[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.
