[Senate Hearing 109-623]
[From the U.S. Government Publishing Office]



                                                        S. Hrg. 109-623
 
                           USF CONTRIBUTIONS

=======================================================================

                                HEARING

                               before the

                         COMMITTEE ON COMMERCE,
                      SCIENCE, AND TRANSPORTATION
                          UNITED STATES SENATE

                       ONE HUNDRED NINTH CONGRESS

                             SECOND SESSION

                               __________

                           FEBRUARY 28, 2006

                               __________

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



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       SENATE COMMITTEE ON COMMERCE, SCIENCE, AND TRANSPORTATION

                       ONE HUNDRED NINTH CONGRESS

                             SECOND SESSION

                     TED STEVENS, Alaska, Chairman
JOHN McCAIN, Arizona                 DANIEL K. INOUYE, Hawaii, Co-
CONRAD BURNS, Montana                    Chairman
TRENT LOTT, Mississippi              JOHN D. ROCKEFELLER IV, West 
KAY BAILEY HUTCHISON, Texas              Virginia
OLYMPIA J. SNOWE, Maine              JOHN F. KERRY, Massachusetts
GORDON H. SMITH, Oregon              BYRON L. DORGAN, North Dakota
JOHN ENSIGN, Nevada                  BARBARA BOXER, California
GEORGE ALLEN, Virginia               BILL NELSON, Florida
JOHN E. SUNUNU, New Hampshire        MARIA CANTWELL, Washington
JIM DeMINT, South Carolina           FRANK R. LAUTENBERG, New Jersey
DAVID VITTER, Louisiana              E. BENJAMIN NELSON, Nebraska
                                     MARK PRYOR, Arkansas
             Lisa J. Sutherland, Republican Staff Director
        Christine Drager Kurth, Republican Deputy Staff Director
             Kenneth R. Nahigian, Republican Chief Counsel
   Margaret L. Cummisky, Democratic Staff Director and Chief Counsel
   Samuel E. Whitehorn, Democratic Deputy Staff Director and General 
                                Counsel
             Lila Harper Helms, Democratic Policy Director


                            C O N T E N T S

                              ----------                              
                                                                   Page
Hearing held on February 28, 2006................................     1
Statement of Senator Burns.......................................     4
    Prepared statement...........................................     5
Statement of Senator DeMint......................................     6
Statement of Senator Dorgan......................................    40
    Prepared statement...........................................    41
Statement of Senator Pryor.......................................    46
Statement of Senator Rockefeller.................................     7
Statement of Senator Smith.......................................    45
Statement of Senator Snowe.......................................    41
    Prepared statement...........................................    42
Statement of Senator Stevens.....................................     1
    Prepared statement...........................................     2
    Prepared statement of Senator Inouye.........................     2
Statement of Senator Sununu......................................     3

                               Witnesses

Boaldin, Trent, President, Epic Touch Company; on behalf of the 
  United States Telecom Association (USTelecom)..................    20
    Prepared statement...........................................    22
Cramer, Bonnie, Member, AARP Board of Directors..................    23
    Prepared statement...........................................    26
Garnett, Paul W., Assistant Vice President, Regulatory Affairs, 
  CTIA--The Wireless Association'.....................    28
    Prepared statement...........................................    30
Post, Glen, Chairman/Chief Executive Officer, CenturyTel, Inc....     9
    Prepared statement...........................................    11
Simmons, Tom, Vice President of Public Policy, Midcontinent 
  Communications.................................................    16
    Prepared statement...........................................    17

                                Appendix

IDT Corporation (IDT), prepared statement........................    56
National Association of State Utility Consumer Advocates 
  (NASUCA), prepared statement...................................    51
Nelson, Hon. E. Benjamin, U.S. Senator from Nebraska, prepared 
  statement......................................................    51
Pollak, F.J., President/CEO, TracFone Wireless, Inc., prepared 
  statement......................................................    59
Turicchi, Scott, President/Chief Financial Officer, j2 Global 
  Communications, Inc............................................    61


                           USF CONTRIBUTIONS

                              ----------                              


                       TUESDAY, FEBRUARY 28, 2006


                                       U.S. Senate,
        Committee on Commerce, Science, and Transportation,
                                                    Washington, DC.
    The Committee met, pursuant to notice, at 10 a.m. in room 
SD-106, Dirksen Senate Office Building, Hon. Ted Stevens, 
Chairman of the Committee, presiding.

            OPENING STATEMENT OF HON. TED STEVENS, 
                    U.S. SENATOR FROM ALASKA

    The Chairman. I want to thank you all for coming. This is 
the Universal Service Fund hearing, and we've been through a 
series of hearings now on telecommunications. This is the first 
one dedicated to Universal Service.
    This concept plays a critical role in ensuring that all 
Americans have access to our Nation's communications system. 
From low-income seniors in the Hawaiian Islands to our Eskimo 
people along the Arctic Ocean, without Universal Service, just 
having a dial tone would average about $200 a month, putting 
telephone service out of the reach of the average family who 
lives in those areas.
    Now, Universal Service began largely as an industry effort 
following the concept, that Senator Inouye and I developed, of 
rate integration. As I've said many times, we remember the days 
that we looked at the television and saw the ads for long-
distance, ``These rates apply throughout the United States, 
except for Alaska and Hawaii.'' Now, that was one thing while 
we were territories, but, once we became a State, it was not 
acceptable. So, Universal Service began, and people living in 
high-cost areas would pay the same phone rates as those living 
in low-cost areas. And the system has evolved now to the 
complex Universal Service Fund that we deal with today.
    The changing face of communications has presented new 
challenges to this Fund, but I think we ought to keep in mind 
that the revenues come only from interstate revenue from the 
telecommunications services, a dwindling rate base. 
Competition, bundled packages and new services, and it's 
resulted in an age where long-distance revenues are declining, 
and that jeopardizes the basic funding for Universal Service.
    Now, I'm going to put the rest of my statement in the 
record, because I don't believe in long statements. But I do 
believe that, as a result of the Supreme Court's decision in 
Brand X, and then the FCC's decision that DSL is not a 
telecommunications service, Congress must examine the whole 
system. And, in response to these market, judicial, and 
regulatory developments, we have to listen and learn to 
determine what should be done to continue this vital service 
for those who are in need of it.
    [The prepared statement of Senators Stevens and Inouye 
follow:]

    Prepared Statement of Hon. Ted Stevens, U.S. Senator from Alaska
    We've been through a series of hearings now on telecommunications. 
This is the first one dedicated to Universal Service.
    This concept plays a critical role in ensuring that all Americans 
have access to our Nation's communications system, from low-income 
seniors on the Hawaiian Islands to our Eskimo people along the Arctic 
Ocean. Without Universal Service, just having a dial tone would average 
about $200 a month, putting telephone service out of reach of the 
average family who lives in those areas.
    Universal Service began largely as an industry effort following the 
concept that Senator Inouye and I developed of rate integration. As 
I've said many times, we remember the days that we looked at the 
television and saw on ads for long-distance, ``These rates apply 
throughout the United States except for Alaska and Hawaii.'' Now that 
was one thing while we were territories, but once we became a State, it 
was not acceptable.
    So, Universal Service began and people living in high-cost areas 
could pay the same phone rates as those living in low cost areas and 
the system has evolved now into the complex Universal Service Fund that 
we deal with today.
    The changing face of communications has presented new challenges to 
this Fund. But, I think we ought to keep in mind that the revenues come 
only from interstate revenue from telecommunications services--a 
dwindling rate base. Competition, bundled packages and new services 
have resulted in an age where long-distance revenues are declining and 
that is jeopardizing the funding basic for Universal Service.
    Long-distance calls are now migrating away from traditional 
interstate companies like AT&T to new delivery systems--from calling 
cards, some of which are evading their USF obligations, to cell phones 
which pay USF on only 28.5 percent of their revenues. The Supreme 
Court's recent Brand X decision held that cable modem service is not a 
telecommunications service and therefore not subject to USF. Together 
with the subsequent FCC decision that DSL is not a telecommunications 
service either, means that IP telephony services may not be required to 
pay into the Fund.
    In response to these market, judicial, and regulatory developments, 
today, we bring together the various parties to listen and learn what 
can and should be done to ensure the continuation of Universal Service.
    Our diverse panel representing wireline, cable, cellular and 
consumer perspectives will help us understand the impacts of some of 
the proposals to broaden the support base for Universal Service.
    We will hold a separate hearing to examine what services Universal 
Service should support, and who should receive support through the 
Fund.
                                 ______
                                 
 Prepared Statement of Hon. Daniel K. Inouye, U.S. Senator from Hawaii
    If we want to ensure that our citizens have the best communications 
capabilities and are able to compete in the global economy, we must 
preserve the sufficiency, stability and viability of the Universal 
Service Fund. Since the enactment of the Communications Act of 1934, 
Congress has long-supported the core belief that basic 
telecommunications services should be available to all Americans at 
reasonable rates.
    Through the Telecommunications Act of 1996, we reaffirmed our 
commitment to the principle of Universal Service.
    We ensured that the definition of Universal Service would capture 
``an evolving level of telecommunications services.'' We did not want 
to leave behind rural and low-income areas as technology continued to 
march ahead.
    Additionally, Congress expanded the Universal Service commitment to 
include schools, libraries, and rural health care providers, as well as 
other eligible telecommunications carriers. Congress recognized that as 
telecommunications services reach more and more individuals, all 
Americans benefit.
    The current funding mechanism is under increasing pressure as new 
Internet technologies and bundled wireless and competitive service 
offerings steadily diminish the funding base. At the same time, total 
Universal Service disbursements have increased from $1.8 billion in 
1997 to $6.5 billion in 2005.
    The rapid increase in the size of the Fund coupled with the decline 
in interstate revenues has prompted the FCC to institute stopgap 
measures to temporarily stabilize the collection mechanism. 
Unfortunately, neither the FCC nor Congress has made the difficult 
choices to ensure the future stability of the collection mechanism.
    In addition to reforming the collection mechanism, we must 
determine how best to distribute the Universal Service funds that are 
collected. For instance, the 1996 Act expanded the Universal Service 
Fund to support rural health services. Yet, while this fund is capped 
at $400 million per year, only $25.57 million was distributed in 2005.
    This program has the potential to improve the health of millions of 
Americans that otherwise would not have access to adequate health care 
services. In rural and remote states like Hawaii and Alaska, tele-
health services have provided significant benefits to people on remote 
islands or in isolated areas who otherwise would not have access to 
doctors and specialists. We must take steps to improve the efficacy of 
this program.
    Issues surrounding application of the Antideficiency Act threaten 
to, once again, disrupt Universal Service funding. We must make certain 
this does not happen. Congress has twice instituted an exemption to 
prevent disruptions. It is time we take permanent action. The programs 
that face the greatest jeopardy include the Schools and Libraries and 
Rural Health funds. We should not risk education and health programs 
while debating technicalities in Washington.
    Finally, we must consider the effect of emerging competition on the 
Universal Service Fund. In the 1996 Act, Congress plainly sought to 
further the co-equal goals of preserving Universal Service and 
fostering local competition. The fulfillment of one goal should not, 
and need not come at the expense of the other.
    Recent data indicate that the percentage of Universal Service 
support provided to competitive eligible telecommunications carriers, 
while small, is increasing. This is placing increased pressure on the 
Fund, but it is also bringing new services to rural communities and 
underserved tribal lands.
    I commend Senators Dorgan, Pryor, Burns, and Smith for introducing 
constructive legislation and hope that the Committee will make 
Universal Service reform a priority this year.
    I would appreciate the witnesses' insights on the steps we should 
take to ensure that we meet the twin goals of preserving Universal 
Service and fostering competition.

    The Chairman. Gentlemen, our diverse panel represents 
wireline, cable, cellular, and consumer perspectives. And I 
hope they will help us understand the impacts of the problems 
of the system, and proposals to broaden the support base for 
Universal Service, and its necessity to continue it.
    I believe Senator Sununu was next.

               STATEMENT OF HON. JOHN E. SUNUNU, 
                U.S. SENATOR FROM NEW HAMPSHIRE

    Senator Sununu. Thank you very much, Mr. Chairman. I do not 
have an extended opening statement.
    I'm glad we're having this hearing focused on Universal 
Service. This is obviously the first part. We're focusing on 
collections. I understand that. But, you know, we need to be 
talking about real reform. I think there is growing consensus 
about broadening the base. I happen to support the proposal put 
forward by FCC Chairman Martin to go to a numbers-based system. 
I know we're going to hear from a number of panelists 
supporting that approach. But real reform also means addressing 
the distribution issue and making sure that the distribution 
methodology does what it should do for those high-cost areas 
you talked about for rural America. That's what the intent of 
the program is. I think we can do a much better job.
    We're spending a lot of money. We're talking about 5 and 6 
and 7 and 8 billion dollars a year. We can do a much better job 
targeting that assistance for high-cost areas or urban areas 
where there's an economic need, and in rural America.
    So, I just hope that as we get through this hearing and 
into the next hearing, we talk honestly about fixing and 
improving the distribution methodology, and that we also talk 
about intercarrier compensation. I think that's something that 
we do need to look at reforming. I think it should be much 
simpler. I don't think it--intercarrier compensation should be 
used as a subsidy mechanism. That's why we have Universal 
Service. So, I think we can look at better using Universal 
Service in order to achieve its goals, and, therefore, allow us 
to simplify and reform an intercarrier compensation, which also 
costs consumers real money.
    So, I'm glad we're having this hearing, but I certainly 
think that some of the participants that are interested in 
these reforms need to be represented on our panels. And, 
obviously, we want to make sure we have panels that include 
some of the biggest payers of Universal Service--I'm sure they 
have an opinion--as we undertake these important reform 
proposals.
    Thank you, Chairman.
    The Chairman. Thank you, Senator.
    Senator Burns?

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

    Senator Burns. Thank you very much, Mr. Chairman. And thank 
you for holding this hearing. And finally we get something 
moving, because the year is running out. And I happen to be one 
in the camp that we've got to pass this bill this year. And it 
can't go any longer, unless--and we'll never--if we don't, why, 
we're never going to get to the point of talking about 
distribution.
    And I want to also congratulate Senator Sununu. He's given 
a lot of thought to distribution. And I have, too. And we know 
that even in Universal Service--and, as important as it is to 
rural telecommunications, I will liken that to the day that we 
got REA, rural electrification. There's some folks on our side 
of the aisle that don't like REA, too. But I will tell you, had 
it not been for them, those of us who live on farms and ranches 
across this country, we'd be watching television by candlelight 
if we didn't have it. And we'd also be, without Universal 
Service. There's a lot of us that wouldn't have telephones. We 
couldn't afford them in some of our areas, because--Senator 
Stevens, from Alaska, represents a State that has got quite a 
lot of dirt between light bulbs, just like Montana. And so, we 
know it's necessary, for us to survive in rural areas.
    Now, I would agree with Senator Sununu in one area. There 
is a point of diminishing returns, when it comes to Universal 
Service, if it's not used correctly. And we know there's some 
abuse. We know that it's used for--in some areas where it was 
never intended to be used in those. And I think, as we go along 
with this debate, those places will be identified. I would hope 
we could identify them and be like the Senator and say, ``OK, 
let's talk very frankly about the effect this policy has in 
some areas of our country,'' because one size does not fit all, 
in some cases. So, we have to take a look at that.
    I have already introduced a bill, and--but I use--there's 
quite a lot of flexibility in this, even on the contribution 
side. But one of these days, we're going to have to look at the 
distribution and be very honest about ourselves and what we 
said, because we can change the effects of communications, by 
policy alone, and I think we should be doing that.
    If you would have told me that rural telephones would have 
had competition in that area, such as eastern Montana, 20 years 
ago, I would have looked at you like you've been smoking 
something funny. But it's happening, and it's happening, of 
course, because of wireless. And it's happened because some 
very visionary people are starting to go into rural areas and 
put in new technologies, new ways of doing business, as far as 
our communication is concerned, even--not only from voice. And, 
as you know, digital changed the whole thing. We're just ones 
and zeros now, folks. You can't brand anything just ones and 
zeros and call it your own anymore. Now, I understand that they 
can really--the techies can boil it down, whether it's voice, 
data, or video, but the average kind of person can't look at a 
signal anymore and identify what kind of a signal it really is. 
So, that changed our--that, too, changed the landscape of how 
we do business in telecommunications.
    So, thank you, Mr. Chairman for having this. I have a 
statement that I would like to put in the record, because--I'm 
glad this debate is underway now, because we've got to move on 
this piece of legislation this year. I think it's--and it's 
really important that we do so.
    And I thank the Chairman.
    [The prepared statement of Senator Burns follows:]

   Prepared Statement of Hon. Conrad Burns, U.S. Senator from Montana
    Congress and this Nation have had a commitment to a Universal 
Service for almost 100 years--a commitment to make affordable telephone 
service available to as many Americans as possible--rural or urban, 
rich or poor. The core principles behind Universal Service are to 
provide the same opportunities for rural Americans to participate in 
the Nation's educational and economic system that exist for Americans 
in urban areas.
    The Universal Service Fund helps keep telephone service affordable 
in high-cost areas such as Montana, helps ensure that schools and 
libraries receive access to Internet, and helps link rural health care 
facilities to urban medical centers, promoting telemedicine.
    Without support from the Universal Service Fund phone bills in 
high-cost areas around the country would increase dramatically--For 
example an average Montanan living in a rural area would pay an 
additional $329.97 each year to receive telecommunications services. 
Many schoolchildren would not have access to the Internet--access vital 
to help children do homework, conduct research and compete in a global 
economy. Many people in remote communities would not have access to 
health care using the Internet--an important issue in Montana where 
many counties do not even have a doctor.
    Without Universal Service, rural businesses and consumers would be 
completely shut out of the communications revolution. Universal Service 
provides the opportunity for every American to participate fully in the 
Internet economy. Just as rural electrification in the 1930s led to a 
surge of economic growth and raised living standards across rural 
America, Universal Service plays the same role in the Internet era.
    Acknowledging the diverse American landscape, Universal Service 
recognizes that the costs of providing telephone service to all corners 
of the U.S. vary widely, but that the Nation as a whole benefits from a 
truly national network--that is, one that connects to as many Americans 
as possible.
    Universal Service also assures the Nation of a secure, far-reaching 
network, at a time when our telecommunications infrastructure is 
essential to national preparedness; and assures all Americans of 
quality service at reasonable rates, no matter where they live.
    For those who say that the Universal Service no longer makes sense, 
or that it should be repealed or scaled back--I encourage them to visit 
Montana or other rural areas and see the Fund in action. The day has 
not arrived when technology and the free market can make affordable 
telecommunications services available everywhere. Simply put, there is 
a lot of dirt between light bulbs in Montana--competition and 
technology have not changed that. Until that time arrives, Universal 
Service funds are the only alternative. As Chairman Stevens recently 
noted: ``[The] Fund is crucial in keeping rural America on the 
information highway and not on an exit ramp.'' At stake in this debate 
is no less than the future of rural America.
    That is not to say that changes do not need to be made to the 
Universal Service Fund. Recently, radical changes have taken place in 
the telecommunications industry negatively impacting the Universal 
Service Fund. Competition and new and improved technology are slowly 
starving the Universal Service Fund and threatening its survival. As 
consumers switch to new technologies like wireless service, e-mail and 
Voice over Internet Protocol (VoIP), the Universal Service Fund is 
slowly taking in less money each year. At the same time, the amount of 
money distributed by the Fund is increasing. This situation is 
obviously not sustainable in the long run.
    These changes have made it necessary for Congress to take a look at 
revising the Universal Service Fund. We must make sure the law keeps 
pace with this changing landscape. In this regard, on February 8th of 
this year, the 10th anniversary of the Telecommunications Act, I 
introduced S. 2256, The Internet and Universal Service Act of 2006 
(NetUSA), to revise the Universal Service Fund to adapt to the 
radically changing telecommunications landscape. My NetUSA bill will 
shore up the Universal Service Fund, ensuring that investment in a 
ubiquitous, advanced telecommunications infrastructure can continue to 
all corners of the country. In general, the NetUSA bill would broaden 
the base of contributions into the Universal Service Fund, and it would 
govern more prudently the distributions of the funds.
    As I mentioned earlier, the Universal Service Fund is slowly taking 
in less money each year, necessitating a revision to the method by 
which contributions to the Universal Service Fund are collected. The 
guiding principle governing any revision is that the Universal Service 
support contribution mechanism should be equitable, nondiscriminatory 
and competitively neutral.
    The NetUSA bill achieves these goals. Among other things it 
requires the Federal Communications Commission within 180 days to 
develop a non-discriminatory and competitively neutral contribution 
methodology based on revenues, working telephone numbers, or any other 
current or successor identifier protocols or connection to the network, 
or any combination of these methodologies. My bill expressly permits 
the FCC to base the contribution methodology on interstate, intrastate, 
and international revenues. Additionally, the NetUSA bill expressly 
provides that a provider is not exempted from contributing to the Fund 
solely on the basis that such provider is not eligible to receive 
Universal Service support. These and other provisions in the bill will 
strengthen the Universal Service Fund to ensure its continued survival 
so that the citizens of Montana and other parts of rural America remain 
on the information highway and not on an exit ramp.
    The Universal Service Fund is but one of many instances where the 
rapid change of technologies and the rise of competition have created 
many challenges in the telecommunications industry. I look forward to 
working with my colleagues to craft creative solutions to these issues 
that are so vital to our Nation's future.

    The Chairman. Thank you, Senator.
    Senator DeMint?

                 STATEMENT OF HON. JIM DeMINT, 
                U.S. SENATOR FROM SOUTH CAROLINA

    Senator DeMint. Thank you, Mr. Chairman.
    I'd like to make a few comments. I mean, we all know how we 
got where we are today. At one time, we were dealing with a 
monopoly industry, where individual phone companies could 
transfer the cost of their local service. Regardless of whether 
it was in a rural area or in a metropolitan area, we could 
transfer those costs onto long-distance calls made within the 
same company. But once the Bells were broken up and long-
distance became separate companies, it was difficult to 
transfer those costs. And the Universal Service Fund played a 
very real and important function in making sure that rural 
areas in South Carolina and all across the country had local 
service, as my colleague just said that we did with 
electricity.
    But certainly everyone knows that the times have changed. 
The rapid technological changes that we have--and we have a 
growing tension between the competitive model and the old 
monopoly subsidized model that we have to deal with. And global 
competition for--we're competing, as a Nation, to bring 
companies here. Our telecommunications infrastructure, and the 
cost of that telecommunication, is a real key component of 
being competitive, my point being--is, we've got to recognize 
that Congress really is at a crossroads. And we cannot continue 
this entitlement concept in a new competitive model.
    I really stand in awe--and I think everyone in Congress 
should--of the size of the Universal Service Fund. $7.1 billion 
a year--$71 billion a decade, is just a huge amount of money. 
Particularly as we look at growing allegations of widespread 
waste, fraud, and abuse under the current system, you know, we 
have no real way of measuring where all this money is going and 
how it's being applied.
    I get back to my original point. I don't question the 
importance of the Universal Service Fund, and it still serves a 
function today, but I think it's inexcusable for us, as a 
Congress--with the growing expanding technological advances 
that we're having, the ability to serve rural America in a 
completely different way--that we are not willing, as a 
Congress, to address a complete reform of the Universal Service 
Fund. And I hope that we have the courage--I know as soon as I 
introduce any ideas to change how this Fund is operated, or 
suggest caps on how it grows, we get calls from all over our 
State of how we're going to put numerous phone companies out of 
business. I no longer accept that. And I hope us--that the 
witnesses today can help clarify the situation. And I hope my 
colleagues on this Committee will take this as a challenge to 
create a competitive--globally competitive model for 
telecommunications.
    Thank you, Mr. Chairman.
    The Chairman. Thank you.
    Senator Rockefeller?

           STATEMENT OF HON. JOHN D. ROCKEFELLER IV, 
                U.S. SENATOR FROM WEST VIRGINIA

    Senator Rockefeller. Thank you, Mr. Chairman. I'll be brief 
so we can get to the witnesses.
    I think we all know the basic problem of the Fund. The most 
immediate problem is how to make sure that the Fund has the 
resources it needs to carry out its mission. The previous 
speaker referred to $500 billion. And I was trying to do my 
math, 10 times 5 equals 50. It's a lot of money, nevertheless. 
It's a lot of money, nevertheless.
    There's a growing and more challenging problem, I think, 
into the growing and the sustaining of this Fund so that it 
does not become financially burdensome to consumers.
    Today, the Committee will address the first question, and, 
on Thursday, we'll address the second question. I believe that 
broadband providers must begin to pay into the Universal 
Service system if we're going to have a long-term sustainable 
base of revenues, which we do need. If we're going to assess 
broadband providers, we should demand that recipients of 
Universal Service Fund resources be required to look out into 
the future and to transition their networks into the next 
generation of broadband networks. In other words, let's use 
this opportunity and the funding which we have to go beyond the 
first step--not leaving it, but to include it, but then go 
beyond it--of just connectivity, and go and say, what is the 
world going to demand of us in order to be able to compete? We 
can do that with Universal Service Fund. And, in fact, 
broadband--States that could never otherwise be broadband. It 
does not make sense to continue subsidizing the deployment of 
networks that are becoming increasingly obsolete. If we're 
going to ask consumers to support the development of advanced 
communication networks in rural areas, we need to create 
policies that force companies--don't like that term enormously, 
but sort of mean it here--to maximize the resources that the 
Universal Service Fund provides to them.
    I believe that we're--if we're going to achieve long-term 
stability in the Universal Service Fund, that this Committee 
must examine the current rate structure and service areas of 
rural carriers to make sure they reflect the changes in the 
industry in the last decade. We must also examine the 
definition of who qualifies as a rural telephone company, and 
the outdated formulas by which carriers receive support.
    These are hard, and they're very complicated issues with a 
lot of stateside emotion involved, but ones that we have to 
address. And we have this opportunity. As Senator DeMint said, 
this is a real turning point in--and is historic for us.
    I'm afraid that, in trying to referee the disputes between 
the various industries, that we all have lost the true meaning 
of Universal Service, which is providing access to 
communications services to those who would otherwise not have 
them, but--not just wired up, but on into the future.
    I reject the notion that Universal Service means the status 
quo. I know West Virginians want wireless services. They want 
broadband, and they want to use VoIP applications. That means 
that we need to develop a Universal Service Fund that creates a 
dynamic communications marketplace for rural consumers that 
will bring them the efficient delivery of services to which 
their urban counterparts have access.
    I can proudly say that West Virginia has been a leader on 
this score with communications issues. My State forced 
telephone companies to become more efficient and accountable, 
to the benefit of consumers. The Public Service Commission was 
a very active place.
    I believe that we can use the policies West Virginia, 
adopted, at least in some measure, on a national scale, to 
achieve the same type of results for all Americans.
    The choices we make on Universal Service, Mr. Chairman, 
will shape the future of West Virginians and all Americans for 
the next generation or two. We cannot afford to let parochial 
interests derail us from stepping up and making the hard 
choices to protect Universal Service and making sure that 
Universal Service reflects the meaning of the future 
competition across this world. Universal Service has made sure 
all Americans are connected to each other and to the world, and 
we must make sure that the program continues to bring all 
Americans into the broadband age.
    I thank the Chairman.
    The Chairman. Thank you very much, Senator.
    All the Senators' statements will be printed in the record, 
along with their verbal comments and all of the statements of 
the witnesses, will be similarly treated.
    I just want to make one statement before we start, and that 
is, through a few selective earmarks, we have established in 
Alaska, telemedicine, tele-education, teleconferencing, and we 
have brought modern health and modern education to the smallest 
villages. A village with a two-room schoolhouse with 12 grades 
in it has the ability now to comply with the No Child Left 
Behind laws because of educational courses that emanate from 
our university campuses. And telehealth brings the ability to 
have an Eskimo woman's breasts examined through telehealth, 
even to the extent of getting immediately down to Mayo's if our 
people in Anchorage think they cannot make the diagnosis. We 
have saved enormous amounts of money by establishing 
teleconferencing between Federal agencies' offices within the 
State that's one-fifth the size of the United States, and saved 
money. So, this Fund we're talking about is not just a fund 
that's dealing with television or with the concept of news. 
This is a very vital system to rural America. The same 
situation would occur in Hawaii, in many instances that I know 
of.
    By the way, the statement of the Co-Chairman will be placed 
in the record, just following mine.
    Our first witness is Glen Post, the Chief Executive Officer 
of CenturyTel, from Monroe, Louisiana. We're pleased to have 
you with us this morning, Mr. Post.

   STATEMENT OF GLEN POST, CHAIRMAN/CHIEF EXECUTIVE OFFICER, 
                        CenturyTel, INC.

    Mr. Post. Thank you, Senator Stevens.
    I am Chairman and Chief Executive Officer of CenturyTel. I 
want to thank you, Senator Stevens and the other Members of 
this Committee, for focusing on Universal Service, and, 
specifically, the contributions methodology.
    Preserving and advancing Universal Service is critical to 
broader telecommunications reform, and fixing the broken 
contribution system is the linchpin of Universal Service. My 
comments will lay out three recommendations to address 
contribution reform later in this report.
    CenturyTel is a telecommunications company, a rural 
infrastructure company. And, in most of our communities, we are 
the largest technology company. Building robust communications 
networks is very capital-intensive, and this would not be 
possible without sufficient and predictable high-cost fund 
support.
    I'm here as the CEO of a company that specializes in 
serving rural America, the more than 2 million mostly rural 
customers. I grew up in rural America. I live in rural America 
today. All of us here today who live in, and work in, or have 
ties to rural America should be motivated to help stabilize the 
Universal Service system, and to get it done correctly and get 
it done quickly.
    Consumers are driving our industry like never before. In 
all markets, the demand for applications and services is 
increasing. Much of that demand is driven by the need for 
affordable broadband services. Increased broadband availability 
is made possible by shorter local loops, increased fiber 
deployment, additional capacity, and electronics, which are all 
a part of the network investment and deployment.
    In CenturyTel's market, 73 percent of our customers have 
access to our broadband services today. In some communities, 
broadband availability means the difference between success and 
failure. Along the Gulf Coast of Alabama, there's a small 
coastal community of Bayou La Batre. Hurricane Katrina just 
about took this little town off the map. The destruction was 
tremendous, but recovery is underway. By April 1st of this 
year, that community will have DSL availability from our 
company, which will allow seafood companies, charter fisherman, 
bed-and-breakfast owners, restaurants, and other businesses to 
rebuild and reach potential customers all over the world.
    However, our present universal system is based on 
regulatory distinctions and a percentage of interstate revenues 
assessment that no one can really defend today. The regulatory 
distinctions have become blurred between interstate and 
intrastate services, and between telecommunication services and 
information services. People want products and services 
packaged or bundled in a manner that makes the present 
contribution system mostly unworkable.
    I believe Chairman Martin and his colleagues at the FCC 
understand the timeliness of this issue, and I believe a key 
goal for this Committee should be to give the Commission the 
tools it needs to do the job you expect of them, while 
providing clear guidance and clear direction and oversight.
    I want to emphasize that, while Universal Service has 
grown, CenturyTel and other incumbent local exchange carriers 
have generally received little or no increased support in 
recent years. In fact, our support is now going down. The 
number of our study areas receiving support is dropping 
dramatically.
    Approximately 33 percent of rural local exchange carrier 
lines eligible for USF in 2001 are no longer receiving support. 
This has contributed to the worst possible environment in which 
to invest in rural networks and/or to consider expanding our 
service to other rural areas in the United States.
    In conclusion, I believe there are three basic steps this 
Committee and Congress must take.
    First, Congress should broaden the contribution base so 
that the responsibility for supporting this Nation's Universal 
Service program is appropriately shared across all sectors of 
the industry. Only a broad-based mechanism will provide long-
term stability for Universal Service and minimize the impact on 
individual consumers. Congress should mandate that the base of 
contributions be expanded to include all voice, all broadband, 
and all telecommunications.
    Second, in addition to being equitable and 
nondiscriminatory, as currently required by the 1996 Act, any 
contributions methodology should also be technologically and 
competitively neutral. Congress should ensure that no one 
technology or service would be favored over another, and should 
eliminate the inequities that have emerged in recent years.
    And, third, Congress should empower the FCC to utilize any 
of the contribution methodologies currently available. All 
revenues, numbers, connections, or any combination of these 
methodologies should be allowed. No one methodology is 
sufficiently robust and resilient to provide the long-term 
stability that is necessary for Universal Service.
    Mr. Chairman, on behalf of CenturyTel, ITTA, and the 
Coalition to Keep America Connected, I want to thank you again 
for allowing me to testify today. We welcome the opportunity to 
continue to work with you and the rest of the Committee to 
fashion legislation to effectively put the Universal Service 
program on solid footing for many years to come.
    [The prepared statement of Mr. Post follows:]

  Prepared Statement of Glen Post, Chairman/Chief Executive Officer, 
                            CenturyTel, Inc.

    Mr. Chairman, Mr. Co-Chairman Inouye and distinguished Members of 
the Committee, I want to begin by commending your leadership in 
convening today's hearing on the crucial topic of Universal Service 
contributions and for inviting me to testify before you. This means, 
first and foremost, singling out Chairman Stevens for his unwavering 
leadership on Universal Service issues. On many occasions, your 
personal intervention, Mr. Chairman, has literally made the difference 
in upholding this program to the benefit of all Americans. I also would 
like to thank Senators Burns and Dorgan, whose Universal Service 
summits in 2003 first focused our attention on the critical subject of 
reforming the contribution mechanism, and whose legislative leadership 
continues to help guide the way. As I will describe, preserving and 
advancing Universal Service is critical to broader telecommunications 
reform, and repairing the contribution system is the lynchpin of 
Universal Service.
I. Introduction
    CenturyTel is a telecommunications company, a rural infrastructure 
company, and in most of our communities is the largest technology 
company. Building robust networks is an evolving process and is 
capital-intensive. Wherever we serve, we are at the center of economic 
and community development. None of this would be possible without 
sufficient, predictable high-cost fund support.
    CenturyTel is in the business of providing its communities with a 
complete menu of telecommunications services. We are investing in high 
quality networks for rural and small urban markets in 26 states. Our 
network is essential to delivering new services and technologies to 
more than 2 million mostly rural consumers. Our network evolves with 
technology and demand. Once they were analog, then digital and now 
increasingly IP based. There are no VoIP applications without a robust, 
high-speed, IP capable network. My job is to build and maintain that 
network for the customers we serve now, and for rural areas we may 
serve in the future. It is important that you understand that for rural 
Americans, Universal Service dollars are not as much for the networks 
of the past as they are for the networks and applications of the 
future.
    I am here as the CEO of a company that specializes in serving rural 
America. I grew up in rural America. I live in rural America. All of us 
here today who live in, work in, or have ties to rural America should 
be motivated to help stabilize the Universal Service system, and to get 
it done quickly.
    I am also here representing the Independent Telephone and 
Telecommunications Alliance (ITTA), an association of midsize carriers 
that collectively serve approximately five million lines, principally 
in rural America. Additionally, I am speaking on behalf of the 
Coalition to Keep America Connected, a broad coalition that supports 
fair and affordable access to communications services for all 
Americans.
    Your attention to contributions issues today will create a renewed 
sense of urgency about the national commitment to both Universal 
Service and competition as fundamental principles of the 1996 Act. 
These same principles are intricately linked with the promise of 
bringing new applications and technologies to rural markets. These 
hearings will also sharpen our focus on specific, actionable 
recommendations to strengthen, preserve, and advance Universal Service 
for all Americans.
    Before addressing specific reform principles, I will highlight the 
positive changes that have taken place since Members of this Committee 
wrote and helped pass the 1996 Telecommunications Act. Consumers are 
driving our industry like never before. In all markets the demand for 
applications and services is increasing. Much of that demand is driven 
by the need for affordable broadband. Increased broadband availability 
is made possible by shorter loops, increased fiber deployment, and 
additional capacity and electronics which are all part of network 
investment and deployment.
    In CenturyTel's markets, 73 percent of our customers have access to 
our broadband services. A CenturyTel broadband connection provides 
rural citizens access to the world: choices ranging from video to IP 
voice service and everything in between.
    In some communities, broadband availability means the difference 
between success and failure. Forks, Washington, a rural logging 
community in northwest Washington State owes much of its growth today 
to a community and company partnership that provided redundant fiber 
and advanced services that now benefits several thousand people 
throughout a broad area of isolated rural communities. That fiber 
investment brought jobs and business opportunities to a community that 
was dying due to a lack of economic development.
    In Montana, the Kalispell Regional Medical Center required a 
customized telecommunications solution that eliminated vast geographic 
distances to address a growing population in a large state. Gigabit 
Ethernet makes the medical center an important resource hub for other 
hospitals in a 100-mile radius. Full telemedicine applications provided 
by CenturyTel allow patients and their doctors in other towns to view 
scans and perform consults with physicians at Kalispell which saves 
time, money, and lives.
    Along the Gulf Coast of Alabama, there is a small coastal community 
known as Bayou La Batre. Hurricane Katrina just about took it off the 
map. The destruction was tremendous but recovery is underway. By May 
1st of this year, that community will have full DSL availability from 
our company which will allow seafood companies, charter fishermen, bed 
and breakfast owners, restaurants and other businesses to rebuild and 
reach potential customers all over the world.
    For consumers who live in the most rural parts of America, 
Universal Service reform must include a contribution methodology that 
results in sufficient, stable and predictable support even in today's 
unpredictable and highly dynamic telecommunications environment. 
Chairman Martin and his colleagues at the FCC are committed to timely 
reform but are constrained by court decisions applying the 1996 Act. 
Your first goal should be to give the Commission the tools it needs to 
do the job you expect of it.
    I must emphasize that while the Universal Service Fund has grown, 
that growth does not translate into additional dollars for all wireline 
carriers. CenturyTel and other ILECs have generally received little or 
no increased support in recent years. Indeed, our support is now going 
down, and the number of our study areas receiving support is dropping 
dramatically. This has contributed to the worst possible environment in 
which to invest in rural networks or consider expanding our service to 
areas that are not currently as well served.
II. The Nation's Commitment to Universal Service
    Universal Service contribution policies can only be realistically 
assessed by asking how well the policies serve the Nation's fundamental 
commitment to provide Universal Service--fair and affordable access to 
the benefits of telecommunications services--for all Americans.
    The Telecommunications Act of 1996 provided a comprehensive 
statutory foundation to effectuate the national commitment to Universal 
Service. Section 254 of the Act sets forth principles that require that 
all Americans have access to quality services at affordable rates; that 
all Americans have access to advanced telecommunications and 
information services; that all Americans have access to services and 
rates comparable to those available in urban areas, regardless of where 
they live; and that Universal Service support mechanisms be 
``sufficient, predictable and specific'' to preserve and advance 
Universal Service.
    The Nation's commitment to Universal Service has resulted in 
tangible benefits for millions of Americans across the country. Multi-
party lines have long ago been converted to single party lines. Analog 
switches have universally converted to digital switches. And low 
capacity dial-up services are now being converted to high capacity 
broadband. IP soft switches and fiber are the next iteration of an 
evolving network architecture that is successful because it has kept 
pace with both technology and consumer demand. The evidence is clear: 
our Nation's Universal Service policies have succeeded in ensuring that 
consumers in rural communities, regardless of technological change, 
have largely kept pace with urban consumers in terms of their access to 
affordable and comparable telecommunications services.
    The Nation's commitment to Universal Service is also seen by some 
as an important tool in expanding rural consumers' access to broadband 
service. Voices as disparate as President Bush and former FCC Chairman 
Reed Hundt have called for universal broadband availability as soon as 
next year. While Universal Service does not support broadband service, 
it is nevertheless undeniable that consumers' access to 
telecommunications services remains a vital component in assuring 
America's global competitiveness in the 21st century even as it has 
over the last century.
    Unfortunately, the Universal Service contributions policies 
established under the 1996 Act are being increasingly undermined by the 
decline in the very interstate telecommunications revenues that were 
originally intended to provide the lifeblood of the fund. Left 
unchecked, this trend threatens to undercut the Nation's fundamental 
Universal Service commitment.
    Reform of Universal Service contributions policies is a baseline 
issue that must be addressed before other USF issues are addressed.
III. The Need for Prompt Contributions Reform
    Section 254 states that all consumers, no matter where they live, 
are entitled to telephone service that is ``just, reasonable and 
affordable.'' However, there is broad agreement throughout most of the 
industry that the reliance on today's system is fundamentally unstable. 
The current contribution mechanism relies on a patchwork of arbitrary 
distinctions between and among different communications providers that 
is distorting the market. Today's Universal Service contribution rules 
are based on the amount of a carrier's revenues derived from interstate 
and/or international telecommunications services. \1\ In reality 
however, the distinctions between ``interstate'' and ``intrastate'' 
services and between ``telecommunications services'' and ``information 
services'' are becoming increasingly hard to make. Packages offering 
voice, video and data as well as flat-rated service, all-you-can-eat 
mobile wireless calling plans, and IP-based services are impeding the 
ability of policymakers to determine the proper jurisdiction and 
classification of these services. \2\
---------------------------------------------------------------------------
    \1\ See, e.g., 47 CFR Sec. 54.709(a).
    \2\ See, e.g., Report and Order and Second Further Notice of 
Proposed Rulemaking, Federal-State Joint Board on Universal Service, 17 
FCC Rcd 24952, 24955 para. 3 (2002).
---------------------------------------------------------------------------
    Industry trends are progressively undermining the long-term 
stability of the Universal Service contributions system. Competitive 
and technological inequities and inconsistencies inherent in today's 
system are eroding the funding base, policymakers' continued reliance 
on current classifications is encouraging a vicious cycle where 
consumers are being asked to shoulder more and more of the Universal 
Service funding responsibility while new providers or unclassified 
providers and services escape the obligation, even though they continue 
to use the public telephone network for their offerings. In the end, it 
is the consumer that suffers the most because the growing obligation is 
ultimately passed on to their monthly bills.
    This legal and regulatory uncertainty coupled with technological 
and competitive dynamics is causing the current contributions base to 
shrink. As more customers move away from traditional long-distance 
services and toward non-contributing competitive alternatives the 
contributions base will continue to decline. In the first quarter of 
2002 the Universal Service Fund base was approximately $20 billion. 
Over the past three years, however, the base has shrunk to just over 
$16 billion, resulting in a negative compounded annual growth rate of 
-6.7 percent. There's little doubt that the current system is 
unsustainable in the long-term.
    The inverse relationship between the contribution base and the 
contribution factor requires the assessment to increase as the 
contribution base continues to decline. In the first quarter of 2002, 
the contribution factor was 6.8 percent. Three years later the factor 
stands at 10.2 percent, down slightly from a high of 10.9 percent in 
the second quarter of 2005. As the contributions factor increases, the 
average consumer's monthly bill will also increase.
    Section 254(d) states that all providers of telecommunications 
services shall make an ``equitable and non-discriminatory'' 
contribution to the preservation and advancement of Universal Service. 
Congress correctly understood that without an ``equitable and non-
discriminatory'' standard, some providers would avoid contributing, 
ultimately shifting responsibility to a narrowing class of carriers. 
Yet the current system fails to meet the statutory standard of 
``equitable and non-discriminatory'' as defined in the 1996 Act.
    The current regulatory and legal morass is creating an 
unsustainable Universal Service Fund incapable of meeting the statutory 
requirements contained in Section 254. Different types of carriers 
providing essentially the same service are being regulated differently. 
Cable providers offering switched telephone service are paying into the 
fund; however, a similar service provided by the same company but over 
its broadband network is excluded. The same will hold true for 
telecommunications carriers who today pay into the Fund for services 
provided over their circuited-switched. However, in a few months, the 
service delivered over the same carrier's broadband network will escape 
Universal Service obligations.
    The lack of regulatory clarity also has created uncertainty whether 
newer service offerings are obligated to pay into the fund. For 
example, today it remains unclear whether service offerings provided by 
voice over internet protocol (VoIP) providers are contributing to the 
Universal Service fund. On the horizon, broadband over power line 
providers will offer voice service over its transmission and 
distribution systems. The FCC is currently looking into whether these 
newer services are obligated to pay into the fund. It is apparent, 
however, that if these newer service offerings with growing revenue 
streams escape their obligation to contribute to Universal Service, the 
fee on consumers' bills is virtually assured to increase.
    Even the existing requirements on carriers that are currently 
assessed endanger the long-term viability of the Fund because their 
contribution obligation remains below what similar providers 
contribute. For example, over two-thirds of wireless carriers' revenues 
are currently shielded from any contribution obligation, an anomaly 
hardly envisioned by the 1996 Act.
    Recent decisions by the FCC regarding the assessment of DSL 
broadband services provide another source of uncertainty for the 
industry. The decision by the FCC to relieve DSL broadband providers 
from the obligation to contribute to the Universal Service Fund (after 
the 270 day transition period) provides the most immediate threat to 
the stability of the fund. Importantly, at the time Chairman Martin 
clearly acknowledged the need to avoid any disruption of the stability 
of the contribution base following that period of time. This Committee 
should support him in this commitment.
    Eliminating the assessments on DSL could have a profound effect on 
the sustainability of the fund. In a recent presentation to the Federal 
Communications Bar Association, Balhoff & Rowe estimated that removing 
DSL from the contributions base, would cause the contribution factor to 
increase 13 percent, from 10.2 percent to 11.5 percent. Alarming as 
that increase may seem, as customers move to broadband--either through 
cable or DSL--the long term effects of relieving both from the 
assessment pool could prove devastating to the consumers left paying 
for the fund.
    Additionally, intercarrier compensation reform proposals that are 
currently being discussed could shift billions of dollars into the 
Universal Service Fund and threaten its viability. The Universal 
Service Fund was never intended to be a revenue replacement collection 
mechanism for the reduction of intercarrier compensation payments. 
However, certain proposals before the FCC would do just that.
    The patchwork of inconsistent contribution obligations is 
fundamentally inconsistent with the Congressional intent of the Section 
254(d) principle that contributions should be ``equitable and non-
discriminatory'' Any contribution mechanism must be both 
technologically and competitively neutral so as to not favor one group 
of providers or services over another. Disparate rules produce the 
distortions and perverse incentives that exist under today's system. 
Contribution avoidance is accelerating within the industry and carriers 
are feeling compelled to devise new means of avoiding or reducing their 
contributions exposure. Carriers will seek to limit their exposure by 
using preferred technologies, complex service configurations and 
intricate network architecture. In the end, the pressure to sustain the 
Fund will continue to shift to a smaller set of customers while the 
non-contributing carriers and services continue to escape paying their 
fair share.
    The FCC is theoretically able to address some of these inequities 
and inconsistencies; however the chairman of the agency has continually 
stated that the FCC does not have sufficient legal discretion under 
existing law to undertake the comprehensive reform needed to fix the 
system. Congressional action is therefore needed to provide the FCC the 
necessary authority to address these inequities that will ultimately 
shore up the existing system.
IV. Legislative Recommendations
    As the Committee, and Congress in general, move to resolve current 
problems with the current contributions system, CenturyTel recommends 
taking the following three steps:
1. Broaden the Base
    First, Congress should broaden the contribution base so that the 
responsibility for supporting this Nation's Universal Service program 
is appropriately shared across all sectors of the industry. Only a 
broad-based mechanism will provide long-term stability for Universal 
Service and minimize the impact on individual consumers. Conversely, 
mandating a narrower contribution base will invite further arbitrage 
and will fail to reverse the deterioration of the contribution base.
    Congress should mandate that the base of contributions be expanded 
to include all voice, all broadband and all telecommunications. 
Specifically, the assessment of all broadband services is particularly 
important to the long-term stability of the Universal Service Fund 
since broadband is one of the fastest growing segments of the 
telecommunications industry. Including assessments on broadband will 
mean that the contribution base will continue to grow for the 
foreseeable future. Conversely, excluding such assessments will pose an 
increasing risk to the stability of the fund.
2. Make Technologically and Competitively Neutral
    Second, in addition to being equitable and non-discriminatory as 
currently required by the 1996 Act, any contributions methodology 
should also be technologically and competitively neutral. Congress 
would thereby ensure that that no one technology or service would be 
favored over another and would eliminate the inequities that have 
emerged in recent years, yet remain flexible enough to change with 
market dynamics.
3. Allow Flexibility in Implementation
    Third, Congress should empower the Commission to utilize any of the 
contribution methodologies currently available--all revenues, numbers, 
including successor identifiers, connections or any combination of 
these methodologies.
    Congress should mandate that the Commission employ a methodology or 
combination of methodologies that will best effectuate the principles 
articulated above. No one methodology is sufficiently robust and 
resilient to provide the long-term stability that is necessary for 
Universal Service. Locking the Commission into a single methodology or 
even a single combination of methodologies would be short-sighted. The 
pace of technological change is rapid enough that any attempt to 
prejudge a specific methodology at this or any point in time is almost 
certainly doomed to obsolescence. A broader, non-prescriptive framework 
will provide the Commission maximum flexibility to evolve contributions 
mechanisms to adapt to developing technologies and services. Allowing 
the Commission flexibility in choosing combinations of methodologies 
will also enable the Commission to preclude the arbitrage that any 
single methodology, in isolation, would be subject to.
    The foundation for implementing these three recommendations has 
largely been laid. Chairman Stevens has made a number of public 
statements regarding similar reforms to the contribution mechanism. 
Also, Senator Burns and Senators Smith and Dorgan have already proposed 
bills that broadly embrace these three recommendations. These proposals 
offer the Committee and Congress an appropriate framework from which to 
structure a durable solution to the current crisis.
V. Conclusion
    For most of a century, because of the Nation's strong commitment to 
Universal Service has succeeded in ensuring that all consumers, 
regardless of where they live, continue to realize the tangible 
benefits that telecommunications services provide every day. Solving 
the problems with the current contributions system is essential to 
fulfilling this commitment. We cannot afford to delay these reforms any 
longer while waiting for a comprehensive rewrite of the Communications 
Act. Immediate action is needed to stabilize the fund. We encourage the 
Commerce Committee to move directly from today's hearing to enact 
forward-looking, technologically and competitively neutral legislation 
that benefits consumers and encourages investment in networks.
    Mr. Chairman, on behalf of CenturyTel, ITTA and the Coalition to 
Keep America Connected, I want to thank you again for allowing me to 
testify today. We welcome the opportunity to continue to work with you 
and the rest of the Committee to fashion legislation to effectively 
address the inequities and inconsistencies of the current system and 
put the Universal Service program on solid footing for many years to 
come.

    The Chairman. Well, thank you very much. And thank you for 
those suggestions. As I said, your complete statement's printed 
in the record.
    Our next witness is Tom Simmons, the Vice President of 
Public Policy for the Midcontinent Communications of Sioux 
Falls, South Dakota.

  STATEMENT OF TOM SIMMONS, VICE PRESIDENT OF PUBLIC POLICY, 
                  MIDCONTINENT COMMUNICATIONS

    Mr. Simmons. Thank you, Mr. Chairman. And thank you, to the 
Members of the Committee, for inviting me to testify today.
    My name is Tom Simmons. I am the Vice President of Public 
Policy for Midcontinent Communications, a leading provider of 
cable telecommunications services in the Dakotas, including 
analog and digital cable television, broadband Internet, long-
distance and local telephone services.
    We serve over 200,000 customers in approximately 200 
communities in North and South Dakota, western Minnesota, and 
northern Nebraska, generally classified as small and rural. The 
size of our communities range from densities of 5 to 116 homes 
per mile of cable plant, and populations ranging from less than 
30 in Barlow, North Dakota, to our largest community, which is 
Sioux Falls, South Dakota. That population is just slightly 
more than 140,000.
    Midcontinent launched its broadband Internet service nearly 
10 years ago, on April 15th, 1996, in Aberdeen, South Dakota. 
We made a pledge then to bring advanced broadband services to 
as many customers as possible, regardless of the size of 
community. At the end of 2005, we completed a project to 
rebuild cable plants to 750 megahertz or better in 50 more 
Midcontinent communities, bringing our total of upgraded 
systems to 152, serving over 95 percent of Midcontinent's 
customers.
    Customers in these communities now enjoy over 150 channels 
of analog and digital video programming, broadband Internet 
service, high-definition television, and digital video 
recording capability. Midcontinent Communications is also a 
certificated local exchange telephone service provider in North 
Dakota, South Dakota, and Minnesota. Midcontinent first 
launched facility-based circuit-switched telephony in 2000, and 
recently launched its first digital VoIP phone service in 
Mitchell, South Dakota. Our plans include the rollout of 
digital phone services in a number of additional communities 
throughout our service area this year.
    Midcontinent is a privately held company that has invested, 
and continues to invest, substantial amounts of private risk 
capital to bring advanced services to our customers without the 
assistance of public funds. We're proud of our ability to 
deliver the services our customers demand, which are no less 
than those demanded and expected in major metropolitan areas.
    As a provider of telephone services in rural America, 
Midcontinent strongly supports the goals and purposes of the 
Universal Service Fund. We believe that quality 
telecommunications services should be available to all regions 
of the country at just affordable and reasonable rates. In that 
regard, like every other cable operator that offers voice 
telephone service either by way of traditional circuit-switched 
telephony or digital VoIP, Midcontinent contributes to the 
Universal Service Fund now.
    We share the concerns of policymakers, industry 
stakeholders, and the public that the Universal Service 
program, as it stands today, is not sustainable. All agree that 
the current USF contribution mechanism, which relies on the 
assessment of interstate telecommunications revenues, virtually 
guarantees that the Fund will continue to shrink.
    To address this problem, the cable industry has long 
advocated the adoption of a telephone-numbers-based 
contribution mechanism, because it is a simple, yet effective, 
reform that'll sustain the long-term health of this Fund while 
still adapting to the evolving technology and economies of 
voice telephony.
    Under a telephone-numbers-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 offering services as a 
replacement for plain old telephone service, and would avoid 
assessments on services that only include a voice component.
    As stated above, Midcontinent and the cable industry 
strongly support the goals and purposes of Universal Service, 
and recognize that changes are necessary to ensure its 
continued viability. However, we strongly believe that the 
assessment of broadband service revenues is not appropriate. 
The imposition of new fees on broadband service at the same 
time policymakers seek to encourage more widespread deployment, 
and service penetration would be counterproductive and would 
raise the price of high-speed Internet service for current and 
potential broadband customers. It would also penalize those who 
have worked diligently to deploy broadband to nearly the entire 
Nation.
    The cable industry has invested $100 billion in private 
risk capital to bring broadband and other advanced services to 
households across the country. And today, 93 percent of all 
households in this country have access to cable's highspeed 
Internet service.
    To conclude, Mr. Chairman, we believe that the assessment 
of broadband service is unnecessary to the goal of a stable, 
sufficient, and predictable Fund. Instead, a numbers-based 
contribution mechanism addresses the current problems without 
declining interstate revenues and bundling of services, and 
captures new technologies and protocols like VoIP.
    Mr. Chairman, thank you for inviting me to testify today. 
I'd be happy to answer any questions you or the Members of the 
Committee may have.
    [The prepared statement of Mr. Simmons follows:]

  Prepared Statement of Tom Simmons, Vice President of Public Policy, 
                      Midcontinent Communications

    Chairman Stevens, Co-Chairman Inouye and Members of the Committee 
thank you for inviting me to testify today. My name is Tom Simmons and 
I am the Vice President of Public Policy for Midcontinent 
Communications, a leading provider of cable telecommunications services 
including analog and digital cable television, broadband Internet and 
local and long-distance telephone services. We serve over 200,000 
customers in approximately 200 communities in North and South Dakota, 
Western Minnesota, and Northern Nebraska generally classified as small 
or rural. The size of our communities range from densities of 5 to 116 
homes per mile of cable plant and populations ranging from less than 30 
in Barlow, North Dakota to our largest community, Sioux Falls, South 
Dakota, which has a population of more than 140,000.
    Midcontinent launched its broadband Internet service nearly ten 
years ago, on April 15, 1996 in Aberdeen, South Dakota, and made a 
pledge then to bring advanced broadband services to as many customers 
as possible regardless of the size of community. At the end of 2005, we 
completed a project to rebuild cable plants to 750 MHz or better in 50 
more Midcontinent communities bringing our total of upgraded systems to 
152, serving over 95 percent of Midcontinent's customers. Customers in 
these communities now enjoy over 150 channels of analog and digital 
video programming, broadband Internet service, high definition 
television, and digital video recording capability. Midcontinent 
Communications is also a certificated local exchange telephone service 
provider in North Dakota, South Dakota, and Minnesota. Midcontinent 
first launched facility based circuit-switched telephony in 2000, and 
recently launched its first digital VoIP phone service in Mitchell, 
South Dakota. Our plans include the roll out of digital phone services 
in a number of additional communities throughout our service area this 
year. Midcontinent is a privately held company that has invested, and 
continues to invest, substantial amounts of private risk capital to 
bring advanced services to our customers without the assistance of 
public funds. We're proud of our ability to deliver the services our 
customers demand which are no less than those demanded and expected in 
major metropolitan areas.
    As a provider of telephone service in rural America, Midcontinent 
strongly supports the goals and purposes of the Universal Service Fund 
(USF). We believe that quality telecommunications services should be 
available to all regions of the country at just, affordable and 
reasonable rates. In that regard, like every other cable operator that 
offers voice telephone service--either by way of traditional circuit-
switched telephony or VoIP--Midcontinent contributes to the Universal 
Service fund.
    A strong Universal Service program is an essential 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. I will focus my remarks on the cable industry's position 
with respect to reforming the contribution mechanism. However, I will 
also briefly discuss our view on proposals to extend Universal Service 
distributions to broadband service.
    The current USF contribution mechanism, which relies on the 
assessment of interstate telecommunications revenues, virtually 
guarantees that the Fund will continue to shrink. 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.
    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-numbers-based 
system, all that matters is whether or not the service uses a phone 
number. As such, a numbers-based system promotes competitive neutrality 
among providers and technologies and ensures that no provider of a 
voice telephone service is placed at a competitive disadvantage due to 
disparate treatment with respect to Universal Service Fund 
contributions.
    While a numbers-based approach would capture any service designed 
as a replacement for plain old telephone service (POTS), it would avoid 
assessments on a service that might include a voice component. 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-numbers-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 
less under a numbers-based system than they do under the existing 
interstate revenue model.
    As stated above, Midcontinent and the cable industry strongly 
support the goals and purposes of the Universal Service program and 
recognize that changes are necessary to ensure its continued viability. 
However, we strongly believe that the assessment of broadband service 
revenues is not appropriate. 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. It would also penalize those who have 
worked diligently to deploy broadband to nearly the entire Nation. The 
cable industry has invested $100 billion in private risk capital to 
bring broadband and other advanced services to households across the 
country. Today, 93 percent of all households in this country have 
access to cable's high-speed Internet service.
    Contrary to assertions that broadband is negatively impacting 
Universal Service, the impact has been minimal at best. Most VoIP 
services, for example, already pay into the Universal Service Fund and 
a number-based plan would, in any case, capture these services into the 
future. The assessment of broadband service is unnecessary to the goal 
of a stable, sufficient and predictable fund. Instead, a number-based 
contribution mechanism addresses the current problems with declining 
interstate revenues and bundling of services, and captures new 
technologies and protocols such as VoIP.
    We also believe it would be a mistake to make broadband services 
eligible for USF distributions. Mr. Chairman, Midcontinent shares your 
desire to ensure that all Americans, including those who live in rural 
communities have access to broadband service. As I stated at the 
outset, Midcontinent has spent hundreds of millions of dollars to 
upgrade its facilities and deploy broadband services in rural 
communities. We did this without a government mandate and without a 
government subsidy. We did it because we want to make certain that our 
customers have the same access to advanced digital technology as all 
Americans. We took the risk and invested private capital in order to 
provide broadband services in the communities we serve. It is 
unnecessary and profoundly unfair for the government to subsidize a 
broadband competitor to Midcontinent or any other broadband provider 
that has already stepped up to the plate and answered the call to help 
close the digital divide.
    We recognize that some form of subsidy may be necessary to promote 
broadband deployment in remote rural areas where no provider is 
currently offering a broadband service and it is otherwise uneconomic 
to do so. The cable industry has offered support for legislation that 
would offer tax credits or tax expensing to companies that deploy 
broadband services in clearly defined and carefully targeted unserved 
areas. But the government should take great care not to subsidize 
broadband in communities where companies are already offering consumers 
broadband service. Subsidizing competition is unfair and a waste of 
scarce resources that should be targeted to areas where a market-based 
solution has not developed.
    While government subsidies may be necessary to promote broadband 
deployment in unserved areas, the cable industry does not believe that 
Universal Service funds should be used to support broadband deployment. 
Such an expansion of the program will put further stress on the 
Universal Service Fund and undermine its principle purpose of promoting 
the availability of affordable telecommunications services to all 
regions of the country. We believe there are better ways to promote 
broadband deployment in unserved areas through tax credits, tax 
expensing or existing loan and grant programs.
    However, any program that subsidizes private entities to deploy 
broadband service is fraught with the potential for abuse. An example 
of such a program, though well intentioned, is the current Rural 
Utilities Service broadband loan program. Loan money from this program 
is being used to subsidize cable and phone competitors in markets where 
there are already two or more broadband providers. This type of 
subsidized competition penalizes private entities serving those markets 
and discourages private investment in rural America. In its September 
30, 2005 report, the Office of Inspector General of the U.S. Department 
of Agriculture found that the RUS had not maintained its focus on rural 
communities without preexisting service, questioned whether the 
Government should be providing loans to competing rural providers when 
many small communities might be hard pressed to support even a single 
company, and observed that the RUS, by granting such loans, may be 
``creating an uneven playing field for preexisting providers operating 
without Government subsidies.''
    Midcontinent supports the goal of the Federal Government to assure 
that all Americans have access to broadband services. We have invested 
hundreds of millions to help that goal become a reality. We recognize 
that government subsidies may be the only answer in some high-cost 
rural areas. However, any government program designed to promote 
broadband deployment must be carefully defined and targeted to only 
those areas that lack broadband service. Furthermore, any such program 
must receive the most stringent government oversight to ensure that 
government funds are allocated only to areas that are defined as 
unserved and are not used to subsidize competition.
    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.

    The Chairman. Thank you very much.
    Our next witness is Trent Boaldin--and I hope that I 
pronounced that right----
    Mr. Boaldin. That's correct.
    The Chairman.--President of Epic Touch Company, of Elkhart, 
Kansas.
    Thank you, sir.

 STATEMENT OF TRENT BOALDIN, PRESIDENT, EPIC TOUCH COMPANY; ON 
  BEHALF OF THE UNITED STATES TELECOM ASSOCIATION (USTelecom)

    Mr. Boaldin. Thank you, Mr. Chairman and Members of the 
Committee.
    I'm Trent Boaldin, President and member of the third 
generation of our family business, Epic Touch, which is based 
in Elkhart, Kansas. Thanks for the opportunity to appear before 
you today, both through my capacity as President of Epic Touch 
and on behalf of the United States Telecom Association.
    Mr. Chairman, I address you and this Committee with 
gratitude, because you are among the strongest and most 
important supporters of Universal Service in the Nation. Thanks 
to the leadership of many of you, 98 percent of American 
households have phone service, and phone rates in rural Kansas 
and Oklahoma are comparable to those in Metropolitan 
Washington, D.C.
    All of you are aware Universal Service is in crisis, and I 
urge you to act this year. More and more providers of voice 
service are able to avoid Universal Service contributions, or 
at least reduce them by, for example, utilizing technologies 
that weren't even foreseen in the 1996 Act.
    Unfortunately, as more and more consumers migrate to these 
alternative services, phone customers are left to support rural 
networks. The need for support does not diminish. And, in fact, 
these new services need rural networks to carry their calls.
    The crisis in Universal Service is an important reason why 
USTelecom is urging this Committee to update our Nation's 
telecom laws now. Our membership ranges from the smallest rural 
telephone companies, such as us, to some of the largest 
corporations in America.
    A year ago, our board of directors unanimously adopted a 
plan for updating our telecom laws. We settled on two goals: 
reform of Universal Service to ensure affordable, reliable 
telecommunications for all Americans; establishment of 
consumer-controlled, market-based competition through the 
elimination of government-managed competition. USTelecom 
believes these goals are mutually reinforcing and must be 
pursued together.
    To strengthen and preserve Universal Service, USTelecom has 
embraced three key reform principles. First, broaden the base 
of contributors to include all providers in both interstate and 
intrastate services. Second, target support to those providers 
offering basic telephone service. And, third, provide Universal 
Service support to networks in order to speed broadband 
deployment without placing undue burden on Fund contributors.
    We are encouraged by legislation that has, so far, been 
introduced by Members of this Committee. We see provisions that 
reflect USTelecom principles. Senator Burns's new bill, S. 
2556, broadens the contribution base to include interstate 
revenues, as well as broadband and broadband voice. The Burns 
bill also would allow support for broadband. Senators Smith, 
Dorgan, and Pryor have also introduced S. 1583 that would 
broaden the revenue base and address intercarrier compensation, 
and create a $500 million broadband account.
    I'd like to tell you a story about another small company in 
our association, Ben Lomand Telephone, which is based in 
McMinnville, Tennessee. Ben Lomand has upgraded its network, 
and has the technical capability to provide video service to 60 
percent of its 42,000 customers. And in 18 months, they'll have 
the ability to provide it to 100 percent of their customers. 
But Ben Lomand has the misfortune of serving an area covered by 
25 different franchising authorities. It's a regulatory 
nightmare--and after 18 months of franchise applications, the 
company has won 15 of the 25 approvals. This cumbersome, 
archaic franchising process is a significant barrier to 
competitive entry into the local video market.
    The video market is the single best reason for companies 
such as ours and others to invest in broadband platforms. So, 
existing franchise rules have become, or they are, a barrier to 
deployment of rural broadband.
    As Congress moves toward updating our Nation's telecom 
laws, no segment of our country has more to gain or more at 
stake in the debate about rural America.
    Again, Mr. Chairman, thank you for this opportunity to 
appear today. We look forward to working with you, Members of 
the Committee, and the staff to develop sound policies, and we 
encourage you to act now.
    [The prepared statement of Mr. Boaldin follows:]

Prepared Statement of Trent Boaldin, President, Epic Touch Company; on 
      behalf of the United States Telecom Association (USTelecom)

    Mr. Chairman, Co-Chairman Inouye and Members of the Committee, I am 
Trent Boaldin, president of Epic Touch Company, headquartered in 
Elkhart, Kansas. Thank you for the opportunity to appear before you 
today, both in my capacity as the president of Epic Touch, as well as 
on behalf of the United States Telecom Association (USTelecom).
    Epic Touch is a family business that provides voice, data, and 
video services in southwestern Kansas. And, I'm proud to say, Epic 
Touch was among the first companies in the Nation to offer broadband to 
rural America, starting with DSL deployment in 1997. And as you know, 
USTelecom's members include companies large and small, companies which 
deliver a wide range of services across the communications landscape, 
including voice, video and data over local exchange, long-distance, 
Internet and cable networks.
    Mr. Chairman, I address you and this Committee with gratitude, 
because you are among the strongest and most important supporters of 
Universal Service in the Nation. Thanks to the leadership of many here 
today, 98 percent of American households have phone service, and phone 
rates in rural Kansas are comparable to those in metropolitan 
Washington, D.C. Rural carriers recognize that these achievements do 
not occur by accident, and we look to you to ensure these achievements 
are protected and extended as new technologies and economic trends 
sweep our industry.
    As all of you are aware, Universal Service is in crisis, and I urge 
you to act this year. More and more providers of voice service are able 
to avoid Universal Service contributions--or at least reduce them--by, 
for example, utilizing technologies not anticipated in the 1996 Act. 
One Internet phone company solicits new customers with radio ads that 
mock wireline phone companies for the ``mysterious'' taxes and fees 
that appear on phone bills.
    Unfortunately, as more and more consumers migrate to these 
alternative services, fewer wireline phone customers are left to 
support rural networks. The need for support does not diminish, and in 
fact these new services need rural networks to carry their calls. To 
match up the continuing need for funds with a smaller revenue base, the 
contribution rate must be ratcheted upward. This feedback loop 
destabilizes Universal Service and is clearly unsustainable. Six years 
ago, consumers paid 5.5 percent. Today, consumers pay almost twice as 
much--in excess of 10 percent.
    The crisis in Universal Service is an important reason why 
USTelecom and its 1,200 member companies are urging this Committee to 
update our Nation's telecom laws. Our membership ranges from the 
smallest rural telephone companies and cooperatives to some of the 
largest corporations in America. Our business models are diverse. But a 
year ago, our board of directors unanimously adopted a plan for 
updating our telecom laws. We settled on two goals:

   Reform of Universal Service to ensure affordable, reliable 
        telecommunications for all Americans in the 21st century;

   Establishment of consumer-controlled, market-based 
        competition through the elimination of government-managed 
        competition.

    USTelecom believes these goals are mutually reinforcing and must be 
pursued together.
    Prompt Congressional action to reform Universal Service will do 
much to ensure a sustainable system for rural and low-income customers, 
as well as schools, libraries, and rural health care facilities. To 
strengthen and preserve Universal Service, USTelecom has embraced three 
key reform principles:

   Broaden the base of contributors to include all providers 
        and both interstate and intrastate calls;

   Target support to those providers offering Basic Telephone 
        Service; and

   Provide Universal Service support to networks in order to 
        speed broadband deployment.

    We are encouraged by legislation that has so far been introduced by 
Members of this Committee. We see many provisions that reflect 
USTelecom principles. Senator Burns' new bill, S. 2556, broadens the 
contribution base to include intrastate revenues, as well as broadband 
and broadband voice. The Burns bill would also allow USF support for 
broadband. Senators Smith, Dorgan and Pryor have also introduced 
legislation, S. 1583, that would broaden the revenue base, address 
intercarrier compensation and create a $500 million broadband account. 
On a related note, both of these bills also address the so-called 
``phantom traffic'' problem--a rising tide of calls that transit our 
networks without the information necessary for proper intercarrier 
compensation. These calls create a shortfall that also results in 
higher rates and increased Universal Service support.
    Although no formal legislation has been introduced to date in the 
House of Representatives, USTelecom has worked with Rep. Lee Terry of 
Nebraska and Rep. Rick Boucher of Virginia on legislation expected to 
be introduced in a matter of days. Their draft bill comports with a 
number of USTelecom principles including broadening the base of 
contributors to include intrastate services, cable modem, and VoIP 
calls. The legislation also contains an important provision to stop 
phantom traffic by requiring any communications provider that 
originates traffic to offer sufficient identification. Finally, it 
allows Universal Service support of broadband.
    As I mentioned earlier, Universal Service reform must go hand-in-
hand with other reforms. Telephony is becoming a form of Internet 
traffic. Companies like Epic are no longer just telephone companies--we 
provide our customers voice, video, and data services. Change is 
sweeping our industry, and no region of the country will be unaffected. 
In the years ahead, rural America must have Internet broadband access. 
Broadband will become essential for communities and individuals to 
remain integrated into the economic, political, and cultural life of 
the Nation. Thus, USTelecom urges incorporation of broadband into our 
notion of Universal Service. In addition, we believe the Committee can 
take steps to accelerate private investment in rural broadband 
deployment. One important change would be streamlined video 
franchising.
    Let me tell you about another small company in our association, Ben 
Lomand Telephone, based in McMinnville, Tennessee. Ben Lomand has 
upgraded its network and has the technical capability to provide video 
service to 60 percent of its approximately 42,000 customers. It will be 
able to offer it to 100 percent of its customers within the next 18 
months. But Ben Lomand has the misfortune of serving an area covered by 
25 different franchising authorities. In some of these video-franchise 
jurisdictions, Ben Lomand serves as few as 100-200 telephone customers. 
It is a regulatory nightmare, and after 18 months of franchise 
applications, the company has won 15 approvals. This cumbersome, 
archaic franchising process is a significant barrier to competitive 
entry into the local video market.
    The video market is the single best reason for companies to invest 
in broadband platforms, so existing franchising rules have become a 
barrier to the deployment of rural broadband.
    As Congress moves toward updating our Nation's telecom laws, no 
segment of our country has more to gain and more at stake in this 
debate than rural America. It is critical that we have policies that 
encourage investment and head-to-head competition throughout the 
country . . . policies that speed new services, choices and value to 
our people . . . while upholding vital social objectives that remain 
important to the Nation--chief among them, our commitment to ensuring 
affordable, reliable access to a dial tone for all Americans.
    We are encouraged by the work of this Committee, whose members 
recognize the vital role of Universal Service to ensuring that our 
citizens--rural, low-income, and otherwise--can reap the full benefits 
of this new world of communications.
    Again, Mr. Chairman, thank you for this opportunity to appear 
today. We look forward to working with you, the Members of the 
Committee, and the staff to develop sound policies that will ensure all 
Americans have access to affordable and reliable communications 
service.

    The Chairman. Well, thank you very much, Mr. Boaldin.
    Our next witness is Bonnie Cramer, who's a Member of the 
AARP Board of Directors from Raleigh, North Carolina.
    Ms. Cramer?

  STATEMENT OF BONNIE CRAMER, MEMBER, AARP BOARD OF DIRECTORS

    Ms. Cramer. Good morning, Mr. Chairman and Members of the 
Committee. My name is Bonnie Cramer, and I'm a volunteer Member 
of AARP's Board of Directors. Thank you for this opportunity to 
testify today on behalf of AARP regarding the importance to 
consumers of the Universal Service Fund.
    Our concern centers on consumers' contribution to the USF. 
At a time when the rising costs for energy, medical care, 
transportation, and other basic needs are pushing older 
Americans' monthly budgets to the limit, every dollar can make 
a difference. The goal of Universal Service has been a 
significant national policy for more than 80 years. The Federal 
USF subsidizes service to high-cost areas, low-income 
consumers, schools, libraries, and rural health care 
facilities. Total funding for the USF has grown from 1.8 
billion in 1997 to 7.1 billion estimated for 2005.
    My remarks this morning will focus on five critical points 
for midlife and older Americans regarding contributions to the 
USF.
    First, achieving Universal Service for all consumers should 
be a top priority. Telecommunications services are essential to 
modern life. For older Americans in particular, the ability to 
contact police, fire, medical, and other services in times of 
emergencies is absolutely necessary. The Universal Service's 
program recognizes the value of connecting everyone to these 
lifesaving services, as well as the importance of connecting 
each of us to one another.
    Second, any mechanism designated for the USF contribution 
should protect the interest of low-income consumers and must 
hold low-volume consumers harmless. AARP understands the need 
to adequately fund the Universal Service program. While 
sufficient funding of the program is of critical importance, 
the goal must not be achieved by harming the very population 
the Fund seeks to help. We must not unduly burden low-income or 
low-volume long-distance consumers. We believe the funding goal 
can be met by retaining the current contribution mechanism and 
by restraining the size of the Fund.
    We contend that the current revenue-based mechanism is both 
equitable and nondiscriminatory. The existing funding mechanism 
does not penalize consumers who make few or no long-distance 
telephone calls. Under some of the proposed funding mechanisms, 
these low-volume long-distance service consumers would be 
required to pay the bulk of the funding for Universal Service. 
AARP is concerned that a shift away from the pay-for-what-you-
use system to a regressive numbers-based plan, as one proposal 
suggests, would unduly harm low-volume long-distance consumers. 
Many of these low-volume long-distance consumers are older 
Americans on fixed incomes. It is simply unfair for consumers 
who have a low long-distance monthly bill to pay larger USF 
fees, raising their overall monthly telephone bill.
    Is it fair for Bill Gates and Aunt Edna, an 86-year-old 
living on a fixed income, to pay the same amount for their 
Universal Service fee on their monthly bill? If Bill Gates 
makes many more long-distance calls now, he pays more to the 
Fund. And that seems to be the equitable way to manage 
contributions. Aunt Edna shouldn't have to bear any greater 
burden to sustain the Fund.
    AARP also asserts that the Fund's size can be constrained 
by limiting Federal Universal Service support from the high-
cost Fund to a single line for each household. This step would 
prevent the excessive and unnecessary future growth in the Fund 
resulting from supporting all lines provided by all eligible 
telecommunications carriers.
    Third, all voice communications providers should contribute 
to the Universal Service Fund. Ensuring that all Americans have 
ready access to affordable, reliable, and high-quality voice 
telecommunications services is critical to the health, welfare, 
and economy of the country. This is true no matter what 
technology is used to provide this service. In fact, from a 
consumer's perspective, any service that is marketed as a voice 
telephone service and that interconnects with a public-switched 
telephone network is a telecommunications service. The only 
equitable, nondiscriminatory, and technology-neutral way to 
collect Universal Service contributions and produce a 
sufficient base of support is to require all carriers that 
benefit from their ability to connect customers over the 
public-switched network to contribute.
    Fourth, the two major programs for low-income consumers, 
Lifeline and Link-Up, are a fundamental component of the USF. 
The Lifeline and Link-up programs offer financial assistance to 
low-income consumers, ensuring all consumers have the 
opportunity to remain connected to essential telecommunications 
services. While these programs preserve and enhance universal 
telephone service, they, unfortunately, only serve a small 
portion of the low-income population, with less than 30 percent 
of income-eligible households participating in the Lifeline 
program. Programs to increase consumer awareness of the 
assistance programs, such as the FCC and National Association 
of Regulatory Utility Commissioners, ``Lifeline Across 
America,'' are an important step to address awareness. However, 
we also recommend automatic enrollment into the Lifeline 
program for all consumers who participate in other designated 
low-income programs, and that would greatly increase the 
participation rate.
    We also, finally, would like to suggest that advanced 
technologies present new challenges in delivering service to 
all Americans. While this Committee considers the contributions 
to, and distribution of, the Universal Service Fund, AARP 
suggests that this Committee consider a related issue of 
growing interest to all our members. AARP recognizes that the 
benefits of ubiquitous and affordable access to broadband 
networks are of particular value to midlife and older 
Americans. For example, with a broadband connection to support 
monitoring devices and interactive video, home health care 
becomes a viable option for many consumers, particularly those 
with limited mobility or those who may not be well enough to 
travel. A broadband connection also facilitates distance-
learning opportunities.
    For older Americans aged 65 and above, only 25 percent 
access the Internet through broadband connection. The remainder 
rely on dial-up. Bridging this digital divide is a significant 
issue for AARP, and we urge policymakers to make affordable 
high-speed broadband a national priority and to consider ways 
to create an aggressive deployment strategy.
    In summary, AARP is a strong supporter of the Universal 
Service Fund, the essential services it maintains, and we look 
forward to working with the Members of this Committee to craft 
policy to best meet the needs of midlife and older Americans, 
particularly those from traditionally underserved communities.
    Thank you.
    [The prepared statement of Ms. Cramer follows:]

 Prepared Statement of Bonnie Cramer, Member, Board of Directors, AARP

    Good morning. Mr. Chairman and Members of the Committee, my name is 
Bonnie Cramer and I am a Member of AARP's Board of Directors. Thank you 
for this opportunity to testify today on behalf of AARP, regarding the 
importance to consumers of the Universal Service Fund (USF). Our 
concern centers on consumers' contribution to the USF. At a time when 
the rising costs for energy, medical care, transportation, and other 
basic needs are pushing older Americans monthly budgets to the limits, 
every dollar can make a significant difference.
    The goal of Universal Service has been a significant national 
policy for more than 80 years. It is based on a set of general 
principles including access to and use of quality telecommunications 
services at affordable rates, access to advanced services (especially 
for schools, health care facilities and libraries), access to services 
in rural and high-cost areas, equitable and non-discriminatory 
contributions by telecommunications providers to a Universal Service 
fund, and specific and predictable support mechanisms.
    The Federal USF subsidizes service to high-cost areas, low-income 
consumers, schools, libraries and rural health care facilities. Total 
funding for the USF has grown from $1.8 billion in 1997 to well over $6 
billion in 2004.
    My remarks this morning will focus on five critical points for mid-
life and older Americans regarding contributions to the USF:

        1. Achieving Universal Service for all consumers should be a 
        top priority;

        2. Any mechanism designated for the USF contribution must 
        protect the interests of low-income consumers and should hold 
        low-volume consumers harmless;

        3. All voice communications providers should contribute to the 
        USF;

        4. The two major programs for low-income consumers (Lifeline 
        and Link-up) are a fundamental component of the USF; and

        5. Advanced technologies that present new challenges in 
        delivering services to all Americans.

1. Achieving Universal Service for all Consumers Should Be a Top 
        Priority
    Telecommunications services are essential to modern life. For older 
Americans in particular, the ability to contact police, fire, medical 
and other services in times of emergency is absolutely necessary. The 
Universal Service program recognizes the value of connecting everyone 
to these life saving services, as well as the importance of connecting 
each of us to one another. Telecommunications services are not only a 
lifeline for mid-life and older Americans, but they also serve as an 
essential component of our work, family life and entertainment.
2. Any Mechanism Designated for the USF Contribution Should Protect the 
        Interests of Low-Income Consumers and Must Hold Low-Volume 
        Consumers Harmless
    AARP understands the need to adequately fund the Universal Service 
program. While sufficient funding of the program is of critical 
importance, the goal must not be achieved by harming the very 
population the Fund seeks to help. We must not unduly burden low-income 
or low-volume long-distance consumers. We believe the funding goal can 
be met by retaining the current contribution mechanism and by 
restraining the size of the fund.
    We contend that the current revenue-based mechanism is both 
equitable and nondiscriminatory. The existing funding mechanism does 
not penalize consumers who make few or no long-distance telephone 
calls. Under some of the proposed funding mechanisms, these low-volume 
long-distance service consumers would be required to pay the bulk of 
the funding for Universal Service.
    AARP is concerned that a shift away from a pay-for-what-you-use 
system to a regressive numbers-based plan as one proposal suggests, 
would unduly harm low-volume, long-distance consumers. Many of these 
low-volume, long-distance consumers are older Americans on fixed-
incomes. It is unfair for consumers who have low long-distance monthly 
bills to pay larger USF fees, raising their overall monthly telephone 
bill.
    Is it fair for Bill Gates and Aunt Edna, an 86 year-old living on a 
fixed-income, pay the same amount for their Universal Service fee on 
their monthly bill? If Bill Gates makes many more long-distance calls 
now, he pays more to the Fund and that seems to be the equitable way to 
manage contributions. Aunt Edna shouldn't have to bear any greater 
burden to sustain the Fund.
    AARP also asserts that the Fund size can be constrained by limiting 
Federal Universal Service support from the high-cost Fund to a single 
line for each household. This step would prevent the excessive and 
unnecessary future growth in the Fund resulting from supporting all 
lines provided by all eligible telecommunications carriers.
3. All Voice Communications Providers Should Contribute to the 
        Universal Service Fund
    Ensuring that all Americans have ready access to affordable, 
reliable, and high-quality voice telecommunications service is critical 
to the health, welfare and economy of the country. This is true no 
matter what technology is used to provide the service. In fact, from a 
consumer's perspective, any service that is marketed as a voice 
telephone service and interconnects with the public-switched telephone 
network (PSTN) is a telecommunications service. In this regard, the 
only equitable, non-discriminatory and technology-neutral way to 
collect Universal Service contributions and produce a sufficient base 
of support is to require all carriers that benefit from their ability 
to connect customers over the public-switched network to contribute.
4. The Two Major Programs for Low-Income Consumers (Lifeline and 
        Link-up) Are a Fundamental Component of the USF
    The Lifeline and Link-up programs offer financial assistance to 
low-income consumers, ensuring all consumers have the opportunity to 
remain connected to essential telecommunications services. While these 
programs preserve and enhance universal telephone service, they 
unfortunately only serve a small portion of the low-income population, 
with less than 30 percent of income-eligible households participating 
in the Lifeline program.
    The Federal Communications Commission (FCC) and the National 
Association of Regulatory Utility Commissioners (NARUC) have initiated 
a program, ``Lifeline Across America'' to aid consumer awareness of 
these two assistance programs. Consumer awareness will certainly serve 
as an important first step to increasing enrollment in the Lifeline and 
Link-up programs. ``Lifeline Across America'' is planning activities, 
such as distributing bilingual outreach materials to targeted 
audiences, and educating state and local government offices about the 
Lifeline and Link-up eligibility requirements and procedures. These 
programs will help inform consumers about the discount programs and 
AARP looks forward to working with the FCC and NARUC to implement this 
effort.
    While increasing consumer awareness of the assistance programs is 
an important step to addressing the underserved low-income population, 
AARP supports additional measures to increase enrollment. For example, 
automatic enrollment into the Lifeline program for all consumers who 
participate in other designated-need programs would greatly increase 
the participation rate in these telephone discount programs.
    We also urge the FCC to report data with estimates on the 
percentage of households in each state and nationally who are eligible 
for Lifeline and Link-Up, along with the most recent corresponding data 
that shows the number of households that participated in these 
telephone assistance programs.
5. Advanced Technologies Present New Challenges in Delivering Services 
        to all Americans
    While this Committee considers the contributions to, and 
distribution of, the Universal Service fund, AARP suggests that this 
Committee consider a related issue of growing interest to our members.
    Improvements in technology over the past two decades have led to an 
array of new and better services, as well as profound social and 
economic benefits for many people. Consumers are accessing the Internet 
to connect with family, friends and colleagues, searching for 
information, and shopping online.
    AARP recognizes that the benefits of ubiquitous and affordable 
access to broadband networks are of particular value to mid-life and 
older Americans. For example, with a broadband connection to support 
monitoring devices and interactive video, home health care becomes a 
viable option for many consumers, particularly those with limited 
mobility or those who may not be well enough to travel. A broadband 
connection also facilitates distance learning opportunities, and 
telecommuting, a particularly attractive option for older workers. The 
Internet can connect older Americans to their community and their 
family. For example, a broadband connection can facilitate older 
Americans desire to ``keep connected'' to loved ones in our ever mobile 
society, allowing grandparents to send and receive pictures and videos 
of loved ones and more actively participate in the lives of their 
children and grandchildren. The Internet can also provide a broad array 
of entertainment options.
    Currently, more than half (53 percent) of all consumers who use the 
Internet from home do so through broadband technology, allowing 
consumers to access a greater range of voice, video and data services. 
However, for older Americans, age 65 and above, only about 25 percent 
access the Internet with a broadband connection; the remainder still 
rely on dial-up access.
    What are the reasons for this digital divide? Are there public 
policies that can provide better prices and greater access to these 
services to help increase broadband use among older Americans? AARP is 
interested in learning more about this divide that is serving as a 
barrier for older Americans.
    Bridging this digital divide is a significant issue for AARP and we 
urge policymakers to make affordable, high-speed broadband a national 
priority and to consider ways to create an aggressive deployment 
strategy that includes specific targets in terms of broadband 
penetration coverage and usage. We look forward to working with the 
Members of this Committee to help establish the United States as a 
leader in providing all consumers with access to the fastest and most 
affordable broadband services.
Conclusion
    In summary, AARP is a strong supporter of the Universal Service 
Fund and the essential services it sustains. We look forward to working 
with the Members of this Committee to craft policy to best meet the 
needs of mid-life and older Americans, and especially those from within 
traditionally underserved communities.

    The Chairman. Thank you very much.
    Our last witness is Paul Garnett, the Assistant Vice 
President for Regulatory Affairs of CTIA.
    Mr. Garnett?

         STATEMENT OF PAUL W. GARNETT, ASSISTANT VICE 
       PRESIDENT, REGULATORY AFFAIRS, CTIA--THE WIRELESS 
                    ASSOCIATION'

    Mr. Garnett. Good morning, Mr. Chairman and Members of the 
Committee.
    On behalf of CTIA--The Wireless Association', I 
want to thank the Senate Commerce Committee for focusing its 
attention on the important and timely issue of 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 customers. My comments today are focused on reforming 
the Universal Service contribution system, but I will also 
briefly discuss the distribution side of the Universal Service 
equation.
    As a significant and growing net payer into the Universal 
Service system, the wireless industry is uniquely positioned to 
comment on proposals to reform the Universal Service system. 
Wireless carriers are now responsible for approximately 34 
percent of contributions to Universal Service, while receiving 
only approximately 12 percent of payments. Wireless carriers, 
therefore, have a strong interest in ensuring that Universal 
Service contributions are collected from as wide a base as 
possible, while ensuring that both incumbent and competitive 
eligible telecommunications carriers, or ETCs, receive no more 
support than is necessary to achieve the goals of Universal 
Service.
    Chairman Stevens, you mentioned the migration of customers 
from traditional stand-alone interstate telecommunications 
services that clearly are subject to Universal Service 
contributions to services for which contributions are not 
always clear. One-rate services that combine local and long-
distance calling create challenges. Add to the mix mobility, 
broadband, and converged wireless devices that now will allow 
both traditional cellular, PCS, and nontraditional VoIP WiFi 
connectivity, and you are talking an administrative and 
enforcement nightmare.
    Low-income customers of traditional voice services have the 
most to lose under the current revenue-based system that allows 
customers of high-end services to avoid contribution costs by 
simply purchasing new types of services. Taken together, these 
changes are placing the revenue-based Universal Service 
contribution system at increasing risk.
    At the FCC, CTIA traditionally has supported the revenue-
based system, but changes in the marketplace have led us to 
conclude that the revenue-based system is no longer 
sustainable, for the reasons that I just mentioned. Considering 
all the alternatives that are currently before the FCC, CTIA 
now believes that a numbers- and capacity-based contribution 
system will best adapt to the evolving, multidimensional 
communications marketplace in which all of us now operate.
    CTIA has developed a detailed proposal for the FCC to 
transition from the current revenue-based system to a numbers- 
and capacity-based system. We believe that our proposal 
addresses each of the concerns addressed by the other panelists 
today.
    Under CTIA's proposal, all switched connections will be 
assessed based on working telephone numbers, and non-switched 
connections will be assessed based on capacity. CTIA has 
carefully designed its proposal to ensure that no consumer 
groups will be unfairly disadvantaged or advantaged as a result 
of the transition to a numbers- and capacity-based system.
    Under CTIA's proposal before the FCC, the typical household 
will pay about the same in Universal Service costs as it does 
today. CTIA has achieved that result by providing safe harbors 
for certain broad customer categories; for example, exempting 
low-income Lifeline and Link-up customer numbers from 
contribution obligations.
    Importantly, CTIA is not asking for special treatment under 
the Universal Service contribution system for wireless 
carriers. Wireless carriers accept their responsibility to pay 
into the Universal Service Fund. Wireless carriers would pay 
more over time under the revenue-based system, and they will 
continue to pay more over time under the numbers- and capacity-
based system that we've designed. No segment of the industry is 
going to add more numbers over the next few years than wireless 
carriers.
    Let me switch gears for a moment and briefly discuss the 
distribution side of the Universal Service equation. The 
wireless industry shares Congress's concerns about growth in 
the size of the Universal Service Fund. After all, the wireless 
industry writes more checks than they cash in the Universal 
Service sphere.
    Senator DeMint, you mentioned the issue of accountability, 
and we think that's a critical issue. At the FCC, CTIA has 
supported proposals to ensure that Universal Service support is 
used only for its intended purposes. CTIA has supported 
stringent guidelines adopted by the FCC requiring both 
incumbent and competitive ETCs to use support to provide 
services to requesting customers throughout a designated 
service area. In essence, we've supported a--carrier-of-last-
resort obligation for both incumbents and competitors.
    However, CTIA strongly opposes any proposals to 
discriminate against wireless carriers. We also are opposed to 
proposals that would unfairly give incumbents and competitors 
unequal high-cost Universal Service support. Giving less per-
line support to competitors puts policymakers, not consumers, 
in the position of deciding which provider wins and loses in 
the competitive marketplace.
    Nondiscriminatory access is critical, because wireless 
deployment in some rural areas has occurred primarily because 
of wireless carrier access to Universal Service support.
    Senator Burns, you mentioned eastern Montana. There are 
many other examples. Let me give a couple of examples as I 
close my remarks.
    Centennial Wireless, for example, has used Universal 
Service support over the last couple of years to bring mobile 
wireless services to communities such as Shaw and Blackhawk, 
Louisiana, that previously had no telephone service at all, 
wireless or wireline.
    On the Pine Ridge Indian Reservation in South Dakota, 
Alltel has used Universal Service to increase telephone 
penetration rates from 27 percent to 92 percent in just 5 
years. Wireless carriers, such as Cellular South, Rural 
Cellular Corporation, Sprint Nextel, Midwest Wireless, U.S. 
Cellular, and many others, have achieved similar results in a 
few short years. We are proud of that track record, but we 
really believe that the best is yet to come, and there's a lot 
more work for wireless to do in rural areas.
    We look forward to a continuing and open dialogue with the 
Members on these important issues. And, again, I want to thank 
you for the opportunity to share the wireless industry's views 
on this important issue, and I welcome your questions.
    [The prepared statement of Mr. Garnett follows:]

   Prepared Statement of Paul W. Garnett, Assistant Vice President, 
     Regulatory Affairs, CTIA--The Wireless Association'

    Good morning. On behalf of CTIA--The Wireless Association, I want 
to thank the United States Senate Committee on Commerce, Science, and 
Transportation for focusing its attention on the important and timely 
issue of 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. My comments are focused on reforming 
the Universal Service contribution system, but I also will briefly 
discuss the issue of how best to address legitimate concerns about the 
distribution side of the Universal Service equation.
    As a significant and growing net payer into the Universal Service 
system, the wireless industry is uniquely positioned to comment on 
proposals to reform the Universal Service system. Wireless carriers are 
responsible for approximately 34 percent of contributions to Universal 
Service, while receiving only approximately 12 percent of payments. 
Wireless carriers have strong incentives to ensure that Universal 
Service contributions are collected from as wide a base of contributors 
as possible, while ensuring that both incumbent and competitive 
eligible telecommunications carriers (ETCs) receive no more support 
than is necessary to achieve the goals of Universal Service. As I will 
explain below, it is the wireless industry's strong interest in a 
sustainable system that assesses Universal Service contributions in an 
equitable and nondiscriminatory manner from as wide a base as possible 
that has led CTIA to support the FCC's adoption of a numbers- and 
capacity-based Universal Service contribution system at the FCC.
    The wireless industry's share of contribution obligations has grown 
significantly over the last decade. In 1997, wireless carriers were 
responsible for only 3.3 percent of contributions. Wireless carriers 
are now responsible for approximately 34 percent of contributions to 
Universal Service. Wireless carriers are quickly becoming the largest 
group of contributors to the Federal Universal Service programs.
    It is safe to say that this growth in Universal Service 
contributions has matched the meteoric rise in the 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, as compared to 
approximately 178 million 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 percent. The wireless household penetration rate 
in rural areas is not far behind--at 50.5 percent. The FCC has found 
that 97 percent of wireless customers live in counties with a choice of 
three or more wireless carriers and 87 percent of wireless customers 
live in counties with a choice of five or more wireless carriers.
    Corresponding with this growth, consumers have received lower 
monthly bills, cheaper minutes, and new and innovative services. The 
average cost of wireless services has declined over time--while 
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 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 2004, the wireless industry crossed the one trillion 
minutes of use threshold.
    Now, wireless carriers are in the midst of rolling out mobile 
broadband services. An alphabet soup of wireless broadband technologies 
is being deployed: WiFi, WiMax, 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.
    The growth of these new and innovative services, while providing 
obvious benefits to consumers, place the current revenues based 
contribution system in a precarious situation. As you know, 
contributions under the current system are premised on distinctions 
between ``interstate'' and ``intrastate,'' and ``telecommunications'' 
and ``non-telecommunications.'' The distinction between intrastate and 
interstate has always been difficult for wireless carriers, which 
provide a service that is inherently mobile. For that reason, the 
Federal Communications Commission created an interim safe harbor that 
now allows wireless carriers to assume that 28.5 percent of the 
telecommunications services are interstate for purposes of calculating 
Universal Service contribution obligations. Many wireless carriers 
nonetheless perform traffic studies to estimate what percent of their 
telecommunications revenues is interstate. This distinction has become 
an issue for wireline carriers that now increasingly offer Voice over 
Internet Protocol (VoIP) services that provide customers with 
mobility--the ability to make and receive calls wherever in the world 
they have access to a broadband connection. Unlimited long-distance 
plans offered by wireline carriers also are making it harder to 
unbundle the revenues associated with the interstate calls that support 
the USF.
    The distinction between ``telecommunications'' and ``non-
telecommunications'' also is a challenge. Communications providers 
increasingly are self-defining themselves out of Universal Service 
contribution obligations. Often, the Federal Communications Commission 
only discovers that contributions are not being paid until well after 
the fact when a carrier is either uncovered by a competitor or turns 
themselves in. Prepaid calling cards are the most recent and infamous 
example of telecommunications carriers calling themselves information 
service providers to avoid Universal Service contribution obligations. 
Commonsense dictates that prepaid calling card providers, who add 
prompts at the beginning of each call, are no different from any other 
provider of long-distance services, but these carriers have exploited a 
lack of clarity in the rules to avoid paying their fair share into the 
Universal Service fund. The prepaid calling card example has cost the 
Universal Service Fund several hundred million dollars in lost 
Universal Service contributions over the last few years. These 
contribution costs just end up getting shifted to wireless carriers and 
others that are playing by the rules. Incidentally, wireless carriers 
can and do pay USF on their prepaid services. Without a doubt, there 
are many other examples of carriers wrongfully avoiding contribution 
obligations.
    The growth of broadband services also is placing the revenue-based 
system under threat. As you are well aware, the United States Supreme 
Court, in the Brand X decision, recently upheld the FCC's determination 
that cable modem providers are information service providers. The FCC 
also recently expanded that declaration, concluding that DSL providers 
also were information service providers--not subject to mandatory 
Universal Service contributions under the Act. Although the FCC 
continues to collect Universal Service contributions from DSL 
providers, it acknowledged that those contributions could end, 
depending on the outcome of the FCC's Universal Service contribution 
methodology proceeding. Meanwhile, several other petitions are pending 
before the FCC seeking declarations that a variety of other services 
are information services, that potentially would be exempt from 
mandatory Universal Service contribution obligations. The wireless 
industry also is fast deploying its own broadband Internet access 
services that should be treated no differently than cable modem or DSL 
services for contribution purposes. To add further complexity to this 
picture, wireless carriers will soon be marketing converged devices 
that will allow consumers to seamlessly transition from traditional 
cellular or PCS connectivity to VoIP WiFi connectivity, whichever 
provides the best user experience.
    Taken together, these changes are placing the Universal Service 
contribution system at risk. The interstate telecommunications revenue 
base used to assess Universal Service contributions has been stagnant 
or in decline over the last few years--even as revenues overall for the 
industry have continued to increase. This can only mean that carriers 
and customers are migrating from traditional services clearly within 
the Universal Service contribution base to services that are not 
subject to contribution obligations. And, the rate of this migration 
will only increase over time. CTIA does not believe that this problem 
can simply be addressed by expanding the scope of revenues subject to 
contribution obligations--for example expanding the base of 
contributors to include all ``communications service providers.'' 
Because a revenue-based system will always rely on definitional 
distinctions (this time as between ``communications'' and ``non-
communications''), it will always be vulnerable to mischief.
    That brings us to the question of what mechanism will best adapt to 
these changes over time? Considering all the alternatives, CTIA, on 
behalf of its wireless carrier members, now believes that a numbers- 
and capacity-based contribution system will best adapt to the evolving 
multi-dimensional communications market in which we now operate. 
Working extensively with our carrier members, CTIA has developed a 
detailed proposal for the FCC to transition from the current revenue-
based system to a numbers- and capacity-based system.
    In identifying the best system, CTIA tried as much as possible to 
adhere to the following core principles: (1) All providers of 
interstate telecommunications should contribute on an equitable and 
nondiscriminatory basis; (2) No individual consumer group should bear 
an unreasonable and unfair share of contribution obligations; (3) 
Opportunities for telecommunications providers to avoid contribution 
obligations should be minimized; and (4) Administrative burdens and/or 
costs for contributors (and by extension consumers) should be 
minimized. Weighing all of these factors, CTIA has developed a numbers- 
and capacity-based contribution system that is fair to both 
contributors and consumers. Numbers and connections are easily 
understood by consumers. Assessing numbers and connections also avoids 
the problem of definitional arbitrage so endemic in the current 
revenue-based system.
    Under CTIA's proposal, all switched connections would be assessed 
based on working telephone numbers and non-switched connections would 
be assessed based on capacity units. CTIA has designed its proposal to 
ensure that no consumers will be disadvantaged as a result of the 
transition to a numbers- and capacity-based system. Importantly, CTIA 
is not asking for special treatment under any Universal Service 
contribution system. Wireless carriers would pay more over time under a 
revenue-based system and they will continue to pay more under a 
numbers- and capacity-based system. No segment of the industry will add 
more numbers over the next few years than wireless carriers. Under 
CTIA's proposal all providers of interstate telecommunications will 
continue to contribute on an equitable and nondiscriminatory basis.
    The CTIA proposal does include certain safe harbor provisions for 
certain broadly-defined residential consumer groups. The needs of 
residential customers--the primary beneficiaries of Universal Service--
must be central to any changes. Under CTIA's proposal, there would be 
no contribution obligations associated with Lifeline and Link-Up 
customer numbers. Moreover, residential broadband services associated 
with a number would not be separately assessed--so that a residential 
customer with a DSL connection would not be assessed for both its 
number and its broadband connection. In addition, CTIA's proposal would 
reduce assessments for wireless ``family plan'' numbers and prepaid 
customer numbers by 50 percent. The Universal Service contribution for 
the typical wireless ``family plan'' would more than quadruple if it 
were subject to the full numbers-based assessment. Under our proposal, 
the amount of that increase would still be significant, but more 
manageable. We believe these provisions are necessary to ensure that 
residential customers--especially those that are low-income or low 
average revenue per unit--are not unfairly impacted by the transition 
to a new system.
    Some customers may pay slightly more or less under CTIA's numbers- 
and capacity-based contribution system, but the typical residential 
customer would pay about the same. Considering a wide range of 
assumptions, CTIA concludes that under the revenue-based system, the 
average residential customer pays no more than $3.00 per month in 
Federal Universal Service contribution costs. Under CTIA's proposal, 
the average residential customers would pay no more than $3.01 per 
month in Federal Universal Service contribution costs in 2006. Overall, 
under the revenue-based system, residential customers are responsible 
for no more than 55.2 percent of the Universal Service contribution 
base. Under CTIA's proposal, residential customers would be responsible 
for no more than 55.9 percent of the Universal Service contribution 
base in 2006. These amounts will increase over time, but would also 
increase under the revenue-based system as the size of the Fund grows 
and as residential customers purchase a wider variety of services. This 
analysis shows that the typical business customer also would pay about 
the same under CTIA's proposal.
    When comparing CTIA's proposal against others, the devil really is 
in the details. For example, assessing numbers without a capacity-based 
component for non-switched connections would result in a significant 
and wholly unfair shift of contribution obligations to residential and 
small business customers. Likewise, some parties have proposed capacity 
tiers and multipliers for non-switched connections that would shift 
contribution obligations down from large business users to residential 
and small business customers. Other proposals seek preferential 
treatment for certain categories of large business customers that are 
neither low average revenue nor low-income. Most recently, carriers and 
customers that inefficiently use numbers have asked for preferential 
treatment--essentially asking the FCC to validate bad business models 
and buying decisions. These proposals are patently unfair and should be 
rejected.
    In short, CTIA believes that it has developed a contribution 
methodology proposal for FCC adoption that is fair to both contributors 
and consumers. CTIA's proposal balances the equities that are necessary 
to ensure a sustainable contribution base. CTIA believes that its 
proposed numbers- and capacity-based contribution methodology will 
adapt overtime as the industry continues to evolve. Importantly, CTIA's 
proposal is not self-serving. As I stated previously, wireless carriers 
have and will continue to pay more over time than under the revenue-
based system.
    Let me briefly discuss the distribution side of the Universal 
Service equation. As Congress considers reforms to the Universal 
Service system, wireless carriers must be recognized for the benefits 
they can and will bring to rural consumers. The wireless industry 
shares Congress's concerns about growth in the size of the Universal 
Service fund. At the FCC, CTIA has supported proposals to ensure that 
Universal Service support is used only for its intended purposes. CTIA 
supports stringent guidelines adopted by the FCC requiring both 
incumbent and competitive ETCs to use high-cost Universal Service 
support to provide supported services to requesting customers 
throughout a designated service area (in essence, a ``carrier of last 
resort'' obligation). However, CTIA strongly opposes any anti-
competitive proposals to discriminate against wireless carriers. We 
also are opposed to proposals that would unfairly give incumbents and 
competitors unequal high-cost Universal Service support. 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 telecommunications marketplace.
    I have heard the argument that Universal Service should not be used 
to create artificial competition in areas that could not sustain the 
incumbent wireline carrier without Universal Service funding. But, 
Universal Service also should not be used to create artificial barriers 
to competition under claims that competition in some areas of the 
country is not economically feasible. As the experience of the wireless 
industry has demonstrated, there can be little question that 
competition is good for consumers--whether located in rural or non-
rural areas--by spurring innovation and efficiency. Limiting Universal 
Service support to one incumbent wireline carrier in a particular area 
will discourage more efficient and innovative competitors from entering 
that area and providing rural customers with the same choices and 
innovative services that benefit customers in more densely populated 
markets.
    Universal Service can and does play a critical role in improving 
access to wireless services in high-cost, rural areas. 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 primarily because 
of wireless carrier access to Universal Service support.
    For example, Centennial Wireless has used Universal Service support 
to bring mobile wireless services to communities, such as Shaw and 
Blackhawk, Louisiana, that previously had no telephone service at all, 
wireline or wireless. On the Pine Ridge Indian Reservation in South 
Dakota, Alltel has used Universal Service to increase telephone 
penetration rates from 27 percent to 92 percent in only five years. 
Wireless carriers, such as Cellular South, RCC, Sprint, Midwest 
Wireless, U.S. Cellular, and others have achieved similar results. In 
many instances, wireless carriers have achieved in a matter of years 
what it took incumbents decades to achieve. We are proud of that track 
record. But, we believe the best is yet to come.
    Efficiency and innovation have been hallmarks of the wireless 
industry. We believe Universal Service distribution policies should 
replicate those values as much as possible. CTIA has long supported 
market-driven efforts to curb demand for Universal Service subsidies. 
Under CTIA's proposals, both incumbents and competitors would receive 
less support. We are open to a variety of proposals that will ensure 
that both incumbents and competitors receive no more support than is 
necessary to achieve important Universal Service goals.
    We look forward to a continuing and open dialogue with the Members 
on these important issues. As strong as our opinions appear, we are 
open to other ideas for furthering the goals of Universal Service in 
the evolving communications marketplace. Again, thank you for the 
opportunity to share the wireless industry's views on Universal Service 
reform and I welcome your questions.

    The Chairman. Thank you very much. We welcome your comments 
about your penetration into the Indian reservations.
    Let me be sure we know what we're talking about. I asked 
for an approximation of this Fund. It's approximately, 
annually, now about $6.2 billion. About 3.73 billion goes to 
high-cost rural areas; 2.1 billion is the e-rate--some of 
that's rural, not much; about .1 billion is for the rural 
health care aspects; about 1 billion is for the Lifeline/Link-
Up for the city programs. This is a program that's increasing 
in cost annually. So, we have to devise a system that's fair to 
both the rural areas and to the city areas. And we appreciate 
your willingness to be part of this dialogue.
    Now, Mr. Post--we are working on a 5-minute time clock for 
ourselves, so I hope you all will be short with your answers, 
so we might have an opportunity to ask more than one question--
what percentage of your traffic is long-distance versus local?
    Mr. Post. Mr. Chairman, I'm not sure, as far as total long-
distance traffic coming out of our markets today. The----
    The Chairman. Well, that is immaterial, but does it make 
sense to distinguish between the two with regard to Universal 
Service, in your opinion?
    Mr. Post. Not really. It does not.
    The Chairman. Do you look at numbers as being a fair 
assessment mechanism for revenues?
    Mr. Post. I think numbers are a fair assessment. The only 
concern I would have is that we avoid any arbitrage that might 
be brought about by--only numbers. And then--so a connection, 
by another name other than a number, it's an e-number or an 
address, could be used to avoid paying access. But I think 
numbers are certainly a good place to start.
    The Chairman. Mr. Boaldin and Mr. Simmons, I don't know 
whether there's conflict between your testimonies or not. Mr. 
Boaldin, you suggest that broadband should be supported. Mr. 
Simmons, you seem to suggest that it shouldn't have to pay in. 
Where do we come out? And one of you suggests that we should 
support the services, the costs of extending the services. Mr. 
Simmons, do you really mean that people that are connected by 
broadband to the telecommunications system should not pay into 
the Universal Service Fund?
    Mr. Simmons. I think what I mean is that broadband for the 
sake of broadband should not be assessed. If there is a 
telephone component that rides over broadband--for example, in 
the digital service that we provide that we launched recently 
in Mitchell, South Dakota, we're treating that as a telephone 
service. So, we would pay into the Universal Service. But it's 
the application of the telephone service, and not necessarily 
the particular network that it rides on, that's the driving 
factor.
    The Chairman. Well, what service are you going to provide 
if it's not communications service?
    Mr. Simmons. On broadband?
    The Chairman. Yes.
    Mr. Simmons. I think my point is that--the issue of 
broadband and the issue of telephone support are two different 
things, at least in my mind. The Universal Service Fund has 
been there, traditionally, to support the telephone services in 
high-cost or rural areas. And I think it's important to get 
that component fixed first. The next step, of course, would be 
to take a look at the broadband programs. And I'm personally 
not in favor of taxing broadband, in favor of dropping that 
into the Universal Service Fund to support just telephone 
service. And, frankly, I'm a bit----
    The Chairman. If I used broadband for a fax service, should 
I pay into it?
    Mr. Simmons. If your fax service is telephone-number-
directed, yes. That's why we promote the telephone-number 
model. You would have a number for your fax service, you would 
have a number for your telephone service.
    The Chairman. With respect, sir, I just think that what 
you're asking the industry then to do is to develop a system 
whereby you don't use numbers, you use call signs of some kind. 
But I believe--when we were dealing with the 1996 Act, I argued 
against telecommunications. I wanted them to talk about 
communications. I hope that's what we're talking about now. 
We're talking about communications. And if you've got 
communications connected by any system--and I think fax is a 
communication, I think e-mail is a communication, and I do 
believe they all should contribute. Now, we may have an 
argument along this table before we're through about that.
    Ms. Cramer, you make really important points about what 
we're doing. Senator Inouye and I would agree with you, being 
the octogenarians of this Senate--well, at least two of them. 
But isn't the cost of connecting someone to the network the 
same without regard to how often they use it? You seem to think 
if you use it very little, that you shouldn't have to pay at 
all. Is that right?
    Ms. Cramer. Our main point is that for someone who is on a 
fixed income, as an example, and who takes a great care to 
limit the use of long-distance calls, that they should not be 
penalized based on the low volume of calls that they use, that 
that should be considered. They should have recognition of the 
low volume that they use.
    This is a major area, as you know, particularly in rural 
areas, but with older people on fixed incomes; not necessarily 
low-income people, but older people on fixed incomes who try to 
make every dollar count. And one of the ways they do that is, 
try to keep their long-distance volume low.
    The Chairman. Would you put a limit on the dollar amount 
per month? Or how do you suggest we do that? I mean, in my 
State, just making a call from Point Barrow to a son or 
daughter in Anchorage is long-distance.
    Ms. Cramer. Well----
    The Chairman. Now, in your area, probably calling from here 
to Baltimore is long-distance, it's distance insensitive, but 
the necessity to call is not insensitive. And you pick up the 
telephone here and call Baltimore, you pay hardly anything. If 
someone picks up the phone in Barrow and calls Anchorage, 
they're going to pay a lot, under your suggestion.
    Ms. Cramer. As I understand it, the surcharges that are 
charged now by the carriers for long-distance are based on the 
volume of the charges, the total charges for long-distance 
calls, so that if, for example, you had a $4 monthly long-
distance charge, your surcharge might be 10, 10.3, 10.8, 
whatever the percentage amount of that. That's what you would 
be assessed. So that if you go to the trouble to keep your 
volume low, then you are paying a smaller amount, not just an 
amount per telephone, for example, but based on the volume and 
the usage.
    The Chairman. Oh, now I understand what you're saying. I 
agree. I don't have any problem with that.
    I'm running over my time, so I'll come back later.
    Up next is Senator Burns.
    Senator Burns. Thank you very much, Mr. Chairman.
    Mr. Post, can you tell us why it's so important for 
Universal Service to be exempt from the Anti-Deficiency Act, or 
the ADA?
    Mr. Post. Yes, sir, I think----
    Senator Burns. That's come up in our conversations, and I 
just want to clear that up for the Committee.
    Mr. Post. I believe it's very important for Universal 
Service to be exempt from the Anti-Deficiency Act. We need 
stability in USF. Consumers need that stability, companies that 
are investing in rural America need that stability to be able 
to count on those revenue streams being available as we invest 
in rural America. If we upgrade these systems, broadband 
systems especially, the investment is great, and we need the 
certainty that those funds are recoverable, that we can have 
returns on those investments.
    Senator Burns. Also, our approach has been to, kind of, let 
the FCC take a look on the contributors. In other words, I 
guess, in some areas maybe numbers might work, some areas it 
may be based on revenues and the like. Do you think the FCC 
should have that kind of flexibility?
    Mr. Post. As far as giving them the----
    Senator Burns. The decisionmaking----
    Mr. Post.--decision?
    Senator Burns.--of----
    Mr. Post. Yes.
    Senator Burns.--of the contributions?
    Mr. Post. I definitely think they should have the 
flexibility to put together the most appropriate combination of 
contribution methodologies, whatever those be, whether it's 
numbers, revenues, capacity, whatever it is.
    Senator Burns. Mr. Boaldin, would you agree with that?
    Mr. Boaldin. Mr. Boaldin?
    Senator Burns. Yes.
    Mr. Boaldin. Yes.
    Senator Burns. I'm sorry.
    Mr. Boaldin. Yes, I would agree with that, along with one 
of the things the FCC----
    Senator Burns. And I've been to Elkhart, Kansas, by the 
way.
    Mr. Boaldin. That's all right. Along with that, as far as 
the FCC goes, they need that flexibility. And then another 
thing that they need, I think, is clarification of their 
authority to assess interstate revenues, as well as authority 
over the access piece.
    Senator Burns. Mr. Simmons----
    Mr. Simmons. Yes, sir?
    Senator Burns.--would you comment on that? Do you think we 
should give the FCC the flexibility, on the contribution side, 
where they get their revenues?
    Mr. Simmons. I believe we should. I believe they're in the 
position to assess this, to understand the positions, have the 
technical expertise to imagine how it would work.
    Senator Burns. Well, we know, on the distribution side--and 
we're not going to get into that until next Thursday--I'm just 
looking at the approach our two bills take that's working its 
way now through Congress, and if that flexibility should be 
allowed.
    Mr. Garnett, your contribution proposal includes a 50 
percent discount on your wireless customers on so-called 
``family plans.'' Would this discount also apply to the 
wireline customers where residential customers have more than 
one phone line?
    Mr. Garnett. In designing our proposal, we tried, as much 
as possible, not to disrupt the way in which large groups of 
residential customers pay in today. So, for a family-plan 
extension on a typical wireless plan, they're paying 9.99 a 
month for that handset, and, as a result, if you flow that 
through to a contribution obligation, it's about 25 cents a 
month. So, what we're proposing is a 50 percent discount from 
the dollar for those types of connections, those types of 
numbers. So, it would be an increase. It wouldn't be as great 
of an increase if you went all the way to the full dollar.
    On the wireline side, from what I understand, second lines 
typically are not given that same amount of a discount, as 
compared to first lines. So, for example, the subscriber line 
charge, which is the basis of Universal Service contributions 
for first and second lines on the wireline side, for local 
exchange carriers are essentially the same, so there's no 
justification, in our mind, for providing that additional 
discount.
    We do provide a complete exemption from contribution 
obligations for Lifeline customers, for low-income customers 
that take advantage of the Lifeline and Link-up mechanism. So, 
they would have no contribution obligation. And, as we all know 
at least 90 percent of those Lifeline and Link-up dollars go to 
local exchange carriers. They would be able to benefit from 
that.
    Senator Burns. Well, the reason I'm looking at this 
flexibility is just for the reason that when we wrote the 1996 
Act--and some of us were around here when we did that--we 
missed the estimate of wireless users so bad. It's unbelievable 
now that we've got more cell phone numbers than we've got 
hardwired numbers. And how we look at that, I think, is that 
flexibility, is going to become very important, because I think 
the landscape will continue to change. And we get wired--well, 
that's not a very good term--we get locked into a situation 
where circumstances change, we have a hard time of dealing with 
that.
    So, I appreciate all of your testimony today, because I 
think flexibility will be the key, as far as contributions are 
concerned, and how we approach that. And I want to thank all of 
you for coming.
    By the way, Ms. Cramer, you live at Raleigh, North 
Carolina?
    Ms. Cramer. I do, yes.
    Senator Burns. I've got a brand new grandchild there. Would 
you take care of it?
    [Laughter.]
    Ms. Cramer. I'll be glad to take your greetings.
    Senator Burns. Well, it's not Raleigh. It's kind of Holly 
Springs. But you know where that is.
    Ms. Cramer. It's very close by. Yes, I do.
    Senator Burns. [presiding] OK. Now we move to Senator 
DeMint.
    Senator DeMint. Thank you, Senator Burns.
    We've talked a lot today about how to get more money into 
the system. I'm concerned about how to get more people to pay 
into the system. But we really haven't talked that much about 
how to reduce the number who are getting paid. And the thought 
I have, as I look at States like Alaska, where there's still a 
long way to go, a need for applying telecommunications to 
telemedicine in other places, we--they may need more Universal 
Service Funds. But I know--also know there are places in my 
State within a few miles of a major metropolitan area that are 
still getting Universal Service Funds, where they may have 
access to satellite, cable, wireless, phone lines, VoIP. How do 
we phase out Universal Service Funds in different parts of the 
country as we're looking at re-regulating or deregulating or 
changing this? Do any of you have any ideas on criteria we 
could use to basically eliminate the Universal Service Fund in 
parts of the country? And I know there are some things in 
existence now, but clearly it's not working. the Fund is 
growing at such a rate, we can't possibly sustain it. And I 
would just like to hear from any of you, particularly those of 
local phone exchanges, to see who might have any ideas on that. 
How do we discontinue use?
    Mr. Post. I will begin the answer, Senator.
    First of all, 35 percent of CenturyTel subscribers today 
are payers into the Fund, they're not receiving funds. So, it's 
not every subscriber. However, 35 percent of our access lines, 
or our customers, are also in such rural areas that there's not 
even a cable company there. It's just too rural. So, it's those 
folks in between, as you say, close to the urban areas.
    I think as technology comes down in price, in some 
instances, as we're able to utilize the advantages of an IP 
network, I think we'll see reductions in cost. And even in the 
Fund guidelines today, our rules today, there are comparative 
costs compared to average nationwide averages. And if you're 
below a certain level--start out at 115 percent of cost, now 
it's 130 percent of the average. You have to be at least 130 
percent of the average cost in order to receive any funds 
today.
    Senator DeMint. Are those costs based on hardlines, as far 
as just the estimate of serving, or is that something----
    Mr. Post. Based on actual costs of the companies whose 
numbers are pooled in the Fund, the nationwide averages.
    Senator DeMint. But the cost of serving, we arrive at that 
based on servicing with a hardline, is that----
    Mr. Post. Basically, that's correct. There is some wireless 
in the wireline areas, but it's----
    Senator DeMint. Yes, well----
    Mr. Post.--but it's primarily wirelines.
    Senator DeMint.--let me keep throwing a few ideas at you, 
because I know one of the Senators mentioned the Rural Electric 
Act that got electricity to farms. And I think it was Senator 
Burns. There's no other way to get electricity to a farm than 
on a line. But I'm worried that the whole concept of Universal 
Service Fund is basically subsidizing, or based on an old 
technology. A lot of developing countries are showing us that, 
when they began with no hardline infrastructure, that they can 
actually go in and create a better system than we have, because 
it's no longer based on the presumption of old technology. I'm 
afraid that what we're doing here is, there's such a 
predisposition toward added costs, but costs of distance on a 
line, the number of people on a line, like we still do with 
electricity. There's got to be a way of recognizing that Alaska 
may need more money, but we need to phase out Universal Service 
Funds when certain other technologies exist. And that may not 
even be a hardline.
    I know we're talking about ways to get more money into it. 
And, as a lot of you know, I've introduced a bill that includes 
a numbers-based system that would share the cost, which I think 
is reasonable. The experts show that the average customer would 
pay less than a dollar a month under that system if we spread 
the cost to everyone who's using a phone number. But as we look 
at fairer ways to charge and to spread the cost out, I think we 
need some ideas from this group on how we can move areas away 
from subsidization and into the area of competition. And some 
of the rest of you may want to comment on it.
    Yes, sir. Mr. Boaldin?
    Mr. Boaldin. Senator DeMint, yes, there are a couple of 
things that I think of when you talk about controlling that 
piece. Obviously, it's raising the bar to entry to being 
eligible to receive it, so making the bar to be an ETC is high 
enough, limiting those that draw from the pool. Another thing, 
I obviously see that what's important to you is global 
competition, and I would think that for you, since global 
competition is so important to you, then you'll obviously see 
the need for broadband. And I think that by clearly defining 
and making sure that the services that are supported, because I 
see that you are in support of this global competition, this 
broadband piece, making sure that the definition of those that 
receive it are truly providing the broadband, and that it is 
needed.
    Senator DeMint. I may be out of time, but I wanted to just 
make a quick point to Ms. Cramer, if I could.
    I'm concerned about the idea of the rates based on usage, 
because if there's any group of folks we need to encourage to 
use the Internet, it's seniors. And to create a cost per use, I 
think, would be a disservice to seniors. I think it would also 
be an obstacle to rural areas attracting industries that would 
locate and basically have to pay based on their use of 
telecommunications. I just hope you'll rethink that, because 
I'm just concerned that that's not the best way to make that--
make our system work.
    Mr. Chairman, I will yield back.
    The Chairman. [presiding] Thank you very much.
    We're going to recognize Senator Dorgan. He has to leave 
immediately.
    Senator Dorgan?

              STATEMENT OF HON. BYRON L. DORGAN, 
                 U.S. SENATOR FROM NORTH DAKOTA

    Senator Dorgan. Mr. Chairman, thank you very much.
    I apologize for missing the testimony. Senator McCain and I 
are holding hearings over in Russell on Indian Affairs. And I 
have had a chance to review most of the testimony.
    I just wanted to say, in one minute, that there's not much 
more important for this Committee to do than to try to resolve 
this Universal Service Fund issue. I was around when we wrote 
the 1996 Act. You know, I agree with the Chairman, I--in many 
ways, I wish that we took the ``tele'' off and just had the 
word ``communications'' as we deal with these issues.
    But the FCC now, very soon, may finally have five members 
at the FCC. With the Federal Communications Commission sinking 
its teeth into these things with a full complement, and with 
the Chairman now holding these hearings in preparation to 
making some judgments about this--and they're--they are 
difficult and complicated, and also controversial judgments--
maybe we'll finally get some--make some progress. But we have 
to do this. This system is going to fall of its own weight. It 
doesn't have a funding base that's adequate. And a lot of 
things are changing around us. And we have to try to make some 
sense of it.
    So, Mr. Chairman, I appreciate your holding the hearings. I 
wanted to mention, Senator Gordon Smith and I have cosponsored 
S. 1583, also cosponsored by Senator Pryor on this Committee. 
That's one approach on the Universal Service issue. And there 
are others. And I'm just--I'm anxious to work with you and 
other Members of the Committee to address this issue.
    [The prepared statement of Senator Dorgan follows:]

              Prepared Statement of Hon. Byron L. Dorgan, 
                     U.S. Senator from North Dakota

    Section 254 of the 1996 Telecommunications Act codified the 
principles of Universal Service that have actually been at the 
forefront of telecommunications policy for decades.
    Section 254 states that all citizens, including rural consumers, 
deserve access to telecommunications services that are reasonably 
comparable to those services provided in urban areas, at reasonably 
comparable rates.
    I was part of the negotiations that brought about that section, and 
it is just as important today as it was when we wrote it.
    Some have called for the end of Universal Service, they allege it 
is outdated or unnecessary.
    Let me say this to the critics--Universal Service continues to be 
essential and a benefit to all.
    Universal Service was designed to ensure that rural consumers are 
not left behind their urban counterparts. And it is just as necessary 
today in working towards tomorrow's broadband network as it was in 
building the phone network.
    It will always be more expensive to serve rural areas, and 
Universal Service support recognizes that.
    But Universal Service does not only benefit rural consumers.
    We put the Universal Service section into the 1996 Act because 
everyone understood that a ubiquitous network benefits everyone.
    Communications are a two-way street, rural folks can call into 
town, and people in New York City can to pick up their phone and call a 
friend, or order something from a company in Minot, ND.
    Frankly, the same is true over broadband networks, your ability to 
send an e-mail or access Internet content to and from anywhere in the 
country benefits from a ubiquitous broadband network as well.
    Unfortunately, the fact is that the Universal Service Fund is in 
serious trouble. The contribution base is in steep decline as the 
entire industry is in the midst of a digital transformation.
    For the most part this digital migration has been great for 
consumers, but as new forms of communication such as cell phones, e-
mail, instant messaging and now Voice over the Internet Protocol (VoIP) 
are invented and popularized, they present new challenges on how to 
preserve the fund.
    In my view we need to take decisive action to broaden the base and 
fix the problem.
    My colleague Gordon Smith and I have done that by introducing S. 
1583, the Universal Service for the 21st Century Act. Our bill will 
ensure the sustainability and longevity of the Universal Service Fund, 
and support the deployment of broadband to unserved areas.
    Our bill will further that goal in two ways. First, it will ensure 
that the Federal Communications Commission (FCC) will address reform of 
Universal Service and inter-carrier compensation. to support the cost 
of a national, quality communications network.
    In addition, our legislation will set up an account within the 
Universal Service Fund for broadband deployment to unserved areas. This 
will enable deployment of broadband to areas of the country that remain 
prohibitively expensive to serve, leaving consumers in those areas 
behind the technological curve. According to a Pew/Internet study that 
was just released. 24 percent of rural Americans have high-speed 
internet connections at home compared with 39 percent of urban and 
suburban dwellers. The study attributes this not to a lack of interest 
by rural consumers, but rather to availability and in some cases, 
income.
    We have heard comments from many stakeholders with an interest in 
this subject, and we look forward to working with our colleagues and 
the Chairman and Ranking Member on our legislation and moving this 
important issue forward.

    The Chairman. Thank you very much.
    Senator Snowe?

              STATEMENT OF HON. OLYMPIA J. SNOWE, 
                    U.S. SENATOR FROM MAINE

    Senator Snowe. Thank you, Mr. Chairman. I want to thank all 
of you for being here today.
    I agree that this is a significant goal for us this year. 
We must do what we can to address many of the issues in 
expanding the Universal Service Fund to more providers. 
Universal Service is a vital program for so many parts of our 
country that otherwise would not benefit from the 
communications services that they have access to today.
    The question before us is, how do you incorporate broadband 
services in a way that does not cause an explosion of the 
Universal Service Fund? We have to demonstrate some type of 
flexibility in supporting broadband service deployment with 
Universal Service Fund revenues.
    [The prepared statement of Senator Snowe follows:]

  Prepared Statement of Hon. Olympia J. Snowe, U.S. Senator from Maine
    Thank you, Mr. Chairman, for holding this day of hearings on the 
Universal Service fund. This morning we address issues surrounding the 
Universal Service Fund contribution methodology.
    As we all know, the value of a network increases as additional 
users join the network. This principle, known as Metcalfe's law, has 
been the foundation for the concept of Universal Service. The Universal 
Service Fund embodies the policy that as many people as possible--
whether it be a blueberry farmer is Aroostook County, a fourth-grader 
in Waterville, Maine, or a senior citizen in a library in Lewiston, 
Maine--should have access to the system.
    Section 254 of the Telecommunications Act of 1996 is well-written 
law that has served our Nation's Universal Service needs in the past 
decade. However, like many of our other telecommunications laws, 
changes in technology and industry structure are causing a need for 
some updates. While there are many aspects of the law that could be 
improved, I believe some are more timely than others, and I hope this 
Committee will be able to act on those issues in need of immediate 
attention this Congress.
    Most importantly, the contribution base of the Universal Service 
Fund must be expanded. Too few users of the network are required to pay 
into the Universal Service fund. Those sectors of the industry are 
disproportionately affected. Everyone who benefits from the network 
should contribute. Congress needs to give the Federal Communications 
Commission the authority to assess intrastate revenues, broadband 
service providers and IP-enabled voice service providers. the Fund will 
be sustainable if its cost is spread out fairly among network users.
    Second, this Committee should consider expanding the Universal 
Service Fund to include limited broadband infrastructure support. Today 
in Maine, 73 percent of households do not have a broadband service--
either because it is too expensive or simply unavailable. The Funds 
resources should be able to be used, in a limited way, to support the 
deployment of next generation communications technologies.
    Third, another component that is vital to successful Universal 
Service reform is inter-carrier compensation. Universal Service cannot 
be addressed in its entirety until the Commission concludes its work on 
inter-carrier compensation reform. These two issues are so closely 
intertwined, that many of Congress's efforts to reform the distribution 
side of the program will be fruitless without certainty of inter-
carrier compensation rules.
    Finally, Congress should act to pass S. 241, legislation that would 
make permanent the Universal Service fund's Anti-Deficiency Act 
exemption. Without certainty in which accounting principles apply, the 
Universal Service Fund will not be stable. S. 241 was introduced over a 
year ago and to date has a total of 47 co-sponsors, including myself, 
Chairman Stevens, Co-Chairman Inouye, Senator Rockefeller and a 
majority of Members on this Committee. I hope that S. 241 will be 
considered on the Commerce Committee's next mark-up.
    I look forward to working with Chairman Stevens and Co-Chairman 
Inouye on Universal Service reform. I also want to continue the 
dialogue with Senators Smith, Rockefeller, Dorgan and others who share 
the same principles I have discussed today.
    Thank you, Mr. Chairman.

    So, Mr. Post, I'd like to start with you. Can I get your 
sense on what you think about expanding Universal Service to 
broadband? Mr. Simmons, you indicated cable industry does not 
want to be assessed. On the other hand, in the final page of 
your testimony, you indicate that any Government program 
designed to promote broadband deployment must be carefully 
defined and targeted to areas that lack broadband service. How 
do we incorporate this vital service into the Universal Service 
Fund? In my State, 73 percent do not subscribe to broadband. 
The United States is 16th in the world in terms of broadband 
penetration. We're really behind the curve.
    So, Mr. Post, what would your recommendations be?
    Mr. Post. First of all, I think it's crucial we broaden the 
base for it, and on a fair and--competitively and 
technologically-neutral basis. I believe that's crucial.
    Second, you know, the real growth in the Fund, in recent 
years, has been from the CTC side of the business, from--
basically $49 million in 2002, and now expected to be over $900 
million, according to USAC, in 2006. The rural telephone 
companies, that portion of the Fund in the last 3 years, has 
actually only increased about .6 percent. And the funding from 
many of the companies, such as CenturyTel, has gone down 
significantly. Actually, our funding has gone down by $35 
million the last 3 years.
    I believe broadband should be part of the building of 
Universal Service, as you say, in rural America. That's going 
to be the only way to get it there, in my view. Just the back-
haul cost and transport cost alone make it unaffordable for 
many rural Americans.
    I believe in broadening the base so you can reduce the 
burden. No single entity, no single service will bear the brunt 
of what it costs to bring those services to rural America. It 
makes sense, and I think we'll see--actually, the impact, on 
the individual consumer that Ms. Cramer was talking about, 
actually could be alleviated, rather than increased, if the 
base is broad enough.
    Senator Snowe. Thank you.
    Mr. Simmons?
    Mr. Simmons. Well, I'm encouraged by the discussion of the 
requirement to right-size the distribution side. There's a lot 
of talk about how we must find, on the contribution side, to 
grow the Fund to take care of all the needs. But, of course, 
the assumption is that all the needs are, in fact, correct and 
accurate and appropriate. And I'm not necessarily convinced of 
that.
    I know that Universal Service has been around for a very 
long time. There are a lot of companies that use that as a 
standard business model. And perhaps that business model has to 
change, as well.
    So, the hearings that you're conducting, I think, are, 
frankly, appropriate and timely to measure both sides, 
contribution and distribution. But I think you start with, 
really, the distribution side of what's necessary before you 
start talking about what contributions are going to be 
necessary to cover those costs.
    Senator Snowe. Mr. Boaldin, do you want to address this 
question?
    Mr. Boaldin. I'm not sure where you got that in the 
statement, but, yes, all broadband, all providers should be 
supported. We need to broaden the base of supporters. Yes, we 
do.
    Senator Snowe. You do?
    Mr. Boaldin. Yes.
    Senator Snowe. OK. And broadband service, do you think it 
should be incorporated into the Universal Service Fund?
    Mr. Boaldin. Well, I think that broadband service is 
absolutely critical to things we're trying to accomplish, yes, 
with Universal Service.
    Senator Snowe. OK.
    Ms. Cramer?
    Ms. Cramer. Our position has been that all voice 
communications providers should contribute to the Universal 
Service Fund. And any service that markets itself as voice 
telephone service or that connects to the local public-switched 
telephone network should contribute.
    And on the distribution side, our position has been that 
the Fund can be constrained by limiting the support to a single 
line for each household.
    Senator Snowe. Mr. Garnett?
    Mr. Garnett. Yes. We believe that the basis for Universal 
Service contributions should be expanded to include broadband. 
Under our proposal, residential broadband providers would 
contribute based on the numbers that they provide their end-
user customers. And then, on the business side, they would 
contribute based on capacity.
    On the distribution side, we're already spending $3.7 
billion a year on high-cost support, and $6 and a half billion 
overall for Universal Service. So, we do think that there are 
opportunities to look at this amount of money we're spending 
already, and review that, and see whether or not those amounts 
are sufficient already to fund broadband deployment. We 
recognize that's an important issue, and we're open to 
considering all the alternatives that are out there.
    Senator Snowe. I understand that advocates of the wireless 
industry have been urging Congress and the FCC to preempt local 
regulation of wireless carriers, on the basis that they 
primarily are mobile interstate service. However, for the 
purposes of the Universal Service Fund, you consider yourself 
primarily intrastate, but for this purpose of local regulation 
preemption, you're interstate. Can you explain this 
contradiction?
    Mr. Garnett. The FCC and the courts have long recognized 
that interstate services can also have intrastate components to 
them. So, even though we believe that mobile wireless services 
are, by their very nature, interstate services, not all aspects 
of that essentially interstate service are necessarily all 
interstate. And under the current contribution system, we 
contribute based on interstate and international end-user 
telecommunications revenues, just like everybody else. Most 
wireless carriers use traffic studies to do that, and, on 
average, report about 23 percent of their telecom revenues as 
interstate. But what we're proposing, actually, is to go away 
from that system and basically treat a number as a number, a 
connection as a connection, and it doesn't matter what 
percentage of your services are interstate or intrastate. We're 
going to a world of mobility, both in the wireless sphere and 
also in the wireline sphere, for that matter, with VoIP 
services. So, that's the direction we see the industry going, 
in general. And we support changes to regulation to reflect 
that.
    Senator Snowe. So, given the trend of bundling services, do 
you think that the FCC should be able to assess both interstate 
and intrastate calls?
    Mr. Garnett. I think that in the revenue-based context, we 
already have a court decision that basically tells the FCC that 
it can't assess intrastate revenues. And that's part of the 
issue that the FCC has been dealing with for the last 5 years 
on this contribution issue. But if you go to a numbers- or 
connections-based system, you don't have to address that direct 
issue. You basically can assess a connection or a number, which 
provides a customer with access to the interstate public-
switched network, and that's enough, in our view.
    Senator Snowe. Thank you.
    Thank you, Mr. Chairman.
    The Chairman. Thank you, Senator.
    Senator Smith?

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

    Senator Smith. Thank you, Mr. Chairman, for this hearing 
and for understanding. I've had to be in three different 
hearings today. And I wanted very much to make my statement, so 
I'll use my question time to do that.
    For more than 70 years, the preservation and advancement of 
Universal Service has been a fundamental goal of our 
telecommunications laws. Universal Service Funds have brought 
affordable telecommunications services to rural, insular, and 
high-cost communities, provided phone service to low-income 
consumers, connected schools and libraries to the Internet, and 
linked health care providers in rural areas with urban medical 
centers.
    Now, this need has not gone away, and the need for robust 
and sustainable Universal Service certainly remains. But it's 
become increasingly clear that major reforms are imperative if 
the Fund is to meet the evolving communication needs of the 
American people.
    It is to that end that I introduced the Universal Services 
for the 21st Century Act, with Senators Dorgan and Pryor; in 
part, to address the structural crisis in the Universal Service 
Fund. Today, the burden of Universal Service Fund contributions 
are placed only on a limited class of telecommunications 
companies, mainly long-distance carriers, causing inequities in 
the system and incentives to avoid payments.
    As demands on the Universal Service Fund increase, the 
shrinking base of contributors and ordinary customers are being 
forced to pay even more. To address these inequities and to 
ensure a stable Universal Service system for the next 70 years, 
our bill authorizes and directs the FCC to establish a broad, 
permanent mechanism to support Universal Service. The FCC may 
consider any collection methodology that promotes competitive 
and technological neutrality, assesses all communications 
services capable of two-way voice, takes into account low- and 
high-volume users, and does not assess a carrier more than once 
for the same transaction, activity, or service.
    In a hearing later this week, this Committee will address 
the second component of my bill, adapting the Universal Service 
system to bring broadband to even more Americans, spur economic 
development in rural and high-cost areas, and make America more 
competitive globally.
    Alarmingly, as many policymakers have noted, the United 
States has fallen from 15th to 16th in global broadband 
penetration. Direct investment in broadband infrastructure 
through the universal system--Universal Service system is the 
solution to this disturbing trend.
    Thank you, Mr. Chairman.
    The Chairman. Thank you very much.
    Senator Pryor?

                 STATEMENT OF HON. MARK PRYOR, 
                   U.S. SENATOR FROM ARKANSAS

    Senator Pryor. Thank you, Mr. Chairman.
    Ms. Cramer, if I can start with you, looking at your 
statement, you said that you're concerned that a connections-
based system would unfairly burden low-income customers. Can 
you elaborate on that a little bit, please?
    Ms. Cramer. The distinction we have drawn is that the 
assessments ought to be on the basis of the actual usage of the 
system. And so, we have drawn a distinction with individuals. 
We've given, as an example, those on fixed incomes who take 
great care to limit the amount of long-distance calling that 
they make, that that should be--their usage, their actual usage 
of the system, should be the basis, not a numbers-based system.
    Senator Pryor. OK. Now, does everybody agree with that, 
or--you disagree with that.
    Mr. Garnett. Yes.
    Senator Pryor. OK. Does--do you all disagree with that, as 
well?
    [A nod of heads.]
    Senator Pryor. OK. Well, we'll have that discussion, and 
I'd like to get more into that. But, first, let me ask--I 
guess, Mr. Garnett, I'll ask you. Most telecom services are 
regulated both at the Federal level and the State level. And 
many States have their own State Universal Service Fund. So, 
like, in Arkansas, we have Federal and State. Are there 
relationships between the FCC and various State USF regulators 
and regulations that should be considered when we're looking at 
Federal contributions?
    Mr. Garnett. Typically, what happens is, Senator, most 
States look to the FCC for guidance on how to develop their own 
Universal Service contribution methodologies. The FCC, as you 
know, currently assesses interstate and international 
telecommunications revenues. And most States have followed suit 
in assessing intrastate telecommunications revenues. So, 
essentially a revenue-based system both at the State level and 
the Federal level, that's right. It's not uniform, but that's 
typically the model.
    Senator Pryor. Even though it's not uniform, it's not 
necessarily unfair, because you're--all the competitors in the 
various States are getting equal treatment?
    Mr. Garnett. Correct.
    Senator Pryor. OK.
    Mr. Garnett. Correct. In most instances, that's correct, 
yes.
    Senator Pryor. OK.
    Mr. Garnett. The Federal/State joint-board process, has 
been one that the FCC has used on numerous occasions to 
coordinate activity, as between the FCC and various States. 
There currently actually are some joint-board issues being 
dealt with on the distribution side. And I would imagine that 
the joint-board process could be something that the FCC could 
use on the contribution side as it implements a new system.
    Senator Pryor. All right. Well, let me--let me ask this, 
while we're talking about that. If I--it's going to--and we'll 
change gears just ever so slightly. But we have a lot of 
changing dynamics in the marketplace. We all know that. You can 
look over the last 15-20 years, the telephone world is very 
different today than it was 2 decades ago. As we look at it 
today, is it your view that we should have a major rewrite of 
USF? Or can we do this more in--you know, with minor 
adjustments to correct some of the problems with USF?
    Mr. Garnett. We think, on the contribution side first, 
there needs to be a major change. The current revenue-based 
system isn't working anymore. Revenues are migrating from the 
current revenue base to services that are not assessed. So, we 
want fundamental change in the contribution methodology.
    Chairman Martin has expressed his support for a numbers-
based system. We've thought long and hard about the issue, and 
are now supporting that change.
    On the distribution side, CTIA has very specific proposals 
for reforms in that area. The primary problem on the 
distribution side, generally, is that carriers are paid for 
what they spend, not where they serve customers. So, you have a 
lot of situations where you have carriers that serve large 
rural areas that don't receive support. And then, on the other 
hand, you have some carriers that serve essentially suburban 
and urban areas that are receiving support, just because they 
happen to spend a lot of money. We need to change that system. 
We need to look at all of the high-cost mechanisms that 
currently exist and think about fundamental reforms to them. 
That doesn't necessarily mean that carriers serving rural areas 
are going to get less support. We just want to make sure that 
support is directed to the right areas.
    Senator Pryor. I'd like to hear from the other witnesses on 
that, whether you think we need a major rewrite, or if we can 
just tweak a couple of things in the USF to get this right. Let 
me start with CenturyTel, down there on the end.
    Mr. Post. Senator Pryor, I think we can do this without a 
major rewrite. I think if we seek a major rewrite, it could 
take years to do. And action on Universal Service needs to be 
taken today. If this Committee and this Congress do not act on 
Universal Service, consumers in rural America will be left 
behind, in terms of communications technology, affordable 
communications technology and comparable services.
    Mr. Simmons. I believe I'd agree with Mr. Garnett, we need 
some major work on the Universal Service portion. The program, 
as it is today, is not working. I don't know that we'd go so 
far as to say ``broken,'' but almost. I think we're dealing 
with different technologies than we have before, and it 
requires a different program. But rather than start with the 
mechanics of the program, we should be starting with what we 
want that program to do. And that's why, as I suggested 
earlier, we spend some time considering what the requirements 
are, or the right sizing of the program, before we get after 
what the contributions should be.
    Senator Pryor. OK. Mr. Boaldin, go ahead.
    Mr. Boaldin. Thank you, Senator Pryor. I think the 
important thing is to act now. And in order to----
    Senator Pryor. On USF.
    Mr. Boaldin. Yes.
    Senator Pryor. Act now on USF.
    Mr. Boaldin. Yes. In order to broaden the base of 
contributors and to support the networks and to reach into the 
interstate piece, I think, yes, we are talking about a 
significant reform, and now.
    Senator Pryor. Thank you, Mr. Chairman.
    The Chairman. Thank you very much.
    I thank you all. I hesitate to keep us any longer. I'm 
still a little confused about the consensus here as to whether 
all communications should pay into the Fund. Could I just ask 
you all, is there any system that could be deemed a 
``communications system'' today--wireless, cable, whatever--
that you think should be exempt from Universal Service? Any of 
you want to totally exempt any communications service from 
Universal Service payments?
    Mr. Simmons. Mr. Chairman?
    The Chairman. Yes?
    Mr. Simmons. I don't know that we would look to necessarily 
exempt, but just to simply say that broadband, as broadband, 
whatever that might be, should pay into Universal Service, I 
believe, would be an error. The communications portion of that, 
the telephone service portion of that, certainly should pay 
into Universal Service. At least that's my opinion and the 
opinion of my company.
    The Chairman. I think Ms. Cramer said ``voice only.'' Are 
you saying voice only?
    Ms. Cramer. Well, we have used two criteria for our 
distinction. We have said all voice communications--if you 
market it as a voice communication or if you are switched to 
the local public telephone network, that would qualify.
    The Chairman. Well, do you think any of those systems that 
you've just discussed should receive payments from Universal 
Service?
    Ms. Cramer. Our restriction on that has been that, yes, as 
long as it could be constrained by one line per household and 
not multiple lines per household.
    The Chairman. Well, I don't know about the rest of the 
Committee, but, for this Senator, I think that the concepts of 
payment on this in the future ought to be based on a definition 
of ``communications,'' because this technology is tumbling so 
fast. We didn't even anticipate some of the systems that are in 
being today, in 1996, and that's only 10 years ago. So, if 
we're going to have a bill that's going to last for a while--
the last one only lasted from 1994 to 1996--we ought to not 
write a bill knowing that within the next 10 years, the whole 
thing's going to have to be changed again.
    Our goal is to try and establish a means by which every 
American has a new right, and that is the right to communicate. 
And, if we can, we've got to find a way to assure that that 
Fund that comes in is a fund that is assessed against all 
systems that provide communications.
    And, Ms. Cramer, we understand your situation. I would like 
to find a way to encourage telephone companies, anyone else 
providing communication services, to offer discounts for the 
elderly so that instead of having to have some special type of 
subsidy, they're recognized. We get that as we go into the 
movies. I should think that people would understand that it's 
very much of a marketing technique. They get the elderly out of 
the house and go to the movies. I agree with Senator DeMint. I 
think we should find a way to encourage people to use their 
telephone when they're sitting home alone, not discourage them. 
But we will work hard on this, and we appreciate your 
assistance.
    Some members who are not here may submit written questions. 
So, if they do, we would urge you to respond to them as quickly 
as you can.
    The Chairman. We will be trying to mark this bill up 
sometime toward the end of the month, or at the latest, the 
first part of the next month. Thank you for your help.
    [Whereupon, at 11:35 a.m., the hearing was adjourned.]

                            A P P E N D I X

            Prepared Statement of Hon. E. Benjamin Nelson, 
                       U.S. Senator from Nebraska

    Mr. Chairman, in the 10 years since the last major 
telecommunications bill was passed, Universal Service has been an 
important catalyst for deployment of communications infrastructure in 
rural areas of this Nation.
    Universal Service has ensured rural access to telephone services at 
rates similar to urban areas, and it has contributed toward making 
communications affordable for schools, libraries, and rural health 
facilities.
    However, since 1996, wireless communications and the Internet have 
blossomed and become an important enabler of economic growth.
    Universal Service is now being challenged by these technological 
changes in two ways.
    First, the long term viability of Universal Service is in danger 
from shifts in the usage of alternative telephone technologies.
    We must reform Universal Service to make it sustainable in a manner 
that survives future changes in technology.
    Second, innovation and competition must be encouraged in even the 
most remote areas of our country.
    Universal Service should be modernized to promote deployment of new 
communications technologies, such as broadband Internet, in rural 
areas.
    To respond to these two challenges, I believe we should:

        1. Ensure the stability of Universal Service in order to 
        preserve affordable telephone service in rural areas, and for 
        all Americans, as well as to continue support for schools, 
        libraries and rural health care providers.

        2. Promote private investment in and deployment of broadband 
        Internet and other advanced telecommunications services, in 
        rural America.

        3. Encourage increased wireless coverage and introduction of 
        new wireless services to rural America.

    To achieve these goals, I advocate that Universal Service reform 
legislation do the following:

        1. Broaden the goals of Universal Service, to encourage the 
        deployment of new and future communications services in rural 
        areas. Place limits on Universal Service funding, so that it is 
        tightly focused on these goals.

        2. Encourage competition for telecommunications services, so 
        that rural Americans can have access to modern communications 
        technologies at equitable prices.

        3. Reform the Universal Service contribution base, to ensure 
        long-term viability, to make it sustainable under future 
        changes in technology, and to make it consistent with future 
        program goals.

    Communications technology holds enormous economic promise to rural 
America, and I look forward to being involved in this reform effort.
                                 ______
                                 
    Prepared Statement of the National Association of State Utility 
                      Consumer Advocates (NASUCA)

    For a number of years, the opinion has been expressed that the 
Federal Communications Commission's current Universal Service 
contribution mechanism, which bases contributions on interstate 
revenues, is ``broken'' and needs to be replaced by a connections-based 
or numbers-based mechanism. \1\ In the past, it was asserted that the 
revenues-based mechanism was in a ``death spiral.'' \2\ This view is 
supposedly grounded in concerns about the level of interstate revenues. 
The facts show these concerns to be exaggerated.
---------------------------------------------------------------------------
    \1\ See, e.g., February 1, 2006 ex parte presentation by CTIA--The 
Wireless Association'; remarks of Senator Ted Stevens to the 
National Association of Regulatory Commissioners (February 2006), 
http://commerce.senate.gov/newsroom/printable.cfm?id=251507.
    \2\ See CC Docket No. 96-45, Coalition for Sustainable Universal 
Service ex parte (November 14, 2001).
---------------------------------------------------------------------------
    The National Association of State Utility Consumer Advocates 
(NASUCA) \3\ seeks to bring the Committee's attention to the fact that 
interstate revenues as reported to the Commission have remained stable, 
as shown on the attached charts. The contribution base in the first 
quarter of 2006 (1Q06) is actually slightly higher than the 
contribution base from the first quarter of 1999 (1Q99), a period of 
seven years. The current level of $18.45 billion is only 12 percent 
less than the high of $20.96 billion in 4Q00 but is 12 percent higher 
than the low of $16.43 billion in 1Q05. Indeed, in the face of 
increasing USF need (as discussed below), the contribution factor has 
remained relatively stable over the last five quarters.
---------------------------------------------------------------------------
    \3\ NASUCA is a voluntary, national association of 45 consumer 
advocates in 42 states and the District of Columbia, organized in 1979. 
NASUCA's members are designated by the laws of their respective states 
to represent the interests of utility consumers before State and 
Federal regulators and in the courts. See, e.g., Ohio Rev. Code Chapter 
4911; 71 Pa. Cons. Stat. Ann. Sec. 309-4(a); Md. Pub. Util. Code Ann. 
Sec. 2-205(b); Minn. Stat. Ann. Subdiv. 6; D.C. Code Ann. Sec. 34-
804(d). Members operate independently from state utility commissions, 
as advocates primarily for residential ratepayers. Some NASUCA member 
offices are separately established advocate organizations while others 
are divisions of larger state agencies (e.g., the state Attorney 
General's office). Associate and affiliate NASUCA members also serve 
utility consumers, but have not been created by state law or do not 
have statewide authority.
---------------------------------------------------------------------------
    This means there is no pressing need--indeed, possibly no long-term 
need--for the Commission to adopt a contribution mechanism other than 
the current mechanism based on interstate and international revenues.
    Some stakeholders argue that the revenue-based mechanism needs to 
be changed because, they allege, it is becoming more difficult to 
identify interstate traffic, given the increasing bundling of services. 
Again, the facts show otherwise. For example, carriers currently 
disaggregate their interstate and intrastate revenues for a variety of 
purposes, including the assessment of taxes and regulatory charges. And 
the ``safe harbors'' that the Commission has adopted for some services 
probably understate the current level of interstate traffic.
    Some also argue that the move to Internet-based services threatens 
the traditional wireline long-distance revenue base, and requires 
movement to a connection-based mechanism. Yet the Commission has 
already asserted exclusive jurisdiction over these services; it is 
clearly within the Commission's ability and, moreover, entirely 
appropriate to require such services to make USF contributions. \4\ 
Other means of increasing the revenue base were described in appendices 
to NASUCA's September 30, 2005 comments filed in the CC Docket No. 96-
45.
---------------------------------------------------------------------------
    \4\ In the Matter of Appropriate Framework for Broadband Access to 
the Internet over Wireline Facilities, CC Docket No. 02-33, Report and 
Order, FCC 05-150 (rel. September 23, 2005), para. para. 112-113. In 
that order, the Commission continued assessing digital subscriber line 
service until June 20, 2006. NASUCA urges the Commission to make that 
policy permanent, and also to assess other similar services. The 
Commission should not hesitate to assess these services despite the 
fact that they cannot currently receive funds from the Federal USF. 
Wireline interstate long-distance services are the traditional source 
for Universal Service funding, despite the fact that none of the USF 
benefits such services; nonetheless, they benefit from the ubiquitous 
network.
---------------------------------------------------------------------------
    Of course, the key task is to keep the draw on the Fund within 
reasonable levels. The Commission has many proposals before it to limit 
the growth in the fund; NASUCA's proposals in this regard were also 
presented in the September 30 comments.
    Despite these facts, some continue to argue that the revenue-based 
mechanism needs to be replaced with a connections-based or a numbers-
based mechanism. NASUCA continues to oppose these proposals because a 
connection-based mechanism inevitably shifts USF responsibility from 
those who use interstate services (as with the current revenue 
mechanism) to those who merely have access to the local network, 
regardless of their interstate usage, or even of their intrastate 
usage. This inevitably shifts the burden of supporting the entire USF 
and all the programs it contains onto lower use and lower income 
consumers. This shifting of burdens is not in the public interest.
    Neither is it in the public interest that a connections-based 
mechanism allows carriers who provide interstate services but have no 
end-user connections to evade responsibility for USF assessments. \5\ 
These carriers--typically interexchange carriers--have traditionally 
been the source of USF contributions.
---------------------------------------------------------------------------
    \5\ 5 CTIA proposes a revenue mechanism for carriers that have no 
connections or numbers. CTIA February 1, 2005 ex parte at 7. Carriers 
will likely obtain de minimis numbers of connections in order to have 
their revenues exempt from assessment. And carriers are equally likely 
to take advantage of arbitrary definitions and assessments of 
connections. See id. at 5.
---------------------------------------------------------------------------
    Many of those who predict doom for the revenue-based contribution 
mechanism do so not only because of the supposed threats to the 
contribution base--which, as noted, have not materialized--but because 
of the dangers of substantial increases to the USF itself. That is 
clearly part of the message of the Intercarrier Compensation Forum 
(ICF). ICF's original ``solution'' to the intercarrier compensation 
issue is to move to a system where carriers do not compensate each 
other for use of their networks (i.e., pure ``bill-and-keep''). ICF 
proposes to make up all lost revenues resulting from the change through 
a combination of direct end-user rate increases and a huge increase in 
the USF. Skeptics might, therefore, view ICF's reliance on a 
connections-based mechanism as largely window dressing, reasonably 
thinking that massive changes to the mechanism will create enough 
confusion to hide the increase in the USF. As NASUCA has previously 
demonstrated, however, the revenue-based mechanism is actually more 
robust and equitable than a connection-based mechanism, especially 
where the needs of the Fund grow substantially. \6\
---------------------------------------------------------------------------
    \6\ CC Docket No. 96-45, et al., NASUCA Reply Comments on Staff 
Study (May 16, 2003) at 7-11. No party has, to NASUCA's knowledge, 
attempted to refute these findings.
---------------------------------------------------------------------------
    Those who support the transition from the current revenue-based 
mechanism to another mechanism do not discuss the costs of that 
transition, \7\ which are certain to be substantial and are certain to 
result in demands by carriers seeking a mandatory pass-through of those 
costs. Those costs will be magnified, of course, if the transition 
period is brief. \8\
---------------------------------------------------------------------------
    \7\ See CTIA February 2, 2006 ex parte.
    \8\ Id. at 7.
---------------------------------------------------------------------------
    In considering all these facts, NASUCA supports the current 
revenue-based USF contribution mechanism. There are more gradual, less 
radical changes that will adequately preserve and advance the USF.




                          USF Contribution Fund
------------------------------------------------------------------------
                                               Total USF   Contribution
                                   Revenues      Need         Factor
------------------------------------------------------------------------
1st Qtr. 1999                          18.35        0.91           0.050
2nd Qtr. 1999                          18.31        0.84           0.046
3rd Qtr. 1999                          18.99        1.10           0.058
4th Qtr. 1999                          18.91        1.10           0.058
1st Qtr. 2000                          18.96        1.11           0.059
2nd Qtr. 2000                          19.38        1.11           0.057
3rd Qtr. 2000                          20.20        1.12           0.055
4th Qtr. 2000                          20.96        1.19           0.057
1st Qtr. 2001                          20.26        1.35           0.067
2nd Qtr. 2001                          20.30        1.40           0.069
3rd Qtr. 2001                          19.94        1.37           0.069
4th Qtr. 2001                          19.40        1.34           0.069
1st Qtr. 2002                          20.25        1.38           0.068
2nd Qtr. 2002                          19.03        1.39           0.073
3rd Qtr. 2002                          17.16        1.51           0.088
4th Qtr. 2002                          16.98        1.59           0.093
1st Qtr. 2003                          17.23        1.50           0.087
2nd Qtr. 2003                          17.03        1.53           0.091
3rd Qtr. 2003                          17.07        1.61           0.095
4th Qtr. 2003                          16.89        1.55           0.092
1st Qtr. 2004                          17.22        1.50           0.087
2nd Qtr. 2004                          17.42        1.50           0.087
3rd Qtr. 2004                          17.02        1.51           0.089
4th Qtr. 2004                          16.47        1.46           0.089
1st Qtr. 2005                          16.43        1.76           0.107
2nd Qtr. 2005                          18.33        1.81           0.111
3rd Qtr. 2005                          18.37        1.68           0.102
4th Qtr. 2005                          18.61        1.63           0.102
1st Qtr. 2006                          18.45        1.69           0.102
2nd Qtr. 2006 *                        18.45        1.77           0.107
------------------------------------------------------------------------
Source: Contribution Factor Public Notices.
Note--For the fourth quarter of 2005, because of the impact of Hurricane
  Katrina, the FCC adjusted the contribution base to $17.87 billion to
  maintain the contribution factor at 10.2 percent.
* The contribution factor is calculated using the 1st Qtr. 2006
  Revenues.

                                 ______
                                 
            Prepared Statement of the IDT Corporation (IDT)

    IDT Corporation (IDT), a $2.5 billion company, is a significant 
contributor to the Universal Service Fund (USF) and provides a wide 
variety of services that could be impacted by Universal Service reform. 
IDT provides prepaid calling cards; prepaid wireless cards; local and 
long-distance phone service; Voice over the Internet Protocol (VoIP) 
service through its Net2Phone subsidiary; and wholesale ``carrier's 
carrier'' services. IDT is headquartered in Newark, New Jersey and is 
led by its Vice Chairman and CEO, Jim Courter, a former U.S. 
Congressman from New Jersey.
    IDT is pleased to provide the following comments to the Committee 
as it considers reforms to the contribution methodology to support the 
USF.
1. IDT Supports the USF and the Effort to Ensure That Basic Telephone 
        Service Is Affordable for all Americans
    Telephone consumers benefit from being able to call their family, 
friends, and business associates all across the country and around the 
world. The more people that are connected to the public-switched 
telephone network, the greater the value to every other telephone 
consumer. Consumers of prepaid calling cards such as those provided by 
IDT, benefit from universal connectivity just as much as other users of 
the telephone network. IDT pays millions of dollars every year into the 
USF to help make basic telephone service affordable for all Americans.
2. IDT is Concerned That the Current Revenue-Based Mechanism Is Not 
        Sustainable and That, as a Result, the Future of the USF Is In 
        Jeopardy
    Currently, USF contributions are collected from carriers based on 
their retail, interstate telecommunications revenues. According to the 
March, 2005 report of the Congressional Budget Office (CBO), the base 
of retail, interstate telecommunications services revenue peaked at 
$80.6 billion in 2000 and declined to $76.3 billion in 2004. \1\ There 
are many causes for this:
---------------------------------------------------------------------------
    \1\ Financing Universal Telephone Service, a CBO Paper, March 2005, 
Summary Table 2. p. ix.
---------------------------------------------------------------------------
    Long distance telecommunications prices have fallen over the past 
few years, due to competitive pressures and Federal and state 
reductions in access charges. Some customers are replacing or reducing 
their use of traditional telephone services with VoIP services, which 
are not currently classified as telecommunications services. 
Furthermore, the FCC has re-classified several services from 
``telecommunications services'' to ``information services.''
    At the same time that the base of funding has decreased, the size 
of the Universal Service Fund increased from $3.7 billion in 1999 to 
$6.4 billion in 2004, primarily because of increases in the high-cost 
fund.
    As a result of a declining base of revenues and the increasing 
needs of the fund, the percentage fee assessed on interstate 
telecommunications revenue has increased from 3 percent in 1999 to its 
current rate of 10.2 percent \2\ This percentage is likely to increase 
further in the future, as the base of funding continues to decline and 
the demands on the Fund continue to increase.
---------------------------------------------------------------------------
    \2\ FCC Public Notice, December 15, 2005, DA 05-3203, available at 
http://hraunfoss.fcc.gov/edocs_public/attachmatch/DA-05-3203A1.pdf.
---------------------------------------------------------------------------
    IDT is concerned that, if these trends continue, the sustainability 
of the Universal Service Fund will be put in jeopardy. Carriers collect 
these Universal Service fees from their customers with an identifiable 
line item on the telephone bill. Consumers are likely to become 
increasingly concerned about the size of this surcharge on their 
telephone bills and may question the legitimacy of the entire Universal 
Service program. This public outcry would be unfortunate given the many 
benefits that the USF provides.
3. The Current Method of Collection Universal Service Support Based on 
        Interstate Telecommunications Revenues Distorts the 
        Marketplace, Creates Inequities Among Carriers, Harms Economic 
        Growth and Causes Harm to Consumers
    There are many other problems with the revenue-based approach:
    a. Effect on the Market: The revenue-based collection mechanism 
creates inefficiencies in the marketplace. It skews business decisions 
toward services that do not directly contribute to the USF, such as 
VoIP services. This disparity in treatment discourages investment that 
might otherwise be economic and beneficial to consumers. Furthermore, 
revenue-based assessments are extremely complicated to administer 
because carriers must attempt to segregate their traffic into separate 
``buckets'' (interstate vs. intrastate: retail vs. carrier; 
telecommunications vs. information services). As carriers increasingly 
offer ``all-you-can-eat'' pricing plans, these distinctions are 
irrelevant and artificial. This methodology is also inconsistent with 
industry accounting practices: it is difficult for firms to quantify 
precisely how much revenue should be placed into each category. It also 
creates both risks of possible manipulation and arbitrage on the one 
hand, and on the other, of imposing devastating liabilities on 
companies that have made good-faith attempts to classify services 
correctly.
    b. Effect on Consumers: The current revenue-based fee is harmful to 
consumers. First, because the fee is based on interstate 
telecommunications revenues, it discourages consumers from making long-
distance (i.e. interstate) phone calls. This inhibits the social 
interaction and communication that brings our Nation closer together. 
Second, as telecom service providers increasingly bundle local and 
long-distance, intra- and interstate, and telecommunications and 
information services into one charge, it is extremely difficult for 
consumers to know in advance which services they use will be subjected 
to a USF fee and which will not.
    c. Effect on the National Economy: Revenue assessments send the 
wrong economic message by discouraging consumers from making phone 
calls, resulting in a welfare loss to society as a whole. The recent 
CBO report noted that, according to one estimate, USF fees cost the 
economy an additional $0.64 to $1.47 for each dollar collected. This 
drag on telephone usage becomes even larger as the contribution factor 
continues to increase (as it likely will).
4. FCC Chairman Martin's Plan to Replace the Current Revenue-Based 
        System of Collecting Universal Service Subsidies With a System 
        Based on Telephone Numbers, or Connections, Will Solve Many of 
        These Problems
    In contrast to the revenue-based mechanism, collecting USF funds 
based on telephone numbers or connections will ensure the 
sustainability of the Universal Service fund, ease the burden on 
consumers, and promote equity among competing telecommunications 
providers.
    a. Most consumers will pay less under a numbers-based collection 
plan than under a revenue-based system. Under the leading proposal 
submitted to the FCC, a numbers-based collection method would require a 
charge of only about $1 per month per telephone number. This flat 
monthly fee would replace the current 10 percent surcharge on 
interstate revenues. Currently, every consumer pays a monthly 
``Subscriber Line Charge'' of $6.50, which is considered an interstate 
service subject to the 10 percent surcharge. Thus, consumers who make 
absolutely no long-distance phone calls still pay a charge of $.65 on 
their monthly phone bill today. The number-based fee would replace this 
$.65 charge with a $1 charge. Thus, any consumer who currently places 
more than $3.50 of interstate phone calls per month will see a net 
reduction in their telephone bills.
    Those who claim that a numbers-based fee will harm low-income 
American consumers are simply mistaken. First, under the leading 
proposal submitted to the FCC, low-income consumers would be completely 
exempt from the $1 fee. Second, as stated above, any consumer that 
makes more than $3.50 in interstate calls will enjoy a rate decrease. 
As interstate revenues continue their decline, causing the contribution 
factor to rise, more and more consumers will benefit from shifting away 
from revenue-based to a numbers-based system. Furthermore, the number 
of telephone numbers in use is increasing, which means that the flat 
charge under a number-based fee may decrease below $1 in the future. 
Finally, prepaid calling card providers such as IDT provide service to 
tens of millions of immigrants and low-income consumers who would 
benefit greatly from a numbers or connections-based plan.
    b. A flat monthly per-number or per-connection fee does not distort 
the market or create anticompetitive inequities.
    A revenue-based fee gives industry incentives to bypass the fee by 
switching to VoIP or other non-telecommunications services. In 
contrast, a flat monthly fee is easier to administer and levels the 
playing field for all telecommunications service providers. Once a 
consumer is connected to the public-switched telephone network, he or 
she may use that connection for telecommunications services, VoIP 
services, video services or any other uses without worrying about 
whether one use will trigger an additional fee. This makes it simpler 
for consumers and removes any artificial advantages that one service 
enjoys over another.
    c. There is no evidence that telephone numbers will be replaced 
anytime in the near future.
    Although some have suggested that telephone numbers will be 
disappearing in the near future, there is no evidence to suggest that 
is the case. The North American Numbering Plan Administration (NANPA) 
predicts that area codes are likely to be exhausted around the year 
2035, indicating that the numbers of allocated telephone numbers will 
continue to increase in the future. \3\ Even if some consumers use the 
Internet or other means to place telephone calls, this is more likely 
to supplement the basic telephone number scheme and not replace it. 
Every consumer will likely retain their existing telephone number in 
order to communicate with those people who do not have access to 
computers or the Internet.
---------------------------------------------------------------------------
    \3\ See, http://www.nanpa.com/pdf/NRUF/
October_2005_NANP_Exhaust_Analysis.pdf.
---------------------------------------------------------------------------
5. In General, any Company That Is Required to Contribute to the USF 
        Should Also Be Eligible to Withdraw From the Fund if it Is 
        Serving Universal Service Goals
    Later this week, the Committee is scheduled to convene a hearing on 
USF Distributions. IDT would like to take this opportunity to point out 
one anomaly in the distribution process. The FCC's programs for low-
income consumers do not currently allow calling card providers to 
receive Universal Service payments, even though calling cards serve the 
same social goals. Because IDT's calling cards provide very affordable 
rates, IDT's principal customers tend to be low-income persons, 
including many ethnic minorities. IDT's cards often provide these 
consumers with their only means of placing telephone calls. Enabling 
calling cards to participate in the low-income programs would foster 
increased access to the telephone network for this underserved segment 
of the U.S. population. As it addresses Universal Service reform, 
Congress should consider reforming the low-income provisions to give 
recipients a choice of applying some or all of their Universal Service 
benefits to calling cards.
6. Conclusion
    The Universal Service program is tremendously important to ensuring 
that every American is connected to the public-switched telephone 
network. The communications marketplace is shifting and the current 
Universal Service subsidy mechanism is simply not sustainable. We 
believe a numbers-based or connections-based program, as proposed by 
FCC Chairman Martin, is the best option available to preserve the 
viability of the Universal Service program, to reduce the burden on 
consumers, and promote equity among providers.
                                 ______
                                 
 Prepared Statement of F.J. Pollak, President/CEO, TracFone Wireless, 
                                  Inc.

    My name is F.J. Pollak. I am President and Chief Executive Officer 
of TracFone Wireless, Inc. TracFone is headquartered in Miami, Florida. 
With more than 6 million customers, TracFone is the Nation's leading 
provider of prepaid wireless telecommunications services. Since its 
inception in 1996, TracFone has been able to grow its business to over 
6 million customers by focusing on a segment of the wireless 
marketplace largely ignored by other wireless companies. Specifically, 
TracFone's service is directed mainly to low volume, often low-income, 
consumers. TracFone offers a ``pay-as-you-go'' service. There are no 
duration or volume commitments, no early termination penalties, no 
advance deposits; no credit checks. TracFone's customers pay only for 
the wireless service they need, when they need it. For many TracFone 
customers, wireless telephone service would otherwise be unavailable 
or, if available, would be unaffordable.
    As a provider of interstate telecommunications services, TracFone 
is required to contribute to the Federal Universal Service Fund (USF). 
Although TracFone contributes to the USF based on its actual interstate 
revenues, it has no means for recovering its USF contribution costs 
from consumers in the form of billed surcharges. Unlike traditional 
providers of post-paid wireline and wireless services, prepaid 
providers do not send monthly invoices and therefore, cannot add 
Federal Universal Service Fund surcharges as line items on customer 
bills.
    TracFone believes that the current USF contribution methodology 
based on interstate revenues is fair to all and is consistent with the 
legal requirements of the Communications Act. To the extent that there 
are concerns about the ability of the revenues-based system to provide 
sufficient support for the USF, TracFone believes that certain 
adjustments could significantly increase the level of USF funding. 
Specifically, there no longer is any need for a wireless safe harbor as 
all wireless providers are able to identify which of their usage is 
interstate. In addition, TracFone believes that Internet-based 
telephone calling services (often called Voice over the Internet 
Protocol or ``VoIP'') should be required to contribute to the USF based 
on their interstate revenues in the same manner as do the traditional 
circuit-switched telephone services which consumers correctly perceive 
as competitive substitutes. Also, the law empowers the FCC to impose 
USF contribution obligations on others who provide services which use 
interstate telecommunications including, for example, broadband 
Internet access services. TracFone believes that the contribution base 
could be expanded to include those services with no reduction in demand 
for those services.
    A contribution methodology based on working telephone numbers would 
significantly and unnecessarily increase the costs of service for low 
volume low-income consumers. Today, based on its actual interstate 
revenues, TracFone remits to the USF about $0.06 per customer per 
month. While this may seem like a small amount, TracFone's average 
revenue per user is only $14 per month as compared with the wireless 
industry average of about $56. Moreover, TracFone customers, like most 
prepaid wireless customers, make few interstate calls. Therefore, 
almost all of its customers' $14 average revenue is derived from 
intrastate and local service--services which, by law, may not be 
subject to assessment for the Federal USF.
    If the FCC were to implement a numbers-based contribution 
methodology and the initial per number charge were to be set at $1 per 
month, TracFone's per customer USF contribution would increase from 
$0.06 to $1--more than a 1,600 percent increase, or approximately $70 
million more per year based on TracFone's 12/31/05 customer base of 
$6.1 million. Since TracFone's customer base has grown rapidly (by over 
1 million in the fourth quarter of 2005), future increases under a 
numbers-based plan would be much greater. TracFone either would have to 
absorb the entirety of these increases from its operating revenues or 
it would have to raise its rates to recover the additional amount since 
it has no means to impose a monthly per number USF surcharge on its 
customers, none of whom receive bills for their prepaid services.
    In short, a numbers-based contribution plan would not work for 
certain types of telecom providers, including prepaid wireless 
providers. Not only are those companies' services not billed, those 
companies do not provide service on a monthly basis. Some consumers 
make multiple purchases of prepaid airtime in a month; other consumers 
may go several months or more without making any purchases.
    Consumer groups have recognized that a numbers-based plan would 
dramatically increase the costs of the USF borne by low-income low 
volume consumers. That is why a coalition of such groups called the 
Keep USF Fair Coalition has opposed the implementation of a numbers-
based contribution proposal at the FCC. In a report released February 
27, 2006 entitled ``Exposing the Hoax: The Phony `Crisis' of the 
Universal Service Fund,'' the Keep USF Fair Coalition articulated the 
view that a flat per-working telephone number tax would significantly 
increase the monthly telecommunications costs for low volume consumers 
and would force many low-income consumers to drop their telephone 
service. The Coalition report also demonstrated that abandonment of a 
revenues-based system in favor of a numbers tax is not necessary, 
pointing out that the contribution base has been stable and that 
available data demonstrate that there will not be a sharp decline in 
interstate telecommunications revenues.
    Moreover, the potentially devastating impact of a regressive 
numbers tax to finance Universal Service is not limited to residential 
consumers. Many so-called ``enterprise'' customers--users of large 
quantities of telephone numbers--would also be hit hard by a numbers 
tax. One prominent example of such users is the higher education 
community. Recently, the FCC has heard from numerous colleges and 
universities, large and small, about how their telecom costs will 
increase dramatically if a per number tax is implemented. For example, 
Harvard University estimates that its annual USF contributions would 
increase from $70,000 to $400,000; Rice University anticipates monthly 
increases from $400 to $10,000; Southern Illinois estimates that its 
annual USF fees would increase from $12,000 to more than $200,000 per 
year; Calvin College, a small liberal arts college in Michigan, would 
have its monthly USF costs skyrocket from $700 to over $11,000. The 
list goes on.
    These institutions differ from each other in many respects. 
However, the ability of each institution to provide telecommunications 
services to its students and faculty would be undermined by the FCC 
numbers tax proposal. Several (including Harvard) even report that 
their ability to provide E-911 access for their students would be 
jeopardized. Given the high priority which the FCC properly has placed 
in E-911 access, it would be a sad and cruel irony if the FCC's numbers 
tax had the perverse impact of limiting E-911 access for students 
residing on college campuses throughout the country.
    There is another problem with a numbers tax. Typically, telephone 
numbers are provided as part of local telecommunications service. Many 
customers of wireline and wireless telephone service make few, if any, 
interstate calls. Yet the FCC's proposed monthly numbers tax to finance 
the Federal Universal Service Fund would be imposed on such customers 
without regard to whether consumers derived any interstate usage 
whatsoever in any given month. Imposition of USF funding obligations on 
such consumers was not what Congress had in mind in enacting Section 
254 of the Communications Act; nor would it be sound public policy to 
require that consumers who use little, if any, interstate service, to 
bear a large--and increasing--share of underwriting the USF.
    If the FCC adopts a numbers tax to fund Universal Service, it will 
be necessary for it to provide alternative contribution mechanisms for 
certain types of carriers. Many providers of interstate 
telecommunications service do not provide customers with working 
telephone numbers as part of their service offerings. Since the law 
requires that ``every'' provider of interstate telecommunications 
service must contribute to the USF, there must be a mechanism 
appropriate for all carriers.
    TracFone recommends that those interstate telecommunications 
service providers who are unable to recover their USF contributions 
through billed charges to their customers be allowed to continue to 
have their contributions based on their interstate revenues. 
Alternatively, in order to prevent pricing their services beyond the 
reach of the low volume, low-income users they serve, TracFone suggests 
that those carriers' USF contributions under any methodology be capped 
at the levels of their contributions under the current revenues-based 
methodology.
    Finally, TracFone reminds the Committee that another component of 
the efforts to ensure that USF contributions not unduly burden the 
provision of telecommunications services is to demand that the fund's 
growth be limited and carefully managed. TracFone urges the Committee 
to continue to encourage the FCC to protect against waste, fraud and 
abuse, and other sources unintended and avoidable growth of the USF. 
Congress and the FCC must enact and implement requirements and 
procedures which limit availability of USF support to those who truly 
need the support and which ensure that the funds are disbursed in an 
efficient and targeted manner, with safeguards to prevent waste, fraud 
and abuse. Implementation of such requirements and procedures will 
ensure that there will be a sufficient USF in the future without the 
need for disruptive and inequitable numbers taxes imposed on consumers 
and on those enterprise customers, including colleges and universities 
and health care institutions, which utilize large quantities of phone 
numbers.
                                 ______
                                 
    Prepared Statement of Scott Turicchi, President/Chief Financial 
                Officer, j2 Global Communications, Inc.

    Mr. Chairman and distinguished Members of the Committee, thank you 
for the opportunity to submit this written statement for today's 
hearing on Universal Service Fund (USF) contributions.
    My name is Scott Turicchi, and I am President and Chief Financial 
Officer of j2 Global Communications, Inc., www.j2global.com.
Summary
    j2 Global supports broadening the USF funding base under the 
existing revenues-based model to include every conceivable kind and 
type of communications service. Under an expanded revenues-based 
contribution methodology, those who consume more communications 
services--by whatever means--will tend to shoulder a greater share of 
Universal Service funding. The expanded revenues-based model will 
bolster the Fund over the long-term as use of communications services 
grows with economic expansion and technological improvements. At the 
same time, the expanded revenues-based model fairly treats those who 
make minimal use of telecommunications services--including the poor and 
elderly.
    A flat monthly fee on every issued telephone number or connection, 
in contrast, is both regressive and ineffective. A flat fee does not 
account for a consumer's degree of use and thus penalizes those who use 
communications services the least--while subsidizing those who use them 
the most. Moreover, consumers unwilling to pay the flat fee will 
inevitably turn back their lightly-used, but overtaxed, numbers to the 
numbering pool--thereby threatening the long-term viability of the USF 
through a downward spiral of returned numbers, followed by rate 
increases, followed by more returned numbers, and so on.
    With respect to j2 Global, a numbers-based or connections-based 
model will force j2 Global to discontinue the advertising-supported, 
``free'' fax and voice-mail services enjoyed by its almost ten million 
U.S. customers--resulting in the loss of a valued service without any 
corresponding benefit to the fund. Put more bluntly, advocates of the 
numbers-based approach should reduce their USF funding estimate 
calculation by upwards of $100 million per year to account just for the 
loss of a substantial portion of the approximately ten million numbers 
used by j2 Global's free customers.
    Large firms and institutions that currently hold unused numbers in 
reserve will undoubtedly join that movement to save costs, resulting in 
the loss of millions more numbers subject to the USF fee and hundreds 
of millions of dollars annually to the fund.
    In the event Congress either requires or allows the FCC to 
implement a telephone numbers-based or connections-based mechanism to 
fund the USF, it should exempt numbers not used for real-time voice 
communications, numbers used exclusively for fax, voice-mail and other 
non-real-time services, and numbers employed in services provided at 
nominal or no cost to subscribers.
Who We Are
    j2 Global provides business-critical communications and messaging 
services through its global communications network to more than 11 
million customers worldwide, including approximately ten million 
customers in the United States.
    Headquartered in Los Angeles, with smaller offices in Santa Barbara 
and San Diego, California, and Glencoe, Illinois, our company is 
publicly traded on NASDAQ (symbol: JCOM) and has had 16 consecutive 
quarters of positive and growing earnings. Our market capitalization 
was more than $1 billion as of February 21, 2006.
    We help our clients efficiently and effectively manage their fax 
needs by providing a service (eFax' ) that delivers incoming 
faxes to the subscriber's personal e-mail InBox. In addition to 
increased convenience and lower costs (as compared with traditional 
methods of faxing), our service also significantly increases the 
security and privacy of the customer's fax environment. As a result, 
companies are also using our service to meet their regulatory 
compliance needs under, for example, Gramm-Leach-Bliley, Sarbanes-
Oxley, and HIPAA, by providing a digital record of their fax messaging. 
For those customers who would also like to receive their voicemail 
messages via e-mail, we offer a combined fax-and-voicemail-to-e-mail 
solution.
    j2 Global's customers range from individuals, to small and mid-
sized businesses, to large enterprises, government agencies, and 
nonprofits. The Federal Reserve Bank, several Fortune 500 companies 
including GE and Ford, major national and regional law, accounting, and 
consulting firms, as well as local real estate agents and self-employed 
entrepreneurs, have all come to rely on our integrated messaging 
services.
    Though almost all of j2 Global's revenue comes from subscription 
fees charged to our paying customers who use more than 750,000 phone 
numbers, we also offer a free service to almost ten million U.S. 
subscribers. Our ``free'' customers receive a telephone number that 
provides delivery of a limited number of faxes, or faxes and 
voicemails, to the subscriber's personal e-mail InBox. j2 Global 
obtains these telephone numbers from local exchange carriers. The 
carriers pay a percentage of their interstate end-user revenues to the 
Universal Service Fund. On a quarterly basis, this percentage, also 
known as the contribution factor, increases or decreases depending on 
the needs of the Universal Service programs. j2 Global has devised and 
administers a set of applications that the public finds desirable and 
the applications, in turn, lead to greater use of the telephone network 
and thus to larger usage-based USF payments. We recover the operational 
costs of this free service primarily through advertising, which we 
deliver to the free customers as a condition of their service. We do 
not have a direct billing relationship with our free customers, and we 
do not make much if any money from them while they maintain their free 
status.
The USF Contribution Issue
    j2 Global agrees with Chairman Stevens that ``the current 
contribution mechanism of assessing only interstate revenue is broken 
and needs reform'' (``Stevens Promotes Internet Subsidy,'' Fairbanks 
Daily News, Feb. 14, 2006). Rapid change in the telecommunications 
marketplace (e-mail, wireless, VoIP, broadband services) is slowly 
eroding the traditional USF financing base. We and our customers 
benefit from a strong telecommunications infrastructure. This Committee 
has led the way in ensuring that a vibrant USF is one of that 
infrastructure's vital components.
    The Committee has at least three bills pending before it that 
address the USF contribution challenge--S. 1583 by Senators Smith, 
Dorgan and Pryor, S. 2113 by Senators DeMint and Ensign, and S. 2256 by 
Senator Burns. We share Chairman Stevens' and Ranking Member Inouye's 
goal that the Committee fashion a bipartisan, consensus approach that 
draws upon the best elements of the three bills, the views expressed at 
these hearings, and the subsequent deliberations among the Senators.
    One of the ideas under consideration for USF financing is to impose 
a flat monthly fee on every issued telephone number in the U.S.--
regardless of how or how often the number is used. This flat fee is a 
very poor solution to the challenge of finding new USF funding sources. 
It is indeed the least equitable of the several ideas under 
consideration to address this challenge and only worsens the current 
policy challenges facing USF financing.
    A USF fee based on telephone numbers or connections has three key 
inherent weaknesses--

        1. It fails to reflect customers' relative degrees of use and 
        reliance on the telephone network, and is a regressive approach 
        that unfairly burdens those least able to absorb the cost. A 
        senior citizen on a fixed income who makes only a few calls per 
        day and a profitable business that makes hundreds of calls per 
        day would pay the same amount.

        2. With demands for USF funding growing, the projected $1 per 
        month fee may prove inadequate. Each fee increase will 
        accelerate the return of numbers to the number pool and 
        endanger the long-term viability of the USF fund--which is, 
        after all, the overarching goal of the legislation under 
        consideration.

        3. Carriers, large companies, universities, charities, and 
        other institutions often have more numbers than they actually 
        use at any given time to facilitate growth and seasonal 
        fluctuations. A numbers-based mechanism--at the margin--likely 
        will cause these customers to drop unused or lightly used 
        numbers, resulting in an increased fee well beyond $1 per month 
        per phone number--a mere projection based on the volume of 
        numbers currently assigned. This will in turn further 
        accelerate the return of unused and lightly used numbers. For 
        this reason, we view a numbers-based approach as inviting a 
        downward spiral that will ultimately destroy the USF itself by 
        provoking ever-increasing public outrage over an ever-
        increasing USF fee on customers' telephone bills.

    With respect to j2 Global, a numbers-based or connections-based USF 
fee would force us to discontinue our advertising-supported, free 
limited service to nearly ten million Americans who now use it. Our 
discontinuation alone would reduce the amount anticipated for the USF 
fund by up to $100 million per year--assuming $1 per month per 
telephone. As noted above, we would expect others with large 
inventories of lightly used or unused telephone numbers to make similar 
business decisions--thereby undermining the USF.
    Admittedly, the existing revenues-based model for financing USF has 
its own challenges and complications, as evidenced by the FCC's 
difficult deliberations over the past several years. However, its 
benefits include a built-in amount of flexibility to alter the 
contribution factor four times per year in order to adjust for 
fluctuations in demand for Universal Service programs. A numbers-based 
system, on the other hand, may limit the Fund's ability to respond to 
consumer needs. In addition, the FCC made good progress in shoring up 
the USF in its December 2002 Order modifying carrier assessments and 
raising the interstate safe harbor for wireless carriers, despite the 
limitations on its authority under current law ( Federal-State Joint 
Board on Universal Service, Report and Order, CC Docket No. 96-45, 17 
FCC Rcd 24952 (2002)).
    We ask that Congress approve legislation that will give the FCC the 
necessary tools to find a long-term solution to the USF financing 
challenge consistent with the Commission's long experience and deep 
expertise with the revenues-based mechanism. Congress should not allow 
the Commission to adopt a sudden, radical change in policy to a 
numbers-based mechanism that would almost certainly result in 
unforeseen consequences for consumers and industry participants that 
could undermine the USF. An expanded contribution base applicable to 
all types and kinds of communications services (intrastate and 
international long-distance, cable, broadband, VoIP, etc.) would permit 
the FCC to fashion a modern revenues-based model that adequately funds 
the USF, imposes a relatively light cost burden on various 
communications services in a growing marketplace, accounts for 
technological change, and treats American consumers fairly depending on 
their degree of use.
    Much of the services offered by j2 Global are interstate long-
distance in nature and thus now generate revenue for the USF under the 
current financing mechanism, though we are not a carrier and thus do 
not pay directly into the fund. We recognize that some of our services 
do not currently generate revenue for the fund, most notably intrastate 
long-distance fax transmissions and voicemail messages and the 
increasing amount of our traffic carried by broadband. Still, we have 
no objection to Congress enlarging the USF financing base with a 
modernized revenues-driven contribution mechanism under which all 
consumers of all communications services pay their fair share.
    Turning to the specifics of the legislation before the Committee, 
we agree with the approach in Senator Burns' bill that the USF funding 
mechanism ``should be equitable, nondiscriminatory, competitively 
neutral, and ensure affordable communications for all Americans'' and 
that the contributions ``be applied as broadly as possible to all types 
of providers'' and be ``competitively and technologically neutral'' (S. 
2256, sec. 2(a)(7), page 3, lines 7-10, sec. 5(a), page 15, lines 14-
23). We also support the language in the Smith-Dorgan-Pryor bill that 
the USF funding mechanism, among other things, should ``take[] into 
account the impact on low volume users, and proportionately assess[] 
high volume users, through a capacity analysis or some other means'' 
(S. 1583, section 3(b)(2)(C), page 4, lines 18-21). While we disagree 
with the provision in the DeMint-Ensign bill that the USF mechanism 
should be ``based upon the assignment of numbers in the North American 
Numbering Plan or any successor methodology,'' we appreciate the bill's 
recognition of a ``discounted contribution rate for paging services'' 
and believe that the rationale for this discount (or for an exemption) 
should extend to fax and voice-mail services. (S. 2113, section 
304(a)(2), page 23, lines 4-6, section 304(b)(2), lines 13-15).
    Although the USF contribution issue is undoubtedly complex, and 
under any approach the FCC inevitably will have much discretion, the 
Congress must provide the FCC with firm parameters to ensure that the 
FCC adheres to the goals of equity, nondiscrimination, competition, and 
affordable communications that we anticipate will be in the final 
legislative product. We do not believe that a numbers-based approach 
can be consistent with these overriding goals--and Congress should 
either prohibit the FCC from adopting a numbers-based approach 
outright, or at a minimum allow it to be adopted only with exemptions 
for numbers not used for real-time voice communications, numbers used 
exclusively for fax, voice-mail and other non-real time services, and 
numbers employed in services provided at nominal or no cost to 
subscribers. These exemptions necessarily flow from the anticipated 
overriding goals of the legislation.
    Thank you again for the opportunity to submit this testimony, and 
we look forward to working with this Committee as it develops USF 
legislation. I welcome the opportunity to answer questions.

                                  
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