[Senate Hearing 109-1107]
[From the U.S. Government Publishing Office]


                                                       S. Hrg. 109-1107
 
                            USF DISTRIBUTION

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


                                HEARING

                               before the

                         COMMITTEE ON COMMERCE,
                      SCIENCE, AND TRANSPORTATION
                          UNITED STATES SENATE

                       ONE HUNDRED NINTH CONGRESS

                             SECOND SESSION

                               __________

                             MARCH 2, 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 March 2, 2006....................................     1
Statement of Senator Burns.......................................     1
Statement of Senator DeMint......................................     4
Statement of Senator Lott........................................    48
    Prepared statement...........................................    49
Statement of Senator Smith.......................................     3
Statement of Senator Snowe.......................................    57
Statement of Senator Stevens.....................................    39
    Prepared statement...........................................     3
Statement of Senator Sununu......................................    54

                               Witnesses

Bloomfield, Shirley, Vice President, Government Affairs and 
  Association Services, National Telecommunications Cooperative 
  Association on Behalf of the Coalition to Keep America 
  Connected......................................................    18
    Prepared statement...........................................    20
Clark, Hon. Tony, President, North Dakota Public Service 
  Commission; Chairman, National Association of Regulatory 
  Utility Commissioners (NARUC) Telecommunications Committee.....    35
    Prepared statement...........................................    36
Hughes, Carson, CEO, Telapex, Inc.; on Behalf of Cellular South 
  and The Wireless Independent Group.............................    24
    Prepared statement...........................................    25
Mao, Jeff, Coordinator of Educational Technology, Maine 
  Department of Education........................................     5
    Prepared statement...........................................     7
Scott, Ben, Policy Director, Free Press; on behalf of Free Press, 
  Consumers Union, and Consumer Federation of America............    39
    Prepared statement...........................................    42

                                Appendix

Inouye, Hon. Daniel K., U.S. Senator from Hawaii, prepared 
  statement......................................................    65
Response to written questions submitted by Hon. Jim DeMint to 
  Hon. Tony Clark, Shirley Bloomfield, Carson Hughes, and Ben 
  Scott..........................................................    65
Response to written question submitted by Hon. Jim DeMint to Jeff 
  Mao............................................................    73


                            USF DISTRIBUTION

                              ----------                              


                        THURSDAY, MARCH 2, 2006

                                       U.S. Senate,
        Committee on Commerce, Science, and Transportation,
                                                    Washington, DC.
    The Committee met, pursuant to notice, at 10:02 a.m. in 
room SD-562, Dirksen Senate Office Building, Hon. Conrad Burns, 

presiding.

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

    Senator Burns. [presiding] Could the witnesses take their 
place at the table, Senator Stevens is tied up on the floor, 
and Senator Inouye is involved out there, probably down in 
Armed Services, or something. Don't know where he is. But you 
might be looking at the only Senator you're going to be talking 
to today, and I know that's sort of disappointing, but 
nonetheless, I was told to open this hearing up and they'll be 
along later. I think this hearing on the distribution part of 
USF is probably the most important hearing that we'll have. We 
looked the other day at the contributions part of it, making 
sure that that's fair and equitable to everybody, and now today 
is the second of these two hearings that deals with the 
Universal Service Fund.
    At stake in this debate is no less than the future of rural 
America. For those who say that Universal Service no longer 
makes sense or that it should be repealed or scaled back I 
encourage them to visit states like Montana and Alaska and 
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's a lot of dirt between light bulbs in Montana. You've 
heard me say that 1,000 times. I was asked the other day to 
explain that. Competition and technology have not changed that. 
Until that time arrives, Universal Service funds are the only 
alternative. As we look at revising Universal Service, we need 
to keep foremost in mind that 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 of our 
schools and our schoolchildren would not have access to the 
Internet; vital to help them do their homework, conduct 
research and compete in a global economy. Many people in remote 
communities would not have access to healthcare using the 
Internet--an important issue in Montana where many counties do 
not even have a doctor. I think I've got 13 counties. We also 
have an aging population in rural areas, so we deliver 
healthcare in a different way than we did years ago.
    That is not to say that changes do not need to be made to 
the Universal Service Fund. Recently, the amount of money 
distributed by the Fund has been increasing, impacting the 
ability of the Fund to keep up with its demand. Much of the 
current Fund growth can be attributed to the rapid increase in 
funding provided to wireless carriers who have become eligible 
for Universal Service payments. Among the issues we need to 
address include clarifying the purpose of Universal Service 
support. It is the purpose of the Fund to promote competition 
in rural areas, rural service, or both. To what extent, if at 
all, should broadband service qualify for Universal Service 
support? Another issue is what types of discipline and 
accountability should be implemented to control the growth of 
the Fund and ensure its survival.
    These and other challenging issues have made it necessary 
for Congress to take a look at revising the way Universal 
Service funds are distributed. 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. I call it NetUSA, to revise the 
Universal Service Fund to adapt to the radically changing 
telecommunications landscape.
    Any distribution mechanism must ensure that Universal 
Service support distributions are fair, that they are 
equitable, and competitively neutral. At the same time, 
maintaining a sustainable Universal Fund requires the recipient 
to be accountable for how that support is used. We need to not 
only control the growth of the Fund, but to make sure the funds 
are going where they are needed, and invested in advanced 
technology. In other words we have to protect the integrity of 
the Fund.
    My NetUSA bill will shore up the Universal Service Fund, 
ensuring that investment in a ubiquitous, advanced 
telecommunications infrastructure that can continue to all 
corners of the country. In general, the NetUSA bill would 
broaden the base of contributions into the Fund, and it would 
govern more prudently the distributions of the funds.
    With respect to distribution, the bill requires the Federal 
Communications Commission to ensure that companies that receive 
Universal Service Fund support invest in and deploy broadband 
infrastructure in rural and high-cost areas. We must ensure 
that these funds are used to accelerate the deployment of 
broadband so that the U.S. becomes a world leader in broadband 
deployment. Right now we're a little behind.
    The NetUSA bill also controls the growth of the Fund by 
making the eligibility rules for receiving the support 
competitively neutral and targeting the Universal Service to 
high-cost areas. Specifically, to be eligible for Universal 
Service Fund support a carrier one, must offer any calling plan 
comparable to the incumbent local phone carrier. Offer services 
under the requirements to protect customers and promote public 
health, safety, and welfare applied to incumbent phone 
carriers, and offer services substantially over its own 
facilities, commit to use any Universal Service support 
received to achieve coverage of the entire service area within 
2 years of the date of designation.
    Moreover, the bill ensures the integrity of the Schools and 
Libraries Program. To deter waste, fraud and abuse, my bill 
strengthens the FCC's management and oversight, including 
imposing sanctions on program violators. And it requires the 
Federal Communications Commission within 180 days of the 
enactment to establish rules regarding the Schools and 
Libraries Fund. And one, identifying appropriate fiscal 
controls and accountability standards; defining the role of 
USAC; creating performance goals and measures; establishing 
appropriate enforcement actions, including sanctions such as 
debarment for applicants or vendors who have been convicted of 
crimes or held civilly liable in connection with the program.
    This 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. And I look forward to speaking 
with everybody at the table today. I think we have a broad 
spectrum of folks here, who represent different segments of our 
industry, and let me tell you it's a pleasure to have you here 
today; we look forward to your testimony because right now, we 
have great challenges ahead and only through you can we solve 
some of these challenges. And I appreciate you coming today.
    [The prepared statement of Senator Stevens follows:]

    Prepared Statement of Hon. Ted Stevens, U.S. Senator from Alaska
    Earlier this week we held a hearing about the funding of the 
Universal Service program. Today, we address the way those funds are 
spent. This hearing will examine what Universal Service should support, 
and who should get money out of Universal Service relative to who pays 
in.
    The changing face of communications demands that we reexamine the 
way Universal Funds are being spent and to what purpose. There have 
been many successful programs supported by USF, but there have also 
been some programs that could use some fine tuning. Today, we will 
listen to various parties in order to learn how the distribution of 
Universal Service funds might be improved in light of new realities in 
the marketplace and changes in technology.
    In a competitive world we need to understand how we maintain 
America's technology position in the world and what communications 
infrastructure we need to support that position, particularly in rural 
areas.
    I look forward to hearing how Universal Service funds can be used 
to encourage the deployment of broadband and other advanced services to 
all Americans as quickly as possible.

    Senator Burns. Senator Smith, from Oregon do you have an 
opening statement and welcome.

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

    Senator Smith. I do Senator, thank you. I guess we've both 
got bills trying to do much of the same thing, but as I noted 
in our hearing earlier this week, it's become increasingly 
clear that major reforms are imperative if the Universal 
Service Fund is to meet the evolving communication needs of the 
American people. To this end I have introduced the Universal 
Services for 21st Century Act with Senators Dorgan and Senator 
Pryor, a bill that will stabilize and broaden the basic 
contributions to the Fund and bring the benefits of high-speed 
Internet networks to unserved areas of our country. Presently 
the Universal Service System provides no direct funding for 
broadband networks except to schools and libraries. As Members 
of this Committee are very well aware, Americans increasingly 
rely on their high-speed Internet connections to communicate 
and conduct business. Many rural and high-cost areas of the 
country, however have limited or no access to these broadband 
networks. So to ensure that all Americans have access to the 
most advanced communications networks in the world, my bill 
allocates $500 million annually to fund construction of 
broadband infrastructure. This new broadband for unserved areas 
account will be capped at $500 million each year, and made 
available to one facilities-based provider in unserved areas on 
a merit based and competitive basis. The focus is rightly 
placed on infrastructure, efficiency and discipline and 
spending. Universal Services for the 21st Century Act will 
bring broadband to more Americans, spur economic development in 
rural and high-cost areas, and make America more competitive 
globally. In the most recent international telecommunications 
union study, the United States fell from 13th to 16th in the 
global broadband penetration. This investment in broadband 
infrastructure is the solution to this disturbing trend. By 
reaffirming and stabilizing Universal Service, and using the 
Fund to spur the development of broadband networks, our 
legislation will ensure that our Nation's communication 
infrastructure will continue to grow and be the robust and 
connected network that Americans expect and that Americans 
deserve. Thank you.
    Senator Burns. Thank you, we've been joined by Senator 
DeMint from South Carolina, who has an interest in this and 
rural telecommunications, and I look forward to hearing your 
statement.

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

    Senator DeMint. Thank you, Senator. And I want to thank the 
witnesses too. I appreciate you being here. I know you 
represent a lot of interests that are benefiting from the 
Universal Service Fund. It was interesting this week--I was 
talking to a friend from back home, we had a conversation and 
he finally mentioned that he wasn't going to be home for a 
week. And I said: ``Where are you?'' He was on a remote river 
bank in Chile, looking at a development opportunity, and 
talking on a satellite phone. And as I approach this hearing I 
guess the thing that strikes me, is that he was getting good 
service and in fact I think we're in a position with the 
technology we have today, he could have high-speed broadband 
service on a remote river bank in Chile. And with the opening 
of the whole video analog spectrum, the technology changes in 
the next few years will be dramatic.
    But there were no Universal Service funds to provide that 
service in Chile. The fact is the Fund was built on a lot of 
assumptions, the assumption that we had to have a lot of 
hardlines and other things to serve rural America. A lot of 
these things are changing. And the challenge I'd like to give 
to you today, is that the current Universal Service Fund is 
unsustainable. Over the next 10 years, $500 billion, an 
incredible amount of money, will be spent--particularly 
considering the other things that we need to deal with as a 
nation of health care and Social Security, that are also 
unsustainable. There's no question that the Universal Service 
Fund has played an important function that we need to get 
service to rural areas. But at this time, when we realize that 
this Fund is unsustainable, it's very important that we 
prioritize where these funds are needed. We know the Chairman 
of this Committee is looking out for Alaska, and the vast open 
spaces there, and that we're going to continue to need 
additional funds to make sure people are served. But I know 
there are places even in my state within only a few miles of a 
major metropolitan area, where there are a number of rural 
communication companies being sustained by the Universal 
Service Fund, that really don't need it. With all of the 
opportunities around we have to make some hard choices. So if 
your purpose of being here today is to defend the status quo, 
frankly it's not going to do this Committee much good, because 
we have to make hard decisions. If your purpose of being here 
today is to defend the current basis of how we reimburse or pay 
out the Universal Service Fund, which is cost-based. And we've 
seen what that's done in year's past to health care and other 
services where it runs up the cost, it discourages competition, 
it does not encourage efficiencies and productivity. If you're 
here today to defend that, it won't help us, because this 
Committee needs to make some hard decisions. We need to get 
control of the cost of Universal Service funds, we need to make 
sure that rural areas are served but we need a lot of new 
thinking. Because the Fund will not continue to grow at its 
current rate, it will just not, it cannot.
    The Nation's priorities are going to have to rearrange how 
that money is spent. So I appreciate your being willing to come 
here today; but I'm listening for ideas on how we can make less 
money go further and meet the needs of rural areas whether they 
are in Montana or Alaska, but I am looking forward to your 
testimony and I yield back, Senator.
    Senator Burns. Thank you very much, Senator. We'll just 
start off this morning, and we have Jeff Mao, Coordinator of 
Educational Technology, Maine Department of Education from 
Augusta, Maine. We got an Augusta, Montana you know.

 STATEMENT OF JEFF MAO, COORDINATOR OF EDUCATIONAL TECHNOLOGY, 
                 MAINE DEPARTMENT OF EDUCATION

    Mr. Mao. Thank you. Good morning, Senator Burns, Senator 
Smith, Senator DeMint, Members of the Committee, thank you for 
the opportunity to testify today. My name is Jeff Mao; I am the 
Coordinator of Educational Technology for the Maine Department 
of Education. My responsibility for the Department is the 
implementation of Maine's 1 to 1 laptop program, the Maine 
Learning Technology Initiative that provides wireless laptop 
computers for all 7th and 8th grade students and their teachers 
in the State of Maine.
    I appreciate the opportunity to share with the Committee 
how Maine has leveraged the support that E-Rate provides our 
schools and libraries to improve both the equitable 
distribution of universal broadband and the resources available 
to schools and libraries in our State.
    The E-Rate program provides the foundation on which Maine's 
innovative technology programs are built. In order to sustain 
these programs, it is critical that the E-Rate program continue 
to exist and to provide secure funding to support the continued 
deployment and maintenance of broadband services statewide. If 
the E-Rate program were to cease to exist, it would undoubtedly 
lead to significant setbacks in the progress of these 
innovative programs as well as the deployment and availability 
of broadband services throughout the State.
    Maine established the Maine School and Library Network in 
order to ensure universal broadband access for all of Maine's 
schools and libraries. In order to ensure stability and 
longevity of the Maine School and Library Network, Maine's 
Legislature established the Maine Telecommunications Education 
Access Fund in 2001. In addition, the legislation established 
that all schools and libraries receiving services from the 
Maine School and Library Network would be required to apply for 
Federal assistance through the E-Rate program. All Maine 
citizens and businesses contribute to the Maine 
Telecommunications Education Access Fund, matching the Federal 
assistance Maine receives from E-Rate. Today, broadband 
services in schools and libraries are funded by E-Rate and the 
Maine Telecommunications Education Access Fund. The Maine 
School and Library Network is available to all schools and 
libraries, providing universal broadband services to over 900 
schools and libraries in all corners of Maine.
    The Maine School and Library Network is both technically 
and figuratively the backbone of educational technology efforts 
in the State of Maine. I'd like to outline three of our 
education technology programs. In March of 2000, Governor Angus 
King announced plans to create a statewide 1 to 1 learning 
initiative. Maine has invested over $38 million in the Maine 
Learning Technology Initiative. Over the past 4 years the 
program has provided 1 to 1 wireless laptop computers to 
approximately 68,000 students in 7th and 8th grade, and over 
3,000 teachers statewide. This includes the large urban schools 
of Lewiston, Portland, and Auburn, and the small schools in 
rural areas like Eastport, Madawaska, and Monhegan Island.
    The State also provides ongoing professional development 
for teachers, principals, and technology coordinators 
throughout the year, and installed wireless networks in all 236 
middle schools. Every day teachers and students utilize digital 
tools and resources now available to them at school from their 
broadband connection.
    The Maine Learning Technology Initiative is equitably and 
universally deployed to all Maine schools, regardless of 
rurality or economics.
    In 1998, Maine established the Maine Distance Learning 
Program. It was established to provide the geographically 
dispersed population of Maine students and teachers a way to 
connect and share. The State of Maine invested $15 million to 
create interactive video conferencing classrooms. Today, 91 
classrooms connect over broadband with high quality audio and 
video feeds.
    This year, 28 high school course offerings are being taught 
over the system including high-need courses such as AP Physics 
and AP Calculus. These are hard-to-find classes in small rural 
schools. In addition, courses like Japanese and American Sign 
Language are taught over the system. These courses are rarely 
available in small rural schools and sometimes not even in our 
larger schools.
    One example, in North Anson, a small rural town in Central 
Maine, 50 percent of the adult population in this town does not 
have a high school degree. Their high school has less than 300 
students and yet Carrabec High School has increased its AP 
course offerings through the use of the system from two to 
eight. Today, the school's ``College Hall of Fame'' celebrates 
graduates now attending schools like the University of 
Michigan, Columbia University, and MIT.
    Finally, Maine began its virtual library in 2000. MARVEL! 
provides every resident of Maine with access to a collection of 
full text and abstracts from magazines, newspapers and 
reference books. Any one public library or school could spend 
over $500,000 to purchase the content available through 
MARVEL!. Now even the smallest school or local library has 
access to vast collections of information. Without the Internet 
access supported by E-Rate, MARVEL! would not be universally 
available to all Maine students from school and to all Maine 
citizens from their public libraries.
    These opportunities would not be possible were it not for 
the E-Rate. These investments all grew from the E-Rate funding, 
which provided the ability to leverage state funds for the 
creation of the Maine School and Library Network, which 
provides broadband Internet connectivity to Maine's schools and 
libraries. These programs are key components in Maine's 
strategy to ensure that Maine students meet and exceed local, 
state, and Federal requirements including No Child Left Behind. 
Maine is preparing its students for the 21st century, and the 
E-Rate program has formed the foundation. Without the E-Rate 
program, the future of all of these innovative programs would 
be put in jeopardy. The continuation of the E-Rate program is 
critical to Maine's students and Maine's future.
    Thank you again, for the opportunity to share with you the 
positive impact that the E-Rate program has had on the students 
and citizens of Maine.
    [The prepared statement of Mr. Mao follows:]

Prepared Statement of Jeff Mao, Coordinator of Educational Technology, 
                     Maine Department of Education
    Chairman Stevens, Ranking Member Inouye and members of the 
Committee, thank you for the opportunity to testify today. I am Jeff 
Mao, Coordinator of Educational Technology for the Maine Department of 
Education. My primary responsibility is the implementation of Maine's 1 
to 1 laptop program, the Maine Learning Technology Initiative that 
provides wireless laptop computers for all 7th and 8th grade students 
and their teachers, teacher and technical training, and support to all 
of Maine's middle schools. In addition I provide direct support to 
schools for their local educational technology efforts.
    I appreciate the opportunity to share with the Committee how Maine 
has leveraged the support that E-Rate provides our schools and 
libraries to improve both the equitable distribution of universal 
broadband and the resources available to students, teachers, and our 
public libraries.
    Maine has a long tradition of innovation in, and support for, 
education. In recent years, Maine has embraced the use of technology to 
improve the quality and scope of educational resources available to 
students and lifelong learners throughout the state. Thanks to the E-
Rate program, Maine has been able to leverage state funds to make 
broadband service available to schools and libraries statewide. The E-
Rate program provides the foundation on which Maine's innovative 
technology programs are built. In order to sustain these programs, it 
is critical that the E-Rate program continue to exist and to provide 
secure funding to support the continued deployment and maintenance of 
broadband services statewide. If the E-Rate program were to cease to 
exist, it would undoubtedly lead to significant setbacks in the 
progress of these innovative programs as well as the deployment and 
availability of broadband services throughout the state. The 
continuation of the E-Rate program is critical to Maine's students and 
Maine's future.
E-Rate and the Maine School and Library Network (MSLN)
    Maine established the Maine School and Library Network in order to 
ensure universal broadband access for all of Maine's schools and 
libraries. In 2001, Maine's Legislature established the Maine 
Telecommunications Education Access Fund (MTEAF, 35-A M.R.S.A. Section 
7104-B) that required all telecommunications providers in Maine to 
contribute to a fund, which would be used to support the Maine School 
and Library Network. In addition, it established that all schools and 
libraries receiving services from the Maine School and Library Network 
would be required to apply for Federal assistance through the E-Rate 
program. All Maine citizens and businesses invest in the Maine 
Telecommunications Education Access Fund, matching the Federal 
assistance Maine receives from E-Rate. Today, broadband services in 
schools and libraries are funded by E-Rate and the Maine 
Telecommunications Education Access Fund. The Maine School and Library 
Network is available to all schools and libraries, providing universal 
broadband services to over 900 schools and libraries in all corners of 
Maine.
    The Maine School and Library Network is both technically and 
figuratively the backbone of educational technology efforts in the 
State of Maine.
Maine Statewide Educational Technology Programs
Maine Learning Technology Initiative (MLTI)
    In March of 2000, Governor Angus King announced plans to create a 
statewide 1 to 1 learning initiative that would provide every student 
in grades 7 and 8 with a digital learning device. Today, the Maine 
Learning Technology Initiative program is in its fourth full year and 
is known around the world as the leading educational technology 
innovation. The program has provided 1 to 1 wireless laptop computers 
to approximately 68,000 students and over 3,000 teachers since the fall 
of 2002. The program installed wireless networks in every middle school 
in Maine, and provides on-going teacher and technical training 
throughout the school year. Teachers and students utilize digital tools 
and resources both on the laptops and on the Internet from Fort Kent to 
Kittery. Every middle school in Maine, from the small rural schools of 
Aroostook County to the coastal fishing communities in Washington 
County to the more urban cities of Lewiston and Portland are accessing 
online resources via State-funded wireless laptop computers. Teachers 
have invested countless hours at professional development workshops 
learning to leverage the resources now available to all of their 
students at school from their broadband connection. Teachers report 
that their teaching has been revitalized by the infusion of technology 
and new teaching methods, and students report they are more engaged and 
invested in their learning. The Maine Learning Technology Initiative 
follows in the footsteps of the Maine School and Library Network as the 
second major educational program that is equitably and universally 
distributed to all Maine students and schools regardless of rurality or 
economics.
    Roughly 60 percent of schools allow their students to take their 
MLTI laptops home. While many families have purchased Internet access 
at home, not all do. While no total solution has been applied, the 
issue has been mitigated by two important programs. First, 68 public 
libraries have identified local funding sources to install wireless 
networks, allowing both students and patrons in general to visit the 
library and utilize the broadband service. The number of libraries 
offering wireless access is expected to continue to grow. Second, the 
Maine Learning Technology Foundation, founded by former Governor Angus 
King has raised private funds which are being used to pay for dial-up 
Internet access for students with a Maine Learning Technology 
Initiative laptop and who qualify for the Federal Free and Reduced 
lunch program.
    Data from studies performed by the Maine Education Policy Research 
Institute (MEPRI) at the University of Southern Maine illustrate the 
impact of both the program, and it's reliance on broadband 
connectivity. A recent report \1\ from MEPRI by the chief researcher, 
David Silvernail, Ph.D., included data from a recent survey done in the 
spring of 2005 of just over 1,100 teachers:
---------------------------------------------------------------------------
    \1\ ``The Impact of the Maine Learning Technology Initiative on 
Teachers, Students, and Learning. Maine's Middle School 1-to-1 Laptop 
Program'', Dr. David Silvernail, Ph.D., February 2006. Report was 
presented to the Joint Standing Committee on Education and Cultural 
Affairs, Maine State Legislature. Copies of relevant slides from the 
presentation are included as Appendix A.

   94 percent responded that having a laptop helped them access 
---------------------------------------------------------------------------
        more up-to-date information.

   93 percent responded that they could access more diverse 
        teaching materials and resources.

   90 percent responded that they could explore topics in 
        greater depth with students.

   89 percent responded that students were more engaged when 
        using laptops.

   89 percent responded that students were better able to study 
        real-life issues/problems using laptops than without them.

   87 percent reported that laptops facilitated students' 
        ability to integrate information from multiple resources.

   80 percent responded that data indicates technology is 
        positively affecting student achievement.

    In the same report, a survey of over 16,500 7th and 8th grade 
students in the program given in the spring of 2005 revealed similar 
findings:

   96.2 percent responded that they were capable of effectively 
        utilizing a search engine.

   85 percent responded that they were more likely to edit 
        their work when using a laptop.

   73 percent responded that they were capable of effectively 
        utilizing a spreadsheet to create graphs.

   72 percent responded that they were more interested in 
        school when using the laptops.

    Also included in the report, a survey of 200 middle school 
principals showed that 89 percent saw the laptop program positively 
impacted improved student achievement in their schools.
    Researcher Anne Davies, Ph.D. studied the affects of the MLTI 
program in a small rural school in downeast Maine. Her report, 
``Finding Proof of Learning in a One-to-One Computing Classroom'' found 
that, ``Students apply, analyze, synthesize, and evaluate information 
and knowledge more often.'' She also concluded, ``Being a student in a 
one-to-one, high-speed, wireless computing classroom makes a difference 
for learning.'' \2\
---------------------------------------------------------------------------
    \2\ ``Finding Proof of Learning in a One-to-One Computing 
Classroom'', Dr. Anne Davies, Ph.D., April 2004. Copies of the full 
report are available from http://www.connect2learning.com.
---------------------------------------------------------------------------
    The impact of the Maine Learning Technology Initiative for Maine 
has been significant. The implications of the project are far reaching. 
With ready access to wireless laptop computers that have broadband 
connectivity, teachers are enriching their curricula. Textbooks are 
becoming less important as current, varied, and often interactive 
resources and content can be gathered and accessed from the Internet. 
Not only could this yield future fiscal savings, but it means that 
teachers are given more flexibility to create and present content to 
their students. This allows teachers to individualize instruction as 
well as craft curriculum that best meets the needs of the students. 
Ultimately, this flexibility means that teachers will be able to better 
help students achieve and meet local, state, and Federal standards 
including No Child Left Behind.
    The Maine Learning Technology Initiative is a successful innovation 
that continues to prove itself. It has been carefully designed and 
implemented based upon a few simple but powerful ideas, (1) One laptop, 
one student, equity for all, (2) Wireless access to broadband services 
in all instructional areas in every school provides access to boundless 
resources and provides a robust communications network, and (3) 
Teachers must be provided with the necessary training to leverage these 
newly available resources. These three ideas are like the legs of a 
stool, remove any one, and the stool will fall. E-Rate provides the 
broadband access. The State of Maine has invested over $38 million over 
the last four years to provide the computers, wireless networks, and 
the necessary teacher training.
Maine Distance Learning Project (MDLP)
    In 1998, the Maine Distance Learning Project (MDLP) was established 
to provide the geographically dispersed population of Maine students 
and teachers a way to connect and share. The State of Maine invested 
$15 million to create interactive video conferencing rooms. Today, 91 
classrooms and 11 sites funded by the Marine Science and Biotech 
Initiative connect over broadband connections with high quality audio 
and video feeds. Up to 4 sites may connect in a fully interactive mode 
allowing schools to share resources.
    This year, 28 high school course offerings are being taught over 
the system including high-need courses such as AP Calculus, AP Calculus 
AB, AP Statistics, AP Physics, and AP U.S. History. These courses would 
not typically be available to small rural schools which do not have the 
staffing or resources to provide these offerings. In addition, courses 
like Japanese language (first and second year), Environmental Science, 
and American Sign Language (first, second, and third year) are taught 
to students through the system.
    Newsweek's article, May 16, 2005, ``Other Winning Equations'' by 
Dan Berrett and Dan Brillman featured one of Maine's schools in the 
Maine Distance Learning Program. Carrabec High School in North Anson is 
a small rural high school of fewer than 300 students serving a 
community where only 50 percent of the adults in the community have a 
high school degree. Carrabec High School expanded its AP course 
offerings from two to eight by utilizing both the Maine Distance 
Learning Program system as well as online course offerings. Carrabec 
High School's students are not the only students to benefit as they 
also provide coursework to other rural schools using the Maine Distance 
Learning Program system like Brendan Murphy's AP Calculus and AP 
Statistics courses. On Murphy's wall, a ``College Hall of Fame'' 
celebrates his students' achievements noting that this school year, 
among his graduated students, are some attending higher education 
institutions including MIT, Columbia University, and the University of 
Michigan.
    Many regions have collaborated to a level not often seen. Not only 
do they share coursework over the system, they aligned their school 
bell schedules and vacation schedules so that all students from all of 
the schools would have equal opportunity to take advantage of the Maine 
Distance Learning Project course offerings. School consortiums in the 
most rural and remote northern and eastern areas of Washington, 
Aroostook, and Penobscot counties have worked together to facilitate 
collaboration and resource sharing.
    The Maine Distance Learning Project system is used for more than 
course delivery. It also serves as a portal to the world allowing 
students to interact with people from different parts of the United 
States and the world. For example, students from Jonesport Beals, a 
small rural downeast coastal community use the Maine Distance Learning 
Project system to meet and talk with other students from Ireland who 
also live in a small rural fishing community. Students from Skowhegan 
interviewed World War II veterans living in Hawaii who were present at 
the Pearl Harbor attack. Many schools use the Maine Distance Learning 
Project system to provide job fair interviews with professionals in 
fields that do not exist in their own rural communities.
    Maine Distance Learning Project is also used for virtual field 
trips allowing schools to expose students to new and exciting resources 
without having to lose valuable instructional time traveling or spend 
limited local funds on transportation expenses. Maine Distance Learning 
Project in conjunction with the Maine State Library, the Maine 
Department of Education, and the Mitchell Institute's Great Maine 
Schools Project have recently been awarded a grant from the Verizon 
Community Foundation to fund the creation of more virtual field trips 
related to Maine's Native American populations. Other organizations are 
also creating virtual field trips including the Penobscot Marine Museum 
(http://www.penobscotmarinemuseum.org) and PCA Great Performances 
(http://www.pcagreatperformances.org).
Maine's Virtual Library, MARVEL!
    Maine began its virtual library in 2000. MARVEL! provides every 
resident of Maine with access to a collection of full text and 
abstracts from magazines, newspapers and reference books that are 
credible, reputable resources. MARVEL! also provides students, business 
people, public library patrons, and higher education students and 
educators the ability to search a number of resources at one time for 
needed information. The print value of the resources provided in these 
databases would be in excess of $500,000 per library. One example of 
cost savings is as follows:

   Maine has 214 schools (public and private) that contain 
        grades 9-12.

   If one of these schools were to purchase just the EBSCO 
        resources contained in MARVEL!, it would cost that school 
        $16,800.

   If all of these 214 Maine schools purchased just the EBSCO 
        materials on their own, the total cost would be $3,595,200.

    The collaboration between the Maine State Library, the University 
of Maine, the Maine State Legislature, and the Maine Telecommunications 
Education Access Fund that funds the statewide licensing of these 
resources for every library and resident of Maine is a truly cost-
effective service that can benefit every Maine citizen. Without the 
Internet access supported by E-Rate, MARVEL! would not be universally 
available to all Maine students from school, and to all Maine citizens 
from their public libraries.
Conclusion
    In keeping with its long history of innovation in education, Maine 
has embraced the E-Rate program and has used it to leverage millions of 
dollars in state and local funding for a wide range of technology 
programs. These programs are directly improving the learning 
opportunities available to students, teachers, and citizens throughout 
the state of Maine by making high-speed Internet access, distance 
learning, and innovative courseware available throughout the state. 
These learning opportunities are a critical part of Maine's efforts to 
catapult its students, businesses, and citizens into the 21st Century.
    These opportunities would not be possible were it not for the E-
Rate program. Maine's citizens, businesses, and State government have 
invested in the Maine Telecommunications Education Access Fund 
(including the Maine School and Library Network and MARVEL!), the Maine 
Learning Technology Initiative, and the Maine Distance Learning Project 
to provide unique and innovative opportunities for not only Maine 
students, but for all of Maine's citizens. These investments all grew 
from the E-Rate funding, which provided the ability to leverage state 
funds for the creation of the Maine School and Library Network, which 
provides broadband Internet connectivity to Maine's schools and 
libraries. These programs are key components in Maine's strategy to 
ensure that Maine students are ready for the 21st Century, and the E-
Rate program has formed the foundation, which has allowed the State of 
Maine to build these innovative educational technology programs. 
Without the E-Rate program, the future of all of these innovative 
programs would be put in jeopardy. The continuation of the E-Rate 
program is critical to Maine's students and Maine's future.
    Thank you again, Chairman Stevens, Ranking Member Inouye and 
Members of the Committee for allowing me this opportunity to share with 
you the positive impact that the E-Rate program has had on Maine's 
schools and libraries.













    Senator Burns. Thank you very much, Mr. Mao. We have 
Shirley Bloomfield, Vice President, Government Affairs and 
Association Services, National Telecommunications Cooperative 
Association, the Voice of Rural Telecommunications.

        STATEMENT OF SHIRLEY BLOOMFIELD, VICE PRESIDENT,

          GOVERNMENT AFFAIRS AND ASSOCIATION SERVICES,

            NATIONAL TELECOMMUNICATIONS COOPERATIVE

             ASSOCIATION ON BEHALF OF THE COALITION

                   TO KEEP AMERICA CONNECTED

    Ms. Bloomfield. Well, thank you for the introduction. I 
think I'll skip that part. But I'm also here today to testify 
on behalf of the Coalition to Keep America Connected. And we 
thank you greatly for the Committee's leadership on Universal 
Service issues, particularly the legislation that some of you 
have introduced already.
    The Coalition to Keep America Connected is organized by 
ITTA, NTCA, WTA, and OPASTCO and collectively our membership 
represents about 700 small and midsize communications 
providers. We serve seven million customers in rural America 
and we cover about 40 percent of the landmass. The coalition 
also has a vast number of folks who are members of it, 
including consumers, small business owners and local 
policymakers.
    Universal Service has remained the cornerstone of our 
Nation's telecommunications policy for more than six decades, 
ensuring that we all enjoy the benefits of a nationwide 
integrated communications network.
    Today, the program emphasizes an assurance that necessary 
cost recovery is available to those that make the commitment to 
serve the Nation's most economically challenging markets as is 
essential in this time of national and economic security.
    The coalition has come up with four main principles that we 
would like to see, and put out on the table for future 
consideration. Support must be used to construct, maintain and 
upgrade networks to benefit all consumers and must not be 
voucher, auction, or block grant based. Support must be based 
upon a provider's actual cost of service. Support must not be 
used to artificially incite competition. On the first point, 
Universal support is for the deployment, maintenance and 
upgrading of telecommunication networks.
    Telecommunications providers do not build networks one 
connection at a time. But rather, networks require substantial 
financial investment and are built to be scaleable and 
expandable to meet future consumer demands for new services and 
new technologies. Policies that would force carriers to build 
and maintain networks one connection at a time, ignore real-
world economics and will create vast inefficiencies and 
increased costs to all consumers.
    Today cost recovery support from the Universal Service 
program has a direct correlation to the carrier's actual 
investment and the cost of providing that service. This cost-
based system has proven to work efficiently and effectively for 
over six decades. We believe this framework is the same 
framework that is going to get broadband out, to increase the 
penetration rates out all across America that we have seen in 
traditional voice service as well.
    Our second principle requires that all Universal Service 
Fund recipients receive support based on their own costs. This 
will increase program accountability as well as reduce the 
demand for funds.
    The vast majority of growth that has already been noted 
this morning in Universal Service is due to competitive 
eligible telecommunications carriers or ETCs. Universal Service 
support to competitive ETCs grew by over 115 percent in the 
last year. During this same period ILEC support grew by just 
less than .7 percent. As a percentage of the overall fund, 
CETCs accounted for approximately 1 percent of all Universal 
Service funds in 2000. At the end of 2005, the distributions 
have skyrocketed to about 18 percent of the high-cost portion 
of the Fund. This may seem like a very small percentage, but if 
left unchecked the Fund will become insolvent.
    Finally many rural areas in our Nation can't support more 
than one gas station, grocery store or other commodity service 
let alone multiple communications providers. While rural 
carriers welcome competition in areas that can support it, 
Universal Service should not be used to artificially incite 
competition in areas it would otherwise not occur. In fact 
little competition is actually from 214(e). Most of the new 
funding for the existing wireless carriers are carriers who 
were already providing service in these markets. Tightening of 
the ETC requirements will ensure that Universal Service monies 
support the intended goal that this committee envisioned in 
1996 of guaranteeing all Americans have access to comparable 
services at rates comparable to those in urban areas.
    When deciding to grant ETC status the following 
qualifications should be met: The designation must ensure 
ubiquitous comparable rates and services and cover the entire 
ILEC market area; the benefits of the designation must not 
outweigh the burdens on the Fund and have the same quality of 
service, safety and other standards. The ETC must demonstrate 
the actual costs, and the funds should not be used to incite 
unnecessary artificial competition.
    I would be remiss to not point out that our thoughts on 
Universal Service distribution are dependent upon some very key 
changes in the contribution side as well. The coalition 
believes the following steps need to be taken to bring 
contributions in line with the realities of today's 
communications marketplace. The base of contributors must be 
expanded to include all providers and using the underlying 
infrastructure, including but not limited to all providers of 
two-way communications regardless of technology. Support shall 
be made available for the cost recovery needs of carriers 
deploying broadband-capable infrastructure. The contribution 
methodology must be assessed on all revenues or a revenues 
hybrid that ensures equitable and nondiscriminatory 
participation. And regulatory authority should be allowed to 
mold and change as technology evolves and must be clarified and 
strengthened.
    If the policy recommendations we've outlined were 
implemented, Universal Service would be on a sound footing and 
continue to play a key role in ensuring all Americans are 
connected to a high quality communications network.
    Thank you very much and I look forward to your questions.
    [The prepared statement of Ms. Bloomfield follows:]

 Prepared Statement of Shirley Bloomfield, Vice President, Government 
     Affairs and Association Services, National Telecommunications 
  Cooperative Association on Behalf of the Coalition to Keep America 
                               Connected
    Good afternoon. I am Shirley Bloomfield, Vice President of 
Government Affairs and Association Services for the National 
Telecommunications Cooperative Association. I am here today to testify 
on behalf of the Coalition to Keep America Connected. We thank you for 
the opportunity to testify before you.
    The Coalition to Keep America Connected effort is organized by The 
Independent Telephone & Telecommunications Alliance, the National 
Telecommunications Cooperative Association, the Organization for the 
Promotion and Advancement of Small Telecommunications Companies and the 
Western Telecommunications Alliance, whose memberships include more 
than 700 small and midsize communications companies. Together these 
companies serve millions of consumers and 40 percent of the landmass 
across America.
    Our Mission is dedicated to ensuring that all consumers have access 
to affordable telecommunications services and the latest technologies--
no matter where they live. We are guided by three main principles. They 
are: Fairness, Affordability and Access. Fairness means that urban, 
suburban, and rural consumers alike deserve to stay connected to their 
families, friends, and the world through communications technologies. 
Affordability means that technology is only useful when it's affordable 
to consumers. Congress must ensure that all Americans can receive 
communications technologies at affordable prices. Lastly, access means 
that every American should have access to the latest, modern 
technologies, no matter where they live.
    Universal Service has remained the cornerstone of our Nation's 
telecommunications policy for more than six decades, ensuring that we 
enjoy the benefits of a nationwide integrated communications network. 
The Universal Service Fund is an essential element to ensure the 
fairness, affordability, and access I just described. In addition, the 
Nation's economic and national security insists that this policy be 
preserved.
    Today, the program emphasizes an assurance that necessary cost 
recovery is available to those that make the commitment to serve the 
Nation's most economically challenging markets. Policymakers must 
understand that this is the key to building the nationwide network that 
has guaranteed all Americans the ability to enjoy an unprecedented era 
of access to information.
    The Coalition has come up with four main principles that we feel 
should guide future policy on the distribution side of Universal 
Service. They are:

        1. Support must be used to construct, maintain and upgrade 
        networks to benefit all consumers and must not be voucher, 
        auction, or block grant based.

        2. Support must be based upon a provider's actual cost of 
        service.

        3. Support must not be used to artificially incite competition.

        4. The rural and non-rural fund distinctions must be 
        maintained.

Support Must Be Used to Construct, Maintain and Upgrade Networks To 
        Benefit All Consumers and Must Not Be Voucher, Auction, or 
        Block Grant Based
    In the infancy of the telephone industry large monopoly companies 
realized it was not economically feasible to serve much of rural 
America due to low population density, relatively isolated and often 
rugged terrain. Thus, they did not build networks serving rural 
America. As a nation, we quickly realized the economic burdens of 
serving rural and high-cost areas with vital telecommunications 
services. As a result, the Nation stood behind the idea of Universal 
Service bringing comparable services and comparable rates to all 
Americans no matter where they live. Due to this highly successful 
policy, over 1,000 small, community-based telecom providers prospered 
in rural America to serve the telecommunications needs of their 
communities. Without the national commitment to Universal Service, 
these networks would not have been built.
    Policymakers must understand that Universal Service support is for 
the deployment, maintenance, and upgrading of communication networks. 
Communications providers do not build networks one connection at a 
time. Rather, networks require substantial financial investment and are 
built to be scaleable and expandable to meet future consumer demands 
for new technologies and services. Regulations that force carriers to 
build and maintain networks one connection at a time ignore real-world 
economics and will create vast inefficiencies and increased costs to 
all consumers. Voucher, auction, and block grant based Universal 
Service support will never work.
    These alternatives do not take into account the capital-intensive 
nature of the telecommunications industry. Network deployment is only 
the beginning. Continual investment in network maintenance and upgrades 
must be done to remain competitive and these alternatives do not meet 
the long-term business planning needs of community based providers. 
Support must be predicable, stable and long-term to encourage necessary 
investment to meet the communications needs of our nation. The current 
industry funded mechanism that we have in place today can continue to 
meet the needs of the industry so long as a few glaring FCC regulations 
are modified to assure these funds are put to the best use.
    Let me clarify that today, support from the Universal Service Fund 
has a direct correlation to a particular carriers network investment 
and the cost of providing that service. This cost-based system has 
proven to work efficiently and effectively for over six decades. We 
believe this framework generally can help us to achieve the same 
successful penetration and adoption rates in broadband services that we 
have seen in traditional voice service. Policymakers must keep in mind 
the purpose of Universal Service is to help alleviate the burdens of 
building networks in high-cost areas.
Support Must Be Based Upon a Provider's Actual Cost of Service
    Requiring all Universal Service Fund recipients to receive support 
based on their own costs will increase program accountability as well 
as reduce demand for funds. Currently, a competitive carrier entering 
an ILEC territory receives support based on the incumbents cost. 
Requiring each Universal Service recipient to document its cost will 
greatly improve program accountability and ensure that funds are being 
used for their intended purpose.
    The vast majority of growth in Universal Service is due to 
competitive eligible telecommunications carriers (ETCs). Universal 
Service support to competitive ETCs grew by over 115 percent in the 
last year. During this same period ILEC support grew by only 0.6 
percent. As a percentage of the overall fund, CETCs accounted for 
approximately 0 percent of all Universal Service funds in 2000. \1\ At 
the end of 2005, their distributions have skyrocketed to more than 18 
percent of the total Fund. This may seem like a small percentage, but 
if left unchecked the Fund will become insolvent.
---------------------------------------------------------------------------
    \1\ Wireless Communications and Universal Service by Bob Rowe, 
Senior Partner, Balhoff & Rowe, LLC @ Columbia Institute for Tele-
Information. Slide 12.
---------------------------------------------------------------------------
Support Must Not Be Used to Artificially Incite Competition
    Many rural areas in our Nation can't support more than one gas 
station, grocery store, or other commodity service let alone multiple 
communications providers. While rural carriers welcome competition in 
areas that can support it, Universal Service should not be used to 
artificially incite competition in areas it would otherwise not occur. 
Tightening of the ETC requirements will help ensure that Universal 
Service monies support the intended goal of guaranteeing all Americans 
have access to comparable services at rates comparable to those in 
urban areas.
    When deciding to grant ETC status the following qualifications must 
be met: (1) the designation must ensure ubiquitous comparable rates and 
services, (2) the designee must actually serve the entire ILEC market 
area, (3) the benefits of the designation must not outweigh the burdens 
on the Funds, (4) the designee must demonstrate its actual costs, (5) 
the designation must not cause excessive market support, (6) the 
designee must agree to quality-of-service and other standards, and (7) 
the funds must not incite unnecessary artificial competition.
The Rural and Non-Rural Fund Distinctions Must Be Maintained
    Separate funds allow the FCC to specifically tailor rural high-cost 
support mechanisms to fit the conditions of rural local exchange 
carriers serving high-cost areas in rural America. Many rural carriers 
lack population density, serve smaller exchanges and lack the economies 
of scale of larger urban-centric carriers.
    In the 1996 Act, Congress wisely established a definition of a 
``rural telephone company'' and included special provisions, including 
ones related to Universal Service, that recognize the unique 
characteristics of these carriers. Requiring separate high-cost support 
mechanisms for rural and non-rural carriers would ensure that the FCC 
continues to recognize the significant differences between small rural 
carriers and large, urban carriers and ensure that the support rural 
carriers receive is sufficient to achieve the goals of Universal 
Service. Clearly, the amount of support needed for a huge carrier with 
millions of lines and serving primarily metro areas to adequately serve 
their rural territories would not at all be sufficient for a rural 
telephone company, with no low-cost metro areas, to continue to achieve 
Universal Service and bring advanced services to their communities.
Conclusion
    I would be remiss to not point out that our thoughts on Universal 
Service distribution are dependant upon some key changes to the 
contribution side of Universal Service. The coalition believes the 
following steps need to be taken to bring contributions in line with 
the realities of today's communications marketplace.

   The base of contributors must be expanded to include all 
        providers utilizing the underlying infrastructure, including, 
        but not limited to, all providers of two-way communications 
        regardless of technology used.

   Support shall be made available for the cost recovery needs 
        of carriers deploying broadband capable infrastructure.

   The contribution methodology must be assessed on all 
        revenues or a revenues hybrid that ensures equitable and 
        nondiscriminatory participation.

   The regulatory authority to modify the scope of contribution 
        obligations as technology evolves must be clarified and 
        strengthened.

    If the policy recommendations we've outlined were implemented, 
Universal Service would be on a sound footing and continue to play a 
key role in ensuring all Americans are connected to a high quality 
communications network.



    Senator Burns. Thank you. We appreciate that. Now we have 
Carson Hughes, Chief Executive Officer, Telapex, Inc., Jackson, 
Mississippi. Thank you for coming.

        STATEMENT OF CARSON HUGHES, CEO, TELAPEX, INC.; 
         ON BEHALF OF CELLULAR SOUTH AND THE WIRELESS 
                       INDEPENDENT GROUP

    Mr. Hughes. Thank you, Senator Burns. And I would like to 
thank the Committee for allowing me to appear here before this 
Committee. I am appearing on behalf of Cellular South, and I'm 
also appearing on behalf of a coalition which includes Chinook 
Wireless, Midwest Wireless, Rural Cellular Corporation. Our 
members serve approximately 1.7 million customers, and 
consumers, the overwhelming majority of whom use their phones 
in rural communities across the United States, and 
approximately 20 states. Let me get right to the point. A 
central goal of Universal Service is to provide rural consumers 
with comparable choices in advanced telecommunications services 
to those that are available in the urban areas. Now does 
anybody in this room, does anyone here in their heart of hearts 
believe that any consumer living in a rural area, where the 
cost is high to serve, would agree that reasonable 
comparability is met by a single line to the home or the 
office, carrying only voice. Or would it be met if the rural 
consumer did not have access to wireless mobile, voice, and 
data transmission just as is enjoyed by their competing urban 
fellow citizens? Who in this room has not benefited in the last 
24 hours from use of a wireless communications device? I would 
dare say no one. But let me tell you from experience, folks in 
the country like Blackberries, and cell phones too, and need 
them for the very reason that they're needed here. And I dare 
say, so do each of the Members of this Committee when they're 
in the rural areas of their home state. Your rural constituents 
need to be able to contact emergency services in the event of 
accident or a fire, carry on their daily business by mobile 
communications, and they need to be able to contact their 
families all over the area and the Nation. And they need to be 
able to do this all over the area where they work, live, and 
play. You have my testimony and you know that I favor wireless 
being allowed among the USF support groups. The more important 
question is why should you be in favor of such service or even 
Universal Service at all. Cutting to the chase. What do people 
expect from the application of USF? In line with my 
understanding of the 1996 Act, rural residents expect the same 
quality of telecommunications enjoyed by city dwellers. In fact 
without comparable services at all levels, the rural Americans 
are not as safe and not able to compete with urban 
counterparts. And rural areas are unable to attract business, 
medical and educational facilities.
    First let me focus on how Universal Service had a large, 
huge impact on our citizenry during the recent hurricane 
season. Four years ago we at Cellular South started an 
aggressive investment of Federal Universal Service support in 
developing a high quality network. As a result of our prudent 
investment of Universal Service support, our wireless network 
was operating for first responders within hours after the storm 
made landfall, and we returned to full capacity throughout 
Mississippi in less than 2 weeks after Katrina swept the 
region. In the immediate aftermath of the storm, we often 
provided the sole means of communications as wireline 
infrastructure lay under the rubble of the hurricane. Wireless 
carried safety messages, reunited families, ordered food and 
other needed supplies, enabled evacuation and evaluations to be 
made. It was the link that saved. It was the link that tied 
together the people. And you made that possible by your support 
here before for USF for rural wireless. We're a competitive 
world where many nations have modern telecommunications systems 
nearly equal to the ones we have here in the United States, 
some say even better. If rural parts of our Nation are to 
effectively compete, those areas must have the necessary modern 
communications infrastructure. You started that by allowing 
Universal Service to apply to wireless, now even considering 
the good wireline infrastructure in most of our rural areas, 
failure to adequately support multiple carrier wireless in 
high-cost rural areas will make those rural areas be equivalent 
to a Third World country within our own national borders, when 
we talk about competitiveness. We think it's very important 
that all carriers use high-cost support for its intended 
purpose. Today, wireless carriers generally have more stringent 
reporting requirements than do any other carriers. In 
Mississippi, for example, we file quarterly reports within the 
state, describing what we're doing, when we're doing it, and 
then when we get through we have to file a report to tell them 
what we did. As I mentioned in my file testimony we support a 
portion of S. 2256 and commend both Senator Burns and Senator 
Smith, for their acknowledgement of the fact that broadband is 
important. We do have some differences with that bill in other 
aspects and I mention that in my testimony. We believe that 
possibly the most important thing that you can do is make it 
absolutely clear to the FCC that any rules that they adopt for 
Universal Service must be competitively neutral and not favor 
any class of carrier. In sum, we urge the Congress to see 
wireless as a part of the solution in rural America. Thank you.
    [The prepared statement of Mr. Hughes follows:]

 Prepared Statement of Carson Hughes, CEO, Telapex, Inc.; on Behalf of 
           Cellular South and the Wireless Independent Group
Introduction to Cellular South and the Wireless Independent Group
    Chairman Stevens, Co-Chairman Inouye and Members of the Committee, 
I am Carson Hughes, Chief Executive Officer of Telapex, Inc., the 
parent company of Cellular South. I am pleased to be here today to 
discuss issues involving the Universal Service Fund.
    I am testifying on behalf of a coalition of independent wireless 
carriers called the Wireless Independent Group (WIG). Members of the 
coalition include Cellular South, Chinook Wireless, Midwest Wireless, 
and Rural Cellular Corporation.
    WIG members serve approximately 1.7 million consumers, the 
overwhelming majority of whom use their phones in rural communities in 
Alabama, Arkansas, Iowa, Florida, Kansas, Maine, Massachusetts, 
Minnesota, Mississippi, Montana, New Hampshire, New York, North Dakota, 
Oregon, South Dakota, Tennessee, Vermont, Washington, and Wisconsin.
    We applaud the Committee for your willingness to explore the 
difficult issues surrounding Universal Service Fund distributions. Like 
all of you, WIG members are committed to the long-term sustainability 
of the Fund. We have seen first hand how Universal Service support 
helps the lives of those living in rural and underserved communities. 
As a company that has participated in the Universal Service program for 
well over four years, I hope our experience can shed light on the 
immense benefits and services that are enjoyed by the rural communities 
we serve because of our access to these funds.
    Let me provide you with a brief description of how Universal 
Service support has helped rural Mississippi consumers enjoy the 
benefits of advanced telecommunications services. In 1988, Cellular 
South began offering service on the Mississippi Gulf Coast. By 1992, we 
expanded out to 8 other Rural Service Areas (RSAs) covering most of the 
state. We were the first to provide analog cellular service to many 
parts of rural Mississippi. By 1999, we had become the first to offer 
near statewide DIGITAL wireless communications to Mississippi. By the 
end of 2001, we had expanded our service into parts of 4 other 
southeastern states.
    In 2002, primarily because of Universal Service support, we became 
the first wireless company to offer a more efficient, next generation 
digital service, providing consumers with unlimited voice and text 
messaging products at a flat rate throughout our entire service 
footprint. Many of these areas are designated as high-cost areas and 
would not have received these services without USF support.
    Cellular South customers average 1,300 minutes of use per month, 
nearly double the industry average of 700 minutes per month. This high 
usage phenomenon is a direct result of our ability to deploy Universal 
Service support to construct and improve wireless infrastructure in the 
high-cost areas of the state. But, more importantly, this data point 
reflects the NEED and DEMAND for mobile communications in rural areas. 
Rural businesses and consumers deserve the same benefits that urban 
areas have with mobility. The Future of Broadband is mobility.
    The health and safety benefits of a modern wireless communication 
infrastructure to rural America may be the most important benefit. 
There is no more powerful safety tool than a cell phone, provided there 
is a signal available to place an emergency call. Cellular South was 
recently commended by the Mississippi State legislature for our 
``exemplary'' efforts during the aftermath of Hurricane Katrina. While 
wireline networks and even some other wireless providers on the 
Mississippi Gulf Coast took months to recover from Katrina, Cellular 
South's wireless network returned to full capacity throughout 
Mississippi less than two weeks after the hurricane's landfall.
    There is no doubt in our mind that Universal Service support, 
prudently deployed in recent years, was key to developing a robust 
network that provided much needed coverage, redundancy, and ancillary 
back-up facilities that enabled our employees to respond effectively. 
We are proud of our employees and thankful to the Congress for its 
foresight in authorizing wireless carriers to draw Universal Service 
funds to improve their networks.
    Congress recognized in the Telecommunications Act of 1996 (1996 
Act) that the future of rural America depends largely on deployment of 
modern telecommunications infrastructure that allows consumers to have 
choices in advanced services that are similar to those available in 
urban areas. By permitting wireless carriers access to Universal 
Service funding to construct network infrastructure in areas that would 
not otherwise support the investment, Congress has opened the door to 
rural consumers having the health, safety, and economic development 
opportunities available through wireless service that are critical to 
bridge the technology gap between urban and rural America. We urge 
Congress that in any subsequent reform of the 1996 Act, Congress will 
keep the door open for rural consumers to continue to enjoy the 
wireless services of today and the advanced telecommunication services 
we can only dream of for tomorrow.
    This testimony will examine the benefits rural consumers enjoy from 
the current USF distribution system while dispelling some of the 
outstanding myths concerning the USF high-cost fund. This document will 
also make policy recommendations about Universal Service we believe 
will best benefit rural communities.
Overview
1. Under the Current System, Rural Wireless Consumers Who Contribute to 
        the Fund Are Not Seeing the Degree of Benefits That They Need 
        and Deserve

   Wireless consumers now contribute roughly $2.5 BILLION per 
        year to the Federal Universal Service system or 34 percent of 
        the total fund.

   Wireless carriers that are designated as Competitive 
        Eligible Telecommunications Carriers (``CETCs'') have drawn 
        just over $1 BILLION IN THE AGGREGATE SINCE 1996, and in 2005 
        they drew roughly 10 percent of the total fund ($700 Million).

   Incumbent Local Exchange Carriers (``ILECs'') draw roughly 
        $3 BILLION per year, or roughly 50 percent of the total fund, 
        to maintain networks that are not growing in number of 
        customers served.

   In the aggregate, we believe that consumers nationwide have 
        spent roughly $19 BILLION since 1996 to finance wireline 
        networks. In areas where wireless competitive ETCs have not 
        been designated, rural wireless consumers see little benefit 
        from the vast majority of the dollars they contribute.

    Bottom line: Congress must make it a priority to provide Federal 
high-cost support to fund wireless infrastructure development for rural 
consumers who desperately need and deserve high-quality wireless 
networks. The health, safety, and economic development benefits that 
flow from investing in mobile wireless communications infrastructure 
are precisely what Universal Service should be funding in rural 
America.

2. CETCs Are Demonstrating to the States That Support Is Being Used To 
        Build 
        Infrastructure in Areas That Would Not Otherwise See Investment

   Even with the advances that have been made in rural wireless 
        coverage, anybody who uses a wireless phone while moving across 
        rural America understands the huge difference in service 
        availability and service quality compared to urban areas.

   WIG members understand how important it is for consumers to 
        have access to mobile wireless services.

   WIG members have constructed new cell sites serving unserved 
        and underserved communities in their ETC service areas that 
        would not have been constructed without Federal high-cost 
        support authorized by Congress.

   The vast majority of states now require CETCs to report how 
        support is being used. These reports provide accountability 
        that is not present for wireline carriers. Vermont, West 
        Virginia, Mississippi and now Minnesota provide good examples 
        of states that have gotten the reporting requirement right.

    Bottom line: Wireless carriers are today providing written proof 
that the support is being used to drive infrastructure investment in 
rural areas that would not otherwise receive such investments. We would 
be pleased to deliver to the Committee on a confidential basis copies 
of reports of what Cellular South has done.

3. The Current System of Providing Support Necessitates Wireless 
        Carriers To Make Efficient Investments but Allows Wireline 
        Carriers To Make Inefficient 
        Investments

   Wireless carriers can only get support after, (1) we build 
        facilities, and (2) we get a customer.

   Wireless carriers are not guaranteed a return, so if we make 
        a poor investment and only get a few customers, we bear the 
        risk of such investment.

   Support to wireless carriers in all areas is currently 
        capped by the number of available customers in a particular 
        area.

   In states like Mississippi and Washington, where support has 
        been targeted to rural areas, the system works properly: 
        Several wireless carriers are fighting for a limited pool of 
        support dollars in rural areas, but receive no support for 
        serving urban areas.

   I am advised that wireline carriers operate on a ``cost-
        plus'' system that pays more as they spend more and thus can 
        cause extreme inefficiencies. I am also advised that in many 
        states and at the Federal level, wireline carriers only report 
        what has been spent, not whether it is needed to provide 
        service.

    Bottom line: Wireless carriers are concerned that ALL carriers be 
accountable. Moreover, consumers should only fund efficient 
investments.

4. Rural Consumers Are Increasingly Demanding (and Certainly Deserve) 
        High Quality Advanced Wireless Services, Including Data and 
        Broadband, Enjoyed in the Urban Areas and They Need Access 
        Throughout the Area Where They Live, Work, and Play

   In 2006, businesses will spend more on wireless services 
        than on wireline according to a study released in January by 
        In-Stat. It is estimated that the demand for wireless data will 
        grow an average of 18 percent per year, through 2009.

    Bottom line: Congress should consider policies that guarantee rural 
communities an opportunity to keep pace with urban areas in the 
technology race.

Testimony
    Recently, the Consumer Electronics Association released a study 
showing that 17 percent of consumers who purchased their wireless phone 
within the past 90 days are relying solely on their wireless phones for 
voice service. \1\ This is a significant jump from earlier reports that 
wireless substitution was roughly 9 percent. We believe that wireless 
is the future for voice and data communications throughout the Nation 
and that sound Universal Service policy that has ``jump started'' 
infrastructure development of advanced wireless networks in rural areas 
must be continued.
---------------------------------------------------------------------------
    \1\ ``The Wireless Purchasing Study: Measuring Satisfaction and 
Loyalty'', Steve Koenig, Senior Manager, CEA.
---------------------------------------------------------------------------
    There is no sound public interest reason to deny rural consumers 
the technology they need to compete with our Nation's urban areas. In 
reality, I can't think of anything that will widen the gap between 
rural and urban areas, and accelerate the brain drain out of rural 
areas more than attempting to control growth of the Fund by limiting 
wireless carrier access to Universal Service funds. Urban areas of our 
Nation benefit from the availability of advanced wireless and wireline 
telecommunication systems in the rural areas since it allows businesses 
to extend their reach. Universal Service, in part, has helped wireline 
carriers deploy a ubiquitous outstanding network in rural America over 
many decades. The public now requires a similarly ubiquitous 
outstanding wireless network.
    It is a simple fact that wireless carriers cannot effectively 
compete in high-cost areas if only the wireline carrier receives 
support. Wireless carriers need Universal Service support to construct 
networks in areas that would not otherwise receive the level of 
investment needed to deliver high-quality advanced services. Every time 
we construct a new cell site in an underserved area, consumers in 
roughly 144 square miles of land area have access to 911, E-911, and 
all of the service offerings that mobile wireless can provide.
    Universal Service must grow with the reality that consumers are 
best served by competition. The best thing Congress can do is insist 
that the FCC adopt rules for distributing Federal Universal Service 
support that are competitively and technologically neutral. In short, 
Universal Service rules must not disadvantage any class of carrier or 
technology. In addition, the FCC must develop mechanisms for verifying 
that carriers are using support for building and maintaining networks.
    Unfortunately, we cannot support a portion of Senate Bill 2256 
proffered by Senator Burns, but we do applaud the inclusion of 
broadband as a supported service. Today, we are seeing the 
proliferation of uses for mobile broadband services and rural consumers 
need these tools to compete with their counterparts in urban areas.
    We are concerned however about anti-competitive proposals that 
would stall or prevent expansion of advanced wireless services in rural 
areas by requiring carriers to build out an entire high-cost area 
before they receive ETC designation. Such a requirement turns the whole 
theory of universal support on its ear, ignoring the economic reality 
that without support, expansion by wireless into many rural areas would 
be impossible. Had this requirement been imposed upon wireline 
companies in years gone by, we would no doubt be looking at large areas 
of the country that would not be enjoying the benefits of the modern 
telecommunication systems that now exist.
    Wireline carriers spent decades building out their networks, all 
the while receiving some form of Universal Service support to assist in 
their construction efforts. Wireless is no different in this regard--we 
cannot build an entire network before receiving any support. The 
current system which only provides support when we get a customer 
naturally requires us to build first, but properly provides support 
incrementally, as we grow. Moreover, disaggregating, or targeting 
support to high-cost areas prevents competitors from receiving support 
when constructing network facilities in urban areas.
    We are also concerned about the proposal in S. 2256 that would 
eliminate the ``identical support'' rule. After much careful 
consideration, the FCC rejected this proposal years ago, and for good 
reason. Paying each ETC on its own costs would require a larger USF and 
would not control growth of the Fund as some would suggest. Wireless 
ETCs under the present system receive the same ``per-line'' support as 
the landline carriers, but nowhere near the same amount of total 
support because wireless ETCs are paid only after they construct 
facilities and gain a customer.
    For example, under the current system, supporting three ETCs that 
serve the same area does not triple the burden on the Fund because, in 
our experience, customers do not carry three wireless phones. In 
effect, support is capped in an area by the number of people living 
there and all wireless competitors must fight for a fixed amount of 
customers and support. Each carrier is paid the same ``per line'' 
support on a ``per line'' basis, rather than each wireless ETC being 
paid on its own costs to construct an entire network. We support this 
because it requires efficiency on the part of the wireless company and 
it does not place regulators in the position of selecting which company 
should be selected to build a network and which company should be left 
out.
    We are also concerned about a provision that would allow rate 
regulation by states. This provision is anti-competitive and bad for 
rural communities because it would eliminate the ability of a wireless 
provider to lower rates if it so chose. We note that many states are 
moving away for most rate regulations of wireline carriers today.
    We are of the opinion that the better course is to permit consumers 
to choose the service they value most and focus on making each carrier 
accountable for the funds they get--to drive the infrastructure needed 
to provide benefits and eventually minimize the amount of support 
needed to serve rural consumers.
    In order to clear the record, we review below several myths that 
have been proffered to date, and our response to each.

        MYTH: Wireless carriers that are CETCs are responsible for 
        ``ballooning'' or ``exploding'' the high-cost Fund.

        FACT: A close examination of the facts about the high-cost Fund 
        shows nothing could be further from the truth.

    We have heard that Universal Service and in particular, the ``high-
cost Fund'' is going bankrupt because of the increase in the number of 
CETCs. More alarming perhaps is the allegation that soon there will be 
no money left in the Fund to sustain telephone services in rural areas, 
again as a result of CETC Designations.
    The most recent figures available to me show the high-cost Fund 
provided $3.4 billion in 2004. Of the roughly $3.4 billion in Federal 
high-cost support distributed in 2004, wireless CETCs received 
approximately $333 million, or around 10 percent of the total. \2\ 
Final figures for support provided in 2005 are not yet available, 
however I am advised that an good estimate of the amount of support to 
CETCs to be approximately $700 million. Without a doubt, support to new 
entrants has risen significantly on a percentage basis, notably because 
it began at zero.
---------------------------------------------------------------------------
    \2\ Source: Universal Service Administrative Company Annual Report, 
2004. Available at 
http://www.universalservice.org/_3res/documents/about/pdf/2004-annual-
report.pdf.
---------------------------------------------------------------------------
    Since 1999, support to ILECs, which operate mature networks that 
typically are not growing, has gone from approximately $1.7 billion per 
year to approximately $3.15 billion per year, a total increase of 
roughly $1.4 billion per year.\3\ Of that increase, roughly $620 
million per year represents a real dollar increase in funding. The rest 
represents support that the FCC has transferred from carrier rates into 
the Universal Service program.
---------------------------------------------------------------------------
    \3\ See id.
---------------------------------------------------------------------------
    The following two tables illustrate ILEC and CETC draws:
    
    

        Table 19.5--High-Cost Support Received by ILECs and CETCs
                        (in millions of dollars)
------------------------------------------------------------------------
                     ILECs        CETCs         Total      Percent CETCs
------------------------------------------------------------------------
1996                   $1,188           $0       $1,188              0.0
1997                    1,263            0        1,263              0.0
1998                    1,690            0        1,690              0.0
1999                    1,717            1        1,718              0.0
2000                    2,233            1        2,235              0.1
2001                    2,575           17        2,592              0.7
2002                    2,889           46        2,935              1.6
2003                    3,142          131        3,273              4.0
2004                    3,155          333        3,488              9.5
------------------------------------------------------------------------
Notes: ILECs is an abbreviation for incumbent local exchange carriers.
  CETCs is an abbreviation for competitive eligible telecommunications
  carriers. CETCs include both wireless and wireline carriers.
Source: National Exchange Carrier Association (1996-1997). Universal
  Service Administrative Company (1998-2004).

    While CETCs have collected a total of approximately $529 million in 
high-cost support through 2004, ILECs have received roughly $19 billion 
in Federal Universal Service support during the same time period. In 
many states, rural ILECs receive substantial support from state 
Universal Service programs as well.


    Funding to new competitors has increased--it is a predictable 
outcome of sensible Universal Service policy. Congress must continue to 
permit competitive entry into rural areas and get beyond short-run 
``growing pains'' in order to achieve the maximum benefits to rural 
consumers. By continuing to provide appropriate incentives for new 
telecommunications providers to invest in high-cost areas, rural 
customers will receive increased quality and quantity of services at 
lower prices.

        MYTH: Wireless carriers don't pay their fair share into the 
        high cost Fund.

        FACT: Wireless consumers, who draw just over 10 percent of the 
        total fund (approximately $330 million) now contribute over 34 
        percent of the total Fund, or roughly $2.6 BILLION per year. 
        Rural wireline carriers, who draw 50 percent of the total fund 
        (approx. $3 Billion) contribute only 3.8 percent of the total 
        Fund.

    Rural wireless consumers are entitled to receive service quality 
and service choices that are reasonably comparable to those that are 
available in urban areas--as promised by Section 254 of the 1996 Act.
    With over 200 million wireless consumers, each of whom pays in 
roughly $1.00 per month, wireless now contributes roughly $2.5 billion 
each year and that number is rising steadily. Yet, wireless CETCs only 
draw approximately 10 percent of those funds to assist with deploying 
and expanding wireless service in rural areas.
    While the large wireline carriers such as Verizon, BellSouth, and 
AT&T contribute 22.7 percent of the total funding, other ILECs, which 
include rural wireline carriers, contribute only 3.8 percent. The table 
below illustrates each class of carriers' contributions to Universal 
Service:


    We can think of no better use for Federal high-cost support than 
the investment in new infrastructure by carriers willing to demonstrate 
that support is being properly invested, to provide rural consumers 
with high-quality service and service choices that are comparable to 
those in urban areas. Any legislation must accelerate wireless 
infrastructure development in rural areas--not impede it.

        MYTH: Supporting wireline and wireless carriers on their own 
        separate costs will curb Fund growth.

        FACT: Supporting each class of carrier on its own costs will 
        retard or prevent competitive entry, will be extraordinarily 
        expensive to implement, will require regulators to pick 
        winners, and will ultimately cost the Fund more than the 
        current system.

    While supporting carriers on their own costs is a catchy mantra, 
the FCC rejected it after years of rulemaking proceedings. The FCC's 
files contain testimony of reputable economists who have also rejected 
this approach.
    Under the bill's proposal to fund each carrier on its own costs, 
wireless competitors, in the short term, are going to draw 
substantially more from the Universal Service Fund than they do today. 
A ``build it and we'll pay for it'' approach was fine when simply 
connecting houses to the network was the goal, but if the goal of 
providing rural consumers with modern technology is to be realized, we 
have to find ways also to support efficient providers of services.
    We think the better approach is the one the FCC selected. Pay 
competitors only the same ``per line'' support as the incumbent, and 
only pay after they first build facilities and get a customer. Under 
the balancing act of this mechanism, support to all competitive 
carriers is capped by the number of available customers and competitors 
must fight for customers and support dollars. My discussion on 
disaggregation below explains how newcomers can be encouraged to invest 
in high-cost areas while at the same time incumbents can be protected.
    We also note the administrative costs of paying each carrier on its 
own costs. As new technologies such as satellite, WiMax, and unlicensed 
spectrum providers line up to enter rural areas, presumably the FCC 
would have to develop a cost model for each to determine the 
appropriate level of support. The cost of doing so would be enormous 
and would not deliver the benefits that the current system does.

        MYTH: You can control growth in the Fund by limiting the number 
        of competitors in a service area.

        FACT: Limiting the number of carriers in a service area robs 
        rural communities of the benefits of competition. Multiple 
        carriers in a service area competing for customers results in 
        cheaper, higher quality voice and broadband services.

    Policies that limit the number of carriers who may receive USF 
support in a given area are contrary to the goal of allowing Americans 
to receive wireless voice and broadband services in rural areas. The 
Universal Service program already has protections in place to cap 
growth and expenditures in a service area:

   The current distribution system caps the amount of Federal 
        support available to wireless carriers serving an area, while 
        NOT capping support to rural incumbent landline carriers.

   The amount of funds available in any high-cost area is 
        capped by the number of customers. In other words, wireless 
        competitors can only receive support if they are successful in 
        getting a customer. When more than one wireless competitor is 
        designated in an area, they must fight for consumer revenue and 
        support.

   Moreover, since the FCC's rules prohibit support to be paid 
        when a customer is served via resale, wireless CETCs must first 
        construct facilities in high-cost areas before getting any 
        support.

    The current system, when combined with disaggregation of support, 
discussed below, are key elements in achieving the dual goals of 
advancing Universal Service and promoting competition in rural areas.

        MYTH: Wireless providers ``cream skim'' areas where it is 
        financially beneficial to operate.

        FACT: Current high-cost Fund regulations prevent cream 
        skimming.

    We have heard this concern expressed in many forms. The most common 
is the ``pole in the tent'' analogy, that is, if wireless carriers are 
allowed to skim off the most lucrative customers, who represent the 
tent pole, then incumbent wireline carriers could go out of business 
having to serve the remaining low-margin customers, and the tent will 
collapse.
    My personal experience teaches that a wireless carrier, indeed any 
newcomer, is going to chase the cream--the high-end customers, the low-
cost areas, and the most lucrative markets irrespective whether they 
are designated as ETCs. In fact, without ETC designation, a newcomer is 
free, in fact encouraged by the economics, to do just that without any 
obligation to extend service to low-margin or high-cost areas. The only 
reasonable conclusion that can be drawn is that cream skimming can only 
be minimized by placing newcomers on a level playing field with 
incumbents and adopting rules to stop newcomers from getting Universal 
Service support in those areas that are low-cost for incumbents, such 
as population centers in rural areas.
    Fortunately, the FCC set up rules five years ago to protect ILECs 
from financed competition in their most lucrative areas. Wireline 
carriers participated in and approved of such rules, which permit them 
to redirect support outward to their highest-cost areas and remove it 
from their ``cream'' areas. That process, known as disaggregation, is 
working in many areas.
We Recommend Congress Consider Washington State as an Example of How To 
        Reform USF
    In Washington, all rural ILECs have targeted or ``disaggregated'' 
Universal Service funds to the highest-cost areas within the State. As 
a result, those designated in low-cost areas receive no support and 
those designated in high-cost areas receive a predictable amount of 
support. Targeting funds in this manner has kept growth in the Fund 
down while delivering services where they are needed most.
    In Washington, wireless competitors draw only 32 percent of the 
total support in the State, compared with 68 percent drawn by wireline 
carriers. Wireless carriers are drawing less despite the fact their 
networks require significant capital expenditures to serve throughout 
the State. They are only rewarded when they get a customer in high-cost 
areas, which means they have to build facilities in the outlying area 
in order to get their first dollar of support.
    Disaggregation also solves the problem of defining service area 
boundaries for newcomers. When an area is disaggregated, regulators 
have more flexibility, because if a newcomer serves predominantly low-
cost areas, it will receive a lesser amount of support. If it serves 
higher-cost areas, it will receive higher levels commensurate with the 
type of area being served.
    Finally, it is important to note that under the current system, 
when more than one wireless competitor is designated in an area, they 
must fight for consumer revenue and support and sparsely populated 
areas will not yield enough ``per line'' support to allow multiple 
carriers to construct facilities.
    We urge Congress to recognize that the FCC has already developed 
very useful tools to permit wireline carriers to more accurately target 
support to high-cost areas so as to properly reward competitors willing 
to invest in areas that need it most, while protecting wireline 
carriers from subsidized competition in low-cost areas.

        MYTH: Wireless carriers are not using funds to improve service 
        to rural America and more oversight is required.

        FACT: Wireless carriers are not only using support to improve 
        their networks but in many, if not most states, they are much 
        more accountable than are wireline carriers.

    My experience at Cellular South is typical of other WIG members. 
When we first obtained CETC status, we knew that the spotlight would 
shine on us, and that we would be expected to demonstrate that support 
is going to improve our networks in ways that would not otherwise have 
happened without support. We expected State commissions to examine our 
use of support, and we have been more than willing to provide reports 
as to our activities each year prior to the State recertification to 
the FCC each October 1.
    Each state handles the process differently. Most require one annual 
report showing funds received over the past year, how they were used, 
along with a projection of support for the coming year and how such 
funds will be used. A few, like Mississippi, require quarterly reports, 
and Cellular South provides those regularly. Although the information 
in such reports as to how future support will be used is kept 
confidential, we are pleased to provide examples of what has been done 
with support.
    Some examples of small communities in Mississippi that now have 
service include Pittsboro, Bassfield, Prentiss, Tylertown, Columbia, 
Byhalia, Houston, Bruce, Banner, Perkinsville, Gore Springs, Pyland, 
Sabougla, Slate Springs, Vardaman, and Woodland. Many of these 
communities are very small and our service to them includes significant 
farm lands that permit the use of our devices in the truck and on the 
tractor. To anyone who understands the risks agricultural workers take 
on every day this new coverage is no small matter.
    Another WIG member, Rural Cellular Corporation, has heard from the 
Maine Sheriffs Association that they depend on cellular phones to do 
their jobs properly, and to protect both citizens and themselves. To 
cite just one example, when a sheriff gets a domestic disturbance call, 
he instructs the dispatcher to provide the phone number at the 
residence. He then calls while on his way to get a sense of the 
situation, for example whether there is alcohol or firearms involved. 
This gives him a better understanding as to what to expect when he 
knocks on that door.
    Our experience is just a small portion of what other WIG members 
can report. To use the example of Rural Cellular Corporation in Maine, 
they have built new cell sites that would not have been constructed in 
towns such as China, Rumford, Bethel, Fort Kent, and Strong. If anyone 
gives the impression that wireless carriers are not using support in 
the manner it was intended, they have not looked at our company or the 
other WIG members that are CETCs.
    In sum, wireless carriers are using support to drive infrastructure 
development in rural areas. Given that wireless consumers contribute so 
much to the Fund, we share concerns that support be used properly, and 
urge Congress to look carefully at all carriers. As we understand it, 
over 400 ILECs report no costs and the accountability for fund use as 
``average schedule'' companies is far more limited than that which 
exists for wireless carriers. We believe that none of the ILECs provide 
specific explanations as to how USF support is used for the benefit of 
consumers, as we in the wireless community are doing today. We urge the 
Congress to shine the same degree of light on all carriers who are 
stewards of the Fund to ensure that consumers receive the benefits that 
they deserve.
Benefits of USF to Rural America
High-Cost Support for Wireless Consumers Provides Vital Health and 
        Safety Benefits to Rural Areas
    In closing, I again note that in urban areas, it is taken for 
granted that one can complete a wireless call in an emergency. In a 
very short time, urban consumers' expectations for wireless have risen 
enormously, to the point where the failure to complete an important 
health or safety call is newsworthy.
    In many rural areas, expectations are often very different. 
Consumers living in these areas understand that wireless phones work in 
larger towns and on major roads, but might not work as well in all 
rural terrain. Although wireless networks are improving, many rural 
consumers still see mobile phones more as ancillary communications 
tools, rather than devices that can be counted on to provide primary 
telephone service. An example of the changing expectations for rural 
coverage is the introduction of a well meaning bill recently introduced 
in our State legislature that would require wireless carriers to 
provide service statewide (Federal license boundaries notwithstanding) 
and proposing hefty fines for failure to comply.
    The best thing the FCC and Congress can do to promote the health 
and safety benefits of mobile wireless communications in rural America 
is to ensure that critical wireless infrastructure continues to be 
built out in rural areas. The high-cost Fund has provided the incentive 
to invest in better technologies and services that ultimately result in 
improved emergency communications.
    We can think of few achievable goals more important than driving 
investment into rural areas. Encouraging wireless carriers to become 
CETCs and ensuring that funds are spent on network construction is 
critical to delivering this vital benefit to rural America.
High-Cost Support in Rural Areas Drives Economic Development
    As a rule, our Nation's rural areas have long trailed cities in 
terms of economic development. Use of high-cost support to improve 
infrastructure has a significant economic impact on small communities 
and is a key to closing that gap. Today, many companies consider rural 
areas as more attractive places to locate and one of the major factors 
involved in selecting a community is the quality of its 
telecommunications infrastructure.
    Wireless service is a very important factor in the equation. More 
and more companies and people today rely on wireless phones to improve 
efficiencies and manage their businesses. The examples we've cited 
above are just the tip of a much larger story. As economies around the 
world become more interdependent, our rural areas have to compete not 
only with American business, but with foreign business as well. 
Universal Service funds, used properly to improve our infrastructure, 
will enable America to compete better on the world stage, with 
countries like Japan and South Korea, who today are far ahead of us in 
both broadband and mobile wireless service development. We can think of 
no better use for Federal high-cost support than to provide the tools 
necessary for our rural areas to compete.
WIG Policy Recommendations
    Rural communities benefit the most from policies that encourage 
competition and improvements to existing telecommunications services. 
Any policy that attempts to stall the entry of new providers in rural 
areas retards the development of needed wireless infrastructure and 
ultimately will widen the gap between rural and urban areas. Consumers 
living in and traveling through rural areas deserve the same kinds of 
health, safety, and economic development benefits that flow from having 
access to advanced wireless and broadband telecommunications services 
such as are available in urban areas.
    Therefore we urge Congress to include the following principles in 
any USF reform measure:

   Universal Service should not guarantee a market outcome for 
        any carrier or class of carrier.

   All Federal and State Universal Service rules must be 
        competitively neutral--that is--Universal Service rules must 
        not disadvantage any class of carrier or technology.

   All carriers who receive Universal Service support must 
        demonstrate that support is actually being invested as required 
        by the Act and the FCC's rules.

   Support should be distributed equitably among all 
        technologies and carriers without continuing a historical 
        preference for ILECs.

   Support should be targeted to the neediest of areas. If 
        ILECs believe ``cream skimming'' is a problem, ILECs are 
        currently permitted to ``disaggregate'' or target Universal 
        Service support to the highest-cost areas so that competitors 
        do not receive funds in areas that are low-cost to ILECs. Thus, 
        there is no need to require new competitors to serve throughout 
        an ILEC study area.

    Most important, wireless consumers pay into the Fund and are thus 
entitled to the benefits that Congress intended to deliver when it 
passed the 1996 Act--to ensure that rural areas have choices in 
services that are comparable to urban areas. Therefore, Congress and 
the FCC should continue to allow rural wireless carriers who have CETC 
status to receive high-cost support from the Universal Service Fund in 
a competitively neutral fashion. Doing so will open rural markets to 
competition, rein in Universal Service Fund growth, and drive voice and 
broadband services to rural Americans.

    Senator Burns. Thank you very much, Mr. Hughes. Now we have 
the Honorable Tony Clark, who comes from my neighbor State of 
North Dakota. He's the Chairman of the Public Service 
Commission. And Commissioner Clark, welcome today, we're 
looking forward to your testimony.

          STATEMENT OF THE HON. TONY CLARK, PRESIDENT,

            NORTH DAKOTA PUBLIC SERVICE COMMISSION;

               CHAIRMAN, NATIONAL ASSOCIATION OF

                REGULATORY UTILITY COMMISSIONERS

              (NARUC) TELECOMMUNICATIONS COMMITTEE

    Mr. Clark. Thank you, Senator Burns, and members of the 
Committee. I am Tony Clark, President of the North Dakota 
Public Service Commission and Chairman of the National 
Association of Regulatory Utility Commissioners (NARUC) 
Telecommunications Committee, which represents commissions in 
all 50 States, the District of Columbia, U.S. territories, with 
jurisdiction over telecommunications, electricity, gas, water, 
and other utilities.
    This series of hearings is especially important to me 
because of the impact that Universal Service programs have on 
rural states like mine. North Dakotans are eager to embrace the 
power and promise of innovative services, but all of those 
technologies require underlying infrastructure: wireline, or 
wireless--and those require real investment to build and 
maintain, especially in rural markets. We read daily about how 
intertwined the global economies of New York, and Los Angeles 
are to those of Tokyo and London. In North Dakota, we like the 
idea of Fargo, Valley City, and even tiny Mandaree, population 
558, on the Fort Berthold Indian Reservation being part of that 
global information economy too, a concept that would be 
unthinkable without a first-class communications 
infrastructure.
    Beyond their economic value, telecommunications networks 
are also critical infrastructure, a point driven home during 
last year's natural disasters on the Gulf Coast.
    We're here today because Universal Service is at a 
crossroads. On the contribution side, there is a growing chasm 
between the services and carriers that sustain the Fund and 
those that interconnect to the network that are supported by 
it. On the distribution side, the Universal Service Fund has 
grown tremendously in the last 5 years. These two trends are on 
a crash course, making the status quo unsustainable.
    On both sides, the Universal Service Fund faces a number of 
existential questions. Questions like: Should it explicitly 
fund broadband infrastructure? How many carriers should be able 
to serve high-cost areas? On what cost basis should carriers be 
reimbursed? How many access lines per customer should be 
funded? Is it intended for networks or is it intended for 
individuals?
    Each choice carries both costs and opportunities, and to be 
perfectly frank with you, the cost and benefits of different 
options are going to vary from State to State, as will the 
advice that each of you will get from each of your individual 
State commissions, but at the end of the day, we must all find 
common ground.
    On a practical level, NARUC believes that whatever the 
Federal Universal Service Fund is intended to accomplish, it 
should be done as efficiently as possible. That is why we 
support a permanent exemption of Federal Universal Service 
programs from the Antideficiency Act. We commend you for 
securing this year's exemption and we look forward to working 
with you to make that exemption permanent beyond 2006.
    Under Section 214(e) of the Act, State commissions are 
delegated to help administer the Federal Universal Service Fund 
by designating eligible telecommunications carriers in each 
state that receives support.
    In March 2005, acting on a recommendation of the Federal-
State Joint Board on Universal Service, the FCC issued 
permissive guidelines for the states to use in their ETC 
designations, partially in response to the growing role and 
prominence of competitive ETCs. At this writing, at least 24 
State commissions, including mine, have either implemented the 
guidelines or initiated rulemakings to incorporate some or part 
of these suggested guidelines. NARUC's members are available to 
talk about our individual experiences if Congress intends to 
reexamine this process.
    NARUC supports efforts to more equitably distribute the 
funding base of the Federal Universal Service Fund in a 
technology-neutral manner, although we believe such efforts 
must be accommodated by similar efforts to ensure the long-term 
sustainability of State programs. Today, Universal Service is a 
jointly shared responsibility between the States and the 
Federal Government, with 26 State programs distributing about 
$1.3 billion dollars. This joint approach benefits both ``net 
donor'' and ``net recipient'' States.
    We are concerned, however, that efforts to expand the 
Federal contribution base without a complementary clarification 
of State authority could inadvertently create tremendous 
funding gaps for State funds. Specifically, there is a danger 
that if the Federal Fund were expanded to draw against 
intrastate revenues, as several bills have proposed, Section 
254(f) of the Act could be interpreted to prevent State 
programs from collecting any assessments, an issue already 
addressed by the Fifth Circuit.
    We believe the ultimate solution is to stabilize the 
contribution base of State Universal Service programs at the 
same time the base is stabilized for the Federal program, by 
making State USF assessment authority co-extensive with that of 
the Federal program, regardless of which contribution approach 
is ultimately chosen.
    Ultimately, NARUC's members share each of your concerns 
about delivering the best, most efficient, advanced, and 
affordable communications services to your constituents because 
they are also ours. As you consider changes to Universal 
Service, both State and Federal, we offer ourselves as 
partners, especially when it comes to impact of national 
policies on each individual state.
    Thank you, Mr. Chairman, Committee Members, I look forward 
to any questions you might have.
    [The prepared statement of Mr. Clark follows:]

 Prepared Statement of Hon. Tony Clark, President, North Dakota Public 
   Service Commission; Chairman, National Association of Regulatory 
       Utility Commissioners (NARUC) Telecommunications Committee
    Mr. Chairman, Co-Chairman Inouye and Members of the Committee, 
thank you for the opportunity to testify today. I am Tony Clark, 
President of the North Dakota Public Service Commission and Chairman of 
the Telecommunications Committee of the National Association of 
Regulatory Utility Commissioners (NARUC). NARUC represents State 
commissions in all 50 States, the District of Columbia and U.S. 
territories, with jurisdiction over telecommunications, electricity, 
gas, water, and other utilities.
    This series of hearings is especially important to me because of 
the impact that Universal Service programs have on rural States like 
mine. North Dakotans are eager to embrace the power and promise of 
VoIP, IPTV, wireless broadband and other innovative services, but all 
of those technologies require underlying infrastructure: wires, 
switches, towers and routers--and those require real investment to 
build and maintain, especially in rural markets. We read daily about 
how intertwined the global information economies of Silicon Valley, New 
York, Los Angeles, and Seattle are to those of Singapore, Tokyo, London 
and Bonn. In North Dakota, we like the idea of Fargo, Valley City and 
even tiny Mandaree (population 558, on the Fort Berthold Indian 
Reservation) being part of that global information economy too--a 
concept that would be unthinkable without a first-class communications 
infrastructure. So the Telecommunications Act's promise of reasonably 
comparable rates and services for high-cost areas means a lot to States 
like mine.
    Beyond their economic value, telecommunications networks are also 
critical infrastructure. One of the most valuable lessons we learned 
when Hurricane Katrina struck the Gulf Coast last year was how the 
importance of reliable communications networks is magnified tenfold 
when disaster strikes--natural or manmade--and first responders and 
relief organizations must coordinate thousands of workers and 
volunteers in real-time efforts where each minute can be measured in 
lives lost or saved.
USF at an Existential Crossroads
    We're here today because Universal Service is at a crossroads. On 
the contribution side, there is a growing chasm between the services 
and carriers that sustain the Fund, and those that interconnect to the 
network supported by it. The end result is that the contribution 
requirement is falling ever more heavily, and unfairly, on a shrinking 
number of carriers. This means that the charge the end-user has to pay 
on interstate and international toll calls has risen to close to 11 
percent recently, which is a result of the growing demands on a 
shrinking revenue base of toll calls. On the distribution side, the 
Universal Service Fund has grown tremendously in the past few years. 
These two trends are on a crash course, making the status quo 
unsustainable.
    On both sides, the Universal Service Fund faces a number of 
existential questions:

   Should it explicitly fund broadband infrastructure and 
        services?

   What is the optimal size of the Fund and does it need to be 
        capped?

   Should it fund competition in high-cost markets?

   How many networks should it be used to fund in high-cost 
        markets?

   On what cost basis should carriers be reimbursed?

   How many access lines per customer should be funded?

   Is it intended for networks or for individuals?

   Should contributions be pegged to network usage, use of 
        numbers, connections or some other methodology?

   Should Universal Service continue to be a shared Federal-
        State responsibility, or should the Federal Government take on 
        the entire burden?

    Each choice carries both costs and opportunities, and a decision on 
any one of them will have a ripple effect on all the others. In 
addition, Universal Service programs are inextricably intertwined with 
intercarrier compensation and larger impacts on the entire 
communications market. To be perfectly frank, the costs and benefits of 
different options will vary from State to State, as will the advice of 
your individual State commissions, but at the end of the day, we must 
all find common ground.
    On a practical level, NARUC believes that whatever the Federal 
Universal Service Fund is intended to accomplish, it should be done as 
efficiently as possible. That is why we support a permanent exemption 
of Federal Universal Service programs from the Antideficiency Act. We 
commend you for securing this year's exemption and we look forward to 
working with you to make that exemption permanent beyond 2006.
Eligible Telecommunications Carrier Designations
    Under Section 214(e) of the Act, State commissions are delegated to 
help administer the Federal Universal Service Fund by designating 
eligible telecommunications carriers (ETCs) in each State that receives 
support. The Act requires a finding that the carrier will offer the 
services supported by Universal Service throughout the service area, 
either using its own facilities or a combination of its own facilities 
and resale of another carrier's facilities, and that it will advertise 
the availability of those services using media of general distribution. 
The Act also requires an ETC designation to be consistent with the 
public interest, convenience and necessity, but did not set forth 
specific criteria to be applied under the public interest tests in 
Sections 214 and 254 of the Act. For service areas already served by a 
rural telephone company, the Act specifically requires a public 
interest determination to be made before a State commission designates 
a competitive ETC for that service area.
    In some States, standards were interpreted to allow a degree of 
latitude in ETC designations. Our experience in North Dakota allowed 
for very little. Prior to my tenure, the Public Service Commission 
(PSC) denied ETC status to a competitive ETC applicant, citing the 
public interest standard and a number of policy concerns, including 
impact on the Federal Fund. The carrier sued the PSC, and the court 
ruled that questions of Federal Fund sufficiency were outside the scope 
of any State PSC inquiry. Lacking the ability to take into 
consideration this factor, the public interest standard became a 
relatively easy burden for a competitive ETC to meet.
    In March 2005, acting on a recommendation of the Federal-State 
Joint Board on Universal Service, the FCC issued permissive guidelines 
for the States to use in their ETC designations, partially in response 
to the growing role and prominence of competitive ETCs. A major policy 
goal of those guidelines was to ensure that all ETCs used any Universal 
Service disbursements to invest in infrastructure and defray consumer 
costs in the appropriate service area. Specifically, the guidelines 
call for a requirement for each carrier seeking ETC status to:

        a. Provide a five-year plan demonstrating how high-cost 
        Universal Service support will be used to improve its coverage, 
        service quality, or capacity in every wire center for which it 
        seeks designation and expects to receive Universal Service 
        support;

        b. Demonstrate its ability to remain functional in emergency 
        situations;

        c. Demonstrate that it will satisfy consumer protection and 
        service quality standards;

        d. Offer local usage plans comparable to those offered by the 
        incumbent local exchange carrier (ILEC) in areas for which it 
        seeks designation; and

        e. Acknowledge that it may be required to provide equal access 
        if all other ETCs in the designated area relinquish their 
        designations pursuant to Section 214(e)(4) of the Act.

    The Order also encouraged States to apply a public interest 
standard, including consideration of a cost-benefit analysis and 
potential ``cream skimming'' effects in instances where an ETC 
applicant seeks designation below the study area level of a rural 
incumbent LEC. And to make sure the guidelines were applied uniformly, 
the FCC encouraged States to require annual certifications from all 
ETCs, even those previously designated, including progress reports on 
coverage and service quality improvements.
    At this writing, at least 24 State commissions have either 
implemented the guidelines or initiated rulemakings to incorporate some 
or part of these suggested guidelines. NARUC's members are available to 
talk about our individual experiences if Congress intends to reexamine 
this process.
USF Contributions and State Programs
    NARUC supports efforts to more equitably distribute the funding 
base of the Federal Universal Service Fund (USF) in a technology-
neutral manner, although we believe such efforts must be accommodated 
by similar efforts to ensure the long-term sustainability of State 
programs. Today, Universal Service is a jointly shared responsibility 
between the States and the Federal Government, with 26 State programs 
distributing about $1.3 billion, or nearly 20 percent of the overall 
national commitment to Universal Service. This joint approach benefits 
both ``net donor'' and ``net recipient'' States because it lessens the 
burden on an already sizable Federal program and permits another option 
when Federal disbursement formulas that ``work'' in the aggregate do 
not adequately serve a particular State or community.
    We are concerned, however, that efforts to expand the Federal 
contribution base without a complementary clarification of co-extensive 
State authority could create tremendous funding gaps. Specifically, 
there is a danger that if the Federal Fund were expanded to draw 
against intrastate revenues, as several bills have proposed, Section 
254(f) of the Act could be interpreted to prevent State programs from 
collecting any assessments, an issue already addressed by the addressed 
by the U.S. Circuit Court for the Fifth Circuit in AT&T v. Public 
Utility Commission of Texas, 373 F.3d 641 (5th Cir., 2004).
    Endangering State Universal Service funds would also raise issues 
of fairness in the Federal distribution formula. The 1996 Act 
explicitly contemplated the creation of State Universal Service funds 
and State funds have been generally created to meet needs not met by 
the Federal distribution formula. For example, many States used their 
funds to address the impact on carriers of lowering intrastate access 
charges, while others used State funds to address implicit subsidies 
that still exist between urban and rural areas within their States, or 
to increase broadband deployment.
    We believe the ultimate solution is to stabilize the contribution 
base of State Universal Service programs at the same time the base is 
stabilized for the Federal program, by making State USF assessment 
authority co-extensive with that of the Federal program, using numbers, 
connections, total revenues, or whichever approach is ultimately 
chosen.
Conclusion
    Beyond Universal Service programs, States have also taken numerous 
measures to encourage expeditious availability of broadband and 
telephonic infrastructure, including numerous bills that deregulated 
incumbent phone companies in return for promises to offer broadband, 
cooperative agreements to purchase broadband services in return for 
commitments to build out to surrounding business and residential areas, 
and in some cases, public builds of broadband infrastructure.
    Ultimately, NARUC's members share each of your concerns about 
delivering the best, most efficient, advanced, and affordable 
communications services to each of your communities. As you consider 
changes to Universal Service, both State and Federal, we offer 
ourselves as partners, especially when it comes to the impact of 
national policies on each individual State. I appreciate the Chairman's 
recent appearance before NARUC and this Committee's desire to tap the 
expertise of our State commissions as Congress moves to resolve 
Universal Service and other important communications issues.

    Senator Burns. Thank you very much Mr. Commissioner, we 
appreciate that very much. Mr. Scott, we've just been joined by 
the Chairman of the full Committee, and boy that has its 
priorities.
    Senator Stevens.

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

    The Chairman. Let's proceed. I appreciate you starting the 
hearing.
    Senator Burns. Well, all right. Mr. Scott, you may proceed. 
Mr. Scott is Policy Director of the Free Press here in 
Washington.

STATEMENT OF BEN SCOTT, POLICY DIRECTOR, FREE PRESS; ON BEHALF 
              OF FREE PRESS, CONSUMERS UNION, AND 
                 CONSUMER FEDERATION OF AMERICA

    Mr. Scott. Good morning. Mr. Chairman, and Members of the 
Committee, I thank you very much for the opportunity to testify 
today. I am the Policy Director for Free Press; we are a young 
organization. We're about 3 years old. We're a nonprofit, 
nonpartisan public interest group dedicated exclusively to 
communications policy. We are both consumer advocates here in 
Washington as well as grassroots organizers out in the country 
where we have, I'm pleased to say, over 225,000 individual 
members. Our members are just regular citizens who care about 
communications issues and want to know what's going on in the 
Congress. Like most Americans our members don't investigate the 
policies that bring them telephone service. They just expect it 
to be there. And as technology changes, and their lives change 
with it, so will their expectations change.
    The focus of my testimony this morning will be on these 
changing expectations and the expansion of Universal Service to 
broadband. It is no longer debatable in my opinion whether 
broadband will be the dominant form of communications in the 
21st century. It is simply a fact. In this light, the public 
policy commitment that you have made to ubiquitous 
communications has never been more important. That said, as we 
have heard this morning, Universal Service is not without its 
problems, some of them quite severe. And yet we view the 
Universal Service predicament as both a threat and an 
opportunity. We believe that as communications technologies 
evolve USF must evolve with them, and to that end, we support 
the expansion of Universal Service to broadband as the 
organizing principle for reform.
    We applaud this Committee and the legislative work of 
Senators Burns, Smith, Dorgan, and Pryor for beginning this 
important transition. On Tuesday morning, Senator at the first 
session of this hearing I listened with great appreciation to 
Senators on this Committee express their wish that USF had not 
been tied to telecommunications alone, that we'd just drop the 
tele off the front end. So I went back to my Communications Act 
and I looked at Section 254 and I found that you did exactly 
that in 1996 by instructing the FCC to base its USF programs on 
advanced telecommunications services and information services.
    Now, there's little doubt in my mind that Congress intended 
to capture in this definition the evolving modes of 21st 
century communications, certainly including broadband. That the 
FCC did not use its discretion to follow this principle does 
not detract from the spirit of the statute. And in my view this 
Committee and this Congress had it right in 1996, and you've 
got it right now. USF should be flexible, technology-neutral, 
and evolve over time to meet the needs of consumers.
    I'd like to move along and bring to the Committee's 
attention the consequences of not taking swift action to expand 
broadband penetration. As this Committee has heard many times 
in hearing after hearing this year the United States has fallen 
from five to number 16 in the world in broadband penetration 
since 2001, and yet we have never heard a satisfactory answer 
as to why that is. So we set out to find one and we did a study 
based on the OECD's examination of global broadband penetration 
and you'll find the study as an appendix to my testimony.
    The conclusions of this new research directly tie our 
global broadband competitiveness to Universal Service policy. 
I'd like to briefly highlight two of the findings. First, 
contrary to conventional wisdom our low population density 
compared to other nations such as Japan, South Korea, and 
Sweden does not account for our global broadband rank. In fact 
we found that population density explains very little of the 
performance relative to other nations. And I believe this 
suggests we can no longer accept the myth that being rural 
means accepting poor broadband performance. Our research 
indicated that the most important factor retarding our 
broadband penetration rates is poverty. The simple reality is 
that in areas with high poverty rates and high infrastructure 
costs we often lack services that meet the needs of low-income 
and fixed-income households. According to a Pew study released 
just early this week, broadband penetration rates in urban 
areas are 39 percent and in rural areas they are 24 percent. 
And I'm sorry to say that that gap has held constant for 
several years. The key issue here in my mind is affordability, 
and the USF program is uniquely suited to address this problem 
if we can apply its support to broadband. If we fail to do this 
successfully we can be sure that jobs and investments will flow 
out of our communities rather than into them.
    I'd like to conclude by offering a set of forward looking 
principles for USF reform. First, I believe we should 
explicitly expand USF to broadband in a technology-neutral 
manner. Second, I believe we should broaden the base of USF 
contributions, equitably assessed and technology neutral, to 
stabilize the future finances of the Fund. Third, we should 
begin a transitional phase leading to a point where all USF-
eligible networks are broadband compatible. Fourth, we should 
tighten oversight of the Funds in order to track how 
distributions are spent, who qualifies to spend them, and what 
the results of that spending will yield.
    And finally, I believe we should implement USF reform in 
conjunction with a comprehensive set of broadband policies 
including opening up more of the public airwaves for wireless 
broadband. We strongly support the bill put forward by Senator 
Stevens as well as Senators Allen, Kerry, Sununu, and Boxer 
that open the empty television channels for wireless broadband. 
I think we should also enhance and protect competition by 
opening the market to any broadband service provider, public or 
private, and advance an enforceable policy of network 
neutrality.
    And, finally, I think we should improve the strategic 
investment in broadband infrastructure through more effective 
use of the RUS grants and by reinstating the technology 
opportunities program at the NTIA.
    There are no easy solutions to correcting the problems of 
Universal Service but they must be addressed based on 
ubiquitous, affordable access to broadband. Without that 
commitment we cannot hope to correct the problems that have 
plunged us down the ranks of global competitiveness. We urge 
the Committee to act prudently, swiftly, and in the spirit of 
the Communications Act. I thank you for your time and attention 
and I look forward to your questions.
    [The prepared statement of Mr. Scott follows:]

Prepared Statement of Ben Scott, Policy Director, Free Press; on Behalf 
   of Free Press, Consumers Union, and Consumer Federation of America
Summary
    Free Press, \1\ Consumers Union, \2\ and Consumer Federation of 
America \3\ appreciate the opportunity to testify on the issue of 
distributions from the Universal Service Fund. As consumer advocates, 
we strongly support the USF programs that have delivered essential 
communications services to low-income households, rural areas, schools, 
libraries, and rural health clinics. We recognize the fiscal crisis of 
falling receipts and expanding expenses in the program demands reform. 
Yet we view USF's present predicament as both a threat and an 
opportunity. We believe that as communications technologies evolve, USF 
must evolve with it. We support the expansion of USF support to 
broadband as the organizing principle to overhaul its contribution and 
distribution systems.
---------------------------------------------------------------------------
    \1\ Free Press is a national, nonpartisan organization with over 
225,000 members working to increase informed public participation in 
crucial media and communications policy debates.
    \2\ Consumers Union is a nonprofit membership organization 
chartered in 1936 under the laws of the State of New York to provide 
consumers with information, education, and counsel about goods, 
services, health and personal finance, and to initiate and cooperate 
with individual and group efforts to maintain and enhance the quality 
of life for consumers. Consumers Union's income is solely derived from 
the sale of Consumer Reports, its other publications and from 
noncommercial contributions, grants and fees. In addition to reports on 
Consumers Union's own product testing, Consumer Reports with more than 
5 million copies in paid circulation, regularly carries articles on 
health, product safety, marketplace economics, and legislative, 
judicial and regulatory actions which affect consumer welfare. 
Consumers Union's publications carry no advertising and receive no 
commercial support.
    \3\ The Consumer Federation of America is the Nation's largest 
consumer advocacy group, composed of over 280 state and local 
affiliates representing consumer, senior citizen, low-income, labor, 
farm, public power, and cooperative organizations, with more than 50 
million individual members.
---------------------------------------------------------------------------
    The debate over USF reform is complex, and there is a danger that 
in the quest to iron out the details of implementation, the Congress 
will lose sight of the principles driving this policy. There are dozens 
of difficult questions to resolve, but we urge the Committee to stand 
firmly on the ideals articulated in the Communications Act of 1934 and 
reaffirmed in 1996. The cornerstone of this legislation is the 
commitment to providing communications services to every American 
household, without regard to geography or income, at an affordable rate 
and a robust quality of service. The legislative history of USF 
indicates that Congress has already committed itself to expanding 
Universal Service support to broadband networks. Not only should we do 
this, we cannot afford to delay.
    The urgency of the ``broadband problem'' in the U.S. is severe. The 
Committee is now familiar with the statistics of America's swift 
decline in the global ranks of broadband penetration. This testimony 
provides new evidence to understand why. The results of our study have 
critical implications for USF policy. Contrary to conventional wisdom, 
America's low population density does not account for our poor 
broadband performance. The key factors explaining our difficulties are 
high prices for service and a substantial low-income population that 
cannot afford them. Other nations have solved these problems with 
strategic investment and comprehensive broadband policies to deliver 
affordable service. USF is uniquely suited to reverse our broadband 
fortunes, bringing affordable service and new investment where we need 
it most--to low-income and rural areas that have heretofore been 
trapped on the wrong side of the digital divide.
    There is no magic formula for solving the Fund's problems. To 
begin, we must agree upon shared goals. To that end, we offer a set of 
principles for implementing a 21st Century Universal Service Fund. We 
support extending USF to broadband by expanding the base of 
contributions in a technologically- and competitively-neutral manner. 
After a transition period, USF eligible carriers should be broadband 
compatible. We believe the size of the Fund must be disciplined through 
careful oversight and accountability, market incentives, and strategic 
investment in infrastructure. We should support carriers without regard 
to technology, provided that each can meet standards for affordable 
broadband and telephone service at a robust quality of service. 
Finally, we should approach USF reform as one piece in a larger set of 
broadband policies that includes opening up the spectrum for innovative 
wireless technologies and protecting competition in Internet services.
    We strongly encourage this Committee to uphold the remarkable and 
progressive commitment to Universal Service that is the foundation of 
our communications policy. Expanding USF to broadband is an essential 
step on our path to reforming the system by maximizing the return on 
public investment and regaining our position as a global leader in 
technology and communications.
Starting From Principle
    As Congress looks to resolve the thorny problems of reforming the 
Universal Service system, we urge Members to start with the principles 
that lie at the base of the Communications Act. The purpose of the Act 
was to regulate communications networks ``so as to make available, so 
far as possible, to all the people of the United States, without 
discrimination on the basis of race, color, religion, national origin, 
or sex, a rapid, efficient, Nationwide, and world-wide wire and radio 
communications service with adequate facilities at reasonable 
charges.'' \4\
---------------------------------------------------------------------------
    \4\ Communications Act of 1934, 47 U.S.C. 151.
---------------------------------------------------------------------------
    This principle--strongly reaffirmed in 1996--is the simple, 
powerful, and fundamentally progressive commitment to universal, 
affordable access to communications services for all Americans. It is 
this policy that has brought telecommunications to schools, libraries, 
rural health facilities, low-income households, and rural areas at 
reasonable rates and adequate quality of service. The vital importance 
of this program is clear to anyone who has ever lived in rural America, 
or struggled to make ends meet. The economic case for affordable access 
is clear, and research produced by consumer groups has been documenting 
it for many years.\5\
---------------------------------------------------------------------------
    \5\ See for example the work of Mark Cooper: ``Disconnected, 
Disadvantaged, Disenfranchised: Explorations in the Digital Divide,'' 
Consumer Federation of America and Consumers Union, October 2000, 
http://www.consumersunion.org/pdf/disconnect.pdf; ``Expanding the 
Digital Divide and Falling Behind on Broadband,'' Consumer Federation 
of America and Consumers Union, October 2004, http://
www.consumersunion.org/pub/ddnewbook.pdf.
---------------------------------------------------------------------------
    The public policy commitment to ubiquitous communications has never 
been more important than now. Standing at the threshold of an 
information technology revolution, we cannot and should not abandon or 
weaken our guarantee of universal, affordable access. Granted, the 
communications marketplace has changed substantially since 1996--the 
last time USF was comprehensively addressed. The needs of our society 
and economy have evolved, and USF must evolve with them. The 
labyrinthine complexity of USF distribution--with both its successes 
and shortcomings--must not be allowed to blind us from the bottom line: 
Broadband is now, undeniably, the essential communications medium of 
the 21st century. Broadband networks are the ``adequate facilities'' 
that we must provide to all Americans at ``reasonable charges.''
    Yet, as in past technological paradigms shifts, rural communities 
and low-income groups have been left behind. The economic costs of this 
digital divide are severe--curtailing the educational, economic, and 
social opportunities for a significant sector of our society. It is no 
secret to this Committee that the United States lags badly behind other 
nations in broadband penetration. The longer we wait for universal 
deployment of broadband to every region of the country, the further 
behind our global competitors we will fall. Not only should we apply 
USF to broadband, we can't afford not to. This is the only way to get 
back on track toward the President's stated goal of universal 
affordable broadband by 2007.
    The current financial crisis in the USF programs and the difficulty 
in ensuring USF support delivers a strong return on investment have 
been readily identified as threats to a successful policy. But needed 
reform is equally an opportunity. We should look to reform USF both to 
address its long-term stability, and to use it to bridge the broadband 
digital divide. The cornerstone of this policy historically, and now, 
must be a commitment to bringing affordable service to average 
citizens. At the time of the Communications Act of 1934, telephone 
penetration rates were around 40 percent--very similar to where we 
currently stand with broadband.\6\ The vision that inspired a policy 
that brought that telephone penetration rate above 90 percent must now 
be applied to high-speed Internet access.
---------------------------------------------------------------------------
    \6\ Mark Cooper, ``Universal Service: A Historical Perspective and 
Policies for the Twenty-First Century,'' Consumer Federation of America 
and the Benton Foundation, 1996.
---------------------------------------------------------------------------
    There is much debate about whether it is appropriate to expand USF 
to cover broadband. However, a close look at the 1996 Act makes it 
quite clear that Congress has already decided on this question. Many of 
the Senators on this Committee fought for a broad, progressive 
definition of the communications services that would be guaranteed to 
all Americans. They had it right a decade ago. They still have it right 
today.
    In Section 254 of the 1996 Act, Congress instructed the FCC to 
define the services that would be supported by USF; and the Commission 
did not include broadband. However, Congress also instructed the FCC to 
base its policies on a set of explicit principles in Section 254(b). 
The first called for making quality communications services available 
at reasonable rates. The second read: ``Access to advanced 
telecommunications and information service should be provided in all 
regions of the Nation.'' If that statement lacks full clarity, we have 
the third principle as a further guide. It read: ``Consumers in all 
regions of the Nation . . . should have access to telecommunications 
and information services, including interexchangc services and advanced 
telecommunications and information services, that are reasonably 
comparable to those services provided in urban areas.'' There is little 
doubt that Congress intended to capture in this definition the evolving 
modes of 21st century technologies--certainly including broadband.\7\
---------------------------------------------------------------------------
    \7\ Communications Act of 1934, 47 U.S.C. 254.
---------------------------------------------------------------------------
    Some would argue that we cannot apply USF to broadband because a 
``substantial majority'' of the public does not subscribe--a condition 
for applying USF support to a new service under Section 254(c). 
However, this misreads the statute. The ``substantial majority'' clause 
is subsequent to the Congressional commitment to covering advanced 
telecommunications and information services in Section 254(b). The 
conditions in Section 254(c) are not meant to modify the previously 
defined set of services that already fall under the principles of USF 
support (``telecommunications and information services, including 
interexchange services and advanced telecommunications and information 
services''), but rather the next generation of services, such as 
wireless telephony. In this analysis, the FCC may use its discretion to 
expand the scope of USF to broadband in ways it has not chosen to do in 
the past.
    But we need not get bogged down in statutory disputes about whether 
broadband should be appropriately supported by USF. Broadband capable 
networks are already supported by USF. Many of the Local Exchange 
Carriers (LECs) in rural areas have built converged networks that carry 
both voice and broadband data. This is a sensible investment, as a 
converged platform is a more efficient and forward-looking 
infrastructure. Many rural LECs receive resources from the Rural 
Utility Service, a fund that has made broadband compatible plant a 
requirement for grants and loans for many years. The E-Rate program has 
explicitly invested USF resources into Internet access for schools and 
libraries. This is sound policy based in the clear principles 
articulated by Congress in 1996--and it should be formally adopted in 
USF reform.
    The USF system does have a checkered track record and some serious 
problems. There is virtual consensus that we need reform. The program 
faces a financial crisis at present because of declining receipts and 
expanding outlays. If broadband becomes an explicit part of USF, these 
issues must be immediately addressed. To do this, there will be a 
significant number of tough questions this Committee will face in an 
effort to overhaul the system of contributions and distributions. But 
this is no time to turn from the principles that have proven so 
successful. Nor is it time to lose sight of the real problems that USF 
is meant to solve--our communications inequalities.
Diagnosing the U.S. Broadband Problem
    The crisis in USF is severe, but the crisis it is intended to 
address is arguably much worse, and certainly portends more dire 
consequences to the health of the U.S. economy. As this Committee has 
heard ad nauseum in hearing after hearing this year, the U.S. has 
fallen out of the top 15 nations in broadband penetration. It bears 
repeating here because this testimony will bring new data to the 
question. This new research directly ties our global broadband rank to 
the issue of Universal Service.
    Defenders of current broadband policy have argued that America's 
low global ranking is misleading because our population density is so 
low compared to smaller nations such as Japan, South Korea, and 
Sweden.\8\ Noting that Canada outperforms us in broadband penetration 
despite its size and population density, we investigated this question. 
We analyzed the data from the OECD study of broadband in 30 nations and 
specifically controlled for population density. The results are 
striking. [See Appendix.] Population density turns out to have very 
little impact on our relative broadband performance compared to other 
nations. Far more important are median household income, the poverty 
rate, and exposure to Internet technologies inside and outside the 
home.
---------------------------------------------------------------------------
    \8\ See for example, FCC Chairman Kevin Martin, ``United States of 
Broadband,'' Wall Street Journal, July 7, 2005.
---------------------------------------------------------------------------
    Rural areas are indeed underserved--broadband penetration rates in 
urban areas are nearly double those of rural areas. Yet, our research 
indicates that geography is a factor in depressed broadband penetration 
because of two higher order causes that are characteristic of rural 
areas--the price of service and the low-income levels of potential 
subscribers. It costs more to build rural infrastructure, which raises 
prices, and the disposable income of the average rural family is lower 
than average. Additionally, rural areas tend to have a disproportionate 
number of retired Americans on fixed incomes. These factors result in 
depressed broadband penetration. These conclusions comport with the 
findings of a study by the Pew Internet and American Life Project.\9\ 
Our research also confirms a recent survey showing that over 45 percent 
of broadband non-subscribers in the U.S. do not subscribe because of 
high prices. A further 10 percent report that service is 
unavailable.\10\ The combination of high prices and poor people results 
in lower technology exposure and adoption in rural America.
---------------------------------------------------------------------------
    \9\ See Peter Bell, Pavani Reddy, and Lee Rainie, ``Rural Areas and 
the Internet,'' Pew Internet and American Life Project, February 17, 
2004, http://www.pewinternet.org/PPF/r/112/report_display.asp.
    \10\ Yankee Group Research, Inc. February 2006, cited at http://
www.emarketer.com/article.aspx?1003833.
---------------------------------------------------------------------------
    On the question of exposure to the Internet, another key factor in 
promoting broadband penetration, Pew found that 32 percent of the adult 
population does not use the Internet--a figure that held steady for the 
first half of 2005.\11\ But our problem is not only with adults, it is 
also children. Of the 30 nations in the OECD study, the U.S. ranked 
26th (ahead of only Mexico, Turkey, and Slovakia) in the percentage of 
15-year olds that have used a computer. Other nations are winning the 
broadband race because they are bringing technology and services to 
low-income areas.
---------------------------------------------------------------------------
    \11\ See John Horrigan, ``Broadband in the United States: Growing 
but Slowing,'' Pew Internet and American Life Project, September 21, 
2005, http://www.pewinternet.org/PPF/r/164/report_display.asp.
---------------------------------------------------------------------------
    The USF program is specifically designed to address these problems 
and is uniquely suited to do so if we apply its support to broadband. 
There are plenty of rural communications providers. The issue is 
finding the right balance of subsidies to incent investment and to make 
their products affordable to low-income Americans. Expanding USF 
support to broadband is a logical step to correcting the negative 
trends in our broadband markets. First, USF brings service to rural and 
low-income areas at affordable rates. Perhaps no other single policy is 
more important to our long-term broadband prospects. Second, USF 
supports discounted Internet access in schools and libraries, which 
frees resources to buy PCs for the computer labs that connect to these 
lines. These public institutions serve to expose our young people to 
technology and catalyze the residential market for home computers and 
broadband services.
    Other nations have used strategic direct investment in broadband 
infrastructure in low-income and rural areas to outperform us across 
the board. We should take note and plan accordingly. Policies that 
stimulate low-income consumer demand will improve the U.S.'s broadband 
situation. Universal Service policy applied to the broadband market 
will play a positive role in bridging the economic and rural digital 
divides. This in turn will significantly improve U.S. broadband 
performance relative to other leading nations.
General Principles of Implementation for USF Reform
    As consumer representatives, we look to USF reform as an 
opportunity to extend the burden of contributions more equitably and to 
broaden the scope of distributions more effectively. The principles for 
implementing USF reform in 2006 must carry the same spirit as the 
principles for implementing USF in 1996. The functions, however, must 
be more forward looking. USF reform should:

   Explicitly expand USF to broadband and set a level of 
        service and a target price comparable to dominant technology in 
        urban areas. The FCC's broadband definition of 200 kbps is 
        unacceptable and backward-looking. It must be revised to ensure 
        appropriate levels of service.

   Broaden the base of USF contributions, equitably assessed 
        and technology neutral, to stabilize the financial future of 
        the Fund.

   Tighten the reigns of oversight and control that ensure 
        disclosure of how the Fund's distributions are spent, who 
        qualifies to spend them, and what the results of that spending 
        yield. Increased data collection to make these assessments, 
        including determining the capacity of lines in service areas, 
        will be a key component to understanding how and where to make 
        strategic investments in infrastructure.

   Find the right balance for USF subsidy. If the subsidy is 
        too big, investment does not flow to the most efficient 
        provider and rate paying consumers are overly burdened without 
        a commensurate benefit. The inter-industry wrestling over 
        revenue must be exposed to scrutiny and untangled fairly. 
        Consumer contributions to the Fund must produce a tangible 
        social and economic benefit in the form of a more robust 
        network and catalyzed economic growth. We have real success 
        stories with broadband provision by carriers of all kinds--we 
        should identify those blueprints and duplicate them.

   Invest in a technology-neutral manner that promotes the 
        least costly, most efficient systems that meet robust quality 
        of service standards.

   Begin a transitional phase leading to a point when all USF 
        eligible carriers offer broadband compatible networks. The 
        converged IP platform that carries both voice and data is more 
        efficient, more robust, and not substantially more expensive 
        than PSTN upgrades. As the PSTN equipment depreciates and 
        requires replacement, it should be replaced with an IP 
        platform.

   Discipline the size of the Fund through rigorous oversight, 
        realistic maximum allocations, forward-looking cost assessments 
        where appropriate, and sliding scales of eligibility and 
        reimbursement. The FCC and State utility commissions should 
        work in tandem to develop new protocols that make sense for a 
        USF that supports 21st century communications services.

   Reform USF in conjunction with a comprehensive set of 
        broadband policies. These should include:

        -- Opening more of the spectrum for unlicensed wireless 
        broadband.

        -- Focusing on competition inducing policies that 
        counterbalance mergers.

        -- Strategic direct investment in rural broadband 
        infrastructure.

        -- Reinstatement of the Technology Opportunities Program at 
        NTIA.

        -- Encourage community development programs as broadband 
        partners in order to expand access to low-cost equipment and 
        technology training.

Conclusion
    There are no easy solutions to correcting to the problems of the 
Universal Service Fund. But they must be addressed based on the same 
principles that have always guided progressive communications policy--a 
commitment to ubiquitous, affordable access to the most important 
technologies of the era. Broadband unquestionably qualifies as the 
dominant communications service of the 21st century. The benefits of 
applying USF to broadband outweigh the costs by a wide margin. Without 
a strong, comprehensive policy commitment to developing our broadband 
markets, we cannot hope to correct the problems that have plunged us 
down the ranks of global competitiveness. We need policies that give 
the ``green light'' to investment in communications infrastructure in 
rural and low-income America with a strong commitment to 
accountability, efficiency, and oversight. We strongly encourage this 
Committee to uphold the remarkable and progressive commitment to 
Universal Service that is the foundation of our communications policy.

    The article submitted with this prepared statement titled, 
Broadband Penetration in the Member Nations of The Organization for 
Economic Cooperation and Development--Why Does the U.S. Lag Behind? has 
been retained in Committee files. The article is also available at 
www.freepress.net/docs/us_lag.pdf.

    Senator Burns. Mr. Scott, thank you very much, and you 
raise some very, very interesting points in your testimony and 
I appreciate that. Senator Stevens.
    The Chairman. Thank you very much, Mr. Chairman. I'm 
participating in another hearing, in a markup, and also an item 
on the floor so I'm going to be in and out. Just want to ask 
you to put my opening statement in the record and to 
congratulate you for these witnesses. Before I go, I've got 
about 5 minutes. Mr. Scott, what's your background?
    Mr. Scott. I did a Ph.D. at the University of Illinois in 
communications and worked on the House side for a little while 
before I went into the nonprofit world.
    The Chairman. Is your group bipartisan as well as 
nonpartisan?
    Mr. Scott. We try not to get involved in party politics.
    The Chairman. That means you can be all one-sided.
    [Laughter.]
    Mr. Scott. We're goal-oriented, sir.
    The Chairman. I like what you say and I like what you're 
doing. How would you suggest we find a way for that coverage of 
broadband you asked us to make?
    Mr. Scott. Well, I think the contribution side is a complex 
problem that the Commission is considering. I think the 
approaches that have been put forward by Members of this 
Committee as well as outside researchers to apply contributions 
to numbers or connections or capacity are interesting ideas. 
I'd like to see more research to show what is the most 
efficient system. My own preference is for a capacity approach 
that recognizes that low-volume users should contribute less 
than high-volume users.
    The Chairman. Do you know what they call Universal Service 
out in the villages of Alaska? POTS, plain old telephone 
service.
    Mr. Scott. Sure.
    The Chairman. Now, I would like to pursue your objective 
but I understand you have some questions about that though, 
about expanding broadband through Universal Service payments, 
is that right? No?
    Ms. Bloomfield. Actually, one of the things that I think is 
important, Mr. Chairman, is that NTCA does a broadband study 
every year and our last study for 2005 showed that 95 percent 
of our telephone companies are providing broadband to a vast 
majority of their service markets. One of the questions for 
this Committee becomes a big issue about pushing those take 
rates. Our take rates are still hovering below 20 percent, so 
in a lot of cases the infrastructure is there. The question is 
what kind of policies can be implemented to actually create 
opportunities and incentives for people living in these markets 
when some of them are lower incomes to actually take the 
service.JLW
    The Chairman. It's my understanding that there's a question 
here about block grants of whether we should use block grants 
or use Universal Service funds in the very high-cost areas. 
Didn't you raise that question?
    Ms. Bloomfield. I would be happy to answer that question.
    The Chairman. Did you raise it though?
    Ms. Bloomfield. We submitted something to that effect to 
the record. If I could say, I think if you look at the Federal 
Fund as it exists, you have 95 percent penetration in all 
markets across the country, and, with all due respect, in terms 
of block grants there is something to be said for a Federal 
distribution system as opposed to states kind of creating 
winners and losers among themselves. And I think that when you 
allow states to create winners or losers you may have carriers 
in states where the state has no incentive to actually fight 
for some of the funding. I think you also add more layers, you 
add 50 different layers and different processes as we've seen 
in states that create their own ETC designation. So when it 
comes to things like block grants we feel very strongly in 
terms of actually using USF federally to build the 
infrastructure and that there are going to be some states, some 
carriers and some consumers in those states who will lose 
through that process.
    The Chairman. Thank you. In most instances the people who 
get the Universal Service payments in rural areas are the 
carriers of last resort. I think we'd agree to that, wouldn't 
you, just generally? Who would like to answer the question 
whether competitors, new competitors, should get the same 
Universal Service, should we duplicate payments on the same 
rural area in order to stimulate competition?
    Mr. Hughes. I'm sorry, I didn't understand the question.
    The Chairman. You have a carrier that's taking Universal 
Service into a rural area?
    Mr. Hughes. Yes, sir.
    The Chairman. You have some that are coming in now that 
want to bring another technology base and provide service in 
that area.
    Mr. Hughes. Yes, sir.
    The Chairman. They're asking for Universal Service 
payments, too. Do you believe we should duplicate Universal 
Service areas to the same high-cost area?
    Mr. Hughes. Well, currently, it's my understanding of the 
way it's done it's not duplication. Cellular South is 
authorized to provide service in a USF area in Mississippi and 
we do have that requirement. The same requirement that the RBAC 
or the incumbent ILEC has, and we thought we had it all along, 
we've tried to reach it and to approach with the same methods 
and the same requirements that it be something that can 
reasonably be done as is put upon the ILEC. So we're 
experiencing that right now so we're not having a problem with 
that.
    The Chairman. Thank you. I'll be back, Mr. Chairman. Thank 
you all for----
    Senator Lott. Can I get in here at some point, too?
    Senator Burns. Yes, sir. Senator Lott, you've been kept 
silent here for----

                 STATEMENT OF HON TRENT LOTT, 
                 U.S. SENATOR FROM MISSISSIPPI

    Senator Lott. Well, I was a little late in arriving and I 
apologize to my colleagues and I'll ask consent that my 
statement be put in the record.
    Senator Burns. Without objection.
    Senator Lott. I do want to thank the panel. I didn't get to 
hear the first two witnesses but I was impressed with the ones 
I did hear. Mr. Scott, you lived up to your self-described 
billing, soft-spoken but powerful statement and an interesting 
one.
    As you know, I was very much involved in the writing of the 
1996 Telecommunications Act and we established a lot of rules 
and regulations which the industry has been dealing with. 
Obviously technology has changed. Even in 1996 we were still 
thinking primarily, about hardlines and how you get more 
competition. We had no idea the explosions or options and 
opportunities and technologies that have taken place and we 
clearly need to have a telecommunications reform act this year 
to get up to speed with what's going on. So I'm hoping that 
this Committee--we've been having a lot of listening sessions, 
a lot of hearings, we need to mark up a bill here in the next 
couple of months. A critical part of that is going to be, how 
do we deal with the Universal Service Fund and who contributes, 
as you pointed out, and who benefits. My state is a big 
beneficiary. Out of the 66 entities that get these funds we're 
number six. And there's good reason for that. We have a lot of 
rural areas, we have a lot of poverty, and we want to make sure 
that the best possible service reaches out to those rural 
areas. And I think some good progress has been made in my 
state. I'm particularly proud of our testimony here from Carson 
Hughes with Cellular South. He did a good job today even though 
I missed the very beginning of it, but I had an idea of what he 
was going to say and how he was going to say it because he and 
I have been exchanging pleasantries since the 1960s when we 
were college friends and fraternity brothers. He sends me 
Internet messages all the time which I can't even get off the 
Internet but my staff gives them to me.
    But I do think that you're right. Several of you have 
said--well, before I come back to Mr. Scott I want to 
acknowledge what Carson Hughes said in his testimony. After the 
hurricane, Cellular South really was very good, their service 
was better than just about anybody else. How do I know? Because 
I was down there trying to use hardlines which were all down. 
Intercommunication between the disaster area and the rescue 
groups was almost nonexistent. I had two cell phones, one which 
worked, and one which did not. And the one that worked was 
Cellular South. They were very good in the aftermath of the 
hurricane throughout the region. A lot of the region is not 
just the coastal developed area. You get 10 miles off the Gulf 
Coast and you're in some pretty rural areas, so I want to thank 
the company for the job they did after the hurricane.
    Mr. Scott, you're right in your testimony. There's no real 
excuse for the United States dropping to 16th in the world in 
terms of provision and adoption of broadband. We've got to do a 
better job. And we're going to try to find a way to do it. 
There's no question we gave the FCC authority in the Act. You 
referred to that Section. But, the FCC has had a lot on them, 
and I think they've been trying to deal with a lot of advancing 
technology. They've done a good job, in some areas more than in 
others, and I've been very critical of them. I think we need to 
do more. I want to make sure that we get this good service to 
New York City as well as Nitta Yuma, Mississippi. And so we're 
going to work with you and all sides of this debate to make 
sure that we have a good way to collect the money and a fair 
system of distributing it, and it has got to be fair on both 
ends.
    So your testimony will be helpful and I'll review it all 
very carefully. While I don't always jump out and co-sponsor 
legislation immediately, I keep my powder dry as long as I can 
so that I can then maybe be helpful in the end to help produce 
a good product. Good work has been done and we look forward to 
working with you over the next 3 months as we move this 
legislation forward. Thank you.
    [The prepared statement of Senator Lott follows:]

  Prepared Statement of Hon. Trent Lott, U.S. Senator from Mississippi
    When the Telecommunications Act of 1996 was passed, we established 
a lot of the rules and regulations under which the industry plays. 
Technology has changed the industry, so we must adapt legislation to 
make sure that every American has the resources they need.
    Getting Internet, telephone, and cable to all rural areas is a 
challenge. This Committee must take it upon itself to make sure that 
the Universal Service Fund provides telecommunication services to ALL 
rural areas.
    There is no excuse for the United States to be Number 16 in the 
provision and adoption of broadband in the World. America is the most 
powerful Nation in the world, but most importantly, it is the land of 
opportunity and it is our job to make sure that every American has the 
telecommunication services they require to fulfill their dreams through 
that opportunity.
    This Committee and the FCC both have an obligation to ensure that 
every citizen receives affordable and quality broadband, cable and 
telephone service whether they live in New York City or Nitta Yuma, 
Mississippi.

    Senator Burns. Mr. Sununu, you just joined the Committee. 
Do you have a statement, sir?
    Senator Sununu. I don't have a statement, no, and I have a 
few questions that maybe I'll phrase in the form of a 
statement. But I'll be happy to have some of the other 
members----
    [Laughter.]
    Senator Burns. Thank you very much. Mr. Scott I was 
interested in your statement. Are you suggesting in your 
testimony that the USF fund, the use of those funds be based 
not on the cost, but also the economic or the economy scale of 
the areas they serve?
    Mr. Scott. Well, you're pressing my level of expertise on 
the criteria requirements for certifying a study area. But I 
definitely think that there's good reason as we move from a 
dial-tone world to a broadband world to look very carefully at 
what the criteria should be for eligibility and what the most 
efficient methods to invest public resources in that area are 
to deliver the services at the lowest possible cost to every 
household in that area.
    Senator Burns. Well, there are a lot of us here that have 
gone from this business of business-learning in healthcare and 
when you go into healthcare, and you have corresponding 
hospitals and clinics and everything else talking to each 
other, that requires broadband and we can't get around that. 
And so I was interested in that.
    Mr. Clark, Commissioner Clark, you might tell us just for 
the record the Antideficiency Act, how important that is, why 
it is necessary, could you do that for the Committee just for 
the record?
    Mr. Clark. Sure.
    Senator Burns. Because you deal with it as a State 
Commissioner.
    Mr. Clark. You bet. I have not heard anyone suggest that a 
permanent exemption, or that an exemption from the ADA is 
something that's not warranted in this particular case, and it 
helps with the efficiency of the Fund itself in helping to keep 
whatever methodology is chosen as minimal as possible. NARUC as 
an association is very supportive of a permanent exemption from 
the ADA. We do not see the uncertainty that's caused by a year-
to-year exemption as a positive thing.
    Senator Lott. Don't you think though, if you'll yield, that 
we should come up with a system where that permanent exemption 
is not necessary?
    Mr. Scott. Mr. Chairman, Senator, the contribution side is 
clearly a very key question in supporting the Fund. Hopefully, 
yes, whatever fixes it is great and it will probably create, a 
statutory fix will probably be needed, could at that time make 
that unnecessary.
    Senator Lott. Can I infringe on your time just a minute 
more because this is----
    Senator Burns. I have a feeling you're going to do it 
anyway.
    [Laughter.]
    Senator Lott. My buddy here. You all are right and this is 
very helpful as you point out, yes this is the crux of the 
conundrum. What we need though is some ideas. You're saying 
good luck; we hope you can find a good fix. And, you know we're 
going to have to take the flak for what we decide and we don't 
like that. We would like to be able to blame it on your 
recommendations.
    [Laughter.]
    Senator Lott. Now, Mr. Scott, you're brilliant. You got a 
Ph.D. in telecommunications from a university up there in 
Illinois. You've got to give us some suggestions here how we 
may do this thing and do it in a fair way. Thank you, Mr. 
Chairman. Would you like to respond to that?
    Mr. Clark. Well, as elected commissioner I certainly 
appreciate your perspective. Senator, this is just speaking for 
myself and not necessarily the association. The FCC has 
suggested and appears to be leaning toward a numbers-based type 
contribution methodology. And from my own perspective, I think 
that may be acceptable in the short-term but pegging it too 
closely to numbers in the long-term, I don't think probably 
works. Because what we're talking about I think is a fund 
that's evolving to supporting networks as opposed to a 
particular service, such as voice, which is what it's currently 
pegged at; and so I think it's an interim solution, but 
frankly, probably something more connections based or total 
company revenue based is a longer term solution.
    Senator Lott. I don't think you got in too much trouble 
with that.
    Senator Burns. No, I think you did good.
    [Laughter.]
    Ms. Bloomfield, let me ask you, are there areas that we 
serve in rural America and where USF has met a point of 
diminishing returns, where, in other words, subsidy is not 
necessary because of competition and other factors? Have we got 
carriers collecting Universal Service funds now that probably 
do not need them?
    Ms. Bloomfield. I think the important distinction Senator, 
is that Universal Services are a cost-recovering mechanism. So 
in reality the carriers are getting reimbursed for investments 
that have already been made into the infrastructure. And I 
think--I know sometimes people like to kind of present 
incumbents as these ancient carriers, but in reality they 
created the most efficient networks that they could, and I 
think as we see technology evolving, we see the interest in 
VoIP and IPTV and broadband services. I think that 
infrastructure needs to be maintained.
    I think the other key component; we've talked a lot about 
where wireless fits in. I think we've seen since 9/11 there is 
a value in some redundant networks and I think that there is 
something to be said for rural residents having access to both 
networks. And at some point you've got to judge what makes 
sense. For example, in the State of Wisconsin there's a study 
area that has six ETCs. Do you need six ETCs that are actually 
all getting the incumbent's cost? At some point you hit some 
inefficiencies. But I think there are ways to take a look at 
some of these things as a way to ensure that if things are done 
correctly and where carriers are kind of assessed either, 
certainly the incumbents have their costs. What I was curious 
looking at was a more efficient way of doing it whether it was 
a proxy model of some sort; it can keep the Fund sustainable. 
But I think as Congress and policymakers look toward that goal 
of making sure that all Americans have access to broadband, I 
would say in all honesty, networks continue to need to evolve.
    Senator Burns. Tell me in rural settings and you'd be on a 
wireline and now I've got a cell phone, do we see those 
customers dropping their wired service?
    Ms. Bloomfield. There certainly has been a drop in wireline 
services. The one component I think people don't fully 
understand, is that wireless services need wirelines as well 
because what happens is there's a backhaul issue where you're 
on your cell phone, you're placing a call, it's going to the 
mobile switching center. And in a majority of the cases those 
calls are going over a backhaul system over a wired network. So 
in reality there is some relationship between the two networks. 
So you can't simply do away with the wireline network and 
assume that those wireless phones will actually work.
    Senator Burns. Senator DeMint.
    Senator DeMint. Thank you.
    Senator Burns. I've taken up too much time here already.
    Senator DeMint. Sure have taken a lot of time, Mister.
    [Laughter.]
    Senator DeMint. I'd first like to start by correcting the 
record in my opening statement. I used some figures that were 
incorrect. The current USF fund is $7.1 billion a year and 10 
years estimate's around $50 billion. I think I mentioned around 
$500 billion. I added an extra zero but that's a real 
difference even in Washington, so I think when you get up that 
high you are talking about a real difference.
    Senator Lott. That's talking about a real difference.
    Senator DeMint. I think when you get up that high you are.
    Just a couple of points. I do appreciate the testimony and 
Mr. Scott; I'd like to just add one thought to your thinking, 
the poverty problem is important. It's also important to 
recognize that poverty is heavily correlated with illiteracy in 
this country and no amount of technology or connectivity is 
going to overcome that. Communication could be part of the 
solution in rural areas as far as overcoming illiteracy, but 
subsidies to connect with an illiterate population is maybe 
getting the cart before the horse. I hope you'll include that 
in your substance.
    Just a couple of thoughts, I know a little bit about living 
in the country and I think a lot of the kind of presumption of 
our testimony today has been that we need to make living in the 
country the same as living in the city. So we need to have the 
same services, and I think all of you know on the surface we 
can't do that. I mean, when you live in the country you might 
not have a sewer line, you have a septic tank but you have 
service. You might not have city water, you have wells, but you 
have service. There's no bus service and taxi service, probably 
not an interstate highway close by, the trash pickups you might 
actually have to take it yourself, schools are a little longer 
drive. The Federal Government cannot make living in the country 
the same as living in the city and we shouldn't. But I think if 
we use some common sense, particularly when it comes to 
communication, we can still make sure that folks living in the 
rural areas of America have the best in the world. But I think 
it requires some new thinking, and I think Senator Lott was 
pleading for some suggestions here, and I know when Senator 
Stevens was here a while ago he asked the question about 
whether we should duplicate the cost if we have a primary 
carrier there receiving USF funds. Should we also fund the 
competitors as they come in, will that help? And I kind of want 
to just ask a question of the panel, maybe some of you will 
volunteer to this, I believe the whole cost recovery method of 
reimbursement is a flawed system at this point. Perhaps it was 
needed in the beginning but it creates a lot of perverse 
incentives and certainly does not encourage efficient delivery. 
My question to you, and I think this would get at the concerns 
about duplication as we have more competitors, is there 
anything wrong with a system where the carriers are reimbursed 
based on their numbers of customers that are served and the 
types of services that they get and the performance or the 
quality that is delivered? So it wouldn't matter necessarily 
how many carriers came in if one replaced a hardline with a 
cell phone then the hard line loses reimbursement and the cell 
phone may get that additional reimbursement. I'm just looking 
for ways to fund this that might become sustainable over time 
so that we can actually provide the services to the rural area, 
but not necessarily just subsidize the various technologies. So 
would anyone like to volunteer?
    Mr. Hughes. Let me first of all maybe correct what I may 
have left as a false impression that when a competitive ILEC 
comes in and is an ETC and is allowed to have USF service under 
the current configuration, they don't get money until they have 
customers. They get paid based on the customers they have so 
that may address part of your question.
    Senator DeMint. Do they not have a cost recovery type of 
payment system?
    Mr. Hughes. No, sir. Their current, and we think it's a 
good plan, now it's based upon some sort of a mark that's in 
the ground that in this case that mark is the cost per line 
that is used by the incumbent ILEC in that particular area. 
Now----
    Senator DeMint. So even if the new carrier comes in with 
something that is more efficient and cost effective, they're 
paid based on the cost of the existing carrier lines?
    Mr. Hughes. Well, you have to remember the quick answer is 
on a per line basis, that is correct. You have to remember that 
no money flows through to that competitor until he has a 
customer within that area, then that particular competitor has 
to make an accounting for the monies that flow to him to--in 
our case----
    Senator DeMint. Based on how much he spends?
    Mr. Hughes. Every bit of USF funds he gets he has to put 
back in the high-cost area. In an effort to meet this criteria, 
you try to give them reasonably comparable services to what's 
enjoyed in the urban area. So, whatever dollars we get we turn 
around and put them back in that rural----
    Senator DeMint. Which is based on how much you can spend?
    Mr. Hughes. No sir, it's not based on how much you can 
spend. It's if you can get enough customers, the more customers 
you get the more money you get, but if you spend a billion 
dollars out there, it has no impact on the amount of money you 
recover directly. It might give you more customers which in 
turn may give you more money.
    Senator DeMint. But if you've got a telephone, a hardline 
service to the home, that carrier gets money for that, and if 
that same customer gets a cell phone, that cell phone company 
gets money for that. And then we want to get some additional 
broadband service, that carrier's going to get service for 
that, so we're going to subsidize three or four different 
technologies in one home.
    Mr. Hughes. Currently the wireless system is a competitive 
system, were it feasible to just go out there without any 
support whatsoever, they'd be there now. They'd be there now. 
So the places that have the lack of service, that is an 
indication that they need some support. Some support allows 
them to go out there, and let me just say this, in Mississippi, 
the Congress has allowed USF to be used by wireless. We're able 
to have a CDMA system which is a step toward broadband. And 
we're currently testing in a community the delivery of 
broadband by wireless. But back to your question, we would get 
no money unless we had a customer in that area, and then that 
money we do get we have to put back in the area. Or if in fact 
we're going to allow competitors to have some support, as long 
as we're going to have competitors that are getting support, we 
think this is a good way. Because it allows the--no matter how 
many you have (competitors) in the area, only those that have 
customers get money and they don't get a full cost recovery.
    Senator DeMint. Well I want to be on record, supporting, 
making sure that rural customers have service. But we need to 
figure out how to stop subsidizing both a sewer line and septic 
tank in homes in the country and that's what we're doing now. 
So I yield back.
    Senator Lott [presiding]. Thank you, Senator DeMint. 
Senator Burns had to go make an introduction, he'll be back in 
a few minutes. Senator Sununu.

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

    Senator Sununu. Thank you, Mr. Subcommittee Chairman. Well 
I'm a little disappointed in the makeup of the panel. I very 
much appreciate all of your work, your commitment to your 
respective companies or associations. I believe everyone on 
this panel does good work, tries to do the best with the 
resources they get from Universal Service. Try to be good 
regulators, try to be good association members, so I don't 
criticize your effort. But the fact remains that with the 
exception of Mr. Scott, you all have a vested interest in the 
existing system the way it's designed. You have absolutely no 
interest from what I can discern at making any modifications, 
any changes from the status quo. You benefit from the 
protection of the status quo. And there's nothing--it's not 
your fault. But it's just a fact of the way the system is 
structured, and what you do. And I just don't think it serves 
us especially well to only visit with, talk with people who are 
currently benefiting by the status quo. We're here to talk 
about the distribution system. And I think it's at least 
worthwhile to discuss real options for modifying the 
distribution system in a way that might better accomplish the 
goals of this very important program. The fact is what Senator 
DeMint just described, is full cost recovery, in fact it's more 
than cost recovery. It's just not accurate to say the new 
entrant will get cost recovery, but not full cost recovery, 
what they get is cost recovery of the cost of the incumbent. 
Which in almost all cases, at least on a moving forward basis, 
a marginal basis is greater than their cost. Now that's not 
necessarily good or bad, we can argue that it encourages at 
least a few additional entrants. But of course we heard that we 
don't want too many entrants, we don't want too much 
competition because that undermines the status quo. But it's 
not rational in my mind to have a system that automatically 
awards someone the cost of another competitor. That is not 
necessarily a rational system. More importantly, it's not the 
hallmark of a fair and efficient system. Senator Lott talked 
about the importance of this system being fair. It absolutely 
must be fair. It also should be efficient. And in order to be 
efficient you have to have, I think, better incentives than we 
have today. At least overall at the moment, we have a system 
that discourages competition, it discourages innovation. You 
have a system where participants specifically design products 
on the basis of their eligibility to qualify for Universal 
Service reimbursement; you cannot argue that that's an 
efficient system. You can't argue that that's doing a good job 
of encouraging innovation and new technology deployment. And I 
think overall it really hasn't encouraged the deployment of 
broadband services, in particular for the reason I just 
described. It was suggested by a panelist that companies have, 
or have incentive to install the most efficient networks that 
they can. This is simply not the case. If you're being 
reimbursed on a cost basis you don't have any incentive, at 
least through this system to improve efficiency, because you 
don't benefit economically through this system by improvements 
in efficiency. That's the nature of a cost recovery system. And 
those are the things that I think Senator DeMint and I believe 
others on both sides of the aisle would like to see improved in 
Universal Service. Greater incentive for efficiency, greater 
incentive for deployment of broadband, and refocusing of the 
program on its essential mission which is serving those in 
high-cost areas, rural areas, and those with the greatest 
economic need.
    I would--now having said all that, maybe you believe I'm 
wrong on all those points. But I'll give you a chance to answer 
a specific question related to the points I made, and that is, 
is there a specific recommendation that the panel, any of the 
panelists would like to make to change the system of 
distribution of Universal Service; we're not talking about 
adding more money. We're not talking about collecting; we had a 
hearing, a good hearing, an excellent hearing on methodologies 
of collection, numbers of connections, or throughput that Mr. 
Scott was talking about. Let's talk about distribution, that's 
what we're here for today. Are there any changes that you would 
recommend for the system of distributing funds? We'll start 
with Mr. Mao and go right down the list.
    Mr. Mao. I'd have to say that the complexities of how the 
distributions system works are well beyond my expertise. I'm 
here as an educator, and generally speaking, an end-user of the 
system itself. So I'd be happy to go back to our folks back at 
the state who deal more with how the funds are distributed, and 
get back to your staff, but I can't do that personally.
    Senator Sununu. I'll interrupt there, then we'll continue, 
but I see this as one of the problems. That in representing the 
education system, you see a bunch of money coming in, which if 
you're in the education system you're for that. Because it's 
good. More money coming into the system. Less money that you 
have to provide locally. And instead of you or those that you 
represent looking at the system and deciding if this in an 
efficient allocation of resources in this particular case 
within the education system, your natural reaction is to defend 
the status quo. And I think there are many--let us just say 
very wealthy school districts across America, getting a lot of 
money from the E-Rate system, and that means less money for 
those at the lowest end of the economic spectrum, and those in 
rural areas that have the toughest time getting the services 
that Senator DeMint described. And I would encourage you to do 
what you described. Talk to people, have an honest assessment 
about where this system of distributing funds within your realm 
of concern is really effective. Yes. Ms. Bloomfield.
    Ms. Bloomfield. Thank you. First of all, I'd like to note 
that I think the ultimate beneficiaries are truly the rural 
consumers. And the one suggestion I would throw out regarding 
the Identical Support Rule, which you noted about the multiple 
ETCs coming in and getting identical support from the 
incumbent, I think there are a couple of different things that 
could be looked at. First, I think that competitive ETCs could 
come in and choose to go through a similar separations process 
that is ongoing from the incumbent, where you figure out what 
your regulated and your unregulated costs are and, are 
reimbursed accordingly, which would get down to the actual 
costs. Or second, you take a look at creating some type of a 
tiered wireless proxy model. That is something that will more 
accurately kind of assess, but maybe be a little bit 
bureaucratically easier for wireless carriers to figure out 
what their actual costs might be. And third, there are frankly 
some competitive ETCs in the Fund who are regional and 
nationwide carriers, and I think that for the sake of 
efficiency in the Fund, to take some look at whether those 
companies should even be in the rural high-cost portion of the 
Fund, should they be in the non-rural portion of the Fund? 
Should they be assessed on a different basis to ensure that the 
funds are targeted very specifically?
    Senator Sununu. But that last point is a case of defining a 
particular carrier a particular way, not making any change to 
the distribution system.
    Ms. Bloomfield. I would assume that for the most case, 
those costs will be lower. And again, you know, the less money 
you get going out on the distribution side because you're 
targeting it specifically, I think it creates a more efficient 
use of the funds.
    Senator Sununu. And although you believe that ultimately, 
the purpose of Universal Service is to support the consumer, 
you oppose any discussion of proposals to give any money to the 
consumer directly.
    Ms. Bloomfield. Again, it goes back to the network. I 
represent small telephone companies who build networks. I don't 
know how you build a network. Right now, we're already seeing a 
huge slowdown in some of the network deployment that they're 
doing because of the uncertainty that's out there in the 
regulatory market. Inter-carrier comping of what? Some of the 
FCC rulings on Universal Service, those will slow down some of 
the network supports. So again, yes, I say that you've got to 
think about building the network.
    Senator Sununu. Yes?
    Mr. Hughes. Senator, if I understood, that's also what I 
might call a voucher system where you give the voucher to the 
consumer?
    Senator Sununu. Yes.
    Mr. Hughes. Yes. We're in the business of competing for 
customers. Send our customer the voucher. We're probably the 
best suited of all of the folks that are out there now to go 
compete for that voucher. Now, having said that, you know, 
that'd be a great world as far as us personally, but there has 
to be something said for maintaining that underlying 
infrastructure that's used, the wireline. If our goal is to 
ultimately have reasonably comparable services to those 
available in the urban areas, a factory coming into town is 
going to want to see a wireline telephone. He's going to want 
to be able to pick it up, but he's going to want to be able to 
use his wireless device, and it may be the one he prefers, it 
may be the one he uses the most. If we come to a head-to-head 
fight about it, we think we're in good shape. But I think if 
our goal is to have that reasonable comparability, we've got to 
do something to make sure that the underlying wireline 
infrastructure is there. But vouchers--listen, we compete every 
day. We have eight--seven--eight competitors out there. That's 
our business. We're in the competition business. We believe in 
it. Bring them on.
    Senator Sununu. Excellent.
    Senator Burns. Senator Snowe.

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

    Senator Snowe. Thank you, Mr. Chairman. I want to welcome 
Mr. Mao here today, who has been a great leader at the 
Department of Education in Maine, on issues related to 
education and technology. His statement is illustrative of the 
value that the E-Rate program has brought to Maine schools as 
well as schools across this country. As one of the authors of 
the E-Rate program, along with my colleague, Senator 
Rockefeller, I am really encouraged and heartened by the value 
and benefits that it has brought to many schools and classrooms 
that otherwise would not be able to afford Internet access. 
Frequently in this debate, we overlook the benefits that have 
been brought by E-Rate program. I hope that we build upon the 
status quo and build upon who receives support from the 
Universal Service Fund. The purpose of the Universal Service 
Fund was to close the gap in America by ensuring that rural 
areas, underserved areas and poor areas in America have access 
to the benefits of telecommunications and technology. This is 
also the purpose of establishing the E-Rate program for schools 
and libraries. The success of the program is demonstrated by 
the fact that when we were re-writing the Telecommunications 
Act in 1996, only about 14 percent of the classrooms were 
wired. Today, that level has reached 95 percent. More than $14 
billion in funding has been distributed from the E-Rate program 
to schools and libraries across this country, and most of the 
E-Rate funds went to schools where over 50 percent of the 
students in the district qualify for the National School Lunch 
Program. This is a real benefit to the low income and the 
disadvantaged. I hesitate to think where our schools and 
libraries would be today if we did not have the E-Rate program 
and the ability to distribute those funds to schools across 
America so that classrooms can be connected. I doubt that the 
Federal Government and the Congress would have provided the 
more than $14 billion for that purpose in any budget. We 
clearly have underfunded education in many categories, so I 
doubt that we would have been providing funds in this area. 
When you look at broadband deployment, we're not even there 
yet. We rank 16th in the world with respect to broadband 
deployment. Therefore, connecting our classrooms and schools 
would probably have been well behind too. Starting from that 
point, Mr. Mao, I would like to hear from you. What do you 
think we should do in the future to expand on the E-Rate 
program in providing technology to classrooms? What do you 
think we ought to be doing now?
    Mr. Mao. Thank you. I think the key for schools and for the 
E-Rate program is to make sure that the system itself, 
regardless of the complexities of paperwork and distribution 
channels and so on and so forth, that the funding maintain 
itself and is responsive to the growing needs. I think what 
we've seen in Maine, particularly because of our laptop 
program, which I think many of you may start to see in some of 
your states, I know we've been talking to lots of them about 
this, and they are all looking to try and do something similar, 
that the need in schools continues to increase. And so, the 
amount of broadband bandwidth that any particular school may 
see today is less than what they're going to need tomorrow. 
And, to speak to something that Senator DeMint mentioned 
before, that it's important to remember that literacy and 
numeracy can be addressed by the Federal Government by 
supporting E-Rate because that connectivity that we provide to 
our schools is exactly the primary source for all of our rural 
schools to get to content. Information is the key to education. 
I think we know that we are in an informational society today, 
and access to information is where all of the power is, so to 
speak. And as an educator, you need to have access to 
information in order to educate your students. And so, by 
providing that universal broadband access to all of our schools 
so that they all have the same access on the same playing 
field, we guarantee that everybody has the same opportunity 
because you never really know where the next Bill Gates may 
come from. He could be living in Fort Kent today. And because 
he has broadband access, he will be able to develop those 
skills as a student today to become the Bill Gates of tomorrow.
    Senator Snowe. Thank you. Ms. Bloomfield?
    Ms. Bloomfield. One of the things that I would say with our 
rural carriers and their markets is encouraging the 
partnership. I think that the dialogue--the communities where 
we've seen the E-Rate being used most effectively is where the 
local companies are talking to their school districts and 
working together to ensure that the schools have the technology 
that they need, and I would just encourage that continued 
dialogue and support from the E-Rate program.
    Senator Snowe. Would it be possible to have that kind of 
support without the E-Rate program? What would happen with our 
school systems if we didn't have the E-Rate program going 
forward?
    Ms. Bloomfield. Well, I date myself in saying I remember 
the days without the E-Rate program, and I will tell you that 
it was very hard for rural carriers because they tried to do a 
lot of very creative things with their schools. They tried to 
dedicate dark fiber. They tried to give away the service, which 
is very hard when you're a regulated industry, because the 
schools in rural America can't afford some of these programs 
and access. So, I think the advent of the E-Rate program has 
really been a boon for these rural communities in terms of 
creating a system where their schools can go to get these 
resources. So again, I see the need to continue to educate the 
school districts about working with their telephone companies 
to get access to the infrastructure they need to provide these 
services.
    Senator Snowe. Thank you.
    Senator Burns. I will tell you that the rural telephones 
and the cooperatives did a great job from the outset of hooking 
schools together in this type thing before we had E-Rate. They 
were doing a lot of work. Senator Stevens.
    The Chairman. Thank you very much. You know, I want to get 
back on the track I was on before. There are now about 150 
villages in Alaska that don't have dial-up Internet. They get 
Internet, but they have to dial long distance, and they get 
charged for the long-distance call. We don't have cable in most 
of our state, and many of the rural telephone companies don't 
offer DSL service. I think that's available by satellite, but 
it's expensive, and it's not supported by USF. So, I really 
think we've got to take a look at this from my point of view of 
what happens to USF and what it covers. I agree to some extent 
with my friend from New Hampshire. The problem is the costs are 
stated by the recipient, and there is no leverage as far as 
keeping down the cost. And Senator Snowe, it applies to schools 
and libraries and health facilities too. We pay their costs. 
There's no standard out there for how much cost. There is still 
the rumor that one school was almost torn down in order that it 
could be rewired to take Internet, and what we really did was 
rebuild a school rather than provide access. Now, I think we 
have to find some way to deal with it. We also have the 
situation I've tried to cover with Ms. Bloomfield, where you 
have an existing carrier, and that carrier is probably the 
older carrier. It's got fixed costs, okay, and it's getting USF 
now. You have a new carrier that comes in, and it's going to 
use a different technology, its costs are very low. But you 
know what it gets from the USF, it gets costs based on the 
original provider, not the costs based upon its own system. 
Now, that's what's causing this Fund to be attacked, I think. 
You know, I hope that we can find some way to create 
competition and lower prices and meet needs, and we have to 
call on all of you to get us some suggestions on how to do 
that, and I would urge you to give us some suggestions. And 
that's why, Mr. Scott, I'm coming back at you. You've got a 
think tank about this. And I think that nonpartisan group, as 
long as it stays nonpartisan, we'll rely on it a lot.
    Senator Burns. In this town?
    The Chairman. You are a misnomer in this town, but we all 
look for a real backboard to bounce things off in a way that we 
don't get a political answer. And I'm not saying you give us 
political answers because you give answers based upon 
situations that you deal with yourself. Which we honor, but 
still, we've got to transcend the broadband. I come back to 
broadband again now. If we're going to keep up with the world, 
Alaskans in rural Alaska need broadband. And as a matter of 
fact, the Federal agencies in Alaska are on broadband. And I do 
think we have to find some way to get the same to the villages, 
to people who operate businesses in rural Alaska, just like we 
would get them to people who operate businesses in rural 
Mississippi or Tennessee. They get them, but we don't. Now, 
anyone got any suggestions? How can broadband go into very 
distant rural service without increasing costs? Anyone know? 
Mr. Scott?
    Mr. Scott. Well, I'll take a stab at that one. I think we 
have to recognize in the Universal Service process that there 
are different kinds of rural areas. It's a different process to 
drag a local loop out to a remote ranch than it is to provide 
broadband to a village that just happens to be 500 miles from 
the nearest fiber line. And I think we have to be flexible and 
forward looking in our ability to recognize that technologies 
like wireless Internet may be the most efficient, least-costly 
solution to bring the highest quality of service to that area. 
And if so, we need to be prepared to put USF funds behind that 
technology. And if the Commission apparently does not----
    The Chairman. We being the Universal Service funds?
    Mr. Scott. Yes, sir.
    The Chairman. Do you agree with that? The others, that 
they've mis----
    Mr. Clark. Mr. Chairman, I'll take a stab at it as well, 
and hopefully this will answer some of Senator Sununu's 
questions as well, speaking for myself and not necessarily the 
association. My answer would be to both; we have to change 
support to networks as opposed to a particular service. And 
perhaps we do a lot better job of targeting to truly rural 
areas, and we support say one wireline network, and perhaps one 
wireless network, but not multiple, multiple competitive 
carriers and then try to rationalize the distribution so that 
we end things like the identical support rule. And things like 
carriers getting reimbursed on every handset that is handed out 
in a particular family, things like that which would help 
control the growth of the Fund while continuing to target 
support to truly rural areas.
    The Chairman. But if broadband's going out there should we 
support satellite delivery to rural areas with the Universal 
Service funds?
    Mr. Clark. Mr. Chairman, perhaps if that's the most 
efficient way of pressing that broadband out to that particular 
area, it may be.
    The Chairman. That would be my answer too. I would hope 
that we get to the point where the bill says, the FCC or 
whoever is administering this fund is going to look for the 
most efficient system available. And as technology develops 
it's going to have to shift. If it costs less but provides the 
same service, it's going to have to shift and save the Fund as 
we go along. Would you agree with that?
    Mr. Scott. Mr. Chairman I would say yes, if that's the most 
efficient way.
    The Chairman. Mr. Hughes.
    Mr. Hughes. I think there's a lot to be said. First of all 
we need to probably--I heard a distinguished Senator the other 
day say that we ought to be talking about communications. And 
we ought to be talking about your right to communications. And 
I thought that was great. We pay people to come up with stuff 
like that. And here I got it free, and I'd----
    The Chairman. I seem to remember that.
    [Laughter.]
    Mr. Hughes. I believe I remember him too. But I would add 
to that, this Southwest Airline, you're free to move about the 
country, you have the right to communications and you're free 
to move about the country. I'm--I think we ought to allow the 
competitive entities to compete and to limit it to one entity, 
one wireless, and if it were up to me, you know that would be 
the greatest thing since sliced bread for my company. But it 
would not be good for the rural areas there served. There may 
be some exceptions and it may be that there's--and it may be 
that only one entity would want to go in somewhere and get that 
support. But I would urge that the Universal Service Fund 
remain on a competitive basis and in essence, the competitive 
LECs are on just about a voucher system. They don't get any 
money, unless they get a customer. You know they have to have a 
customer there.
    The Chairman. Well what do you do about the cost situation? 
You have a current provider and along comes new technology and 
its cost base is literally less than half the original 
provider. How do you handle that in terms of being fair about 
Universal Service?
    Mr. Hughes. That's a good point and it makes you think. And 
on its face, it's almost a straw man when you think about it 
though. The current system allows an entity to recover based 
upon a mark on the ground. And that particular mark has been 
set in this case as being the cost per line. Now again, you can 
have as many competitors as you want, it's the number of 
customers that you get that determines what you have there.
    You know clearly you could have cost studies; you could go 
to these other methods that are proposed. The problem with that 
is this isn't the last rodeo. This is technology, there are 
going to be other technologies. So each and every time we do 
that, we're going to have to have new cost studies, we're going 
to have to have new methods of determining what is included, 
new methods of accounting for it. It has taken years to get in 
place what is in place now. We believe that the--that's 
something to be said for knowing what's going to happen and to 
base it upon the incumbent costs given that there is a limited 
number that you can have in the area, it's capped. There's a 
cap on the amount of money that can be spent over there, it's 
not spiraling out. That's another kind of a straw man, it's not 
spiraling out of sight because of competitive LECs, it's 
capped. You've got to have the customer. Yes you could, to 
answer your question. You could do a cost study for every sort 
of technology that's out there, and as we get more you could do 
each one, but one of the problems that people seem to have now 
with the programs is the complexity. Imagine the complexity if 
you had eight different technologies, each one of them based on 
their own cost studies, each one of them based on their own 
method of determining what's out there, what's to be done. It 
could become much more of an administrative nightmare.
    The Chairman. Thank you, Mr. Chairman, one last thing, a 
setup. I've been listening to Senator Sununu, and I think he 
makes some points. I've been thinking about asking the 
Committee to put in this bill a sort of random audit of costs, 
of all recipients of Universal Service funds. Sort of a little 
GAO if you will, to decide what part of the country to look at, 
and not auditing everybody, but a random audit to see the 
fairness of the costs and determine whether or not there is 
anything we can do to reduce the costs that are so 
automatically paid by Universal Service funds. We can't audit 
everybody, but I do think a random audit concept, sometimes, 
some libraries, this place, schools, and other places, the 
health facilities, and the providers. Everyone that gets 
Universal Service funds would know that there's a possibility 
that someone's going to come knock on your door and say prove 
those costs, what do you think about that? Mr. Scott, do you 
think I'm on the right track?
    Mr. Scott. Yes sir, I think that's a good idea. I think I'd 
be remiss as a consumer advocate if I didn't say that we need 
to make sure that the consumer contribution to the Universal 
Service achieves a commensurate consumer benefit on the other 
end from the distribution.
    The Chairman. Mr. Hughes, and then I'm finished.
    Mr. Hughes. We certainly want sunshine on that--that's why 
we file all the reports. We get the money, the USF money; we 
want the people to know what we do with it. In our particular 
case we receive Universal Service funds but there has never 
been a situation since we've been receiving it that we have not 
exceeded the amount that was spent in that high-cost area, from 
the USF funds that were received. Our own money is going in 
there also. So we've got a nickel in the game also, but it--but 
were it not for the USF fund we could not have expanded. We 
would not have CDMA service all over the state of Mississippi 
today; were it not for the Universal Service Fund. Because of 
it, it makes it something that we can put a pencil to it and 
make it work.
    The Chairman. Well I'll yield to the Chairman. In the final 
analysis Senator Burns has been my guru, I went out and visited 
his place there in Montana. If you haven't visited that 
laboratory they've got out there to explore how this whole 
system works you ought to do that. But he and I have talked 
long and hard, and I think we'll be able to get together here 
and get a provision in this bill that will assure a 
continuation of the Universal Service in a way that most people 
want to see it done. Thank you, Mr. Chairman.
    Senator Burns. Along with that, I think something has to be 
done along those lines just to protect the integrity of the 
Fund and that it does what it's designed to do. Mr. Mao, we've 
heard of abuses in E-Rate, misuses of money. And we've heard 
all kinds of stories. From your standpoint is that a problem 
for E-Rate?
    Mr. Mao. I think from a public perception perspective it's 
always a problem. But I think typical of most programs of any 
sort; any instances of fraud or abuse are always highlighted 
and get 50 million times more press than those events where 
things are working well. Which is why I was so grateful for the 
opportunity to talk to----
    Senator Burns. It's the same in politics too, I'll 
guarantee you.
    [Laughter.]
    Mr. Mao. Absolutely. So I think it's important that we 
continue to make sure that the public and the Members of the 
Committee, and others are aware of the fact that E-Rate is a 
successful program for schools. And it has enabled incredible 
things to occur in schools and to speak to Senator Sununu's 
discussion about innovation. It is E-Rate that allowed Maine to 
innovate to a point where we have deployed a one-to-one laptop 
program that has not only inspired our own teachers and 
students; but inspired at least six or eight other states to 
look at that kind of an educational program, as well as the 
folks at the MIT media lab, to develop new technologies, to 
build a device for less money, to deploy across the world, and 
to change the nature of education. So it's exactly that kind of 
program that created those kinds of innovations.
    Senator Burns. Could we, going back to the conversation I 
had with Mr. Scott, are there economies of scale and should 
there be a means test? We have some schools that are very 
wealthy. And they have a tax base that allows them to do great 
things. Maybe they don't have a school equalization program 
like we do in Montana, that sometimes works and sometimes it 
doesn't. But should we take a look at that in order to make 
these dollars work in places where we really need the E-Rate?
    Mr. Mao. I think that the E-Rate program already does that. 
Right now funding to schools and libraries is based on 
populations of free and reduced-income students within your 
population, within your district. So the system already has 
those checks and balances built in so that schools that are 
high-need that do have higher percentages of students who 
qualify for the Federal free and reduced program, do receive 
more funding than those districts which are very wealthy and do 
not have those populations. In which case, those districts 
sometimes don't even qualify for any dollars. So I think the 
system does have those checks and balances in place already and 
I think it does an effective job. I think to speak to economies 
of scale. Maine is a very rural state, and very dispersed. 
Maine has done things that helped our schools to organize 
themselves into what we have with the Maine School and Library 
Network, where they are able to, as a conglomerate, seek 
service and create efficiencies to lower costs, because while 
some may feel that by having a cost-driven system, as some 
people have characterized it, schools still don't get a free 
ride. You know none of this is free, so it's always in the 
school's best interest to reduce the cost of that service 
because they're still going to be paying for some portion of 
it. And in a school every dollar makes a difference. So I don't 
think that the system is anticompetitive in that sense.
    Senator Burns. Well as far as guesstimating and doing 
things like that, I could remember the 1996 Act, all of us were 
involved in writing that Act you know, I remember the estimates 
we had on cell phone usage by the year 2000. We couldn't have 
been further off. But basically the driving force in 1996 
started in about 1990, 1991 whenever we were dealing with the 
telecommunications industry that new technologies were coming 
onboard, and we were trying to deal with them with a law, 
regulatory law, that was written in 1934. And so that had to 
change, now technologies have a habit of speeding up, 
accelerating. And here we are back only 10 years later, re-
examining that Act and making some changes that reflect the 
technologies of today and a changing landscape on how we 
communicate. This has been a very good hearing today, do you 
have any more questions?
    This has been a very good hearing today, all your testimony 
was very good and it will have an effect on how we write this 
Universal Service bill I will tell you that, weighing all 
things. So I appreciate your being very candid with us because 
it is not easy to write a bill that one size fits all. And our 
demands in Montana are different than yours in Maine, and in 
Mississippi, and of course in North Dakota we talk the same 
language up there. And you are a native of Illinois, Mr. Scott.
    Mr. Scott. No sir, I grew up in Texas.
    Senator Burns. Did you? And you tell people that and 
everything?
    Mr. Scott. I do.
    [Laughter.]
    Senator Burns. That's good.
    Mr. Scott. I claim it.
    Senator Burns. I thought maybe the way you talked would be 
all right in southern Illinois but I'm not quite sure around 
Chicago. Senator Stevens.
    The Chairman. But we just want a bill that fits all sizes 
though right, not one size. But I do want to thank you, and I 
want to make sure we put in the record all of the statements 
that you prepared. They'll be in the printed in the record and 
all the statements of the Members of the Committee that 
submitted. One or two of them from time to time ask that you 
respond to a question. We have at least five full committees 
meeting this morning, so it's possible that some that were not 
here will want to ask a question, and we would appreciate it if 
you would respond to them as quickly as you can. We will get 
around to this bill sometime at the end of the month or earlier 
next month. But we do thank you very much. Mr. Scott, it's nice 
to know you're in business; we're going to keep you busy. Thank 
you very much.
    Senator Burns. We will leave the record open, and like 
Senator Stevens said there will be some inquiries, if you could 
respond to the individual Senator and to the Committee it would 
help us quite a lot. Thank you very much. We're adjourned.
    [Whereupon, at 11:49 p.m., the hearing was adjourned.]
                            A P P E N D I X

 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.
    On Tuesday, we examined the pressures on the current Universal 
Service funding mechanism, and today, we consider 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 who 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 and 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.
    As we discussed on Tuesday, 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.
    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.
                                 ______
                                 
     Response to Written Questions Submitted by Hon. Jim DeMint to 
   Hon. Tony Clark, Shirley Bloomfield, Carson Hughes, and Ben Scott
    Question 1. We have seen a great deal of consolidation in the 
telecommunications marketplace lately, but little, if any, in the rural 
phone industry. Why do you think that there has been so little 
consolidation among Rural ILECs? Does the current USF system discourage 
consolidation, and thereby encourage duplication and inefficient use of 
Federal monies? Should a subsidy system in the 21st century perpetuate 
this unnatural phenomenon, especially in areas where we are seeing more 
and more inter-platform competition?

    Answer from Mr. Scott. The lack of consolidation in the rural 
telecommunications market results from a variety of factors. There may 
be some cases where the USF distribution system inhibits natural market 
acquisitions--because larger carriers are reluctant to take on high-
cost areas under price cap regulation. But in other cases, there are 
social and economic reasons that these carriers remain independent. 
Many rural LECs are small, family owned businesses. For these people, 
there are social reasons not to sell. Other rural LECs operate in truly 
remote areas with very high costs--making them an unattractive prospect 
to potential buyers.
    In the case of service areas that are economically unattractive to 
major carriers, the subsidy system for small LECs has produced positive 
results. Many of these small LECs, according to NTCA data, have been 
more aggressive deploying broadband than their larger counterparts. 
They have put the higher subsidy levels from rate of return regulation 
to good use. If a large ILEC were to buy the smaller carrier, the 
regulations that apply to large ILECS, such as a price cap regime, 
would then apply. Though this subsidy might be smaller and more 
efficient in terms of resources spent from the USF, the resulting 
quality of service in that service area would also likely be lessened.
    The question of consolidation may not be relevant to the problem of 
inefficiencies in USF distributions, especially when we consider inter-
platform competition among ETCs. We should carefully explore the manner 
in which competitive ETCs are subsidized. On the one hand, competition 
can be a major benefit to rural consumers--bringing new services to the 
area. ETCs can include both wireless and CLECs, who can ultimately 
compete head-to-head with the ILEC's for customers. However, this 
attempt to encourage competition in local markets comes with a trade-
off. An increase in competition translates into the need for funds to 
subsidize the CETC and reimburse the ILEC for its revenue loss. This is 
because as the ILEC's customer base shrinks in the face of competition, 
it must recover its fixed costs from fewer lines. This increases the 
overall per line cost. In turn, this translates into a higher per-line 
subsidy, which is also available to the ETC competitor (because its 
subsidy is based on the incumbents cost structure, a practice which 
should be the subject of considerable scrutiny and reform). Cost 
calculation and distribution of funds to competitive carriers is the 
real issue that Congress, the FCC, and state PUCs must investigate to 
determine how to promote efficient use of funds without relegating 
rural areas to a substandard quality of service. It's a delicate 
balance that clearly will require great care to achieve as we move into 
a broadband environment.
    We need a system that deploys subsidies to effectively bring 
telecommunications services--including broadband--to as many homes as 
possible. In some cases, this goal may justify changes in CETC and cost 
calculation processes. In others, the essential services delivered by 
rural LECs should be maintained and supported at current levels. If 
there is a different market structure and distribution mechanism that 
would better achieve this goal, we would support it.

    Answer from Ms. Bloomfield. First, we need to clarify that 
Universal Service funds are not Federal monies as you allude in your 
question. Universal Service is an industry funded mechanism that is 
administered by the Universal Service Administrative Company (USAC). 
USAC is an independent, not-for-profit corporation designated as the 
administrator of the Universal Service Fund by the Federal 
Communications Commission (FCC). We do not believe that anyone in 
Congress thinks it is a good idea to take this industry funded 
mechanism and turn it into a Federal tax-based system.
    Second, Universal Service is not a subsidy. It offsets the higher 
network costs of rural carriers so that Americans living in rural and 
insular areas can afford to connect to basic communications services. 
As we all know, the more people connected to the network the more value 
it has. If Universal Service funds weren't available to maintain and 
upgrade the networks of South Carolina's high-cost companies, over 
650,000 of your constituents would see their phone bills increase by as 
much as $600.00 per year.
    Rural LECs were formed to serve high-cost rural communities that 
were bypassed by the industry's large carriers that had no economic 
incentive to serve such markets. Merging two high-cost companies does 
not create the same types of efficiencies as combining two corporate 
goliaths. We would like to bring to your attention the excerpt below 
taken from telecommunications expert and economist, Dale Lehman from 
his paper titled, False Premises, False Conclusions: A Response to an 
Attack on Universal Service, NTCA White Paper, August 2004.
        A number of considerations make forced consolidation of RLECs 
        bad for rural America. Among these:

   Costs are only half the equation. Quality of service also 
        matters. There is no evidence that consolidation would improve 
        service quality. In fact, the evidence points in the other 
        direction.\1\ For example, the evidence shows that the RLECs 
        have deployed state of the art facilities and services to rural 
        areas fairly ubiquitously.\2\
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    \1\ See, for example, D.E. Lehman, Who Will Serve Rural America?, 
NTCA White Paper, July 2000.
    \2\ OPASTCO's membership survey released May 10, 2004, finds that 
88 percent of the responding RLECs' customers have advanced services 
available to them (with an estimated subscription rate of 12.8 
percent). NTCA's 2004 Broadband/Internet Availability Study, released 
June 29, 2004, finds that 92 percent of the surveyed companies offer 
broadband services and that these services are available to 74 percent 
of their customers (with a subscription rate of 10 percent). These 
numbers compare favorably with the latest FCC data (``High-Speed 
Services for Internet Access: Status as of December 31, 2003,'' FCC, 
issued June 2004) which finds that 93.2 percent of the Zip Codes 
nationwide have at least one broadband subscriber, but only 73.5 
percent of the more sparsely populated zip codes (<6 persons/mi \2\) 
and 82.7 percent of the somewhat more densely populated rural Zip Codes 
(6-15 persons/mi \2\). The FCC and OPASTCO/NTCA data are not directly 
comparable since the FCC reports Zip Codes where there is at least one 
broadband subscriber and not how many of the subscribers in those Zip 
Codes are capable of receiving broadband services. Since the coverage 
data appears similar in magnitude in all these sources, it is almost 
surely the case that RLECs have deployed broadband services more widely 
than their large company counterparts.

   The same logic that advocates sharing of overhead costs 
        could be applied to sharing of other costs. Universal Service 
        costs could be drastically reduced if rural residents would 
        share their lines, thereby saving on the large outside plant 
        costs of serving sparsely populated regions. In fact, we had 
        such a system--it was called party lines and Universal Service 
---------------------------------------------------------------------------
        policy was largely responsible for its deserved eradication.

   Community-based rural telephone companies keep jobs in rural 
        areas and promote the national interest in maintaining 
        economically viable rural communities. Managerial positions in 
        these community-based companies are among the best in rural 
        areas. Economic development depends on both physical and human 
        infrastructures.\3\ Keeping these skilled jobs in rural areas 
        provides reasons for skilled people to stay or move to this 
        community which, in turn, helps attract businesses that depend 
        on a skilled labor force, thereby creating a virtuous cycle. 
        The U.S. Department of Agriculture reports that the average 
        annual earnings per utilities job was $66,631, more than 
        $20,000 higher than any other job category. While these jobs 
        are relatively small in number (0.5 percent of the nonmetro 
        total), they are among the most skilled jobs in rural areas.\4\
---------------------------------------------------------------------------
    \3\ The literature on rural economic development is voluminous. One 
study of particular interest comes from the UK: Teleworking and Rural 
Development, by Huws, Honey, and Morris, Rural Development Commission, 
1997. This study investigates the determinants of business and 
employment location, finding that proximity to other high-tech 
businesses and labor pools is a prime determinant of where a high-tech 
firm will decide to locate. The study points to good development 
potential for rural areas close to urban areas, but is much more 
pessimistic about isolated rural areas.
    \4\ USDA, 2001, Nonmetro Jobs and Earnings, [ers.usda.gov/Emphases/
Rural/Gallery/EarningsTable.htm] A case in point: the Kerrville 
exchange in Texas was purchased by Valor Telecom. Previous local 
managerial positions moved to Irving, Texas.

   Consolidation means less local management, less local 
        customer support, and a decreased ability to tailor strategy to 
        each particular rural community. This may make sense in some 
        cases, but should not be forced on all rural areas. Community-
        based RLECs already merge, acquire, sell their exchanges, and 
        share resources, but these decisions are dictated by local 
        market conditions. It makes no sense to demand that a company 
        share management when there may be no other carriers with which 
        to share. (Border to Border, Scott County, and South Park were 
        created to provide service to areas that were unserved--who 
---------------------------------------------------------------------------
        would these companies share management with?)

        The impetus to consolidate rural service areas is misguided. It 
        will further isolate rural communities, robbing them of access 
        to local educational institutions, vital jobs and expertise, 
        and relegating them to a one-size-fits-all mentality that is 
        bad for rural people and businesses.

        The potential savings through consolidation are largely 
        illusory. Larger service areas would result in de facto 
        decreases in Universal Service funding but not because the 
        costs are reduced. Larger service areas simply average out 
        relatively high-cost communities and subscribers with 
        relatively low-cost ones. In the extreme, all USF would 
        disappear if we were to consolidate the entire ILEC industry 
        into a single service area (by definition, this company would 
        have the national average cost of provision). This was largely 
        the situation prior to AT&T's divestiture. Nonrural carriers 
        already have this problem. They are either ineligible to 
        receive USF or receive inadequate support for their highest-
        cost subscribers due to this averaging effect.\5\ [ . . . ] We 
        should not broaden the scope of this problem by extending such 
        a policy to rural telephone companies. RLECs do not have the 
        urban cores of non-rural carriers that might enable them to 
        ``internally average'' their support amounts. This is true 
        regardless of whether or not the RLEC is affiliated with a 
        holding company.
---------------------------------------------------------------------------
    \5\ The current USF would increase by an order of magnitude if each 
wire center were designated as the study area. Essentially, companies 
serving larger study areas provide support for their higher-cost 
customers by charging more to their lower-cost customers. This is not 
sustainable in a competitive environment.

    However, there is one rule within Universal Service that does 
discourage RLEC acquisition of RBOC exchanges and it is called the 
parent-trap rule. The parent-trap rule discourages RLECs from 
purchasing rural exchanges from RBOCs by limiting Universal Service 
support to the amount of support received by the RBOC for the same 
exchange. This is insufficient and far below cost. Because RBOC support 
is determined by average cost using a proxy model that includes all of 
their low cost areas, which also happens to be 90 percent of their 
customers. Policies should encourage rural carriers to purchase these 
exchanges by allowing them to receive support based upon the costs to 
provide service for those exchanges.
    We do, however, feel that there is one inefficiency in the 
Universal Service system called the identical support rule. This is 
where competitive providers receive their support based on the wireline 
incumbent's costs. Universal Service is a cost-based system and all 
carriers should receive support based on their own support. If public 
policy dictates that more than one provider in an area should receive 
Universal Service support (for example, one wireline and one wireless) 
then those providers should have to demonstrate their costs. Currently, 
wireless providers receive support based on the incumbent wireline 
company's costs creating a windfall of support for the wireless 
carrier.
    An example of how the identical support rule is an inappropriate 
use of funds is that wireless carriers such as Alltel/Western Wireless, 
which operate in approximately 19 states, would be considered a non-
rural carrier if it were a landline carrier and ineligible to receive 
rural high-cost support under the current rural high-cost USF support 
rules. However, due to the identical support rule they qualify and 
receive report based on the incumbent carrier's cost. The current 
identical support rule allows not only windfalls for large wireless 
carries to pad their bottom lines, but also is a major contributor to 
the waste in the current USF distribution system.
    Another inefficiency in the industry not related to Universal 
Service is that traditional voice telecommunications carriers are still 
subject to a Federal excise while the remainder of the industry faces 
nothing like this. Telecommunications carriers should no longer be 
forced to pay this tax.

    Answer from Mr. Hughes. I do not closely follow consolidation 
transactions among rural ILECs and am not able to put a figure on the 
number of consolidations among rural ILECs to support or reject the 
statement that there has been ``so little consolidation.'' \1\ I can 
only reply anecdotally but would suggest that some of the rural ILECs 
not owned by larger companies may be closely held, co-operatives or 
family held and the desire to remain owned by those in the area being 
served (i.e., serving their neighbors, or remaining in the family, or 
owned by those being served) may be very strong.
---------------------------------------------------------------------------
    \1\ In my home state most of the rural area is covered by 
BellSouth, which has consolidated into its system at least one rural 
LEC since the Bell divestiture in 1984. In the areas covered by non-
Bell entities, some are owned by larger companies such as Alltel, 
Frontier, and TDS and there has been some consolidation and transfers 
over the years among the others. I am not familiar with the reason 
behind each of the ownership changes, nor if the rate of charge in 
ownership or consolidation has increased or decreased since the current 
Universal Service system was put in place.
---------------------------------------------------------------------------
    In my view, as a general matter, a 21st century Universal Service 
system should continue to improve upon the 1996 Act. As I understand 
the Act, it promised deregulatory policies that encourage competition 
throughout the country and a Universal Service policy that allows 
competitors to access Universal Service support so they can enter high-
cost areas. A Universal Service system should not provide high-cost 
support in low-cost areas where inter-platform competition is now 
present because consumers in such areas can switch to a carrier that 
can provide high-quality service.
    One way to make the high-cost system more efficient is to target 
support to the areas where it is truly high-cost to serve. Many rural 
ILECs serve both low-cost and high-cost areas, yet they receive support 
averaged over the entire area. When a competitive ETC is designated, it 
may receive Universal Service support when serving in a low-cost area. 
In 2001, the FCC adopted rules to deal with this problem, allowing 
rural ILECs to ``disaggregate'' their support away from their low-cost 
areas out to their high-cost areas. Disaggregation causes competitors 
to get no support for networks they may have already constructed in 
low-cost areas, and the entering competitors are forced to construct in 
high-cost areas to get support thus furthering the purpose of the USF 
while reducing cost. It is my understanding that all of the Universal 
Service support in areas served by the former Bell companies is 
disaggregated, including BellSouth's areas in my State of Mississippi. 
We believe that requiring rural ILECs of any real size to disaggregate 
their support when a competitive ETC enters an area removes any 
economic incentive to the ETC to focus on the lower-cost areas, thus, 
help to minimize fund growth and ensures that the highest-cost areas 
that need investment the most receive it.
    Further, where appropriate, a timely move away from providing 
support based on embedded historical costs to forward-looking costs 
would also reduce the amounts required for the high-cost areas.
    As addressed in our replies to other questions below, all carriers 
receiving high-cost support must be accountable to regulators to ensure 
funds are being used for approved purposes. We know it can be done 
because we are doing it now. Such a requirement will help remove the 
temptation for waste and abuse that might exist.

    Question 2. I would like to turn the focus for a minute on the lack 
of ``performance measures'' in the current USF program. It is no secret 
that effective program management requires the implementation of 
meaningful performance measures. It is very tempting to equate 
``accountability'' in programs with the mere prevention of ``waste, 
fraud and abuse,'' no one can hold a program truly accountable without 
clearly articulated goals and reliable performance data that enable 
program managers to assess the effectiveness of any program and 
determine whether changes are needed. What performance measures would 
you like to see implemented in the USF program?

    Answer from Mr. Clark. I believe that a number of strides have been 
made recently with regard to implementing more meaningful performance 
standards for eligible telecommunications carriers (ETCs). In March of 
2005, the FCC provided states guidance towards implementing stricter 
ETC certification standards and requirements. Among the suggestions 
that ``tighten-up'' the certification process are standards that should 
help ensure the performance of ETCs. Build-out plans, ability to remain 
functional in emergency situations, outage reports, and complaint data 
are all parts of the suggested performance standards. In response to 
the FCC action, over half the states have already completed them, and 
are in the process of finalizing ETC rules that are substantially 
similar to the FCC lead. North Dakota is one of them. I believe the 
core standards that have been articulated by the FCC address most of 
the glaring concerns regarding necessary performance standards. While 
similar performance standards could certainly be spelled out in 
statute, it would appear that the FCC and states have adequate 
authority to address these issues as needed under the current 
construct.

    Answer from Mr. Scott. The starting point for USF reform must 
include more regular auditing and more rigorous accountability. The 
concept of a mini-GAO for USF, raised in the hearing by Senator 
Stevens, moves us in the right direction. We also support many of the 
concepts advanced by the FCC in its 2005 proposed rule making on the 
Comprehensive Review of Universal Service Fund Management, 
Administration, and Oversight (Docket 05-124, para. 24-31).
    These include specific measures to determine the outcomes achieved 
in the application of USF resources in each of the supported programs. 
Of course, each program will require its own specific measures in order 
to track progress and calculate efficiency. The Commission outlines 
different types of measures: outcome, output, and efficiency. Outcome 
measures would require a model of the intended results of the program. 
Output measures would take into account the number of households, 
schools, health clinics, etc., that are served by the USF programs. 
Efficiency measures would assess whether the program brings the desired 
outcome to the recipient base using a reasonable expenditure of 
resources. Naturally, efficiency measures would have to be tied to the 
strategic policy goal of bringing communications services to households 
that otherwise would be left behind by the marketplace.
    To meet these goals, service providers will have to meet strict 
reporting requirements on the location of lines, number of subscribers 
served, and the quality of service provided. The Commission will be 
able to determine the cost to the program for each recipient, the type 
of service provided, and the percentage of eligible recipients that 
take advantage of the program. The Commission will also have to 
substantially revise its definition of ``broadband'' upward to meet a 
higher standard than 200 kbps.

    Answer from Ms. Bloomfield. First, it is important to know that 
RLECs must justify the use of Universal Service to the State commission 
as part of the annual certification of eligibility to receive Universal 
Service funds. This ensures accountability of the high-cost portion of 
the Universal Service Fund. There are no such reporting requirements in 
place for competitive eligible communications carriers. Having all 
carriers who receive Universal Service funds adhere to the same 
reporting requirements would be a good first step.
    If performance measures do become a part of eligibility to receive 
Universal Service funds, certainly maintaining a high level of quality 
of service should be the hallmark. Quality of service standards should 
include: percentage of calls completed, ability to remain functioning 
during an electric outage, percentage of calls dropped, access to 
emergency services, and high customer satisfaction.
    Should public policy dictate that Universal Service funds may be 
used to cover broadband, which is essential to fulfill the President's 
goal of ubiquitous broadband deployment by 2007, certain performance 
measures should be enacted such as percentage of customers with access 
to the evolving level of broadband at speeds defined by the FCC.

    Answer from Mr. Hughes. All ETCs must be required to demonstrate 
how the support they receive is being used for the benefit of 
consumers. As I understand Section 254(e) of the Act, a carrier that 
receives support is required to use that support only for the 
provision, maintenance, and upgrading of facilities and services for 
which the support is intended. In Mississippi, we submit our annual 
plans and then very specific quarterly reports to the State commission 
explaining exactly what we are doing with the funds. While we believe 
quarterly reporting to be somewhat burdensome and reports on a semi-
annual or yearly basis would be as meaningful, we are happy to comply 
if our regulatory authority believes quarterly reports to be in the 
public interest. All carriers should be required to file similar 
reports and submit to meaningful audits, upon request, that examine 
whether funds are being used as required by law. It is not enough for 
some carriers to simply file reports with the National Exchange Carrier 
Association that demonstrate that expenditures were made. Reports must 
explain the specific projects and demonstrate how support is being used 
to build, maintain, or upgrade facilities within the requirements of 
the intended uses of USF. The comparison of the use of the funds to the 
statutorily stated goals would provide a management guide and a tool 
for regulatory review. The filed reports could provide both cumulative 
and current period information together with such other information 
regarding USF usage as the regulatory authority might deem helpful in 
its evaluation process. Periodic and meaningful audits would complete 
the picture.
    Wireless carriers have come under criticism for not being 
accountable for their use of Universal Service funds. We believe these 
suggestions of lack of accountability are not generally founded on 
fact. I am unaware of any wireless carrier that is not using support 
properly and know that many members of our WIGs coalition are 
demonstrating their use of support in a fashion that is much more 
detailed than that required by wireline carriers.
    It is my understanding that there are approximately 400 wireline 
carriers that operate on an ``average schedule'' basis for USF 
purposes, which means they do not report their own costs to get 
support. I am advised that they receive support through a formula, 
irrespective whether they need support, or whether they actually invest 
the support they receive as required. I am advised that many, average 
schedule companies do not file detailed reports similar to those that 
wireless carriers are required to file in Mississippi. It would seem to 
be only wise that a meaningful accounting of such use should be filed 
with an appropriate oversight authority.

    Question 3. I have a question about companies operating on rate-of-
return regulations. Under current regulations, ``Rate-of-return 
carriers'' recoup all of their operating and capital costs, plus a net 
profit of 11.25 percent from the government. So, this means the more a 
rate-of-return carrier spends, the more profit they get from the 
government. This provides a strong disincentive for these carriers to 
drive down their costs. It seems to me that this regulation provides 
perverse incentives. Why should we continue with rate of return 
regulation? Is there a better way?

    Answer from Mr. Clark. The concern you have raised with regard to 
rate of return regulation is valid and is one that is often cited as a 
drawback to traditional rate regulation, and not just in the context of 
the telephone industry. Clearly, one of the disadvantages to rate of 
return regulation generally is that it creates an incentive to over-
invest. In response, regulators have looked to other alternative forms 
of regulation, such as price caps. However, no regulatory construct is 
perfect. The disadvantage of price caps can be an incentive to 
disinvest in the network, and to cut corners on things like customer 
service. Frankly, there is no perfect solution. It is a dilemma that 
has existed from the first days of regulation, and is an outgrowth of 
the realization that regulation is a second-best option to a 
competitive market. However, there are situations where a competitive 
market does not exist, and we are left to cope as best we can with the 
imperfect tools of regulation. One of the places where a competitive 
market does not exist is the terminating monopoly. To the extent that 
intercarrier compensation (access charges) continues to exist there 
really is no option but to have some form of rate regulation. (It 
should be noted that access charges are somewhat interrelated with, but 
not the same as the Federal Universal Fund program.) The best 
regulators can do in such situations is to try and set clear rules and 
regulations that, at the very least, prevent gaming the system, and on 
the balance, leave consumers better off than they would otherwise be 
with firms that could otherwise exercise market power.

    Answer from Mr. Scott. This is an important question, but we should 
begin considering it with the knowledge that the vast majority of lines 
nationwide are served by large carriers with price caps. Less than 10 
percent of lines are served by carriers operating under rate of return 
regulations. On the question of incentives and efficiency, the answer 
has two sides. There are quite likely some rate of return carriers that 
might better be subject to price caps to improve efficiency. However, 
there are other rate of return carriers that couldn't deliver service 
without that level of subsidy. To meet our policy goal of an efficient 
USF distribution system, we need to account for both.
    On the one hand, price caps can promote efficiency. Rate ceilings 
lead carriers to establish prices below the cap so that they can make 
profits up to the ceiling. There is doubtless a firm incentive to 
maximize profit by being more efficient in service provision.
    On the other hand, there are real questions about whether small 
carriers (in very rural areas) can generate the scope and scale 
necessary to make price caps a workable system for them. Topography may 
demand long local loops that are unfeasible to build under price caps. 
The economics of the market may simply determine that a particular LEC 
is a public interest communications provider. Subjecting them to price 
caps may undermine their ability to get access to capital at reasonable 
rates, maintain and upgrade their networks, and attain the long term 
stability to serve a high-cost area.
    There may be an optimal number of lines that would trigger a shift 
from rate of return regulation to price caps--and the shift to 
broadband will almost certainly impact this calculation. There may also 
be a method to determine different levels of price caps using models 
that take into account the particular local circumstances of a service 
area. This is a question the FCC should consider very carefully.

    Answer from Ms. Bloomfield. First we need to again clarify your 
misunderstanding in believing that any money for rate-of-return 
carriers is transferred from the government. The United States 
Government in no way funds telecommunications carriers whether they are 
cooperatives or stock companies so they in no way profit from the 
government.
    Additionally, there is zero evidence to prove the worn-out argument 
that non rate-of-return related companies are any more efficient than 
those under rate-of-return regulation or that rate of return regulation 
leads to inflated deployment and cost recovery. The reality is that it 
is a key element to fulfilling your national policy objective of 
Universal Service. The rate-of-return operational approach is 
absolutely essential to the recipe for ensuring high-cost regions of 
the country are well served. All one needs to do is to compare the 
services that are available for rural Americans in a high-cost market 
served by a rural carrier and a non-rural carrier to see the 
deficiencies that would result if rate-of-return operations were not 
permitted. Small systems that are dedicated to their communities could 
never effectively provide quality services under a price cap 
operational approach. The economies of scale do not exist to do so, and 
they would be disincented from providing the quality services they are 
able to under rate-of-return regulation.
    With regard to the current ``rate'' that Federal regulations 
permit, it is critical to recognize that the rate has been allowed to 
stand by the FCC in recognition of the significant decrease in 
intercarrier compensation that has, and will, continue to take place 
over the proceeding and subsequent months and years.

    Answer from Mr. Hughes. In urban markets where more than one high-
quality network provides competition, ILEC rates can be deregulated and 
the market can determine what a carrier can charge. I understand that 
some states have at least partially deregulated the rates of all but 
basic local exchange service for the ILEC. Such changes are in fact 
often touted by ILECs as being the wave of the future. We at Cellular 
South believe that, with competition, consumers will receive affordable 
telephone service without rate regulation and the overall need for 
Universal Service support will lessen over time as more efficient and 
competitive networks are constructed.
    I do not know whether price cap regulation now in effect for large 
ILECs can be effectively imposed on small rural ILECs. There are many 
technical questions surrounding this issue that are beyond my 
expertise, and better directed toward experts in the field of telephone 
regulation.
    We do support providing Universal Service support to all ILECs 
based on the forward-looking cost of providing an efficient network. We 
believe that consumers who pay into the system should not pay more than 
what is necessary to deliver services efficiently and ensure that rural 
consumers have choices in services and service providers that are 
reasonably comparable to that which is available in urban areas.

    Question 4. I have a USA TODAY article, from November 17, 2004, 
which documents that XIT Rural Telephone Cooperative paid each of it's 
1,500 ranchers in the Texas Panhandle a $375 dividend--which was more 
than the mere $206 each rancher paid in local phone fees for the year. 
In the meantime, XIT took $2.6 million in Federal Universal Service 
fees that year. How and why did this happen and should this practice be 
allowed to continue?

    Answer from Mr. Scott. This is very troubling example. It 
demonstrates the danger that carriers will exploit the rate of return 
regulatory system. It points to the need for greater accountability, 
performance measures, and enforcement practices to ensure that public 
subsidies are not used to reap excessive returns.

    Answer from Ms. Bloomfield. The allocation of the excess of 
operating revenues over costs is one of the hallmarks of the 
cooperative operating model. The concept is integral to the idea that 
cooperatives are structured for the economic benefit of their members 
and thus pay capital credits to members in proportion to their 
participation in the enterprise. Stock companies, on the other hand, 
pay dividends to their owners on the basis of their contribution to 
equity. In both cases, the law recognizes that it is legitimate for the 
company to pay out a portion of its margins (in the case of a 
cooperative) or dividends (in the case of a stock company) as an 
incentive to keep the enterprise operational. The criticism of capital 
credit payouts overlooks this basic fact. Yes, cooperative members 
receive capital credits, but stockholders in stock companies, large and 
small alike, that may be receiving research and development funding or 
other forms of tax credits or Universal Service, etc. also receive 
economic rewards in the form of dividends or other returns on their 
investment.
    The fact that individual capital credits for any one cooperative in 
any one year may exceed local rates is purely coincidental and that 
fact should not undermine the economic structure of a cooperative model 
that still works in rural areas.
    Additionally, capital credits are typically paid on a seven to ten 
year delay so that in the meantime the cooperative has ready access to 
reserves in the event of a natural disaster, emergencies such as 
floods, ice storms, hurricanes, or national security events such as 
September 11, 2001, when a small community-based provider in South 
Dakota was called upon to quickly upgrade a remote facility to 
temporarily accommodate the Vice President of the United States who was 
being kept out of harm's way.

    Answer from Mr. Hughes. The obvious and direct answer is that no 
wrongful use of Universal Service support should be allowed to 
continue. I assume that any knowingly wrongful use of Universal Service 
funds carries appropriate penalties. I have no personal knowledge of 
the XIT case. It is unclear from the news article whether the payout 
was a special dividend due to a one-time transaction such as the sale 
of an asset, or a regular dividend. If it is a regular dividend, with 
the business generating excess funds for payment to shareholders, then 
the question should be asked whether those excess revenues are coming 
from their regulated business that is receiving Universal Service 
support, or if it is coming from other lines of business. For example, 
the company may be providing Internet access, video service, or have 
other revenue streams.
    If excess dividends are generated as a result of their regulated 
business, then this is a problem that could be and should be reviewed 
under an appropriate system of accountability with timely full 
reporting requirements. I am advised by counsel that XIT is a company 
that reports its costs (a Cost Company as opposed to an Average 
Schedule Company), however I do not know whether the applicable Texas 
regulatory commission reviews what XIT is doing with USF support it 
receives in the same way that the Mississippi Public Service Commission 
reviews our investments before certifying us to receive further USF 
funds. If XIT is generating excessive profits on its regulated 
business, then the Texas commission would appear to have a duty to take 
appropriate action to correct any abuses of the system they might find 
upon a review of all of the facts in the case. I assume any irregular 
use of USF funds would also be addressed at the time of the annual 
certification to the FCC by the Texas authority.

    Question 5. Mr. Hughes, how does rate-of-return regulation affect 
your company?
    Answer from Mr. Hughes. In the vast majority of the area where 
Cellular South provides service, our ILEC competition is BellSouth. 
BellSouth is a large ILEC that I understand is now Price Cap regulated 
by the Mississippi Public Service Commission and other regulatory 
authorities to the extent its prices/rates are regulated. I 
understanding that recent legislation will allow further deregulation 
of its rates. The remaining portion of our service area is served by a 
number of rural ILECs. We compete in both areas the same way--that is--
we focus on investing support, getting consumers, and building our 
business in the rural ILEC areas just the same as in the BellSouth 
areas. Our rates are uniform in the rural and urban areas serviced and 
without regard to how the underlying ILEC is regulated.
                                 ______
                                 
     Response to Written Question Submitted by Hon. Jim DeMint to 
                                Jeff Mao
    Question. What do you think about requiring performance measures 
for the E-Rate program? Do you think that would enable the Fund to be 
fine-tuned to maximize the benefit to learning? Do you think that can 
be best achieved through the FCC or do you think the E-Rate program 
could be better administered toward meeting educational goals, as some 
have suggested, at the Department of Education or elsewhere?
    Answer from Mr. Mao. The E-Rate program should have performance 
measures. It is important to keep these measures focused on the goals 
of the program, to allow schools and libraries access to advanced 
telecommunications. Therefore, I think it would be both reasonable and 
appropriate for the E-Rate program to be measured on its success at 
assisting schools and libraries access to advanced telecommunications 
services like broadband services.
    Further, it is important to look beyond simple Internet 
connectivity, but to consider bandwidth needs of the schools and 
libraries, so that the program can be fine-tuned to ensure that it 
continues to provide support for the growth and advancement in 
available and necessary broadband services.
    It is also important to recognize how broadband connectivity and 
the E-Rate program in general support education. Broadband connectivity 
is one of many critical inputs that schools and libraries need to 
provide a quality education and services to all learners and patrons. 
However, it is not one that should be administered by the Department of 
Education. To do so, would be like asking the Department of Education 
to administer the roads on which their school buses travel. Broadband 
connectivity and E-Rate should remain in the realm of the FCC as they 
are the experts in the field.

                                  
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