to
areas that are very sparsely populated so they have extremely long
loops.
MRS. CUBIN. And they are required to provide one to
everyone.
MR. NAVIN. Yes, they have the "carrier of last resort"
obligation. So that is something else that the Joint Board is
currently considering right now as it relates to support for wireless
ETCs is whether the support should be based upon the incumbents'
costs or the wireless carriers' own costs and whether or not there
should be some sort of cap on the amount of support available once
there is competitive entry into the particular service area.
MRS. CUBIN. Well, it seems to me if the wireless cost isn't as
much as the incumbents' cost and yet they either receive money
based on the incumbents' costs, that that is a real advantage for
them. But you think those will be decided soon?
MR. NAVIN. We are hopeful. I know they just met down in
Red Boiling Springs to talk about these very issues, so I am
looking forward to getting a report with regard to the progress they
made down in Tennessee, and we are hopeful.
MRS. CUBIN. Thank you.
MR. TERRY. Would the gentlelady yield?
MRS. CUBIN. Sure.
MR. TERRY. In our bill, we don't leave it up to the FCC. It
will be on actual costs, not incumbent costs, and that is another
way that we control cost.
MRS. CUBIN. I see that my time has expired.
Thank you, Mr. Chairman, and thank all of you for being here.
MR. UPTON. I want to thank the panel for being here as well.
Based on the questions, you can see that I don't think anybody is
happy with the status quo. We need some changes here that are
going to be made. I look forward to working on a bipartisan basis
toward constructive, positive changes. And we appreciate your
extensive testimony today.
Thank you very much.
[Whereupon, at 4:58 p.m., the Subcommittee was adjourned.]
RESPONSE FOR THE RECORD OF DR. DONALD B. MARRON, ACTING
DIRECTOR, CONGRESSIONAL BUDGET OFFICE
Question 1. In his testimony, Director Marron states that
"[s]pending for [the high-cost] program could be curbed by
limiting high-cost support to one connection per household, by
basing support on each carrier's own costs rather than on a cost
standard set by the incumbent carrier, or both." Please comment on
whether you agree or disagree with these two reform proposals and
explain your answer.
Answer. The Congressional Budget Office's (CBO's) recent
analysis indicates that limiting high-cost support to one connection
per household could have reduced spending from the high-cost
program by over $600 million in 2006 and, if other elements of
current policy remained in place, would reduce spending by
between $1.2 billion and $1.8 billion annually by 2011. Those
estimates assume that all support for competing eligible
telecommunications carriers is for second connections. That
assumption is supported by the observation that about 95 percent
of high cost support for new entrants is paid to wireless providers
and that a very large percentage of consumers who purchase
wireless service continue to purchase wireline service. Regarding
basing each carrier's support on its own costs, many analysts have
pointed out that new entrants have lower costs than incumbent
carriers. But current regulations do not require those entrants to
file cost data, so that claim cannot be verified with currently
available data. Nevertheless, either reform proposal by itself or
both in combination would probably reduce future spending from
the Universal Service Fund (and revenues collected by the fund)
below the level it would otherwise be.
Question 2a. In February 2004, the Federal-State Joint Board
on Universal Service recommended supporting a single connection
per household, as a means of reducing excessive growth in the
fund: "We believe that limiting the scope of high-cost support to a
single connection to the public telephone network would be more
consistent with the goals of section 254 than the present system."
Please comment on whether you agree or disagree with this
statement and explain your answer.
Answer. Section 254 establishes the Joint Board and specifies
its role in determining the services covered by the Universal
Service Fund. The board has explored in detail the question of
whether support for a single connection or for multiple connections
is consistent with the legislation. CBO is unable to comment on
this legal/policy issue.
Question 2b. The Joint Board also determined "Section
254(b)(3) encourages access to connectivity, however, not
unlimited connections at supported rates. Advanced services
increasingly are being provided along with voice services over a
single connection. Nothing in the Act supports the argument that
multiple connections should be supported for access to dial-up
Internet access or fax services, neither of which is a supported
service." Please comment on whether you agree or disagree with
this statement and explain your answer.
Answer. The board has explored in detail the issue of the
advanced services that can be provided over a single connection
and the question of whether support for a single connection or for
multiple connections is consistent with the legislation. CBO is
unable to comment on this legal/policy issue.
Question 2c. The Joint Board also concluded "We believe that
further growth due to supporting multiple connections presents a
significant threat to fund sustainability." Please comment on
whether you agree or disagree with this statement and explain your
answer.
Answer. CBO projects that funding for multiple connections is
likely to increase spending from the Universal Service Fund by
between $600 million and $1.2 billion annually by 2011. The fund
has sustained such increases in the past by increasing collections
from telecommunications providers. In 2004, the most recent year
for which the Federal Communications Commission (FCC) has
published data, the fund's revenue base was $77.8 billion. To
finance $600 million in additional spending with the 2004 revenue
base would have required an increase in the contribution rate of 0.8
percentage points from its 2004 annual average level of 8.8
percent. A $1.2 billion increase in spending would have required a
rise of 1.6 percentage points in the contribution rate. (In recent
quarters, the contribution rate has been as high as 10.9 percent.)
CBO's report Factors That May Increase Future Spending
from the Universal Service Fund stated that "Further increases in
spending by the USF would drive up the fee percentage even
higher, unless either a different revenue mechanism was devised or
the base of telecommunications services subject to the fees was
broadened. Higher fee levels might cause consumers to shift more
of their spending to telecommunications services that are not
subject to USF fees-such as e-mail and instant messaging-thus
reducing receipts for the fund."
The FCC has recently taken actions to expand the revenue base
by raising the payments required by cellular telephone providers
and including revenues based on Internet telephony. Those actions
would decrease the payments made by traditional wireline carriers
necessary to finance the fund. However, funding multiple
connections would further increase budgetary pressure on the fund
and divert resources from other economic activity to support the
purposes of the fund.
Question 3a. Should only one provider receive universal
service support in any given area? Please explain your answer.
Question 3b. Should only the provider that can serve the area
at the lowest possible cost receive the universal service support?
Please explain your answer.
Answer. The answers to those questions are policy judgments.
CBO's mandate to provide impartial analysis precludes making
such policy recommendations.
Question 4a. In his testimony, Mr Garnett asserts that "the
high-cost mechanisms subsidize incumbent carriers based on what
they spend...not necessarily based on whether they actually serve
customers located in a rural, high-cost area." Do you agree with
the accuracy of this statement? Please explain your answer.
Answer. For a carrier that serves both rural and nonrural areas,
support of the high-cost fund is based on an economic-engineering
model that estimates what an efficient entrant would need to spend
to provide service in the areas served by the carrier, rather than the
carrier's reported costs. Included in that model is a count of the
number of lines the carrier actually serves.
A rural carrier receives high-cost loop support according to a
formula that relates its allowable cost to the number of lines that it
serves. Under that calculation, if the number of lines served by an
incumbent rural carrier declines, its per-line support will rise,
because many of the carrier's costs are fixed and therefore do not
vary with the number of lines served.
An incumbent carrier also often has an obligation as the
"carrier of last resort" that requires it to provide service to virtually
any customer in its service region. State regulators usually place
some limits on the obligation, for example, exempting extremely
remote sites. The regulations also allow an incumbent to shift
much of the cost of serving such sites to the customers who desire
service.
Question 4b. Do you believe that subsiding incumbent carriers
(or any carriers) based on what they spend rather than who they
actually serve is the right policy outcome? Please explain your
answer.
Answer. CBO cannot comment on whether one policy or
another produces a desired policy result. However, approaches to
providing universal service that provide the targeted population
with the means to purchase services, rather than subsidizing the
providers of those services on the basis of their costs, will probably
provide a specified level of service at a lower total cost to the
economy.
Question 5. As Mr Garnett points out in his testimony, "CTIA
has proposed combining the current five high-cost universal
service mechanisms into one mechanism that calculates support
based on the most efficient technology-whether wireline or
wireless-in a small geographic area." Please comment on whether
you support or oppose such a proposal and why?
Answer. CBO has not studied that issue.
RESPONSE FOR THE RECORD OF THOMAS J. NAVIN, CHIEF,
WIRELINE COMPETITION BUREAU, FEDERAL COMMUNICATIONS
COMMISSION
1. In February 2004, the Federal-State Joint Board on
Universal Service (Joint Board) recommended that the
Commission limit the scope of high-cost support to a single
connection that provides access to the public switched telephone
network (February 2004 Recommended Decision (FCC 04J-1)).
The Joint Board expressed its belief that such an approach would
curb growth of the fund. Indeed, in comments filed in June 2003
in the record in that proceeding, the National Association of State
Utility Consumer Advocates had estimated that making non-
primary lines ineligible for support would reduce the size of the
high-cost fund by $336 million annually. Congress subsequently
passed the FY2005 Consolidated Appropriations Act, which
included a provision prohibiting the Commission from using
appropriated funds to modify, amend, or change its rules or
regulations to implement the Joint Board's recommendation
regarding single connection or primary line restrictions on
universal service support payments. On November 22, 2005,
Congress extended this ban through this fiscal year. Thus, the
Commission is prohibited from limiting high-cost support to one
connection per household.
The Commission is now focused on other possible ways to
limit universal service fund growth. One way to limit growth
would be to consider whether high-cost universal service support
should be based on a particular provider's actual costs.
Specifically, in the ongoing Rural Review Proceeding (FCC 04-
125), the Joint Board is considering alternatives that may better
reflect a wireless competitive eligible telecommunications carrier's
(ETC's) cost of serving high-cost areas that receive universal
service support. Once the Joint Board makes a recommendation in
that proceeding, the Commission will carefully consider the record
and weigh any alternatives to the current approach.
2a. In its February 2004 Recommended Decision, the Joint
Board found that limiting high-cost support to a single connection
would be consistent with the goals of section 254 before Congress
prohibited the Commission from using appropriated funds to
implement such a policy. Although this primary line policy
restriction remains in place (see answer to question 1), in the Rural
Review Proceeding, the Joint Board is considering other means of
reducing excessive growth in the fund and whether they are
consistent with the goals of section 254. Once the Joint Board
makes a recommendation in that proceeding, the Commission will
carefully consider the record and weigh any alternatives to the
current approach.
2b. & 2c. As the Joint Board notes, dial-up Internet access and
fax services are not supported services under the Commission's
rules. Moreover, the Joint Board found that nothing in the Act
requires supporting multiple connections. As stated in the
response to question 1, however, Congress prohibited the
Commission from using appropriated funds to modify, amend, or
change its rules or regulations to implement the Joint Board's
recommendation regarding single connection or primary line
restrictions on universal service support payments.
3a. Chairman Martin has expressed his concerns over policies
that use universal service support as a means of creating
"competition" in high cost areas in which costs are prohibitively
high for even one carrier. Subsidizing duplicative networks in
high-cost areas has increased the demand on the universal service
fund.
In the Rural Review Proceeding, commenters proposed
requiring more stringent criteria for designating ETCs or otherwise
limiting the number of supported carriers in rural areas. Once the
Joint Board makes a recommendation in that proceeding, the
Commission will carefully consider the record and weigh any
alternatives to the current approach.
3b. Chairman Martin has expressed interest in a reverse auction
approach to high-cost fund disbursement in which carriers compete
for the least amount of universal service funds needed to operate a
network. Such an approach has the potential to promote efficient
investment by encouraging the deployment of the most cost-
effective technology.
4a. & 4b. The high-cost support mechanisms for incumbent
rural and rate-of-return carriers are based on those carriers'
embedded, or actual, costs for the areas they serve. In the Rural
Review Proceeding, the Joint Board sought comment on what
carrier characteristics, in addition to company size, the
Commission should consider for purposes of determining how
high-cost loop support should be calculated. The Joint Board
specifically asked: "[s]hould the Commission try to target support
more effectively to the highest cost rural areas by considering
whether the area served is rural, as defined in some fashion?" The
Joint Board is considering the comments it received. Once the
Joint Board makes a recommendation in that proceeding, the
Commission will carefully consider the record and weigh any
alternatives to the current approach.
5. In the Rural Review Proceeding, the Joint Board is
considering several proposals, including CTIA's proposal, that
would combine the high-cost universal service mechanisms into
one mechanism. Once the Joint Board makes a recommendation in
that proceeding, the Commission will carefully consider the record
and weigh any alternatives to the current approach.
RESPONSE FOR THE RECORD OF TONY CLARK, PRESIDENT, NORTH
DAKOTA PUBLIC SERVICE COMMISSION, ON BEHALF OF NATIONAL
ASSOCIATION OF REGULATORY UTILITY COMMISSIONERS
July 21, 2006
The Honorable Fred Upton
Chairman, Subcommittee on
Telecommunications and the Internet
Committee on Energy and Commerce
2125 Rayburn House Office Building
Washington, DC 20515
Dear Chairman Upton:
Thank you for the opportunity to respond to the committee's
written questions. I should note that my responses are
representative of my own views, and not necessarily those of the
National Association of Regulatory Utility Commissioners, which
has not adopted specific policy positions on the detailed questions
you have asked.
As for your specific questions:
1. I do not support the idea of limiting support to one
connection per household, though I do believe that
eliminating the identical support rule carries merit.
Connections-based limitations are almost always flawed
from the onset because they ignore the reality of the
telecommunications business, namely, that high cost areas
are served by networks. Therefore, it is networks that must
be the focus of support. A voucher-type system (which is
encompassed in many of the connections-based proposals)
would also be an administrative disaster in the making. I
do, however, believe there is a need to revisit the notion
that many multiple competitive carriers should be funded in
areas that may be unable to support even one if not for the
subsidy. Rather than a flawed and administratively
prohibitive single connection limitation, I believe a
reasonable compromise would be to:
a. better define truly high cost areas
b. target support to networks in those areas, regardless
of who that carrier happens to be (i.e. "rural" or
"non-rural")
c. limit support to one wireline and one wireless
carrier in high cost areas, and reimburse those
carriers based on their own cost models, rather than
on the incumbent's per line average.
2a. I disagree with that statement for the reasons stated in my
answer to question 1.
2b. While I generally agree with the statement, I would note that
second lines for faxes and dial-up Internet access is not a large cost
driver for the fund. To the extent there has been in increase in
fund expenditures, it is primarily because of competitive ETC's,
related to wireless.
2c. I believe that the policy of supporting unlimited numbers of
carriers is a significant threat to fund stability. As I mentioned
earlier, I believe as reasonable step would be to instead support up
to one wireline and one wireless provider in high cost areas.
3a. Please see my responses to questions 1 and 2c. I will expound
a bit on them by explaining why I would support both one wireline
and one wireless network. For most people the wireline and
wireless phones are complements to each other. For voice quality
and reliability, wireline service is the gold standard. But it lacks
what wireless provides, mobility. For economic development, for
public safety and for quality of life, I argue that availability to both
networks is needed for communities. Yet I readily understand the
concern that the fund is unsustainable if current growth patterns
continue. One wireline and one wireless provider would achieve a
balance between these competing interests.
3b. Because the telecommunications industry is very capital
intensive, it is highly unlikely any provider would realistically be
able to duplicate an incumbent's existing network and underbid it.
Therefore, a low-cost provider regime (which would probably be
based on bids or auctions) would likely not be of much benefit.
However, for the sake of argument, if any such model ever was
adopted, I would strongly urge the following:
a. Wireline providers would only bid against other
wireline providers and wirless providers would only bid
against other wireless providers (this is in keeping with
my belief that one network of each type should be
supported) and;
b. There must be very stringent and ongoing oversight of
quality of service and requirements for deployment of
advanced services. A low cost bid process might be a
disaster for quality of service and the deployment of
advanced services if this oversight is not included.
4a. I disagree in part, and agree in part. Carriers (whether
incumbent or competitive) receive support based on the
incumbent's average per line embedded costs. There is however,
some truth to the fact that support itself is often not targeted to
truly high cost rural areas. For example, in my home state of
North Dakota, there are very rural, high-cost exchanges served by
Qwest that receive no support simply because they are served by
Qwest. If they happened to be served by a rural LEC, however,
they would be eligible. Frankly, this is unfair to both the non-rural
LEC and to the consumers living in those areas.
4b. While perhaps not perfect, I believe that an embedded cost
model for incumbent LECs in rural areas is the best approach to
use. Low-bid models have the problems I referred to in my answer
to question 3b. Theoretical models (like TELRIC) might be a
second-best option, but I do have some concerns that TELRIC may
not be an appropriate reflection of costs in high-cost areas.
Embedded cost models do have the advantage of being verifiable
and accountable to regulatory bodies. As I said in my answer to
4a, I do not believe it is fair to exclude support for certain high-
cost areas simply because of the characteristics of the provider that
serves there.
5. I am not familiar enough with the CTIA proposal to
indicate my thoughts on it. I would however, direct readers
to my response to question 3a and b, which highlights some
of the concerns I have with any pure "low-cost" model
being able to take into account the varying quality,
reliability and mobility characteristics of different
technologies.
Sincerely,
Tony Clark, President
North Dakota Public Service
Commission
RESPONSE FOR THE RECORD OF SKIP FRANTZ, CHAIRMAN, UNITED
STATES TELECOM ASSOCIATION
1. In his testimony, Director Marron states that "[s]pending
for the [high-cost] program could be curbed by limiting high-
cost support to one connection per household, by basing
support on each carrier's own costs rather than on a cost
standard set by the incumbent carrier, or both." Please
comment on whether you agree or disagree with these two
reform proposals and explain your answer.
The first reform proposal asserts that spending for the high cost
program could be limited by limiting high-cost support to one
connection per household. Proposals for restructuring universal
service support must be measured on a variety of criteria. While
cost is certainly important, effectiveness and ease of administration
also must be taken into account. One connection per household
ignores the high fixed cost nature of telecom infrastructure. When
a wireline provider loses a customer to wireless the phone pole is
not chopped down. The wireline provider is obligated to provide
service to everyone who requests it. Under a primary line regime,
a wireline provider could, for example, split residential households
in a service area with a wireless provider. The high cost funding
associated with those households would be cut in half to each
company, providing an inadequate amount of assistance toward
fulfilling the goal of providing quality service at affordable rates.
Furthermore, the amount of support would be unpredictable,
discouraging each from investing in facilities.
Moreover, such a system would be very difficult to administer.
For example, if three students shared an apartment would each be a
separate household, or would it be considered only one household?
How about a house with an "in-law suite"? Furthermore there
would be tremendous potential for abuse by listing phone lines in
various names. Finally, the proposal ignores business users for
whom universal service support of high cost rural telecom
infrastructure is key to their success and thus rural economic
development. Congress has rejected this "primary line" proposal
numerous times and should continue to do so on solid public
policy grounds.
The second reform proposal asserts that spending for the high
cost program could be curbed by basing support on each carrier's
own costs rather than on a cost standard set by the incumbent
carrier. This assumes that CETC costs are necessarily lower than
the costs of the incumbent ETC. There is no objective evidence on
the record supporting this assertion. Furthermore, such a system
would require a regulatory costing approach for CETCs, many of
whom are relatively lightly regulated today.
2a. In February 2004, the Federal-State Joint Board on
Universal Service recommended supporting a single connection
per household, as a means of reducing excessive growth in the
fund: "We believe that limiting the scope of high-cost support
to a single connection to the public telephone network would
be more consistent with the goals of section 254 than the
present system." Please comment on whether you agree or
disagree with this statement and explain your answer.
See first paragraph of response to question 1.
2b. The Joint Board also determined "Section 254(b)(3)
encourages access to connectivity, however, not unlimited
connections at supported rates. Advanced services
increasingly are being provided along with voice services over
a single connection. Nothing in the Act supports the argument
that multiple connections should be supported for access to
dial-up Internet access or fax services, neither of which is a
supported service." Please comment on whether you agree or
disagree with this statement and explain your answer.
First, the question supposes that multiple connections are being
used for dial-up Internet services or fax services. As we know,
dial-up Internet services are quickly being supplanted by
broadband services, so the number of connections used for dial-up
is rapidly diminishing. This is one of the factors accounting for the
well-documented reduction in ILEC access lines. Second, many
fax services do not use a dedicated line - often they are structured
so that the caller can select the voice or fax option on a single line.
Third, dial-up Internet services and fax services are far from being
"advanced services." High speed broadband is an advanced
service - dial-up Internet and fax services are provided over an
ordinary Public Switched Telecommunications Network (PSTN)
voice connection which is a supported service. Finally, Section
254(b)(2) states that "Access to advanced telecommunications and
information services should be provided in all regions of the
Nation."
2c. The Joint Board also concluded "We believe that further
growth due to supporting multiple connections presents a
significant threat to fund sustainability." Please comment on
whether you agree with this statement and explain your
answer.
Further growth can and should be mitigated by ensuring that
rigorous standards for designation of and performance by CETCs
are developed and enforced. Currently states view CETC
designation as a "reverse unfunded mandate" - that is, the more
CETCs states designate, the more funds flow to a particular state.
FCC "guidelines" for CETC designation should be made more
robust, supplemented with further standards, and should be enacted
into law.
3a. Should only one provider receive universal service support
in any given area? Please explain your answer.
The Telecommunications Act of 1996 currently provides for
states to take public policy considerations into account in the
designation of multiple ETCs in areas served by rural telephone
carriers. States should take that responsibility seriously and
operate under strict standards for designation of multiple ETCs.
3b. Should only the provider that can serve the area at the
lowest possible cost receive the universal service support?
Please explain your answer.
This question assumes that such provider can be conclusively
identified. First, such a system would require a strict regulatory
costing approach. Second, it assumes that the technology mix and
therefore the cost of each provider remains static. And third, it
assumes that the relative cost of technology used by each provider
would be unchanged. A provider initially determined to be the low
cost provider could end up being the highest cost provider if
technology allows competitive providers to serve high cost areas
more efficiently.
4a. In his testimony, Mr. Garnett asserts that "the high-cost
mechanisms subsidize incumbent carriers based on what they
spend.not necessarily based on whether they actually serve
customers located in a rural, high-cost area." Do you agree
with the accuracy of this statement? Please explain your
answer.
The high-cost mechanisms are designed to support
infrastructure that assures the availability of service to all
customers in a rural, high-cost area, as mandated by the carrier of
last resort (COLR) responsibilities imposed by many state laws
and regulatory bodies and the Rural Utilities Service
telecommunications lending programs.
4b. Do you believe that subsidizing incumbent carriers (or any
carriers) based on what they spend rather than who they
actually serve is the right policy outcome? Please explain your
answer.
Universal service funding must support the availability of
network infrastructure in high cost rural areas, not particular
services or customers. Telecommunications is a business which is
characterized by high fixed costs and long term investments.
Efficiently constructed telecommunications networks are designed
to serve present customers and anticipate future growth. When a
telecommunications provider loses customers it is generally not
possible to reduce costs proportionately, as most of the costs are
sunk. Although ideally the amount of telecommunications
infrastructure would always exactly match the number and service
requirements of customers in a rural area, this is an unrealistic
expectation.
5. As Mr. Garnett points out in his testimony, "CTIA has
proposed combining the current five high-cost universal
service mechanisms into one mechanism that calculates
support based on the most efficient technology - whether
wireline or wireless - in a small geographic area." Please
comment on whether you support or oppose such a proposal
and why?
We cannot properly evaluate this proposal based on the
description. However, as noted in the response to question 3b
above, it is difficult to define the lowest cost provider let alone the
"most efficient technology." That definition could change over
time as technology changes and as the definition of universal
service changes. For example, the "most efficient technology"
could be very different for narrowband versus broadband services.
Second, the definition of "a small geographic area" could bias the
result as to which technology could serve it most efficiently. It
would be easy to envision scenarios in which gerrymandering
could change the result.
RESPONSE FOR THE RECORD OF RICHARD CIMERMAN, VICE
PRESIDENT, STATE GOVERNMENT AFFAIRS, NATIONAL CABLE AND
TELECOMMUNICATIONS ASSOCIATION
1. In his testimony, Director Marron states that "[s]pending for [the
high-cost] program could be curbed by limiting high-cost support
to one connection per household, by basing support on each
carrier's own costs rather than on a cost standard set by the
incumbent carrier, or both." Please comment on whether you
agree or disagree with these two reform proposals and explain your
answer.
The cable industry agrees that high-cost support should be
limited to one connection per household. While we have not
examined data on the number of multiple connections that are
currently supported, a limitation on the number of supported
connections would necessarily limit spending.
We do not agree that support should be based on a
carrier's own costs rather than a cost standard set by the
incumbent carrier. Support should be the same for all
carriers, whether based on the incumbent's costs or the costs of
the lowest cost carrier. In this way the universal service
support mechanism can drive higher cost carriers to become
more efficient.
2a. In February 2004, the Federal-State Joint Board on Universal
Service recommended supporting a single connection per
household, as a means of reducing excessive growth in the fund:
"We believe that limiting the scope of high-cost support to a single
connection to the public telephone network would be more
consistent with the goals of section 254 than the present system."
Please comment on whether you agree or disagree with this
statement and explain your answer.
The cable industry agrees that limiting the scope of high-
cost support to a single connection to the public telephone
network would be more consistent with the goals of Section 254
than the present system. Section 254 specifically calls for
"access" to telecommunications services. A single connection is
sufficient to balance the twin goals of ensuring access while
also ensuring that contributors to the fund (ultimately the end
users of telecommunications services) are not unduly burdened
by the size of their contributions.
2b. The Joint Board also determined "Section 254(b)(3)
encourages access to connectivity, however, not unlimited
connections at supported rates. Advanced services increasingly are
being provided along with voice services over a single connection.
Nothing in the Act supports the argument that multiple connections
should be supported for access to dial-up Internet access or fax
services, neither of which is a supported service." Please comment
on whether you agree or disagree with this statement and explain
your answer.
The cable industry does believe that the statutory language
of Section 254(b)(3) requires support for multiple connections.
2c. The Joint Board also concluded "We believe further growth
due to supporting multiple connections presents a significant threat
to fund sustainability." Please comment on whether you agree or
disagree with this statement and explain your answer.
The cable industry has not sufficiently examined data on
the level to which multiple connections are supported to
determine the extent to which they pose a "significant threat to
fund sustainability." Nonetheless, as explained above multiple
connections should not be supported.
3a. Should only one provider receive universal service support in
any given area? Please explain your answer.
Universal service support should be portable. Any eligible
provider should receive universal service support for the
customers they serve in a rural high cost area. A provider in a
rural high-cost area that loses a customer should lose support
for that customer. A provider that wins a customer in a rural
high-cost area in which support is available should receive
support for that customer.
3b. Should only the provider that can serve the area at the lowest
possible cost receive the universal service support? Please explain
your answer.
As long as the subsidy in a given area is based on the costs
of the lowest cost provider then the subsidy should be available
to any provider willing to serve the area. Limiting support to
one carrier would limit the efficiencies and cost savings that
competition can bring.
4a. In his testimony, Mr. Garnett asserts that "the high-cost
mechanisms subsidize incumbent carriers based on what they
spend . not necessarily on whether they actually serve customers
located in a rural, high-cost area." Do you agree with the accuracy
of this statement? Please explain your answer.
Generally, yes. Under the current system an area is largely
determined to be a high-cost area if the incumbent carrier's
self-reported costs of serving customers are sufficiently greater
than the national average cost of serving customers.
Incumbent carriers operating under a rate-of-return based
regulatory scheme have little incentive to be efficient. So the
fact that a carrier may have spent more than the national
average to serve customers, does not mean that it is actually
more costly than the national average for those customers to be
served, and an efficient carrier may be able to serve them at a
lower cost.
4b. Do you believe that subsidizing incumbent carriers (or any
carriers) based on what they spend rather than who they actually
serve is the right policy outcome? Please explain your answer.
No. Subsidies should be targeted to carriers serving those
rural areas that are determined to be high-cost areas based on
what an efficient carrier would spend and as described above
the subsidies should be portable.
5. As Mr. Garnett points out in his testimony, "CTIA has proposed
combining the current five high-cost universal service mechanisms
into one mechanism that calculates support based on the most
efficient technology - whether wireline or wireless - in a small
geographic area." Please comment on whether you support or
oppose such a proposal and why?
While this proposal seemingly has merit we would need
additional information on how the new mechanism would
operate to determine whether we support or oppose it.
RESPONSE FOR THE RECORD OF DAVID CROTHERS, EXECUTIVE VICE
PRESIDENT, NORTH DAKOTA ASSOCIATION OF TELEPHONE
COOPERATIVES, ON BEHALF OF NATIONAL TELECOMMUNICATIONS
COOPERATIVE ASSOCIATION
Question 1: In his testimony, Director Marron states that
"[s]pending for [the high-cost] program could be curbed by
limiting high-cost support to one connection per household, by
basing support on each carrier's own costs rather than on a cost
standard set by the incumbent carrier, or both." Please comment on
whether you agree or disagree with these two reform proposals and
explain your answer.
Answer 1: Director Marron offered two recommendations for
curbing growth in the universal service fund. First, limit high-cost
support to one connection per household. Second, base support on
each carrier's own cost rather than on a cost standard set by the
incumbent carrier. I agree with Director Marron's conclusion that
basing the support from the universal service fund on a carrier's
own cost would curb spending but would disagree with his
recommendation of limiting support to one connection.
Limiting support to one line while may have been a cost saver
in years past, isn't much of a cost saver now and will be even less
so in the future due to increased broadband subscriptions. The
driving force behind second lines in households was primarily for
a dial-up Internet connection, with higher broadband adoption
rates this is increasingly less of a factor. Multiple lines are much
more a factor for our nation's small businesses. Limiting support
to one line would harm this sector of our economy greatly and will
put rural businesses at an extreme disadvantage.
Regarding the recommendation that recipients of USF receive
support based upon their own cost and not that of the incumbent, I
and NTCA could not agree more. This is long overdue and a
position that rural carriers have advocated since its inception.
For ILECs, the high-cost universal service program is a highly
accountable cost-based program. Support out of the fund is based
on a national average cost per line calculated by the FCC. Rural
carriers with costs exceeding 115% of this national average
receive support from the fund to offset these elevated costs to keep
local rates affordable. Wireline incumbents file immense amounts
of data outlining their costs and network investments to receive
cost recovery support from the fund. This data is reviewed, vetted
and approved at many levels, including by the fund administrator,
the Universal Service Administrative Company (USAC), and the
FCC.
However, new competitive carriers are treated differently.
Under the guise of competitive neutrality the FCC unwittingly
undermined the accountability of the fund by allowing new
competitive carriers to receive support from the USF without the
same stringent reporting and accounting requirements mandated
of the incumbents. Instead of filing their own cost and investment
data, these new competitive entrants receive support based on the
incumbents' cost. All the competitive carriers' are required to file
is a count of the number of customers they serve. In many cases,
especially if the competitive carrier is a wireless provider, their
cost is well below that of the incumbent potentially giving wireless
carriers a windfall of support. This situation has perpetuated and
encouraged abuse of the USF by wireless carriers, which account
for 97% for competitive ETCs.
Elimination of this identical support rule is a necessity if
Congress is serious about controlling growth and increasing
accountability of the USF. Experts from the CBO and FCC on the
panel stated the irrefutable fact that the vast majority of growth in
universal service is due to competitive eligible telecommunications
carriers (ETCs). Universal service support to competitive ETCs
grew by over 115% in 2004 . During this same period ILEC
support grew by only 0.6%. The numbers speak for themselves.
Requiring all universal service fund recipients to receive support
based on their own costs will increase program accountability,
reduce demand for funds and ensure that funds are being used for
their intended purpose.
Question 2a: In February 2004, the Federal-State Joint Board
on Universal Service recommended supporting a single connection
per household, as a means of reducing excessive growth in the
fund: "We believe that limiting the scope of high-cost support to a
single connection to the public telephone network would be more
consistent with the goals of section 254 than the present system."
Please comment on whether you agree or disagree with this
statement and explain your answer.
Answer 2a: I and NTCA disagree with the Federal-State Joint
Board's assessment of the goals of section 254. It is clear that the
purpose and goal of section 254 is to ensure comparable services
at comparable rates to all Americans, regardless of how many
lines they have in their home or business. Limiting support to one
connection per household is antithetical to the goal of universal
service and would drastically raise the cost of additional lines for
rural consumers. Limiting support to one connection is not in line
with the comparability clause and therefore would be illegal under
current law in my opinion. Why should rural families or small
businesses be forced to pay two, three or even four times what
urban consumers and businesses pay for additional lines? The
answer is they should not. Such a limitation would greatly
diminish the competitiveness of rural businesses due to their
location and would likely rely more heavily upon
telecommunications to sell and market their services.
Question 2b: The Joint Board also determined "Section
254(b)(3) encourages access to connectivity, however, not
unlimited connections at supported rates. Advanced services
increasingly are being provided along with voice services over a
single connection. Nothing in the Act supports the argument that
multiple connections should be supported for access to dial-up
Internet access or fax services, neither of which is a supported
service." Please comment on whether you agree or disagree with
this statement and explain your answer.
Answer 2b: Your statement that advanced services
increasingly are being provided along with voice services over a
single connection is true as noted above in Answer 1. Therefore,
limiting support to a single or primary line is not a cost saver for
the universal service fund. However, to your point that section 254
(b)(3) does not specifically allow support for multiple connections,
it certainly does not preclude this, and further my interpretation is
that multiple lines should be supported to be in compliance with
the comparability clause.
Question 2c: The Joint Board also concluded, "We believe
that further growth due to supporting multiple connections presents
a significant threat to fund sustainability." Please comment on
whether you agree or disagree with this statement and explain your
answer.
Answer 2c: I and NTCA would disagree with this statement
and it would appear that you do as well based on your statement in
question 2b where you state, "Advanced services increasingly are
being provided along with voice services over a single
connection." Again, due to the decrease in second lines in homes,
limiting support to a primary or single connection would not be a
significant cost saver for the universal service fund moving
forward.
Question 3a: Should only one provider receive universal
service support in any given area? Please explain your answer.
Answer 3a: In some high-cost, sparsely populated,
economically depressed rural areas, yes. As FCC Chairman Kevin
Martin previously stated "I am hesitant to subsidize multiple
competitors to serve areas in which the costs are prohibitively
expensive for even one carrier. This policy may make it difficult
for any one carrier to achieve the economies of scale necessary to
serve all of the customers in a rural area leading to inefficient
and/or stranded investment and a ballooning universal service
fund." In a case like this with a high-cost, sparsely populated
area the provider that should receive support is the wireline
provider since without the wired infrastructure, the residents will
not have comparable services [to urban areas] as the wired
infrastructure is necessary for voice, video and data including
wireless voice services.
Question 3b: Should only the provider that can serve the area
at the lowest possible cost receive the universal support? Please
explain your answer.
Answer 3b: The idea of providing universal service support
to the lowest possible cost carrier is contradictory to the goal of
universal service - to ensure that consumers living in rural and
high-cost areas have access to comparable communications
services at rates comparable to consumers residing in urban and
suburban areas.
Consumers in rural communities must not be relegated to a
substandard level of service or technology in order to save a few
dollars. Less expensive services are often not built to the same high
standards as the ILEC wireline network. For instance, wireless
and VoIP calls are less expensive than traditional wireline service
and is reflected in the lower call quality. Anyone who has used
these new technologies can attest to the lower call quality, often
dropped calls or being disconnected from the network for periods
of time. Rural consumers would be forced to rely solely on these
services with lower quality by those in Washington, DC if USF
support were limited to the lowest cost provider.
Additionally, it is important to remember that these "lower cost
carriers" such as wireless and VoIP are dependant upon the wired
infrastructure of the ILEC for their services to work. Contrary to
public perception, a wireless network does not stand alone. The
only portion of a wireless call that is actually wireless is from a
consumer's handset to the nearest cell tower. It may be more
appropriate to think of a wireless network as a large number of
gateways to the interconnected network that makes up the national
and global telecommunications infrastructure. Truly, much of
what makes up the nation's wireless networks is provided by the
wireline LEC and interexchange carriers (IXCs) that make up the
public switched telephone network (PSTN). It is essential to note
that the viability of wireless networks is entirely dependent upon
the ongoing availability of the wireline networks that actually
serve as the backbone. Similarly, VoIP calls are entirely dependant
upon the broadband network, a majority of which was built by our
nations wireline providers.
In addition, how will "low cost" be determined and measured?
Providing support to only the carrier with the lowest upfront
deployment cost may seem efficient but in actuality may turn out to
be short sighted and more expensive in the long run. Certain
technologies, including wireless and even traditional cable
modem, may be unable to increase capacity as consumer demand
and requirements rise. Experts agree that running a fiber line may
be the most costly upfront but due to its long life and potentially
unlimited capacity may, in the long run, be the least expensive and
efficient for all American's communications needs. Short term cost
is only one factor that must be considered.
Other factors that should be considered when determining ETC
status are the ability to serve an entire service area, long term
commitment to serve rural communities in question,
bandwidth/capacity of the service at current time and in the future,
quality of service to consumers, ability to remain functional during
an emergency, financial viability of a communications company,
and interoperability.
If law requires the FCC to continually abandon existing ETC
recipients in favor of new lower cost providers the result will be
devastating to rural communities. USF recipient churn and
instability in the market would be a disincentive to invest in
networks to improve and upgrade service by the existing ETC
receiving support.
Furthermore, if a carrier's ability to receive USF support is
not secure they will be unable to obtain long term public (RUS)
and private financing necessary to build networks.
Communications is a capital intensive industry which requires
long term network planning and continual upgrading. This would
not be possible if support could be pulled from the ETC and given
to a new lower cost provider at any time or even within a few
years.
Question 4a: In his testimony, Mr. Garnett asserts that "high-
cost mechanisms subsidize incumbent carriers based on what they
spend.not necessarily based on whether they actually serve
customers located in a rural, high-cost area." Do you agree
with the accuracy of this statement? Please explain your
answer.
Answer 4a: No. In his statement Mr. Garnett refers to ILEC
support being tied to investment and not on who an ILEC serves.
The statement is incorrect and Mr. Garnett appears to be
confusing two separate issues - basis of support and definition of
rural.
To receive support from the high-cost fund for rural carriers,
an ILEC must meet the definition of a rural carrier and the service
territory must meet the definition of a rural service area. These
definitions are established by the FCC. Therefore, an ILEC's
eligibility to receive support under the rural USF program is
directly tied to its customers and service territory.
Once a carrier and its service area are deemed to have met
these requirements then the question as to the level of support
comes into play. The money rural carriers "spend" is the actual,
embedded cost to provide regulated telecommunications service to
consumers throughout their rural service areas, as defined by the
FCC. This data is what the FCC and the fund administrator,
USAC, use to calculate the level of support an ILEC is eligible to
receive. The rural high-cost universal service support mechanisms
are therefore based on the actual cost to provide affordable
telephone service to consumers throughout their specific rural
service areas. These costs are reviewed and approved by both
state and federal regulatory agencies.
Since the early 20th century, AT&T, the Bell Operating
Companies and GTE chose not to invest in facilities to provide
basic telephone service to nearly 40 percent of the geographic
area of the United States. This territory consisted primarily of the
most rural, insular, and sparsely populated areas in the Nation.
Thin populations and difficult landscapes made these vicinities too
costly for large carriers to invest in and the risk of not recovering
their investment was too high. Many Americans living in these
areas therefore had to invest their own time, labor and money to
form small subscriber-owned telephone cooperatives and
community-based commercial telephone companies in order to
bring service to their homes and communities.
Today, there are over 1,000 rural telephone companies serving
rural America. These companies were the first and often the only
companies willing to bring the latest telecommunications
technology to Americans living in the remote areas of our country.
This cooperative spirit that brought telephone service to rural
America is the same spirit that Congress embraced when it enacted
the Communications Act of 1934 so that all people of the United
States, rural and urban, can have access to affordable and
comparable telecommunications services.
Question 4b: Do you believe that subsidizing incumbent
carriers (or any carriers) based on what they spend rather than who
they actually serve is the right policy outcome? Please explain
your answer.
Answer 4b: Carriers are not reimbursed based on what they
spend. As stated in answer 4a ILEC support is directly tied to the
customers they serve and their actual cost of providing that
service. And again, all relevant data is filed, reviewed, vetted and
approved on the state and federal level. On the contrary, CETCs
are not required to meet the FCC definition of a rural carrier as
does an ILEC nor are they required to demonstrate their cost of
providing service. This lack of accountability has detrimentally
impacted the universal service fund and must not be allowed to
continue.
Question 5: As Mr. Garnett points out in his testimony, "CTIA
has proposed combining the current five high-cost universal
service mechanisms into one mechanism that calculates support
based on the most efficient technology - whether wireline or
wireless - in a small geographic area." Please comment on
whether you support or oppose such a proposal and why?
Answer 5: The five funds within high cost are designed
specifically to calculate more accurately appropriate distributions
from the fund to recipients. For instance, the separate rural and
non-rural distinctions are made to ensure accountability and are
specifically needed to meet the goals of universal service taking
into account the difference between the RBOCs and the smaller
independent carriers. The FCC has considered combining the
rural and non-rural funds on more than one occasion and each
time the conclusion of FCC experts is that doing so would reduce
accountability and lead to waste in the fund.
USF support from the non-rural fund is based on a forward-
looking cost model and support from the rural fund is based on the
embedded cost of small independent carriers. While such cost
models may enhance incentives for cost-reducing innovation
relative to embedding cost mechanism, such models can't
guarantee that support will be either predictable or sufficient as
required by the Telecommunications Act of 1934. Independent
carriers vary vastly in size, scope, geography and population
distribution. No cost-model can accurately account for these vast
differences.
In the several years the FCC worked on developing the
forward-looking cost model that is currently used for non-rural
carriers, many attempts were made to adapt this model to rural
independent carriers. All attempts were deemed a failure. During
the testing of the cost-model it was found that support levels for
some rural carriers were too low and for some carriers way too
high. Therefore support was unpredictable and did not provide the
required sufficient level of support to some carriers while
providing a windfall of support to other ILECS. Thus, it was
unanimously determined that applying a cost model to the rural
fund would not meet the policy goals of universal service and
would reduce fund accountability.
In addition, the FCC sought and received input from many
industry experts such as the Rural Task Force. The Rural Task
Force studied this very question and found this idea to be un-
workable. Please see Rural Task Force paper, "A Review of the
FCC's Non-Rural Universal Service Fund Method and the
Synthesis Model for Rural Telephone Companies" for further
information [http://www.wutc.wa.gov/rtf].
RESPONSE FOR THE RECORD OF PAUL W. GARNETT, DIRECTOR,
REGULATORY AFFAIRS, CTIA - THE WIRELESS ASSOCIATION
1. In his testimony, Director Marron states that "[s]pending
for [the high-cost] program could be curbed by limiting high-
cost support to one connection per household, by basing
support on each carrier's own costs rather than on a cost
standard set by the incumbent carrier, or both." Please
comment on whether you agree or disagree with these two
reform proposals and explain your answer.
While CTIA supports proposals to curb growth in the size of
the universal service fund, we oppose each of the proposals
described by Director Marron, because they would disserve
consumers. Consumers in both rural and non-rural areas benefit
from high-quality, competitively priced, and innovative services
that result when multiple competitors are in a marketplace. In
adopting section 254(b)(3) of the Act, Congress recognized the
importance of providing consumers in high-cost rural areas access
to the same types of telecommunications service offerings that are
available to consumers in urban areas. At the same time, Congress
recognized the importance of competition. As noted by the United
States Court of Appeals for the Fifth Circuit in Alenco
Communications, Inc. v. FCC, 201 F.3d 608, 616 (5th Cir 2000),
"[t]he FCC must see to it that both universal service and local
competition are realized; one cannot be sacrificed in favor of the
other." The Fifth Circuit therefore concluded that "protection from
competition" is "the very antithesis of the Act." See 201 F.3d at
622.
There is little doubt that consumers in urban, low-cost areas see
the benefits of having multiple points of access to the network.
While some consumers limit themselves to one wireless or
wireline connection to the network, it is clear that a larger group of
consumers prefer to maintain both wireline and wireless
connectivity to the network. The proliferation of wireless "family
plans" also exposes a flaw in the idea of limiting consumers to one
connection "per household." Under the "family plan" model,
multiple individuals in a household have points of access to the
network - and this is becoming the norm, not the exception.
Therefore, in practice, limiting support to one connection per
household would deny consumers in rural high-cost areas the
quality and variety of services available to consumers in non-rural,
low-cost areas.
The Federal-State Joint Board on Universal Service's "primary
line" proposals also would have distorted the competitive
marketplace. The Joint Board conceded that its proposals were
meant to prevent or mitigate reductions in support available to
rural incumbent carriers resulting from competitive entry. See
ETC Recommended Decision, 19 FCC Rcd 4257, 4289, para. 76
(Jt. Bd. 2004). Even accounting for loss of customers as a result of
healthy competition, none of the Joint Board's proposals would
have resulted in any overall loss of revenues (even in the long run)
for the vast majority of rural incumbent LECs that are guaranteed
profits under rate-of-return regulation. Designing high-cost
mechanisms to insulate incumbent carriers from the rigors of the
competitive marketplace by guaranteeing them support disregards
the fact that the Act demands "sufficient funding for customers,
not providers." See Alenco v. FCC, 201 F.3d at 622.
CTIA also opposes Director Marron's proposal to base support
on each carrier's own costs. While this proposal clearly is an
attempt to curb spending on high-cost support, it would have the
opposite effect. Under this proposal, both the incumbent and
competitive eligible telecommunications carriers would have
incentives to increase costs to receive more high-cost universal
service support. This proposal also would distort the marketplace
by giving unequal per-line support to competing eligible
telecommunications carriers. The incumbent and competitors
should not receive unequal high-cost universal service support.
Unequal support will distort markets by creating artificial
incentives for consumers to purchase certain services and
dissuading market entry by more efficient and innovative
competitive alternatives. Importantly, giving less per-line support
to one set of competitors puts policy-makers, not consumers, in the
position of deciding which provider wins and loses in the
competitive marketplace. Consumers lose out when policy-makers
second guess the competitive market.
Policy-makers should not repeat the mistakes of the past by
supporting universal service policies that distort the competitive
market or create incentives for both incumbents and competitors to
develop business models premised on receipt of greater and greater
subsidies. If the experience of the wireless industry can be any
guide, simplified regulations that encourage and reward efficiency
will best benefit consumers by ensuring that universal service is
targeted only to where it is most needed and is no more than is
necessary. At the FCC, CTIA has proposed combining the current
five high-cost universal service mechanisms into one mechanism
that calculates support based on the most efficient technology -
whether wireline or wireless - in a small geographic area. CTIA
also has supported other efforts to reduce demand for universal
service, while ensuring that support is available to both incumbent
and competitive eligible telecommunications carriers on a non-
discriminatory basis.
2a. In February 2004, the Federal-State Joint Board on
Universal Service recommended supporting a single connection
per household, as a means of reducing excessive growth in the
fund: "We believe that limiting the scope of high-cost support
to a single connection to the public telephone network would
be more consistent with the goals of section 254 than the
present system." Please comment on whether you agree or
disagree with this statement and explain you answer.
[See response to 1.]
2b. The Joint Board also determined "Section 254(b)(3)
encourages access to connectivity, however, not unlimited
connections at supported rates. Advanced services
increasingly are being provided along with voice services over
a single connection. Nothing in the Act supports the argument
that multiple connections should be supported for access to
dial-up Internet access or fax services, neither of which is a
supported service." Please comment on whether you agree or
disagree with this statement and explain your answer.
Section 254(b)(3) of the Act demands that consumers in high-
cost, rural areas have access to comparable telecommunications
and information services without reference to a single connection
or multiple connections. Under the Act, comparability must be
measured by what services are available to consumers in urban
areas. Consumers in urban areas clearly have access to services
that include single and multiple connections, provided over a
variety of technology platforms. At the same time, supporting
unlimited customer connections may inflate the size of the
universal service fund. It also is fair to question support for forms
of connectivity that are not widely utilized by residential customers
in low-cost, urban areas. CTIA is open to further discussions on
how best to address this tension.
2c. The Joint Board also concluded "We believe that
further growth due to supporting multiple connections
presents a significant threat to fund sustainability." Please
comment on whether you agree or disagree with this statement
and explain your answer.
Continuing to calculate high-cost support based on an
incumbent carrier's embedded costs poses a far greater threat to the
sustainability of the universal service fund than growth in support
for multiple connections. Over the last five years, incumbent
carriers have received greater levels of high-cost universal service
support even though they continue to lose customers. From 2000
through 2005, incumbent carriers accounted for roughly two-thirds
of the growth in the size of the high-cost universal service
mechanisms. Since 1997, of the $22 billion spent on high-cost
universal service subsidies, $20.9 billion has gone to incumbent
LECs and only $1.1 billion has gone to wireless carriers and other
competitors. This inequity exists even as consumers are
demanding more and more wireless services. In fact, there are
now more mobile wireless subscribers than wireline switched
access lines.
3a. Should only one provider receive universal service
support in any given area? Please explain your answer.
CTIA opposes artificial limits on the number of eligible
telecommunications carriers in a given area. While limiting fund
growth is a worthwhile goal, limiting support to one provider in a
given area would deny consumers the benefits of competition in
terms of lower-priced, higher-quality, and new and innovative
services. One proposal before the FCC in the recent eligible
telecommunication carrier proceeding was to limit the number of
eligible telecommunications carriers in those areas in which the
incumbent receives more than a prescribed level of high-cost
universal service support. Such a limitation would create powerful
and perverse incentives for incumbent carriers to drive up the cost
of universal service in order to avoid competitive entry.
Incumbent carrier inefficiencies should be a reason to encourage,
not discourage, entry by more efficient competitors.
The better answer is to make same per-line support available to
both the incumbent and competitors based on the most efficient
technology for a given market. That way, consumers, not
regulators, would decide whether a particular market can sustain
competition. Using universal service support to indefinitely
maintain monopolies will never be good for consumers.
3b. Should only the provider that can serve the area at the
lowest possible cost receive the universal service support?
Please explain your answer.
Although CTIA has suggested that a cost model could be used
to calculate high-cost universal service support, CTIA is open to a
variety of market-driven proposals that would reward more
efficient carriers that compete away the cost of universal service.
CTIA has proposed combining the current five high-cost universal
service mechanisms into one mechanism that calculates support
based on the most efficient technology - whether wireline or
wireless - in a small geographic area. CTIA also has expressed
interest in other proposals, such as the use of reverse auctions to
determine support amounts. A proposal to limit support to the
lowest cost provider in a particular geographic areas is similar to a
version of reverse auctions under with the lowest bidder would
receive all universal service support. While limiting support to the
lowest cost provider in a particular geographic could drive down
the cost of high-cost universal service support, it does run the risk
of distorting the competitive market. Similar to a "winner takes
all" reverse auction, it also is not entirely clear what economic
incentive an eligible telecommunications carriers would have to
drive down the cost of universal service, knowing that it runs the
risk of bidding away support amounts. The length of the winning
eligible telecommunications carrier's period of exclusivity also
may impact a carrier's costs levels and may factor into the decision
of competitors to enter that market.
4a. In his testimony, Mr. Garnett asserts that "the high-cost
mechanisms subsidize incumbent carriers based on what they
spend and not necessarily based on whether they actually serve
customers located in a rural, high-cost area." Do you agree
with the accuracy of this statement? Please explain your
answer.
Unlike the competitive market in which wireless carriers
operate, the high-cost universal service mechanisms (and
intercarrier compensation) actually reward rural incumbent local
exchange carrier inefficiency (and encourage competitive carriers
to seek universal service support in those markets served by
inefficient incumbents). Absurdly, the high-cost mechanisms
subsidize rural incumbent local exchange carriers based on what
they spend, not necessarily based on whether they actually serve
customers located in a rural, high-cost area. Specifically, the high-
cost loop support, interstate common line support, and local
switching support mechanisms determine support based on an
incumbent carrier's "actual" or embedded costs plus a prescribed
11.25% rate-of-return. In contrast, the high-cost support
mechanism for so-called "non-rural" carriers calculates support
based on the forward-looking economic costs - a measure of what
it would cost an efficient wireline carrier to serve a particular
geographic area. Because support for rural incumbent local
exchange carriers is based on costs averaged over an incumbent
carrier's total costs, these mechanisms allow rural incumbent local
exchange carriers to keep support even as they lose customers.
In a recent report entitled "Universal Service" Telephone
Subsidies: What Does $7 Billion Buy?, Professor Thomas W.
Hazlett documents how the high-cost universal service works in
practice. A full copy of the report is available at
http://www.senior.org/Documents/USF.Master.6.13.06.pdf.
According to Professor Hazlett, under the current high-cost support
mechanisms, "[t]he more service costs, the more money the phone
carrier receives - a clear incentive to avoid cost savings." Under
the current high-cost support mechanisms, "there appears to be no
way to distinguish between 'high costs' and obsolete and
inefficient ways of doing things."
In his report, Professor Hazlett lists 16 incumbent carriers that
receive over $1,000 per line per year in so-called "corporate
operations expenses," an array of expenditures unrelated to
installing and maintaining plant and equipment. As the FCC has
noted, such costs "may be discretionary" and include, for example,
"travel, lodging, and other expenses associated with attending
industry conventions and corporate meetings." See Rural Task
Force Order, 16 FCC Rcd 11244, para. 63. According to
Professor Hazlett, the average rural incumbent LEC corporate
overhead expense is about $99 per year per line and the average
non-rural incumbent LEC corporate overhead expense is about $75
per year per line. Professor Hazlett also lists the top 12 high-cost
support per line recipients of high-cost support - with one carrier
receiving an astonishing $13,345 per line per year.
Accipiter Communications, Inc. (Accipiter), a rural incumbent
local exchange carrier on both of these lists, receives $6,927 per
line per year in high-cost universal service support to serve 219
access lines. Accipiter has annual corporate operation expenses of
$2,113 per line. Accipiter recently filed a petition with the FCC to
enable it to receive high-cost universal service support to defray
the costs of serving potential customers in the Vistancia
development, located in Peoria, Arizona. A copy of the petition is
available at
http://gullfoss2.fcc.gov/prod/ecfs/retrieve.cgi?native_or_pdf=pdf&
id_document=6518365842. Peoria, Arizona is a suburban
community located just 25 miles from Phoenix. Maricopa County,
in which Peoria is located, has the fourth highest number of
millionaires of any county in the United States. For additional
information, go to
http://moneycentral.msn.com/content/invest/extra/P148783.asp.
Vistancia includes two golf courses and 4,000 square foot homes
costing over $1 million. Vistancia advertises itself as "an
innovative urban commercial and residential village."
http://www.vistancia.com/news/20060612.shtml (emphasis on
urban added). One of the two golf courses describes the
community in this way:
In the peaceful hills of Peoria, Arizona - tucked within the
friendly confines of Vistancia - a private country club
community is taking shape. Home to a Jim Engh-designed
golf course, a fully appointed clubhouse, and a superb
selection of residences and homesites, Blackstone honors
what we cherish most: family, fine living, and a world of
new experiences.
Go to http://www.blackstonecountryclub.com/index_flash.html. For
additional information on Vistancia's many amenities, go to
www.vistancia.com.
With customers like these, it is little wonder that Accipitier is
interested in extending its network into the Vistancia development.
But, should universal service support be used to fund that
expansion? Cox Communications, which already serves customers
in Vistancia, neither receives nor has asked for universal service
subsidies. The area also is served by a long list of at least six
wireless carrier competitors, which also do not receive high-cost
universal service support to serve that area. Now Accipiter is
asking for high-cost universal service support so it can "compete"
with all of these unsubsidized competitors.
Given how the current universal service system is structured,
this type of behavior is not surprising. According to Professor
Hazlett, "there appears to be no mechanism in place to . . . rein in
even the most egregious inefficiencies." Professor Hazlett
concludes that "incentives created by these subsidies encourage
widespread inefficiency and block adoption of advanced
technologies - such as wireless, satellite, and Internet-based
services - that could provide superior voice and data links at a
fraction of the cost of traditional fixed-line networks."
4b. Do you believe that subsidizing incumbent carriers (or
any carriers) based on what they spend rather than who they
actually serve is the right policy outcome? Please explain your
answer.
For the reasons detailed in my response to 4a., absolutely not.
5. As Mr. Garnett points out in his testimony, "CTIA has
proposed combining the current five high-cost universal
service mechanisms into one mechanism that calculates
support based on the most efficient technology - whether
wireline or wireless - in a small geographic area." Please
comment on whether you support or oppose such a proposal
and why?
The best way to answer this question is to first look at all that is
wrong with the current high-cost universal service mechanisms -
which represent an increasing majority of the overall universal
service fund. There are numerous problems with the high-cost
mechanisms, such as: (1) incentives for inefficiency; (2)
enrichment of incumbent LEC profits; and (3) impenetrable
administrative complexity. Taken together, these problems result
in a bloated fund that does not effectively target the appropriate
levels of support to different high-cost areas. As a result, the high-
cost support mechanisms do a poor job of ensuring that all
Americans have access to high-quality, affordable
telecommunications and information services. Moreover, the high-
cost support mechanisms undermine the efficient development of
competition as envisioned by the Act.
Incentives for Inefficiency. Embedded, cost-based, high-cost
universal service mechanisms reward inefficiency by creating
incentives and opportunities for carriers to engineer higher
embedded costs to receive more support. Despite industry-wide
efficiency gains, advances in technology, and amortization of
depreciated equipment, high-cost universal service subsidies
continue to increase rather than decrease over time. To debunk
one frequently repeated myth, it is new support for incumbents, not
competitors, that has been the primary cause of fund growth.
Since competitive eligible telecommunications carriers receive
high-cost support based on the incumbent carrier's costs, increased
incumbent LEC costs mean more support for both incumbents and
competitors.
In practice, the FCC's high-cost support mechanisms
compound incentives for inefficiency inherent in embedded cost
support mechanisms. For example, the high-cost support
mechanisms discourage carriers from taking advantage of
economies of scale normally associated with combining
operations. Under the high-cost mechanisms, smaller rural
incumbent LECs are eligible for more support than larger carriers.
Incumbent LECs that increase their customer base risk reducing or
eliminating their qualification for high-cost support. The
embedded high-cost mechanisms' preference for small carriers
also creates incentives for carriers to appear small when, in fact,
they are much larger. Incumbent LECs do this by operating
numerous "study areas" in a given state or by balkanizing their
operations among the various states. One incumbent LEC, for
example, operates in 18 study areas in Wisconsin.
Guaranteeing Universal Service Profits. In addition to
reimbursing incumbent LECs for their service-related costs, the
high-cost universal service mechanisms also are designed to
guarantee a prescribed level of profits for incumbent LECs. For
example, the federal high-cost support mechanisms for rural and
rate-of-return incumbent LECs include a guaranteed rate of return
of 11.25%. This rate-of-return is based on the cost of capital for
Regional Bell Operating Companies in 1991. The 11.25% return
was based on the RBOCs' 8.8% cost of debt in 1991. We estimate
that today rural incumbent LECs have an average cost of debt of
only 5.46%. This would allow rural carriers to earn a 15.06%
return on equity from the universal service mechanisms. To make
matters worse, many incumbent LECs have reported to the FCC
that they had profits far in excess of the prescribed rate-of-return.
These elevated universal service profits do not translate to
improved telecommunications services in high-cost areas. Instead,
they simply enrich carriers, while increasing the overall size of the
fund to the detriment of other carriers and consumers who end up
paying higher universal service pass through charges.
Impenetrable Administrative Complexity. The five separate
high-cost support mechanisms, in conjunction with the waivers and
other loopholes carriers use to receive additional high cost support,
make the system an administrative and enforcement nightmare.
Also, support calculations under the various federal high-cost
support mechanisms rely on archaic and complicated cost
accounting, jurisdictional separations, and reporting rules that have
existed in one form or another since 1984. This administrative
complexity makes it exceedingly difficult for the Universal Service
Administrative Company ("USAC"), the FCC's independent
universal service fund administrator, to audit incumbent LEC cost
data submitted for purposes of calculating high-cost support.
These wasteful administrative costs are paid by consumers through
higher rates for service, as well as higher universal service pass-
through charges.
At the FCC, CTIA has put forth market-oriented proposals to
address these problems. CTIA has supported efforts to reduce
demand for universal service, while ensuring that support is
available to both incumbent and competitive eligible
telecommunications carriers on a non-discriminatory basis.
Specifically, CTIA has proposed calculating support based on the
most efficient technology - whether wireline or wireless - in a
small geographic area. Under this proposal, incumbent and
competitive eligible telecommunications carriers would receive the
same level of "per-line" support based on the most efficient
wireline or wireless technology for a given area. As in the
competitive market, eligible telecommunications carriers would
only receive support to the extent that they win customers. More
customers would equate to more support. At the same time,
incumbents and competitors that lose customers would lose
support (a novel concept under the current mechanisms).
Although CTIA has suggested that a cost model could be used
to calculate support, as noted previously, CTIA is open to other
market-driven proposals (such as reverse auctions) that would
reward more efficient carriers that compete away the cost of
universal service. CTIA also has proposed shorter term reforms
within the context of the current mechanisms that would reduce
support for carriers that do not need it and potentially increase
support to those carriers with legitimate needs. For example,
CTIA has supported:
(1) Eliminating profit guarantees in high-cost mechanisms
(We think carriers should get their profits from their own
customers, not through the universal service mechanisms);
(2) Requiring carriers to combine study areas in a given
state (The current rules allow large, low-cost incumbents to
appear small and high-cost by balkanizing their operations
within a state); and
(3) Transitioning larger rural incumbent carriers to the non-
rural high-cost mechanisms.
Increased accountability must be central to any universal
service reforms. That's why CTIA has supported technology
neutral "carrier of last resort" obligations for both incumbent and
competitive eligible telecommunications carriers. CTIA also has
supported requirements that both incumbent and competitive
eligible telecommunications carriers achieve measurable results -
for example, showing how universal service dollars have been used
to improve service quality and coverage. We are open to other
proposals and look forward to a continuing dialogue on these
important issues.
RESPONSE FOR THE RECORD OF STACI L. PIES, VICE PRESIDENT,
POINTONE COMMUNICATIONS, ON BEHALF OF VOICE ON THE NET
(VON) COALITION
1. In his testimony, Director Marron states that "spending
for the [high-cost] program could be curbed by limiting high-
cost support to one connection per household, by basing
supporting on each carrier's own costs rather than on a cost
standard set by the incumbent carrier, or both." Please
comment on whether you agree or disagree with these two
reform proposals and explain your answer.
As Congress and the FCC examine whether and how the
nation's Universal Service system should be reformed, the focus
should always be delivering competitive, innovative and robust
services to all consumers nationwide, at just, reasonable,
affordable and reasonably comparable rates. For too long, the
primary beneficiaries of USF have been the companies that receive
the funds rather than the consumers that may or may not benefit
from USF policies.
In keeping with the principle that consumer impact should
drive USF policy implementation, the VON Coalition supports
reforms that recognize that competition creates additional pressure
for USF recipients to operate efficiently thereby minimizing the
need for subsidies. As the Coalition stated in its testimony, to help
accelerate the transition to a nationwide broadband network,
Congress should adopt policies that create incentives rather than
disincentives for efficient network deployment and exchanging
traffic between Internet networks and the legacy phone network --
thus geometrically increasing the value of both of America's
communications networks.
As the Fifth Circuit explained, "The Act does not guarantee all
local telephone service providers a sufficient return on investment;
quite to the contrary, it is intended to introduce competition into
the market. Competition necessarily brings the risk that some
telephone service providers will be unable to compete." Thus,
"[t]he Act only promises universal service, and that is a goal that
requires sufficient funding of customers, not providers." As the
Fifth Circuit recognized, "So long as there is sufficient and
competitively-neutral funding to enable all customers to receive
basic telecommunications services, the FCC has satisfied the Act
and is not further required to ensure sufficient funding of every
local telephone provider as well."
2.a. In February 2004, the Federal State Joint Board on
Universal Service recommended supporting a single connection
per household, as a means of reducing excessive growth in the
fund: "We believe that limiting the scope of high-cost support
to a single connection to the public telephone network would
be more consistent with the goals of section 254 than the
present system." Please comment on whether you agree or
disagree with this statement and explain your answer.
As stated in response to question 1, the VON Coalition urges
Congress to focus on the benefits to consumers of any particular
proposal as well as ensuring that USF policies create incentives for
efficient network deployment and the utilization of the most
efficient technologies. Moreover, USF reforms should ensure that
all providers of a substitute service to the same customer receive
the same amount of support, regardless of the identity of the
provider or the underlying technology.
2.b. The Joint Board also determined "Section 254(b)(3)
encourages access to connectivity, however, not unlimited
connections at supported rates. Advanced services
increasingly are being provided along with voice services over
a single connection. Nothing in the Act supports the argument
that multiple connections should be supported for access to
dial-up Internet access or fax services, neither of which is a
supported service." Please comment on whether you agree or
disagree with this statement and explain your answer.
The VON Coalition believes that Congress and the FCC should
view the Universal Service subsidy system in a new light. While
the Joint Board's focus on "services' may be useful in the circuit
switched world, as the Joint Board also recognized, in a broadband
world, multiple services are provided over the same network. In
focusing on the types of services that qualify for subsidies, the
USF regime emphasizes voice services to the detriment of data and
Internet services and ensures that most money stays or flows
exclusively to incumbent carriers. The USF fund should not
constrain us to the confines of the 100 year old analog voice
regime when the world is moving to broadband based voice.
A shift away from the focus on services or application and
instead towards a focus on the transmission when determining
whether a connection should be subsidized will provide
appropriate incentives for broadband buildout. Broadband enabled
networks and VoIP are facilitating transformative improvements in
the way we communicate that harness the power of the Internet.
VoIP is not just another flavor of telephone service. In contrast to
traditional plain old telephone service ("POTS"), VoIP voice is an
application, just like e-mail, streaming audio, streaming video, and
web browsing and can occur over any packet data network,
including the Internet. VoIP has the ability to decouple voice from
the legacy copper telephone network, so that innovation can
happen on Internet time, and consumers can connect from any
broadband network. By transforming voice communications into
a software application, VoIP can integrate communications and
data in entirely new ways. Soon a voice component can be added
to any type of device, application or service that uses a
microprocessor or touches the Internet. Accelerating VoIP
adoption can mean cost savings for consumers and businesses,
reduced operational costs for providers, advanced features
unavailable with traditional phones, increased competition among
network and service providers, increased infrastructure investment,
accelerated broadband deployment, improvements in emergency
services, lower cost communications for rural and government
users, increased access for persons with disabilities, and increased
worker productivity.
2.c. The Joint Board also concluded "We believe that
further growth due to supporting multiple connections
presents a significant threat to fund sustainability." Please
comment on whether you agree or disagree with this statement
and explain your answer.
The VON Coalition agrees with the reasoning articulated by
the Fifth Circuit in the Alenco v. FCC. In that decision, the Court
pointed out, "excessive funding may itself violate the sufficiency
requirements of the Act." The reason is that "universal service is
funded by a general pool subsidized by all telecommunications
providers--and thus indirectly by the customers." In other words,
because customers bear the ultimate cost of supporting universal
service, "excess subsidization in some cases may detract from
universal service by causing rates unnecessarily to rise, thereby
pricing some consumers out of the market."
3.a. Should only one provider receive universal service
in any given area? Please explain your answer.
The VON Coalition suggests that limiting support in a given
area to one provider eliminates incentives for that provider to
deploy the most advanced and economically efficient technologies,
thus harming the very consumers that the Universal Service Fund
is intended to benefit. Congress should ensure that even with USF
subsidies, the market behaves as must like a competitive market as
possible. Accordingly, federal USF policies must not discriminate
between providers of substitute services to the same customers.
All providers in a given area must be eligible to receive the same
amount of support, regardless of the identity of the provider or the
underlying technology. Importantly, such a support basis mimics
the risks and rewards of an unsubsidized market and benefits
consumers by enabling companies to deliver competitive,
innovative and robust services to all consumers nationwide, at just,
reasonable, affordable and reasonably comparable rates.
3.b. Should only the provider that can serve the area at
the lowest possible cost receive the universal service support?
Please explain your answer.
Rather than requiring the government to identify and select the
least-cost supplier of services, a solution that would be fraught
with problems, the VON Coalition believes that a better approach
to lowering the costs of universal service and ensuring
sustainability of the fund is to focus on accelerating VoIP driven
benefits to consumers, businesses, and the economy by
establishing incentives for carriers to make cost-effective
investment decisions while improving service to consumers in their
areas by increasing the availability of broadband services. The
VON Coalition agrees that all Americans benefit from the fact that
residents of rural areas have access to high quality telephone
service. However, the incentives for providers to improve
economic efficiency by deploying IP-based networks and services
are adversely impacted by the manner in which the fund is
currently administered given that high cost carriers generally
receive subsidies based on their costs.
4.a. In his testimony, Mr. Garnett asserts that "the high-
cost mechanisms subsidize incumbent carriers based on what
they spend . . . not necessarily based on whether they actually
service customer located in a rural, high cost area." Do you
agree with the accuracy of this statement? Please explain your
answer.
As stated in 3.b. above, the VON Coalition is equally
concerned that the current distribution system does not provide the
proper incentives for deploying economically efficient technology.
High-cost support provides subsidies to make carriers whole,
regardless of their investment decisions or business models by
guaranteeing 'reasonable' rates of return. Utilizing traditional,
circuit switched technology, it is generally agreed that in those
areas, basing end-user retail prices strictly on the cost of service
would likely create a barrier to subscription and frustrate the
achievement of Universal Service goals. However, with the advent
of more efficient, lower cost technologies such as VoIP, the cost of
providing service in rural and high cost areas can decrease
significantly. Not only does VoIP enable robust, innovative
communications experiences for all Americans, it significantly
lowers the cost of network deployment and the provision of
services to enterprises and residential consumers.
4.b. Do you believe that subsidizing incumbent carriers
or any carriers based on what they spend rather than who they
actually serve is the right policy outcome? Please explain your
answer.
Subsidizing any provider based on the actual costs without
appropriate auditing and oversight increases significantly the
burden on the Fund. Moreover, such a policy outcome is
detrimental to consumers because providers have no incentives to
operate more efficiently or deploy new technologies that might
offer lower costs.
5. As Mr. Garnett points out in his testimony, "CTIA has
proposed combining the current five high-cost universal
service mechanisms into one mechanism that calculates
support based on the most efficient technology - whether
wireline or wireless - in a small geographic area." Please
comment on whether you support oppose such a proposal and
why.
The VON Coalition supports Universal Service reforms that
eliminate the current incentives for carriers to ignore technological
innovations that would reduce their dependency on or
qualifications for subsidies. A single mechanism that calculates
support based on the most efficient technology would provide
appropriate, market driven incentives for high cost telephone
companies to deploy less expensive, more robust and feature rich
broadband technologies thereby benefiting consumers with lower
cost service and less expensive universal service payments. The
current USF subsidies mechanism assures a regular and predictable
revenue flow with little to no risk and significant rewards.
RESPONSE FOR THE RECORD OF GEOFF FEISS, GENERAL MANAGER,
MONTANA TELECOMMUNICATIONS ASSOCIATION
1. In his testimony, Director Marron states that "[s]pending
for the [high-cost] program could be curbed by limiting high-cost
support to one connection per household, by basing support on
each carrier's own costs rather than on a cost standard set by the
incumbent carrier, or both." Please comment on whether you
agree or disagree with these two reform proposals and explain
your answer.
I disagree in large part with Director Marron's suggestion that
high-cost support can be limited in any practical manner to one
connection per household. This suggestion is commonly referred
to as a "primary line restriction." I agree with his suggestion that
support should be based on each carrier's own costs rather than on
a cost standard set by the incumbent carrier. This suggestion is
commonly referred to as the "identical support rule." I'll address
each suggestion separately.
First, I should point out that as Director Marron's testimony
attests, most of the so-called growth in the Universal Service Fund
(USF) has resulted from regulatory cost shifting, as directed by
Congress, from "implicit" support mechanisms (i.e., intercarrier
compensation or access revenues) to "explicit" support (i.e.,
universal service). Economically speaking, consumers are paying
no more to support investment in ubiquitous, affordable, advanced
telecommunications infrastructure. Instead of paying implicit
support through intercarrier compensation for maintaining
investment in a national telecommunications infrastructure, they're
paying the same amount explicitly through universal service
support. As my testimony shows, the amount of support received
by incumbent ETCs has remained essentially the same.
This is not so, however, with regard to "new" support created
by recent and growing designation of new, mostly wireless,
eligible telecommunications carriers (ETCs). CBO notes that
designation of new ETCs is where the "new" growth of universal
service funding is found. FCC Chairman Kevin Martin also has
noted this phenomenon in a speech to USTelecom in October,
2006.
.a lot of the Fund's growth in recent years is attributable to
new competitive eligible telecommunications carriers (or
CETCs), particularly wireless CETCs that have begun to
receive funding. The number of CETCs is increasing
dramatically and is one of the primary drivers of fund growth.
Since 2000, CETC high cost payments have grown from
about $1.5 million annually to about $333 million annually.
(FCC Chairman Kevin Martin, speech to USTelecom,
10/26/05)
CBO points out in its testimony that "[f]urther growth in the
number of wireless telephone carriers that become eligible to
receive USF support for providing service in rural areas could
increase spending for the High-Cost Program by between $0.6
billion and $1.2 billion."
So, while the Fund (explicit support) has grown, intercarrier
compensation (implicit support) has shrunk. As CBO notes, the
next intercarrier compensation reform proposal in the pipeline will
bring more of the same regulatory shift from implicit support to
explicit support, notwithstanding the "new" support obligations
resulting from continuing designation of additional ETCs. In fact,
it is the designation of additional, multiple ETCs serving the same
area that has led to recommendations aimed at curbing the growth
of the USF. Among those recommendations is the so-called
primary line restriction.
Primary line restriction. Conceptually, there are attractive
arguments in favor of a primary line restriction. As indicated in
following questions below (e.g., 2a.), the Federal-State Joint Board
on Universal Service in 2004 enumerated a number of rationales
justifying adoption a primary line restriction. Among them: it is
necessary to protect the sustainability of the Fund and to mitigate
"uncontrolled" growth as more and more new ETCs are designated
in high-cost areas; restrictions should be considered that would
curtail artificial inducements for competitive entry; and, preventing
automatic support of multiple connections might curtail incentives
by states to designate ETCs to attract more universal service
funding to their states. I do not disagree with any of these
observations. However, I do disagree with the proposed solution
and believe that fund growth can be addressed through alternative
means that do not harm rural economic development and that
preserve the integrity of the universal service program. (See
below.)
Indeed, there is widespread opposition to a "primary line
restriction." In fact, Congress twice has enacted one-year
moratoria on imposition of any primary line restriction, and rural
telecom companies support a permanent moratorium/prohibition
on the primary line restriction. One problem with a primary line
restriction lies in its practical (or should I say "impractical")
implementation. First, it would be very difficult to determine
which line is "primary," and which one(s) is (are) not. There
would be tremendous opportunity to game the system; to slam,
cram, or otherwise attempt to (mis)characterize line(s) as
"primary." If one of the intentions for universal service reform is
to reduce arbitrage and "gaming," this potential reform may go in
the opposite direction. For example, wireless companies offer
each member of a household a separate phone and number-each
of which receives universal service support if the wireless carrier is
an ETC. Wireline households may have multiple phones but only
one universal service-supported line. Thus, where universal
service supports one wireline to a household, it now supports five
"lines" for a household of four, if all members of the household
each have a wireless phone, plus a supported wireline. (This is one
reason why the primary line concept is attractive.) If there were a
primary line restriction, would each member of the family choose a
"primary" line, or would one "household" choose a single primary
line? And then how would you determine what a household is, and
who in the household gets to chose the primary line? How would
you police such a system, even if you could devise a system which
accurately determines what a primary line is? And so on.
A second problem with the primary line restriction is if only
the primary line receives universal service support, then all other
lines would be priced according to their actual costs. (Remember,
wireless carriers do not even account for their actual costs today.)
Presumably, non-primary lines would then be more expensive. (if
they weren't, they wouldn't need universal service support.) In
Montana, unsupported lines could be hundreds of dollars more
expensive. (My testimony indicated that Montanans would pay
between $330 and $600 more.) This would be a significant
deterrent to small business (i.e., multi-line commercial enterprises)
development in rural areas, and I do not believe Congress intends
to thwart rural economic development. To the extent that
consumers would purchase less telecommunications capability,
carriers would be left with less revenue with which to recover their
substantial investment in services and infrastructure, leaving rural
America with less investment in basic as well as advanced
investment incentives. Moreover, businesses would be left with
fewer telecommunications assets with which to maintain and grow
their operations.
In short, any potential advantages of a primary line restriction
would be far outweighed in the form of diminished investment
incentives, impossible administrative burden, and reduced
economic development potential in rural America. Furthermore, it
is questionable whether a primary line restriction would comply
with the Telecommunications Act's universal service principles,
particularly that universal service is "specific, predictable, and
sufficient." 47 U.S.C. 254 (b)(5). If consumers could chose, and
switch among supported lines, then carriers would have a difficult
time at best determining what lines are supported, and predicting
investment accordingly.
Identical support rule. As noted above, there are practical
alternatives to a primary line restriction, the most effective of
which is the elimination of the "identical support rule." The
identical support rule effectively says that any new ETC receives
the same level of universal service support as the incumbent. For
example, say a wireless carrier is designated as an ETC in the
service area of an incumbent carrier. The new wireless ETC uses a
combination of its own facilities and those of the incumbent. It
provides a different level of service quality, does not have carrier-
of-last-resort or other state or federal obligations imposed on the
incumbent, deploys a different type of network architecture, and
generally has a different cost structure than the incumbent. As a
result, its costs are significantly less than the incumbent's. Yet,
under the identical support rule, the wireless ETC receives the
same level of universal service support as the incumbent. The
identical support rule effectively becomes a windfall rule for the
new ETC.
This effect has been illustrated on numerous occasions. For
example, FCC Chairman Martin noted in the same October, 2005,
speech to USTelecom,
I have also expressed concern over how CETC support is
calculated. For example, even if [new ETCs'] costs are
lower, they receive support based on [the incumbent's]
higher costs.
The Montana Public Service Commission (MTPSC)
recognized the windfall effects of the identical support rule in
comments the MTPSC filed with the FCC in 2004:
To further illustrate the need to eliminate the identical
support rule we offer the following information. Western
Wireless' CEO, John Stanton, in his presentation to this fall's
Qwest Regional Oversight Committee (ROC) meeting of
September 12 and 13, [2004] Missoula, Montana, presented
estimates of relative wireline and wireless investment costs.
Those costs are as follows: (1) national wireline carriers'
cost is $2,492; (2) national wireless carriers' cost is $920;
(3) rural wireline carriers' cost is $7,195; and (4) rural
wireless carriers' cost is $1,734. It is apparent from the
presentation that to base support to wireless carriers upon the
cost of the ILEC would bequeath an extraordinary subsidy to
the wireless industry. As OPASTCO comments, and the
Montana PSC agrees, the "identical support" rule must be
eliminated. Reply Comments of the Montana Public Service
Commission. In the Matter of the Federal-State Joint Board
on Universal Service, Request for Comments on Certain of
the Commission's Rules Relating to High-cost Universal
Service Support. CC Docket No. 96-45. December 14,
2004. [Note: Western Wireless has been acquired by Alltel
since these comments were filed.]
It should be noted that wireless facilities need only reach from
the end user to the nearest point of presence on the wireline
network, thus saving the wireless carriers considerable expense.
Indeed, wireless carriers (and VOIP providers, for that matter) rely
on quality, ubiquitous wireline infrastructure to complete their
calls. Yet, wireless ETCs are receiving universal service windfalls
as they receive universal service support based on incumbent
ETCs' support, and not on their own costs, which generally are
considered less because they don't have the level of infrastructure
investment, quality, ubiquity, etc. that the incumbent has.
Does it make sense effectively to subsidize competitors with
windfalls at the expense of universal service support?
Emphatically not. Elimination of the identical support rule is an
effective means by which to reduce the gaming of the universal
service program and to mitigate uncontrolled growth of the
Universal Service Fund.
2a. In February, 2004, the Federal-State Joint Board on
Universal Service recommended supporting a single connection
per household, as a means of reducing excessive growth in the
fund: "We believe that limiting the scope of high-cost support to a
single connection to the public telephone network would be more
consistent with the goals of section 254 than the present system."
Please comment on whether you agree or disagree with this
statement and explain your answer.
As I noted above, the Joint Board observed that the Universal
Service Fund is growing primarily as a result of the designation of
new, mostly wireless ETCs. It recommended, on a 5-3 vote, to
adopt a primary line restriction as a means by which to protect the
sustainability of the Fund. While the symptoms were properly
diagnosed, the remedy remains contentious; and even the slim
majority recognized that a number of conditions and caveats
needed to be present if a primary line restriction were to be
considered seriously by the FCC. (It should also be noted that the
Joint Board's recommendation was just that: a recommendation for
further consideration by the FCC. Moreover, as additional and
dissenting comments pointed out, the Joint Board did not address
such central issues regarding the growth of the Fund as
subsidization of competition, appropriate controls over designation
of ETCs, or determination of an appropriate basis of support-e.g.,
the identical support rule. These more central issues could more
effectively accomplish the same objective as an identical support
rule without threatening economic development, investment in a
national infrastructure, or imposition of insurmountable
administrative burden which could result in more-not less-
gaming of the universal service program.)
The Joint Board acknowledged that a primary line restriction
could have significant negative effects on investment in rural
telecommunications infrastructure. For example, it requested the
FCC to examine the effect of its recommendations on businesses
with multiple connections. As I noted in my response to the
previous question, a primary line restriction would likely increase
significantly the cost/price of additional lines. Most "multiline"
businesses in rural America are small. In Montana, the
overwhelming majority of businesses have fewer than 5 lines, if
they are multiline at all. Significantly increasing the price of these
few additional lines would impose a tremendous burden on these
small businesses, and would negatively affect their ability to
maintain multiple lines, thereby affecting not only the businesses'
ability to retain and grow their operations, but negatively affecting
telecom carriers' return on investment.
The Joint Board advanced options to "avoid or mitigate
reductions in the amount of high-cost support flowing to rural
areas as a result of implementing a primary line restriction."
Among the options was a hold harmless proposal that recognizes
the substantial investment that rural carriers have made in
infrastructure and thus would hold these carriers harmless from
lost of universal service support.
Further, the Joint Board recommendations were conditioned on
the FCC's ability to develop competitively neutral rules and
procedures that do not create undue administrative burdens on
carriers. As noted above, this condition may well be impossible to
meet. Not only is a primary line restriction difficult to administer,
but it likely would result in more, not less, manipulation (gaming)
of the system, which Congress, the FCC and industry alike would
prefer to eliminate rather than foster. Given more effective and
more efficient solutions (elimination of identical support) the Joint
Board's recommendation likely does not meet its own conditions.
2b. The Joint Board also determined "Section 254(b)(3)
encourages access to connectivity, however, not unlimited
connections at supported rates. Advanced services increasingly
are being provided along with voice services over a single
connection. Nothing in the Act supports the argument that
multiple connections should be supported for access to dial-up
Internet access or fax services, neither of which is a supported
service." Please comment on whether you agree or disagree with
this statement and explain your answer.
I disagree with the implication of this statement that
connections to the nation's telecommunications infrastructure
should somehow limit consumers' access to advanced
telecommunications capabilities. In fact, we should be, and are,
encouraging precisely the opposite policy as a matter of national
economic competitiveness and domestic economic development.
In Montana, rural telecommunications providers have pushed
broadband access to between 80% and often as much as 100% of
their service areas. Over 250 rural Montana communities have
access to DSL, starting at 256Kbps, and often reaching well over
megabit speeds. In a state where the largest city has a population
of 100,000, reaching 250 communities often means that towns of
100 residents or less have access to DSL technology. Many
Montana rural telcos report that over 50% of their Internet
customers subscribe to broadband services rather than dial-up
Internet. Businesses are sprouting up in remote communities
across the nation as a result of consumers' and entrepreneurs'
access to advanced telecommunications capabilities. Economic
opportunity no longer exists only in our nation's cities. Anyone
anywhere can start a business and instantly gain access to world
markets. Access to advanced telecommunications infrastructure is
critical to this economic vibrancy. And universal service is in no
small degree contributing to this economic growth and vitality. I
seriously doubt that Congress intends to curtail investment in the
telecommunications platform that provides the foundation of
economic growth.
Section 254(b)(3), as referenced by the Joint Board, states
Consumers in all regions of the Nation, including low-
income consumers and those in rural, insular, and high cost
areas, should have access to telecommunications and
information services, including interexchange services and
advanced telecommunications and information services, that
are reasonably comparable to those services provided in
urban areas and that are available at rates that are reasonably
comparable to rates charged for similar services in urban
areas. [Emphasis added.]
The Joint Board statement appears to imply that access to
advanced telecommunications and information service is OK for
one line, but not for any other line(s). I don't know how that's
possible. If a family or business has two lines, should only one be
used for Internet access or fax capabilities even though both
lines-and the network they're attached to-are perfectly capable
of providing advanced services? And I certainly don't think that's
a desirable policy for the United States. For more than 70 years,
universal service has supported carriers' investment in networks
"for the provision, maintenance and upgrading of facilities and
services for which the support is intended. Any such support
should be explicit and sufficient to achieve the purposes of this
section." 47 U.S.C. 254(e). [Emphasis added.] The rural
telecommunications providers of Montana and the nation have
been investing in and upgrading their networks to bring supported
services to consumers in all corners of the nation.
Continual investment in telecommunications infrastructure
including facilities for which universal service support is intended
has brought a number of additional benefits to rural consumers.
For example, by investing in advanced, high capacity fiber
backbones and digital "softswitches," telecom providers have been
able to increase network efficiency, enhance cost effectiveness of
network investment, and simultaneously deliver more robust
services and applications for consumers' personal and commercial
benefit. Two companies alone in Montana are drawing $2 million
less in universal service support today than in 2004. Meanwhile,
their investment in advanced telecommunications capabilities has
meant that more of their customers have access to more advanced
telecommunications applications choices than ever before.
Universal service support facilitates investment in networks for the
purpose of providing supported services. Such investment also
facilitates the delivery of advanced communications capabilities.
Investing in a fiber backbone, for example, facilitates delivery of
supported services, and enables more bandwidth to be deployed
throughout the network.
The question implies that universal service is static, and that it
is preferable that we provide only dial tone, without the capability
of supporting advanced services, notwithstanding the principles set
forth by Sections 254 and Sec. 706, which encourage an evolving
definition of universal including support for advanced services.
The Act defines universal service as
an evolving level of telecommunications services that the
Commission shall establish periodically [taking into
account] the extent to which such telecommunications
services-(A) are essential to education, public health, or
public safety; (B) have, through the operation of market
choices by customers, been subscribed to by a substantial
majority of residential customers; (C) are being deployed in
public telecommunications networks by telecommunications
carriers; and (D) are consistent with the public interest,
convenience and necessity. 47 U.S.C. 254(c)(1).
Moreover, as I pointed out in my testimony, members of
Congress on both sides of the aisle and the President are calling for
more-not less-investment in broadband capabilities as a means of
maintaining our nation's international economic competitiveness.
Dial-up Internet access and fax services hardly qualify as advanced
telecommunications capabilities which will ensure our nation's
international economic competitiveness.
2c. The Joint Board also concluded "We believe that further
growth due to supporting multiple connections presents a
significant threat to fund sustainability." Please comment on
whether you agree or disagree with this statement and explain
your answer.
I do not disagree with the statement, inasmuch as it indicates
that growth of the Fund due to the designation of multiple ETCs
threatens the Fund's long term sustainability. As FCC Chairman
Martin said in the aforementioned speech to USTelecom,
I do not think it is viable in the long term to continue
subsidizing multiple competitors to serve areas in which
costs are prohibitively expensive for even one carrier.
Then-Commissioner Martin made the same point in additional
comments dissenting in part, and concurring in part to the Joint
Board's recommendation. He noted that the Joint Board's
recommendations may continue to make it difficult for any one
carrier to achieve the economies of scale necessary to serve all of
the customers in rural areas.
For reasons cited above, however, I do not agree with the
statement that multiple "connections" to the network are the
culprit, especially considering the negative economic effects of
implementing a primary line restriction, as discussed above.
3a. Should only one provider receive universal service support in
any given area? Please explain your answer.
From the perspective maintaining the sustainability of the
Fund, the question is valid. As noted above, we should consider
whether it is good policy to subsidize competition rather than to
promote universal service.
However, a "single-carrier" approach may in fact result in
unintended, negative consequences, much as a primary line
restriction could result in negative investment and economic
development consequences. How would states or the FCC
determine which single provider would qualify for universal
service support? (Suggestions regarding a "least-cost-provider," or
"most-efficient-technology" approach are discussed below.) As
noted earlier, wireless calls (and VOIP services) rely on an
underlying wired infrastructure. But if a wireless provider, for
example, were chosen as the single provider eligible for universal
service support, investment in the underlying network upon which
the wireless provider depends, may cease as the underlying carrier
would be unable to sustain an adequate (e.g., sufficient, specific
and predictable) level of investment in its network.
A more effective way to curtail growth in the Universal Service
Fund is to implement current law more strictly by applying
appropriate public interest standards prior to the designation of
additional ETCs and by controlling the distribution of funds by
eliminating the identical support rule. If it appears that designating
a second ETC to serve an area already served by an ETC merely
subsidizes the second carrier at the expense of unnecessary growth
of the Fund, then a state Commission or the FCC should deny
designating the second carrier as an ETC in that area. If other
public interest standards are not met by designating a second
carrier, then the second ETC should not be designated. I am not
aware of any ETC applications having been denied anywhere in
the nation. It can be argued that current law has not been
implemented as strictly as it should.
I should note that H.R.5072 accomplishes the very solutions
that are designed effectively to limit the growth of the Universal
Service Fund while preserving the valid intent of universal service
to support ubiquitous access to advanced, quality
telecommunications. For example, H.R.5072 clearly states that
state commissions shall conduct thorough reviews of ETC
applications prior to designating additional ETCs. The bill further
eliminates the identical support rule as an effective means of
curtailing the growth of the Fund.
3b. Should only the provider that can serve the area at the lowest
possible cost receive universal service support? Please explain
your answer.
As noted above, a single-provider approach to universal service
may result in negative repercussions for investment in underlying
network infrastructure. As Western Wireless' Chairman John
Stanton was quoted in the MTPSC December, 2004, reply
comments to the FCC (above), his company's investment costs
were substantially lower than incumbents' costs. However, I doubt
whether the figures cited by Mr. Stanton compared actual
consumer value on an apples-to-apples basis. For example, did the
data cited by Mr. Stanton include comparable quality of service,
network redundancy, backbone infrastructure, bandwidth and
advanced service capability, ubiquitous carrier-of-last-resort
obligations throughout the comparable service area, equal access,
emergency service capabilities, compliance with other federal and
state requirements, etc.? My suspicion is that the wireless carrier's
costs were "less," because the wireless carrier did not account for
many of the investments and obligations that it counts on the
wireline network to make in its behalf.
A least-cost-provider approach to universal service may result
in a race to the lowest-common-denominator of network
investment. The company that can invest the least would receive
universal service, despite what services may or may not be
available as a result of such minimal investment. If the least-cost
provider happens to have little, if any, backbone infrastructure then
consumers will have little effective access to "universal"
communications capabilities because the "more expensive"
infrastructure provider would not be able to recover its investment.
Again, as noted above, continual investment in access to
ubiquitous, quality, advanced telecommunications networks
facilitates all applications and services that are dependent on such
an underlying infrastructure, including quality wireless services
and new Internet-based services.
Finally, a least-cost provider approach relies on an affirmative
showing of providers' actual costs of providing service (however
"costs" and "service" are defined.) Wireless carriers do not
provide any sort of cost data and at least to date have strongly
resisted revealing any cost information for public scrutiny.
4a. In his testimony, Mr. Garnett asserts that "the high-cost
mechanisms subsidize incumbent carriers based on what they
spend.not necessarily based on whether they actually serve
customers located in a rural, high-cost area." Do you agree with
the accuracy of this statement? Please explain your answer.
I disagree with Mr. Garnett's statement. Rural carriers by
definition serve customers located in rural, high-cost areas. As I
noted in my testimony, Montana's rural telcos serve on average
fewer than three access lines per mile. Moreover, only
expenditures "for the provision, maintenance and upgrading of
facilities and services for which the support is intended" are
permitted. Incumbent ETCs must file revenue requirements,
comply with extremely detailed cost accounting standards and be
subject to audits by the National Exchange Carriers Association
(NECA) as well as the Universal Service Administrative
Corporation (USAC). (Wireless ETCs, on the other hand, have no
cost accounting standards, since they automatically receive the
incumbent's level of universal service support under the identical
support rule.)
As noted earlier, universal service supports network
investment, not per customer investment. (See also discussion of a
voucher system, below.) Mr. Garnett also implies that rural, high-
cost incumbent carriers receive more universal service support the
more they need. This is the "gold plating" allegation. However, as
noted above, rural carriers are actually creating efficiencies and
drawing less support from the Fund while providing more services
through their continual investment in advanced more efficient and
effective technologies. Moreover, rural carriers' investments are
fully accounted for, contrary to the windfalls that wireless ETCs
receive as a result of the identical support rule. Rural telcos'
investment in rural, high-cost areas, supported in part by universal
service, have resulted in tangible, significant benefits to rural
American consumers and to the nation's economy in general.
Economic opportunity is not limited to a single geographic area.
Total economic activity is enhanced by continual investment in the
nation's telecommunications infrastructure and by access to this
investment by all consumers, no matter where they live.
Therefore, I disagree with the assertion that such investment
fails to benefit consumers located in rural, high cost areas-as well
as consumers in urban areas who in turn benefit from ubiquitous
access to consumers and businesses anywhere in the nation or the
world.
4b. Do you believe that subsidizing incumbent carriers (or any
carriers) based on what they spend rather than who they actually
serve is the right policy outcome? Please explain your answer.
I believe that universal service support should be based on an
ETC's own verifiable costs associated with the provision of
supported services. Rural telecom providers have demonstrated
clearly that universal service support is money invested in
supported services and has resulted in deployment of affordable,
quality, advanced telecommunications capabilities to Americans
living in high-cost rural areas.
I do not believe that universal service should support
individuals rather than networks. This concept often is referred to
as a "voucher system." First, ETCs must by law (47 U.S.C 214(e))
serve an entire study area (unless granted a smaller, re-defined
service area, a concept with which MTA does not necessarily
concur as it invites gaming, arbitrage and creamskimming).
Universal service therefore supports network investment. It cannot
support costs associated with providing access to
telecommunications services to one consumer and not a different
consumer next door. Much like a primary line restriction,
implementation of a customer-specific voucher system would be
nearly impossible. How would you determine which customer
receives universal service and who does not? What sort of
information would be required to be divulged by consumers to
what government entities? How would a voucher mechanism, if
one could be devised, be policed? Would telephone companies be
expected to investigate whether consumers are eligible or ineligible
for universal service? What enforcement mechanisms would be
required? What if the "ineligible" consumer moves and an
"eligible consumer" moves into the same residence using the same,
previously unsupported line?
In short, a voucher system ignores network/infrastructure costs.
The network needs to be built, operated, maintained and upgraded
regardless of who is on the end of the line placing and receiving
communications.
5. As Mr. Garnett points out in his testimony, "CTIA has proposed
combining the current five high-cost universal service mechanisms
into one mechanism that calculates support based on the most
efficient technology-whether wireline or wireless-in a small
geographic area." Please comment on whether you support or
oppose such a proposal and why?
In my response to question 3b, I explained that supporting the
least-cost provider may not result in sufficient investment in
telecommunications infrastructure upon which a variety of
telecommunications applications, including wireless and VOIP,
depend.
Similarly, supporting the most "efficient" technology could
lead to similar consequences. Also, comparing apples to apples
again would be problematic. How would one compare the
efficiency of a portion of high frequency spectrum to the efficiency
of fiber optics? I might argue, for example, that nothing beats the
unlimited bandwidth and therefore efficiently of fiber optics, as
measured on a cost-per-byte basis since there is practically no limit
to the amount of data one can push down fiber. However a
spectrum advocate might argue that transmitting data through the
air is more efficient than transmitting it through glass
(notwithstanding the fact that the communications eventually end
up being transmitted through wired-most likely fiber-
infrastructure.) Further does, or should, an efficiency analysis
include such factors as quality, redundancy, reliability, bandwidth,
etc? Does support for an efficient technology limit consideration
to other network factors? As noted above, rural telcos are
investing in more efficient technologies and thereby providing
more robust service options for consumers while simultaneously
drawing less universal service support. Would support be directed
at one "technology" at the expense of investment in a network?
Mr. Garnett suggests a cost model could be used to calculate
support. Unfortunately, no cost model has yet been devised that
accurately depicts the actual costs of investing in and operating a
telecommunications network. In fact, existing cost models are so
complicated that only a few carriers have been able to run them on
their systems. And those that have have found interesting
anomalies. For example, some rural carriers would receive more,
not less, universal service support if they used existing cost
models.
In conclusion, MTA does not contest the assertion that the
Universal Service Fund is threatened by the dual problem of
diminishing revenues combined with uncontrolled, increasing
distribution growth. MTA believes that universal service is as
valid today as it has ever been. Perhaps it is even more important
than ever before, as advanced telecommunications capabilities are
essential to our nation's economic vitality and competitiveness.
The revenues side of universal service funding can be addressed by
broadening the base of contributions to include all communications
providers (who, after all, rely on a robust, ubiquitous, advanced
telecommunications network infrastructure). And the uncontrolled
growth on distribution side of the universal service funding
equation can be addressed effectively by controlling the
designation of new ETCs and eliminating the automatic portability
of incumbent support levels regardless of a carrier's own costs.
More radical recommendations such as a primary line restriction, a
voucher system, or a least-cost/most-efficient-technology approach
are untested, highly problematic approaches which very likely
could result in less investment in our nation's telecommunications
infrastructure at a time when we should be promoting ubiquitous,
affordable access to the most advanced telecommunications
capabilities we can deploy.
H.R.5072 incorporates many of the suggestions I have made
herein regarding reasonable approaches to resolving the current
contribution and distribution deficiencies facing the Universal
Service Fund. As I mentioned in my testimony, MTA endorses
H.R.5072 and strongly urges the Energy and Commerce
Committee to adopt the provisions of this legislation.
Finally, I should note that while my responses reflect my views
and those of the Montana Telecommunications Association, these
responses encompass the views of hundreds U.S. rural
telecommunications providers and others nationwide.
It is an honor to have this opportunity to respond to the
Subcommittee's interest in universal service. Please do not
hesitate to contact me if I can be of any further assistance.
Respectfully submitted,
/s/
Geoff Feiss, General Manager
Montana Telecommunications Association
208 North Montana Avenue, Suite 105
Helena, Montana 59601
[email protected]
406.442.4316
RESPONSE FOR THE RECORD OF DR. MARK COOPER, DIRECTOR OF
RESEARCH, CONSUMER FEDERATION OF AMERICA
1) In his testimony, Director Marron states that "[s]pending
for [the high cost] program could be curbed by limiting high-
cost support to one connection per household, by basing
support on each carriers own costs rather than on a cost
standard set by the incumbent carrier, or both. Please
comment on whether you agree with these two reform
proposals and explain your answer.
The designation of a single USF line explicitly violates the
language of section 254 of the Act, which states:
"Consumers in all regions of the Nation, including low income
consumers and those in rural, insular and high cost areas, should
have access to telecommunications and information services,
including interexchange access services and advanced
telecommunication and information services that are reasonably
comparable to those services provided in urban area and that are
available at rates that are reasonably comparable to rates charged
for similar services in urban areas." I believe that this broad
commitment to universal service should not be abandoned. Second
lines in rural areas are telecommunications service that would no
longer be available at reasonable rates.
The designation of a single USF eligible line would likely
discourage investment in rural areas, as well as be administratively
difficult to implement. How is a household defined? Who in each
dwelling gets the authority to make the designation of primary
line? A possible compromise that would reign in the growth of
ETC cost is the implementation of so-called "reverse auctions" that
does not restrict the services to be provided. The Commission
could design a process that would award subsidies to the lowest
provider bidder plus all other bidders within a certain range of that
figure. This built-in ex ante competition comes with a trade-off:
the benefits of in-market competition and the costs associated with
giving subsidies to less efficient bidders. However, if the auction
is designed well, consumers will still enjoy the benefits of
competition - particularly on vertically integrated services -
while overall program costs are kept in check.
I agree that USF distributions should be based on each carrier's
own forward looking cost, and not the cost of the incumbent.
There is a perverse outcome to the current system - as ETC's
capture incumbent customers, the incumbent's per line costs
increases, which in turn increases the total subsidy to both the
incumbent and the competitor. Engineering models have advanced
to the point where accurately determining own-forward looking
costs is completely feasible, and there is no good reason to
continue with the status quo.
2a) In February 2004, the Federal-State Joint Board on
Universal Service recommended supporting a single connection
per household as a means of reducing excessive growth in the
fund; "We believe that limiting the scope of high-cost support
to a single connection the public telephone network would be
more consistent with the goals of section 254 than the present
system." Please comment on whether you agree or disagree
with this statement and explain your answer.
It is simply impossible to read the Act and reach that
conclusion. The designation of a single USF line explicitly
violates the language of section 254 of the Act, which states:
"Consumers in all regions of the Nation, including low income
consumers and those in rural, insular and high cost areas, should
have access to telecommunications and information services,
including interexchange access services, that are reasonably
comparable to those services provided in urban area and that are
available at rates that are reasonably comparable to rates charged
for similar services in urban areas." I believe that this broad
commitment to universal service should not be abandoned.
In 2004, the Federal-State Joint Board proposed limiting USF
support to just a single customer-designated primary line.
However, the FCC never acted on this recommendation. The
Joint Board members who dissented in the 2004 decision were
concerned that the designation of a single USF eligible line would
discourage investment in rural areas, as well as be administratively
difficult to implement. Prior to issuing the recommendation, the
Joint-Board received a letter from Senators of both parties stating
that a primary line designation policy would be "a major step
backward that would thwart the essential purpose of universal
service".
Limiting service to a single line would harm consumers by
limiting competition and raising prices. Carriers would be
unwilling to invest in network upgrades in rural areas due to
uncertainty, which in light of the current problems with the digital
divide is unacceptable. Reverse auctions are a better way of
addressing the concerns with the growth of ETC distributions
while maintaining maximum consumer benefits.
2b) The Joint Board also determined "Section 254(b)(3)
encourages access to connectivity, however, not unlimited
connects at supported rates. Advanced services increasingly
are being provided along with voice services over a single
connection. Nothing in the Act supported the argument that
multiple connections should be supported for access to dial-up
Internet access or fax services, neither of which is a supported
service." Please comment on whether you agree or disagree
with this statement and explain your answer.
Disagree. Section 254(b)(3) of the statute directs the FCC to
make reasonably comparable services available to consumers
nationwide at reasonably comparable rates. "Consumers in all
regions of the Nation, including low-income consumers and those
in rural, insular and high cost areas, should have access to
telecommunications and information services, including
interexchange services and advanced telecommunications and
information services, that are reasonably comparable to those
services provided in urban areas and are available at rates that are
reasonably comparable to rates charged for similar services in
urban areas." The section gives a long list of services that covers
all of the services which the Joint board would like to cut out.
Dial-tone is a telecommunications services. Fax and Internet are
applications that flow over a telecommunications service. They
are information services or advanced information services that are
directly covered by the section as well. Notice the emphasis on
access in addition to rates. Also notice how the Act covers
advanced telecommunications services and information services in
addition to basic services. Limiting support to a single dial tone
line would deny rural households access to 21st century critical
advanced services.
2c) The Joint Board also concluded "We believe that further
growth due to supporting multiple connections presents a
significant threat to fund sustainability." Please comment on
whether you agree or disagree with this statement and explain
you answer.
The growth in ETC support is a part of the concern about the
stability of the Fund. However, the real problem is with how rural
incumbent carriers are supported (historical costs versus forward
looking costs) and how ETC's are supported (based on the
incumbents cost, not their own cost). Addressing these flaws in
the Fund will strengthen the long-term viability of the program,
without harming consumers or running counter to the purpose of
the Act.
3a) Should only one provider receive universal service support
in any given area? Please explain your answer.
Universal support should be administered in a manner that
fulfills the purpose of section 254 of the Act: providing reasonably
comparable telecommunications and advanced information
services to all Americans. If the Commission implements a well
designed reverse auction program, and only one carrier bids for
support, then that carrier will be the sole recipient of support.
However, it runs counter to the purpose of the Act to arbitrarily
limit support to one carrier.
3b) Should only the provider that can serve the area at the
lowest possible cost receive the universal service support?
Please explain your answer.
The purpose of the universal service fund is to ensure
reasonably comparable services at reasonably comparable rates for
consumers. One carrier in an area could be designated as the sole
recipient of universal service support only if that carrier stood
ready to serve al consumers in the area at reasonably comparable
rates. The reverse auction is the way to accomplish this. Other
approaches that cut off support to a carrier might leave customers
unable to obtain reasonably comparable services at reasonably
comparable rates.
4a) In his testimony, Mr. Garnett asserts that "high-cost
mechanisms subsidize incumbent carriers based on what they
spend...not necessarily based on whether they actually serve
customers in a rural, high cost area." Do you agree with the
accuracy of this statement? Please explain your answer.
This statement is not wholly accurate. Small rural incumbent
carriers (as designated by the Commission, not "rural" per se in a
geographic sense) receive high-cost support based on their historic
embedded costs, and not their forward looking long-run
incremental costs. In addition, many of these carriers are subject
to rate-of-return regulation and not price-cap regulation. Thus,
they do not have much incentive to hold down costs. This could be
easily remedied by moving these carriers in line with the
regulatory treatment of RBOC and other non-rural carriers.
4b) Do you believe that subsidizing incumbent carriers (or any
carriers) based on what they spend rather than who they
actually serve is the right policy? Please explain you answer.
Carriers should be subsidized for delivering high cost services
to consumers at rates that are reasonably comparable to the rates
for urban customers. Given that consumers have the freedom to
join and leave a network as they wish; it is not the right framework
to think of support exclusively based on customers "actually
served". Providers have to make decisions about rolling out and
maintaining infrastructure. Since many rural and high cost areas
lack competition, rates in those areas are and must remain
regulated. Regulation should ensure that what carriers spend to
serve customers should be the efficient, forward looking cost of
serving those customers.
5) As Mr. Garnett point out in his testimony, "CTIA has
proposed combining the current five high-cost universal
service mechanisms into one mechanism that calculates
support based on the most efficient technology - whether
wireline or wireless - in a small geographic area." Please
comment on whether you support or oppose such a policy
proposal and why?
If the goal of the Act is to ensure "access to
telecommunications and information services, including
interexchange services and advanced telecommunications and
information services, that are reasonably comparable to those
services provided in urban areas and are available at rates that are
reasonably comparable to rates charged for similar services in
urban areas", then basing costs on a single technologies own-cost
is bad public policy. It will leave consumers unserved. Moreover,
it is important not to allow inferior services to set an artificially
low figure for support. If a given technology cannot deliver the
full range of telecommunications and advanced
telecommunications, information and advanced information
services, but it were used to set the subsidy, it would undermine
access to the services contemplated by the Act. That said,
regulators should drive costs to the level of forward looking
economic cost. A better way is to base it on each carriers own-
cost, and pick a host of carriers through a system of reverse
auctions.
Wireless Communications and Universal Service by Bob Rowe, Senior Partner, Balhoff & Rowe,
LLC @ Columbia Institute for Tele-Information. Slide 12.
For a thorough discussion of the challenges associated with deploying rural telecommunications
networks, see White Paper #2 of the Rural Task force, an independent advisory panel appointed by
the Federal-State Joint Board on Universal Service to provide guidance on universal service issues
affecting the telecom industry. The panel comprised experts from all facets of the industry,
including local, long distance, wireline, wireless, etc.
http://www.wutc.wa.gov/rtf/old/RTFPub_Backup20051020.nsf/?OpenDatabase. January, 2000.
47 U.S.C. 254(b).
See Organisation for Economic Cooperation and Development (OECD). Broadband Statistics,
December, 2005.
http://www.oecd.org/document/39/0,2340,en_2649_34223_36459431_1_1_1_1,00.html.
Universal Service Administrative Corporation (USAC): 3Q 2005; Appendices HC 01 and HC 05.
See Reply Comments of the Montana Public Service Commission. In the Matter of the Federal-
State Joint Board on Universal Service, Request for Comments on Certain of the Commission's
Rules Relating to High-cost Universal Service Support. CC Docket No. 96-45. December 14, 2004.
"To further illustrate the need to eliminate the identical support rule we offer the following
information. Western Wireless' CEO, John Stanton, in his presentation to this fall's Qwest Regional
Oversight Committee (ROC) meeting of September 12 and 13, [2004] Missoula, Montana, presented
estimates of relative wireline and wireless investment costs. Those costs are as follows: (1) national
wireline carriers' cost is $2,492; (2) national wireless carriers' cost is $920; (3) rural wireline
carriers' cost is $7,195; and (4) rural wireless carriers' cost is $1,734. It is apparent from the
presentation that to base support to wireless carriers upon the cost of the ILEC would bequeath an
extraordinary subsidy to the wireless industry." [Emphasis added.]
For example, Texas, Mississippi, and Kansas are the largest recipients respectively of universal
service high cost support. Universal Service Administrative Corporation (USAC). HC02, High Cost
Support by State, 1st Qtr., 2006. http://www.universalservice.org/about/governance/fcc-
filings/2006/Q1/HC02%20-%20High%20Cost%20Support%20Projected%20by%20State%20-
%201Q2006.xls.
The Consumer Federation of America is the nation's largest consumer advocacy group, composed
of over 280 state and local affiliates representing consumer, senior, citizen, low-income, labor, farm,
public power and cooperative organizations, with more than 50 million individual members.
Consumers Union is a nonprofit membership organization chartered in 1936 under the laws of the
state of New York to provide consumers with information, education and counsel about good,
services, health and personal finance, and to initiate and cooperate with individual and group efforts
to maintain and enhance the quality of life for consumers. Consumers Union's income is solely
derived from the sale of Consumer Reports, its other publications and from noncommercial
contributions, grants and fees. In addition to reports on Consumers Union's own product testing,
Consumer Reports with more than 5 million paid circulation, regularly, carries articles on health,
product safety, marketplace economics and legislative, judicial and regulatory actions which affect
consumer welfare. Consumers Union's publications carry no advertising and receive no commercial
support.
Free Press is a national, nonpartisan organization with over 225,000 members working to increase
informed public participation in crucial media and communications policy debates.
Communications Ac of 1934, 47 USC 151.
See for example the work of Mark Cooper: "Disconnected, Disadvantaged, Disenfranchised:
Explorations in the Digital Divide," Consumer Federation of America and Consumers Union,
October 2000, http://www.consumersunion.org/pdf/disconnect.pdf; "Expanding the Digital Divide
and Falling Behind on Broadband," Consumer Federation of America and Consumers Union,
October 2004, http://www.consumersunion.org/pub/ddnewbook.pdf.
Mark Cooper, "Universal Service: A Historical Perspective and Policies for the Twenty-First
Century," Consumer Federation of America and the Benton Foundation, 1996.
See for example, FCC Chairman Kevin Martin, "United States of Broadband," Wall Street Journal,
July 7, 2005.
See Peter Bell, Pavani Reddy, and Lee Rainie, "Rural Areas and the Internet," Pew Internet and
American Life Project, February 17, 2004, http://www.pewinternet.org/PPF/r/112/report_display.asp
Yankee Group Research, Inc. February 2006, cited at
http://www.emarketer.com/article.aspx?1003833
See John Horrigan, "Broadband in the United States: Growing but Slowing," Pew Internet and
American Life Project, September 21, 2005,
http://www.pewinternet.org/PPF/r/164/report_display.asp
Wireless Communications and Universal Service by Bob Rowe, Senior Partner, Balhoff & Rowe,
LLC @ Columbia Institute for Tele-Information. Slide 12.
2 In the Matter of the Multi-Group (MAG) Plan for Regulation of Interstate Services of Non-Price
Cap Incumbent Local Exchange Carriers and Interexchange Carriers CC Docket 00-256, Federal-
State Joint Board on Universal service CC Docket 96-45, Access Charge Reform for Incumbent
Local Exchange Carriers Subject to Rate of Return Regulation CC Docket No. 98-77, and
Prescribing the Authorized Rate of Return for Interstate Services for Local Exchange Carriers CC
98-166, FCC 01-304, 142 (rel. November 8, 2001) (MAG Order), Separate Statement of
Commissioner Kevin J. Martin. (MAG Order), Separate Statement of Commissioner Kevin J. Martin.
Alenco Communications, Inc. v. FCC, 201 F.3d 608, 620 (5th Cir. 2000).
Id. (emphasis in original).
Id.
Alenco, 201 F.3d at 620.
Id.
Id.