[Senate Hearing 110-1111]
[From the U.S. Government Publishing Office]


                                                       S. Hrg. 110-1111
 
                       THE PRESENT AND FUTURE OF 
                       THE UNIVERSAL SERVICE FUND 

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

                                HEARING

                               before the

                         COMMITTEE ON COMMERCE,
                      SCIENCE, AND TRANSPORTATION
                          UNITED STATES SENATE

                       ONE HUNDRED TENTH CONGRESS

                             FIRST SESSION

                               __________

                             MARCH 1, 2007

                               __________

    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 TENTH CONGRESS

                             FIRST SESSION

                   DANIEL K. INOUYE, Hawaii, Chairman
JOHN D. ROCKEFELLER IV, West         TED STEVENS, Alaska, Vice Chairman
    Virginia                         JOHN McCAIN, Arizona
JOHN F. KERRY, Massachusetts         TRENT LOTT, Mississippi
BYRON L. DORGAN, North Dakota        KAY BAILEY HUTCHISON, Texas
BARBARA BOXER, California            OLYMPIA J. SNOWE, Maine
BILL NELSON, Florida                 GORDON H. SMITH, Oregon
MARIA CANTWELL, Washington           JOHN ENSIGN, Nevada
FRANK R. LAUTENBERG, New Jersey      JOHN E. SUNUNU, New Hampshire
MARK PRYOR, Arkansas                 JIM DeMINT, South Carolina
THOMAS R. CARPER, Delaware           DAVID VITTER, Louisiana
CLAIRE McCASKILL, Missouri           JOHN THUNE, South Dakota
AMY KLOBUCHAR, Minnesota
   Margaret L. Cummisky, Democratic Staff Director and Chief Counsel
Lila Harper Helms, Democratic Deputy Staff Director and Policy Director
              Margaret Spring, Democratic General Counsel
   Christine D. Kurth, Republican Staff Director and General Counsel
Kenneth R. Nahigian, Republican Deputy Staff Director and Chief Counsel





















                            C O N T E N T S

                              ----------                              
                                                                   Page
Hearing held on March 1, 2007....................................     1
Statement of Senator Dorgan......................................    39
Statement of Senator Inouye......................................    36
    Prepared statement...........................................    36
Statement of Senator Klobuchar...................................   114
    Prepared statement...........................................   117
Statement of Senator Pryor.......................................    42
Statement of Senator Rockefeller.................................    20
Statement of Senator Smith.......................................    45
Statement of Senator Snowe.......................................    49
Statement of Senator Stevens.....................................     1
    Prepared statement...........................................    36
Statement of Senator Thune.......................................   105

                               Witnesses

Burke, Hon. John Downes, Board Member, Vermont Public Service 
  Board; Member, Federal-State Joint Board on Separations; and 
  Member, Federal-State Joint Board on Universal Service.........    15
    Prepared statement...........................................    16
Copps, Hon. Michael J., Commissioner, Federal Communications 
  Committee......................................................     7
    Prepared statement...........................................     9
Crothers, David, Executive Vice President, North Dakota 
  Association of Telecommunications Cooperatives.................    54
    Prepared statement...........................................    56
Gregg, Hon. Billy Jack, Director, Consumer Advocate Division, 
  Public Service Commission of West Virginia.....................    21
    Prepared statement...........................................    22
Landis, Hon. Larry S., Commissioner, Indiana Utility Regulatory 
  Commission.....................................................    11
    Prepared statement...........................................    13
Massey, Richard N., Executive Vice President, Corporate 
  Secretary, and General Counsel, Alltel Wireless................    77
    Prepared statement...........................................    78
Simmons, W. Tom, Senior Vice President, Public Policy, 
  Midcontinent Communications....................................   106
    Prepared statement...........................................   108
Staihr, Ph.D., Brian K., Regulatory Economist, 
  EmbarqTM Corporation................................    71
    Prepared statement...........................................    73
Tate, Hon. Deborah Taylor, Commissioner, FCC and Chairman, 
  Federal-State Joint Board on Universal Service.................     1
    Prepared statement...........................................     5
Tauke, Thomas J., Executive Vice President, Public Affairs, 
  Policy and Communications, Verizon.............................    87
    Prepared statement...........................................    89

                                Appendix

Letter, dated March 8, 2007 to Hon. Daniel K. Inouye from George 
  Strandell, General Manager and CEO, Golden West 
  Telecommunications.............................................   124
Nelson, Hon. Bill, U.S. Senator from Florida, prepared statement.   119
Pollak, F.J., President and CEO, TracFone Wireless, Inc., 
  prepared statement.............................................   121
Wallace, Gary, Vice President, Corporate Relations, ATX Group, 
  Inc., prepared statement.......................................   119
Response to written questions submitted by Hon. Maria Cantwell 
  to:
    Hon. Michael J. Copps........................................   133
    Hon. Deborah Taylor Tate.....................................   130
Response to written questions submitted by Hon. Daniel K. Inouye 
  to:
    Hon. John Downes Burke.......................................   139
    Hon. Michael J. Copps........................................   131
    David Crothers...............................................   153
    Hon. Billy Jack Gregg........................................   148
    Hon. Larry S. Landis.........................................   134
    Richard N. Massey............................................   162
    W. Tom Simmons...............................................   169
    Brian K. Staihr, Ph.D........................................   154
    Hon. Deborah Taylor Tate.....................................   127
    Thomas J. Tauke..............................................   167
Response to written questions submitted by Hon. Bill Nelson to:
    Hon. John Downes Burke.......................................   145
    Hon. Michael J. Copps........................................   132
    David Crothers...............................................   154
    Hon. Billy Jack Gregg........................................   151
    Hon. Larry S. Landis.........................................   137
    Richard N. Massey............................................   165
    W. Tom Simmons...............................................   170
    Brian K. Staihr, Ph.D........................................   156
    Hon. Deborah Taylor Tate.....................................   129
    Thomas J. Tauke..............................................   168


          THE PRESENT AND FUTURE OF THE UNIVERSAL SERVICE FUND

                              ----------                              


                        THURSDAY, MARCH 1, 2007

                                       U.S. Senate,
        Committee on Commerce, Science, and Transportation,
                                                    Washington, DC.
    The Committee met, pursuant to notice, at 10:03 a.m. in 
room SR-253, Russell Senate Office Building, Hon. Daniel K. 
Inouye, Chairman of the Committee, presiding.

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

    Senator Stevens [presiding]. The Chairman is stuck in 
traffic and has asked me to start the hearing. I suggest we 
just allow the witnesses to begin, and wait for the Chairman to 
make his opening statement. Does that agree with you, Senator?
    We welcome you all and look forward to your statements. We 
would appreciate it if you can be as short as you desire, but 
all of your statements will be printed in the record as though 
read.
    Please. Ms. Tate?

             STATEMENT OF HON. DEBORAH TAYLOR TATE,

 COMMISSIONER, FCC AND CHAIRMAN, FEDERAL-STATE JOINT BOARD ON 
                       UNIVERSAL SERVICE

    Ms. Tate. Yes, good morning. Good morning, Vice Chairman 
Stevens and esteemed members of the Committee. Thank you all 
for the honor, really, of being here today.
    I know that the entire Joint Board appreciates having the 
opportunity to actually have a dialogue with you all. Many of 
you all have been so instrumental in championing Universal 
Service policies for our Nation.
    Last month, the FCC Commissioners testified before you and 
I stated then my commitment to Universal Service, no matter 
where Americans live. I re-emphasize that commitment today.
    Also, this week, as you know, we celebrated the 10th 
anniversary of E-Rate. And I just wanted to thank Senators 
Snowe and Rockefeller for their leadership and vision for 
generations of young Americans.
    First, I'd like to applaud Senator Stevens on the 
introduction of the Universal Service for Americans Act, which 
addresses an array of Universal Service issues, and, on the 
contributions side, provides broader statutory authority for 
the FCC to assess both interstate and intrastate revenues, a 
solution to expanding and stabilizing the contribution base 
that's not available under the present Act. It was also, I 
might note, recommended unanimously by a previous Joint Board. 
So, I look forward to a continued dialogue with Senators Smith 
and Dorgan and Pryor and other members of this committee who 
will be introducing legislation.
    Today, obviously I'm here not just as an FCC Commissioner, 
but also as the Chair of the Federal-State Joint Board, a role 
that I'm honored to serve and take seriously, and obviously am 
very, very pleased to be joined by a number of my colleagues on 
the Joint Board. I want to thank them, as well as my colleagues 
who are not here, for their commitment to the in-depth study of 
what are really complex issues. I also appreciate our mutual 
desire to build a consensus to address the challenges before 
us. As I stated at the en banc hearing, the good news is that I 
think we all truly share the same goal; it's just working on 
how we best reach the goals that are set forth in the Act, 
given the challenges of today's ever-changing technology and, 
of course, the growing marketplace.
    I've seen and experienced firsthand the opportunities 
provided by Universal Service in rural parts of Tennessee, 
probably impossible without the Universal Service program.
    In my written testimony, I provided you with an overview of 
the work that we've done to date during the past year since I 
became Chairman, but today I thought I'd just like to focus on 
providing some context for all the rest of the panel presenters 
that you all will hear today regarding the growth of the Fund.
    A modern and high-quality communications infrastructure is 
essential to ensure that all Americans, including those living 
in rural areas, have access to the opportunities that broadband 
provides. The Joint Board, like this committee, has renewed the 
debate regarding Universal Service funding for broadband in 
underserved areas. However, changes in technology and 
increasing numbers--the numbers of carriers who are receiving 
Universal Service support--have grown dramatically and place 
significant and increasing pressure on the stability of the 
Fund, which now provides approximately $4 billion through the 
high-cost mechanism alone.
    I brought a couple of charts that we had reviewed at our en 
banc. Chart 1 shows that, since 2003, the incumbent LEC 
payments have been relatively flat; and, they have actually 
begun to go down just a little in recent years. On the other 
hand, chart 1 shows that almost all of the recent growth in the 
high-cost Universal Service is largely a result of CETCs' 
access to high-cost support.

[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

    Chart 2 shows that the USF payments to CETCs have been 
growing at a rate of 101 percent per year since 2002. 
Specifically, in 2000, CETCs received a million dollars. We 
expect that to be a billion in 2006.

[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

    Chart 3 shows the rapid year-over-year dollar growth of 
CETCs. This also highlights another problem, and that is that 
CETCs presently, as you know, receive Universal Service support 
based on the incumbent LEC's embedded cost, or the per line 
support amount that the incumbent LEC receives, rather than 
support based on their own costs.

[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

    These charts show that our current high-cost mechanism is 
in need of repair and revision. Discussion of this issue should 
not in any way be construed as critical of the dazzling array 
of services that competitors, including wireless providers, are 
bringing to many parts of our country, including rural areas. 
However, as a Federal official, I believe that we are called to 
be good stewards of consumer dollars and the Fund.
    The Chairman and others, including Verizon, CTIA, and 
Alltel, and I think you will hear from them later, have 
proposed various reverse auctions as a possible mechanism that 
could be used for distributing high-cost support. Certainly, 
auctions could provide technologically and competitively 
neutral means of controlling the Fund's growth and ensuring 
more efficient technology.
    Other commenters, some of whom you will hear from today, 
have discussed other tools: geospatial mapping, more targeted 
distribution of support, and improved data-based 
decisionmaking. I hope to continue to facilitate the 
discussions among all of my colleagues, while doing all we can 
to ensure affordable, quality services are available to 
consumers, no matter where they choose to live in this country. 
However, we must do so in a way that is sustainable, to allow 
new generations of Americans to have access to the latest 
generation of services, so that our country and our citizens 
can compete in the increasingly global economy.
    Thank you all, and I'm pleased to answer questions after 
the presentations.
    [The prepared statement of Ms. Tate follows:]

 Prepared Statement of Hon. Deborah Taylor Tate, Commissioner, FCC and 
        Chairman, Federal-State Joint Board on Universal Service
    Good morning, Chairman Inouye, Vice Chairman Stevens, and 
distinguished members of the Committee. I especially want to thank you, 
Chairman Inouye and Vice Chairman Stevens, for your leadership and 
commitment to Universal Service.
    I appreciate your invitation to participate in this hearing. It was 
exactly 1 month ago that I sat at this table before you with the other 
members of the Federal Communications Commission (FCC or Commission). 
At that time, I stated my commitment to promoting the availability of 
quality, affordable telecommunications services to consumers--no matter 
where they live--across the United States and I reemphasize that today.
    I also wanted to recognize the work of this Committee on Universal 
Service issues. I applaud Senator Stevens' introduction of the 
Universal Service for Americans Act, S. 101, which addresses an array 
of Universal Service issues. For example, the bill addresses Universal 
Service contributions by giving the Commission discretion to assess 
both interstate and intrastate revenues--a solution to expanding and 
stabilizing the contribution base that is not available to the 
Commission under the existing Act. I also look forward to working with 
other members of this Committee who may be introducing legislation on 
universal service.
    Today, I am here again not only as an FCC Commissioner, but also in 
my role as Chair of the Federal-State Joint Board on Universal Service 
(Joint Board), a role that I am honored to serve and greatly respect. I 
am pleased that I am joined by some of my Joint Board colleagues--
fellow FCC colleague Commissioner Mike Copps, Commissioner Larry Landis 
of Indiana, Commissioner John Burke of Vermont, and Director Billy Jack 
Gregg of the Consumer Advocate Division of West Virginia. All of the 
Joint Board members--those here today, as well as FCC Chairman Martin, 
Joint Board State Chair Ray Baum of Oregon, and Commissioner Edgar from 
Florida--deserve praise for their commitment to the in-depth study of 
these complex issues in addition to their full time jobs as government 
officials. I also appreciate our mutual desire to build consensus to 
address the challenges before us.
    Congress required the FCC to institute a Joint Board ``to recommend 
changes to any of [the FCC's] regulations in order to implement 
sections 214(e) and [254]'' of the Act. Accordingly, I welcome the 
opportunity to hear directly from you regarding Universal Service 
issues facing the FCC, the industries we impact and most importantly, 
as section 254 of the Act states, ``consumers in all regions of the 
Nation.'' Like many of you, I have seen and experienced firsthand the 
opportunities provided by Universal Service in very rural areas. I 
remember the day the telephone wire was rolled up a gravel road to my 
grandmother's house in rural Tennessee--likely an impossibility without 
a Universal Service program. At the same time, in my roles at the FCC 
and on the Joint Board, I have a responsibility to preserve and advance 
the Universal Service Fund to best serve the public interest.
    Since becoming Chair of the Federal-State Joint Board on Universal 
Service, the Joint Board has continued its work to review the Universal 
Service policies and respond to the FCC's referrals. I have been 
committed to keeping our work on a timetable paced to fulfill our 
statutory role in a thoughtful and deliberative manner, including 
holding meetings and conference calls, issuing notices, and reviewing 
comments. The Joint Board staff held a retreat for 3 days in June 2006 
to review outstanding and new proposals, and the Joint Board met in 
August 2006 during the NARUC meeting in San Francisco. Because there 
were several newer members of the Joint Board, including myself, in 
September, we hosted a 2-day meeting at the FCC focusing on training. 
We heard from USAC, NECA and FCC Bureau experts about the mechanics of 
the Universal Service programs. The state members of the Joint Board 
and staff met again in November 2006 during the NARUC meeting in Miami. 
The full Joint Board held its recent en banc hearing less than 2 weeks 
ago here in Washington, D.C. We were pleased that members of your 
staffs attended as well.
     We continue to evaluate the issues expressly delegated by the FCC 
to the Joint Board for consideration, including what many call the 
``rural review'' proceeding and the ``basis of support'' elements of 
the competitive ETC review. As a part of its analysis, the Joint Board 
is looking at ways to improve the distribution of high-cost Universal 
Service support. Accordingly, we continue to evaluate draft proposals, 
hear from experts, and explore solutions that will help sustain the 
benefits of the Universal Service program for years to come. As 
Chairman of the Joint Board, I hope to encourage discussion among my 
colleagues and facilitate consensus that will ensure that American 
consumers throughout the Nation continue to have access to an evolving 
level of innovative services.
    Although the Joint Board has been considering several options, last 
summer, the Joint Board sought public comment on the use of reverse 
auctions as a tool to improve the distribution of high-cost support. On 
August 11, the Joint Board issued a Public Notice and sought comment on 
primary questions, such as the overall appropriateness and legality of 
implementing reverse auctions, as well as questions about the mechanics 
of any reverse auctions, such as Federal and state jurisdictional 
roles, quality of service obligations, and the unique questions 
regarding the treatment of incumbent local exchange carriers (LECs). 
The Joint Board received numerous comments and reply comments last 
fall, and also received additional submissions in the record. Further, 
as a part of last week's en banc hearing, the Joint Board heard 
experts, including witnesses from the National Telecommunications 
Cooperative Association, Verizon, and CTIA--The Wireless Association  
discussing specific proposals, benefits, and concerns regarding the use 
of reverse auctions. We also heard from experts on geo-spatial mapping 
and more targeted approaches to the distribution of support that would 
modify our current programs, including witnesses from the Polis Center 
in Indianapolis, CostQuest Associates, and Embarq TM. I am 
encouraged that you plan to hear from some of these same groups later 
today.
    I think it is important to understand how technological change in 
the industry is impacting the policy discussion. The communications 
marketplace continues to evolve daily, as convergence shakes the 
foundations of the old order for industry, for government, and for 
consumers alike. While this convergence creates real benefits for 
consumers through the introduction of exciting new services and 
increased competition among multiple service providers, it also 
challenges us to adapt our regulations to keep pace with these 
technological changes.
    The Joint Board continues to carefully evaluate the balance of 
issues at the intersection where the policies of Universal Service and 
competition meet. It is critical that we not lose sight of the 
Universal Service goals, as we look forward to ensuring that an 
evolving level of communications services are rolled out to all areas 
of the country.
    As we heard at the en banc, the area of greatest growth in the 
high-cost program relates to the increasing entry of competitive ETCs 
into rural areas. The fact is that overall support funding for 
incumbent LECs has been flat or decreasing in recent years. On the 
other hand, we have witnessed rapid growth in the funding of CETCs--
sometimes funding a second, third or more entrants in what have been 
determined to be high-cost markets. According to FCC and USAC data, 
competitive ETC funding has grown from $1 million in 2000 to $1 billion 
in 2006. If this continues at the present rate, CETC funding could 
double by funding year 2008.
    This growth is not only due to multiple providers receiving high-
cost support, but also because CETCs receive Universal Service support 
based on the incumbent LEC's embedded costs or the per line support 
amount that the incumbent LEC receives. But as we heard at the en banc, 
as competitors enter areas supported by Universal Service high-cost 
funding, their actual costs are likely to be very different, often 
lower, than the incumbent telephone carrier's costs on a per line 
basis.
    Discussion of this issue should not be construed as critical of the 
dazzling array of services that competitors, including wireless 
providers, are bringing to the rural areas of our country. Indeed, 
wireless services have added a new dimension to connectivity--
mobility--that is very important to many consumers. It is no wonder 
that wireless telephone connections now far out strip the number of 
wireline connections--by over 25 percent, according to the FCC's most 
recent figures. I have mentioned the issue to you in detail because the 
fact is that the growth of Universal Service high-cost support is 
easily identified, and is expected to continue to grow rapidly.
    As we look ahead to the long-term goals of the Universal Service 
program, we must balance the goal of encouraging competitive entry with 
the other challenges, such as the further deployment of advanced 
services. For instance, Alltel recently filed a novel proposal to 
allocate funding for broadband in unserved areas through competitive 
bidding. It is essential that as the converging communications 
landscape changes, we recognize how technological changes are putting 
strains on the mechanics of our contribution and distribution systems 
which must be addressed by policies that avoid subjecting the program 
to unsustainable growth. Like you, as a Federal official, we are 
stewards of these consumer dollars. While doing all we can to ensure 
that affordable, quality services are available to consumers all across 
the country, we must do so in a way that is sustainable to allow new 
generations of Americans to have access to the latest generation of 
services so that our country is able to compete in the increasingly 
global economy.
    Again, I appreciate your invitation to be here with you today. I 
look forward to hearing from you today and in the future, and I will be 
pleased to answer any questions.

    Senator Stevens. Well, thank you, Commissioner Tate.
    Our next witness is Commissioner Michael Copps, of the FCC.

       STATEMENT OF HON. MICHAEL J. COPPS, COMMISSIONER, 
                FEDERAL COMMUNICATIONS COMMITTEE

    Mr. Copps. Thank you, Mr. Vice Chairman, members of the 
Committee.
    I'm pleased to visit with you again today to focus on the 
challenge of how to bring advanced telecommunication services 
to all of our citizens and to ensure that our Universal Service 
system, which has accomplished so much, can make this happen in 
a sustainable way. Each and every citizen of this great country 
should have access to the wonders of communications, whether 
they live in rural areas, on tribal lands, or in our inner 
cities, whether they have limited incomes or disabilities, 
whether they are schoolchildren or rural healthcare providers.
    If we're going to ensure that no community and no citizen 
is left behind by a lack of access to basic or advanced 
telecommunications in this new digital age, we need to make 
some changes. We must, first of all, include these new 
opportunity-creating technologies as part of our Universal 
Service program. In plainer English, it is time to bring 
broadband into the Universal Service system. Then we must fine-
tune the Fund. We must broaden the USF contribution base. We 
must make sure funds are distributed with maximum equity among 
consumers, areas, and technologies. We must fund what is 
necessary to achieve our goal, and no more. And we must 
appreciate that the economies of nonrural, rural, and truly 
remote service areas can be very different.
    If we're going to broaden the purposes of Universal 
Service, we need to make that commitment up front. USF surely 
cries out for changes in many aspects, but isn't it better to 
get the mission clear before we do a lot of tinkering around 
the edges? I'm not suggesting delaying the fine-tuning. I'm 
just suggesting the urgency of stating the message and the 
mission. It strikes me that first you have an objective, then 
you have a program. A USF commitment to broadband strikes me as 
a pressing national need. Broadband is the great network and 
infrastructure challenge of our time, just like canals and 
railroads and highways were in an earlier era. Our future will, 
in significant measure, be decided by how well we build our 
broadband connectivity in the digital age.
    So, first we need to look at what role Universal Service 
should play in meeting this great infrastructure challenge. I 
recognize that the process of incorporating broadband will 
involve complex and difficult choices about what mix of 
technologies, like wireless and copper-based, and fiber, to 
support, and how to support them, and over what time frame. And 
I don't have a silver-bullet answer, but I'm not sure anyone 
else does either. I do know that we need to confront these 
questions in a forthright and honest fashion. We need to 
resolve them through a process that involves all the 
stakeholders in this important issue. That surely includes the 
state authorities, like the experts sitting beside me here 
today, who are such a fountain of creative and insightful ideas 
on the subject. And I hope the FCC will play a more proactive 
role in the effort, not least by gathering the hard data that 
is absolutely essential for sound policymaking, doing the 
analyses, and teeing up options for you and Congress to look 
at. You should push us to do more, much more, in this regard.
    We also need direction on whether Universal Service is 
going to be ``the'' vehicle or ``a'' vehicle in a comprehensive 
national broadband strategy, because such a strategy might 
involve additional components, like matching grants or tax 
incentives. But this much I know: we simply cannot throw up our 
hands and say that there shouldn't be any Federal Universal 
Service support for broadband. Unfortunately, in too may ways, 
that's exactly what our approach to Universal Service does 
today.
    In truth, I believe that Congress already gave the FCC and 
the states a statutory mandate to bring access to advanced 
telecommunications to each and every citizen of this country. 
I'm not sure, however, that all of my colleagues on the 
Commission agree that we have the authority to include 
broadband in universal service, or even on whether doing so is 
the way to go; hence, the apparent need for Congressional 
guidance.
    I realize much of our discussion today may be considerably 
more nitty-gritty and mechanics-oriented than what I've just 
said. We have a duty to deal with the nuts and bolts of 
managing the program we have today. So, permit me, quickly, to 
propose three things that I think could be done immediately to 
put Universal Service on a more solid footing so that it can be 
better deployed to help shape our future.
    First, with boundaries between local and long distance 
eroding and the skyrocketing success of any-distance calling 
plans, assessing Universal Service contributions only on 
interstate services is anachronistic. While it will require a 
legislative fix, I believe that assessing both intrastate and 
interstate revenues is a good idea. It would significantly 
lower the contribution factor and would expand the base of 
future funding for broadband buildout, if that is the road you 
choose.
    Second, it is as clear as clear can be that the costs of 
investing and maintaining wireless and wireline infrastructure 
are inherently different. I believe that wireless can and 
should be part of Universal Service, but the time has come to 
put an end to the irrational and costly system of supporting 
wireless carriers based on the cost of wireline incumbents. The 
identical support rule is the subject of a five year old Joint 
Board referral. I believe it is time for the Board to make a 
recommendation to the full Commission.
    Third, I believe that the Universal Service system cannot 
thrive without regular review and care. The high-cost fund, 
like many other good programs, can only benefit from additional 
oversight and auditing to ensure that a few bad actors don't 
jeopardize the strength of this great enabling program.
    The Joint Board and the FCC are discussing how best to 
shore up the Fund. Board Chairman Tate and our state colleagues 
here this morning are working hard to develop recommendations 
for the Commission. Our state colleagues on this morning's 
panel are among the Nation's leading experts on Universal 
Service. They have put creative ideas before the Joint Board 
and the Commission. And Commissioner Tate and I may well be 
asked to vote on these ideas in the months ahead.
    Last week, the Joint Board held a valuable en banc hearing 
addressing some of the issues we will be discussing this 
morning. I would like to at least see some recommendations come 
forth in the next few months. And, by way of suggestion, I 
would hope that future referrals from the Commission would 
contain some time limitations for Board action. The USF can do 
great things for America. It can help ensure that often 
unserved areas of our country are connected to vital education, 
public health, public safety, employment, and business 
opportunities, but we do not have the luxury of time to get 
this right, because the rest of the world has no intention of 
waiting for us.
    So, thank you for holding this hearing. I look forward to 
our conversation today to see how we can best maintain a robust 
and effective and forward-looking Universal Service system that 
remains true to its essential mission and true to the mission 
of our country.
    [The prepared statement of Mr. Copps follows:]

      Prepared Statement of Hon. Michael J. Copps, Commissioner, 
                   Federal Communications Commission
    Mr. Chairman, Mr. Vice Chairman, members of the Committee, I am 
pleased to visit with you again today to focus on one of the most 
important challenges confronting this Committee, our Commission and the 
country. This is the challenge to bring advanced telecommunications to 
all our citizens and to ensure that our Universal Service system, which 
has accomplished so much, can make this happen in a sustainable way. 
Since I went to the FCC nearly 6 years ago, my overriding objective has 
been to help bring the best, most accessible and cost-effective 
communications system in the world to all our people--and I always 
underline the ``all.'' Each and every citizen of this great country 
should have access to the wonders of communications--whether they live 
in rural areas, on tribal lands, or in our inner cities; whether they 
have limited incomes or disabilities; whether they are schoolchildren 
or rural healthcare providers.
    If we are going to ensure that no community, no citizen, is left 
behind by lack of access to basic or advanced telecommunications in 
this new digital age, we need to think anew, adjust our policies and 
craft the proper incentives. We must include these new opportunity-
creating technologies as part of our Universal Service program. In 
plainer English, it is time to bring broadband into the Universal 
Service system. We must also update and broaden the USF contribution 
base. We must make sure funds are distributed with maximum equity among 
consumers, areas and technologies. And we must recognize that the 
economics of non-rural, rural and truly remote service areas are 
fundamentally different.
    Permit me to begin by emphasizing the importance of an USF 
commitment to broadband because this is, far and away, the most 
meaningful step we can take to create opportunity for our citizens, to 
ensure community development in every area of our country and to keep 
our Nation competitive in the global economy. Broadband is the great 
network and infrastructure challenge of our time. If you double back 
through the years of this Nation's history, you will find that just 
about every formative era has had its own major infrastructure 
challenge. Go back to the very beginning as settlers pushed into the 
frontier and populated new lands. Their infrastructure challenge was to 
develop ways to deliver their produce and products to increasingly far-
away markets. So they found ways to build roads and turnpikes and 
canals and ports to meet that challenge. Later, as we industrialized, 
the need was to lay a railway grid, first across regions and then 
across the country, climaxed by the great saga of the Transcontinental 
railroads as we became a continental power following the Civil War. 
Closer to our own era, in the Eisenhower years as suburbs grew and our 
demography changed, came the Interstate Highway System binding the 
country more closely together. We saw it in communications, too, in 
extending telephone service to rural America with the Rural 
Electrification amendments under Harry Truman and with the Universal 
Service Fund that we are gathered here to discuss this morning. In all 
of these infrastructure build-outs, there was a critical role for 
government, business and local community organizations to work together 
toward a great national objective. This is really the American Story. 
It's how we built our Nation and how we grew. It is, I believe, the 
only way we will continue to grow it.
    From where I sit, broadband networks are the canals and railroads 
and highways of the digital age. Our future will be in significant 
measure decided by how we master, or fail to master, advanced 
communications networks and how quickly and how well we build out 
broadband connectivity.
    So first we need to look at what part Universal Service should play 
in meeting this great infrastructure challenge. I recognize that the 
process of incorporating broadband into Universal Service will involve 
many complex and difficult choices about what mix of technologies--like 
wireless, copper-based, and fiber--to support, how to support them, and 
on what time frame. I certainly don't have a silver bullet answer here 
today, and I am not sure that anyone else does either. But I do know 
that we need to confront these questions in a forthright and honest 
fashion, and we need to resolve them through a process that involves 
all the stakeholders in this important issue. That surely includes the 
state authorities, like those sitting beside me here today, who are a 
fountain of creative and insightful ideas on this subject. I hope the 
FCC will play a more proactive role in this effort--not least by 
gathering the hard data that is absolutely essential to sound 
policymaking, doing the analysis and teeing up options for Congress to 
consider. We also need to make sure that decisions about Universal 
Service are part of a complete national broadband strategy, which might 
involve additional components such as matching grants and tax 
incentives. More than anything else, I know that we simply can't throw 
up our hands and say that there shouldn't be any Federal Universal 
Service support for broadband. Yet in too many ways that is exactly 
what our approach to Universal Service does today.
    In truth, I believe that Congress already gave the FCC and the 
states the statutory mandate to advance the cause of bringing access to 
advanced telecommunications to each and every citizen of our country. 
I'm not sure, however, that all my colleagues on the Commission agree 
that we have the authority to be more proactive in encouraging 
broadband deployment and penetration, and this is why I am hopeful that 
Congress will choose to make this clear for all of us to understand.
    Earlier this year I was fortunate enough to meet a small business 
owner who was able to work out of his home on a rural hilltop on the 
Big Island of Hawaii after broadband service was installed--rather than 
trekking each day to the nearest town miles away to get online. And not 
too long ago I visited an Inuit village in Alaska, totally unreachable 
by road, where a sick child with an ear infection could be examined by 
a doctor hundreds of miles away. In another Alaskan village, students 
had used their broadband connection to speak in real time with the crew 
of the International Space Station. Like a string wrapped around a 
finger, stories like these remind us that lives and livelihoods and our 
very health are hugely influenced by the communications infrastructure 
available to us.
    As we work on implementing these lofty concepts, we must also of 
course deal with nitty-gritty of administering the program we have 
today. Permit me propose three things that I believe could be done 
immediately to put Universal Service on a more solid footing so that it 
can be better deployed to shape our future. First, with boundaries 
between local and long distance eroding, and the skyrocketing success 
of any-distance calling plans, assessing Universal Service 
contributions only on interstate services is anachronistic. While it 
will require a legislative fix, I believe that assessing both 
intrastate and interstate revenues is a good idea. Second, it is as 
clear as clear can be that the costs of investing and maintaining 
wireless and wireline infrastructure are inherently different. I 
believe that wireless can and should be a part of Universal Service, 
but the time has come to put an end to the irrational and costly system 
of supporting wireless carriers based on the cost of wireline 
incumbents. The identical support rule is the subject of a 5-year old 
Joint Board referral; I believe it is high time for the Board to make a 
recommendation to the full Commission so we can take corrective action. 
Finally, I believe that the Universal Service system cannot thrive 
without regular review and care. The high-cost fund, like many other 
good programs, can only benefit from additional oversight and auditing 
to ensure that a few bad actors do not jeopardize the strength of this 
great enabling program.
    The Joint Board and the FCC are in the midst of a serious debate on 
how to best shore up the Universal Service Fund and how it can meet the 
changing needs of the country as we head into the 21st century. Board 
Chairman Tate and our state colleagues here this morning are hard at 
work developing recommendations for the Commission. Our state 
colleagues on this panel are among the Nation's leading experts on 
Universal Service. They have put creative ideas before the Joint Board 
and Commissioner Tate and I may well be asked to vote on these ideas in 
the months ahead. Last week, the Joint Board held a valuable en banc 
hearing addressing some of the issues we will be discussing today. I 
continue to urge my colleagues that we act quickly and deliberately to 
address the rising demands on Universal Service. All of us want this 
system to work. None of us wants our country, or anyone in it, to miss 
the opportunities of the digital age. None of us wants to see any kind 
of digital gap anywhere in America. But, truth is, if we don't get our 
policies right, we could experience a 21st Century Digital Gap, in 
spite of the wonder of all these new technologies, greater than the one 
we experienced with plain old telephone service in the last century. 
The USF can do great things for America. It can help ensure that often 
unserved areas of our country are connected to vital education, public 
health, public safety, employment, and business opportunities. But we 
don't have the luxury of time to get this right because the rest of the 
world isn't planning on waiting for us.
    I look forward to our conversation today to see how we maintain a 
robust, effective, and forward-looking Universal Service System that 
remains true to its essential mission and true to the mission of our 
country.
    Thank you for your attention and for holding this hearing today.

    The Chairman [presiding]. I thank you very much, 
Commissioner Copps.
    Our next witness is a member of the Indiana Utility 
Regulatory Commission, the Honorable Larry S. Landis.
    Commissioner Landis?

   STATEMENT OF HON. LARRY S. LANDIS, COMMISSIONER, INDIANA 
                 UTILITY REGULATORY COMMISSION

    Mr. Landis. Thank you, Mr. Chairman, Mr. Vice Chairman, 
members of the Committee.
    Senator Inouye, I had the privilege of visiting your state 
this past year to witness the installation of my friend Chad 
Miles, CEO of a small, but highly innovative, rural company, as 
President of OPASTCO.
    Senator Stevens, I bring you special greetings from the 
city of your birth, Indianapolis. I also had the privilege of 
visiting your state last year, and had a chance to experience 
firsthand the unique challenges and opportunities which both 
traditional and advanced communications hold out for the people 
of Alaska.
    I thank you for the opportunity to address the critical 
issues relating to Universal Service from the perspective of 
the Joint Board and the perspective of state regulators.
    I want to underscore that I do not necessarily represent 
the views of all state regulators, which, like those of this 
body, sometimes diverge.
    Given time constraints, I'd like to start by referencing 
the March 2, 2006, testimony of my colleague, North Dakota 
Public Service Commission Chairman Tony Clark, almost exactly a 
year ago today, on behalf of NARUC. His observations are still 
relevant. Today, we speak more about the distribution side of 
Universal Service. However, I do want to acknowledge the 
bipartisan effort which went into framing a solution to funding 
of Universal Service, which was incorporated into the proposed 
Communications Act of 2006 last year, and, as Commissioner Tate 
has already mentioned, is incorporated into a freestanding bill 
and other legislation again this year. The latitude which you 
incorporated into that plan, from a funding perspective, was 
useful, commendable, and, I believe, enjoys broad support from 
state regulators.
    I want to limit my remarks about the important issue of the 
significant growth in the size of the high-cost fund. I share 
the opinion of my colleagues on the need for a cap on 
expenditures to give us breathing room to address the issues in 
a more comprehensive manner. It's critically important to the 
sustainability of the program and to its continued place on the 
public policy agenda. Chairman Martin has spoken to the issue 
forcefully. And my Federal and State colleagues have addressed, 
and will address, that issue here today.
    In considering reform, we would do well to take a page from 
the Hippocratic Oath and first resolve to do no harm. Given the 
size, scope, and complexity of the current mechanisms, this is 
a considerable challenge. For example, high-cost loop support 
for rural companies is currently determined based on legacy 
investments; or, put another way, embedded costs. We need only 
look to Detroit to see the problems which legacy decisions can 
present for companies looking to move into the 21st century and 
to compete with companies which are not saddled with those 
decisions; decisions which seemed appropriate at the time, but 
now may create a challenge, a significant burden of competitive 
disadvantage. So, we need to encourage companies to look to the 
future rather than to a legacy past. But if we decide to sever 
those links to a legacy past, we also have a responsibility to 
offer a reasonable migration path to those companies which have 
based their business plans on that model, which we now may 
consider less relevant.
    Another example may be found in the challenge presented by 
the growth in the number of competitive ETCs, primarily 
wireless companies. The FCC's guidelines on CETC designations, 
adopted in 2005 in response to a recommendation of this Board, 
define criteria and urge states to apply a public-interest 
standard. In Indiana, we've taken this challenge seriously. 
Other states have chosen a more permissive approach or, as is 
the case in North Dakota, were restricted in their ability to 
review ETC applications by a court decision. Those 2005 
guidelines should be made mandatory, and, as states, we need to 
assume our share of responsibility.
    At the same time, there are many rural areas where multiple 
wireless providers are active, where there is already 
competition. We need to make sure that we don't inadvertently 
advantage one company over the others which entered that market 
based on a competitive unsubsidized model.
    Lurking just around the corner is the question of broadband 
buildout. The problem is that there is relatively little 
granular data which would tell us what form and how much should 
be devoted to buildout in those high-cost and very high-cost 
areas. Commissioner Copps has spoken to the need for better, 
more robust data, and I share and echo his concern.
    I believe that states have an important and potentially 
growing partner role with the FCC as joint stewards in 
implementing your vision and seeing to it that Universal 
Service funds are appropriately disbursed, the legitimate needs 
are met, but that accountability and performance are audited 
and demanded.
    Again, I thank you for the privilege of sharing our 
thoughts with you this morning. I look forward to any questions 
you may have.
    [The prepared statement of Mr. Landis follows:]

       Prepared Statement of Hon. Larry S. Landis, Commissioner, 
                 Indiana Utility Regulatory Commission
    Good morning, Mr. Chairman, Co-Chairman Stevens, and members of the 
Committee. I am Larry Landis, and I am a member of the Indiana Utility 
Regulatory Commission. I serve on the Telecommunications Committee of 
the National Association of Utility Regulatory Commissioners, NARUC, 
and was Vice Chair of NARUC's Intercarrier Compensation Task Force. I 
am also a member of the Federal-State Joint Conference on Advanced 
Telecommunications Services; and most pertinent to today's hearing, a 
member of the Federal-State Joint Board on Universal Service.
    Thank you for the opportunity to address the critical issues 
relating to Universal Service from the perspective of state regulators. 
I want to underscore that I do not necessarily represent their views, 
which like those of this body, sometimes diverge.
    Given today's time constraints, I would start by referring you back 
to the March 2, 2006 testimony of my colleague Tony Clark, Chairman of 
the NARUC Telecommunications Committee and of the North Dakota Public 
Service Commission, before this Committee almost exactly a year ago 
today. Commissioner Clark's observations then are still relevant today.
    Commissioner Clark characterized Universal Service as being at a 
crossroads. Among the questions he posed:

   Should broadband infrastructure and services be explicitly 
        funded?

   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 be funded in high-cost markets?

   On what cost basis should carriers be reimbursed?

   How many access lines per customer--or household--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 is there some other configuration 
        which makes sense?

    Today we speak more about the distribution side of Universal 
Service. However, I do want to acknowledge the bipartisan effort which 
went into framing a solution to funding of Universal Service which was 
incorporated into the proposed Communications Act of 2006 last year, 
and which I understand is incorporated into a free-standing bill again 
this year. The latitude which you incorporated into that plan from a 
funding perspective was useful, commendable, and I believe enjoys broad 
support from state regulators.
    I will limit my remarks about the important issue of the 
significant growth in the size of the high-cost funds. I share the 
opinion of my colleagues on the need for a cap on expenditures to give 
us breathing room to address the issues in a more comprehensive way. It 
is critically important to the sustainability of the program and to its 
continued place on the public policy agenda. Chairman Martin has spoken 
to this issue forcefully and my Federal and state colleagues have 
addressed and will address that issue here today.
    In considering reform, we would do well to take a page from the 
Hippocratic oath and first resolve to do no harm. Given the size, scope 
and complexity of the current mechanisms, that is a considerable 
challenge.
    For example, high-cost loop support for rural companies is 
currently determined based on legacy investments, or put another way, 
embedded costs. We need only look to Detroit to see the problems which 
legacy decisions can present for companies which are looking to move 
into the 21st century and to compete with companies which are not 
saddled with those decisions. Those decisions seemed appropriate at the 
time, but now create a significant burden of competitive disadvantage.
    Increasingly, facilities-based competition is coming to many rural 
local exchange companies. It is coming not only in the form of mobile 
wireless, but also VoIP delivered by cable modem, fixed wireless and 
broadband over power lines. But that competition is taking root 
primarily in the villages, communities, towns and small cities in those 
rural service areas. Often it doesn't reach out to the ``truly rural'' 
areas served by rural LECs.
    We need to encourage incumbents--indeed, all providers--to look to 
the future rather than to a legacy past. But if we decide to sever 
those links to a legacy past for the RLECs, we also have a 
responsibility to migrate those companies which have based their 
business plans on a model which we may now consider less relevant. And 
we need to focus support in those areas where the costs are higher by 
an order of magnitude, and which in many cases are not contestable.
    Another example may be found in the challenge presented by the 
growth in the number of competitive ETCs, primarily wireless companies. 
Some will assert that this growth is symptomatic of the problems of 
Universal Service. Others will argue that this is a reflection of the 
dynamic growth of the wireless sector. Regardless, the wireless sector 
has been the primary contributor to growth in the high-cost funds.
    Under Section 214(e) of TA 96, State Commissions are delegated to 
help administer the Universal Service Fund by designating those 
companies which are eligible to receive support (Eligible 
Telecommunications Carriers, or ETCs) in each state. The FCC's 
guidelines on ETC designations and certifications, adopted in 2005 in 
response to a recommendation of this Board, define criteria and urge 
states to apply a public interest standard.
    In Indiana, we have taken this charge seriously by fully adopting 
these guidelines and applying them to each new ETC applicant and each 
ETC who seeks annual certification for Federal Universal Service Funds. 
Other states have chosen a more permissive approach or--as is the case 
in North Dakota--were restricted in their ability to review ETC 
applications by a court decision. Those 2005 FCC guidelines should be 
made mandatory, and as states we must shoulder our share of 
responsibility.
    At the same time, there many rural areas where multiple wireless 
providers are active. Some companies have entered some rural markets 
based at least in part on the assumption that they could receive 
Universal Service support. Other companies have entered rural markets 
based on a competitive, unsubsidized model. One proposal would hold 
reverse auctions in those areas where there are multiple wireless ETCs, 
with wireless ETC funding distributed on a winner-take-all basis. Where 
there is already competition, we need to make sure we don't 
inadvertently advantage one company over its competitors, which entered 
that market based on their assumption that it was contestable. Put 
another way, we need to make sure we are not inadvertently making it 
more difficult to compete, thereby perhaps reducing competition while 
reforming Universal Service subsidies.
    Lurking just around the corner is the question of rural broadband 
buildout. The problem is that there is relatively little granular data 
which would tell us which of several solutions would be most cost-
efficient in addressing the needs of the unserved in any given 
geographical area. Once we know that, we are in a far better position 
to determine what form and how much should be devoted to buildout in 
those high-cost and very high-cost areas.
    Where will tax abatements be sufficient incentive to encourage 
buildout? Where are costs so high that only a straight subsidy will 
work? In the latter cases, where the market isn't there, who will 
choose which technology is selected, and how large should the subsidy 
be? Commissioner Copps has spoken to the need for better, more robust 
data, and I share his concern.
    I believe the states have an important and potentially growing 
partner role with the FCC as joint stewards in implementing your 
vision, and in seeing to it that Universal Service funds are 
appropriately deployed, that legitimate needs are met, but that 
accountability and performance are audited and demanded.

    The Chairman. I thank you very much, Commissioner Landis.
    And now, may I call upon a member of the Vermont Public 
Service Board, the Honorable John D. Burke.

  STATEMENT OF HON. JOHN DOWNES BURKE, BOARD MEMBER, VERMONT 
  PUBLIC SERVICE BOARD; MEMBER, FEDERAL-STATE JOINT BOARD ON 
                   SEPARATIONS; AND MEMBER, 
         FEDERAL-STATE JOINT BOARD ON UNIVERSAL SERVICE

    Mr. Burke. Thank you very much, Mr. Chairman, Mr. Vice 
Chairman, members of the Committee. Thank you for giving us a 
chance to express to you our views, our beliefs, our desires, 
and our hopes for the Fund, going forward.
    There's no doubt that the stated purpose of the Universal 
Service Fund, as stated in section 254(b)(3), was to provide 
comparable services at comparable rates to the higher-cost 
areas of America. I certainly hope that as we go forward we try 
to remember that is the primary goal that all of us have in 
mind.
    The task becomes daunting. And one of the main reasons it's 
become daunting is in order to try to further that goal, the 
Fund has become substantially larger and more inclusive than it 
might have been originally anticipated to be. There's a slide 
and a graph, that we also used at the en banc meeting, that 
gives you an idea of where the pressure on the Fund really 
presently comes from.
    Commissioner Tate mentioned the fact that there is a 
substantial growth in the CETC side of the Fund, the 
competitive side of the Fund. If you look at that growth, you 
can see that it's risen to an amount of almost a billion 
dollars. The idea of the growth in CETC does not end there. 
There are estimates and reasonable projections, part of which 
were part of our en banc presentation, that would indicate that 
by 2009 this particular portion of the Fund may have risen to 
as much as $2.5 billion, making the Fund no longer a $4 billion 
project, but a $6.5 billion project. It's the challenge of all 
of us--you, as legislators, us, as members of the Joint Board, 
recommending to the FCC, and, of course, the FCC--to do what we 
can to try to take pressure off that fund to the point that we 
are able to serve the people that need to be served, as defined 
in 254(b)(3), without getting to the point of the Fund getting 
so large that it implodes on itself.
    The graph--it's not meant to be exact; obviously, estimates 
are estimates--but you can see that the pattern of growth is 
actually just following the trend that's existed for the past 4 
years, up until today, and going forward for the next 2.
    I also would like to take this opportunity to indicate that 
I have proposed a cap on the CETC side of the Fund, presumably 
with inflation adders to allow for the Joint Board and the 
Congress to consider alternatives that would take the pressure 
off the Fund and still allow it to handle its intended purposes 
under section 254(b)(3). I would hope that you would look at 
these alternatives and work with us in formulating methods of 
going forward to both control the Fund and allow it to succeed.
    As we consider these alternatives, though, we should 
understand that there are other ideas and other concerns that 
exist with regard to supported services under the Fund. I agree 
with Commissioner Copps that broadband, especially in rural 
America, those areas that are harder to serve, is truly a 
crying need. In my own State, although it would appear that 
we're about 70-plus percent served by broadband, truthfully we 
only have one really major metropolitan area. If we remove 
Burlington from the mix, we really are less than 50 percent. 
For people today in rural areas, trying to do business on the 
web, or trying to make a living on the web, trying to keep 
informed on the web, broadband is truly a necessity, and I 
really believe that, as a supported service, it could move 
forward.
    I applaud Senator Stevens for his idea and his concerns 
expressed with regard to broadband in his bill. I think that we 
have to move forward in broadband in ways that are creative, 
maybe with matching grants or in ways, with the states, that 
would allow the states to help target those areas in broadband 
most in need, and also help limit the size and the pressure on 
the Fund by having the states participate with a matching grant 
program, which would mean that they would be more likely to be 
targeting exactly the areas that are most in need, because 
their dollars would be invested, as well.
    I thank you for the opportunity to have addressed you. I 
appreciate the fact that you have us here today. And I hope 
that all of us move forward in a cooperative way to try to do 
what we can for those areas of America that need to be served 
both by telephone service and by advanced services.
    Thank you.
    [The prepared statement of Mr. Burke follows:]

  Prepared Statement of Hon. John Downes Burke, Board Member, Vermont 
Public Service Board; Member, Federal-State Joint Board on Separations; 
       and Member, Federal-State Joint Board on Universal Service
I. Introduction
    I thank the Committee for the invitation to speak today. Federal 
Universal Service policy is of great importance to the Nation, and 
particularly to states, like Vermont, where it is expensive to provide 
telephone service.
    To introduce myself, I have been a Member of the Vermont Public 
Service Board for 6 years. I have served on the Federal-State Joint 
Board on Separations since 2003. Last year I was also appointed as a 
Member of the Federal-State Joint Board on Universal Service. With 
Commissioners Baum of Oregon and Landis of Indiana, I have also served 
as one of five state NARUC Commissioners who oversaw the industry's 
development of the current Missoula Plan.
II. The Statute
    The existing Universal Service law, Section 254, was passed in 
1996. It was a significant step forward in establishing universal 
availability of telephone services in this country. Section 254 of the 
Act repeatedly imposes the duty on both the FCC and the Universal 
Service Joint Board to ``preserve and advance'' universal service.\1\ 
More specifically, the statute lists six goals, some of which apply 
primarily to distribution of Universal Service support, and some of 
which apply to collection. Notable in this list is subdivision (3), 
which requires that rural ``access to telecommunications and 
information services,'' including ``advanced telecommunications and 
information services'' be ``reasonably comparable to those services 
provided in urban areas.'' It also requires that the rural rates 
charged be ``reasonably comparable to rates charged for similar 
services in urban areas.''
---------------------------------------------------------------------------
    \1\ See 47 U.S.C.  254(b), 254(b)(4), 254(b)(5), 254(d), 254(f).
---------------------------------------------------------------------------
    Reasonably comparable rates is the heart of the high-cost support 
system, and the courts have taken this goal seriously. Twice, the Court 
of Appeals in Denver has remanded FCC decisions because the FCC had not 
shown how its programs satisfy that goal.\2\ Developing a system in 
compliance with Section 254 should be an important priority for the 
Joint Board and the FCC.
---------------------------------------------------------------------------
    \2\ Qwest Comm. Int'l Inc. v. FCC, 398 F.3d 1222, 1235 (10th Cir. 
2005).
---------------------------------------------------------------------------
A. Challenge--Competition and the Growth of CETCs
    The most urgent problem for Universal Service is the rapid growth 
of funding for competitive telecommunications carriers. There is 
nothing inherently wrong with providing support to competitors, but our 
current policy is on a self-destructive path that could jeopardize the 
entire Universal Service system, and it is my opinion that subsidizing 
robust competition was never an underlying goal of this Fund.
    Our current policy was adopted to promote ``competitive 
neutrality,'' a seventh principle that the first Joint Board added to 
the list of goals for universal service. As we have applied it, this 
principle has led to the ``equal payment'' rule. Under this rule, 
carrier ``A'' who is an Incumbent Eligible Telecommunications Carrier 
(IETC), and carrier ``B,'' who is a Competitive Eligible 
Telecommunications Carrier (CETC), receive equal support per line. This 
was seen as neutral, even though only carrier A must submit its costs.
    This equal payment rule was originally conceived as a way to 
transfer support when a CETC wins a customer from an IETC. Review of 
the record shows that the Joint Board did not anticipate that 
households with one carrier and one telephone line would begin to have 
two or more carriers and multiple cellphone lines in addition to the 
classical Plain Old Telephone Service (POTS) line. Today, each of these 
lines may draw a quota of Universal Service support.
    The equal payment rule never acknowledged the effects of economies 
of scale, one of the basic characteristics of networks. When two 
carriers divide a market that previously was served by one, the total 
cost of serving that area can go up, not down, particularly if the area 
served is high-cost and rural. As Chairman Martin has repeatedly 
pointed out, our current policy has the effect of supporting 
construction of multiple networks in areas where constructing the first 
network has been very expensive. This has understandably produced 
explosive growth in the support provided to Competitive ETCs. As 
Commissioner Tate's slides show, this support has been growing at 101 
percent per year for the last 4 years, and is approaching $1 billion. 
Moreover, the number of new CETC applications suggests the growth will 
continue into next year and beyond. Even though support to ILECs has 
held fairly level during this period, rapid CETC growth creates risk 
for the entire Universal Service mechanism.
    I have recommended an immediate CETC cap for all carriers whose 
support depends on the equal payment rule. I recommended that the cap 
apply by study area, so that areas without CETC support would remain 
that way until a new CETC support system is devised. In areas where 
there is already some CETC support, that amount would be divided among 
the competitive carriers that obtain designations.
    Over the longer term, it is imperative that we develop clearer 
policies about how we expect existing networks to be supported in high-
cost areas, how many networks we are willing to support, and how they 
will be selected.
B. Challenge--Uneven Support
    One of the earliest decisions made after the 1996 Act passed was to 
create separate ``tracks'' for the Universal Service provided to rural 
and so-called ``nonrural'' carriers. That decision has continued to 
this day.
    Today, rural and nonrural carriers have largely distinct support 
systems. The mechanisms differ in many significant ways, but the 
overall effect is that support for larger nonrural carriers is 
significantly less than support for smaller ``rural'' carriers. Today 
the average rural carrier receives $13.68 per line per month in high-
cost support. The average nonrural customer receives 66 cents per line 
of high-cost support, and most of that goes for interstate cost and not 
for local rate reductions. In sum, customers of large carriers receive 
about five cents of high-cost support for every dollar paid to benefit 
the customer of rural companies, not due to differences in need, but 
rather, to the size of the company that serves them.
    This would be fine if nonrural carriers had no rural customers. In 
fact, the match between ``rural carrier'' and ``rural customer'' works 
fairly well in the Midwest where there are hundreds of rural companies. 
But the equation between ``rural carrier'' and ``rural customer'' does 
not work well in New England or in the Appalachian region, where Bell 
companies still serve large rural areas.\3\ In truth, millions of rural 
customers are served by larger carriers. Among the so-called 
``nonrural'' companies, more than one customer in five is actually a 
rural customer.\4\
---------------------------------------------------------------------------
    \3\ The converse problem also exists. A few so-called ``rural 
carriers'' actually serve low cost suburbs.
    \4\ Vicki M. Hobbs, and John Blodgett, The Rural Differential: An 
Analysis of Population Demographics in Areas Served by Rural Telephone 
Companies, Rural Policy Research Institute, 1999 at 2 (21 percent of 
large carrier customers are rural, based upon 1990 census).
---------------------------------------------------------------------------
    The problem bites most deeply in states, like Maine, Montana, 
Wyoming and Vermont, where there are no large cities that can subsidize 
rural areas through retail rate averaging. These states suffer from a 
double disability: the absence of large cities eliminates the 
possibility of averaging high and low cost areas to develop lower 
average rates overall; and the absence of smaller ``rural'' telephone 
companies reduces the support available to rural customers.
    The disparity between rural and nonrural companies has only become 
worse over time. Rural customers served by large companies today are 
not only likely to have higher rates, they probably have less access to 
broadband as well.
C. Challenge--Broadband
    Broadband is probably the most important current challenge for 
universal service. Section 254 directs that access to advanced services 
should be provided in all regions of the Nation. Yet many states have 
large areas where broadband is available only by satellite. It has been 
widely reported that the United States is falling behind, year by year, 
in the percentage of our citizens who buy broadband.
    The Joint Board should give serious consideration to adding 
broadband to the official list of supported services. Section 253 gives 
us detailed guidance for this decision. The statute recognizes that 
``Universal Service is an evolving level of telecommunications 
services.'' We must consider whether such broadband telecommunications 
services ``are essential to education, public health, or public 
safety'' and whether ``a substantial majority of residential 
customers'' have actually subscribed.\5\ As Consumer Advocate Gregg has 
pointed out to us, a majority of residential customers may soon 
actually subscribe to broadband.
---------------------------------------------------------------------------
    \5\ See 47 U.S.C.  254(c)(1).
---------------------------------------------------------------------------
    One possible problem is that Section 254 allows us to add only 
``telecommunications services'' to the existing list of supported 
services. The FCC has declared that several kinds of broadband Internet 
services are actually ``information service,'' not ``telecommunications 
service.'' So, even though Section 254 tells us explicitly that 
``access to advanced telecommunications and information services should 
be provided in all regions of the Nation,'' we will need to examine 
carefully whether these FCC rulings bar use of Section 254 as a vehicle 
to promote broadband.
    A second possible problem is that including broadband in the 
definition of Universal Service could inadvertently disqualify some 
existing carriers who provide ``POTS'' or ``Plain Old Telephone 
Service.'' Section 254 does not specifically anticipate allowing 
funding for services that do not meet the minimum requirements for 
eligibility. We would need to move carefully to allow existing carriers 
a reasonable transition period to meet any new requirements.
    Another concern is that to include broadband in the definition of 
Universal Service could greatly expand the size of the high-cost fund. 
This is a serious concern, but we should not assume that broadband 
services will be supported in the same ways that we now support POTS.
    The Joint Board has recently sought comment on the use of auctions, 
and we are examining the potential for newer technologies to better 
target existing support. I believe that we should also examine matching 
grants. Many Federal agencies, from Transportation to Education, today 
promote good state policy through the use of such matching grants. If 
applied to broadband, a system of matching grants could easily be 
controlled fiscally by implementing an annual funding cap. Also, 
matching grants would be most likely to be effective. States generally 
know the most about their own broadband needs, and a mechanism that 
required a state matching share would be very likely to focus support 
in areas where a problem really exists.
    Earlier this winter, Vermont Governor James Douglas outlined to our 
state legislature an initiative that would authorize state bonding to 
provide broadband in unserved areas. A Federal matching grant for 
broadband deployment would allow us to stretch our limited state 
dollars. It would greatly assist Vermont and other states that are 
still struggling to provide a first broadband connection to many of 
their citizens.
    I also agree with Commissioner Copps that data quality is a problem 
for broadband. Data indicating which Zip Codes have broadband is 
misleading. Knowing that broadband is available somewhere within a zip 
code is little solace to an individual customer who can't buy it from 
anyone. The Joint Board should be collecting data on broadband at a 
much finer scale than it does now, and the technology clearly exists to 
do this.
D. Challenge--Limiting Fund Size
    I have mentioned the need to equalize support for all rural 
customers and my desire to expand support to broadband. I also want to 
emphasize that a rational Universal Service policy can achieve these 
goals without unduly increasing the size of the national Fund, possibly 
without increasing it at all.
    The existing Universal Service system has not been designed as a 
single system. Rather, it is a series of eight separate programs that 
were created incrementally over two decades.\6\ A few programs have 
been modified, but none has ever been replaced. Each new program 
typically focused on some cost component or company characteristic that 
seemed relevant at the time.\7\ But we have never taken a comprehensive 
and multi-jurisdictional view of carrier costs, and we have never 
replaced even one older program.
---------------------------------------------------------------------------
    \6\ The first Universal Service program was the High Cost Loop 
program, and was created in 1984.
    \7\ For example, the High Cost Loop program addressed a 1984 change 
in the jurisdictional separation of loop costs. Today this program 
exceeds $1 billion, but there is no similar program for the interoffice 
transport costs of rural companies, costs that for some companies can 
be even larger than loop costs. Likewise, the Interstate Access Reform 
and Interstate Common Line Support programs were created in 2000 and 
2001 to replace revenues lost through reform of interstate toll access 
rates.
---------------------------------------------------------------------------
    Another problem with the existing system is that it provides the 
most support to the smallest companies, not necessarily those with the 
highest costs. The most obvious example today is Local Switching 
Support, which does not even attempt to limit support to carriers with 
high costs.\8\
---------------------------------------------------------------------------
    \8\ This support mechanism was created in 1987 when the FCC made a 
change affecting the separation of costs affecting the cost recovery 
for local ``class 5'' switches. Originally known as ``DEM weighting,'' 
this mechanism allowed ILECs with 50,000 or less access lines to 
allocate a higher percentage of their local switching costs to the 
interstate jurisdiction. The greatest benefit went to ILECs that 
already had the largest interstate usage and to the ILECs that had the 
fewest lines, according to the following table.

    Number of Access Lines                      Weighting for 
Interstate Dial
              in Study Area            Equipment Minutes Separations 
Factor
    ------------------------------------------------------------------
--------
                 0 to 10,000                                            
  3.0
    ------------------------------------------------------------------
--------
            10,001 to 20,000                                            
  2.5
    ------------------------------------------------------------------
--------
            20,001 to 50,000                                            
  2.0
    ------------------------------------------------------------------
--------
            50,001 or more                                               
1.0

    See 47 C.F.R.  36.125(f ). While the FCC's rules for this program 
no longer explicitly differentiate based upon size, the program's 1996 
support parameters were frozen in place by a reformulation that took 
effect on January 1, 1998, thereby indefinitely perpetuating the size-
based distinction. See 47 C.F.R.  36.125(f ).
---------------------------------------------------------------------------
    If we could design a comprehensive system, we could adopt a single 
definition of total cost, and we could find new efficiencies by 
eliminating support to carriers that do not have high overall costs.
    As I mentioned above, matching grants can be another tool to 
maintain fiscal discipline. Federal matching programs in other policy 
areas routinely live within their budgets.
    For these reasons, I believe that the existing fund size could be 
reduced, or we could broaden the scope of the Fund to cover broadband, 
without unduly harming rate payers and without violating any of the 
principles contained in Section 254(b).
E. Challenge--Intercarrier Compensation and Separations
    I mentioned above that I have been privileged to serve on both 
Joint Boards and the NARUC Intercarrier Compensation project. This has 
convinced me that Universal Service is intimately tied both to 
separations and to intercarrier compensation.
    Separations has had a particularly close historical relationship to 
universal service. Before 1996, Universal Service programs were enacted 
in the form of separations rules. Although these programs were designed 
to reduce or avoid an increase in local rates, they acted through 
separations rules and created inter-jurisdictional cost transfers that 
ultimately raised interstate access and toll rates.\9\ Even more recent 
programs, like the High Cost Modeling Program that applies to larger 
carriers, rely on separations factors to avoid the double-recovery of 
costs that have been separated to the interstate jurisdiction.\10\
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    \9\ The High Cost Loop (1984) and DEM Weighting (1987) programs 
were both codified in separations rules. Inter-jurisdictional cost 
transfers still exist. See, e.g., 47 C.F.R.  36.603 which describes 
the High Cost Loop program as a ``loop cost expense adjustment.''
    \10\ See 47 C.F.R.  54.309 (support equals 76 percent of 
difference between cost and benchmark).
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    Universal service also has a close historical relationship to 
intercarrier compensation. Several Universal Service programs were 
created solely as components in intercarrier compensation reforms. For 
example, the CALLS program, adopted by the FCC in May of 2000, reformed 
interstate access rates for large ``price cap'' carriers. The following 
year, 2001, the Commission adopted the ``MAG'' order that did 
essentially the same thing for smaller ``rate-of-return'' carriers. 
Each order created a new Universal Service mechanism. This year those 
programs--``Interstate Access Support'' and ``Interstate Common Line 
Support''--will cost $1.9 billion.
    The current version of the Missoula Plan, now pending before the 
Commission, would add another layer. It proposes additional FCC 
payments of $2.5 billion to finance the reform of new kinds of 
intercarrier payments, such as intrastate access and reciprocal 
compensation.
    The close interaction among these programs shows why two Joint 
Boards sometimes find it difficult to identify comprehensive solutions. 
One can seldom make a recommendation on any of the three topics without 
affecting the other two. Perhaps Congress should consider a new and 
more comprehensive mechanism for cooperation between the FCC and the 
states, particularly in policy areas requiring coordination of rates 
and cost assignments.
F. Improving the Uses of USF Dollars
    Some carriers have criticized the existing support mechanisms for 
being insufficiently specific geographically. I agree that more 
detailed targeting of support for competitive carriers could possibly 
increase their investment in underserved areas. However, I think the 
Joint Board and the states have adequate tools now to address this 
issue. The Joint Board is looking at proposals from industry that would 
mandate greater disaggregation of existing support, with this result in 
mind.
    We should not forget that states already have some tools to 
encourage carriers to invest in unserved areas. States annually must 
certify the proper use of Universal Service support. These 
certifications offer states a chance to review where Federal funds have 
been spent, and some states have required detailed investment plans as 
a condition of annual certification.\11\
---------------------------------------------------------------------------
    \11\ Vermont also has used another tool, the designation process, 
to promote rural investment. Vermont's sole CETC has a designation as 
ETC that expires from time to time. Before the designation is extended, 
the Public Service Board reviews the carrier's investment history and 
the geographic areas to which it has extended service.

    The Chairman. I thank you very much, Mr. Burke.
    And now, I'm pleased to yield to my colleague, Senator 
Rockefeller.

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

    Senator Rockefeller. Thank you, Mr. Chairman.
    I'm very pleased to welcome Bill Jack Gregg back again 
before the Committee. He has served, with the distinction that 
is his, as the Director of the Consumer Advocate Division of 
the West Virginia Public Service Commission, since the office 
was created by a particularly brilliant Governor who happened 
to be presiding at that time.
    [Laughter.]
    The Chairman. You talk about yourself?
    Senator Rockefeller. Of course.
    Over the years, he's provided--well, look, he's a visionary 
as to how this whole thing ought to work. He's spent his life 
on it. We're lucky to have him before us.
    Welcome, sir.

         STATEMENT OF HON. BILLY JACK GREGG, DIRECTOR,

                  CONSUMER ADVOCATE DIVISION,

           PUBLIC SERVICE COMMISSION OF WEST VIRGINIA

    Mr. Gregg. Thank you. Thank you, Mr. Chairman, Mr. Vice 
Chairman, members of the Committee.
    As you've heard from the other speakers before me, there is 
amazing agreement amongst the members of the Joint Board as to 
what the current problems are with the high-cost fund. The 
current system is unsustainable. It's inconsistent, and 
incredibly complex. It's growing out of control. It's 
distributed poorly.
    The sad fact is that the advent of competition into 
telecommunications has actually caused a substantial increase 
in the size of the high-cost fund, as you've seen visually on 
the slides presented by Commissioner Tate. This has increased 
the burden on all consumers, and it didn't have to be this way.
    As noted in both the House and Senate reports on the 
Telecommunications Act of 1996, competition was supposed to 
lower the cost of Universal Service as providers competed for 
the Universal Service subsidy. The FCC initially kept true to 
the intent of the Act. Universal Service high-cost support, as 
modified by the Commission for the advent of competition, was a 
technologically and competitively neutral zero-sum game. That 
is, the Universal Service subsidy was portable to whichever 
eligible telecommunications carrier won the customer. The ETC 
gaining the customer won the subsidy. The ETC losing the 
customer lost the subsidy. The Commission's approach was upheld 
by the Fifth Circuit Court of Appeals in the case of Alenco 
Communications versus the FCC in 2000.
    Unfortunately, without explanation, the Commission 
abandoned its rulemaking proceeding to define ``captured'' and 
``new lines'' and deleted a section of its rules which had 
reduced support to an incumbent when a competitive ETC won a 
customer. As a result, the Commission began providing support 
for all lines of all ETCs serving high-cost areas.
    In 1999, this did not seem like a big deal. Unfortunately, 
the unforeseen consequences of these actions have been 
dramatic. By deciding to support all lines of all ETCs in high-
cost areas, the Commission opened the door to supporting 
multiple wireless networks in high-cost areas, which supplied 
supplementary, rather than substitute, services. Far from being 
a zero-sum game in which ETCs compete for the Universal Service 
subsidy while the size of the Fund stays relatively the same, 
the current system is a no-losers support system in which all 
ETCs receive support for all lines they serve in high-cost 
areas, no matter how duplicative or costly this additional 
support may be.
    Under the current system, far more than affordable access 
to the telecommunications network is being provided. The high-
cost fund now provides support to multiple networks in high-
cost areas, where, previously, none had been able to exist 
without an explicit subsidy. The current system of providing 
support to all lines of all ETCs in high-cost areas must be 
ended if we are to have a rational and sustainable high-cost 
support system. In fact, when multiple providers are able to 
offer service within the same area, it raises the question of 
whether that area should continue to receive high-cost support 
at all. Because of the complex, disparate, and often unrelated 
bases of the different high-cost support mechanisms, and the 
rapidly escalating size of the high-cost fund caused by 
increasing payments to competitive ETCs, the Joint Board has 
begun to look at new alternatives to bring rationality back to 
the high-cost fund, as you have heard this morning.
    Unfortunately, while we contemplate these proposals, the 
Fund will continue to grow to an ever more unsustainable size. 
The high-cost fund has increased by a billion dollars, as 
you've heard, over the past 3 years, driven by new payments to 
competitive ETCs. In addition, the FCC currently has before it 
pending over 30 applications for ETC status from wireless 
carriers, including two from Cingular for the states of 
Virginia and Georgia. Cingular is the largest wireless provider 
in the United States. The FCC has estimated that, if it grants 
all of the ETC applications pending before it today, the high-
cost fund will rise to five and a half billion dollars by 2009. 
And if Cingular continues to seek ETC status, Verizon Wireless, 
the second largest wireless provider, will be forced to follow 
suit. The result will be a high-cost fund surpassing $6 billion 
and approaching $7 billion. A fund of this size will not only 
impose unacceptable burdens on American consumers, it will also 
severely limit our ability to add new services, such as 
broadband, to the list of services supported by Universal 
Service.
    In order to be stable and sustainable in the long-term, the 
Universal Service Fund must be configured like a pyramid. It 
must have a broad and stable base of contributions at the 
bottom and a narrow, but sufficient, distribution of support at 
the top. The current Universal Service Fund requires work on 
both ends of the structure. Issues related to the contribution 
base must be resolved. Since all benefit from Universal 
Service, all should contribute. In addition, the limited 
resources of the Fund must be properly distributed and targeted 
to carry out the purposes of the Act. In order to continue the 
public policy success of the Universal Service Fund, we must 
support access, not excess.
    Thank you very much.
    [The prepared statement of Mr. Gregg follows:]

    Prepared Statement of Hon. Billy Jack Gregg, Director, Consumer 
     Advocate Division, Public Service Commission of West Virginia
    My name is Billy Jack Gregg and I am the Director of the West 
Virginia Consumer Advocate Division. My office is charged with the 
responsibility of representing West Virginia utility ratepayers in 
state and Federal proceedings which may affect rates for electricity, 
gas, telephone and water service. My office is also a Member of the 
National Association of State Utility Consumer Advocates (NASUCA), an 
organization of 43 state utility consumer advocate offices from 41 
states and the District of Columbia, charged by their respective state 
statutes with representing utility consumers before state and Federal 
utility commissions and before state and Federal courts.\1\ I am a 
former member of the Board of Directors of the Universal Service 
Administrative Company (USAC) and the Rural Task Force, and have served 
on the Federal-State Joint Board on Universal Service since March 2002. 
I greatly appreciate the opportunity to testify at this legislative 
hearing on the challenges currently facing the Federal Universal 
Service Fund (USF or the Fund).
---------------------------------------------------------------------------
    \1\ NASUCA has the unique position of representing consumers in 
states which benefit from universal service, as well as consumers who 
must pay the cost of Universal Service. In most respects, my testimony 
reflects the positions taken by NASUCA, although there are some areas 
where NASUCA has not yet reached a consensus position.
---------------------------------------------------------------------------
I. Background
    The most important issue facing the Federal USF today is adapting 
the Fund to a competitive environment and ensuring its long-term 
sustainability. As the telecommunications market changes rapidly, we 
must ensure that the USF is sufficient, predictable and affordable for 
all parties involved: fund recipients, telecommunications providers and 
consumers. Before I address the current problems facing the USF, I 
believe it is appropriate to review the Fund's achievements since the 
passage of the Telecommunications Act of 1996 (the Act).
    The nation's commitment to Universal Service was codified in 
Section 254 of the Act. The purpose of Section 254 was to ensure that 
all Americans have access to affordable, quality telecommunications 
services.\2\ Based upon the requirements of Section 254, the FCC, after 
consultation with the Federal-State Joint Board on Universal Service, 
created a new Federal USF in 1997 containing several distinct support 
mechanisms. Total USF funding has grown from $1.8 billion in 1997 to 
approximately $7.2 billion during 2007. While these support amounts are 
large, they must be kept in perspective. Total telecommunications 
revenues in the United States last year were in excess of $230 billion. 
By annually collecting and redistributing approximately 3 percent of 
these total revenues, we are able to: provide affordable access to 
phone service in all high-cost areas of the nation; support low-income 
customers; assist rural healthcare providers; and connect all 
classrooms to the Internet. Moreover, all states and territories 
benefit from the USF as shown on Attachments 1 and 2.\3\ That's quite 
an accomplishment, and one that everyone involved in the USF should be 
proud of as we move forward to ensure the long-term sustainability of 
the Fund.
---------------------------------------------------------------------------
    \2\ Section 254 of the Act enshrined and expanded Universal Service 
principles which had been followed by the FCC for decades.
    \3\ Attachments 1 and 2 show actual disbursements to states during 
2005 under each of the Federal USF support mechanisms. Attachment 1 
ranks the states based on total support received. Attachment 2 
considers the number of access lines in each state, and ranks the 
states based on monthly support received per line.
---------------------------------------------------------------------------
    However, as with all things, somebody must pay for the Fund's 
benefits. That somebody is the American telecommunications consumer in 
every state and territory. Although all states benefit from the USF, 
some states pay far more into the Fund than they receive back in 
support, as shown on Attachments 3 and 4.\4\ The concept of 
sustainability encompasses both the size of the Fund and the relative 
burden it imposes. In order to ensure that the USF is sustainable for 
the long-term, we must ensure that the USF remains affordable for the 
individual consumer and for the payer states. As I will discuss in 
detail later, the biggest threat to the long-term sustainability of the 
USF is the burden imposed by the unrestrained growth of the High Cost 
Fund.
---------------------------------------------------------------------------
    \4\ Attachments 3 and 4 show the same disbursements as Attachments 
1 and 2, but also include the USF payments made by consumers in each 
state during 2005. Attachment 3 ranks the states based on total net 
support received, while Attachment 4 ranks the states on net per line 
support received. Negative numbers indicate that states paid more in 
USF assessments than they received in USF benefits.
---------------------------------------------------------------------------
II. The Long Term Sustainability of the Universal Service Fund
    As previously mentioned, the Federal USF has grown from $1.8 
billion to $7.2 billion since the Act was passed. During this same time 
the USF assessment factor, which is paid by all local, long distance 
and wireless customers in the United States based on interstate 
revenues, has more than doubled, from less than 5 percent to over 11 
percent.\5\ Almost everyone who addresses the issue of the long-term 
sustainability of the USF has the same prescription: broaden the 
contribution base and properly control the distribution of funds from 
the USF. However, depending on the interest group making the 
recommendation, the actual method of broadening the base and 
controlling the distribution of funds can vary wildly.
---------------------------------------------------------------------------
    \5\ The assessment factor was 9.7 percent during the first quarter 
of 2007 and is expected to rise above 11 percent for the second 
quarter.
---------------------------------------------------------------------------
    The FCC and Congress have wrestled with the issue of the funding 
base for over 4 years. Although numerous ideas and proposals to broaden 
the contribution base have been brought forth, none have been 
implemented. Many parties oppose broadening the contribution base on 
the grounds that it will only lead to more profligate spending of money 
paid into the USF. I am firmly convinced that unless we first bring the 
distribution of the High Cost Fund under control, no progress will be 
made on the contribution side.
    In looking at the long-term sustainability of the Fund, we need to 
review the status of funds paid out by the individual support 
mechanisms which make up the overall USF. A quick review of the four 
funds making up the Federal USF--the High Cost Fund, the Low Income 
Fund, the Schools and Libraries Fund, and the Rural Health Care Fund--
shows that the High Cost Fund is the most problematic. Set forth below 
are the collections for each of these funds in 2003 and projected for 
2007.\6\
---------------------------------------------------------------------------
    \6\ The 2007 figures are based on USAC demand projections for the 
first two quarters, with funding for the third and fourth quarter 
assumed to be the same as in the second quarter. A graphic display of 
the growth of each of the funds since 2000 is set forth on Attachment 
5.

                    Change in USF Funding Mechanisms
                               [2003-2007]
------------------------------------------------------------------------
                                                 $ Millions
             USF Fund             --------------------------------------
                                       2003         2007        Change
------------------------------------------------------------------------
High Cost Fund                         3,261.1      4,270.8      1,009.7
Low Income Fund                          712.9        766.8         53.9
Schools & Libraries Fund               2,184.0      1,988.5       -195.5
Rural Health Care Fund                    27.9        160.0        132.1
------------------------------------------------------------------------
    Total                              6,185.9      7,186.1      1,000.2
------------------------------------------------------------------------

    As can be seen, the High Cost Fund has grown by over a billion 
dollars since 2003, while the other funds have shown modest or negative 
growth in the same period. The Schools and Libraries Fund has been 
capped at $2.25 billion a year since its inception. The Rural Health 
Care Fund has likewise been capped at $400 million a year, although 
annual expenditures have come nowhere near that level. The Low Income 
Fund has been the focus of repeated state and Federal efforts to 
increase participation, yet funding has not grown substantially over 
the past 4 years. The High Cost Fund is clearly the main driver in the 
growth in the overall Fund and the USF contribution factor.
    Within the High Cost Fund, support for competitive eligible 
telecommunications carriers (ETCs), and more particularly wireless 
carriers, has been the sole cause of growth since 2003. As shown below, 
payments to competitive ETCs have soared from $126.7 million in 2003 to 
$1.2 billion projected for 2007.\7\
---------------------------------------------------------------------------
    \7\ Once again, the 2007 figures for CETCs are based on USAC 
projections for the first two quarters of 2007, with funding for CETCs 
for the third and fourth quarters assumed to be the same as the second 
quarter.

[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

    While USF support payments to competitive ETCs have increased 
tenfold, payments to both rural and non-rural incumbent ETCs have 
actually declined, as shown below.\8\
---------------------------------------------------------------------------
    \8\ The totals shown in the table differ slightly from the High 
Cost Fund totals shown in the table on page 24 because they are not 
adjusted by interest earnings, administrative costs and out-of-period 
adjustments.

                        Change in Funding to ETCs
                               [2003-2007]
------------------------------------------------------------------------
                                                 $ Millions
               ETCS               --------------------------------------
                                       2003         2007        Change
------------------------------------------------------------------------
Rural Incumbents                       2,467.0      2,415.5        -51.5
Non-rural Incumbents                     767.9        689.8        -78.1
Competitive ETCs                         126.7      1,220.2      1,093.5
------------------------------------------------------------------------
    Total                              3,361.6      4,325.5        963.9
------------------------------------------------------------------------

    Payments to rural incumbents have been held in check by a cap on 
the High Cost Loop Fund. This cap does not apply to competitive ETCs. 
Payments to non-rural incumbents have been limited by loss of lines and 
a ceiling on the Interstate Access Support Fund.
    It should not be surprising that funding for competitive ETCs has 
increased. After all, before the advent of competition incumbents 
received 100 percent of high-cost funding. It was expected that as 
competitors gained ETC status and won customers in high-cost areas, 
their high-cost funding would rise. What is surprising is that 
incumbent support has not dropped by an amount proportionate to the 
increase in competitive ETC funding. In other words, the advent of 
competition has actually caused a substantial increase in the size of 
the High Cost Fund, and increased the burden on all consumers. It did 
not have to be this way.
III. Competition and the Universal Service Fund
    It has often been said that the twin pillars of the 1996 
Telecommunications Act were competition and universal service. 
Competition would allow consumers to enjoy lower prices and better 
services, while Universal Service would ensure that all Americans, even 
those in rural and high-cost areas, would share in the benefits. Not 
only was the introduction of competition expected to lower prices of 
telecommunications services, it was supposed to lower the cost of 
Universal Service as providers competed for the Universal Service 
subsidy. As the House and Senate Reports on the Act stated:

        . . . as the current system of internal and external subsidies 
        is replaced by a system consisting primarily of external 
        subsidies, the total amount of subsidies collected from low-
        cost customers and passed on to high-cost customers would not 
        change significantly. Over time, CBO [Congressional Budget 
        Office] expects that the operating costs of telephone companies 
        would tend to fall as a result of competitive pressures and the 
        total amount of subsidies necessary would decline.\9\
---------------------------------------------------------------------------
    \9\ House Report No. 104-204(I) (1995), Arnold & Porter Legislative 
History Pub. L. 104-104 (A&P) at 60.
---------------------------------------------------------------------------
        . . . competition and new technologies will greatly reduce the 
        actual cost of providing Universal Service over time, thus 
        reducing or eliminating the need for Universal Service support 
        mechanisms as actual costs drop to a level that is at or below 
        the affordable rate for such service in an area. . . .\10\
---------------------------------------------------------------------------
    \10\ Senate Report No. 104-23, A&P at 254 (1995).

---------------------------------------------------------------------------
    This view was echoed by Senator Stevens during debate on the Act:

        [The Act] opens up the local market to competition while still 
        preserving the concept of universal service. It does so by 
        taking advantage of new technologies which are intended to 
        reduce the cost of all services, including universal service. 
        In fact, I find it interesting that the Congressional Budget 
        Office has said that this bill will reduce the cost of 
        Universal Service from the existing system by at least $3 
        billion over the next 5 years.\11\
---------------------------------------------------------------------------
    \11\ 141 Congressional Record S7881 (1995), A&P at 210.

    The High Cost Fund began in a monopoly environment prior to the 
passage of the Act. Since 1996 the FCC has struggled to adapt the USF 
to a competitive environment where multiple providers could offer the 
same or similar services to consumers. In implementing the Universal 
Service provisions of the Act, the FCC initially kept true to the Act's 
intent. In the First Report and Order on Universal Service, the 
---------------------------------------------------------------------------
Commission described its overall approach to universal service:

        . . . Universal Service will be sustainable in a competitive 
        environment; this means both that the system of support must be 
        competitively neutral and permanent, and that all support must 
        be targeted as well as portable among eligible 
        telecommunications carriers. . . . By following the principle 
        of competitive neutrality, we will avoid limiting providers of 
        Universal Service to modes of delivering that service that are 
        obsolete or not cost effective.\12\
---------------------------------------------------------------------------
    \12\ In re: Federal-State Joint Board on Universal Service, CC 
Docket No. 96-45, Report & Order (May 8, 1997); as corrected by 
Erratum, FCC 97-157 (June 4, 1997) at  19 & 49; aff'd in relevant 
part sub nom. Texas Office of Public Utility Counsel v. FCC, 183 F.3d 
393 (5th Cir. 1999). This order will be referred to as the ``First 
Report & Order.''

    The Commission also dealt directly with the issue of which ETC 
---------------------------------------------------------------------------
would receive high-cost support:

        We adopt the Joint Board's recommendation to make rural 
        carriers' support payments portable. . . . [A] CLEC 
        [competitive local exchange carrier] that qualifies as an 
        eligible telecommunications carrier shall receive Universal 
        Service support to the extent that it captures subscribers 
        formerly served by carriers receiving support based on the 
        modified existing support mechanisms or adds new customers in 
        the ILEC's study area. We conclude that paying the support to a 
        competitive eligible telecommunications carrier that wins the 
        customer or adds a new subscriber would aid entry of 
        competition in rural areas. [Emphasis added.] \13\
---------------------------------------------------------------------------
    \13\ First Report & Order,  311. See also  287-289; 312.

    In short, Universal Service high-cost support, as modified by the 
Commission for the advent of competition, was a technologically and 
competitively neutral ``zero sum game:'' the Universal Service subsidy 
was portable to whichever ETC won the customer. The ETC gaining the 
customer won the subsidy, the ETC losing the customer lost the subsidy. 
As part of this framework, the Commission revised its rules to add 
---------------------------------------------------------------------------
Section 54.307(a)(4) which stated:

        The amount of Universal Service support provided to such 
        incumbent local exchange carrier shall be reduced by an amount 
        equal to the amount provided to such competitive eligible 
        telecommunications carrier.\14\
---------------------------------------------------------------------------
    \14\ In re: Federal-State Joint Board on Universal Service, CC 
Docket No. 96-45, Fourth Order on Reconsideration (Dec. 30, 1997) at  
84; App. A, Item 6, 47 C.F.R.  54.307(a)(4).

    The Commission stated that this rule change was necessary to ensure 
that when a competitive ETC received support for a customer, ``. . . 
the incumbent LEC will lose the support it previously received that was 
attributable to that customer.'' \15\ The Commission's approach was 
upheld by the Fifth Circuit Court of Appeals in the case of Alenco 
Communications, Inc. v. FCC:
---------------------------------------------------------------------------
    \15\ Id.

        The FCC must see to it that both Universal Service and local 
        competition are realized; one cannot be sacrificed in favor of 
        the other. The Commission therefore is responsible for making 
        the changes necessary to its Universal Service program to 
---------------------------------------------------------------------------
        ensure that it survives in the new world of competition.  . . .

         . . . [T]he [FCC's universal service] order provides that the 
        Universal Service subsidy be portable so that it moves with the 
        customer, rather than stay with the incumbent LEC, whenever the 
        customer makes the decision to switch local service providers. 
        . . . The purpose of Universal Service is to benefit the 
        customer, not the carrier. ``Sufficient'' funding of the 
        customer's right to adequate telephone service can be achieved 
        regardless of which carrier ultimately receives the 
        subsidy.\16\ [Emphasis in original.]
---------------------------------------------------------------------------
    \16\ Alenco Communications, Inc. v. FCC, 201 F.3d 608, 615 & 621 
(5th Cir. 2000).

    Unfortunately, in November 1999, without explanation the Commission 
abandoned its rulemaking proceeding to define ``captured and new 
lines'' and deleted Section 54.307(a)(4) of its rules which had reduced 
support to an incumbent when a competitive ETC won a customer.\17\ 
Finally, in April 2000, the Commission effectively abandoned the 
distinction between ``new,'' ``captured,'' and ``other'' lines served 
by ETCs, stating ``. . . a competitive eligible telecommunications 
carrier receives support for each line it serves based on the support 
the incumbent local exchange carrier would receive for serving the 
line.'' \18\
---------------------------------------------------------------------------
    \17\ In re: Federal-State Joint Board on Universal Service, CC 
Docket No. 96-45, Ninth Report & Order and Eighteenth Order on 
Reconsideration (Nov. 2, 1999), at  90; App. C, Item 7.
    \18\ In re: Federal-State Joint Board on Universal Service, CC 
Docket No. 96-45, Order (April 7, 2000), at  16.
---------------------------------------------------------------------------
    The unforeseen consequences of these actions have been dramatic. By 
deciding to support all lines of all ETCs in high-cost areas, the 
Commission opened the door to supporting multiple wireless networks 
which supplied supplementary, rather than substitute services. As 
previously discussed, this supplementary support to wireless ETCs has 
added a billion dollars to the High Cost Fund since 2003.\19\ Far from 
being a ``zero sum game'' in which ETCs compete for customers while the 
size of the Fund stays relatively the same, the current system is a 
``no losers'' support system in which all ETCs receive support for all 
lines they serve in high-cost areas, no matter how duplicative or 
costly this additional support may be.\20\
---------------------------------------------------------------------------
    \19\ In essence, the USF has created a $1 billion wireless 
infrastructure fund. This was done without any explicit policy decision 
or directive by either the Congress or the Commission. It just 
happened, based on the incentives created by the high-cost support 
rules.
    \20\ The fact that multiple providers are able to offer service 
within a particular area raises the question of whether that area 
should properly be able to receive continued high-cost support.
---------------------------------------------------------------------------
    Under the current system, far more than affordable access to the 
telecommunications network is being provided. The High Cost Fund now 
provides support to multiple networks in high-cost areas, where 
previously none had been able to exist without a subsidy. If a customer 
in a high-cost area receives two landlines from the incumbent wireline 
ETC, and three wireless phones from a competitive ETC, all of these 
lines receive high-cost support. Even more bizarre, if the rural 
incumbent ETC actually loses lines, support for both the incumbent ETC 
and the competitive ETC will go up as a result of the equal support 
rule.\21\ The result has been a rapid escalation of support as 
competitive ETCs have rushed in to take advantage of the rules created 
by the FCC.
---------------------------------------------------------------------------
    \21\ The equal support rule, found in 47 C.F.R.  54.307(a)(1), 
provides that a competitive ETC will receive per line support equal to 
the support received by the incumbent ETC. Because the High Cost Loop 
mechanism is designed to recover an incumbent's full revenue 
requirement regardless of the number of lines served, the loss of lines 
by the incumbent will increase per line support, all other things being 
equal.
---------------------------------------------------------------------------
    One outrageous example of the current system is found in the AT&T 
(BellSouth) service territory in Mississippi. AT&T as the incumbent 
non-rural carrier receives $101.2 million in High Cost Support 
annually. In addition, there are sixteen (16) other competitive ETCs 
receiving $118.5 million in High Cost Support annually for providing 
service in the same study area.\22\ Most of this CETC support goes to 
wireless ETCs, including $59.1 million to AT&T's wireless subsidiary, 
Cingular. While there is no doubt that Mississippi is a high-cost area, 
the Act's requirement to provide affordable access does not require 
providing subsidies to multiple networks serving the same customers. 
The current system of providing support to all lines of all ETCs in 
high-cost areas must be ended if we are to have rational and 
sustainable high-cost support system.
---------------------------------------------------------------------------
    \22\ Universal Service Administrative Company, Federal Universal 
Service Support Mechanisms Fund Size Projections for the First Quarter 
2007 (Nov. 2, 2006), App. HC01. Ironically, if AT&T's support in 
Mississippi was determined under the rural support mechanism, its 
support for 2007 would fall from $101.2 million to $24.7 million. See, 
National Exchange Carrier Association, Submission of 2005 USF Study 
Results (Sept. 29, 2006), App. E. Because of the equal support rule, 
the support paid to competitive ETCs would fall as well.
---------------------------------------------------------------------------
    Because of the complex, disparate and often unrelated bases of the 
different high-cost support mechanisms, and the rapidly escalating size 
of the High Cost Fund caused by increasing payments to competitive 
ETCs, the Joint Board has begun to look at new alternatives to bring 
rationality back to the High Cost Fund. One of these proposals is 
reverse auctions; another is newer, more sophisticated modeling and 
more precise targeting of support based on new mapping technology. 
These proposals will need much work before it is determined if they are 
ready to be implemented on a national or even a pilot project scale.
    Unfortunately, while we contemplate these proposals, the Fund will 
continue to grow to an ever more unsustainable size. The High Cost Fund 
has increased by $1 billion over the past 3 years driven by new 
payments to competitive ETCs. In addition, the FCC currently has 
pending before it over thirty (30) applications for ETC status from 
wireless carriers, including two from Cingular for the states of 
Virginia and Georgia. The FCC has estimated that if it grants all of 
the ETC applications pending today, the High Cost Fund will rise to 
$5.5 billion by 2009. If Cingular, the largest wireless carrier, 
continues to seek ETC status, Verizon Wireless, the second largest, 
will be forced to follow suit. The result will be a High Cost Fund 
surpassing $6 billion and approaching $7 billion. A fund of this size 
will not only impose unacceptable burdens on American consumers, but 
will severely limit our ability to add new services, such as broadband, 
to the list of services supported by universal service.
    As a result, the Joint Board is currently considering several 
proposals to cap the High Cost Fund while we consider long-term 
solutions on how to adapt the Universal Service system to the new 
competitive environment by properly targeting support and ensuring that 
the Fund does not grow to an unsustainable size. In fact, one of the 
difficulties confronting policymakers in this area is the lack of any 
upward limit on the Fund expressed by Congress. It is interesting to 
note that in the currently pending S. 101, the Universal Service for 
Americans Act, Section 202 creates a $500 million a year Broadband for 
Unserved Areas Program. This is similar to funding under the existing 
cap on the Schools and Libraries Fund. Moreover, Section 202 makes 
clear that distributions from the Broadband fund may only be made to 
one facilities-based broadband provider in each unserved area. Based on 
the wording of Section 202, policymakers know exactly how much they 
have to spend, and can then attend to the issues of how to equitably 
distribute the Fund in accordance with the principles established by 
Congress. While a limitless Universal Service Fund may have made sense 
when we were faced with making previous implicit subsidies explicit, 
eleven years after the passage of the Act it may be time for Congress 
to also express its opinion on the ultimate size of the High Cost Fund.
IV. The Contribution Base
    Ensuring the long-term sustainability of the Fund will require not 
only controlling the size and distribution of the fund, but also 
broadening the contribution base. Moreover, until the distribution and 
sizing issues are solved, it is not likely that a consensus will 
develop concerning how to address the contribution base.
    The funding base for the USF has not kept pace with the growth in 
the fund, resulting in higher and higher USF assessments on carriers 
and their customers. The contribution base problem stems in large part 
from the wording of the Act itself. Section 254(b)(4) states that: 
``All providers of telecommunications services should make an equitable 
and nondiscriminatory contribution to the preservation and advancement 
of universal service.'' However, Section 254(d) states: ``Every 
telecommunications carrier that provides interstate telecommunications 
services shall contribute on an equitable and non-discriminatory basis, 
to the specific, predictable, and sufficient mechanisms established by 
the Commission to preserve and advance universal service.'' In other 
words, even though the principle set forth in the Act is that all 
telecommunications providers should contribute to the fund, and even 
though the Fund benefits all areas of the country, Section 254(d) 
limits the obligation to support the Fund to a subset of 
telecommunications carriers--providers of interstate telecommunications 
services.\23\
---------------------------------------------------------------------------
    \23\ As a practical matter, virtually all telecommunications 
carriers provide some sort of interstate service.
---------------------------------------------------------------------------
    In 1997 the FCC decided to base the funding for the high-cost and 
low-income support mechanisms on each carrier's interstate and 
international revenue, while the funding for schools and libraries and 
rural health support mechanisms were supported by assessments on all 
revenues, interstate and intrastate. The use of intrastate revenues for 
USF assessment purposes was struck down by the Fifth Circuit Court of 
Appeals in 1999.\24\ Since that time the contribution base for the USF 
has been limited to only interstate and international revenues. As the 
USF has grown, and as the interstate revenue base has leveled off, the 
assessment rate has increased rapidly.
---------------------------------------------------------------------------
    \24\ Texas Office of Public Utility Counsel v. FCC, 183 F.3d 393 
(5th Cir. 1999) at 448.
---------------------------------------------------------------------------
    So long as interstate revenues grew at a reasonable rate, the 
ultimate impact of fund growth on the USF assessment rate and 
customers' bills was fairly moderate. However, beginning in 2000 
interstate revenue growth began to flatten out, and during 2002 started 
to decline. The result has been a steep escalation in the USF 
assessment rate, from 5.7 percent in the fourth quarter of 2000 to 9.7 
percent in the first quarter of 2007.\25\ Based on the latest 
projections from USAC, the assessment factor for the second quarter of 
2007 is likely to exceed 11 percent.
---------------------------------------------------------------------------
    \25\ These increases have been flowed through to most customers by 
means of line items. Beginning in the second quarter of 2003, carriers 
can no longer mark up these assessments, but can only flow through the 
assessment rate approved by the Commission.
---------------------------------------------------------------------------
    There are several alternatives available in order to broaden the 
USF contribution base. One alternative would be to retain the current 
system, but remove restrictions in current rules which artificially 
depress the existing interstate revenue contribution base. One such 
restriction is the so-called ``safe harbors'' which limit the 
contribution responsibility of certain classes of carriers, such as 
wireless carriers and Voice over Internet Protocol (VoIP) carriers. 
Another restriction limits the contributions from broadband providers, 
one of the fastest growing areas of telecommunications. Currently, 
providers of broadband are exempt from paying to support the USF.\26\ 
If the Commission includes broadband in the list of USF supported 
services, it is obvious that broadband providers should also contribute 
to the Fund.
---------------------------------------------------------------------------
    \26\ Digital subscriber line service (DSL) providers previously 
paid into the Fund, but were exempted by FCC action in 2006.
---------------------------------------------------------------------------
    A second alternative would be to grant the FCC the authority to 
base contributions to the Fund on total telecommunications revenues. 
Shown on Attachment 6 is a comparison of changes in the Universal 
Service Fund, the interstate revenue base, and total telecommunications 
revenues from 1997 to 2007.\27\ As you can see, total 
telecommunications revenues currently amount to approximately $230 
billion and would provide an adequate funding base for the USF. In 
fact, if total telecommunications revenues had been used as the funding 
base from the start, we would not be discussing this issue today. The 
growth in the Fund could have been accommodated while keeping the 
assessment rate around 3 percent.
---------------------------------------------------------------------------
    \27\ On Attachment 6 USF Funding and the Interstate Revenue Base 
are taken from USAC reports. The Total Revenue Base is taken from the 
FCC's Trends in Telephone Service reports. The funding base for 1997 is 
estimated. Beginning in the second quarter of 2003, the USF funding 
base has been based on carriers' projected revenue collections.
---------------------------------------------------------------------------
    Use of total revenues would also eliminate disputes about whether 
revenues are intrastate or interstate, and would equitably spread the 
obligation to support Universal Service to all providers and to all 
customers based on their use of the network. However, basing Federal 
Universal Service on total revenues would require a statutory change to 
clarify that the FCC has the authority to base contributions on all 
revenues, intrastate as well as interstate. In addition, a total 
revenues base could be susceptible to erosion in the future as more and 
more traffic, including voice traffic, migrates to the Internet and is 
classified as ``information services,'' currently exempt from USF 
assessment.\28\ Finally, in order to prevent any uncertainty concerning 
state authority, any statutory change to allow assessment of total 
telecommunications revenues for the Federal Fund should specify that 
states have the reciprocal right to use total revenues as the basis for 
assessments for state Universal Service programs.
---------------------------------------------------------------------------
    \28\ It should be noted that the FCC already has the discretionary 
power under 254(d) to require contributions from any other provider of 
interstate telecommunications ``if the public interest so requires.''
---------------------------------------------------------------------------
    A third alternative would be to base assessments on connections to 
the public switched telephone network, or on assigned telephone 
numbers. The FCC has considered several such proposals over the past 
few years. While these connection-based or numbers-based proposals do 
enlarge the base of the USF, and minimize problems with classification 
of services or revenues as information services, they do have several 
flaws: (1) each proposal radically shifts the funding of the USF among 
industry groups; (2) each proposal appears to exempt pure providers of 
interstate long distance from making any contribution to the Fund in 
contravention of the plain wording of Section 254(d); (3) each proposal 
requires capacity-based connection equivalents for high-capacity 
customers; and (4) each proposal shifts responsibility for payment of 
USF charges from high-use to low-use customers.
    A final alternative, which my office has proposed to the FCC, would 
be a hybrid of the proposals described above. For example, the 
Commission could continue to base 50 percent of the Universal Service 
assessment on interstate revenues, and assess the remaining 50 percent 
on end-user connections to the public switched network. Such a hybrid 
would not require a statutory change and would ensure that all 
providers of interstate services, even those that did not provide end-
use connections, would continue to contribute to support universal 
service. In addition, this 50/50 hybrid approach would mitigate impacts 
on low-usage customers, and result in contributions from various 
industry sectors that are very close to those produced by use of total 
telecommunications revenues.
    In this regard, I should note that Section 101(a) of the Universal 
Service for Americans Act is particularly helpful. Section 101(a) 
empowers the Commission to assess for Universal Service based upon 
interstate revenues, intrastate revenues, connections, numbers, 
capacity or any combination of these methods. In short, Section 101(a) 
provides the Commission with a full set of tools to address different 
contribution circumstances that may arise as the telecommunications 
marketplace evolves.\29\ Moreover, Section 101(a) also provides 
reciprocal flexibility for state commissions in assessing providers to 
support state Universal Service funds.
---------------------------------------------------------------------------
    \29\ For this same reason, I oppose Section 206 of the Universal 
Service for Americans Act, which prohibits the use of primary lines in 
distributing support. As discussed above, the major problem confronting 
the Fund currently is on the distribution side. Congress should 
broaden, not limit, the tools available to the Commission in addressing 
the problems of adapting the USF to competition.
---------------------------------------------------------------------------
    In finding a solution to the contribution base problem, I agree 
with Senator Stevens of Alaska who has previously said: ``All companies 
that use the network, in my judgment, should contribute to universal 
service, regardless of the type of service they provide.'' \30\ I 
believe we must expand contribution responsibility to encompass all 
revenues and all services that connect to the telecommunications 
network. Since all benefit, all should contribute.
---------------------------------------------------------------------------
    \30\ TR Daily, March 26, 2003.
---------------------------------------------------------------------------
V. Conclusion
    In order to be stable and sustainable in the long-term, the USF 
must be configured like a pyramid: it must have a broad and stable base 
of contributions at the bottom, and a narrow but sufficient 
distribution of support at the top. The current Universal Service Fund 
requires work on both ends of this structure. Issues related to the 
contribution base must be resolved. Since all benefit, all should 
contribute. In addition, the limited resources of the Fund must be 
properly distributed and targeted to carry out the purposes of the Act. 
In order to continue the public policy success of the Universal Service 
Fund, we must support access, not excess.
                              Attachment 1
                   Federal Universal Service Support
                   [Ranked by Support in Each State]
                    [2005 Disbursements in Millions]


----------------------------------------------------------------------------------------------------------------

----------------------------------------------------------------------------------------------------------------
                                                   High cost   Low income        Rural    Schools &        Total
                                                     support      support       health    libraries      support
                                                                               support      support
                                                ----------------------------------------------------------------
          State                                                             $ Millions
----------------------------------------------------------------------------------------------------------------
1 California                                            98.9        304.7          0.5        220.8        624.9
2 Texas                                                230.0         72.3          0.1        274.2        576.6
3 New York                                              51.8         52.5          0.0        298.3        402.6
4 Mississippi                                          209.3          3.6          0.1         29.4        242.4
5 Oklahoma                                             120.2         32.4          0.1         44.0        196.7
6 Kansas                                               178.7          3.1          0.3         10.6        192.7
7 Georgia                                              111.7          8.3          0.1         50.1        170.2
8 Florida                                               91.5         17.8          0.1         53.4        162.8
9 Wisconsin                                            130.2          8.8          1.0         21.0        161.0
10 Arkansas                                            141.0          2.4          0.1         15.7        159.2
11 Alaska                                              120.3          7.4         14.9         15.9        158.5
12 Louisiana                                           111.2          2.4          0.0         41.5        155.1
13 Pennsylvania                                         65.5         19.2          0.1         67.1        151.9
14 Puerto Rico                                         133.8         13.3          0.0          3.0        150.1
15 Illinois                                             63.5          9.3          0.2         73.4        146.4
16 Alabama                                             109.3          3.2          0.0         28.0        140.5
17 Minnesota                                           113.4          6.0          0.8         19.9        140.1
18 North Carolina                                       80.2         14.5          0.2         37.0        131.9
19 Arizona                                              74.6         20.3          0.7         36.0        131.6
20 Washington                                           94.4         19.8          0.1         16.7        131.0
21 Ohio                                                 37.8         35.0          0.0         57.4        130.2
22 Missouri                                             85.2          5.4          0.1         36.3        127.0
23 Tennessee                                            54.7          6.1          0.1         59.5        120.4
24 Kentucky                                             83.6          7.5          0.7         26.5        118.3
25 Virginia                                             87.3          2.3          0.3         25.2        115.1
26 South Carolina                                       76.3          2.9          0.0         27.6        106.8
27 Iowa                                                 90.3          6.2          0.2         10.1        106.8
28 Michigan                                             53.6         11.4          0.7         34.7        100.4
29 Colorado                                             79.3          3.5          0.1         11.3         94.2
30 South Dakota                                         77.8          7.3          0.5          5.4         91.0
31 New Mexico                                           58.5         10.7          0.3         17.8         87.3
32 Oregon                                               68.5          7.3          0.0         11.4         87.2
33 Montana                                              76.7          2.6          0.5          3.8         83.6
34 Indiana                                              56.6          5.7          0.1         12.5         74.9
35 West Virginia                                        66.3          0.7          0.1          7.7         74.8
36 North Dakota                                         62.7          3.8          0.5          3.0         70.0
37 Nebraska                                             55.9          2.4          0.7          6.3         65.3
38 Idaho                                                55.1          3.9          0.2          2.8         62.0
39 Wyoming                                              56.6          1.4          0.1          0.7         58.8
40 New Jersey                                            1.3         14.5          0.0         39.4         55.2
41 Maine                                                28.8          8.8          0.1          9.1         46.8
42 Vermont                                              35.2          2.8          0.0          1.2         39.2
43 Massachusetts                                         3.6         14.3          0.0         21.0         38.9
44 Nevada                                               29.6          4.1          0.0          3.2         36.9
45 Utah                                                 23.6          2.9          0.4          7.5         34.4
46 Hawaii                                               29.5          0.7          0.3          1.8         32.3
47 Connecticut                                           2.2          5.3          0.0         19.3         26.8
48 Virgin Islands                                       22.6          0.2          0.1          3.9         26.8
49 Guam                                                 19.2          0.4          0.0          3.1         22.7
50 Maryland                                              4.3          0.5          0.0         12.7         17.5
51 D.C.                                                  0.0          0.9          0.0         10.8         11.7
52 Rhode Island                                          0.0          4.6          0.0          6.9         11.5
53 New Hampshire                                         8.7          0.6          0.0          1.7         11.0
54 American Samoa                                        2.3          0.1          0.0          2.4          4.8
55 N. Mariana Is.                                        0.7          0.1          0.0          1.4          2.2
56 Delaware                                              0.3          0.3          0.0          0.4          1.0
----------------------------------------------------------------------------------------------------------------
    Total                                            3,824.2        808.5         25.5      1,861.8      6,520.0
----------------------------------------------------------------------------------------------------------------
Note: Numbers may not add due to rounding. Annual support amounts less than 50,000 show as 0 due to rounding.
  Support amounts shown are actual amounts disbursed. Amounts assessed and collected may be higher.
Source: USAC 2005 Annual Report NECA 2005 Annual USF Filing.

                              Attachment 2
                   Federal Universal Service Support
                   [Ranked by Support in Each State]
                    [2005 Disbursements in Millions]


----------------------------------------------------------------------------------------------------------------

----------------------------------------------------------------------------------------------------------------
                       High cost   Low income        Rural    Schools &        Total
                         support      support       health    libraries      support
                                                   support      support
                     -----------------------------------------------------------------
          State                                  $ Millions                              Total          Monthly
                                                                                       lines         support per
                                                                                                           line
----------------------------------------------------------------------------------------------------------------
1 American Samoa             2.3          0.1          0.0          2.4          4.8         10,872       36.79
2 Virgin Islands            22.6          0.2          0.1          3.9         26.8         69,425       32.17
3 Alaska                   120.3          7.4         14.9         15.9        158.5        414,396       31.87
4 Guam                      19.2          0.4          0.0          3.1         22.7         67,059       28.21
5 South Dakota              77.8          7.3          0.5          5.4         91.0        348,183       21.78
6 Wyoming                   56.6          1.4          0.1          0.7         58.8        289,052       16.95
7 North Dakota              62.7          3.8          0.5          3.0         70.0        347,899       16.77
8 Mississippi              209.3          3.6          0.1         29.4        242.4      1,328,966       15.20
9 Montana                   76.7          2.6          0.5          3.8         83.6        506,462       13.76
10 Kansas                  178.7          3.1          0.3         10.6        192.7      1,380,168       11.64
11 Puerto Rico             133.8         13.3          0.0          3.0        150.1      1,180,127       10.60
12 Arkansas                141.0          2.4          0.1         15.7        159.2      1,371,860        9.67
13 Oklahoma                120.2         32.4          0.1         44.0        196.7      1,732,719        9.46
14 Vermont                  35.2          2.8          0.0          1.2         39.2        407,202        8.02
15 New Mexico               58.5         10.7          0.3         17.8         87.3        940,723        7.73
16 N. Mariana Is.            0.7          0.1          0.0          1.4          2.2         24,480        7.49
17 Idaho                    55.1          3.9          0.2          2.8         62.0        714,999        7.23
18 Nebraska                 55.9          2.4          0.7          6.3         65.3        815,003        6.68
19 West Virginia            66.3          0.7          0.1          7.7         74.8        980,333        6.36
20 Iowa                     90.3          6.2          0.2         10.1        106.8      1,540,622        5.78
21 Louisiana               111.2          2.4          0.0         41.5        155.1      2,268,720        5.70
22 Alabama                 109.3          3.2          0.0         28.0        140.5      2,275,897        5.14
23 Kentucky                 83.6          7.5          0.7         26.5        118.3      2,003,264        4.92
24 Maine                    28.8          8.8          0.1          9.1         46.8        808,894        4.82
25 Wisconsin               130.2          8.8          1.0         21.0        161.0      3,089,638        4.34
26 Minnesota               113.4          6.0          0.8         19.9        140.1      2,703,043        4.32
27 Arizona                  74.6         20.3          0.7         36.0        131.6      2,577,209        4.26
28 Texas                   230.0         72.3          0.1        274.2        576.6     11,590,562        4.15
29 South Carolina           76.3          2.9          0.0         27.6        106.8      2,174,893        4.09
30 Hawaii                   29.5          0.7          0.3          1.8         32.3        665,486        4.04
31 Oregon                   68.5          7.3          0.0         11.4         87.2      1,933,674        3.76
32 Missouri                 85.2          5.4          0.1         36.3        127.0      3,247,315        3.26
33 Tennessee                54.7          6.1          0.1         59.5        120.4      3,085,923        3.25
34 Washington               94.4         19.8          0.1         16.7        131.0      3,419,234        3.19
35 Georgia                 111.7          8.3          0.1         50.1        170.2      4,611,880        3.08
36 Colorado                 79.3          3.5          0.1         11.3         94.2      2,606,818        3.01
37 New York                 51.8         52.5          0.0        298.3        402.6     11,284,257        2.97
38 Utah                     23.6          2.9          0.4          7.5         34.4      1,056,543        2.71
39 California               98.9        304.7          0.5        220.8        624.9     21,285,036        2.45
40 Nevada                   29.6          4.1          0.0          3.2         36.9      1,267,684        2.43
41 North Carolina           80.2         14.5          0.2         37.0        131.9      4,596,547        2.39
42 Virginia                 87.3          2.3          0.3         25.2        115.1      4,290,319        2.24
43 Rhode Island              0.0          4.6          0.0          6.9         11.5        491,107        1.95
44 Indiana                  56.6          5.7          0.1         12.5         74.9      3,492,042        1.79
45 Pennsylvania             65.5         19.2          0.1         67.1        151.9      7,345,084        1.72
46 Ohio                     37.8         35.0          0.0         57.4        130.2      6,372,077        1.70
47 Illinois                 63.5          9.3          0.2         73.4        146.4      7,323,440        1.67
48 Michigan                 53.6         11.4          0.7         34.7        100.4      5,688,091        1.47
49 Florida                  91.5         17.8          0.1         53.4        162.8     10,356,878        1.31
50 D.C.                      0.0          0.9          0.0         10.8         11.7        791,292        1.23
51 New Hampshire             8.7          0.6          0.0          1.7         11.0        754,305        1.22
52 Connecticut               2.2          5.3          0.0         19.3         26.8      2,135,021        1.05
53 Massachusetts             3.6         14.3          0.0         21.0         38.9      3,779,199        0.86
54 New Jersey                1.3         14.5          0.0         39.4         55.2      5,983,090        0.77
55 Maryland                  4.3          0.5          0.0         12.7         17.5      3,606,266        0.40
56 Delaware                  0.3          0.3          0.0          0.4          1.0        546,439        0.15
----------------------------------------------------------------------------------------------------------------
    Total                3,824.2        808.5         25.5      1,861.8      6,520.0    165,977,717        3.27
----------------------------------------------------------------------------------------------------------------
Note: Numbers may not add due to rounding. Annual support amounts less than $50,000 show as $0 due to rounding.
Support amounts shown are actual amounts disbursed. Amounts assessed and collected may be higher.
Source: USAC 2005 Annual Report NECA 2005 Annual USF Filing.

                              Attachment 3
         Net Universal Service Support Payments by State: 2005
            [Annual Payments and Contributions in Thousands]
                    [Sorted by Net Support Received]


----------------------------------------------------------------------------------------------------------------
                                 Payments from USF to service providers*
                      -------------------------------------------------------------                   Estimated
       State or                        Low-                    Rural                   Estimated     net  dollar
     jurisdiction       High-cost     income     Schools &     health      Total    contributions**    flow***
                         support      support    libraries      care
----------------------------------------------------------------------------------------------------------------
Florida                   $91,450     $17,761      $53,437       $107     $162,755       $474,550      -$311,795
New Jersey                  1,332      14,530       39,404          0       55,266        246,120       -190,854
Maryland                    4,327         502       12,644          0       17,473        147,285       -129,812
Pennsylvania               65,504      19,156       67,149         75      151,884        276,859       -124,975
Illinois                   63,506       9,291       73,442        196      146,435        267,388       -120,953
Massachusetts               3,634      14,270       20,954          0       38,858        157,471       -118,613
Ohio                       37,754      35,022       57,444         45      130,265        224,776        -94,511
----------------------------------------------------------------------------------------------------------------
California                 98,866     304,668      220,789        456      624,779        716,580        -91,801
Michigan                   53,575      11,425       34,722        694      100,416        187,795        -87,379
Virginia                   87,312       2,257       25,263        299      115,131        193,412        -78,281
Connecticut                 2,249       5,315       19,307          0       26,871        100,797        -73,926
North Carolina             80,179      14,504       36,946        149      131,778        200,447        -68,669
----------------------------------------------------------------------------------------------------------------
Indiana                     56632       5,716       12,516        112       74,976        122,711        -47,735
Georgia                   111,693       8,282       50,126        114      170,215        212,680        -42,465
Nevada                     29,639       4,075        3,166         36       36,916         68,888        -31,972
Colorado                   79,277       3,514       11,256        120       94,167        121,551        -27,384
Delaware                      259         277          377          0          913         24,842        -23,929
----------------------------------------------------------------------------------------------------------------
New Hampshire               8,732         632        1,736          2       11,102         34,363        -23,261
Dist. of Columbia               0         893       10,840          0       11,733         31,241        -19,508
Utah                       23,579       2,927        7,542        363       34,411         49,090        -14,679
Washington                 94,387      19,823       16,679         64      130,953        145,534        -14,581
Rhode Island                   44       4,622        6,925          0       11,591         22,577        -10,986
----------------------------------------------------------------------------------------------------------------
Tennessee                  54,684       6,141       59,517         61      120,403        125,508         -5,105
New York                   51,833      52,544      298,250          6      402,633        406,561         -3,928
Missouri                   85,146       5,396       36,291        118      126,951        126,036            915
Northern Mariana Is.          668          85        1,364          0        2,117          1,056          1,061
Hawaii                     29,525         694        1,812        277       32,308         28,039          4,269
----------------------------------------------------------------------------------------------------------------
American Samoa              2,318          60        2,421          0        4,799            184          4,615
Oregon                     68,469       7,307       11,394         22       87,192         82,192          5,000
Arizona                    74,550      20,310       36,008        675      131,543        125,949          5,594
South Carolina             76,322       2,869       27,579         41      106,811         95,834         10,977
Maine                       28812       8,795        9,099         49       46,755         29,995         16,760
----------------------------------------------------------------------------------------------------------------
Guam                       19,165         421        3,093          0       22,679          3,402         19,277
Virgin Islands             22,618         158        3,976        102       26,854          6,739         20,115
Vermont                    35,244       2,842        1,236         20       39,342         16,024         23,318
Nebraska                   55,890       2,406        6,254        746       65,296         37,675         27,621
Idaho                      55,055       3,923        2,797        153       61,928         32,363         29,565
----------------------------------------------------------------------------------------------------------------
West Virginia              66,318         710        7,658         91       74,777         42,624         32,153
Minnesota                 113,352       5,993       19,911        845      140,101        106,743         33,358
Kentucky                   83,600       7,537       26,481        720      118,338         80,627         37,711
New Mexico                 58,511      10,655       17,819        293       87,278         45,014         42,264
Wyoming                    56,598       1,395          684        100       58,777         14,719         44,058
----------------------------------------------------------------------------------------------------------------
Alabama                   109,343       3,224       28,023         19      140,609         95,271         45,338
Iowa                       90,336       6,198       10,042        186      106,762         60,490         46,272
Wisconsin                 130,225       8,829       21,021        940      161,015        111,194         49,821
North Dakota               62,718       3,804        2,956        503       69,981         14,669         55,312
Montana                    76,731       2,631        3,807        542       83,711         23,456         60,255
Louisiana                 111,241       2,414       41,487          5      155,147         90,833         64,314
----------------------------------------------------------------------------------------------------------------
South Dakota               77,788       7,280        5,434        469       90,971         15,846         75,125
Puerto Rico               133,786      13,286        2,966          0      150,038         52,930         97,108
Arkansas                  140,997       2,369       15,662        120      159,148         58,606        100,542
Oklahoma                  120,188      32,358       44,003        129      196,678         74,099        122,579
Kansas                    178,684       3,149       10,545        290      192,668         58,672        133,996
----------------------------------------------------------------------------------------------------------------
Alaska                    120,274       7,374       15,909     14,949      158,506         22,070        136,436
Texas                     230,017      72,330      274,218        132      576,697        434,538        142,159
Mississippi               209,251       3,619       29,364        133      242,367         58,511        183,856
----------------------------------------------------------------------------------------------------------------
    Total              $3,824,187    $808,568   $1,861,745    $25,568   $6,520,068     $6,605,426       -$85,358
----------------------------------------------------------------------------------------------------------------

                              Attachment 4
                 Monthly Net USF Payments per Loop 2005
                   [Sorted by Net Payments Per Loop]


----------------------------------------------------------------------------------------------------------------
                                                                                                       Monthly
                                                                                                         net
              State or jurisdiction                       USF Loops            Net USF  payments       payments
                                                                                                       per loop
----------------------------------------------------------------------------------------------------------------
Delaware                                                           530,802             -$23,929,000       -$3.76
Maryland                                                         3,483,388             -129,812,000        -3.11
Connecticut                                                      1,997,944              -73,926,000        -3.08
New Jersey                                                       5,577,359             -190,854,000        -2.85
Massachusetts                                                    3,529,151             -118,613,000        -2.80
New Hampshire                                                      719,375              -23,261,000        -2.69
Florida                                                          9,875,661             -311,795,000        -2.63
Nevada                                                           1,248,633              -31,972,000        -2.13
----------------------------------------------------------------------------------------------------------------
Rhode Island                                                       431,042              -10,986,000        -2.12
Dist. of Columbia                                                  766,942              -19,508,000        -2.12
Virginia                                                         4,097,788              -78,281,000        -1.59
Pennsylvania                                                     7,034,040             -124,975,000        -1.48
Illinois                                                         6,944,463             -120,953,000        -1.45
----------------------------------------------------------------------------------------------------------------
Michigan                                                         5,105,300              -87,379,000        -1.43
Ohio                                                             5,887,158              -94,511,000        -1.34
North Carolina                                                   4,362,919              -68,669,000        -1.31
Indiana                                                          3,317,961              -47,735,000        -1.20
Utah                                                             1,022,713              -14,679,000        -1.20
----------------------------------------------------------------------------------------------------------------
Colorado                                                         2,474,508              -27,384,000        -0.92
Georgia                                                          4,416,698              -42,465,000        -0.80
Washington                                                       3,259,380              -14,581,000        -0.37
California                                                      20,610,893              -91,801,000        -0.37
Tennessee                                                        2,987,705               -5,105,000        -0.14
----------------------------------------------------------------------------------------------------------------
New York                                                        10,230,291               -3,928,000        -0.03
Missouri                                                         3,081,156                  915,000         0.02
Arizona                                                          2,419,556                5,594,000         0.19
Oregon                                                           1,855,141                5,000,000         0.22
South Carolina                                                   2,073,761               10,977,000         0.44
----------------------------------------------------------------------------------------------------------------
Hawaii                                                             632,638                4,269,000         0.56
Texas                                                           10,945,498              142,159,000         1.08
Minnesota                                                        2,565,929               33,358,000         1.08
Wisconsin                                                        2,877,855               49,821,000         1.44
Kentucky                                                         1,904,145               37,711,000         1.65
----------------------------------------------------------------------------------------------------------------
Alabama                                                          2,196,302               45,338,000         1.72
Maine                                                              767,662               16,760,000         1.82
Iowa                                                             1,468,226               46,272,000         2.63
Louisiana                                                        2,002,682               64,314,000         2.68
West Virginia                                                      953,275               32,153,000         2.81
----------------------------------------------------------------------------------------------------------------
Nebraska                                                           764,517               27,621,000         3.01
Idaho                                                              694,630               29,565,000         3.55
New Mexico                                                         909,041               42,264,000         3.87
Northern Mariana Is.                                                22,770                1,061,000         3.88
Vermont                                                            397,603               23,318,000         4.89
----------------------------------------------------------------------------------------------------------------
Oklahoma                                                         1,635,403              122,579,000         6.25
Arkansas                                                         1,313,238              100,542,000         6.38
Puerto Rico                                                      1,158,243               97,108,000         6.99
Kansas                                                           1,284,666              133,996,000         8.69
Montana                                                            480,860               60,255,000        10.44
Mississippi                                                      1,250,753              183,856,000        12.25
----------------------------------------------------------------------------------------------------------------
Wyoming                                                            273,429               44,058,000        13.43
North Dakota                                                       332,667               55,312,000        13.86
South Dakota                                                       333,770               75,125,000        18.76
Virgin Islands                                                      68,956               20,115,000        24.31
Guam                                                                65,044               19,277,000        24.70
----------------------------------------------------------------------------------------------------------------
Alaska                                                             389,001              136,436,000        29.23
American Samoa                                                      10,956                4,615,000        35.10
----------------------------------------------------------------------------------------------------------------
    Total                                                      151,029,353             -$85,358,000
----------------------------------------------------------------------------------------------------------------

                              Attachment 5

[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

                              Attachment 6

[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]


              STATEMENT OF HON. DANIEL K. INOUYE, 
                    U.S. SENATOR FROM HAWAII

    The Chairman. I thank you very much, Director Gregg. And I 
thank the panel very much.
    We will begin our questioning with Vice Chairman Stevens.
    Senator Stevens. Well, thank you very much, Mr. Chairman. 
You haven't made your opening statement. Do you want to make 
the opening statement?
    The Chairman. It will be made part of the record.
    Senator Stevens. I'll make mine part of the record, too, 
then.
    [The prepared statements of Senators Inouye and Stevens 
follow:]

 Prepared Statement by Hon. Daniel K. Inouye, U.S. Senator from Hawaii
    Today's hearing on Universal Service returns the Committee to 
familiar territory. Indeed, it was just over a decade ago that we 
created Section 254 of the Communications Act, which provided the 
Federal Communications Commission with statutory authority to create a 
system of explicit support to preserve and advance the goals of 
universal service.
    While it may be familiar territory, today's Universal Service 
system faces new challenges, brought on by shifts in the way that 
Americans communicate and by the steady emergence of new communications 
platforms.
    Without question, when it comes to Universal Service reform, we 
face a difficult task in balancing competing equities to promote the 
goals of Universal Service in a manner that will achieve a fair result. 
These issues are complicated, and radical solutions often promise more 
than they can deliver.
    If we are to move forward in fashioning a system that is both 
flexible enough to adapt to changes in the marketplace and rock-solid 
in its commitment to promoting reasonably comparable communications 
services at reasonably comparable rates, then all of us--industry, 
regulators, and Members of this Committee--will need to roll up our 
sleeves, and work toward proposals that will result in meaningful 
progress and a firmer footing for the stability and sufficiency of the 
Universal Service Fund.
    I am hopeful that today's hearing, featuring two distinguished 
panels, will begin this constructive discussion.
                                 ______
                                 
    Prepared Statement of Hon. Ted Stevens, U.S. Senator from Alaska
    I would like to thank the Chairman for scheduling this hearing. 
Senator Inouye has been a great leader and friend with respect to 
Universal Service ever since we began working together to achieve the 
same phone rates in Alaska and Hawaii as in the rest of the country.
    As communications technologies advance and evolve, the mission of 
Universal Service continues. The 1996 Telecommunications Act locked in 
certain aspects of the Universal Service program that made sense in 
1996 but that now need to be revisited. Chief among these is how the 
program is supported.
    Last Congress, this committee worked in a bipartisan fashion to 
reach consensus on how to update Universal Service contributions and 
ensure that all communications carriers are covered. S. 101, the USA 
Act, reflects the work that the Committee engaged in last year. This 
would result in a more rational approach with a smaller fee on most 
consumer phone bills. For the elderly, who could have been 
disproportionately impacted, we created an exception. The bill also 
ensures that no technology is excluded from being able to receive 
Universal Service funds. While there seems to be consensus relative to 
Universal Service contributions, there are a number of issues before 
the FCC relative to distributions that do not yet have consensus. I 
expect that we will hear about proposals for reverse auctions and other 
ways to limit Universal Service spending today, and I look forward to 
that discussion.
    Fiscal controls are important, so long as they do not undercut 
Universal Service's mission to deliver communications service to rural 
America. I will listen today to understand how any proposal ensures 
that the network costs of rural carriers will be sufficiently 
supported. In addition, I hope witnesses will explain what mechanisms 
will exist to allow carriers to make new investment to bring new and 
essential services to rural America. Unless these and other concerns 
are addressed, I do not see how the FCC can move forward to implement 
some of these proposals.
    I look forward to working with my colleagues to address 
contribution reform in this Congress, and to better understand what 
options the FCC is looking at to address the distribution methodology 
in a way that will not disadvantage rural America.

    Senator Stevens. I congratulate the panel. You really have 
presented the viewpoints of your own entities and yourselves on 
probably the most difficult problem we face. And it does seem 
to me that somehow or other we have to devise a way to have an 
adjustment period to get back to the point where there is just 
one subsidy involved in these areas of very high cost. Has 
anyone got any idea how to do that? Now, you've heard my 
comments before. I think reverse auctions will just do no more 
than bring in national concerns that'll absolutely wipe out all 
the local carriers who have pioneered these lines in the past, 
which I think is very unfair. But, on the other hand, I also 
think that those legacy carriers have got to adjust, and 
they've got to have some way to become broadband providers. 
Some of you have suggested that that be on the basis of grants. 
So, let me ask all of you. Would you envision those grants 
would come from the Fund?
    Mr. Burke. I think I was probably the one that fired that 
idea, Senator. And the way I had envisioned, to this point in 
time, is that, certainly, the Fund could be used as the 
vehicle. I felt that a matching type of grant, using the states 
as the bellwether, would be a particularly good way of doing 
it, because, number one, it would give the states an incentive 
to be targeting extremely well; and, number two, the states 
probably are the best vehicle to target. Whether or not it was 
through the Fund or through a separate entity, I really have no 
particular opinion. But I do think, if you did do it through 
the Fund, that a matching grant proposal at least has the 
attraction of being focused, targeted, and, therefore, limited 
in scope by that close targeting, in conjunction with the 
states, and allow, therefore, the pressure on the Fund to be 
not undue.
    Mr. Gregg. Senator Stevens, I think that the approach that 
was set forth in the Universal Service for Americans Act, S. 
101, section 202, which set up the broadband fund of a half a 
billion dollars, was the appropriate concept that we could use 
for the high-cost fund, as well. As set forth in section 202 of 
the Universal Service for Americans Act, the support is limited 
to a single facilities-based provider per unserved area. That 
is a rational way to target and maximize the benefit of that 
type of program. I would conceive that this broadband fund 
should be a part of the overall Universal Service Fund. And I 
also endorse the approach given by Commissioner Burke; having 
the states have to pony up their own money, so that it's a 
joint State-Federal effort to bring broadband to all Americans, 
I think, is a very good idea.
    Obviously, policymakers deciding how much they have to 
spend for a particular policy, and establishing principles to 
guide its distribution, is the way we're used to working. One 
of the things that's unusual about the high-cost fund is, 
there's no limit. That might have made sense in 1996, when we 
knew we were going to have to make implicit subsidies explicit, 
but 11 years down the road now, it may be time for this 
Congress to express its opinion as to what upward limit there 
should be on the high-cost fund, as well.
    Senator Stevens. What do you think about that, Mr. Copps?
    Mr. Copps. I think if we're going to go down that road of 
general grants, which is not a bad idea, we have to talk, first 
of all, about coordination with other programs that are out 
there, because we already have initiatives like Rural Utility 
Service grants and things like that, so there has to be a 
strategy for all of this. But I think if we just look at the 
Fund and how to make it credible, if we would go to the 
intrastate funding that I was talking about, if we would have 
broadband paying in, as well as receiving, thereby greatly 
expanding the revenue base of the Fund, and given that we've 
already tried to true-up wireless and VoIP and do the 
oversight--I think we would have a fairly viable approach to 
Universal Service.
    Senator Stevens. Would you change the Commission's current 
position that the broadband carrier would receive support based 
upon the cost of the legacy carrier?
    Mr. Copps. I think that's something we can look at. I just 
want to make sure rural carriers and rural consumers have 
access to what they need. So, can we maybe look at that basis? 
Yes. But, you know, it really concerns me to see so many of the 
large companies selling off rural exchanges. That puts the 
burden on any company coming in and really put broadband out to 
rural consumers. The burden falls on these rural carriers. So, 
yes, I'm alive to having the oversight and making sure that the 
distribution is disciplined, but there has to be that ability 
to cover the legitimate costs of getting advanced 
telecommunications to all consumers in all states.
    Senator Stevens. Mr. Landis, thanks for your comment about 
my Hoosier background, but what do you think about this comment 
about the concept of having the states and the Federal agencies 
in a partnership, in terms of bringing on this broadband 
conversion?
    Mr. Landis. Mr. Vice Chairman, I would agree with my 
colleagues. And I would add that I think there's strong 
agreement among all of us on the Joint Board in that regard. I 
think in many states the Governors are looking at broadband as 
an economic development tool. So, in addition to just looking 
at it as a communications tool, it becomes an economic 
development tool. I believe the states would readily opt into 
the opportunity to add to and to grow funds to develop those 
areas that are underserved and most difficult and most costly 
to reach. In Wyoming, for example, they've undertaken a very 
extensive study at a very granular level to determine not only 
the cost of serving all unserved areas in the state, but to 
determine the least-cost mode of doing so for each unserved 
area. If you coupled that, for example, with an auction which 
allows all intermodal competitors to bid, but set a ceiling on 
the cost, which is the lowest cost, then you have a level 
playing field opportunity for all intermodal competitors and, 
at the same time, secure build-out for the least amount of 
funds expended to get to those highest-cost areas.
    Senator Stevens. Thank you very much. My time's up. I don't 
know that other areas have the same problem we do. Our tele-
medicine, our tele-education, out tele-conferencing for 
disasters are all tied to this system that currently is 
supported by Universal Service. Any disruption in that would 
disrupt the healthcare system, the education system, and the 
overall survival system, in terms of disasters. So, we're very 
worried about this transition in our area, to make sure that it 
doesn't dislocate the existing service as it tries to bring on 
a new service.
    Thank you, Mr. Chairman.
    The Chairman. I thank you, sir.
    Senator Dorgan?

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

    Senator Dorgan. Mr. Chairman, thank you very much.
    First of all, thanks for your testimony. Senator Stevens 
has introduced a broadband bill. Senator Smith and I have 
reintroduced our broadband bill. Both, I think, are reflective 
of what might have been possible in the last Congress. I, kind 
of, view both as a starting point. I'm much more interested in 
what is required than what is possible. I think we ought to 
stretch what is possible to what is required. And I want to 
just ask a couple of questions about that.
    As I understand it, the Commission defines broadband as 200 
kilobits. Is that correct?
    Mr. Copps. That's correct.
    Senator Dorgan. That's almost unbelievable to me, frankly. 
You know, you take a look at a number of foreign countries, 
they're getting 20 times our speed for half our cost, because 
they've developed much more aggressive public policy, deciding 
that they wanted the buildout of advanced services more 
universally.
    I was here in 1996, with my colleagues, when we wrote this 
bill, and we talked about, in this legislation, that we wanted 
to provide consumers in rural and high-cost areas with access 
to telecommunications and information services that are 
reasonably comparable to those services and rates provided in 
urban areas. And so, what we said was, ``Individuals in rural, 
insular, and high-cost areas should have access to basic and 
advanced services at rates that are reasonably comparable to 
rates charged for similar services in urban areas.'' I don't 
understand, I would say to the two Commissioners, why the 
Commission has described that provision in law as not including 
Universal Service support for broadband.
    Mr. Copps, could you respond to----
    Mr. Copps. I agree. I think we have the charge, under the 
Telecommunications Act, to be addressing that and bringing 
advanced services to rural areas. As I said in my statement, I 
don't know that we have a consensus on that particular 
challenge, but I'm certain that we need to meet it. This is the 
infrastructure of our future. I'm convinced that some of those 
rural citizens in North Dakota are just not going to get high-
speed broadband, really competitive high-speed broadband, 
unless we develop a national strategy and use this Fund in a 
more effective fashion to bring that kind of advanced 
telecommunications to all of the citizens of your State, and 
the other states, too.
    Senator Dorgan. Commissioner Tate?
    Ms. Tate. You know, I share your concerns. I think we all 
do. We are very concerned about getting these services out to 
the rural parts of America. I think that, really, Commissioner 
Landis hit the nail on the head, in that this is really about 
economic development for our whole country. So, we look forward 
to working with you as we move forward.
    Senator Dorgan. But my question wasn't about my concern. I 
think all of us have the concern. My question was about the way 
we wrote the law. We specifically included, in the law, 
advanced services. We weren't sure what those advanced services 
were, but we understood what we wanted Universal Service to 
mean; and that is, people in rural areas would be able to get 
reasonably comparable services at affordable prices. And so, I 
think the way this is worded--you know, I went to a high school 
where I had a senior class of nine students. We didn't have a 
foreign language. So, I couldn't read it if it were a foreign 
language. But this is not a foreign language. As I read this, 
it says advanced telecommunication and information services 
shall be accessible, ``in all regions of the Nation,'' and then 
we talk about access to advanced services at rates reasonably 
comparable. I don't understand how that can have been misread 
for so long by so many, Mr.----
    Mr. Gregg. Senator Dorgan, 254(c) of the Telecom Act sets 
forth how Universal Service, or those services that will be 
supported by the Universal Service Fund, are to be determined. 
``Universal Service'' is defined as an evolving level of 
telecommunications services. And there are set forth a number 
of criteria which the Joint Board has to evaluate in 
determining whether to add services to the list of supported 
services. Currently, there are, I believe, 13 separate 
services, which basically make up plain old telephone services, 
that are supported. One of the criteria that we have to look at 
in deciding whether to add broadband is whether it is 
subscribed to by action of market forces by a substantial 
majority of residential customers. The last time we examined 
this, in 2002, only 12 percent of residential customers 
actually subscribed to broadband. The verdict of the Joint 
Board then was, ``It's coming, but it's not yet there.'' Right 
now, we are almost at 50 percent. The time to move is now, 
under the existing law.
    Senator Dorgan. You know, the Joint Board, that's a 
different subject, perhaps for another day. I know it relates 
to this, but the Joint Board's been talking about primary line 
restriction for rural areas, and so on. What that is, is a 
carve-out for a disadvantage for rural areas. So, I have 
minimum high regard for some of those recommendations, I might 
say.
    Let me ask, my understanding is, the FCC currently says 
that broadband is ``deployed,'' in an area if one customer in a 
Zip Code is served. Is that correct, Commissioner Copps?
    Mr. Copps. That is correct. It's almost like saying if one 
person in your town drives a Mercedes-Benz, everybody must 
drive a Mercedes-Benz. But that's the methodology we've used. I 
think the Commission is on the verge of trying to tee up a 
little more sophisticated approach to this, but that involves 
notice and comment on a proceeding, and we're about 15 years 
too late to be heading down that road.
    In answer to the previous question, though, a further 
factor that you need to take care of is, we've been doing our 
dead-level best--not me, but the Commission, generally--to 
exclude some of these systems, some of these technologies, from 
Universal Service by reclassifying them as information service. 
So, the plain old telephone service of the last century, yes, 
we're supporting that, the POTS. But we don't support the PANS, 
which is the Pretty Awesome New Stuff. And I think America 
needs the POTS and the PANS in the 21st century.
    Senator Dorgan. Well, first of all, this is horribly 
complicated; I understand that. I mean, just trying to think 
through all of this, and understand it--it's horribly 
complicated. But, I've got to tell you, I think we're really 
tiptoeing, and have been tiptoeing for a long while; and, in 
some cases, been tiptoeing on not very solid ground. I think 
some serious mistakes have been made in implementation of the 
law. No question, we have to broaden the base. All of us 
understand that. And there have been previous decisions that 
should have broadened the base, that did not. We have to do 
that.
    But, more than that, I think both the Congress and the 
Commission have to decide on how broad these goals are going to 
be, and how aggressive we're going to be in meeting them. And I 
sense a reluctance here in the panel and also with respect to 
the witnesses, a reluctance to really describe what is 
required. Because I come from a town of 300 people. I'm just 
telling you, lots of places are getting left behind and are 
going to be permanently left behind.
    Mr. Landis, you talked about this being economic 
development. Well, I'll tell you where economic development is 
not going to happen, certainly if the Joint Board would have 
had something to say about primary line. I mean, you will not 
have any crack at economic development in areas where you live 
on the wrong side of the digital divide.
    So, Mr. Chairman, thank you for holding this hearing. I 
think this is a starting point, and I'm much more interested in 
what is required----
    Senator Stevens. Would you yield for just one----
    Senator Dorgan. I certainly would.
    Senator Stevens. Senator, if you pick up the phone and want 
to make a reservation in one our major hotels, you're talking 
to someone in India. That system could be in North Dakota or in 
Alaska, in many parts of rural America, but for the absence of 
this kind of service. I really think it is economic 
development, and bringing home some of the stuff that's gone 
overseas, because of the lack of the communication network we 
needed to keep up.
    Senator Dorgan. Well, I agree with that. All I'm saying is, 
I don't think any of us--the Congress, the Commission--none of 
us can afford to be timid. I mean, we've got to move. It's been 
11 years now since we passed this bill.
    The Chairman. Yes.
    Senator Dorgan. And, as I said, I read it, and it's in 
English, and I understand what is possible. I want the FCC to 
broaden its capability to read this in a way that does what is 
possible to give all Americans the same opportunities.
    Mr. Copps. Can I make just one comment? Because I don't 
want anybody ever to think that I'm the least bit reluctant 
about this. I believe that this is absolutely integral to the 
future of our country. I believe this is the central 
infrastructure challenge that the United States of America has. 
As you look throughout our history, we've had infrastructure 
challenges. When we first started this country, settled the new 
lands, the question was, how do you get products to markets? 
So, we decided, as a country, to build roads and turnpikes and 
river improvements and canals and all the rest. Then we built 
regional railroads. After the Civil War, we're a continental 
power, how do we bring the country together? We committed to 
the infrastructure, we built the transcontinental railroad. 
Even in the Eisenhower years, we built the interstate highway 
system. This generation's rendezvous with destiny is to get 
these modern telecommunication systems out to all of our 
citizens. It's economic development, it's individual 
opportunity, it's individual fulfillment. And I think it's the 
future of the country.
    Senator Dorgan. Mr. Chairman, my time is up, but I--the 
interstate highway issue is exactly the point. They probably 
wouldn't justify building an interstate highway through North 
Dakota, East to West, except as it connects our Nation and as a 
bridge. The same is true with respect to the digital interstate 
highway that we have to build everywhere in this country.
    The Chairman. Thank you very much.
    Senator Pryor?

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

    Senator Pryor. Thank you, Mr. Chairman.
    Interesting discussion today. I want to thank the panel for 
being here. When you look at the future of telecommunications, 
to me it seems like it's wireless and broadband. I don't think 
there's any doubt about that. I mean, that's the way everything 
seems to be going. And I'm glad we're having a broadband 
discussion here today, because it's essential. It's like what 
everybody has said in the room. There are some challenges in 
figuring it out, but we have to do it the right way to make 
sure that all Americans--within reason, but all Americans have 
access to broadband.
    Let me switch gears just for a moment, about wireless, 
because I do feel like America is going wireless. Clearly, 
that's just the trend that things are going, the direction 
things are going. For example, in Arkansas, we have 47,000 
farms. Those farms support about 287,000 jobs in the ag sector. 
Farmers need wireless communications. Someone told me, 
yesterday, they'd rather sit on their tractor and transact 
business--it's not easy for them to get off and go in the 
farmhouse and do all that--and do that. And that's the way it 
is everywhere. And everybody ought to have access to that. 
And--for example, a farmer--broadband is important to them; 
wireless broadband. They can check commodity prices. They can 
transact their business when they're out there in the fields 
and taking care of other business. And they ought to have that 
same access that other people have, as well.
    So, Ms. Tate, let me start with you, if I can, and really 
ask the whole panel about the new rules for high-cost support 
that will continue to support wireless. Is that what we're 
committed to doing, is to make sure the future is wireless and 
broadband?
    Ms. Tate. Well, I think that you're right, that there are 
short-term issues and solutions that we've tried to lay out 
here today. And then, there are also longer-term solutions. 
And, as Senator Stevens says, we've got to think about the 
transition in between, so that companies who have been reliant 
on some of these funds have the opportunity to, as they are 
learning new business plans and reengineering their business 
plans for all the new technology, also have to realize whatever 
is going to happen with the Fund. So, I certainly recognize the 
need, and we want to be supportive of all the new innovative 
technological changes, and I appreciate exactly what you're 
saying.
    Senator Pryor. You know, one of the challenges, being from 
a rural State--and pretty much all of us are from rural states 
here today, or states that have a large percentage of rural 
population--one of the challenges in the traditional wireline--
by the way, I think there's always going to be a market for 
wireline, the traditional telephone. I don't see that going 
away. I don't think we'll go 100 percent wireless. But one of 
the challenges has always been, in rural America, to string 
that copper wire out the miles and miles and miles you have to, 
to get to a few customers; whereas, you have a densely 
populated area, where you have to string it maybe a block, and 
you get ten times the customers that you would get with several 
miles out in the country. But I would like to hear from the 
rest of the panel about your commitment to making sure that 
wireless is a real option for rural America.
    Mr. Copps?
    Mr. Copps. Well, I agree with that, too. I think what 
wireless has already done is fantastic, and the future is 
boundless. That being said, I think we are under a charge to 
observe some semblance of technology neutrality at the 
Commission. The reality of the situation right now is that 98 
percent of the people who are getting broadband today, are 
getting it through DSL and cable modem. So, our hope for the 
future is that wireless will play its rightful role. I think we 
will see a lot of innovations. We already are. And I think the 
one obligation of the Commission is to encourage that, to 
provide the right kind of incentives that don't disadvantage 
another technology in the process, but that really open the 
frontiers for these industries to develop.
    Senator Pryor. Right.
    Commissioner Landis?
    Mr. Landis. I would agree with my Federal colleagues that 
wireless has to play an important role in the process. The 
challenge is to address it in such a way that we don't 
inadvertently make the wrong decisions. In----
    Senator Pryor. Tell us what----
    Mr. Landis.--many cases----
    Senator Pryor.--tell us what you mean by that.
    Mr. Landis. In many cases, in hundreds of areas across the 
country there are already multiple wireless companies present. 
In many of those cases, those entries occurred based on a 
competitive model; that is, they entered the market to serve a 
customer base that they saw that they could do without support. 
In other cases, companies have built their entry premised on 
Universal Service support. And whatever we do, in terms of the 
solutions that are developed, we want to make certain that we 
don't inadvertently advantage one company in an environment 
which may be largely competitive. The challenge, of course, is 
in separating those two out and determining where a truly 
competitive situation has been the motivating factor behind 
entry, and those areas where entry really does require support.
    Senator Pryor. Actually, just a comment on that. I love 
competition. I think that's healthy. But we've all heard the 
terms like ``cream-skimming'' or ``cherry-picking.'' We've all 
heard those terms. But, you know, we all know that the 
investment, by and large, is going to follow the population. I 
mean, that's just the way it is. I mean, because that's where 
the money is, that's where the preliminary investment is. So, I 
just think we need to make sure that the proper amount of 
investment is going out to rural America to serve those needs, 
as well.
    Did you have a comment?
    Mr. Burke. Senator, I come from a State, too, where the 
``C'' I worry about a lot isn't necessarily competition, but, 
instead, is coverage. And----
    Senator Pryor. Right.
    Mr. Burke.--I understand----
    Senator Pryor. We have some that----
    Mr. Burke.--your concern.
    Senator Pryor.--yes.
    Mr. Burke. The only thing I will say, though, is that I 
believe that the Universal Service Fund should have some limit 
as to where the line would be drawn between subsidizing 
competition and making sure that rural America has a reasonably 
comparable service. That's a challenge. I'll freely admit that. 
Because both sides of that coin can readily be seen. I think 
that maybe that's what we have to focus on. Maybe the focus 
ought to be, where do we draw that line? And I think that 
that's a challenge.
    Today, my son has no idea what a wireline is. He thinks 
just electric service runs through those wires and poles----
    Senator Pryor. Right.
    Mr. Burke.--outside his door.
    Senator Pryor. Right.
    And, Mr. Gregg? Thank you.
    Mr. Gregg. Senator, your question about wireless raises 
some of the issues with the problems of the high-cost fund 
today. We have created a de facto $1 billion wireless 
infrastructure fund through the operation of current high-cost 
fund rules. Nobody planned it that way, nobody intended it, 
nobody is looking at it that way today. But that is, in fact, 
what it is. The problem is, it is not distributed evenly. The 
wireless carriers are flocking, obviously, to where the money 
is, like Willy Loman, in talking about robbing banks. They're 
doing what is economically rational under the current rules.
    If we want to support wireless buildout in rural areas, if 
this Congress wants to support wireless buildout in rural 
areas, they should say so. Like the broadband fund in S. 101, 
there probably should be set up a wireless broadband fund, as 
well, with some principles to guide distribution. Otherwise, 
we're going to continue to have it pocketed away in certain 
discrete areas instead of equitably distributed throughout the 
United States.
    Senator Pryor. Mr. Chairman, thank you.
    Senator Dorgan. Mr. Chairman, might the Senator yield to me 
just for a moment?
    Senator Pryor. Sure.
    Senator Dorgan. I did not mention that Senator Pryor is, of 
course, a part of Senator Smith's and my Universal Service 
bill----
    Senator Pryor. Thank you.
    Senator Dorgan.--and has played an integral role in that.
    Senator Pryor. I'm proud to be part of it.
    Senator Dorgan. I neglected to mention that. I apologize.
    Senator Pryor. Thank you.
    The Chairman. Thank you.
    Senator Smith?

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

    Senator Smith. Back to the same bill. I'm proud to be with 
my colleagues on this bill. Enough may have already been said 
about it, but it does create a $500 million account within the 
Fund, and it specifically targets broadband deployment.
    I think you've all answered this generally in agreement 
that the Universal Fund should be used to promote broadband 
deployment. But I'm wondering, are there other ways we can 
encourage broadband deployment to rural Americans? And I'm 
really thinking, should the Universal Service Fund be tied to 
minimum broadband speeds? Does anybody have a thought on that? 
Should that be a standard?
    Mr. Copps. Well, I know it shouldn't be tied to 200 
kilobits up and down, as we currently define broadband. You've 
got to find a way to incentivize it. And you'll hear a lot of 
talk today about the wonderful job we're doing with broadband 
deployment and penetration. But so much of it is at speeds that 
are not going to make us competitive in the world, are not 
going to make rural America competitive with urban America. So, 
having some benchmarks like that, I think, is an important part 
of an incentivizing system that's really going to get this 
stuff out.
    Senator Smith. Well, you know, to Senator----
    Mr. Copps. I mean, the devil's in the details, but I think 
the concept is certainly worth looking at.
    Senator Smith.--to Senator Stevens' point, if we're going 
to bring the jobs back from India to Alaska and North Dakota--
I'd throw in Oregon, too, and Arkansas--it's got to be 
comparable, doesn't it? Yes.
    Certainly, one of the goals of the Fund is to reform the 
control and growth of that fund. And, you know, Senator Stevens 
has mentioned that the reverse auctions may or may not be a 
good idea. I don't know. I think he's opposed to that. I have 
no firm position on that, especially. But I'm wondering, are 
there other ways we might control the growth of the Fund, short 
of capping it or reverse auctions?
    Mr. Gregg. There are any number of ways you can limit the 
Fund. The Fund has a number of discrete inputs that result in 
what finally comes out of the Fund. Decisions that were made 
early on, as I said in my opening statement, have resulted in 
the system we have now. We could have gone to a system similar 
to that described by Commissioner Burke for the whole high-cost 
fund, where we simply allocated a certain amount of money to 
each State, said, ``If you match this, you get the Federal 
share. You then decide how to allocate it. Your states are 
closer to it. You know where the money needs to go. You know 
where the high-cost areas are. You know where the unserved and 
underserved areas are. Go to it, subject to audit after the 
fact.'' You could have, even within the context of the current 
Universal Service Fund, limited receipt of Universal Service 
subsidies to only one facilities-based provider for each study 
area in the United States. All of those would have constrained 
the size of the Fund, but yet provided adequate support to do 
everything we want to do.
    Senator Smith. Is there a consensus that the best way to 
direct is through the states, as opposed to a certain provider?
    Mr. Gregg. I think the states have an obvious role. In 
fact, the Tenth Circuit Court of Appeals, in the Quest I 
decision, said that section 254 describes a cooperative State-
Federal effort to promote and advance Universal Service. So, 
states will always be involved.
    Senator Smith. Any other thoughts on that?
    Mr. Copps. Well, I would hope we would always have a 
constructive Federal-State relationship. I think we've kind of 
gotten away from it in some of the FCC preemptive activities 
that have taken place over the last few years. The genius of 
America is having that balanced partnership.
    You asked about specific steps to control the growth of 
that fund. You know, one that several observers have talked 
about, and I think I mentioned, is doing something about the 
identical support system. Yes, we want to encourage all of 
these multiplicity of technologies, but we want to do it in a 
realistic fashion and allow for the recovery of legitimate 
costs. But this fund is under too much pressure to go beyond 
that and to be adding any monies that don't need to be in it. 
So, that's one way that we could do it.
    Senator Smith. Thank you.
    Mr. Burke. Senator, I would only mention, and only add, 
that I think that there are other ways besides just an auction 
that can be viewed. In fact, we've heard, from several 
presenters, issues on disaggregation and better targeting the 
areas that need help. There's no particular answer that seems 
to be an absolute given at this point in time. And one of the 
reasons for the caps--I just want to make sure you don't think 
that the idea of a cap was an ultimate solution--as a matter of 
fact, it clearly is a Band-Aid, trying to give us the ability 
to work toward that point where we can come up with a more 
permanent answer.
    Senator Smith. Thank you very much.
    The Chairman. Senator Rockefeller?
    Senator Rockefeller. Thank you, Mr. Chairman.
    I just want to make a point, since I came in late, and then 
I have two questions within 7 minutes.
    The just-departed Senator, Olympia Snowe, and I had an 
event the other night, which many people should have been at, 
which was about the E-Rate. And you can't possibly expect me to 
be in the Commerce Committee on this subject without talking 
about the E-Rate. I think it's probably received more oversight 
than any government program ever conceived. And that's been a 
good thing. We have not paid the same level of attention to the 
high-cost fund. We're facing serious challenges in trying to 
adapt Universal Service to, as Commissioner Copps has said, an 
entirely different telecommunications environment.
    I share Billy Jack Gregg's concern that the growth of the 
Fund is becoming increasingly financially burdensome to the 
consumers. If we do not adopt policies that limit the growth of 
the Fund, we will know that, as the Honorable Mr. Burke has 
indicated, that a cap will be inevitable, but not at this 
point.
    I would prefer that the FCC adopt policies that would limit 
the growth--and this will lead to a question to the two 
Commissioners--to limit the Fund of the growth so that the cap 
is not necessary. But I know--that was a very thoughtful 
statement by Mr. Gregg--supporting the cap, at least in the 
short term, because of Congress's and the FCC's inability to 
make hard decisions, what it amounts to. Senator Dorgan was 
talking about that. I think it's unfortunate it got to this 
point.
    The FCC and the Joint Board are facing short-term tough 
decisions to limit the growth of the Fund. We all must begin 
the long process. I believe there are three main points. I 
believe that broadband providers must begin to pay into the 
Universal Service system if we're going to have a long-term 
sustainable base of revenues, called a ``pyramid base.'' Two, 
we should demand that recipients of Universal Service Fund 
resources that get those things, that they be required to 
transition their networks into the next-generation broadband 
network. That has not been necessarily advanced toward them, 
but I think it's critical. It does not make sense to continue 
subsidizing the deployment of networks that are becoming 
obsolete. We have been told, third, for 2 years, that broadband 
is the future of all communications. I agree with Senator 
Dorgan again. We talk, we talk, we talk, we talk. I think I've 
been on 12 bills in the Finance Committee to do with broadband, 
none of which get it. They all get 75 cosponsors, and nothing 
ever happens. So, we've been told for 2 years that broadband is 
the future of all communications. We've got to make sure that 
rural Americans fully participate in this future.
    Now, my questions, to all panelists; in a previous hearing, 
Chairman Martin said that the FCC has the authority to broaden 
the Universal Service program to include broadband, but, he 
said, it didn't have the money. In Mr. Burke's statement, he 
states that current law may not allow the FCC to include 
broadband in the program. I would like to ask each of the other 
panelists, or all of the panelists, starting with Commissioners 
Tate and Copps, their thoughts on whether they believe the FCC 
has the authority to add broadband to the list of supported 
services to the Universal Service Fund.
    Ms. Tate. Well, Senator, I think that whether we have the 
authority or not also has to be balanced with whether or not 
you utilize that authority or not, and the continued pressure 
that that would put on the Fund. So----
    Senator Rockefeller. You know, I'm already off track with 
you. The answer is not, Can you afford it? Do you have the 
authority? That's all I'm asking.
    Ms. Tate. Yes, sir, I think that we do----
    Senator Rockefeller. OK.
    Ms. Tate.--have the authority.
    Senator Rockefeller. Commissioner Copps?
    Mr. Copps. I think we have the authority. I think the 1996 
Act makes plain that we are supposed to consider evolving 
advanced technologies. I think that translates into broadband, 
and can only translate into broadband. So, yes, I think the 
Commission has that authority.
    Mr. Burke. Senator, I think that the concern that I had was 
simply, as you read the Act--and as the newest member of the 
Joint Board, you tend to just go back and read the Act itself 
before you go anywhere else--and the concern that I had was 
that, in fact, there is, implicit in the subsequent section to 
the (b) section, that there be a take rate of a majority of the 
residential households. I'd like to think that actually, 
however, that's almost a nonquestion for us now, based on the 
definition we have of ``broadband services.'' Even if you do 
look at that, and the take rate does have to be 50 percent to 
sustain a challenge, we're there, or will be there so quickly 
that, by the time we're able to do anything with regard to 
supported services, even if we were able to do it in a matter 
of just a few months, we're already going to have a 50 percent 
take. So, hopefully that's a question we don't have to answer, 
anyway.
    Senator Rockefeller. Thank you.
    Mr. Gregg. The answer to your question is yes, even though 
the FCC has defined many of the broadband services as, quote, 
``information services,'' they have also said that each of 
those services--cable modem, DSL--have a telecommunications 
component. As a result, 254(c) would apply in determining 
whether they should be added to the list of supported services. 
As I indicated in response to Senator Dorgan a while ago, the 
problem with adding broadband to the list of supported services 
and bringing it under the umbrella of the Universal Service 
Fund is a problem with the wording of the Act. We are going to 
start moving on adding broadband, but it will take 2 years to 
get it finished. If you want it done faster, Congress needs to 
change the wording of the Act.
    Senator Rockefeller. Is that on the record?
    [Laughter.]
    Senator Rockefeller. Thank you.
    Mr. Landis?
    Mr. Landis. Yes, Senator.
    Senator Rockefeller. The answer is yes?
    Mr. Landis. Yes.
    Senator Rockefeller. OK.
    [Laughter.]
    Senator Rockefeller. I thought you were just recognizing 
that I was sitting here.
    [Laughter.]
    Senator Rockefeller. I wasn't sure.
    Mr. Landis. Both.
    Senator Stevens. Ask Mr. Gregg for a draft of the amendment 
he would like to----
    Senator Rockefeller. Yes, that's a very good idea.
    You got an amendment?
    Mr. Gregg. You could just change 254(c) to say it does 
include broadband, as defined by the FCC.
    Senator Rockefeller. The Clerk has recorded that.
    Mr. Burke. Or with faster speeds than the FCC.
    Mr. Gregg. I'm assuming that the FCC is going to evolve 
that definition. 200K may have made sense back in 1998, when 
they first started recording the advance of broadband. It now 
probably is something closer to 768K or 1 meg. In a few years, 
it'll probably be closer to 10 to 100 megs.
    Senator Rockefeller. I've got to do my final question.
    Commissioner Tate, last year the FCC relieved DSL providers 
from paying into broadband. At the same time, the FCC required 
VoIP companies to contribute to the Universal Service Fund. 
This mandate is currently being challenged in court, where it 
could lose. Again, last year the FCC increased the percentage 
of wireless consumer bills subject to USF assessment. Now, how 
have these decisions impacted the flow of revenues into the 
Universal Service Fund? Is the FCC collecting more, or are they 
collecting less, revenues because of some of these decisions 
that they have made? It's my understanding that wireless 
carriers are paying less in USF obligations than the industry 
did before you increased their safe harbor. What will the FCC 
do if the courts strike down the requirement relating to VoIP, 
as set forth by the FCC?
    Ms. Tate. Well, Senator, I don't think that I have the 
numbers with me today to absolutely answer exactly what you're 
asking and what the exact figures are. I think that we tried to 
make those decisions, because they were the right decisions. 
I--the DSL decision was made before I got----
    Senator Rockefeller. OK.
    Commissioner Copps?
    Mr. Copps. I think the practical effect of the mistaken 
decision that the Commission made to exclude broadband was 
really to create a shortfall which is probably somewhere in the 
area of $350 million to $500 million. Now, that doesn't mean 
the Fund is suddenly deficient, because it's USAC that sets the 
size of the Fund. It means it skews everything. It means you 
have to go out and raise the monies from somewhere else. 
Different businesses, different consumers feel the impact. But 
there's no question in my mind that it had an unhealthy effect. 
And if we're really going to go down this road of broadband 
that everybody's talking about, certainly we have to reverse 
course and make sure that it's going to be contributing.
    Senator Rockefeller. With the Chairman's permission, I 
think that--Senator Dorgan, did you have a comment?
    Senator Dorgan. No, I'll defer.
    Senator Rockefeller. OK.
    Senator Dorgan. Thanks.
    Senator Rockefeller. Thank you.
    The Chairman. Senator Snowe?

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

    Senator Snowe. Thank you, Mr. Chairman.
    I want to welcome all of you here today. And obviously 
these are, you know, complex issues, and some are more timely 
than others. And I just want to be clear on the question that 
was posed by Senator Rockefeller, on the question of changes in 
the existing telecommunications law with respect to broadband. 
So, which would come first? Would you be proceeding with any 
action in broadband under the Universal Service Fund? Would you 
be pending any action by Congress? Or would you be taking your 
own action eventually on this question? I'm not clear on that.
    Mr. Copps. I would be in favor of going ahead and taking 
actions under authority that I think we have. Whether I can get 
three votes to do that----
    Senator Snowe. Right.
    Mr. Copps.--at the Federal Communications Commission, I 
don't know. But I think that's the road that I would like to go 
down, that kind of initiative.
    Senator Snowe. Commissioner Tate?
    Ms. Tate. Yes, I'm trying to say this in a very thoughtful 
way, but I think that, at the same time that we think that we 
have the authority, and that we do believe that this is the 
direction the country needs to move ahead, we have some pretty 
stark and dramatic rises in this Fund that we have to weigh in 
what we have to do first. I think the growth of the Fund has 
got to be stemmed. But, yes, I think that we should look at 
broadening the definition to broadband.
    Senator Snowe. So, would that be contingent on action taken 
by Congress, on that question? I mean, I think that that's 
obviously an important issue, in terms of time frame here, as 
well, because I agree with you, Commissioner Copps--and I think 
all of you probably share the same thought--I mean, there is a 
timeliness question and an urgency when it comes to broadband 
deployment, ultimately. I mean, because we can't afford to 
wait, given, you know, our standing in the world, for example. 
I mean, you know, we rank 19th or 20th in the world in terms of 
broadband deployment. In my home state of Maine, 73 percent of 
households don't have access to it. So, I think that's a major 
issue, in terms of time frame and what the schedule is going to 
be, in the final analysis. And so, would you be taking a vote 
anytime soon on this question? I mean, exactly what----
    Ms. Tate. I think we----
    Senator Snowe.--what's the plan?
    Ms. Tate.--encourage the Chairman to put that before us.
    Senator Snowe. OK.
    Mr. Gregg. Senator Snowe, as----
    Senator Snowe. Yes?
    Mr. Gregg.--as I said earlier, it all depends on the FCC 
taking action under current law. They have to act first, refer 
it to the Joint Board. But that's a 2-year process. If you want 
it to move faster----
    Senator Snowe. And that's what you were----
    Mr. Gregg.--it's going to----
    Senator Snowe.--saying.
    Mr. Gregg.--be up to Congress.
    Senator Snowe. I see. So, if you want to do it sooner, then 
we have to take Congressional action. I see. Because it's the 
FCC first.
    In terms of broadband deployment overall, Senator Stevens 
obviously has, in the telecommunications rewrite, a $500 
million Fund for unserved areas. What are your thoughts on that 
question? In terms of trying to, you know, target and limit, 
you know, the deployment, because we want to contain the costs, 
is that a way to go about it? If we use specific geographical 
information, as some have recommended, as a way of trying to 
contain the growth--if we were to include broadband deployment?
    Ms. Tate. I think you're probably going to hear from some 
presenters later, in the next panel, that are going to talk 
more about targeted approaches, and I think that's something 
that we heard at the en banc. We haven't even had a chance to 
talk about the en banc held last week, and we are still 
discussing that. We haven't discussed them as FCC Commissioners 
yet. But I think those are interesting proposals. I do think 
it's important to recognize there are a lot of states that have 
incredible initiatives going on that are using their own State 
tax incentives, for instance, and other incentives, to try to 
encourage broadband in their states. Kentucky is one. Tennessee 
has a task force. So, I think that the states are doing a lot.
    Senator Snowe. Commissioner Copps?
    Mr. Copps. I think a targeted approach is fine in the world 
in which we live, but I think, in the final analysis, it comes 
down to, how ambitious do we want to be in having a national 
broadband strategy? And in terms of Universal Service, does 
that really mean everybody? It seems to me it does. Does it 
mean reasonably comparable service at reasonably comparable 
prices? I think, yes. So, I think the ultimate goal has to be 
every citizen of this country having access to this kind of 
technology and service.
    Senator Snowe. Thank you.
    Yes?
    Mr. Landis. Senator, I think one of the things, which we've 
already addressed, and which you'll also hear from the second 
panel, is the need for more precise information with regard to 
the cost of doing so. In reality, there are multiple ways in 
which we can encourage it. If the cost of buildout to unserved 
areas is not too great--and don't ask me to put an exact number 
on it--it may well be that tax incentives at the State level 
would prove sufficient to promote broadband buildout. If you 
look at the Wyoming experience, for example, where they have 
projected costs based on a model for those areas that are 
currently unserved, the tenth docile costs over $10,000 per 
household for buildout. And so, tax incentives are not going to 
prove sufficient in that situation. Clearly, there needs to be 
a subsidy if we are going to move forward, and if we have the 
will to actually make that a reality.
    Senator Snowe. I see.
    Mr. Landis. But the first step, it seems to me, is getting 
a handle on the actual costs of doing so, at a much more 
granular level.
    Senator Snowe. I see.
    Mr. Burke. Senator, I think that states are really aware of 
their shortcomings with regard to broadband and advanced 
services. I think you're aware that Governor Douglas, in 
Vermont, has indicated his plan to make Vermont an E-State in 
its entirety by 2010. Obviously, incentives are on the minds of 
states. And that's one of the reasons why, it seemed to me, 
that to help both the Congress and states target the matching-
funds type of grants might make sense. I think that it allows 
for a solid distribution. Because I think, although this Fund 
is very laudable, the devil's going to be in the details, and 
the targeting is going to be extremely important.
    Mr. Gregg. The market itself will ultimately make broadband 
available to about 85 to 90 percent of all the households in 
the United States. It's going to be that remaining 10 to 15 
percent of households where it is not economically feasible to 
have broadband made available, absent some sort of explicit 
subsidy. Obviously, adding it to the Universal Service Fund is 
a piece, tax breaks and incentives are a piece, the RUS program 
of low-interest loans and grants is a piece. There's going to 
be a multiplicity of sources that go into making broadband 
available to that final 10 to 15 percent. And that is where our 
efforts should be focused.
    Senator Snowe. Thank you.
    And finally, I would like to ask, since, we're, celebrating 
the 10th anniversary of the E-Rate, and one of the issues that 
obviously emerged was the Antideficiency Act, and Senator 
Rockefeller and I supported a permanent exemption. Commissioner 
Tate, what's your response to that? Because, otherwise, I don't 
know what guarantees there are that we could stabilize the E-
Rate, under the circumstances, if the ADA were to apply.
    Ms. Tate. Yes.
    Senator Snowe. You agree with that. They should be a 
permanent exemption. That's the only way to address it.
    Ms. Tate. Well, I'm not sure that I would go so far as to 
say it's the only way. But I appreciate your efforts to----
    Senator Snowe. Yes.
    Ms. Tate.--stabilize that fund.
    Senator Snowe. Yes.
    Any others? Commissioner Copps?
    Mr. Copps. I certainly support the----
    Senator Snowe. Yes. OK.
    Mr. Copps.--permanent exemption.
    Senator Snowe. Right. OK.
    And finally, when it comes to, you know, broadband 
deployment within the school systems and classrooms in America, 
do we have any information with respect to E-Rate. Because I 
happen to believe that we should make the E-Rate adaptable to, 
you know, the technologies of the future. And that includes, 
obviously, broadband deployment and the bandwidths and 
platforms. Do we have any current information with respect to 
how many classrooms in America that might have access to, you 
know, broadband deployment?
    Mr. Copps. I think we're up in the 93 or more percent of 
classrooms connected, but then you've got to ask yourself, 
what's the----
    Senator Snowe. Right.
    Mr. Copps.--speed of the connection? And are kids in rural 
America going to expect a dial-up connection to the rest of the 
world, or a true high-speed connection? So, I think the future 
of the E-Rate is every bit as important as the past. It's got a 
long way to go. These are evolving and changing standards, and 
we have to make sure that the E-Rate program accommodates those 
changes and brings that level of communications to our kids.
    Senator Snowe. OK.
    Thank you. Appreciate it.
    Senator Stevens. Mr. Chairman, could I ask just one 
question?
    The Chairman. Sure.
    Senator Stevens. It's my understanding that in order to 
utilize satellite delivery to consumers in isolated rural 
areas, you'd need a change in the law. Do you agree with that, 
Mr. Copps?
    Mr. Copps. Not that I'm aware of. I have seen broadband 
delivered by satellite. I've seen it in----
    Senator Stevens. I mean, Universal Service payments, 
though.
    Mr. Copps. Oh. I am not aware of there being a problem. 
I'll be happy to look into it and----
    Senator Stevens. Thank you.
    Mr. Copps.--see if there is, but I do not believe there is. 
I believe it should accommodate all of those different 
technologies.
    The Chairman. I'd like to thank the panel very much.
    I think it's obvious to many that I'm a member of the 
crystal-set radio generation.
    [Laughter.]
    The Chairman. And, as a result, I'm convinced of the 
dynamic and ever-changing evolutionary character of 
communication. I am one of those who worked upon the 
Telecommunications Act of 1996. And, I think, 3 months later it 
was obsolete. We used the word ``Internet'' twice in the whole 
bill. Now it's part of our vocabulary.
    I will be submitting questions to all of you, because time 
is of the essence, and we have a whole panel waiting.
    But this panel reminded me of an early time in my life when 
I had a nice chat with a gentleman called Henry J. Kaiser, who 
was making millions every day. And I asked him what is his 
secret, and he said, ``It's very simple. I never use phrases 
like, `This is an impossible task,' or I never uses phrases 
like, `This is too complicated.' That's a cop-out.'' And I'm 
glad that none of you have copped-out, in the panel here, the 
Committee has not copped-out.
    The Vice Chairman has suggested, and I agree with him, that 
we should have a special, in-depth briefing on broadband, 
because, in order to cope with this problem, we'd better have a 
real good understanding of the potential, the limitations of 
broadband. And we're going to do that.
    And so, with that, I'd like to thank all of you for your 
contribution. It's been a great session for me. But I'd like to 
submit my questions, if I may.
    Thank you very much.
    Our next panel consists of the following: the Executive 
Vice President of North Dakota Association of 
Telecommunications Cooperatives, Mr. David Crothers; the 
Director-Policy/Regulatory Economist, Department of Law and 
External Affairs of the Embarq Corporation, Dr. Brian K. 
Staihr; the Executive Vice President, Corporate Secretary, and 
General Counsel of Alltel Corporation, Mr. Richard N. Massey; 
the Executive Vice President, Public Affairs, Policy, and 
Communications of Verizon, Mr. Thomas J. Tauke; and the Vice 
President of Public Policy, Midcontinent Communications of 
Sioux Falls, South Dakota, Mr. W. Tom Simmons.
    Gentlemen, I thank you very much for your patience. I'd 
like to first recognize the Executive Vice President of the 
North Dakota Association, Mr. David Crothers.

          STATEMENT OF DAVID CROTHERS, EXECUTIVE VICE

             PRESIDENT, NORTH DAKOTA ASSOCIATION OF

                TELECOMMUNICATIONS COOPERATIVES

    Mr. Crothers. Mr. Chairman, we thank you for the ability to 
appear before you today, sir.
    The status of Universal Service is quite possibly the most 
important issue facing our industry today. Restructuring the 
Universal Service program properly will be critical to 
determining whether all Americans will have the opportunity to 
participate in the 21st century economy.
    Our Nation, however, finds itself in a dilemma. Even though 
it is acknowledged by all that Americans increasingly rely on 
more sophisticated communications services and bandwidth for 
economic, healthcare, and educational opportunities, some are 
looking to limit the growth and mission of the program. While 
other countries are making the investment to ensure ubiquitous 
broadband coverage for their citizens, the United States 
remains a second-tier nation, in terms of making a genuine 
commitment to broadband deployment. It is our position that 
rather than contemplating ways to cap the Fund, or to otherwise 
limit the program, policymakers should, instead, be looking for 
ways to enhance it and help accelerate such deployment.
    Mr. Chairman, NTCA developed a national communications 
policy course that would move the Nation in that direction. The 
plan is forward-looking and addresses our Nation's 
communications needs, especially those in high-cost rural areas 
of our country. The plan envisions the Universal Service 
program having an ongoing mission.
    To see what the Universal Service program has accomplished, 
I ask that you look at North Dakota. We believe the state is a 
perfect example of everything that is right with the Universal 
Service program. Ours is a very low-density state. Independent 
rural telephone companies serve over 96 percent of its 
geographic territory. That wasn't always the case, however. In 
1996, large out-of-state telephone companies began selling 
their highest-cost exchanges. In total, some 90 exchanges were 
sold in the State over a 5-year period. Locally owned, locally 
operated telephone companies stepped up and bought every one of 
those exchanges. The result has been greater levels of 
investment and greater technology for rural residents in North 
Dakota. Today, high-speed broadband is provided in 290 
communities through a variety of technologies by independent 
telephone companies.
    Rural communications providers have worked hard to ensure 
that rural America will not be relegated to being a 
communications backwater. This approach is a stark contrast to 
the array of interests that wish to mold the program into 
something that it was never intended to be: a mechanism to 
ensure competitive neutrality or to create government-
subsidized competition where there would otherwise have none 
existing.
    This blind pursuit of competition for competition's sake 
has allowed the Universal Service program to be accessed by 
those who have no real commitment to the policy of Universal 
Service. Even FCC Chairman Martin and Verizon, both proponents 
of alternative approaches to controlling the program's growth, 
have acknowledged the cause of the growth is the CETC segment 
of the industry. Consequently, the Fund's growth has been 
rapid, and, some say, politically unsustainable.
    Today, there are countless plans under consideration to 
control the growth of the Universal Service program. Most of 
them, including the auction concept proposed by Verizon, ignore 
the real root of the problem. NTCA's approach makes far more 
sense, in our judgment: expand the base of USF contributors, 
strengthen the public-interest requirements for ETC 
designation, and eliminate the identical support rule. Each of 
these proposals could easily be implemented and would 
absolutely control the program's growth.
    Just last week at an FCC forum, the subject of reverse 
auctions was once again cited as the solution to many of the 
Universal Service Fund's programs. The concept of reverse 
auctions is to limit support to the lowest-cost provider. This 
argument is the antithesis of Universal Service. Auctions will 
lead us down the road of supporting the lowest common 
denominator. It is truly a race to the bottom.
    Rural communications providers have a quality-of-service 
approach to network construction, and it has allowed the people 
of rural America to enjoy a state-of-the-art infrastructure at 
affordable rates. Alternatively, the other technologies and 
services, such as wireless voice technologies and VoIP, are 
built and operated at far less stringent standards, and use the 
infrastructure of others. The great misconception continues to 
exist that wireless handsets are communicating directly to 
another wireless handset or to a tower, or through a tower to 
another party. Mr. Chairman, wireless needs wires. Universal 
Service support ensures that there is a state-of-the-art 
underlying network upon which all these services can rely. 
Reverse auctions will not ensure this.
    We ask, are we willing to risk allowing the almost 
limitless bandwidth capacities associated with wireline to be 
undermined? And what will happen, we ask, with reverse 
auctions, when a carrier other than the incumbent wins the 
auction? Without this stream of support, the rural incumbents, 
in many cases, will no longer be functional. And we fear, when 
repeated winners of those auctions replace one another over and 
over, and the lack of investment that will follow. Sadly, it 
will be the American citizen who suffers the consequences of 
these short-term fixes.
    Mr. Chairman, today we are on the cusp of fully moving into 
a world where data, video, and mobility are the primary 
objectives of consumers. The technologies of tomorrow, though, 
will still be reliant on the underlying wireline voice network 
of today.
    Mr. Chairman, thank you for allowing us to appear before 
you today.
    [The prepared statement of Mr. Crothers follows:]

    Prepared Statement of David Crothers, Executive Vice President, 
           North Dakota Association of Telephone Cooperatives
    Mr. Chairman, you have convened us here today to consider the 
status and future of our national Universal Service policy and its 
underlying support mechanism. The discussion surrounding this venerable 
policy is nothing new and indeed has persisted, and evolved, much as 
the program itself has, and should. While this conversation has at 
times been exhausting, and at others outright exasperating, the 
Nation's small and rural community based communications providers 
welcome and embrace it nonetheless. We do so because such dialogue only 
serves to strengthen and improve this long-standing national policy--a 
policy that plays a critical role in maintaining and expanding the 
communications infrastructure that is so necessary to our national and 
economic security. So thank you Mr. Chairman for your ongoing efforts 
to ensure the goal of Universal Service remains the solid cornerstone 
of our national communications policy that it has always been.
    Do we still need this program? The answer to that question is an 
emphatic yes! More and more Americans rely on communications every day 
to meet their commerce, security and entertainment needs. The bar for 
the 21st century communications has been raised. More bandwidth must be 
deployed in our networks so all American households, urban and rural 
alike, can benefit from education, healthcare, and economic 
opportunities that are dependent upon a robust communications platform.
    Other countries of the world understand the need to make a 
financial commitment now to ensure adequate bandwidth in their 
communications networks. This will provide their citizens with 
opportunities for economic growth and global participation. Rather than 
working on ways to cap Universal Service Funds, particularly to 
wireline network providers that have deployed critical backbone 
infrastructure, the Congress should be looking for ways to expand the 
fund, thereby encouraging an accelerated deployment of broadband 
facilities throughout America.
    Some question the continued need for universal service. To these 
doubters, I invite you to visit my state of North Dakota and see the 
incredible accomplishments of this program for yourself. I can, without 
question, assure this committee that the Universal Service Fund is more 
necessary today than ever before.
    It is important when discussing Universal Service to approach it 
from the proper perspective. Detractors and supporters alike cannot 
deny that the Universal Service system is a shining example of 
successful national policy. This program is largely responsible for the 
extremely high communications connectivity our Nation enjoys today. It 
is due to Universal Service support that virtually any American that 
wishes to have voice connectivity is able to. Likewise it is largely 
due to this program that such connectivity is uniform in price and 
scope regardless of where you live.
    For more than a decade now our industry has been exposed to an 
operating environment marked by competition and deregulation. These 
concepts are in many ways in direct conflict with the policy of 
universal service. Universal Service of course is about developing the 
appropriate policy environment to ensure all Americans have access to 
communications services of an equitable price and scope. The very 
nature of the Universal Service concept does not allow for the ``let 
the chips fall where they may'' theory associated with competition and 
deregulation.
    The rural segment of the industry has always understood the reality 
that the policies of competition and deregulation will be ineffective 
if simply broad brushed across all spectrums of the marketplace. Yet, 
when confronted with the policies, we have simultaneously embraced and/
or tackled them with vigor. This response is in stark contrast to the 
array of entities from the private and public sectors alike that 
continue trying to mold the Universal Service program into something it 
was never intended to be--a mechanism for ensuring competitive 
neutrality. Herein lays the debate about where this program stands 
today, and where it should go in the future.
    Unfortunately, while the Congressional intent of the 
Telecommunications Act of 1996 that led to the emergence of these 
conflicting policies was quite clear the manner in which it has been 
interpreted is quite another story. Competitors, state regulators, the 
Federal Communications Commission (FCC), and yes even some of your 
Congressional colleagues have upset the delicate dichotomy that was to 
have existed between the distinct concepts. The result is a disastrous 
situation where, under the guise of establishing an environment of 
competitive neutrality, the program is being accessed by many that have 
no real commitment to the policy of universal service. Consequently, 
its growth has been rapid and is currently at a politically 
unsustainable rate which is the root of why we are here today.
    Mr. Chairman, so often throughout the course of this debate, people 
have directed the industry, and particularly small rural carriers, to 
``think outside the box'' in our search for solutions to the fix we 
find ourselves in today. The comment might be amusing were it not so 
completely oblivious to our way of thinking and operating each and 
every day of our existence. If I do nothing else here this morning, it 
is my overarching desire to ensure that everyone participating and 
listening to this discussion ultimately leaves with the recognition and 
understanding that rural carriers do and always will ``think outside 
the box.'' Truly, they have no other choice.
    What segment of the industry was the first to have completely 
converted to digital switched systems? What segment of the industry was 
a pioneer in providing wireless options to their hardest to reach 
customers? From what segment of the industry did the first company to 
deploy an all fiber system come? What segment of the industry was the 
first to offer distance learning and tele-health applications? What 
segment of the industry was an early leader in providing cable-based 
video, then satellite video, and now IP video to their markets? What 
segment of the industry quickly moved into Internet service provision 
in the early stages of the Internet's public evolution? And what 
segment of the industry continues to lead in the deployment of high-
speed broadband capable infrastructure?
    Mr. Chairman in every instance the answer to those questions is--
the small rural segment of the industry. Many might be asking why these 
carriers care or have this unique perspective and approach to their 
mission. The answer to that question is relatively simple. Because 
these systems are owned and operated by the members of the community in 
the case of cooperatives, or by members from the community in the case 
of commercial systems. Clearly as a result they are entrepreneurs. 
Clearly they are continually ``thinking outside the box.''
    But, does thinking outside the box mean we should automatically 
discount the obvious? Frankly, it is astounding to us at how great the 
zeal of some is to do just that. Today there are countless plans under 
development and already on the table directed at how to control the 
growth of the Universal Service program. They are Byzantine in their 
detail and approach to eventually get to the end-point desired.
    Even worse, such plans also completely ignore the most obvious, 
basic, and easy to implement responses. Expanding the system's 
assessment base--strengthening the requirements for receiving eligible 
telecommunications carrier (ETC) status--eliminating the identical 
support rule which provides competitors with inflated support--all 
concepts that could easily be implemented and that we know for certain 
would produce the desired result.
    Evidently not in the minds of many as was evidenced just last week 
at an FCC forum as well as during the course of the NARUC meeting. A 
great many voices continue to sing the praises of the reverse auction 
concept. This approach seeks to limit support to the lowest cost and/or 
most efficient technology. This argument is the antithesis of the goal 
of Universal Service which I mentioned is to ensure ALL Americans have 
access to communications services that are comparable in price and 
scope.
    Auctions would presumably lead us down the road of supporting the 
lowest common denominator. Again, the exact opposite of what Universal 
Service was structured to accomplish. Traditionally, rural 
communications system have been built and constructed to extremely 
exacting standards. While the law requires that rural Americans receive 
no less, the Universal Service system and other cost recovery programs, 
as well as private financiers demand no less. This Quality of Service 
(QoS) approach to network construction and management is the formula 
that has allowed our industry to build and maintain the infrastructure 
that is an integral part of the premiere communications system our 
Nation enjoys today.
    However, today, many alternative technologies and services to 
traditional wireline voice service are built and operated according to 
far less stringent standards. For example, it is a well accepted fact 
that wireless voice technologies generally do not approach the QoS 
standards of wireline calls. Another example is Voice over Internet 
Protocol (VoIP) oriented service which is even further away from 
meeting the QoS standards of wireline voice service.
    There is one more critically important reason for the inferior 
nature of some of these alternative technologies. They do not consist 
entirely of their own infrastructure. For example, with regard to 
wireless service, a great misconception continues to exist among 
policymakers and the public alike, that wireless hand sets are 
communicating directly to one another or directly to a wireless tower 
and directly from that tower to another party. This is simply not the 
case. Wireless needs wires Mr. Chairman. Whether it's the wires to 
complete a wireless to wireline call or a wireless to wireless call, 
there are wires involved at some point in the call's path. The great 
majority of these wires are owned and operated by the incumbent voice 
providers.
    Likewise with the VoIP voice services we hear so much about today, 
these systems rely almost entirely upon the infrastructure of others, 
and to this point that infrastructure has generally been the last mile 
connections of wireline carriers and the Internet system. An 
interesting point to make here is that due to ineffective statutes and 
regulations, services such as this are allowed to utilize this 
infrastructure that belongs to others without paying for such use. They 
are using the facilities of rural providers, and are not paying to do 
so. Without such compensation, the ability of network owners to 
continue to invest in their networks is put in jeopardy. Without such 
investment we will eventually reach the point at which such facilities 
will not function. Without such facilities being able to effectively 
operate, many applications such as wireless and VoIP services would be 
unable to operate.
    Which bring us back to reverse auctions. Universal service support 
ensures the continuum of the underlying network upon which all other 
services rely. Auctions fail to ensure that such support will continue 
to be provided. Are we willing to risk allowing the almost limitless 
bandwidth capacities associated with a wireline network to be 
undermined simply because policymakers choose to make an easy policy 
decision with wide-ranging long-term implications rather than buckling 
down and confronting the real underlying issues associated with 
universal service? There are other questions with the reverse auction 
concept as well. How will efficiency be determined and measured? 
Providing support to the system with the lowest upfront costs may 
appear efficient today but what about over the long-term?
    What happens when a carrier other than the incumbent wins the 
Universal Service support? Without this stream of cost recovery, most 
rural incumbents would be hard pressed to remain operationally 
functional. What becomes of their underlying infrastructure that is 
necessary to the operations of alternative technologies? What happens 
in the future when other providers consistently and repeatedly emerge 
that are lower cost than the prior? Do we find ourselves stuck in a 
process of unending churn of providers? Wouldn't such instability 
destine such providers to never being able to secure the long-term 
financing that is so necessary to this capital intensive business?
    Finally, are policymakers themselves really up to the challenges 
that reverse auctions present. It's easy to talk about a lowest cost 
bidder approach saving money. However, we think parties to such an 
initiative would quickly realize the fallacies behind this concept were 
it ever implemented. No American, whether rural or urban based, would 
be well served by reverse auctions. Indeed, I would like to submit for 
the record a far more extensive paper on this subject. It was prepared 
at the request of the National Telecommunications Cooperative 
Association by Dale Lehman who is the Director of the Executive MBA in 
Information and Communication Technology at the Alaska Pacific 
University.
    No, Mr. Chairman, as I alluded earlier, there are far better, more 
reasonable, more realistic, and more workable options that will best 
ensure the proper application and future operation of the Universal 
Service system. Indeed, many such ideas and concepts were contained in 
the Universal Service section of the Communications Act of 2006 that 
this committee marked up late last year. That legislation was the 
product of input from many policymakers and many sectors of the 
industry. Please allow me to just highlight its stronger provisions:

   Establishing a new definition of ``communications service'' 
        that alleviates the arbitrage of certain carriers wiggling out 
        from under their Universal Service responsibilities;

   Expanding the base of contributors to the Universal Service 
        Fund (USF) which will lower the overall USF assessment for all 
        consumers;

   Providing flexibility in how the FCC assesses providers for 
        their contributions, which allows consideration of new 
        technologies and services as well as modern modes of 
        communications;

   Giving states new flexibility for their appropriate 
        management of their state Universal Service funds;

   Codifying new minimum guidelines for receiving the eligible 
        communications carrier status necessary to receive Universal 
        Service support;

   Permanently prohibiting the FCC from limiting Universal 
        Service support to a single primary line, which ensures rural 
        America's small businesses remain competitive;

   Permanently exempting the program from the Anti-Deficiency 
        Act and permanently removing the private fund from the Federal 
        budget process which would preclude the program from 
        experiencing future short falls or spikes in Fund assessments;

   Clarifies an entity is not exempt from contributing to the 
        system solely on the basis that it does not receive support 
        from the program;

   Establishing that equivalent services must live up to the 
        geographic toll rate averaging provisions that are in current 
        law;

   Ensuring a smooth conversion resulting from any new 
        regulations or statutes affecting the program by requiring the 
        FCC to adopt transition mechanisms of not less than 5 years for 
        any changes in the Universal Service distribution process.

    Were there areas that could have been stronger? No question, after 
all, the entire bill, as in most legislative instances, was a 
conglomeration of compromise. Yet there was one key area that was 
initially stronger that was weakened as it moved through the mark-up 
process. The earliest drafts of the bill directly set the stage for the 
Universal Service system to begin formally supporting the deployment of 
broadband and advanced services capable infrastructure. This is a key 
issue.
    Today we are on the cusp of fully moving into a world where data, 
video, and mobility are the primary objectives of consumers and voice 
will be secondary, or even an afterthought. Remember my earlier 
discussion that pointed out how most alternative technologies are 
reliant upon the underlying wireline voice network. Well the same holds 
true here. Regardless of whether consumers are focused on voice or some 
other form of communication, they will still require the underlying 
infrastructure to ensure their communication gets to its destination. 
The only difference is that with regard to broadband and advanced 
services capable infrastructure, the costs and subsequent need for 
support are even greater than they are for voice only infrastructure.
    There was one other omission with regard to the legislation that 
would have gone a long way in controlling the growth of the program and 
that was the elimination of the identical support rule. For those of 
you that are unfamiliar with this issue, the FCC's rules currently 
allow competitive ETCs to receive Universal Service support based on 
the costs of incumbent carriers. So in the case of a carrier with 
extremely high costs, a competitor can secure a Universal Service 
designation for that market and receive the exact same dollars per 
consumer even if their costs are a fraction of the incumbents. It is a 
terrible waste of funds and is a rule that should have been changed 
yesterday.
    Mr. Chairman, as a concluding thought I would just like to 
reiterate what many of us already know Universal Service is not. 
Universal service support is neither a subsidy nor a tax. Universal 
service support is an industry funded cost recovery mechanism that 
offsets the higher cost to build and maintain vital communications 
networks in rural, sparsely populated, and insular portions of our 
Nation. No Federal monies are appropriated for this purpose.
    America stands at a crossroads between a narrowband and broadband 
world. The choice is clear. I can assure you that I and the entire 
rural segment of the industry that is associated with NTCA and the 
other rural communications associations are ready to work with you to 
move forward aggressively with a national plan to bring broadband to 
all Americans as is envisioned by so many. Thank you.
                                 ______
                                 
                              Attachment A
The Use of Reverse Auctions for Provision of Universal Service--Dale E. 
        Lehman, Ph.D.\1\
---------------------------------------------------------------------------
    \1\ Dale E. Lehman is Director of the Executive MBA in Information 
and Communication Technology at Alaska Pacific University. He has 
taught at a dozen universities, and held positions of Senior Economist 
at Southwestern Bell Telephone Company and Member of Technical Staff at 
Bellcore. He has a B.A. in Economics from SUNY at Stony Brook, and M.A. 
and Ph.D. degrees in Economics from the University of Rochester. He has 
published widely in the area of telecommunications economics and 
policy, including a number of previous papers on behalf of NTCA.
---------------------------------------------------------------------------
    This paper reviews the theoretical and applied literature on the 
use of reverse auctions (also called minimum subsidy auctions or 
competitive auctions) for provision of universal service. It reveals 
that reverse auctions are feasible, and have met with some success, for 
provision of new infrastructure/services into previously unserved 
areas, or for the upgrading of existing infrastructure and/or services. 
In contrast, the U.S. environment is one in which there are multiple 
existing service providers, using a diverse set of technologies, in 
most supported areas. Existing infrastructure requires (i) a transition 
mechanism to recover past prudent investments made to serve high-cost 
areas; and (ii) increases the difficulty of creating an auction that is 
not biased in favor of any set of current infrastructure providers 
(particularly if they utilize different technologies). Unfortunately, 
there is scant empirical evidence on which to determine the feasibility 
or desirability of reverse auctions relative to alternative methods of 
providing Universal Service under these conditions.
    The use of auctions to award provision of utility services can be 
traced back to Demsetz (1968). Demsetz introduced the notion that 
franchise bidding could replace traditional public utility regulation. 
Particular use for provision of universal service, or carrier of last 
resort (COLR) responsibilities, was first explored by Milgrom in his 
1996 Nobel lecture in honor of William Vickrey, and was first suggested 
for examination by the FCC in 1995. Considerable academic and 
practitioner work has been conducted on auctions since that time, 
especially in conjunction with the widespread use of auctions for 
awarding the right to use spectrum resources. In addition, there is a 
lengthy literature surrounding the use of competitive bidding for 
awarding contracts (e.g, Defense Department procurements, public works 
construction, etc.) which are a discrete form of an auction (in which a 
single project or set of projects is awarded on the basis of a 
competitive bidding process).
    The use of competitive processes has a number of general beneficial 
properties: they promote incentives for cost-reducing innovation, they 
mitigate against informational asymmetries between funding entities and 
entities contracted to provide services on their behalf, auctions can 
be used to ration scarce resources to those that value them the most, 
and they can permit market forces to play a role in the determination 
of the quality of services provided. Competitive contracts are not a 
panacea, however. Victor Goldberg (1976) points out that competitive 
procurement and alternative regulatory mechanisms should be compared 
under realistic conditions related to the nature of the service that is 
being provided.
    Goldberg provides the example of a university food service that 
might be contracted out on the basis of a competitive bid, or could be 
provided internally by the university itself. The latter is meant to 
approximate the conditions under which a regulated utility operates. 
Regulators must monitor the quality and cost of service provision, and 
face a number of potential inefficiencies inherent in monopoly 
provision by an agent with better information than the principal. 
Competitive bidding reduces only some of these problems, and creates 
some new issues. Quality of service must still be monitored, and there 
are administrative costs associated with both the awarding and 
oversight of contracts.
    Goldberg points out that administered contracts, traditional 
regulation, or any other regulatory mechanism must balance the right of 
consumers to be served and the right of providers to serve. Universal 
Service is a statement of the public's right to be served (at 
comparable rates for comparable services, in high cost and insular 
areas, and for consumers of low income), and regulators become the 
agent of these consumers' rights. At the same time, providers have the 
right to an opportunity for a competitive return on their investments.
    Goldberg's key insight is that the nature of the service itself, 
and not the particular way in which contracts are awarded (competitive 
bidding or regulated monopoly, for example), is what determines the key 
issues that must be dealt with. Significant investment costs raise 
issues associated with the need to establish long-term contracts. 
Volatile operating costs (e.g., fuel costs) would raise issues of risk, 
regardless of the regulatory mechanism that is adopted.
    This principle is pertinent to the use of reverse auctions for 
provision of universal service. Provision of Universal Service entails 
significant investment costs (sunk costs to a degree that depends on 
the technology deployed) under conditions of continual technological 
progress. Services are provided to consumers for which the demand falls 
short of the provisioning costs.\2\ In the U.S. there are few unserved 
areas: instead, there are multiple networks, using different 
technologies and with different quality attributes, and serving 
different parts of rural areas. There are also a variety of regulatory 
restrictions placed on existing rural service providers. The potential 
use of auctions must be evaluated against a backdrop of these 
characteristics.
---------------------------------------------------------------------------
    \2\ This can either result from consumer unwillingness or inability 
to pay the full cost of provision, or from public policy that limits 
their price to be less than these costs. In either case, market 
provision will be insufficiently forthcoming, absent some form of 
support.
---------------------------------------------------------------------------
    This paper will review the theoretical literature and applied 
evidence, and is organized according to a number of related issues that 
must be resolved in order to implement reverse auctions for universal 
service. These include:

   Definition of the service to be auctioned.

   Size of areas to be defined.

   Number of COLRs to be subsidized.

   Time period for contract awards.

   Transition/stranded investment issues.

   Bidder eligibility.

   Type of bidding to be conducted (sealed or open, single or 
        multiple round, combinatorial, etc.)

   Basis for determining winning bids.

   Pricing and service flexibility accompanying awards.

   Monitoring and enforcement issues.

    Each topic has a number of feasible alternatives. In a comparison 
of reverse auctions and cost proxy model-based USF, Sorana (1998) 
states that ``it can be easily seen that the two mechanisms cannot be 
ranked on purely theoretical grounds.'' \3\ Similarly, theory alone 
cannot determine the desirability of reverse auctions for universal 
service.
---------------------------------------------------------------------------
    \3\ Sorana (1998) at page 18.
---------------------------------------------------------------------------
    I examine the theoretical guidance and empirical evidence that is 
available from the applications of reverse auctions in 
telecommunications (and some limited relevant experiences in other 
industries). A recurring theme will be that the complexity of these 
decisions increases significantly in the presence of an existing 
infrastructure (rather than a ``green-field'' application), and when 
competing service providers use different technologies (with different 
cost and quality characteristics).
Service Definition
    The definition of Universal Service will need to be specific in 
terms of service quality, coverage, and capabilities. In particular, it 
will need to specify whether equal access is to be included, 
appropriate service quality standards (e.g., system reliability), and 
what data speed is to be supported. This is one area in which auctions 
may be less desirable than the current USF mechanism.
    Under current rules, the delivery of services can outpace the 
definition of universal service: for example, higher broadband speeds 
may be available, even while broadband is not included within the 
definition of universal service. An auction mechanism may not permit 
this outcome--the carrier's business case will need to support the 
service delivered. If policymakers want to see faster deployment, then 
they will need a specific auction for their desired rate of deployment.
    Broadband is not part of today's Universal Service definition, and 
the FCC's definition of broadband service is relatively slow by today's 
standards. Many rural carriers provide broadband speeds well in excess 
of 256k, and often in the absence of sufficient market demand to 
justify the deployment costs of these higher speeds, on a narrow 
profitability criterion. The justification for providing these services 
rests on their economic importance to the rural community served, and 
the ability to provide these services is facilitated by USF.
    It is precisely because of the strong cost-reducing incentives of 
reverse auctions that the service definition must be precise. This 
means that regulators must predict service needs at least as far into 
the future as the time period that the franchise will cover. The need 
for such regulatory foresight undermines some of the principal 
theoretical advantages of reverse auctions--that they potentially 
replace regulatory fiat with market processes.
    Coverage is another key part of service definition. It is not 
feasible to define Universal Service as availability to 100 percent of 
the population. Reduced targets, such as 90 percent, however, do not 
sound like Universal Service. For many years, telephone companies have 
operated under state-specific requirements to provide service to any 
location within X miles (usually a fairly small number) of their 
current network facilities. Special construction charges apply to 
locations that exceed X, with the costs usually borne by the party 
requesting service. Given that this practice has been built into 
construction plans, it seems that continuing this practice would be 
least disruptive to consumers.
Size of Areas
    A fundamental principle for an auction to be efficient is that the 
item being auctioned must be the same for all bidders (their individual 
valuations may differ, but the item being auctioned must be the same if 
the bids are to be compared). This means that the coverage area must be 
the same for all COLR bidders.
    Theoretical work also suggests that there may be subtle strategic 
effects as geographical coverage differs across competing providers. If 
one provider is obligated to serve all customers at the same price, and 
the other carrier can serve a subset of customers, the COLR carrier 
must be reimbursed for reduced profits on the contested part of the 
market as well as the higher costs of serving the uncontested consumers 
[Hoernig and Valletti (2003)]. The strategic considerations go further 
and can ``raise the subsidy substantially, and even may leave both 
firms with higher profits than if they were just serving the urban 
market.'' \4\ More generally, differential serving areas and COLR 
obligations create strategic incentives which will influence the level 
of competition between carriers. Theoretical work has thus far been 
constrained to the case of an incumbent competing with a new entrant--
the case of competing existing COLRs has not been modeled. Strategic 
considerations and information asymmetries have yet to be analyzed in 
this environment.
---------------------------------------------------------------------------
    \4\ Hoernig and Valletti (2003) at page 91.
---------------------------------------------------------------------------
    The next question is whether these areas should be large or small. 
When there are potentially significant cost complementarities (costs 
depend on the specific combination of areas that a service provider 
will serve), then there are two options: (i) auction a large enough 
areas to include most of the significant complementarities; or (ii) 
auction many smaller areas, but permit for combinatorial bidding so 
that significant complementarities can be realized. There appears to be 
some dispute about the feasibility of (ii) [Kelly and Steinberg (1998) 
claim that complex combinatorial auctions are feasible, but Hultkrantz 
(2004) cites Kelly and Steinberg's work, but concludes that ``the 
consensus in the economic literature seems to be that combinatorial 
auctions have several desirable properties but are too difficult to be 
used;'' Sorana (1998) claims ``it must be ultimately recognized, 
however, that the theoretical and experimental properties of multi-unit 
auctions, combinatorial or otherwise, are not well understood,'' and 
Luander and Nilsson (2004) provide experimental evidence that 
combinatorial auctions may be more efficient and make collusion more 
difficult than one shot sealed auctions].
    Large area auctions would appear to favor larger carriers, or would 
require smaller carriers to bid jointly in order to compete.\5\ Larger 
areas that make sense from a network perspective may also require a 
mixture of areas currently served by rural and nonrural carriers. This 
would exacerbate the complexity of designing joint bids to serve large 
areas. It may also increase the size of the Fund by including high-cost 
areas (currently served by nonrural carriers) that do not presently 
receive support.
---------------------------------------------------------------------------
    \5\ Current spectrum auctions highlight this issue. Joint bidding 
is permitted, but the bidders cannot subsequently use the spectrum 
rights individually, under their separate business identities. Auction 
design should avoid dictating market structure--it should reveal when 
joint bidding is most efficient, but it should not force carriers to 
consolidate operations. Forced consolidation presupposes that 
regulators know the most efficient market structure to begin with, 
undermining the potential of auctions to substitute market processes 
for regulatory processes.
---------------------------------------------------------------------------
    In general, smaller areas should involve more precise and larger 
Universal Service funds, ceteris paribus. Larger areas involve more 
averaging of relatively high and relatively low cost customers, tending 
to decrease the overall fund size, but failing to provide full support 
for high-cost areas [Lehman (2000)]. Smaller areas necessarily involve 
the complexities of combinatorial bidding.
    The averaging effect can be substantial. At the extreme, imagine a 
single national service area being auctioned off--a subsidy would 
probably not be required to serve the high-cost areas along with the 
low cost areas. This result, however, is a move away from decades of 
efforts aimed at increasing competition in the industry. If auctions 
are designed to accommodate large areas and competition within these 
areas, then the overall Fund cost will be driven upwards, as discussed 
below under the number of COLRs.
    Determination of geographical areas to be auctioned is complicated 
by the presence of multiple existing network infrastructures. For 
example, suppose that the COLR includes service to 100 percent of the 
customers within a current ILEC serving area and that a wireless 
carrier wishes to bid, but their network only covers 80 percent of the 
population in that area. The wireless carrier would be required to 
arrange to resell the incumbent's service or provide an alternative 
infrastructure for the 20 percent of customers that it does not 
currently reach.
    Conversely, suppose the service area is defined as the wireless 
carrier's service area, and that this extends beyond any single ILEC's 
service area. This would require several ILECs to combine their bids to 
match the service area of the wireless carrier. In either case, 
transactions costs and uncertainty will increase when existing 
infrastructures do not match.\6\
---------------------------------------------------------------------------
    \6\ The 1999 NPRM cited the use of competitive bids for COLR in 
Hawaii. The first such award went to TelHawaii. In order to transfer 
the assets from the previous COLR, GTE Hawaiian Tel, the Public 
Utilities Commission of Hawaii condemned some of the assets of GTE 
Hawaiian Tel. Several court battles later, a state court overturned the 
condemnation as unconstitutional. Rather than continue the legal 
battles, TelHawaii pulled out of the market after spending millions of 
dollars attempting to enter [Honolulu Star-Bulletin, July 20, 1999]. 
Regardless of the ultimate merits of the legal dispute, problems like 
this are likely to accompany bids that require use of other carrier's 
facilities in order to satisfy the COLR obligations.
---------------------------------------------------------------------------
    It is difficult to design an auction that will be technologically 
neutral under these circumstances. To avoid bias, areas would need to 
be smaller than anybody's current service area, thereby placing a 
similar burden on all potential bidders. However, such small areas 
would greatly increase the complexity of the combinatorial auctions 
that would be required.
Number of COLRs
    Closely related to defining the geographic COLR area is the issue 
of whether there will be one winning bid or more than one within each 
area. At a fundamental level, there is a tradeoff between competition 
for the market (favored by a single winning bidder) and competition 
within the market (promoted by multiple winning bidders). A priori, it 
is not clear which type of competition would lead to greater economic 
efficiency.
    It is clear that total subsidies will be larger with multiple 
winning bids than single winners. This is evident from the GTE reverse 
auction proposal submitted to the FCC [Weller (1998)]. Weller proposed 
that bidders submit two bids--one for sole provision of COLR within an 
area and the other assuming shared provision of COLR responsibilities. 
Preliminary evidence was that reducing a carrier's market share by 50 
percent would increase unit costs by 52 percent. This is due to the 
fact that network investment is not proportional to the number of 
customers, particularly in sparsely populated areas. Serving half of 
the customers may entail nearly the same infrastructure as serving all 
of the customers.
    It should be noted that some technologies may be more tolerant than 
others of multiple winning bidders. Wireless technology does not have 
the same sunk cost characteristics as wireline technology, so per unit 
subsidies may not increase as dramatically for wireless carriers. This 
need not cause a problem as long as the wireline bidder can receive a 
subsidy adequate to serve a partial market share. If high-cost support 
is capped at current per-subscriber levels, adequate support would be 
impossible, however. So, it is important that there be no caps on bids 
if multiple COLRs are to be awarded.
    Single COLRs does lead to reduced USF costs in one way--it 
eliminates the problem of multiple supported services (wireline and 
wireless) without the administrative problems that accompany proposals 
to limit individual support to a single service (to households, or 
locations, etc.).
    Sorana (1998b) examines an auction mechanism (based on the 3rd 
lowest bid) that permits multiple COLRs. He points out that ``there 
could be much higher cost involved if the auction rules are not 
carefully crafted.'' This results from the vulnerability to collusion. 
While careful auction rules can avoid this (by making the number of 
COLRs dependent on the bid amount) ``it may still be unable to generate 
enough incentives for high-quality service.''
    Laffont and Tirole (2000) provide an extended theoretical analysis 
of reverse auctions, focused principally on the issue of multiple 
COLRs. They conclude:

        ``We are unaware of formal analyses of Universal Service 
        auctions with endogenous market structure. We have tried to 
        provide a framework within which analysis of such auctions can 
        begin. The first insights thus gleaned do not build as strong a 
        case for the introduction of competition as we had expected.'' 
        \7\
---------------------------------------------------------------------------
    \7\ Laffont and Tirole (2000) at pages 254, 260.

    One salient point is that endogenous market structure increases 
uncertainty for bidders, thereby requiring an extra risk premium in 
their bids. Laffont and Tiorle also echo the complexities raised by 
---------------------------------------------------------------------------
existing infrastructure in high-cost areas,

        ``Much of the discussion on Universal Service auctions proceeds 
        as if all competitors were building their network from scratch. 
        This may be a fine assumption for newly settled areas or when 
        substantial network upgradings are contemplated. In practice, 
        however, many high-cost areas are already partly covered by a 
        wire-based incumbent operator able to provide the supported 
        services with its existing technology. While the incumbent 
        operator's network may have been very costly to build, once in 
        place it has a low (short-term) marginal cost. And so 
        facilities-based entrants (e.g., offering wireless services) 
        may find it hard to compete with the incumbent. In our view, 
        more attention should be devoted to this aspect of Universal 
        Service provision.'' \8\
---------------------------------------------------------------------------
    \8\ Laffont and Tirole (2000) at page 260. This point was also made 
by Milgrom (1996).

    In the U.S. environment, the issue is doubly complex since there is 
existing wireless infrastructure in many high-cost areas. The 
theoretical performance of auctions has not yet been studied under 
these circumstances. Nor is there much empirical evidence to provide 
guidance.
Duration
    There is a tradeoff between long and short duration of COLR 
franchises. Short time periods enhance the ability of Universal Service 
costs to adjust to changes in technology or changes in service 
definition. However, this comes at the cost of inhibiting investments 
that have longer time horizons.
    It is notable that cable franchise awards (where competitive 
bidding is used) are quite long--typically 8-15 years. It is difficult 
to reject a renewal application upon expiration. Federal law places the 
burden of proof for failing to renew a cable franchise on the 
community--they must show that the carrier is either unable to continue 
providing the service or will be unable to provide the service that the 
community requires in the future [Kramer (2003)]. In fact, in the 
1980s, only 7 out of 3,516 cable refranchising decisions resulted in 
replacement of the existing franchise owner [Zupan (1989)].
    There is a relationship between contract duration and the number of 
winners. Even with single auction winners, issues arise concerning 
whether the incumbent winners should have any special treatment in 
subsequent auctions, or whether there are benefits to opening future 
auctions to carriers other than the prior winners. Laffont and Tirole 
(2000, page 261) reach the conclusion that,

        ``the incumbent may be shut out of the market. The transfer of 
        the incumbent's capital to winning entrants (either through 
        rentals or through an acquisition) may give rise to the usual 
        concerns about the impact of ``second sourcing'' on the 
        incumbent's incentives to invest in the quality of its 
        network.''

    Previous work by Laffont and Tirole (1988) explored the case where 
incumbent's investments are observable (i.e., where they can be 
acquired by others--an example of unobservable investment is the 
buildup of knowledge within the human capital of the firm's managers: 
it seems that most rural incumbent investment is observable, such as 
the physical capital of the infrastructure). They reach ``a relatively 
pessimistic assessment of the virtues of second-sourcing (or takeover) 
when substantial investments are at stake.'' (page 532) This is due to 
the potential that some of the value of the incumbent's investment may 
flow to future auction winners. This externality causes the incumbent 
to under-invest, and calls for future auctions to be stacked in the 
incumbent's favor. Indeed, this is a rationale behind the burden of 
proof in cable refranchising that falls on those that do not want a 
franchise renewed.
    Universal Service minimum subsidy auctions in South America have 
typically used lump-sum payments with 5 year exclusive franchises [ITU 
(2002)]. The subsidy is paid in stages, according to established 
milestones (e.g., upon installation of half of the required payphones), 
but it is not a recurring payment. That is, the subsidy is geared to 
recover the full cost of the investment (unless the bidder is willing 
to bid for only partial recovery during the 5 year period). Carriers 
can decide how much risk they wish to bear by bidding for less than 
full recovery during the 5 year period. Given that these South American 
auctions (and new ones proposed in Africa) take place in green-field 
environments, there is often a business case for ultimate expansion 
into these unserved areas, so bidders may be willing to accept less 
than full cost recovery from the subsidy mechanism. It is unclear how 
relevant these circumstances are to the U.S. rural environment (where 
many rural areas are not growing).
    Sorana (1998) points out that ``sufficiency'' of USF is not assured 
by good auction design, and neither is voluntary provision of universal 
service. He constructs a model to compare reverse auctions with cost-
proxy models, finding that auctions may involve lower subsidies than 
accurate cost proxy models, but his model assumes that the funds from 
the auction are sufficient for the intended purposes. He notes that 
this is not assured.
    Competitive bidding is used in the Essential Air Service program, 
but with only a 2 year horizon. Airplanes, however, are quite mobile, 
unlike telecommunications infrastructure. These examples suggest that 
the time periods would have to be relatively long, if there is to be 
sufficient incentive to invest in telecommunications infrastructure.
Transition
    Existing infrastructure complicates the picture. Suppose the 
incumbent loses the auction but has investment that was prudently 
incurred, but has not yet been fully recovered. It is possible that the 
winning bidder may want to purchase this infrastructure.\9\ This 
creates legal and policy issues, but it also impacts economic 
efficiency. If regulators establish a precedent for truncating recovery 
of prudent past investments, then future investment will be affected. 
It is unlikely many investments will take place with payoff periods 
longer than the duration of the franchise.
---------------------------------------------------------------------------
    \9\ Although this may entail problems such as those encountered in 
the Hawaii case discussed above.
---------------------------------------------------------------------------
    The World Bank (2000, pages 6-26) cites competitive bidding as a 
feature of a good universality fund, but ``As previously discussed, the 
process is more difficult where an incumbent is already providing the 
designated universal services.'' The embedded network may provide the 
incumbent with an advantage bidding against new entrants (as was the 
case in India and Australia, discussed below), or may force the 
incumbent to fail to recover its past investments, despite regulatory 
oversight deeming those investments to be prudent.
    Despite these complications, the World Bank does claim that 
auctions are still possible--they cite transfer of assets to the lowest 
bidder, subcontracting, joint ventures, etc. as mechanisms that can 
deal with embedded infrastructure. While such developments can enhance 
efficiency, there are costs associated with each of these avenues (as 
demonstrated in the Hawaii case in footnote 6).
    The only way to avoid bias either for or against incumbent networks 
is to fully recover the incumbent's investment prior to enacting the 
reverse auction. It is not surprising that the most successful reverse 
auctions (Chile, Peru, Guatemala, Columbia, and the Dominican Republic) 
involved previously unserved areas or significant upgrades to the 
existing infrastructure within these areas [ITU (2004)].
    The need to address stranded investment is well-recognized in the 
area of electricity deregulation. The Congressional Budget Office 
(1998) reviewed the stranded cost issue, concluding,

        ``For reasons of fairness and political reality, utilities are 
        likely to be compensated for some or all of their losses. 
        Determining the correct figure for stranded costs, deciding how 
        much of them to compensate, and figuring out how that 
        compensation should be paid are difficult issues, which are 
        slowing progress toward restructuring in many states.''

    Volumes have been written and disputes continue over measurement 
and recovery of stranded electric generating costs, but it is an issue 
faced by all attempts at deregulation.
    For example, in Texas, there is a provision for ``true-up'' 
charges:

        ``These `true-up' proceedings are designed to provide 
        commission authorization for an electric utility to begin 
        recovery of its costs for power plants built to meet customer 
        demand for electricity prior to the start of retail 
        competition, which cannot be recovered in the competitive 
        marketplace. These costs are said to be `stranded.' ''\10\
---------------------------------------------------------------------------
    \10\ Described at http://www.aep. com/newsroom/resources/docs/
TrueUp.pdf#search=%22stran
ded%20investment%20auctions%22.

    Reverse auctions potentially render the incumbent's network less 
valuable (if they lose the bid or forego full cost recovery in order to 
win the bid). Given that these were prudent investments undertaken 
precisely to fulfill the COLR, there is a strong case for recovery of 
these stranded costs. To the extent that new technologies (e.g., 
wireless) cause this decrease in value, the case for recovery is 
strengthened (since the investments were prudent at the time they were 
made, and were often recovered through overly long depreciation 
schedules). Resolution of this issue is of political, legal, and 
economic importance (the latter through its affect on future investment 
incentives).
Eligibility
    Bidders must be financially and operationally capable of fulfilling 
their COLR responsibilities. The FCC has considerable experience with 
ensuring bidder eligibility, although there have been problems, 
particularly with small bidders. The goal should be to have enough 
bidders to ensure a competitive bidding process, while limiting future 
problems with failure to deliver the required services.
    The 1999 Peru auctions illustrate this problem [ITU (2004)]. The 
winning bid was 20 percent of the available subsidy, but the winning 
company then could not meet its targets. The ITU presents this an 
example of excessively low bidding and points out that most Latin 
American auctions have attracted bidders without much operational 
experience, and have failed to attract large international operators or 
incumbents.
Summary on Geography, Size, Numbers, and Eligibility
    The discussion thus far can be summarized as a spectrum of choices 
that would govern the intensity of competition for the COLR subsidy. 
International experience can be placed on a continuum from lack of 
competition to healthy competition. The Latin American examples [World 
Bank (2000), ITU (2002), ITU (2004), Intelecon (2005), Scherf (2006)] 
appear to have had truly competitive bidding in their reverse auctions. 
Savings of 50 percent (compared with the maximum potential subsidy 
level) are commonly cited, but these ``savings'' are based on 
comparison with a cost proxy model of unknown accuracy. There is no 
evidence concerning the relative costs of reverse auctions and other 
Universal Service mechanisms in any of these countries. Still, the 
auctions were administratively feasible and resulted in multiple 
bidders for the COLR.
    The extreme example of a lack of competition for the market is 
India [Malik and Silva (2005), Noll and Wallsten (2005)]. Reverse 
auctions were held for infrastructure upgrades to a number of rural 
areas. The incumbent, BSNL, won almost all of the bids and bid the 
maximum subsidy available in each case. Critics of the Indian auction 
point out that the eligibility rules essentially predetermined this 
outcome. Only providers with current infrastructure in these regions 
could bid; technologies were limited to wireline and fixed wireless, 
and bidders were required to install infrastructure to reach everyone 
within these regions but without any wholesale regulation of the 
incumbent to provide for interconnection, unbundling, or resale. As a 
result, in 19 of the 20 areas, there was only a single bidder (BSNL) 
and they bid the maximum subsidy available. The rules were designed to 
promote neither entry nor efficiency.
    The other end of the spectrum can be envisioned as the U.S. While 
competitive bidding has not been utilized, support on a predetermined 
per line basis (i.e., without uniform coverage requirements) has been 
offered to multiple ETCs. The fact that many rural areas have witnessed 
multiple carriers willing to accept the offered support level, suggests 
that there would be multiple bidders if the auction were conducted on a 
per-line subsidy level, and without requirements to serve everybody 
within the same service areas with the same quality characteristics. In 
this sense, the current rules for the high-cost fund are designed to 
promote entry, but not efficiency.\11\
---------------------------------------------------------------------------
    \11\ Parties differ in the source of inefficiency that they see, 
but virtually all agree it is inefficient. Some parties point to the 
support of multiple carriers based on incumbent costs as leading to 
unnecessary duplication of infrastructure and unnecessary support for 
CETCs. Others believe the waste is caused by the cost plus nature of 
determining support levels. In any case, nobody claims the current 
environment is particularly efficient.
---------------------------------------------------------------------------
    Australia provides an interesting data point [Department of 
Communications, Information Technology and the Arts, Australia (2004), 
ITU (2006)]. Two pilot regions were selected for reverse auctions. 
These included the most remote 80 percent of Australia, and $150 
million was available for introducing unlimited local calling with 
these areas. The goal was to find ``a simpler way of determining a 
reasonable level of subsidy de-linked from a calculation of costs.'' 
\12\ The auction was designed for a single winner. No competitive 
tenders were received. In fact, since 1991, carriers other than the 
incumbent (Telstra) have been free to apply to be COLR, but none have 
applied. The ITU report concluded ``However, while the experiences with 
designating Universal Service providers on the basis of competitive 
tendering in some countries has been encouraging (e.g., Chile and 
Peru), there has been some less positive experience in Australia.''
---------------------------------------------------------------------------
    \12\ ITU (2006) at page 14.
---------------------------------------------------------------------------
    Australian regulators did follow-up analysis to determine the 
causes for lack of competitive interest. Major factors cited were: 
difficulty competing with Telstra, meeting the obligation to serve all 
customers, and difficulty identifying other revenue opportunities to 
help support COLR responsibilities. It is also possible that the 
investment climate at the time of the pilots was unfavorable. The 
regulator concluded that higher subsidies might induce entry, but they 
were not worth the significant increase in costs. They recommended 
preserving the reverse auction option, but not continuing it at this 
time. One benefit they cite from the pilots is the determination that 
Telstra was not being overcompensated for COLR at current subsidy 
levels.
    Another example is provided by electricity deregulation in Maine 
[Maine Public Utilities Commission (2002)]. Maine claims to have the 
most robust retail competition for electricity customers in the Nation. 
Significant competition (more than half of the market) has developed 
for large customers. Virtually no retail competition has developed for 
small residential and business customers (with the single of exception 
of a small area in northern Maine, which the Commission discounts for a 
number of region-specific reasons).
    State legislation eliminated the obligation to serve, with 
``standard offer service'' available for those who could not find a 
suitable competitive supplier. The Commission was instructed to strive 
for at least 3 suppliers of standard offer service in every areas, 
``but only if multiple suppliers would not cause rates to be 
significantly higher.''
    Early attempts to solicit competitive bids for standard offer 
service did not result in retail suppliers for all customer classes. 
Later attempts were somewhat more successful. Still, the Commission 
notes that ``there is virtually no retail competition for residential 
and small commercial customers, either in Maine or elsewhere.'' Their 
research concludes that prices should not be increased in the hope of 
attracting suppliers (consumer input was strongly against paying higher 
prices in exchange for increased competition). Standard offer service 
does extend some of the benefits of competition to individual small 
customers through the aggregation inherent in a standard offer 
available throughout the state. In the telecommunications context, this 
is akin to requiring geographical averaging of retail prices across 
broad geographic regions. This is closer to the old system of implicit 
support in which lower cost customers pay higher prices in order to 
support lower prices for the high-cost customers. Such a system is not 
feasible in a truly competitive environment.
    What these examples reveal is that regulators have wide discretion 
in determining the extent of competition for the market that results 
from a reverse auction. They can design auctions that preclude entry 
(such as in India) or they can promote entry, regardless of attendant 
inefficiencies (the U.S.). It appears to be feasible to get reasonable 
entry and efficiency in a green-field environment. This is what the 
Latin American examples show. It is more elusive in environments with 
existing providers.
    The political economy of regulatory policy must be considered when 
evaluating reverse auctions. In the absence of strong policy direction, 
it will be difficult to design a reverse auction that does not either 
deny CETCs their current support or deny rural ILECs recovery of their 
existing investments. The result could well be a managed competitive 
reverse auction, with few of the benefits that reverse auctions 
potentially offer.
    To avoid a managed outcome, regulators must set a clear goal in 
terms of how much entry they want, and what efficiency cost they are 
willing to bear. A concrete example is the choice of serving area. Very 
small geographical areas can promote entry (per-subscriber subsidy bids 
is the extreme example), but jeopardize the ability to realize cost 
complementarities and at the risk of unnecessary duplication of 
support. The trouble is that regulators must know a great deal about 
what is most efficient before they can design the reverse auction (for 
example, they must know how many COLRs are efficient, and which 
technologies are most efficient, and how to define Universal Service 
over the length of the franchise contract). It is the absence of such 
knowledge that is one of the major benefits of using reverse auctions 
to begin with--the market is supposed to provide these answers.
    It is the existence of current infrastructures that complicates 
this design. Rules cannot be chosen that will satisfy all interests, so 
the regulator is required to know what the efficient outcome looks like 
before the auction can be designed. In a green-field environment, by 
definition the COLR that is being auctioned is one that the market has 
not found profitable--hence, there are fewer interests at stake in the 
creation of the reverse auction mechanism. The evidence supports this 
conclusion: green-field reverse auctions have been fairly successful, 
while there are no clear examples of competitive bidding in more 
developed settings.
Auction Mechanics
    There are a number of subsidiary design questions that deal with 
the mechanics of how a reverse auction would actually operate.
Type of Bidding
    Most reverse auctions have utilized simple one-shot sealed 
auctions. Most spectrum auction design has been multiple-round, open, 
combinatorial auctions. The underlying issues concern the importance of 
cost/value complementarities, bidder risks, and opportunities for 
collusion. These have been extensively studied in the general auction 
literature. A few particular considerations apply in a Universal 
Service setting. Cost complementarities are potentially important, so 
the auction must either be combinatorial or involve fairly large 
geographical areas. Both pose problems. In addition, in an environment 
in which there are existing infrastructure providers, sealed bidding 
would appear to impede much necessary negotiation about joint bids, 
outsourcing arrangements, etc. Some research suggests that sealed 
bidding may actually facilitate collusion [Luander and Nilsson (2004)]. 
On balance, it would appear that combinatorial bidding is more 
appropriate in the U.S. environment, but the feasibility and complexity 
of the required auction is in some dispute.
Determination of Winner(s)
    It is clear that more than price must be considered in determining 
winning bids. None of the international examples (or domestic examples 
from other industries) entail a price-only selection. What the 
literature does say, however, is that the rules for determining winners 
must be specified precisely and unambiguously in advance [ITU (2002), 
World Bank (2000)]. That is, the process must avoid subjectivity. This 
is the same problem encountered in many procurement contracts--the 
rules must be clear and objective.
    Current costs, under the U.S. high-cost fund, are controlled via a 
number of oversight mechanisms, the lack of full cost recovery (high-
cost funding only supports a percentage of the costs above the national 
average), and competitive pressure from other services (e.g., VoIP, 
wireless usage substituting for wireline usage, etc.). The high-cost 
fund, itself, is not designed to necessarily minimize costs. It does 
not contain cost-reducing incentives as strong as would an auction 
mechanism. While this can lead to inefficiency in terms of costs, it 
also permits more flexibility in terms of services offered (e.g., 
broadband speeds). This flexibility has value--particularly, if 
regulators do not have sufficient information to project Universal 
Service definitions into the future.
Post-Award Flexibility
    Reverse auctions in developing countries have relied on additional 
service revenues to reduce the cost of public subsidies. Permitting 
COLRs to market value-added services, in addition to the contracted 
COLR, can result in their bids being less than the cost of providing 
solely the COLR. Some countries have specifically permitted retail 
prices in rural areas to exceed those in urban areas by predetermined 
amounts. In some auctions (e.g., the Essential Air Service Program) 
there are no restrictions on post-award pricing at all.
    It is clear that bidders will bid lower in a reverse auction to the 
degree that they have post-award flexibility. However, flexibility 
endangers the concept of universal service. Once again, there is a 
tradeoff. The more flexibility that is provided, the lower the expected 
subsidy required, but the less assurance there is that Universal 
Service objectives will be met.
    It is also worth noting that the ``successful'' Latin American 
reverse auctions rely, in part, on asymmetric interconnection fees to 
support rural providers. For example, the largest Chilean rural 
operator gets 60 percent of its total revenues from such charges; 
Columbia has recently introduced asymmetric fees, and Peru plans to 
[ITU (2004)]. They also permit higher rural prices and lower license 
fees in rural areas. Uganda has recently introduced a reverse auction 
for service to 154 communities that no operators were willing to serve, 
and part of the mechanism was permitting voice service rates in rural 
areas to be up to 50 percent above rates in Kampala (as well as higher 
termination fees in rural areas) [Intelecon (2005)].
Monitoring and Enforcement
    Performance under the franchise award must be monitored. Most 
countries have specific penalties for failure of winning bidders to 
meet their performance targets. Removal of a COLR, either through 
failure to perform adequately or through carrier bankruptcy, poses 
particular problems for reverse auctions for universal service. How is 
service to be guaranteed for rural customers in the event that their 
winning bidder does not (or is unable to) meet its obligations? Scherf 
(2006) cites this as a weakness in the build-out requirements that 
accompany licenses in many developing countries: it is cheaper to pay 
the penalties than fulfill the requirements.
    Bankruptcy risks are somewhat mitigated under the current USF by 
the historic regulatory compact in which rural ILECs have been able to 
recover their past investments. When cost recovery becomes more 
uncertain, and when awards are based on low subsidy bids, these risks 
increase.
    Scherf (2006) says that ``the regulatory environment has to be 
credible and sustainable to the eyes of investors,'' (page 12) and 
discusses issues associated with enforcement mechanisms, particularly 
in developing countries. He cites problems in Peru, where some very low 
bids had been submitted, with subsequent renegotiation under the threat 
of carrier bankruptcy. He also mentions Uganda, where the regulator has 
not even asked for the performance data it would need to monitor 
performance. These concerns are more pronounced in countries with less 
developed political institutions, but they also arise in the U.S. In 
addition, we have the issue of the appropriate jurisdictional 
responsibility for monitoring and enforcement.
Conclusions
    In a definitive work on the theory and practice of auctions, 
Klemperer (2004) concludes,

        ``In conclusion, the most important features of an auction are 
        its robustness against collusion and its attractiveness to 
        potential bidders. Failure to attend to these issues can lead 
        to disaster. And anyone setting up an auction would be foolish 
        to blindly follow past successful designs: auction design is 
        not `one size fits all.' . . . In the practical design of 
        auctions, local circumstances matter and the devil is in the 
        details.'' \13\
---------------------------------------------------------------------------
    \13\ Klemperer (2004) at page 122.

    Auctions have a number of desirable properties. The ITU states 
---------------------------------------------------------------------------
that,

        ``The use of well-designed competitive tenders can (in certain 
        circumstances) help to generate incentives to contain costs, 
        innovate, and reveal the true cost of delivering Universal 
        Service (thus helping to minimize the subsidy required.'' \14\
---------------------------------------------------------------------------
    \14\ ITU (2006) at page 25.

    We have seen that auctions can be feasible and effective for 
provision of Universal Service in unserved areas, if they are properly 
designed. Their success depends on an appropriate definition of the 
objective for universal service. Reverse auctions have been most 
successful where the objective can be clearly defined and does not 
require long-range forecasting: e.g., provide payphone service in 
specified rural villages (Chile, Peru, Columbia, Guatemala).
    Reverse auctions in the U.S. are a different matter. There are 
multiple existing infrastructures, utilizing different technologies, 
providing different services, and with different serving areas. 
Universal Service is an evolving set of service requirements that is 
difficult to forecast. The performance of auctions in this setting is 
theoretically and empirically untested. The limited evidence suggests 
that these are difficult problems.
    Auction design will need to address competition within the market 
as well as for the market, potentially large cost complementarities 
between high-cost areas as well as between high-cost and low-cost 
areas, and provide for investment incentives with significant sunk 
costs and technological uncertainty.
    Much of the theoretical appeal of reverse auctions is dissipated 
under the actual conditions under which Universal Service will be 
provided. Regulators will need more foresight than they would like. 
They will need to specify Universal Service requirements far enough 
into the future to allow for the required investment incentives. They 
will need to know more about the most efficient market structure 
(single COLR, multiple, which technology, etc.) than they would like. 
Auctions are supposed to permit the market to make these 
determinations, not regulators. But, this benefit can be illusive. Can 
the market pick the technology if the auction design cannot put 
different technological platforms on an equal footing?
    One clear beneficiary of a reverse auction system is the economics 
profession. Their expertise lies in auction design and the devilish 
details contain plenty of interesting work. How consumers of Universal 
Service and providers will fare, is less clear.
The Joint Board Discussion Proposal
    The Discussion Proposal (The Proposal) provided with the Joint 
Board Public Notice provides a good illustration of the difficulties of 
applying reverse auctions in a nongreenfield environment. The Proposal 
does not appear to be derived from any theoretical efficiency 
properties, nor does it follow the reverse auctions that have been 
implemented elsewhere. Instead, it seems to be driven by the need to 
accommodate the fact that we are currently supporting multiple networks 
using multiple technologies in rural areas.
    Separate support for broadband and mobility services in rural areas 
for 10 year periods, takes a particularly static view of technology. It 
provides support to two sets of services, neither of which are included 
in the current definition of universal service--mobility and broadband. 
The Proposal does attempt to address the transition issue by offering 
an initial phase-in whereby rural ILECs can elect to receive support 
(at current levels plus inflation) for the first 10 year period for 
broadband service. This is recognition that past prudently incurred 
investments need to be recovered.
    But, what happens after 10 years? What will govern future network 
investment? Here, the Proposal is silent on the details that will 
ultimately determine future Universal Service in rural America. The 
Proposal says that ETCs would be required to relinquish essential 
facilities at ``fair market value'' at the end of the contract term. 
After 10 years of trying to determine ``fair market value'' for 
unbundled network elements under the Telecommunications Act of 1996, 
the task of determining ``fair market value'' for essential rural 
network facilities will be daunting.
    The Proposal defines geographical coverage as 90 percent or more of 
the households, without specifying how ETCs would acquire the services 
needed to reach the remainder of the households (echoing some of the 
problems in the Australian and Indian reverse auctions discussed 
above). Basic geographical units would be counties, with the exception 
of rural ILECs, and counties could be bid on in bundles or separately. 
This does not address the complexity of the combinatorial auction that 
would be required (the U.S. Census Bureau lists 3,141 counties or 
county-equivalent administrative units), nor does it address the issue 
of whether the mobility support would extend to all counties, including 
those served by nonrural ILECs. There is the potential for a 
significant growth in the fund, if it includes currently unsupported 
areas.
    Upon review of the past ``successes'' with reverse auctions, they 
appear to deliver tangible benefits when used to support delivery of 
services where current infrastructure is not in place. While many rural 
areas see significant competition among wireless carriers, there is 
still a need for more extensive build-out of rural networks. The 
mobility USF could be aimed at this goal, by tying support to specific 
infrastructure targets.
    The Proposal illustrates the complexity of applying reverse 
auctions in the existing mixed technology infrastructure of the United 
States. The devil is in the details, but the details are not in the 
Proposal.
References
    Australia, Department of Communications, Information Technology and 
the Arts. 2004. ``Review of the Operation of the Universal Service 
Obligation and Customer Service Guarantee.''
    Congressional Budget Office. 1998. ``Electric Utilities: 
Deregulation and Stranded Cost.''
    Demsetz, H. 1968. ``Why Regulate Utilities?'' Journal of Law and 
Economics, Vol. 11, 55-66.
    Goldberg, Victor. 1976. ``Regulation and Administered Contracts.'' 
Bell Journal of Economics, Vol. 7, 426-452.
    Hoernig, Steffen H. and Tommaso M. Valetti. 2003. ``The Interplay 
between Regulation and Competition: The Case of Universal Service 
Obligations.'' Chapter 6 in Spectrum Auctions and Competition in 
Telecommunications, edited by Gerhard Iling and Ulrich Kluh, The MIT 
Press.
    Hultkrantz, Lars. 2004. A fresh start on universal-service policy. 
Paper presented at the Swedish National Post and Telecom Agency 
Conference.
    Intelecon. 2005. ``Universal Access and Universal Service Funds: 
insights and experience of international best practice.''
    International Telecommunications Union (ITU). 2002. Model Universal 
Service/Access Policies, Regulations and Procedures. Part II: Minimum 
Subsidy Competitive Auction Mechanisms for Funding Public 
Telecommunications Access in Rural Areas and Tariff/Interconnection 
Regulation for the Promotion of Universal Service/Access. Paper 
prepared by Edgardo Sepulveda for the Global Symposium for Regulators, 
Hong Kong, December 7-8, 2002.
    International Telecommunications Union (ITU). 2004. ``Leveraging 
Telecommunications Policies for Pro-Poor Growth Universal Access Funds 
With Minimum-Subsidy Auctions.'' DAC Network on Poverty Reduction, 
Development Co-operation Directorate, Development Assistance Committee.
    International Telecommunications Union (ITU). 2006. ``What Rules 
for Universal Service in an IP-Enabled NGN Environment?'' Background 
Paper for ITU Workshop, Geneva, March 23-24, 2006.
    Kelly, Frank and Richard Steinberg. 1998. ``A Combinatorial Auction 
with Multiple Winners for Universal Service.'' Subsequently published 
in Management Science: 46(4), 586-596, 2000.
    Klemperer, Paul. 2004. Auctions: Theory and Practice. Princeton 
University Press.
    Kramer, Jonathan. 2003. ``Leveling the Playing Field for Cable-TV 
Franchise Renewals.'' Public Management; 85, 11.
    Laffont, J.J. and Jean Tirole. 1988. ``Repeated auctions of 
incentive contracts, investment, and bidding parity with an application 
to takeovers.'' RAND Journal of Economics, Vol. 19, No. 4.
    Laffont, J.J. and Jean Tirole. 2000. Competition in 
Telecommunications. The MIT Press.
    Lehman, Dale E. 2000. Who Will Serve Rural America? white paper for 
the National Telephone Cooperative Association.
    Luander, Anders and Jan-Eric Nilsson. 2004. ``Combinatorial 
Procurement Auctions--A Collusion Remedy?'' Unpublished Manuscript.
    Maine Public Utilities Commission. 2002. ``Standard Offer Study and 
Recommendations Regarding Service after March 1, 2005.''
    Malik, Payal and Harsha de Silva. 2005. ``Diversifying Network 
Participation: Study of India's Universal Service Instruments.'' WDR 
Dialogue Theme 3rd cycle, Discussion paper WDR0504, regulateonline.org 
and LIRNEasia.
    Milgrom, Paul. 1996. Procuring Universal Service: Putting Auction 
Theory to Work. Lecture at the Royal Swedish Academy of Sciences.
    Noll, Roger G. and Scott Wallsten. 2005. ``Universal 
Telecommunications Service in India.'' AEI-Brookings Joint Center, 
Related Publication 05-25.
    Scherf, Thorsten. 2006. ``Policies for universal Access to 
Telecommunications in Rural Areas of Developing Countries--A 
comparative Analysis.'' Unpublished paper, available at http://
zeus.econ.umd.edu/cgi-bin/conference/download.cgi?db_name=I
IOC2006&paper_id=544#search=%22scherf%20universal%20service%22
    Sorana, Valter. 1998a. ``Some Economics of Carrier of Last Resort 
Auctions.'' Paper presented at the Telecommunications Policy Research 
Conference.
    Sorana, Valter. 1998b. ``Auctions for Universal Service 
Subsidies.'' Unpublished manuscript, Stanford University.
    Weller. 1998. ``Auctions for Universal Service Obligations.'' Paper 
presented at 12th biennial conference of the International 
Telecommunications Society.
    Westerveld, R. and C.F. Maitland. ``Technical and policy advances 
in rural telecommunications.'' Unpublished manuscript.
    World Bank. 2000. Telecommunications Regulation Handbook: Module 6, 
Universal Service. Edited by Hank Intven, McCarthy Tetrault.
    Zupan, M.A. 1989. ``Cable franchise renewals: do incumbent firms 
behave opportunistically?'' RAND Journal of Economics 20, 473-482.

    The Chairman. Thank you very much, Mr. Crothers.
    May I now recognize Dr. Staihr?

  STATEMENT OF BRIAN K. STAIHR, Ph.D., REGULATORY ECONOMIST, 
                EMBARQTM CORPORATION

    Dr. Staihr. Thank you very much.
    I'm Brian Staihr. I'm an Economist for Embarq. Very happy 
to be here today.
    Now, Embarq is the country's largest independent wireline 
telephone company. We have about 7 million customers across 18 
states. And if you look at the picture that Brian's showing you 
over here we serve some very wonderful rural areas, like Possum 
Kingdom, Texas, and Pretty Prairie, Kansas.
    [Laughter.]
    Dr. Staihr. And because we're very rural, we appreciate the 
time and the effort that this committee has put into the 
subject of Universal Service. Already this year, Senator 
Stevens has introduced the USA Act, which addresses many 
important issues. And we look forward to working with all of 
you in the future.
    Now, quickly to reiterate two facts, we all know that the 
Federal Fund has grown significantly in the past few years and 
the FCC is looking at ways to control this growth, including 
auctions. We also know, if you look at this graph, that the 
source of the growth is receipts that have gone to competitive 
carriers rather than to incumbents that serve as carriers of 
last resort. Now, this difference is significant, because when 
a company is a carrier of last resort, it has an obligation to 
serve all the customers in an area, including the high-cost 
customers that nobody else wants to serve. Competitive carriers 
and wireless carriers don't have this obligation even when they 
get USF.
    Now, to see why this difference is significant, I want to 
show you a picture of Meadowview, Virginia. The different 
colors in the picture on the left represent different 
population densities. Yellow and red show high density, which 
is low cost. The green shows low density, which is high cost. 
Embarq, as the carrier of last resort, has to serve the whole 
thing, the yellow and the green parts.
    The second picture shows you the wireless coverage in 
Meadowview. As you can see, the wireless coverage pretty much 
stops where the high-cost parts start. The wireless carrier 
doesn't have an obligation to serve the high-cost area; and, 
even if it receives USF, it doesn't have this obligation.
    Now, this picture illustrates a key problem with the Fund 
as it exists today. Before we had competition, a company like 
Embarq would serve Meadowview, and we could count on the low-
cost areas offsetting the high-cost areas. If we lost money 
serving the green part, that was OK, because we served the 
yellow part, too, and, on average, we were all right. But, 
after 1996, competition developed, and, in a place like 
Meadowview, it developed just in the yellow areas. As a result, 
we could no longer count on that low-cost offsetting the high 
cost, because we'd lost half the customers in the low-cost 
area.
    The point here is, the Federal Universal Service Fund has 
not kept pace with this competitive reality, because, when the 
current system looks at a place like Meadowview, it assumes 
that Embarq can continue to use the low-cost areas to offset 
the high cost, and we can't do that anymore.
    In addition, under the current system, this competition 
creates a very strange kind of chain reaction. Competitors come 
into the low-cost areas, they get the same support per line as 
the incumbent. This support draws more competitors into those 
same areas. That means the competitors serve low-cost 
customers, the incumbent serves high-cost customers, the 
incumbent's costs go up, the support goes up, we end up 
oversupporting the town center and basically shortchanging the 
outlying areas.
    The way to fix this is to target support more granularly, 
to reexamine the area that we look at when we determine the 
need for Universal Service support, particularly to consider 
the town center and the outlying areas differently.
    What will this do? Three things. First, it'll stop that 
chain reaction. Second, it'll target the support to where it's 
really needed. And, third, it will eliminate this reliance on 
these unsustainable cross-subsidies, while not necessarily 
increasing the size of the Fund.
    Now, I've got one more picture to show you. This is Fort 
Meade, Florida. Every green dot on that picture is a customer 
location. You can see there's a very clear downtown area. That 
area is pretty low-cost. The outlying areas are much higher-
cost. All right? The outlying areas don't see competition, in 
general. When we see competition in Fort Meade, it's, just like 
Meadowview, in that downtown area. As a result, the outlying 
areas can't be subsidized by the downtown. The outlying areas 
need support. And, under the current system, they don't get 
any.
    Targeting USF would bring rationality to the USF 
distribution system. And it's not mutually exclusive with other 
policy considerations that we're looking at today. We can talk 
about reverse auctions. We can talk about support for 
broadband. We can talk about eliminating identical support. We 
can talk about more granular support, in conjunction with any 
of those. Or we can talk about more targeted support, apart 
from any of those. It works both ways.
    Now, to wrap things up, 11 years ago when the Act was 
passed, we didn't have much competition in rural America, we 
didn't have the capabilities or the tools to calculate support 
specifically for these outlying areas. Today, we have the 
capability, we have the tools, and we have one more thing--we 
have the incentive, going forward, to do it right.
    So, with that, I'll stop. I appreciate the time today and 
look forward to any questions you may have.
    [The prepared statement of Mr. Staihr follows:]

  Prepared Statement of Brian K. Staihr, Ph.D., Regulatory Economist, 
                    EmbarqTM Corporation
    Good morning, Mr. Chairman, Vice-Chairman Stevens, and members of 
the Committee. My name is Brian Staihr, I work as an economist for 
Embarq, and I appreciate the opportunity to testify before you today.
    Embarq is the largest independent wireline telephone company in the 
country, serving nearly seven million customers across eighteen states 
[Fig. 1]. We serve some of the most rural portions of the country, 
places like Possum Kingdom, Texas; Pretty Prairie, Kansas; and Crater 
Lake, Oregon. And because we serve rural America, we are well aware 
that this Committee has put tremendous time and effort into the subject 
of universal service. Already this year, Senator Stevens has introduced 
the USA Act which addresses a number of important issues such as 
exempting the Universal Service Fund (USF) from the Antideficiency Act 
and stabilizing the contribution base while preserving State Universal 
Service programs. We look forward to working with Chairman Inouye, Vice 
Chairman Stevens and all the members of this Committee going forward as 
you sort through the complex issues involved in laying a solid 
foundation for the next generation of universal service. Getting these 
issues right is a matter of vital importance not just to the 
stakeholders around this table, but to the economic competitiveness of 
every rural community--and those in more populated areas who benefit by 
connecting to rural America.

[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

    I want to start out today by highlighting two established facts: 
First, we know that the Federal Universal Service Fund has grown 
dramatically in recent years. As a result of this growth, the FCC is 
investigating various ways to control the size of the Fund, including 
the use of reverse auctions, which I will talk more about in a moment.
    Second, as the graphs before you illustrate [Fig. 2], we also know 
this growth has been driven by the increasing participation of second 
and third competitive carriers in the Fund, as opposed to the incumbent 
carriers that shoulder the core carrier-of-last-resort 
responsibilities.

[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

    This difference is significant. When a company such as Embarq is a 
carrier-of-last-resort, that company has an obligation to serve all 
customers, including the customers in very high-cost areas that no one 
else wants to serve. Competitive carriers and wireless carriers do not 
have these same carrier-of-last-resort obligations, even when they 
receive USF dollars.
    To illustrate why this difference is significant, I've included a 
picture here of a rural area that Embarq serves called Meadowview, 
Virginia [Fig. 3]. The different colors on the left picture represent 
different population densities, with red and yellow showing the highest 
densities and green showing low density. As you can see, the southern 
portion of Meadowview is actually fairly populous; the northern part is 
less populous, very rural, and very high-cost to serve. Embarq, as the 
carrier-of-last-resort, serves the entirety of Meadowview, the yellow 
parts and the green parts.

[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

    In contrast, the picture on the right shows the coverage area of 
the major wireless provider in Meadowview. As you can see, wireless 
coverage essentially stops where the high-cost areas start. Strange as 
it may sound, the wireless company has no obligation to serve the high-
cost portions of Meadowview, even if it receives USF dollars.
    These pictures actually illustrate three related concepts that lie 
at the heart of the challenges that Universal Service faces today.
    First, before competition, a company like Embarq could serve an 
area such as Meadowview and count on the fact that the lower-cost 
portions would offset the higher-cost portions. It didn't matter if a 
company lost money serving the green areas, because the company also 
served the yellow areas and, on average, the company could cover its 
costs.
    Second, this changed with the passage of the 1996 Telecom Act. We 
have seen competition develop everywhere, but in places like Meadowview 
the competition is limited to what we see here: the more densely 
populated areas. Competitors--both wireline and wireless--most often 
target the low-cost areas, and avoid the high-cost areas. As a result, 
we can no longer count on those lower-cost areas to offset the highest-
cost regions because in many cases we've lost half the customers in the 
low-cost areas to competition.
    Third, and most importantly, the Federal Universal Service Fund has 
not kept pace with this competitive reality. When the current USF 
mechanism evaluates an area like Meadowview, the system assumes that 
Embarq can continue to use low-cost areas to offset the higher-cost 
ones. In fact, the current system assumes that Embarq can use low-cost 
areas anywhere in the state of Virginia to offset the cost of serving 
the high-cost portions of Meadowview.
    In addition, by allowing competitive carriers to receive support 
while serving only the parts of a rural study area they choose, the 
current system creates dysfunctional incentives that lead to an 
unfortunate chain reaction:

   New entrants gravitate to the town center area and receive 
        support at the same per-line rate as the carrier of last 
        resort, creating a windfall opportunity;

   Drawn by the windfall, multiple competitive providers apply 
        for support in the same geographic area;

   Bereft of its low-cost, offsetting customers, the incumbent 
        carrier's per-line costs go up--increasing the support to all 
        USF recipients in that area, and increasing the windfall;

   The Fund ends up overspending in the town centers and 
        shortchanging the outlying areas where support is most needed.

    As we look to the future of Universal Service, we need to correct 
these basic misassumptions to make the Fund truly compatible with 
today's--and tomorrow's--competitive environment. The way to do that is 
straightforward: We have to re-examine the geographic area that we use 
to determine whether support is needed, and recalculate that support at 
a much more granular level, so that the town centers and outlying areas 
are considered separately, and the support migrates to where it is 
truly needed the most. Not only would such an approach eliminate many 
of those dysfunctional windfalls, it would be more competitively 
rational because it would channel support to the truly rural outlying 
areas that need it the most, eliminating those unsustainable cross-
subsidies without necessarily increasing the size of the Fund.
    The picture in front of you shows the community of Fort Meade, 
Florida [Fig. 4]. Each green dot on this picture is a customer's 
location. There is a very clearly identified downtown area which is 
actually low-cost to serve; then there are outlying areas where the 
cost of serving is many times higher. As was the case with Meadowview, 
when we see competition in a place like Fort Meade we see it in this 
low-cost downtown area. As a result, the outlying areas are the ones 
that need explicit support from the Fund.

[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

    While granular targeting adds a heavy dose of rationality to the 
USF distribution process, it is not mutually exclusive to other 
approaches under consideration, such as reverse auctions, support for 
broadband, modifying the ``identical support'' rule or eliminating 
support for multiple providers altogether. Each of these, and many 
other policy decisions associated with universal service, represent 
important crossroads that will have impact for decades to come. 
Granular targeting is, however, a competitively realistic first step 
for all of those larger decisions that could eliminate some of the 
worst abuses and realign the market incentives associated with 
Universal Service to more closely match the program's original 
purpose--providing affordable, reliable service where the market would 
not otherwise deliver it.
    Eleven years ago when the Act was passed, true competition hadn't 
reached any of the town centers in rural America, and we had neither 
the tools nor the capability to easily calculate and target support 
separately for these outlying areas. Today we have both the capability 
and the tools. And we have one more thing: The incentive to do this 
right, going forward. With that, I will close. Again, thank you very 
much for the opportunity to speak with you today, and I look forward to 
any questions you may have.

    The Chairman. I thank you very much, Dr. Staihr.
    And now, may I call on Mr. Massey?

                STATEMENT OF RICHARD N. MASSEY,

         EXECUTIVE VICE PRESIDENT, CORPORATE SECRETARY,

              AND GENERAL COUNSEL, ALLTEL WIRELESS

    Mr. Massey. Thank you, Mr. Chairman. And thank you, Mr. 
Vice Chairman. And we appreciate very much the interest of you 
two particularly, and of the Committee, in Universal Service.
    I say that on behalf of Alltel Corporation, and also on 
behalf of myself. I'm a citizen of one of the more rural states 
in the country. And we totally ascribe to the values that both 
Senator Stevens' bill--the USA Act included, and also the 
Smith-Dorgan-Pryor bill. We think those move the ball down the 
field quite considerably, and we appreciate those efforts.
    Alltel is the fifth largest wireless carrier in the 
country. We serve about 11 million customers. However, we cover 
about one and a half million square miles. The--so, we're the 
largest, in terms of geography. So, a vast amount of the 
coverage and our customer base is rural. We actually have been 
in the rural business--the rural telecom business for 60 years, 
so we know it pretty well.
    What we've learned, spending a great deal of time with our 
customer base, is that wireless is what they need. Wireless is 
a very critical tool that a number of businessmen require to be 
competitive in this world. If you analyze the industries in a 
number of these rural states--I know this is true for Alaska, 
for an example, and for Arkansas--the industries in the rural 
areas are agriculture, mining, timber. These are not desktop 
businesses, these are businesses where the employees, the 
capital, is out in the world. And what those people tell us is, 
they want a wireless solution. So, we believe wireless is the 
future of a lot of the communications--maybe not all of it, but 
a lot of it--particularly with respect to businesses.
    Universal Service has been critical in the development of 
the wireless infrastructure in the world. I can tell you, on 
behalf of Alltel, there are a number of markets that would not 
be served but for Universal Service. So, it's very important to 
us.
    I'll give you an example. The Pine Ridge; it's Pine Ridge 
Reservation, South Dakota, is in one of the poorest counties in 
the United States. When we found this market, some years ago, 
it included an incumbent wireline provider that receives 
Universal Service funds. Only 30 percent of the population on 
this reservation actually used telephones. We received 
competitive ETC money, and built the wireless network there. 
And today, 80 percent of that population are wireless 
consumers.
    Senators that's a success story for the Universal Service 
Fund. We believe that's what it was intended for. It's to get 
coverage to people who can't get coverage otherwise, or they 
don't choose to get coverage from another carrier otherwise.
    So, broadband deployment, we totally ascribe to the views 
of all the Senators and the prior and current committee members 
who believe that broadband is the challenge of the future. We 
believe it is the interstate highway system of the future. We, 
however, believe that it's not necessarily going to be 
wireline. We believe the future--that broadband's future is in 
wireless. Today, we have a wireless network, as do the Verizon 
Wireless folks, that provides data speeds that are comparable 
to DSL speeds. We believe that, in many, many markets--in many, 
many underserved markets, this sort of technology will be 
preferred by the consumer.
    So, in essence, we believe Universal Service is critical to 
the community development of wireless in these underserved 
markets.
    Two points. The myriad number of reforms that are here, 
bewildering thousands of reforms, is very complex stuff. There 
are two things that we'd like to emphasize here. The first that 
we would like for you to make sure is included in any so-called 
reform by the Joint Board and the FCC, the first is competitive 
neutrality. That was in the Stevens bill. Competitive 
neutrality is two parts. One of them is competition. We believe 
that funding a for-profit monopoly is a bad idea. We think that 
kind of business went out of style about 50 years ago. We 
believe you have to fund some competition so that subscribers--
so that customers can get the services they deserve. 
``Neutrality'' means you don't pick which technology is going 
to win in a particular market, you let the customer pick. 
That's the way the Universal Service Fund has worked to date. 
Customers pick their carrier. They pick the technology. And we 
think that's very important.
    Finally--and I'm about out of time--accountability is 
something we ask for. We want to be accountable for the funds 
that you give us to build out networks in underserved markets. 
All we ask is that you impose the same standards on all the 
carriers uniformly and fairly. That's the essence of our 
proposal on reform.
    Thank you very much.
    [The prepared statement of Mr. Massey follows:]

  Prepared Statement of Richard N. Massey, Executive Vice President, 
       Corporate Secretary, and General Counsel, Alltel Wireless
    On behalf of Alltel Corporation, I would like to thank the 
Committee for inviting me to speak to you today. Alltel is based in 
Little Rock, Arkansas, and serves more than 11 million wireless 
customers in 35 states. Alltel operates the Nation's largest wireless 
network in terms of geographic area served, but our customer base is 
smaller than those of the larger carriers. This is because we are one 
of the few major wireless operators to focus on serving rural and more 
sparsely populated areas. We provide leading-edge, digital mobile voice 
services. We are also rapidly deploying higher-speed, mobile broadband 
services. Our EV-DO based AxcessSM Broadband service is now 
available in over 100 communities covering 44 million people--including 
numerous high-cost areas where we have been designated as an ETC. This 
broadband service offers speeds of 400-700 kbps--comparable to the 
throughput of many DSL services in the market today.

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    Alltel's roots go back some 60 years as a rural, independent 
telephone company. Although we are now exclusively in the wireless 
business--we spun off our wireline local telephone operations last year 
to the company now known as Windstream--we remain true to our deep 
commitment to providing the best possible service to rural Americans. I 
know there are many other rural-focused wireless carriers across the 
country and I acknowledge their great efforts as well.
    Mr. Chairman, Mr. Vice Chairman, and members of the Committee, I 
would like to commend you for your work in this area. Members of this 
Committee, past and present, are largely responsible for the Universal 
Service provisions enacted in the Telecommunications Act of 1996 eleven 
years ago--and those provisions have been a great success in getting 
affordable telecommunications services, including wireless services, 
out to rural communities. The 1996 Act told the FCC and the industry: 
let's preserve and advance universal service, and make sure that 
consumers in rural, insular, and high-cost areas have access to service 
that is comparable to services available in urban areas. The Act also 
said, let's get these services out to people using a pro-competitive, 
de-regulatory policy framework and open all telecom markets to 
competition. These policies are working well. Today's Universal Service 
system is bringing the most advanced services and technologies, 
including wireless, to consumers across America--not just in 
metropolitan areas.
    Alltel looks forward to working with the entire Committee on 
Universal Service reform and I would also like to praise Senator 
Stevens and the other Members of this Committee for the introduction of 
S. 101, the Universal Service for Americans Act (USA Act). This 
forward-looking bill sets the right course for Universal Service policy 
by reaffirming the fundamental principle of competitive neutrality. 
Rural consumers will benefit most from a system that promotes Universal 
Service without interfering with competition, and without unfairly 
favoring any class of providers or technologies over another. We also 
are enthusiastic about the bill's strengthened eligibility guidelines 
and auditing provisions. These will increase the program's 
accountability and will ensure that every dollar of high-cost support 
is used to maintain and improve communications facilities serving rural 
consumers. The bill also wisely broadens the base of Universal Service 
contributors.
    Consumers everywhere increasingly demand mobile, broadband, and 
other leading-edge telecom and information services. Over the past 5 
years, the number of mobile wireless subscribers has grown by 86 
percent, from 118 million in June 2001 to 219 million in June 2006. 
There are now many more wireless phones in service than wireline. 
According to a survey conducted by the U.S. Department of Health and 
Human Services, over 10 percent of consumers are using wireless as 
their only phone service. And among consumers with more than one 
connection, a substantial proportion now use wireless as a primary 
means of communications. Without question, wireless communications is 
the ``lifeline'' of today's consumers. Meanwhile, wireless broadband 
service has grown a whopping 2,750 percent--from about 400,000 lines in 
2005 to over 11 million in 2006.

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    We are seeing these same trends in rural areas. Rural consumers 
increasingly want and need mobile wireless service. Many of you 
represent rural consumers and you therefore know that people in rural 
areas often spend more time than their urban counterparts on the road, 
and depend even more heavily on mobile communications, especially since 
desk jobs are increasingly moving out of rural areas and into city 
centers. For example, an entrepreneur may need to reach contacts when 
driving from one end of a large county to another for business; a 
parent may need access to telecommunications while driving children to 
and from relatively distant schools; and a farmer may need access to 
data on agricultural prices while working on a remote part of his or 
her property. Wireless broadband is often the only means of high-speed 
access in many high-cost areas and is playing a major role in bridging 
the ``broadband divide.'' Alltel appreciates the emphasis this 
Committee places on the importance of high-speed deployment across 
rural America.
    A critical part of this story is the competitively neutral 
Universal Service high-cost fund program, which, thanks to this 
Committee's efforts, has enabled wireless carriers to serve the most 
remote parts of the country. Until just recently, only a negligible 
amount of Universal Service funding was going to support the deployment 
of wireless service to high-cost areas--even though wireless technology 
and networks are what consumers in those areas need and want. Of the 
$25 billion spent on high-cost Universal Service since 1996, only about 
$2 billion has gone to wireless carriers and other competitors. Even 
today, less than 25 percent of Universal Service high-cost funds go to 
support the deployment of wireless service, even though there are now 
more wireless subscribers. Wireless contributes more than twice the 
amount into the Universal Service Fund than it receives out of the 
fund.

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    America is getting a great return on its investment in wireless 
universal service. It's true that support for wireless has increased 
over the past few years. But that has come with a tremendous expansion 
of wireless service into rural areas. With Universal Service support, 
we are building facilities deep into rural areas, not just along major 
highways, and delivering service to consumers where they live and work. 
For example, on the Pine Ridge Reservation in South Dakota, the tribe 
estimated that less than 30 percent of the population had telephone 
service prior to Alltel's entry into the market as a wireless Universal 
Service provider. Today more than 80 percent of the population on the 
Pine Ridge reservation has access to wireless telephone service. As 
Senator Thune knows well, the vast majority of these consumers are 
eligible for and are receiving a discounted Lifeline service of only $1 
per month. This is the true meaning of universal service.

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    Similar stories can be told across the country. In rural parts of 
Arkansas, Louisiana, Maine, North Dakota, West Virginia, and many other 
states, rural consumers are getting more and better wireless service at 
increasing broadband speeds as a direct result of high-cost Universal 
Service support to wireless companies. Wireless penetration rates went 
up from 41 percent in 2001 to 68 percent in 2005 in the most sparsely 
populated areas with fewer than 100 residents per square mile. This is 
a tremendous success story.

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    Make no mistake--wireless carriers are receiving funds only when we 
step up and are held accountable to our commitment to serve the entire 
geographic area, including outlying areas as well as towns and cities. 
To obtain ETC (eligible telecommunications carrier) designation and 
retain that status, we are required to make detailed annual 
demonstrations, to the FCC and to most state commissions, that we are 
spending the money to build and upgrade cell sites throughout our 
service areas, and to maintain and promote top-quality service to 
consumers in those areas. We are held accountable for every Universal 
Service dollar we spend. Alltel added numerous cell sites to its 
network last year, a significant percentage of which were the direct 
result of Universal Service support. Our capital budgeting process 
considers total funds available, including USF funds, when planning for 
new cell sites. Consequently, in each state where Alltel is an ETC, 
there are several cell sites built based upon anticipated Universal 
Service funding. Alltel expends 100 percent of the USF support on 
capital and operating expenditures within its ETC areas. And rural 
consumers increasingly are depending on wireless ETCs as their 
``carriers of last resort.'' When we use our USF support to build out 
new cell sites, we charge the same amount to everyone who chooses to 
buy our service; a consumer doesn't have to pay any more to get mobile 
service once the network is in place.
    Simply put, with wireless high-cost universal service, you get a 
big ``bang for your buck.'' USF support for wireless in rural areas 
gives you a great return on your investment. So why do you hear 
complaints about growing high-cost support for wireless consumers? And 
why are many parties inundating the FCC and the Joint Board with 
proposals that would scale back support for new wireless networks and 
services in a major way? Alltel urges this Committee to monitor this 
situation closely as the Joint Board prepares to make its next set of 
recommendations. It's true that the total high-cost fund is growing. 
But the solutions need to address the real problem. Support for rural 
wireless is not the problem--and anti-competitive proposals to reduce 
funding toward wireless consumers are not the answer.
    As Verizon correctly noted a few weeks ago to the FCC, the real 
problem is that the existing Universal Service program is tailored to 
support traditional voice-grade services, while technological changes 
and increasing competition are transforming rural consumers' 
telecommunications needs. As a result, the amount of high-cost funding 
per line--to wireline as well as wireless--is growing rapidly without 
efficiently advancing the goals of universal service.
    So what is the solution? How can we place reasonable limits on the 
growth of the fund, while ensuring that we spend the money wisely and 
effectively? How can we do this without harming rural consumers' access 
to competitive wireless and wireline services comparable to those 
available in urban areas?
    I would like to discuss three policy recommendations that are now 
under serious consideration: (1) reverse auctions; (2) placing ``caps'' 
on Fund growth; and (3) targeting funds more effectively. Alltel has 
submitted a proposal (see attached) for reforming how support is 
distributed from the Universal Service Fund, including a reverse 
auction aimed at bringing broadband service to unserved and underserved 
areas, a per-line cap on Universal Service support for basic voice 
services, and an approach to identifying high-cost areas that targets 
Universal Service support to those areas and holds carriers accountable 
for all support received.
    1. Reverse Auctions. The amount of Universal Service support could 
be determined through a competitive bidding process, rather than 
through an intrusive regulatory cost-accounting system. The lowest bid 
would determine the amount of USF support. Alltel congratulates FCC 
Chairman Kevin Martin for advancing this innovative idea, which is 
worthy of further development. As Chairman Inouye and Senator Stevens 
have correctly observed in the past, complicated questions arise in 
connection with auctions for services that are already being provided 
by existing ETCs, and there could be serious unanticipated 
consequences. Alltel believes that it may be possible to resolve these 
issues, and ultimately competitively neutral auctions might be a viable 
way to set support levels.
    Pending the resolution of these broader implementation questions, 
Alltel has proposed an initial ``pilot'' reverse auction program, which 
would focus on promoting broadband deployment in the most underserved 
rural markets. Service providers using all technologies would bid 
competitively in a single set of reverse auctions, and each 
participating ETC would have to make a commitment to provide 
substantial broadband service, as well as conventional services, 
throughout a community within a specified period of time. The lowest 
bid would determine the level of per-line Universal Service support 
needed for the auction winner to fulfill this commitment. But other 
carriers who make the same service commitments would have a chance to 
receive some support as well.
    The key in this or any USF auction system is to make sure that the 
competitive bidding process does not displace competitive service for 
customers in the marketplace, post-auction. Reverse auctions should be 
used to set the amount of funding per line, not to pick a single 
``winner'' as the exclusive provider of supported universal service. 
This would give all participating ETCs strong incentives to build 
facilities and get competitive services out to consumers in rural 
areas.
    Alltel strongly opposes proposals to use reverse auctions to 
effectively scale down high-cost funding for one category of Universal 
Service providers--wireless carriers. For example, consumers would not 
benefit from the anti-competitive proposal to hold two separate 
auctions, the first for wireless only, and the second, presumably 
conducted many years later, only for wireline service. This imbalanced 
type of auction process certainly would reduce support for wireless 
service in high-cost areas, by pushing down the level of support per 
line for a single auction winner, and preventing anyone other than the 
auction winner from providing supported wireless services even if it is 
willing and able to fulfill the obligations of an ETC. The result would 
be to dramatically slow the rate of wireless investment in rural areas 
and make it harder for rural consumers to access affordable, high-
quality mobile service. But this approach would do nothing to target 
support to areas where it is most needed, or to promote deployment of 
next-generation networks in rural areas. This Committee should be wary 
of proposals like this.
    2. Caps On Fund Growth. Another proposal under discussion is to 
place some kind of caps on the growth of the fund. A cap could be an 
effective tool in controlling the growth of the USF, provided that it 
can be structured in a way that helps rural consumers. In fact, Alltel 
has offered a detailed proposal to do just that.
    Another version of a fund growth cap has been offered by West 
Virginia consumer advocate Billy Jack Gregg, who appeared on the first 
panel this morning. Under Mr. Gregg's proposal, the total funding 
disbursed to all eligible telecommunications carriers in a particular 
geographic area--wireless and wireline--would be allowed to grow only 
to the extent that population in the area grows, plus inflation. But 
the dollars would be targeted based on the number of consumers who 
choose to take service from each ETC--that is, based on the number of 
lines each ETC serves. If you serve more customers, then you get more 
support. If a new carrier comes in and makes the same ubiquitous 
service commitment, then it would get a fair share of the funding as 
well.
    The idea behind both Alltel's proposal and Mr. Gregg's is, if the 
country needs to limit funding growth, then consumers should be the 
ones to decide where the dollars should flow by deciding what they want 
to buy, rather than having regulators make those decisions for them. 
This way, the competitor that attracts the most consumers--by providing 
the highest quality, most appealing, or lowest cost services--will get 
the support needed to serve those rural areas.
    By contrast, some have suggested that separate caps should be 
imposed on wireless ETC fund growth and on wireline incumbent fund 
growth. Like the anti-competitive proposal for two separate auctions 
(wireless and wireline), this proposal would substantially reduce the 
amount of funds to support wireless investment in rural areas, but 
would fail to satisfy the fundamental principle of competitive 
neutrality. It might limit the overall growth of the fund, but how 
would it help rural consumers? It just continues sending the money 
where it has always gone, without doing anything to promote investment 
and new competitive services in high-cost areas. Again, we respectfully 
ask this Committee to be on guard for competitively biased proposals.
    3. Target Funding. A third reform proposal is to target funds more 
effectively, so that they would go to carriers that serve consumers who 
actually live in high-cost areas, rather than simply giving the funds 
out based on the same formulas that have been used for decades. Alltel 
has offered a detailed proposal to target high-cost funding to 
geographically disaggregated areas, so that funding would flow to the 
highest-cost areas in each state, regardless of whether those areas 
were historically served by large or small incumbents, or by wireless 
or other competitive carriers. Embarq, to its credit, has offered 
another, similar proposal, with funding targeted to outlying portions 
of a study area or wire center, where costs are highest, rather than to 
town centers. Re-targeting funding more efficiently would enable the 
Fund to support Universal Service goals while also potentially reducing 
the overall size of the Fund and--most importantly--without limiting 
rural consumers' access to competitive service choices.
    Unfortunately, the existing system focuses funding on carriers with 
high-cost structures, rather than on consumers in high-cost areas. Some 
propose to make this already problematic system even worse, by 
calculating support for wireless carriers based on so-called ``actual 
costs.'' This would target the most funds to companies that spend the 
most money and punish carriers for providing service more efficiently. 
It also does nothing to encourage carriers to get services out to 
consumers. And it would require a complicated and unnecessary 
regulatory cost accounting system for competitive wireless carriers. 
This system doesn't work well today for wireline incumbents. Why would 
we want to extend it to wireless competitors?
    In conclusion, I would like to thank this Committee once again for 
its commitment to policies that simultaneously promote Universal 
Service and advance competition. I also appreciate the efforts of the 
FCC, the Joint Board, and state commissions. Universal service support 
is making a real difference in increasing rural consumers' access to 
wireless services that are vital for health, safety, and economic 
development. Wireless carriers like Alltel are helping bridge the 
geographic ``broadband divide'' and are enabling rural communities to 
fully participate in our global economy. Going forward, Universal 
Service funds should be targeted and spent more effectively--but 
without driving down investments in wireless networks in high-cost 
areas. Pro-Universal Service and pro-competitive rules and policies 
will continue to bring the benefits of wireless and wireline services 
to consumers across America.
                                 ______
                                 
                                            Alltel Wireless
                                                  February 16, 2007
Commissioner Deborah Taylor Tate,
Federal Chair, Federal-State Joint Board on Universal Service
Federal Communications Commission
Washington, DC.

Commissioner Ray Baum,
State Chair, Federal-State Joint Board on Universal Service
Oregon Public Utility Commission
Salem, OR.
 RE: High Cost Universal Service Support, WC Docket No. 05-
                                                        337
 Federal-State Joint Board on Universal Service, CC Docket 
                                                  No. 96-45

    Dear Commissioner Tate and Commissioner Baum:

    Consumers in many rural areas rely on high-cost Universal Service 
support that carriers use to make available affordable 
telecommunications services, such as wireless services. Since the entry 
of competitive eligible telecommunications carriers (``CETCs'') into 
the Universal Service market, rural areas have greatly benefited from 
the deployment of basic and advanced wireless universal services. The 
pro-competitive vision of the 1996 Act has become a reality in many 
rural areas, but there is more work to be done. As Universal Service 
reform measures are considered, such as imposing reasonable limitations 
on the growth of the Universal Service Fund, they must be accomplished 
without compromising the pro-consumer principle of competitive 
neutrality. At the same time, Universal Service must continue to evolve 
to promote the development of new broadband networks and advanced 
services.
    Alltel submits a set of concrete proposals to advance these goals. 
We propose the immediate adoption of a new ``pilot'' program of 
``reverse auctions'' focused on promoting broadband service for 
consumers in the most underserved, high-cost areas. Pending development 
of a broader transformation of the system in the longer term, we also 
recommend certain transitional reforms to the existing high-cost 
support system that can be implemented immediately, designed to (1) 
target funding more effectively to high-cost areas; (2) impose 
reasonable limits on fund growth; and (3) ensure greater accountability 
for the use of funds.
    To date the explicit Universal Service funding system has 
successfully brought consumers in rural America the benefits of access 
to robust wireless and wireline network infrastructure. Our Nation's 
competitively-neutral Universal Service program spurs both wireless and 
wireline companies to expand their networks and introduce new services 
for consumers and businesses in rural areas.
    At the same time, in rural areas as well as in the rest of the 
country, technological change and increasing competition are 
transforming consumers' telecommunications needs. Consumers 
increasingly demand higher-bandwidth services: across the country, 
purchases of broadband lines increased by 52 percent from 2005 to 2006, 
according to recent FCC reports, including an increase from fewer than 
400,000 wireless broadband lines in 2005 to over 11 million in 2006. 
Use of traditional voice-grade wireline telephone lines declined by 3.2 
percent over the same time period. Consumers also increasingly require 
mobility: mobile wireless service has grown by 50 percent during the 3 
years ending in December 2005, and consumers now use more wireless than 
wireline lines. Rural consumers have the same interests in obtaining 
access to high-speed technologies and mobile services, and are 
demonstrating changes in demand that parallel those of consumers across 
the country. But due to the relatively high costs of deploying wireline 
and wireless networks in many rural areas, these services are being 
deployed less rapidly in rural areas than elsewhere.
    The existing Universal Service system is not well adapted to this 
changing environment, and a consensus is emerging that the high-cost 
support rules need reform. The existing system is designed to support 
traditional voice-grade wireline services--for which demand is 
shrinking--and does not target funds effectively to promote development 
of advanced networks in the highest-cost areas. As a result, high-cost 
fund amounts per-line are growing in many areas, without efficiently 
advancing the goals of universal service.
    The specific and concrete measures we propose--building on 
proposals offered by Joint Board member Billy Jack Gregg and a range of 
industry parties--will not only maintain the availability of existing 
services in the highest-cost areas, but also will target funding to 
promote new broadband services. They will establish greater 
accountability on the use of support funds and will set reasonable 
limits to the growth of the fund. Critically, these proposed measures 
also remain true to the Commission's core goal and statutory mandate of 
maintaining a level playing field for facilities-based, intermodal 
competition to serve rural consumers.
    These policy changes will affect CETCs as much as ILECs. Alltel is 
not offering these proposals in an intent to benefit or harm any 
category of providers, but because they will promote the interests of 
consumers and advance the public interest.
    We look forward to working with you on these important matters.
            Respectfully submitted,
                                              Gene DeJordy,
                                Vice President, Regulatory Affairs.
                                           Steve R. Mowery,
                                     Vice President, Public Policy.
                                                Mark Rubin,
                        Vice President, Federal Government Affairs.

cc: Joint Board members and staff
                                 ______
                                 
         Summary of Alltel's Universal Service Reform Proposals
    ``Pilot'' reverse auction system focused on broadband: Use reverse 
auctions to allocate funds (starting at about $25 million) to bidders 
that commit to deploy basic and advanced services, including broadband 
services (e.g., 400 Mbps) in selected unserved and underserved markets.

   Bidders would offer the lowest amount of funding needed to 
        deploy to specified proportions of the population in the Zip 
        code within given benchmark dates.

   All ETCs--not just the auction winner--could receive 
        comparable per-line funding if they make the same service 
        commitment.

    Reforms to the existing funding system:

   To limit fund growth: Allow per-line support in each study 
        area to grow by no more than the inflation rate.

   To target funds more effectively: Disburse high-cost funding 
        to geographically disaggregated areas, whether served by ``non-
        rural'' carriers or large ``rural'' ILEC holding companies, as 
        well as CETCs:

     For purposes of determining funding amounts, consolidate 
            all ``study areas'' served by a single ILEC holding company 
            in each state into a single study area.

     Apply the ``non-rural'' funding rules to such study areas 
            if they have more than 50,000 lines.

     Revise the ``high-cost model'' forward-looking support 
            mechanism for ``non-rural'' carriers (including the 
            consolidated study areas of ILEC holding companies formerly 
            deemed ``rural'') to provide support in the highest-cost 
            wire centers nationwide, not just in 10 states.

     Require all rural ILEC study areas to be disaggregated for 
            purposes of targeting support to the highest-cost portions 
            of such study areas.

   To ensure accountability: Broaden the FCC's 2005 
        accountability and reporting requirements and apply them to all 
        ETCs, including ILECs as well as FCC-designated CETCs.

     Require all ETCs (ILECs as well as CETCs) to document that 
            they are using their funds to maintain and expand service 
            availability for consumers in high-cost areas.

     Make USAC, rather than NECA (an RLEC-dominated advocacy 
            group), responsible for collecting and processing cost data 
            and determining support amounts.

    To protect competitive and technological neutrality: Retain the 
rule that all ETCs receive the same amount of support per line served.

    The Chairman. I thank you very much, sir.
    And now, may I call upon Mr. Tauke?

                 STATEMENT OF THOMAS J. TAUKE,

           EXECUTIVE VICE PRESIDENT, PUBLIC AFFAIRS,

               POLICY AND COMMUNICATIONS, VERIZON

    Mr. Tauke. Mr. Chairman, Mr. Vice Chairman, distinguished 
members of the Committee, this Committee has shown such great 
leadership on this issue in the past. We thank you and commend 
you for that. And we are encouraged by your interest in the 
ongoing challenges with Universal Service.
    We often say, in the telecommunications world, that the 
world has changed. And, indeed, the world has changed, and it's 
changing very rapidly. But the Universal Service system and the 
Universal Service Fund is stuck in the past. You've heard a lot 
today already about the problems with the Universal Service 
Fund and the challenges in trying to modernize it for the new 
age, the new era in which we live. I'd like to offer just a few 
comments to supplement the statement that I submitted for the 
record.
    First, I think it is helpful, as we think about these 
issues, to think of them in two pieces. One piece is the 
Universal Service Fund today and how we fix that Fund. The 
other piece is, how do we fund the infrastructure that is 
needed for the broadband that we want to deliver to all 
Americans?
    The first piece, the Universal Service Fund, has generally 
been focused on maintaining affordable rates for consumers. It 
is, if you will, a supplement to the expense budgets of 
companies. The challenge with broadband is that you need huge 
capital expenditures; help, if you will, with the capital side 
of the budget. Therefore, attempting to provide the same 
solution to both, in our view, does not get us in the right 
place. So, I encourage you to think of these in two pieces.
    First, on the Universal Service Fund piece, then. You've 
heard, today, that there are a lot of problems with the growth 
of the Fund. And, indeed, there are. I'd like to share with you 
just a couple of thoughts as to why the Fund is growing the way 
it is.
    The first problem that we have with the way the Fund is 
growing is that we have multiple carriers in many geographic 
areas. There are a lot of geographic areas around the country 
today where we are subsidizing three, four, five--and, in some 
cases, more--wireless carriers, in addition to the wireline 
carrier. Now, I ask you, if the public needs to subsidize a 
carrier to provide service in a given area, why do we want to 
just subsidize three, four, or five? So, the problem is, we've 
had a proliferation of carriers receiving subsidies for the 
same area.
    Second problem is, as wireless carriers come in, the Fund 
explodes because of the nature of the service. If I have a 
home, for example, with a wireline carrier in an area that is 
receiving Universal Service support, and I have, let's say, two 
lines in that home, I get support for two lines. If my family 
has four people who have four wireless phones, and the wireless 
carrier applies for a subsidy, there are four subsidies going 
into that household. So, the subsidy doubles from two lines to 
four lines. The wireless network is paid on the basis of the 
cost of the wireline network, even though the technologies are 
totally different. And so, the wireless network is getting 
twice as much support for that home as the wireline network. 
This just doesn't make sense. The system needs to be reformed. 
And this is what's driving the cost that we have in this high-
cost area.
    Now, when you look at this problem, and you say you have 
multiple carriers, particularly wireless, who are receiving 
this cost that is defined by wireline, how do you address that 
issue? We looked at various ways to do it. Do you want to go 
through cost proceedings for wireless? How do you choose one of 
the wireless carriers among all of them? Our view is that the 
best approach is the reverse auction concept, so that in areas 
where you have multiple carriers, that you look at this reverse 
auction concept, starting with the areas where there are 
multiple wireless carriers, and use that system to pick which 
carrier receives the support and also what the level of support 
should be.
    We think, then the FCC should take a look at how that works 
and whether or not that approach should be extended to other 
parts of the Universal Service Fund. But there has to be a 
mechanism to stop the subsidy for multiple carriers and to stop 
this dependence on the wireline costs to serve wireless.
    Second, in the broadband area--and I'm almost out of time--
but, in the broadband area, we urge you to take a look at 
programs like ConnectKentucky. Kentucky is a tough State to 
serve--tough terrain, dispersed population. Through the 
ConnectKentucky program, today that state has 94 percent of its 
homes connected, and expects to be close to 100 percent by the 
end of the year. They've done it by targeting support to areas 
where there is no broadband service today, and focusing on 
getting the capital investment through public-private 
partnerships and, in some cases, with Federal funds, into the 
areas that need the broadband deployment. We think that 
approach, of focusing on grants for infrastructure investment, 
is the best approach to get quick action in the deployment of 
broadband throughout the country.
    [The prepared statement of Mr. Tauke follows:]

   Prepared Statement of Thomas J. Tauke, Executive Vice President, 
           Public Affairs, Policy and Communications, Verizon
    Chairman Inouye and Members of the Committee:
    Thank you for inviting Verizon to participate in this hearing on 
the Universal Service program for telephony services. Universal Service 
is a longstanding and appropriate goal of telecommunications policy. 
However, the means of achieving the goal of providing affordable 
telephone service to high-cost areas--the Universal Service Fund--needs 
to be reformed.
    The world of communications--driven by new technologies and 
competition--has changed dramatically and will continue to change. This 
dynamic process has created new opportunities for consumers, while 
challenging all providers in the marketplace to reinvent themselves. 
For Verizon, this means investing in new networks, offering exciting 
new services to consumers, becoming more customer-focused, and 
increasing our efficiency in order to compete.
    Today the challenges of change are reaching all markets, including 
those in rural America. Unlike the days of yesteryear, most consumers 
in rural America now have a choice of carriers. But in two-thirds of 
areas served by rural telcos that receive Universal Service support, 
competitive carriers also receive subsidies. In those same markets, 
many new providers operate without subsidies.
    Unfortunately, the Federal high-cost funding mechanisms intended to 
ensure that Universal Service goals are met have not adapted to the 
changing marketplace. In fact, these programs are often an impediment 
to the kind of transformation consumers and the marketplace require. 
Frankly, the high-cost Universal Service funding system is not working 
for consumers; it's not fair, and we need to work together to change 
it.
    As competition and technology bring consumers more choices and 
lower prices, one would expect that the cost of providing Universal 
Service would go down. But it's not. Instead, the burden on the 
consumer to pay the cost of the Universal Service program is going up. 
The percentage rate of the surcharge on phone bills has tripled, with 
more increases on the horizon, and in the past 8 years, high-cost 
funding has grown from $1.7 billion to $4.1 billion--a 142 percent 
increase.
    This increase is driven, in part, by the proliferation of new 
communications options for consumers. For example, when a family with 
one wire line buys a wireless family plan with four handsets, the 
Universal Service funding provided for that family increases by a 
factor of five.
    Moreover, in many areas we are seeing three, four, even five 
wireless carriers receiving Universal Service funding. From a public 
policy perspective, this doesn't make sense. If the consumer needs to 
subsidize service in a given area, how many duplicative infrastructures 
and carriers should they subsidize? Necessary reforms must include ways 
to better target support only to those areas that truly require 
subsidies to ensure affordable access.
    Another factor that is driving increases in the Fund is that the 
amount of subsidy received by wireless carriers is determined by the 
cost incurred by wireline carriers to deliver service. To add insult to 
injury, as wireline telcos lose traditional lines to wireless, their 
per-line cost increases, thus driving up the subsidy per customer. This 
increased subsidy is then passed on to all providers.
    The problem is not just that the Fund is getting bigger. Within the 
fund, the support for each recipient is also becoming unstable. A telco 
with cost increases that are more than the nationwide average can 
increase its support, while one that spends less can lose support. This 
doesn't provide very good incentives for carriers.
    Further, in order to keep the telco high-cost funding within its 
current cap, the FCC raises the threshold for receiving support. Areas 
with costs close to the threshold can lose funding entirely as a 
result. Yet carriers with higher costs are given no incentive to change 
their behavior. This churn threatens the predictability of support.
    Verizon believes that modernization of the Fund should be guided by 
the following principles:

   First, funding should be targeted to geographic areas where 
        consumers will be denied service without universal support.

   Second, the Fund should ensure affordable service in high-
        cost areas, while limiting consumer costs to no more than is 
        required to accomplish that goal.

   Third, a new policy should recognize the need to maintain a 
        rural wireline infrastructure even as the number of wireline 
        voice customers declines.

   Fourth, a new and fairer system is needed to fund high-cost 
        support.

    Reform should start with the way money is collected for the 
Universal Service Fund. Verizon supports reform of the pay-in mechanism 
to the Fund by basing payments on phone numbers. Tying payments to 
telephone numbers ensures that the Fund is supported by all voice 
customers, and it substantially reduces the administrative burden.
    We also must reform the way money is paid out of the high-cost 
fund. Earlier this month, Verizon filed with the Joint Board a proposal 
(attached to my written testimony) that would modernize the high-cost 
funding mechanisms. This proposal moves us toward achieving the four 
objectives outlined above.
    It meets the needs of rural consumers for high-quality services at 
an affordable price. It stabilizes the fund, encourages a competitive 
and innovative marketplace, and promotes efficiency so consumers are 
treated fairly when they pick up the tab for Universal Service support.
    Verizon proposes a ``reverse auction'' for the distribution of 
Universal Service support funds. To ensure an orderly movement to this 
new system for determining the payment of Universal Service support, we 
suggest four steps:
    First, we should stabilize funding in each geographic area, by 
initially capping the Fund in each area at current levels. This will 
protect consumers who are paying into the Fund as we move to a new 
system. This will also put an end to the instability and churn of the 
current fund, making support more predictable.
    Second, the FCC should adopt a framework for competitive bidding 
through a reverse auction. Competitive bidding is the way government 
generally procures products and services. It allows an agency through a 
transparent process to select the most efficient provider and to get 
the best possible terms. Consumers--as users of rural services and as 
payers of these services--benefit.
    Third, this market-based process should begin in areas where there 
are already at least two wireless ETCs. The wireless carrier that 
submits the lowest bid would enter into a contract, with a specified 
term, that spells out its obligations. The ILEC in these areas would 
continue to receive its existing support, subject to a cap. Once these 
auctions have been completed, we suggest that auctions among wireline 
carriers be held in those few areas where there is a competitive 
wireline carrier receiving support.
    Fourth, after these initial auctions, the FCC should open a new 
proceeding to review the auction process, and to determine next steps. 
The FCC might also use the results of areas where auctions have been 
held to adjust high-cost support for other areas.
    We believe this approach puts in place a more market-oriented 
system that will sustain Universal Service in this competitive 
marketplace. While today's recipients argue over costing methods or 
administrative details of the fund, our proposal focuses every provider 
in rural areas on the kinds of transformation that produce benefits for 
consumers: greater efficiency, creative ways of doing business, and new 
services.
    Let me close with three points on broadband. We all know how 
important the deployment of new, more capable networks and services is 
to our future. Verizon is a leader in that process.
    First, we believe that our proposal is the best way to allow the 
current Universal Service system to play a constructive role in the 
deployment of new services. Each provider in preparing its bid will 
consider all of the services and revenue sources in its business plan, 
regardless of whether they are part of the supported service. For that 
reason, the support provided will help the carrier implement all parts 
of its business plan. This allows Universal Service to support basic 
services and encourage broadband deployment in a market-driven way.
    Second, recognizing the importance of connecting America to 
broadband networks, we believe that we need to approach policies for 
broadband deployment with great care, and with an understanding that 
while broadband is still developing, we are seeing remarkable growth 
thanks to private investment. Policies that removed regulatory 
roadblocks have encouraged Verizon and others to invest heavily in new 
technology.
    Third, beyond that, we encourage Congress to review the success of 
programs to connect Americans in hard-to-serve areas. Specifically, we 
call to your attention to the very successful ConnectKentucky program.
    ConnectKentucky pulled the public and private sectors into a 
partnership which has already made broadband accessible to 94 percent 
of Kentucky households. ConnectKentucky reports that it will increase 
that number to close to 100 percent by the end of this year.
    The ConnectKentucky program began by compiling an inventory of the 
current and planned investment in broadband networks in the state. It 
then determined if sufficient demand existed in unserved areas to 
command private investment. Where private investment was not likely, 
the program focused on public-private partnerships and securing public 
funding from various sources to build broadband facilities.
    This program is working because it's focused on infrastructure 
investment. That's the key reason why we should not look to the current 
Universal Service Fund to solve the broadband issue. The current fund 
is designed to provide sustained, ongoing support to maintain 
affordable rates. But maintaining affordable rates is not the challenge 
in delivering broadband services to all Americans. Instead, the 
challenge in broadband delivery is coming up with the one-time capital 
investment in infrastructure.
    In most places, the private sector is making that one-time capital 
investment. Where the market is working, we should let the market 
continue to meet the needs of consumers. Where we determine that 
broadband is not available and the private sector is not making the 
needed investment in network facilities, we should target programs to 
support infrastructure investment, perhaps through a combination of 
loans, tax credits, or grants.
    Verizon believes that the process we have proposed will help create 
a Universal Service Fund that is sustainable in this new 
telecommunications marketplace, while meeting the needs of consumers in 
high-cost areas, and providing carriers with the proper incentives to 
invest and innovate in the communications marketplace.
    Verizon looks forward to discussing and working with the Committee 
on this and other ideas that further the worthy goals of universal 
service, particularly in this time of innovation and opportunity that 
is being enabled by the communications industry. Thank you.
                                 ______
                                 
                                                    Verizon
                                                   February 9, 2007
Hon. Deborah Taylor Tate,
Federal Chair, Federal-State Joint Board on Universal Service
Federal Communications Commission
Washington, DC.

Hon. Ray Baum,
State Chair, Federal-State Joint Board on Universal Service
Oregon Public Service Commission
Salem, OR.

Re: In the Matter of Federal-State Joint Board on Universal 
Service, High Cost Universal Service Support, WC Docket No. 
     05-337; In the Matter of Federal-State Joint Board on 
                     Universal Service, CC Docket No. 96-45

    Dear Commissioner Tate and Commissioner Baum:

    This proceeding is a unique opportunity to put in place meaningful 
reforms that will stabilize the Universal Service Fund, create better 
incentives for companies to serve rural America in efficient and 
innovative ways, and lower the cost of access to communications 
services for all consumers. The FCC and the Joint Board have shown 
constructive leadership on Universal Service reform in order to bring 
benefits to consumers and stabilize the fund. It is the right time for 
these important changes. More than ever before, consumers of 
communications services have options--especially from new offerings by 
cable, Voice over IP, and wireless providers--and they are taking 
advantage of them. But at the same time, consumers are faced with 
increasing costs as they continue to support a Universal Service system 
that is growing larger every year.
    The need for reform is becoming more urgent as the high-cost fund 
now surpasses the $4 billion mark, with approximately $1 billion 
flowing to competitive eligible telecommunications carriers (``CETCs'') 
annually. A solution is needed, and the answer is a system that not 
only controls the growth of the fund, but provides more rational 
incentives to providers and ensures access to important services. 
Reforms must also create and sustain an environment that promotes 
innovation and efficiency gains and makes sure that consumers receive 
the benefit of these innovations.
    For all these reasons, Verizon and Verizon Wireless (hereinafter 
``Verizon'') propose that reform should involve the use of auctions or 
competitive bidding as the means to better target Universal Service 
support. This letter proposes the basic structure for and path to such 
auctions. Attached is an Appendix that outlines in greater detail one 
possible way to design and structure such auctions, although other 
approaches and designs may be appropriate and workable.
    The reform plan proposed here is a careful and measured approach. 
It suggests immediate action to address the most pressing concerns. It 
proposes implementing competitive bidding quickly and on a limited 
basis, and where it can provide the greatest benefit. It then gives the 
Joint Board and the Commission the flexibility to assess the results of 
these auctions, and to decide whether to extend their use more widely.
    Verizon's proposal is as follows:

    First, stabilize the Fund by placing a reasonable cap on current 
support levels that is designed to control the growth the Fund has 
experienced in recent years, introduce better incentives for all ETCs, 
and prepare for further reform;
    Second, establish an administrative framework for competitive 
bidding, which would include the auction design;
    Third, implement auctions to allocate funding for wireless CETCs. 
These auctions would be held in areas that currently support more than 
one wireless CETC, and would select a single wireless CETC to receive 
support. Once these auctions have been completed, a separate set of 
auctions should be held for wireline ETCs in areas where there is 
currently at least one wireline CETC, to select a single wireline 
provider of Universal Service for the area.
    Fourth, after some reasonable period, the FCC would review the 
experience gained with the CETC auctions, and consider developments in 
technology and rural markets to determine an appropriate method for 
extending market-based efficiencies to additional areas. These methods 
could include:

   A single auction in which both wireline and wireless ETCs 
        would participate, which would select a single Universal 
        Service provider for each area.

   The use of representative bidding, based on statistical 
        analysis of the auction results, to adjust support for ETCs 
        whose support had not yet been determined by an auction.
Step One: Stabilize the Fund by Placing a Reasonable Cap on High Cost 
        Support at Current Levels
    As commenters in this docket and many others have observed 
repeatedly, the high-cost fund has grown at an alarming pace in recent 
years and this rate of growth threatens both the viability and the 
long-term sustainability of the fund.\1\ It is also increasing the 
amounts that consumers must spend on communications services.
---------------------------------------------------------------------------
    \1\ The Universal Service Administrative Company (``USAC'') now 
projects that in the first quarter of 2007 the high-cost fund will top 
$4.3 billion. See USAC, HC02--High Cost Support Projected by State--
1Q2007, http://www.usac.org/about/governance/fcc-filings/2007/quarter1
.aspx. This is more than double the size of the Fund just seven years 
ago. See USAC, Universal Service Fund Facts--High Cost Program Data, 
1998-2005 Disbursements by Calendar Year (2005) (Unaudited), http://
www.universalservice.org/about/universal-service/fund-facts/fund-facts-
high-cost-program-data.aspx#calendar.
---------------------------------------------------------------------------
    A reasonable cap on the high-cost fund is critical for at least 
three reasons.
    First, the growth in the Fund threatens core Universal Service 
goals if not contained. The USF contribution factor has risen 
dramatically in recent years. In 1998, the contribution factor averaged 
3.16 percent and has increased more than three-fold since, now standing 
at 9.7 percent.\2\ As the Fifth Circuit predicted more than 5 years 
ago, ``excess subsidization in some cases may detract from Universal 
Service by causing rates unnecessarily to rise, thereby pricing some 
consumers out of the market.'' Alenco Communications v. FCC, 201 F.3d 
608, 620 (5th Cir. 2000).
---------------------------------------------------------------------------
    \2\ See FCC, Industry Analysis & Technology Division, Wireline 
Competition Bureau, Trends in Telephone Service, Table Compiled as of 
April 2005, at Table 19.16 (June 21, 2005); see also FCC, Proposed 
First Quarter 2007 Universal Service Contribution Factor, http://hraun
foss.fcc.gov/edocs_public/attachmatch/DA-06-2506A1.pdf.
---------------------------------------------------------------------------
    Second, the current high-cost mechanisms do not take into account 
the benefits and availability of new competition. Consumers 
increasingly view cable telephony, VoIP, and wireless as viable 
alternatives to wireline phone service. Competition from these 
intermodal providers has increased substantially over the last several 
years and has brought consumers exciting new services.\3\ The spread of 
new intermodal competition in various ways and degrees into all parts 
of the country has advanced Universal Service goals tremendously. As 
intermodal competition thrives--and drives down prices--subsidies 
should be getting smaller or even disappearing altogether in areas 
where competitive carriers operate without subsidy. But just the 
opposite is happening. Subsidies are increasing even as competition 
explodes and rates continue to fall over time.\4\
---------------------------------------------------------------------------
    \3\ See Comments of Verizon and Verizon Wireless at 3-10, WC Docket 
No. 05-337 (filed October 10, 2006) (``Comments of Verizon'').
    \4\ The Progress & Freedom Foundation, Digital Age Communications 
Act: Preliminary Proposal of the Universal Service Working Group, at 9-
10 (Rel. 1.0, Oct. 2005) (footnote omitted) (``Although the costs of 
providing telephone service have fallen significantly over time, 
[Universal Service Fund] spending has increased from $15 per household 
in 1993 to $52 per household in 2003.'').
---------------------------------------------------------------------------
    Third, a reasonable cap on support at current levels will put in 
place better incentives for all carriers and allow them to adapt to the 
new marketplace. The high-cost fund in its current form is a product of 
an earlier time, before competition and technology transformed the 
industry. Today, these forces are compelling all providers to become 
more efficient and more creative, and to develop new services and new 
sources of revenue. Yet the current structure of the Fund discourages 
supported companies from transforming themselves in a way that advances 
both their own long-term interests and those of the customers and 
communities they serve. Capping support would begin the process of 
introducing market incentives for innovation and efficiency--a process 
that would subsequently be carried forward through competitive bidding.
    For example, support from the rural high-cost fund is based on a 
comparison of each ILEC's revenue requirement per line with a 
nationwide benchmark. This may have made sense at one time in a less 
competitive market, but in today's dynamic market, where the number of 
traditional telephone lines is shrinking, it is creating anomalous 
results and bad incentives:

   Under the current rules, as a rural ILEC loses lines, its 
        cost per line increases. Because CETCs receive the same amount 
        of support per-line as the ILEC, over time this system also 
        increases the per-line support for each CETC--even though the 
        CETC's per-line cost is, if anything, falling as it gains 
        customers.

   Each rural ILEC can increase its support if its cost per 
        line grows faster than the national average. This creates an 
        artificial incentive that may bias ILEC decisionmaking, since 
        the system rewards higher expenditures and penalizes cost 
        reduction.

   The ILEC portion of the high-cost loop fund is capped, but 
        that cap produces unanticipated effects, creating winners and 
        losers among the ILECs, and a misalignment of incentives. When 
        the total amount of support would otherwise push the Fund above 
        the cap, USAC raises the nationwide benchmark in order to 
        ensure that disbursements to rural ILECs do not exceed the cap. 
        This has the effect of eliminating support for some study areas 
        where per-line costs had previously been just above the 
        benchmark. The application of the cap thus has a dramatic 
        impact on the support to those ILECs. Yet ILECs with higher 
        costs--whose spending may have caused the Fund to exceed the 
        cap--have no incentive to change their behavior.

    For these reasons, as the first step in the reform process, the 
Commission should stabilize the Fund and create better incentives for 
all ETCs. This can be done by placing a reasonable cap on the fund, 
based on current support levels. Support would be capped for each study 
area, with two separate caps, one for wireline ETCs and one for 
wireless ETCs.
    The cap on support for wireline ETCs in each study area would be 
the total amount received by all wireline ETCs in that area in a base 
year, and would include support from all Federal mechanisms that 
provide high-cost funding (the high-cost loop fund (both rural and non-
rural), local switching, interstate access support (IAS), and 
interstate common line support (ICLS)). If more than one wireline ETC 
receives support in a study area, the support amount would be 
apportioned among them based on their relative lines.
    The cap on support for wireless ETCs in each study area would be 
the total amount received by all wireless ETCs in that area in a base 
year from all the support mechanisms listed above. In a study area 
where there is more than one wireless ETC, the capped support would 
also be apportioned among them based on their relative lines.
    In order to reflect changes in the overall need for Universal 
Service in each study area, each year the total wireline cap and the 
total wireless cap in the study area would be adjusted by the 
percentage change in the number of households in the area.
    The particular structure proposed here, two separate funding 
limits, applied at the study area level, will accomplish two important 
goals: (1) It will end the churn in support--among study areas, and 
between wireline and wireless ETCs--caused by the current rules. As 
explained above, the current operation of the high-cost loop fund is 
producing winners and losers as lines and support amounts change each 
year. The more targeted cap described here would minimize those shifts 
and stabilize wireline support for each study area; (2) By applying 
separately to wireline and wireless ETCs, the proposal would curtail 
what has been the largest source of growth in the USF in recent years--
new funding to CETCs.
Step Two: Adopt the Auction Design and Framework
    After the cap is in place, the Commission should adopt a framework 
for the auction process. This framework would include administrative 
arrangements as well as the design of the bidding process itself. For 
auctions to be successful, proper design is critical. Although the 
exact details of an auction may be flexible, the following are the key 
aspects which are necessary in this context:
Areas for Auction
    As part of the framework, the Commission should choose the 
geographic areas for which auctions would be held. These areas would 
then serve as the ``building blocks'' which bidders could, if they 
choose, package together in the flexible bidding process described 
below. Auction areas should be small enough to allow the auctions to 
target support where it is most needed, but not so small as to create 
unnecessary complexity. Although other areas of similar size may be 
appropriate, the most logical choice among the current alternatives (at 
least initially) is wire centers. These areas tend to reflect 
information about where rural populations are clustered, and thus 
distinguish between high and low density areas, since ILEC switches 
have generally been located in population clusters, for example in the 
center of a small town. Although CETCs have different network 
topologies, they have also tended to locate their facilities in 
population clusters for similar reasons, and these areas therefore tend 
to be correlated with ILEC wire centers. For this reason, wire centers 
are a reasonable choice for the areas to be auctioned.
Package Bids
    The Commission should adopt an auction design that allows bidders 
flexibility to submit bids for individual wire centers, or bids for 
packages of wire centers. An auction with this package bidding feature 
is called a ``combinatorial'' auction.
    Each bidder will be in the best position, based on its own business 
plan and market forecasts, to determine whether it is better to bid on 
individual areas separately, or in a group or package. By designing the 
auction this way, the Commission and the Joint Board would also gain 
the flexibility to use relatively small, targeted areas, such as wire 
centers, as the building blocks for this process. In effect, rather 
than deciding itself how these areas should be grouped together, the 
combinatorial auction allows the Commission to obtain this information 
from the market, through the decisions of the bidders.
    By allowing for smaller building blocks such as wire centers, the 
flexible auction design would also provide more precise targeting of 
support, and address concerns about ``cherry-picking,'' without 
ballooning the fund. At the same time, it would give CETCs more 
flexibility to plan their market entry in ways that fit their 
technologies and business plans.
Flat Payments to Auction Winners
    Auctions for high-cost support should be structured around bids for 
a flat amount of support. This approach offers several advantages. 
First, it eliminates the need to apportion support among different 
providers, avoiding controversial issues regarding whether support 
should be provided to primary or second lines, wireless handsets, or on 
some other basis. It also eliminates one of the main sources of growth 
in the Fund in recent years: the addition of multiple handsets by each 
household.
    Each bid can be a flat amount of subsidy for a given area, or 
package of areas. This format is simpler and puts the responsibility 
for estimating demand in a given area where it belongs--with the 
bidders themselves. ETCs are in a much better position than the auction 
administrator to know their own revenue expectations and cost 
structures. In preparing their bids, ETCs will evaluate the competitive 
landscape and project their own growth should they win the bid to 
provide supported services in an auctioned area.
    Finally, by providing support in a flat amount, this approach 
avoids distorting the incentive each ETC would have to gain or lose a 
customer. The benefit to any ETC of gaining a customer would simply be 
the additional revenue the ETC would obtain from that customer. 
Further, the auction gives the Commission, for the first time, a means 
to set the flat support at the amount that is just sufficient to make 
an ETC willing to undertake the burden of the Universal Service 
responsibility. Taken together, these features ensure that the proposed 
framework would not distort competition at the margin among ETCs in an 
area and would not prevent competition from occurring in an area that 
would otherwise have supported it.
Auction Reserves
    Any auction for Universal Service support should include a reserve 
amount, which is the maximum bid that would be accepted. Reserves are 
commonly used in auctions to limit the range of possible outcomes. In 
the Universal Service context, the reserve ensures that the support 
determined by the auction is no greater than the amount of support 
provided prior to the auction.
    The reserve reflects the limit of what the auction administrator 
would be willing to pay. By selecting the most efficient provider, and 
identifying the support amount that provider is willing to accept, the 
auction offers the best opportunity to obtain Universal Service on 
terms most advantageous to the public. However, if no bid lower than 
the current support amount is submitted, the administrator is better 
off reverting to the existing support arrangement, which would continue 
in an auctioned area where the reserve is not met.
    The auction design included here suggests two reserves that would 
each have to be satisfied: one that applies at the study area level, 
and a second reserve that applies at the wire center level. The 
aggregate reserve at the study area level would be the capped amount 
established at the beginning of the process. The wire center reserve 
should be based on a pro-rata distribution of the study area support to 
each wire center, but with some additional amount added to allow for 
the auction results to direct more support to higher cost wire centers, 
and less to lower cost ones. This means that the sum of the individual 
wire center reserves in a study area would be greater than the 
aggregate reserve for the study area as a whole. However, the separate 
imposition of the study area reserve would ensure that the auction 
cannot result in an increase in support for any study area.
Step Three: Auctions for Wireless and Wireline CETCs
    It makes sense for the Commission and the Joint Board to start, as 
an initial step, with auctions for wireless CETCs in areas in which 
multiple wireless CETCs currently operate and receive support. This 
would be followed by a parallel set of auctions for wireline ETCs, in 
areas where at least one wireline CETC has been designated.
    Wireless CETCs operate on fundamentally different cost structures 
than ILECs--a fact that has long made the Commission's portability 
rules, which tie CETC support to the ILEC's per-line costs, a primary 
target for reform. Starting the competitive bidding process with 
wireless CETCs would immediately help to connect wireless CETC 
subsidies with the actual cost of providing wireless services, as 
wireless CETCs bid against each other for support in those areas 
eligible for auction. A wireless CETC auction will ensure that 
affordable wireless service is available in high-cost areas, and that 
such service is provided by the most efficient wireless provider.
    Using an auction to select a single wireless CETC in each area is 
an important step toward rationalizing distributions from the fund. 
Support to CETCs (primarily wireless carriers) has caused substantial 
growth in the Fund over the last few years. In 1999, wireless carriers 
received approximately $500,000 in high-cost support.\5\ By 2002, 
wireless CETC support had increased to approximately $45 million. Id. 
In 2005, wireless CETCs received more than $600 million in high-cost 
subsidies and through May of last year, that number increased to more 
than $800 million. Id. At this rate, CETCs will soon account for 
approximately 25 percent (if not more) of all high-cost subsidies. 
While in many areas a wireless CETC may ultimately prove to be the most 
efficient provider of universal service, funneling more and more 
support to fund duplicative networks in high-cost areas should not 
continue. With wireless carriers and their customers now paying a 
significant share of the Federal USF,\6\ wireless consumers will be 
harmed by continual increases in USF assessments. The public interest 
will be served by stabilizing the Universal Service Fund and directing 
wireless subsidies to the most efficient providers through the use of 
competitive bidding.
---------------------------------------------------------------------------
    \5\ See USAC, Distribution of High Cost Support Between Wireless 
and Wireline CETCs, 
http://www.universalservice.org/_res/documents/about/pdf/fundfacts-
High-Cost-Support-Between-CETCs-199 8-2006.pdf.
    \6\ See Alltel Ex Parte Presentation, CC Docket No. 96-45 (Oct. 20, 
2006) at Attach. at 12.
---------------------------------------------------------------------------
    The Commission should also allow for a reasonable transition for 
wireless CETCs that are receiving support today, but do not receive 
support after the auction. The ILEC, and any wireline CETC in that 
area, would continue to receive support on the basis of the capping 
mechanism established in Step 1.
    Once the wireless CETC auctions have been completed, the Commission 
should also nominate for auction any area where there is at least one 
wireline CETC. In these auctions ILECs and wireline CETCs would 
participate, and each auction would select a single wireline provider 
of Universal Service for the area. The reserve for this auction would 
be the total amount of support received by wireline ETCs in the area 
prior to the auction. These auctions would be held in a relatively 
limited number of areas, since wireline ETCs are designated in about 90 
study areas today.
Step Four: the Commission and the Joint Board Review Auction 
        Experiences and Decide Next Steps
    After some reasonable period, the FCC should initiate a review of 
its experience with the wireless and wireline CETC auctions. The 
Commission would consider the development of markets in rural areas and 
changes in technology and determine next steps. Options would include:
    1. Conducting general auctions. The Commission could decide to move 
forward with general auctions in which both wireline and wireless ETCs 
would participate. Such an auction would be held in each high-cost area 
where there is at least one CETC, and would select a single Universal 
Service provider for the area to receive the support determined by its 
bid.
    2. Using representative bidding. The Commission could use the 
results of auctions, where they have been held, to adjust the support 
of ETCs whose support has not yet been established by an auction. This 
use of ``representative auctions'' is an established practice in other 
applications.\7\ Once it has assembled a representative sample of 
results from the areas where bidding has been completed, the FCC could 
commission an econometric study that would relate the auction results 
to the characteristics of a high-cost area, such as size and density. 
This econometric model would estimate the likely results of an auction 
in an area with given characteristics.
---------------------------------------------------------------------------
    \7\ See Comments of Verizon and Verizon Wireless at 27-28.
---------------------------------------------------------------------------
    Results from wireless auctions could be extended to wireless CETCs 
operating in areas where auctions had not yet been completed. Results 
from wireline auctions could be applied to wireline ETCs whose support 
had not yet been set by auction.
    The support amount for these ETCs would then be set at the lower of 
the capped support amount or the amount estimated from the auction 
results. If an ILEC believes that the estimated support should not be 
implemented in a given area, it would have the option of nominating the 
area for an auction.
          * * * * * * *
    In its present form, Universal Service funding provides companies 
with the wrong incentives, discourages innovation, and has increased 
the amounts consumers pay for communications services. The approach 
outlined here will help remedy these problems and transform the Fund 
into an efficient, market-oriented system that advances the core 
Universal Service objectives.
            Sincerely,
                                           Kathleen Grillo,
                                Vice President--Federal Regulatory.
                               Attachment
cc: Chairman Kevin J. Martin
Commissioner Jonathan Adelstein
Commissioner Michael J. Copps
Commissioner Robert M. McDowell
Hon. Lisa Polak Edgar
Hon. Larry S. Landis
Hon. John D. Burke
Hon. Billy Jack Gregg
Daniel Gonzalez
Michelle Carey
Ian Dillner
Scott Bergmann
Scott Deutchman
John Hunter
Thomas Navin
Donald Stockdale
Amy Bender
Jeremy Marcus
Vickie Robinson
Ted Burmeister
Katie King
Gary Seigel
Phil Nyegaard
Jacob Williams
Jennifer A. Richardson
Peter Bluhm
Peter A. Pescosolido
Joel Shifman
Jeff Pursley
Lori Kenyon
Aram Shumavon
Eric Seguin
Brad Ramsay
David Dowds
Michael H. Lee
Philip McClelland
Denise Parrish
                                Appendix
Modernizing Universal Service--A Design for Competitive Bidding
    This appendix illustrates one way the Joint Board and the FCC could 
implement a competitive bidding process for Universal Service 
obligations.
1. Summary
    The auction design outlined in this appendix would introduce a more 
efficient framework for the distribution of support to Universal 
Service providers in high-cost areas. This could be done in a series of 
steps:
    First, immediate measures would be taken to stabilize the fund, and 
to introduce better incentives for all ETCs, by capping support based 
on current levels.
    Second, the FCC would adopt a framework for competitive bidding, 
including administrative arrangements and the design of the bidding 
process itself.
    Third, to initiate the use of competitive bidding, the Commission 
would prompt auctions in high-cost areas where there are multiple 
wireless CETCs. These auctions would select a single wireless provider 
of Universal Service for each area. The incumbent local exchange 
companies in those areas would continue to receive support based on the 
capping mechanism. Once the wireless CETC auctions had been completed, 
the FCC would also nominate any area where there is at least one 
wireline CETC. These auctions would select a single wireline provider 
of Universal Service for each of those areas.
    Fourth, after some reasonable period, the FCC would review the 
experience it had gained with the CETC auctions, and consider 
developments in technology and rural markets to determine an 
appropriate method for extending market-based efficiencies to 
additional areas. These methods could include:

   A single auction in which both wireline and wireless ETCs 
        would participate, which would select a single Universal 
        Service provider for each area.

   The use of representative bidding, based on statistical 
        analysis of the auction results, to adjust support for ETCs 
        whose support had not yet been determined by an auction.

2. Stabilize the Fund
    The FCC should start by taking immediate steps to stabilize the 
fund, bring fund growth under control, and put in place incentives for 
all ETCs to adapt to changes in the market and become more efficient. 
This would establish a starting point for the implementation of 
competitive bidding.
    Support would be capped for each study area. There would be two 
separate caps in each study area, one for wireline ETCs and one for 
wireless ETCs.

   Cap for wireline ETCs. The cap on support for wireline ETCs 
        would be the total amount received by all wireline ETCs in the 
        study area in a base year (which could be the most recent 
        twelve-month period for which data are available when an order 
        becomes effective). The cap would include receipts from all 
        programs for high-cost areas (the high-cost loop fund (rural 
        and non-rural), local switching, interstate access support 
        (IAS), and interstate common line support (ICLS)).\1\
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    \1\ For ILECs, once the cap described here has been applied, it 
would replace the calculation that is done today to determine support 
amounts from each of the existing funds. The exception would be the 
calculation for rate-of-return ILECs of the support amounts for local 
switching and ICLS, which would be calculated as they are today. High 
cost subsidies in each rate-of-return study area would then be adjusted 
to bring the total amount of support within the study area cap. The 
current cap on the ILEC portion of the high-cost fund would no longer 
be applied. For price cap ILEC study areas, the total amount of 
wireline support in each area should simply be capped, and if there are 
wireline CETCs in the area the support would be apportioned among the 
wireline ETCs on the basis of their relative lines.

     If there is more than one wireline ETC in the study area, 
            the capped support amount would be apportioned among them 
---------------------------------------------------------------------------
            on the basis of their relative lines.

     The current cap on the ILEC portion of the high-cost fund 
            is producing winners and losers as lines and support 
            amounts change each year. The mechanism described here 
            would minimize those shifts and stabilize wireline support 
            for each study area.

   Cap for wireless ETCs. The cap on support for wireless ETCs 
        would be the total amount received by all wireless ETCs in the 
        study area in a base year (which could be the most recent 
        twelve-month period for which data are available when an order 
        becomes effective). The cap would include support from all 
        programs for high-cost areas (the high-cost loop fund (rural 
        and non-rural), local switching, interstate access support 
        (IAS), and Interstate Common line support (ICLS)).\2\
---------------------------------------------------------------------------
    \2\ For wireless ETCs, none of the existing funds is capped today. 
The total amount of funding to wireless CETCs in each area should 
simply be capped, and the apportionment among wireless CETCs on the 
basis of their relative lines would replace the existing fund 
calculations.

     If there is more than one wireless ETC in the study area, 
            the capped support amount would be apportioned among them 
---------------------------------------------------------------------------
            on the basis of their relative lines.

     Increased support for wireless ETCs represents a large 
            proportion of the growth in the Federal mechanisms in 
            recent years. The cap would stabilize the Fund and provide 
            a starting point for the wireless ETC auctions.

   Adjustment of the caps. Each year, the total wireline cap 
        and the total wireless cap in each study area would be adjusted 
        by the percentage change in the number of households in the 
        study area. This would allow the cap to reflect changes in the 
        overall need for Universal Service in the area. However, there 
        would be no adjustment for the total number of lines or 
        handsets in the area. The current rural growth factor (which 
        has been negative in some recent years) would be eliminated.
3. Adopt the Framework
    Before any auction takes place, the FCC should adopt a framework 
for the auction process.
        a. Areas for Bidding
    The FCC would first designate the geographic areas that would be 
used for bidding. Areas should be small enough to allow support to be 
targeted where it is most needed, but not so small as to create 
unnecessary complexity. They should incorporate information about where 
rural populations are clustered, so as to distinguish between high and 
low density areas.
    Geographic units such as census block groups or counties are 
possibilities, but these areas often cut across geographic barriers, 
such as mountains and rivers, and ignore clustering of customers that 
would be relevant to any prospective provider of universal service. The 
arrangement of ILEC wire centers, however, contains useful information 
about the geography of each area and the location of customers, since 
ILEC switches have generally been located in population clusters (in 
the centers of small towns). CETCs, while they have different network 
topologies, have also tended to locate their facilities in population 
clusters for similar reasons; they have put their facilities where the 
customers are.
    The use of ILEC wire center areas represents a reasonable balance 
among these considerations. If some other geographic unit of similar 
size is readily available, and meets the requirements discussed here, 
then the Commission may consider that unit in place of wire centers. 
Once a geographic unit has been selected, steps should be taken to 
ensure that all potential participants in an auction would have ready 
access to data delineating the boundaries of those areas. An auction 
design that allows for package bids (as discussed below) makes it 
possible to use areas that are smaller than a study area.
        b. The ``Reserve'' or Maximum Bid
    The Commission would also establish a maximum bid, or reserve, for 
each wire center. Reserve amounts are widely used in competitive 
bidding processes to limit the range of possible outcomes. In this 
case, the reserve amount would be set at the level of the support 
provided immediately prior to the auction. In this design, two reserves 
would be enforced: the first at the study area level, and the second at 
the wire center level.
    The aggregate reserve. For the wireless auction, the aggregate 
reserve for each study area would be the total amount of support 
provided to all wireless ETCs in the study area prior to the auction. 
For the wireline auction, the aggregate reserve for each study area 
would be the total amount of support provided to all wireline ETCs in 
the study area prior to the auction.
    The wire center reserve. In order to allow competitive bidding to 
proceed at the wire center level, it would be necessary to develop a 
reserve amount for each wire center. This would be done by 
disaggregating the existing support at the study area level in the 
following way:

   First, the aggregate reserve in the study area would be 
        divided by the total lines of all wireless (wireline) ETCs to 
        derive an average per-line support amount.

   Second, the aggregate study area reserve would be 
        disaggregated to each wire center on a pro-rata basis by 
        multiplying the number of wireless (wireline) ETC lines in each 
        wire center by the average per-line support amount.

   Finally, each wire center amount would be multiplied by a 
        constant greater than one to arrive at the wire center reserve 
        amount.

    This approach allows a reserve to be developed for each wire 
center, but avoids the need for the Commission to develop detailed cost 
estimates by wire center.\3\ Because each wire center reserve is 
greater than its pro-rata share of the current level of support in a 
study area, it also provides room for the bidding process to provide 
more support to higher cost wire centers, and less support to lower 
cost ones. However, this also means that the sum of the individual wire 
center reserves will be greater than the aggregate reserve at the study 
area level. The application of the aggregate reserve ensures that the 
bidding process cannot result in an increase in support for the study 
area as a whole.
---------------------------------------------------------------------------
    \3\ The Commission does not need to engage in detailed cost 
analysis in order to establish reserves. In fact, part of the reason to 
use competitive bidding is to reduce reliance on traditional measures 
of cost. However, auction results might be improved if some simple 
indicator could be developed, perhaps based on the size or density of 
the wire center, to differentiate between higher and lower cost wire 
centers. Support from the non-rural high-cost fund is already 
disaggregated to the wire center level. There is also a process in 
place for ILECs to develop and submit proposals to disaggregate study 
areas for USF purposes, and where such plans have been approved, they 
could be used to calculate a reserve at the wire center level.
---------------------------------------------------------------------------
        c. Qualification Process
    Qualified bidders that would be eligible to participate in the 
bidding process would be providers who have been designated as ETCs in 
the area. This is consistent with Section 214(e), which requires a 
carrier to be an ETC in order to be eligible for support.
        d. Obligation of the Auction Winner
    In any competitive bidding process, the ETCs would be bidding for 
the obligation to serve as the provider of Universal Service in a high-
cost area, in return for which it would receive financial support equal 
to the amount of its bid.\4\ The Commission, in cooperation with the 
states, would develop a statement that would define the winning 
bidder's obligations. This would, in effect, serve as a request for 
quote (or RFQ).
---------------------------------------------------------------------------
    \4\ Some of the Universal Service mechanisms, such as Lifeline, 
Link-Up, schools and libraries, and rural health care, are not related 
to high-cost subsidies, and would not be determined through the 
competitive bidding process outlined here.
---------------------------------------------------------------------------
    In return for the Universal Service support, the winning bidder 
would be required to offer service in the entire area, and to meet any 
other terms of the RFQ. If a wireless CETC bids for an area and loses, 
then that CETC would no longer have an obligation to serve that area.
        e. Schedule and Organization of the Bidding
    In this design, competitive bidding would not take place 
simultaneously in all areas. Instead, bidding would be introduced 
gradually through a series of transitional steps.
    The Commission would establish a regular schedule of events leading 
up to an auction. This would include nomination of areas for bidding, 
registration of bidders, posting of deposits, and the bidding process 
itself (this series of events is referred to here as a ``bidding 
cycle''). This flexible framework would allow the Commission to manage 
the transition to competitive bidding in reasonable steps, and, at the 
same time, provide ETCs themselves with the opportunity to decide when 
an area is ready for competitive bidding.

   A bidding cycle would be held twice each year. The first 
        bidding cycle would begin 6 months after the adoption of an 
        order establishing the plan.

   In any cycle, a wireless CETC would be able to nominate for 
        bidding any area for which it is qualified, and where there is 
        at least one other wireless CETC, except in areas where an 
        auction had already been held and the term of the contract 
        resulting from that auction had not yet expired. A wireline ETC 
        would be able to nominate an area where there is at least one 
        wireline CETC for a wireline auction, except in areas where an 
        auction had already been held and the term of the contract 
        resulting from that auction had not yet expired.

   At certain points in the transition process, the Commission 
        would, on its own motion, nominate areas that meet certain 
        criteria. For example, as discussed in Section 4, it would 
        nominate areas with more than one wireless CETC to begin the 
        wireless CETC auctions.

   Dates would be established for the events in each cycle. For 
        example, if a wireless CETC wished to nominate an area for 
        bidding in the first half of a given year, it might be required 
        to file its nomination by February 1 of that year.

   Once an area has been nominated, a second window would be 
        established for ETCs to register to bid in areas that had been 
        nominated, and to nominate additional areas. This would prevent 
        an ETC from gaining a first-mover advantage by nominating an 
        area, would ensure that all ETCs interested in a given area are 
        able to participate, and ensure that all areas related to those 
        initially nominated can be included in the bidding process.

   The Commission would set a firm date for bidding to begin. 
        As described in Section 6 below, bidding would be dynamic, 
        which is to say it would involve multiple rounds.

   By grouping all of the bidding processes for each six-month 
        period together, this framework would simplify administration. 
        And, by announcing a clear schedule of events in advance, the 
        framework would also make it easier for ETCs to plan their 
        participation in the bidding process.
4. Auctions for Wireless and Wireline CETCs
    To initiate the use of auctions for universal service, the 
Commission could first prompt competitive bidding among wireless CETCs.
    In each area where there is more than one wireless CETC, an auction 
would select one ``winner'' to be the wireless provider of Universal 
Service in that area. Any area that had not previously been nominated 
by a wireless CETC, and where more than one wireless CETC is already 
certified, could be nominated by the FCC on its own motion.\5\ Wireless 
CETCs would bid for a flat amount of support in each area. The design 
of the bidding process is discussed in Section 6.
---------------------------------------------------------------------------
    \5\ The Commission could decide either to prompt bidding on all 
such areas in one bidding cycle, or could decide that it would be more 
convenient to spread the auctions out over time.
---------------------------------------------------------------------------
    Once a wireless winner is selected, that provider would receive the 
support amount contained in its bid. The ILEC, and any other wireline 
ETC in the same area, would continue to receive support under the cap 
mechanism described in Section 1.
    The FCC could publish results of all auctions on a website, where 
that information would be available for use by any bidder in 
formulating its bid in subsequent auctions.
    Once the wireless CETC auctions have been completed, the Commission 
should nominate for auction any area where at least one wireline CETC 
has been designated. In these auctions, both the ILEC and any wireline 
CETC would participate, and the auction would select a single wireline 
provider of Universal Service for the area.
5. FCC Reviews Auction Experience, Decides Next Steps
    After a reasonable period, the FCC could then review its experience 
with the wireless and wireline Universal Service auctions.
    The Commission would consider this experience, the development of 
markets in rural areas, changes in technology, and the acceptance of 
substitutes by customers of different services.
    Based on this experience, the FCC would then determine whether it 
should nominate additional areas for auction.

   A general auction. The Commission could prompt a general 
        auction in any area where there is a CETC. Both wireline and 
        wireless ETCs would participate. The general auction would 
        select a single ETC to be the Universal Service provider for 
        the high-cost area and to receive the support determined by its 
        bid. The auction design described here is intended to be 
        suitable for a general auction; the FCC could determine whether 
        any adjustments would be appropriate, based on the experience 
        gained with previous auctions. The reserve for this auction 
        could be the sum of the wireline and wireless support amounts 
        provided on the date of the general auction.

   Representative bidding. As part of its review, the 
        Commission should also consider whether to use the results of 
        auctions, where they have been held, to adjust the support of 
        ETCs receiving support not yet established by an auction. Once 
        it has assembled a representative sample of results from the 
        areas where bidding has been completed, the FCC should either 
        perform or commission an econometric study that would relate 
        these results to the characteristics of the areas, such as size 
        and density. This econometric model could then be used to 
        estimate the likely results of an auction in an area with given 
        characteristics.

    Estimates based on the wireless auctions, or on general auctions, 
        could be used to adjust the support of a wireless ETC in an 
        area where a wireless ETC auction had not yet been completed, 
        (either because the area had not been nominated, or because an 
        auction in the area had failed).

    Estimates based on the wireline auctions, or on general auctions, 
        could be used to adjust the support of wireline ETCs whose 
        support had not yet been set by an auction.

    The support would be the lower of the capped support amount or the 
amount indicated by the econometric study.\6\ If an ETC does not 
believe that the estimate produced by the econometric study should be 
applied to a given area, then it would have the option of nominating 
that area for bidding.
---------------------------------------------------------------------------
    \6\ As Verizon and Verizon Wireless noted in their comments, this 
approach has been used to extend auction results in other settings, 
such as the pricing of timber cutting rights in Canada. Comments of 
Verizon and Verizon Wireless at 27-28, WC Docket No. 05-337 (filed 
October 10, 2006).
---------------------------------------------------------------------------
6. Design of the Competitive Bidding Process
    The design outlined here is called a ``clock-proxy'' auction. The 
bidding process would be a hybrid of two designs that combines the 
advantages of each. The first phase is a clock auction. The second 
phase is a proxy auction. This design draws on the latest work of 
auction experts in this area (including the Commission's own). A 
similar design has recently been adopted by Ofcom for a major spectrum 
auction in the United Kingdom.
        a. The Clock-Proxy Hybrid
    The last few years have seen significant advances in auction design 
theory.\7\ One of these advances has been the development of a hybrid 
of two types of auction designs, a ``clock'' auction and a ``proxy'' 
auction. This hybrid is called a ``clock-proxy'' auction.
---------------------------------------------------------------------------
    \7\ For an overview of modern auction theory, see Paul Milgrom 
(2004), Putting Auction Theory to Work, Cambridge: Cambridge University 
Press. For essays on various aspects of combinatorial auctions, see 
Peter Cramton, Yoav Shoham, and Richard Steinberg (2006), Combinatorial 
Auctions, Cambridge, MA: MIT Press. A discussion of the clock-proxy 
design is provided in Lawrence M. Ausubel, Peter Cramton, and Paul 
Milgrom, ``The Clock-Proxy Auction: A Practical Combinatorial Auction 
Design,'' which appears as Chapter 5 in Cramton, Shoham, and Steinberg.
---------------------------------------------------------------------------
    The first phase of this design would be a ``clock auction.'' A 
clock auction is a dynamic, multiple round process in which the 
auctioneer announces prices and bidders respond with quantities desired 
at the announced prices. It is called a clock auction because the 
rounds of bidding are conducted at regular intervals. This design 
allows the auction itself to generate information useful to the 
bidders. By observing the results of the early rounds, each bidder 
gains knowledge of the value of each area and how the areas are related 
to one another. In this respect, the clock phase of this design is 
similar to the spectrum auctions. Importantly, a clock auction also 
limits the opportunities for bidders to engage in strategic behavior 
compared with a more conventional multiple-round auction in which the 
bidders themselves formulate the bids. In each round, a bidder can only 
answer a yes-or-no question for each area or package of areas: will the 
bidder be willing to become the Universal Service provider at the 
support amount called out by the auctioneer? This kind of design thus 
makes it difficult, for example, for a bidder to use the amount of its 
bid to signal other bidders.
    The second phase of this design would be a ``proxy'' auction, which 
is based on the results of the clock phase. The proxy phase is 
necessary to make the results from the clock phase more efficient. It 
provides the opportunity for bidders to create combinations of prices 
that would not have occurred in the clock phase. This is called the 
proxy stage because the bidding activity is conducted by a proxy agent 
(a computer program) following strict rules in order to limit the 
possibility of strategic behavior by the bidder itself.
        b. Advantages of the ``Clock-Proxy'' Hybrid Design
    Flexible bidding for individual areas, or packages of areas. This 
design allows the bidders to place bids on different areas in a very 
flexible way. A bidder could submit bids on a specific area or areas. 
The same bidder could also submit a ``package bid'' on a group of 
areas, if the bidder found them to be related to one another (for 
example, if the bidder could serve the ``package'' more efficiently 
than the individual areas separately). This type of bidding process is 
called a ``combinatorial'' auction.
    A design which permits the flexibility of package bidding makes the 
choice of the area to be auctioned less critical. It would allow the 
Commission to design the auction around smaller geographic units (such 
as the wire center areas discussed here) without unduly complicating 
the bidding process. Rather than having the Commission make decisions 
about how areas should be grouped together, this approach allows the 
Commission to elicit information from the bidders about how the areas 
should be grouped. This design would achieve more accurate targeting of 
Universal Service support, and address cherry-picking concerns. These 
advantages would be gained without inflating the fund, and without 
giving up the economies of serving larger areas in cases where those 
are important.
    Allowing for different relationships among areas. The auction 
design outlined here is designed to perform well--in terms of 
efficiency, and minimizing the need for support--regardless of whether 
different bidders view a given set of areas as independent, 
substitutes, or complements. This is important because in bidding for 
Universal Service support, all three of these are possible:

   Areas are independent if a bidder's willingness to bid for 
        hypothetical ``area A'' is not affected by the outcome of the 
        bidding for any other area. For example, a small ILEC that 
        serves a single wire center may care only about that area.

   Two areas are substitutes if a bidder wishes to win either 
        area A or area B, but not both. This could be the case for a 
        wireless carrier that wants to enter one new market, and is 
        considering A and B as possible alternatives. If in the early 
        rounds of bidding this carrier encounters strong competition 
        for A, it may shift its attention to B in later rounds. This 
        kind of behavior has occurred in the spectrum auctions.

   Two areas are complements if a bidder sees some synergies in 
        serving the two areas together, so that it would be willing to 
        accept less support in area A if it also wins area B. For 
        example, a mid-size ILEC that serves several wire centers in a 
        state may view them as complements. In this case, strong 
        competition for A may make this carrier less willing to bid for 
        B.

    Some earlier proposals for competitive bidding of Universal Service 
have essentially treated high-cost areas as independent.\8\ For that 
reason, they do not make any provision for either substitutes or 
complements. The multiple-round design used in the spectrum auctions 
performs well when areas are substitutes, but not as well when they are 
complements. As explained in more detail below, the clock-proxy auction 
design will perform well regardless of whether different bidders view a 
given set of areas as independent, substitutes, or complements.
---------------------------------------------------------------------------
    \8\ For example, neither Milgrom (Paul Milgrom, ``Procuring 
Universal Service: Putting Auction Theory to Work,'' Lecture at the 
Royal Swedish Academy of Sciences, December 9, 1996) nor Weller (Dennis 
Weller, ``Auctions for Universal Service Obligations,'' 
Telecommunications Policy, Vol. 23, 1999, pp. 645-674) allowed for 
package bidding; instead they proposed a separate auction for each 
area. Since these designs were also single-round, sealed-bid auctions, 
they did not allow bidders to shift their attention from one area to 
another based on results in earlier rounds. The only provision for 
complementarity was a limited opportunity for a bidder to withdraw if 
it wins area A but loses some other area it sees as related. Because 
the design proposed here deals directly with package bidding, and also 
allows for multiple rounds, there is no need for such a withdrawal 
provision.
---------------------------------------------------------------------------
    Minimizing strategic behavior. The design outlined here also 
minimizes the possibility of strategic behavior, such as collusion 
among the bidders, or an attempt by one bidder to conceal its interest 
in particular areas by holding back until the late rounds of an 
auction. This is particularly important in the context of bidding for 
universal service, where the number of bidders for any given area is 
likely to be small. Because this design encourages each party to bid 
straightforwardly based on relevant business factors, such as its 
expected costs and revenues, it would improve the transparency of the 
process, and the efficiency of the outcome.
    Single Winner-Flat Amount of Subsidy. This design allows for a 
single winner. Thus, there would be no need to attempt the difficult 
task of apportioning support amounts among different providers. This 
would avoid many contentious issues that have arisen in the past, such 
as whether to support primary lines, additional lines, multiple 
handsets, and so on. It would also make for a simpler bidding process. 
Each bidder would bid a flat dollar amount of subsidy--the total amount 
the ETC would accept in order to take on the Universal Service 
obligation for a given high-cost area. Each bidder would base its bid 
on its own business plan, which would include the bidder's own 
assessment of many factors--including the demand quantities (of lines, 
handsets, etc.) it would expect to serve within each area.
        c. Clock Phase
    As discussed above, in the first phase of the auction (the 
``clock'' phase), the bidding would proceed in a series of discrete 
rounds. Instead of having the bidders submit support amounts, the 
auctioneer ``calls out'' a support amount for each area in each round. 
Each bidder then indicates which areas it would be willing to serve as 
the Universal Service provider at the specified support amount. The 
clock phase would proceed as follows:

   The support amount called out by the auctioneer in each 
        round is a flat amount per year. It is constant each year for 
        the duration of the contract. In the first round of the clock 
        phase, the auctioneer calls out the reserve price in each wire 
        center.

   In each round of the clock phase, each bidder may submit a 
        bid on a package that includes any area or combination of areas 
        it chooses. Since the support amounts are being announced by 
        the auctioneer, the package bid is simply a list of the areas 
        the bidder would be willing to serve for the amounts called out 
        in that round. Each bid is also exclusive in the sense that at 
        the end of the clock phase the auctioneer can accept only one 
        bid for each area, and one bid from each bidder. All bids 
        remain in effect for the entire duration of the auction and 
        cannot be withdrawn (even after bidding has closed). At the end 
        of the bidding process, the auctioneer may go back and accept 
        any bid from a previous round. This means that a bidder must 
        carefully consider what it bids in every round, because every 
        bid is a binding offer that the bidder might be called upon to 
        honor.

   At the end of each round, the auctioneer determines how many 
        bids have been submitted for each area. The objective of the 
        auctioneer is to select a single bidder for each area. 
        Therefore, in an area where more than one bid has been 
        received, there is excess supply. In areas where no bids have 
        been received there is excess demand. In areas where there is 
        excess supply (more than one bidder) the auctioneer reduces the 
        support amount called out in the next round by a set amount.\9\
---------------------------------------------------------------------------
    \9\ The decrement by which the bid is reduced each round is an 
element of the auction design. A large, or coarse, bid decrement will 
make the auction go faster, but may jump over the correct support 
amount. To address this issue, a device called ``intra-round bidding'' 
may be used to obtain finer information from the bidders. Rather than 
simply drop out of the bidding for an area when the support amount 
falls below the level it would accept, a bidder could indicate 
willingness to accept a level of support between the amounts called out 
in the last two rounds.

   The auction is held over the Internet, using a software 
        program to administer the bidding.\10\ The program includes 
        admission control to ensure that only qualified entities submit 
        bids. The program also checks to see that bids meet the rules, 
        and prompts the bidder to resubmit a bid if it does not. The 
        rounds occur at some set interval, perhaps every 2 hours.
---------------------------------------------------------------------------
    \10\ Having bids submitted electronically over the Internet, and 
using specialized software to administer the bidding process, has been 
used successfully in the FCC's spectrum auctions, as well as many other 
successful auctions around the world.

   The program will accept only bids that meet the wire center 
        reserve. It also checks after each round to see that the 
        aggregate reserve is met at the study area level, and provides 
---------------------------------------------------------------------------
        that information to the bidders prior to the next round.

   This aggregate reserve check can only be done after a round 
        is completed, so within a round each bidder does not know if 
        the bids being submitted, taken together, will satisfy the 
        rules. In some cases, not all wire centers in a study area will 
        have been nominated for bidding. In this event, in order to 
        apply the aggregate study area reserve, the auctioneer would 
        include the areas that were not part of the auction in the 
        calculation as if they had received bids at their wire center 
        reserve amounts.

   Each bidder would be subject to an ``activity rule,'' which 
        would require it to bid actively in every round in order to 
        maintain eligibility to bid in subsequent rounds. This rule, 
        which has been used in the spectrum auctions, prevents a bidder 
        from ``lying low'' in early rounds to conceal its intentions, 
        or to allow rivals to eliminate one another.\11\ In areas where 
        there are few bidders, the auctioneer may limit the information 
        provided to each bidder. For example, each bidder may know the 
        number of other bidders, but not the identity of each.
---------------------------------------------------------------------------
    \11\ Specifically, the rule employed here is called a ``revealed 
preference activity rule,'' which ensures that, as the support amount 
declines during the rounds of bidding, a bidder cannot shift its bid 
toward a package whose support amount has fallen more than the support 
amount from a previously preferred package. See Ausubel, Cramton, and 
Milgrom, op. cit., at page 120.

   The clock auction rounds continue until there is no more 
---------------------------------------------------------------------------
        than one bidder for each area.

   At the end of the clock phase, there may be some areas for 
        which there is no bid. There may also be areas where bids have 
        been submitted, but these do not satisfy the aggregate reserve 
        constraint because, as discussed above, the sum of the wire 
        center reserves will be greater than the aggregate reserve 
        constraint for the study area.

   At the end of the clock phase, the auctioneer runs an 
        optimization program that selects the winning bidder in each 
        area, based on all the bids submitted (this may include bids 
        from earlier rounds, since all bids remain in effect until the 
        auction closes). The optimization seeks to select winners for 
        as many areas as possible, while minimizing the cost to the 
        fund.

        d. Proxy Phase
    Once the clock phase of the auction has been completed, a final 
round or ``proxy phase'' is held to ``fine-tune'' the results.
    The proxy phase is used to make the results of the clock phase more 
efficient. The proxy format opens up additional bidding opportunities 
by allowing each bidder to specify package prices that might not have 
been announced by the auctioneer in the clock phase. At the same time, 
the proxy phase limits each bidder's ability to behave strategically by 
having a proxy agent bid on behalf of the actual bidder according to 
strict rules.
    In the proxy phase, each bidder reports a valuation for each 
package of areas in which it is interested. This valuation is the 
``best and final'' support amount that bidder would accept. Unlike the 
clock phase, where each bidder specifies a single package in each 
round, here a bidder may submit valuations for any number of packages, 
and the packages may overlap in the sense that a given wire center may 
be included in more than one package.
    The actual bidding is then done on the bidder's behalf by a proxy, 
which is simply a computer program that bids according to preset rules, 
given the valuations submitted. Starting with the support amounts 
produced by the clock phase, each proxy looks for opportunities to make 
its bidder better off by submitting a bid on the bidder's best package; 
that is, the package that maximizes the difference between the current 
bid and the bidder's valuation. Bidding continues until no proxy can 
find any such opportunity.

   The same reserve rules discussed in Section 3.b are 
        maintained in the proxy round. The activity rule is also 
        maintained in the proxy phase, but may be relaxed by a measured 
        amount to allow bidders to increase the number of areas on 
        which they bid.

   In practice, the proxy round is implemented using an 
        optimization program. A winner is chosen for each area by a 
        criterion that minimizes the total amount bid over all areas. 
        The amount of support determined by the optimization is also 
        competitive in the sense that no coalition of bidders can offer 
        the auctioneer a lower-cost plan.

   In the final optimization, there may still be some wire 
        centers for which there is no bid. There may also be study 
        areas for which bids were submitted, but where the auction 
        fails because the bids did not meet the aggregate reserve 
        constraint for the study area. In these areas, the situation 
        would revert to the status quo prior to the auction, and the 
        ETC(s) that participated in the auction would continue to 
        receive support capped by the mechanism described in Section 1.

   The proxy phase builds upon the advantages of the clock 
        phase. The information generated in the clock phase helps 
        bidders formulate the valuations they are asked to submit in 
        the proxy phase.

   If the areas are substitutes, the clock auction may also do 
        most of the work of identifying the best bids, leaving 
        relatively little need for ``fine tuning'' in the proxy phase.

   However, where areas are complements, it is likely that 
        bidders may hold back from making some bids, and the clock 
        phase may end before all of the possible bids have been 
        revealed. Suppose a bidder is interested in a package of areas 
        A, B, and C which it views as complements. Given the particular 
        support amounts called out by the auctioneer, and especially if 
        another party bids aggressively for B, this bidder may choose 
        not to bid for any of the three areas, even though its combined 
        bid might have been superior. By giving the bidder an 
        opportunity to specify a different combination of support 
        amounts, the proxy phase may elicit a bid for the package that 
        would be better, from the auctioneer's perspective, than any 
        combination of bids offered in the clock phase.
7. Transition: Implementation of Auction Results
    After the auction results have been announced, a transition period 
is necessary if a ``winner'' will be taking on new Universal Service 
obligations. For example, if the winner is a wireless CETC not already 
serving the area, then a transition period may be needed. At some pre-
announced point in the transition, the administrator could require the 
winner to post bonds to ensure performance of the contract. Later in 
the transition, the winner may be required to file an implementation 
plan to show how it would plan to fulfill its responsibility. This 
would create an incentive for the winner to formulate plans in a timely 
way, and would provide the administrator with an early warning of any 
potential problems. A transition period would also allow ETCs that had 
participated in an auction, and had not won, to adjust their business 
plans.
    Transition in the Event of a General Auction. Under this proposal, 
no general auction would be held unless the Commission took action 
pursuant to its review in Step 4. If a general auction is held, and the 
ILEC is the winner, then no transition would be needed, since the 
obligation it would take on would simply be an extension of what it is 
already doing. If an ILEC bids for an area and loses, the state 
commission would decide whether and how to reduce regulation of that 
carrier and what (if any) obligation to serve would be appropriate. The 
Commission and/or state commissions, on the other hand, could decide to 
exercise their authority to remove obligations that the losing ILEC 
bidder may have to provide unbundled elements or resale.
    Although the winner would have the responsibility to provide 
service, it could fulfill that responsibility by contracting with other 
parties, including the incumbent. The losing ILEC could choose to 
continue to operate, selling retail services to end-users. The state 
commission may reduce retail regulation of such ILEC services. The ILEC 
could also sell wholesale inputs to the new Universal Service provider. 
If the FCC and/or the state commission removed UNE and resale 
obligations from the ILEC, then these wholesale transactions could be 
at commercial terms.
8. Terms of the Contract
    The contract between the winner and the regulators (FCC and state) 
would incorporate the terms of the RFQ and the level of annual support 
to the winner. Like any procurement contract, it would include 
provisions to ensure that the terms of the contract are met. These 
could include fines, forfeiture of bond amounts, and being barred from 
participation in any subsequent auctions.
    The contract would be awarded for a set term. The area could not be 
nominated during that contract period. At the end of the term, the 
contract would continue until a party--either an ETC or the 
Commission--nominated it again, at which time another auction would be 
held.
9. Areas Not Yet Auctioned
    In some areas, support may not have been set through competitive 
bidding (either because the area was not nominated for bid or because 
the auction failed to produce a result). These areas would continue 
under the capped support arrangement described in Section 1. In an area 
that receives no support today, the reserve would be zero, and thus 
that area would not be eligible for auction.

    The Chairman. I thank you very much.
    May I now call upon Senator Thune?

                 STATEMENT OF HON. JOHN THUNE, 
                 U.S. SENATOR FROM SOUTH DAKOTA

    Senator Thune. Thank you, Mr. Chairman.
    And I thank you for holding this hearing. And I apologize--
I've been bouncing back and forth between an Armed Services 
Committee hearing this morning--for not being here for all the 
testimony. I thank our witnesses.
    And I particularly want to welcome here a South Dakotan. 
Tom Simmons is the Senior Vice President of Public Policy for 
Midcontinent Communications, which is located in Sioux Falls, 
South Dakota. And I happen to be a subscriber. They provide 
phone, they provide Internet, they provide video. And so, I 
have all those at my home in Sioux Falls. And I appreciate the 
efforts that they're making to improve those services all 
across South Dakota.
    As you know, I'm a cosponsor of Senator Stevens' bill that 
deals with USF, both on the distribution mechanism and the 
contribution mechanism, and think that that--can improve the 
way that we go about reaching some of these areas that aren't 
reached and delivering broadband to more areas across the 
country. But I certainly welcome other thoughts about how to do 
that, whether or not those are the best solutions or whether--
there are perhaps other ideas that might be even better ones.
    So, thank you Tom, for being here today, for making the 
trip out from South Dakota, and to all our witnesses for their 
excellent testimony. And we'll look forward to moving forward 
with some legislation that will address this very important 
issue.
    Thanks.
    The Chairman. Mr. Simmons?

  STATEMENT OF W. TOM SIMMONS, SENIOR VICE PRESIDENT, PUBLIC 
              POLICY, MIDCONTINENT COMMUNICATIONS

    Mr. Simmons. Chairman Inouye, Vice Chairman Stevens, 
members of the Committee, thank you for inviting me to testify 
today.
    My name is Tom Simmons. I'm the Senior Vice President of 
Public Policy for Midcontinent Communications, a leading 
provider of cable telecommunications services, including analog 
and digital cable television, broadband Internet, long-distance 
and local telephone services. We serve approximately 200 
communities in North and South Dakota, western Minnesota, and 
northern Nebraska, generally classified as small or rural. The 
size of our communities range from densities of 5 to 116 homes 
per mile of cable plant, and populations range from less than 
30, in Barlow, North Dakota, to our largest community, in Sioux 
Falls, home of Senator John Thune, which has a population of 
more than 140,000.
    Midcontinent launched its broadband Internet service over 
10 years ago, on April 15, 1996, in Aberdeen, South Dakota. At 
that time, we made a pledge to bring advanced broadband 
services to as many customers as possible, regardless of the 
size of the community.
    At the end of last year, we completed a project to rebuild 
our cable plant to 750 megahertz or better in 50 more 
Midcontinent communities, bringing our total number of upgraded 
systems to over 156; and that serves 95 percent of 
Midcontinent's customers. Customers in these communities now 
enjoy over 150 channels of analog and digital video 
programming, broadband, high-speed Internet service, high-
definition television, digital video recording, and video on 
demand.
    I'd like to start by simply pointing out that the entry of 
cable operators into telephony is great news for consumers 
across America. According to recent reports, cable phone 
customers are saving over $10 a month on their phone bills, and 
the anticipated consumer benefit from competition over the next 
5 years will total more than $100 billion. And cable operators 
like Midcontinent are increasingly bringing benefits of their 
competitive phone services to rural areas.
    As I testified last Congress before this Committee, 
Midcontinent strongly supports the goals and purposes of 
Universal Service. We believe that quality telecommunications 
services should be available to all regions of the country at 
just, affordable, and reasonable rates. A strong Universal 
Service program is an essential component of national 
telecommunications policy, and we share the concern of 
policymakers, industry stakeholders, and the public, that, in 
its current form, the Universal Service program is not 
sustainable.
    But, while there is general consensus that all aspects of 
the system, including contributions, eligibility, and level of 
support, are in need of reform, there are a wide range of views 
as to how the program should be restructured.
    With respect to distribution-related Universal Service 
issues, we believe it would be a mistake to make broadband 
services eligible for USF distributions in areas that already 
have a broadband provider. It's unnecessary and profoundly 
unfair for the government to subsidize a broadband competitor 
to Midcontinent or any other broadband provider that has 
already stepped up to the plate and answered the call to help 
close the digital divide. Subsidizing competition is also a 
waste of scarce resources that should be targeted to areas 
where a market-based solution has not developed.
    Also, the continued growth in the size of the Fund is a 
matter of significant concern to the cable industry, for a very 
simple reason: these costs ultimately are borne by consumers.
    Our industry supports efforts to reduce the burden of 
Federal support programs by more efficiently distributing 
support. In particular, we believe that reverse auctions, if 
structured properly, offer an opportunity not only to reduce 
the size of the Fund, but also promote competition in high-cost 
areas by making support available on a more equitable basis.
    Turning to the current USF contribution mechanism, cable 
recognizes that reliance on the assessment of interstate 
telecommunications revenues virtually guarantees that the 
funding base will continue to shrink. To address this, the 
cable industry has long advocated the adoption of a telephone-
numbers-based contribution mechanism, a simple, yet effective, 
reform that will sustain the long-term health of this Fund 
while adapting to the evolving technology and economics of 
voice telephony.
    As stated above, Midcontinent and the cable industry 
strongly support the goals and purposes of the Universal 
Service program. We recognize that changes are necessary to 
ensure its continued viability. We appreciate that the 
legislation introduced by Vice Chairman Stevens would give the 
FCC the option of establishing a numbers-based assessment 
scheme. And we'd like to work with this Committee to give 
priority to a numbers-based option and ensure that future 
assessments are not extended to broadband and Internet 
services.
    The imposition of new fees on broadband service at the same 
time policymakers seek to encourage more widespread deployment 
and service penetration would be counterproductive and would 
raise the price of high-speed Internet services for current and 
potential broadband customers. It would also penalize those who 
have worked diligently to deploy broadband to nearly every part 
of the country.
    Thank you, Mr. Chairman, for inviting me to testify today. 
I'd be happy to answer your questions, or those of the members 
of the Committee.
    [The prepared statement of Mr. Simmons follows:]

     Prepared Statement of W. Tom Simmons, Senior Vice President, 
               Public Policy, Midcontinent Communications
    Chairman Inouye, Vice Chairman Stevens and members of the Committee 
thank you for inviting me to testify today. My name is Tom Simmons and 
I am the Senior Vice President of Public Policy for Midcontinent 
Communications, a leading provider of cable telecommunications services 
including analog and digital cable television, broadband Internet and 
local and long distance telephone services. We serve over 200,000 
customers in approximately 200 communities in North and South Dakota, 
western Minnesota, and northern Nebraska generally classified as small 
or rural. The size of our communities range from densities of 5 to 116 
homes per mile of cable plant and populations ranging from less than 30 
in Barlow, North Dakota to our largest community, Sioux Falls, South 
Dakota, which has a population of more than 140,000.
    Midcontinent launched its broadband Internet service over 10 years 
ago, on April 15, 1996 in Aberdeen, South Dakota, and made a pledge 
then to bring advanced broadband services to as many customers as 
possible regardless of the size of community. At the end of 2005, we 
completed a project to rebuild our cable plant to 750 MHz or better in 
50 more Midcontinent communities bringing our total number of upgraded 
systems to 156, serving over 95 percent of Midcontinent's customers. 
Customers in these communities now enjoy over 150 channels of analog 
and digital video programming, broadband Internet service, high 
definition television, and digital video recording capability. 
Midcontinent Communications is also a certificated local exchange 
telephone service provider in North Dakota, South Dakota, and 
Minnesota. Midcontinent first launched facility based circuit-switched 
telephony in 2000, and in the last year launched its first digital VoIP 
phone service in Mitchell, South Dakota. Since then, we've rolled out 
digital phone services in a number of additional communities throughout 
our service area and plan to continue the conversion of analog to 
digital telephony in many more. Midcontinent is a privately held 
company that has invested, and continues to invest, substantial amounts 
of private risk capital to bring advanced services to our customers 
without the assistance of public funds. We're proud of our ability to 
deliver the services our customers demand, which are no less than those 
demanded and expected in major metropolitan areas.
    As a provider of telephone service in rural America, Midcontinent 
strongly supports the goals and purposes of the Universal Service Fund 
(USF). We believe that quality telecommunications services should be 
available to all regions of the country at just, affordable and 
reasonable rates. In that regard, even prior to the Federal 
Communications Commission's recent order requiring that all VoIP 
providers pay into the USF, Midcontinent and all other cable operators 
offering voice telephone service--either by way of traditional circuit-
switched telephony or VoIP--have always contributed to the Universal 
Service Fund.
    The entry of cable operators into the telephony marketplace is 
great news for consumers across America. According to a recent J.D. 
Power report, cable phone customers are saving over $10 a month on 
their phone bills. Based on the projected growth of cable phone 
services, Microeconomic Consulting and Research Associates recently 
projected that the total anticipated consumer benefit from competition 
over the next 5 years will total more than $100 billion. And cable 
operators, such as Midcontinent, are increasingly bringing the benefits 
of their competitive telephone services to rural areas.
    A strong Universal Service program is an essential component of 
national telecommunications policy and we share the concerns of 
policymakers, industry stakeholders and the public that, in its current 
form, the Universal Service program is not sustainable. While there is 
general consensus that all aspects of the system, including 
contributions, eligibility and level of support are in need of reform, 
there are a wide range of views as to how the program should be 
restructured.
    With respect to distribution related Universal Service issues, we 
recognize the value in preserving and promoting this program which 
provides funding to companies that serve areas where market forces 
historically might not have resulted in all customers being served. 
These market forces, however, are not static. Improvements in 
technology, particularly the transition to IP-based equipment and 
services, have made it possible for cable operators and other 
facilities-based competitors to serve areas that previously might not 
have supported competitive entry. Similarly, incumbent local exchange 
carriers increasingly are able to provide multiple services (including 
DSL and video) over infrastructure previously used solely to provide 
telephone service. This transition to markets in which there is 
facilities-based competition for voice and non-voice services calls 
into question the need for continued government funding at historical 
levels, and may eventually permit the total elimination of high-cost 
support in at least some markets.
    The continued growth in the size of the fund, however, is a matter 
of significant concern to the cable industry for a simple reason--these 
costs ultimately are borne by consumers. Based on the anticipated 
growth of cable telephony services, and the corresponding growth in the 
share of the program that will be funded by cable consumers, our 
industry supports efforts to reduce the burden of Federal support 
programs by more efficiently distributing support. In particular, we 
believe that reverse auctions, if structured properly, offer an 
opportunity not only to reduce the size of the fund, but also to 
promote competition in high-cost areas by making support available on a 
more equitable basis. The challenge is to reduce the burden on 
consumers and promote competition, without sacrificing the level of 
service provided in these areas today. We believe that an auction 
program can achieve these goals if it incorporates the following 
requirements.
    First, reverse auctions will only be effective and technology 
neutral if they cover relatively small service areas (such as census 
block groups) rather than service areas that conform to the boundaries 
of a particular type of service provider.
    Second, minimum levels of service to be offered and obligations to 
be met by all bidders must be established. This should include some 
sort of carrier-of-last-resort obligation, which will ensure that the 
fundamental goal of providing service to all consumers is met. Any 
facilities-based provider that commits to meeting these requirements 
should be eligible to participate in the auction.
    Third, bidders should be required to offer services using their own 
wired or wireless connection to the end-user. Such a requirement will 
provide an important incentive for the construction of competitive 
networks.
    Fourth, eligibility to participate in an auction and receive the 
resulting support should be contingent on accommodating requests for 
interconnection. Incumbent carriers should not be permitted to collect 
government funding for their networks, while at the same time blocking 
competitive entry and foreclosing the introduction of more efficient, 
innovative technologies that will provide the ultimate cure for high-
cost networks.
    Fifth, there should be no guarantee of support such that an 
incumbent local exchange carrier or any other provider is ``made 
whole'' through a government subsidy if they receive less support than 
they did before the introduction of auctions. Any type of guaranteed 
support or other guaranteed revenue stream would completely undercut 
the rationale for moving to an auctions-based system, which is to 
reduce the overall amount of support provided by the program.
    Lastly, for each area subject to auction there should be a fresh 
look on a periodic basis. As technology develops and companies continue 
to expand their networks, the amount of support needed to serve any 
particular geographic area should continue to decline to reflect 
increased efficiencies.
    We also believe it would be a mistake to make broadband services 
eligible for USF distributions in areas that already have a broadband 
provider. Midcontinent shares this Committee's desire to ensure that 
all Americans, including those who live in rural communities, have 
access to high-speed Internet service. As I stated at the outset, 
Midcontinent has spent hundreds of millions of dollars to upgrade its 
facilities and deploy broadband services in rural communities. We did 
this without a government mandate and without a government subsidy. We 
did it because we want to make certain that our customers have the same 
access to advanced digital technology as all Americans. We took the 
risk and invested private capital in order to provide broadband 
services in the communities we serve. It is unnecessary and profoundly 
unfair for the government to subsidize a broadband competitor to 
Midcontinent or any other broadband provider that has already stepped 
up to the plate and answered the call to help close the digital divide.
    We recognize that some form of subsidy may be necessary to promote 
broadband deployment in remote rural areas where no provider is 
currently offering a broadband service and it is otherwise uneconomic 
to do so. The cable industry has offered support for legislation that 
would offer loans or tax incentives to companies that deploy broadband 
services in clearly defined and carefully targeted unserved areas. But 
the government should take great care not to subsidize broadband in 
communities where companies are already offering consumers broadband 
service. Subsidizing competition is unfair and a waste of scarce 
resources that should be targeted to areas where a market based 
solution has not developed.
    However, despite our support for government programs that target 
funding to unserved areas, we would like to point out that any program 
that subsidizes private entities to deploy broadband service is fraught 
with the potential for abuse. An example of such a program, though well 
intentioned, is the current Rural Utilities Service broadband loan 
program. Loan money from this program is being used to subsidize cable 
and phone competitors in markets where there are already two or more 
broadband providers. This type of subsidized competition penalizes 
private entities serving those markets and discourages private 
investment in rural America. In its September 30, 2005 report, the 
Office of Inspector General of the U.S. Department of Agriculture found 
that the RUS had not maintained its focus on rural communities without 
preexisting service, questioned whether the government should be 
providing loans to competing rural providers when many small 
communities might be hard pressed to support even a single company, and 
observed that the RUS, by granting such loans, may be ``creating an 
uneven playing field for preexisting providers operating without 
government subsidies.''
    While government subsidies may be necessary to promote broadband 
deployment in unserved areas, the cable industry does not believe that 
Universal Service Funds are necessary to spur further broadband 
deployment. Broadband deployment in this country continues to grow at a 
robust rate, with the number of consumers that have signed up for high-
speed Internet service in the U.S. far exceeding any other country in 
the world. The cable industry, for example, has invested over $110 
billion since 1996 in order to provide high-speed Internet access and 
other advanced services throughout the country.
    As of June 30, 2006, the Federal Communications Commission reported 
that based on company data, cable modem service was available to 93 
percent of households that could access cable TV service and the phone 
companies' Digital Subscriber Line (DSL) service was available to 79 
percent of households who could access ILEC telephone service. Kagan 
Research reported even higher numbers, stating that cable broadband 
service is available to more than 94 percent of all U.S. homes.
    With private industry investing in broadband deployment like never 
before, and the successful roll out of broadband and other advanced 
services across the country, it does not make sense to undermine the 
Universal Service program's principle purpose of promoting the 
availability of affordable telecommunications services to all regions 
of the country.
    Turning to the current USF contribution mechanism, cable recognizes 
that reliance on the assessment of interstate telecommunications 
revenues virtually guarantees that the funding base will continue to 
shrink. An increasing number of companies offer consumers voice 
telephone service for a fixed monthly rate that does not differentiate 
between local or long distance calls. Companies also offer bundled 
packages of digital services that include voice telephony. Most 
consumer VoIP services are offered without regard to intrastate or 
interstate distinctions. The fact is that interstate telecommunications 
revenues have been declining and are predicted to continue declining 
for the foreseeable future. As the line between what is a local and 
long distance call continues to blur, the existing USF contribution 
mechanism will become increasingly obsolete which threatens the 
viability of the program itself.
    The cable industry has long advocated the adoption of a telephone 
numbers-based contribution mechanism, a simple yet effective reform 
that will sustain the long-term health of this Fund while adapting to 
the evolving technology and economics of voice telephony. Using 
telephone numbers would be a relatively simple means of determining who 
should contribute as well as when contributions were owed and in what 
amount. There would be no need to apportion provider revenues into 
interstate versus intrastate or to determine which portion of a bundled 
offering represents interstate telecommunications. It would also make 
no difference whether a service was defined as a telecommunications 
service or as an information service. Under a telephone number-based 
system, all that matters is whether or not the service uses a phone 
number. As such, a numbers-based system promotes competitive neutrality 
among providers and technologies and ensures that no provider of a 
voice telephone service is placed at a competitive disadvantage due to 
disparate treatment with respect to Universal Service Fund 
contributions.
    While a numbers-based approach would capture any service designed 
as a replacement for plain old telephone service (POTS), it would avoid 
assessments on a service that might include a voice component. Few 
would argue, for example, that applications, or devices, where voice 
functionality is ancillary to the actual purpose of the service or 
device--such as voice enabled gaming--should be assessed for USF 
purposes.
    Some have expressed concern that a numbers-based system would 
collapse as proposals to map telephone numbers to Internet addresses, 
such as ENUM, become a reality. However, ENUM requires that a 
subscriber have an active telephone line. If someday in the distant 
future a non-number based system were developed and widely implemented, 
the telephone number-based contribution mechanism could easily be 
adapted, as some form of unique identifier or address will always be 
necessary to route various types of voice communications.
    Mr. Chairman, the reality is that interstate telecommunications 
revenues are declining and will continue to decline. Conversely, an FCC 
staff analysis shows that the number of active telephone numbers is 
expected to grow for the foreseeable future, from 554 million numbers 
in use in 2004 to nearly 600 million numbers in use in 2007. Moving to 
a numbers-based USF contribution mechanism embraces this reality and 
will ensure the Universal Service Fund remains solvent well into the 
future. Furthermore, it would create a more predictable and equitable 
split between assessments collected by providers of local and long 
distance telephone services, and between residential and business 
subscribers. Residential telephone subscribers would generally pay less 
under a numbers-based plan. Assuming an appropriate assessment amount, 
even most one-line households with low long distance usage would pay 
less under a numbers-based system than they do under the existing 
interstate revenue model.
    As stated above, Midcontinent and the cable industry strongly 
support the goals and purposes of the Universal Service program and 
recognize that changes are necessary to ensure its continued viability. 
We appreciate that the legislation introduced by Vice Chairman Stevens 
(S. 101) would give the FCC the option of establishing a numbers-based 
assessment scheme and we would like to work with this Committee to give 
priority to the numbers-based option and ensure that future assessments 
are not extended to broadband and Internet services. The imposition of 
new fees on broadband service at the same time policymakers seek to 
encourage more widespread deployment and service penetration would be 
counter-productive and would raise the price of high-speed Internet 
services for current and potential broadband customers. It would also 
penalize those who have worked diligently to deploy broadband to nearly 
the entire Nation.
    Contrary to assertions that broadband is negatively impacting 
universal service, the impact has been minimal at best. Most VoIP 
services, for example, already pay into the Universal Service Fund and 
a number-based plan would, in any case, capture these services into the 
future. The assessment of broadband service is unnecessary to the goal 
of a stable, sufficient and predictable Fund. Instead, a number-based 
contribution mechanism addresses the current problems with declining 
interstate revenues and bundling of services, and captures new 
technologies and protocols such as VoIP.
    Mr. Chairman, Midcontinent supports the goal of the Federal 
Government to assure that all Americans have access to telephony and 
broadband services. We have invested hundreds of millions to help that 
goal become a reality. We recognize that government subsidies may be 
the only answer in some high-cost rural areas. However, any government 
program designed to promote broadband deployment must be technology and 
provider neutral and carefully defined and targeted to only those areas 
that lack broadband service. Furthermore, any such program must be 
subject to the most stringent government oversight to ensure that 
government funds are allocated only to areas that are defined as 
unserved and are not used to subsidize competition.
    Thank you for inviting me to testify today. I would be happy to 
answer any questions you or the members of the Committee may have.

    The Chairman. Thank you very much.
    I'd like to thank the panel for its patience waiting for 
us.
    I'd like to recognize Senator Thune for questions.
    Senator Thune. Thank you, Mr. Chairman.
    I guess I would like to direct a question to Mr. Massey at 
Alltel. In the NTCA testimony, it was pointed out that wireless 
needs wires. And I guess I'm interested in knowing whether you 
agree with that statement. And how should that statement impact 
our thoughts about a reverse-auction proposal that combines 
wireless and wireline into the same auction? Would combining 
them into a single auction impact the incumbent wireline 
infrastructure that's already being deployed?
    Mr. Massey. Senator, that's a great question. And the 
construction of a network of all of our communications network 
is very complicated, and I will do my best not to use arcane 
terms.
    All networks use what is called ``backhaul.'' Backhaul is 
the conduit through which traffic that originates in the last 
mile is channeled to then go through switches and so forth to 
reach the other side, the other last mile. It's the garden hose 
in the middle of all networks. Yes, wireless networks--all 
wireless networks, to some extent, use backhaul.
    However, I'll say, we believe we pay, as we say in 
Arkansas, full retail for access to those networks. It is one 
of our highest expenses, which is access to those wireline 
networks through which traffic is routed. And I'm not aware 
that the subsidy affects that pricing by one penny.
    Senator Thune. Do wireless carriers need the same level of 
USF support as wireline carriers?
    Mr. Massey. Do we need the same level?
    Senator Thune. Yes. I mean, what's the----
    Mr. Massey. We believe----
    Senator Thune. What is the----
    Mr. Massey.--we do, yes.
    Senator Thune. What are the differences in how a wireless 
carrier spends those dollars, compared to a wireline carrier?
    Mr. Massey. I can give you pretty good answers on the 
wireless side. Part of the problem on--and I'm glad you raised 
the actual-cost issue, because it's one of those things that 
has been in a number of the filings. Just a couple of things on 
that. And the answer is, we don't know. The fact is, is that we 
don't--we have a pretty good handle on our costs. We're a 
public company. When we submit, for accountability for our USF 
funds, we give to the FCC, really for the world to know exactly 
where every dime we spend goes. The problem is that on the 
wireline side, there is an intermediary and a black box, 
Senator, and it's very difficult for us to tell what their 
actual costs are. So, it's very possible, in my opinion, 
notwithstanding some of the thinking that may be out there, 
that our actual costs to extend service to a customer could be 
more than the actual cost of a LEC, of a wireline company, to 
extend those costs. We just don't know. And we've not, frankly, 
seen any factual basis for any differentiation there.
    The so-called ``identical support'' rule is one that 
compensates competitive carriers for essentially the underlying 
wireline provider. And one point that I'd like to make on that 
is--and if you see our written testimony, you'll see it there--
that we've provided some factual basis for that. Support's not 
really identical. It's not necessarily the same in a particular 
market. So, we're not necessarily receiving the same dollars to 
build the network in a market that the wireline companies are 
receiving for that market.
    The third thing is, is that we just ask that you'd beware, 
as you consider this so-called ``actual cost'' concept, the 
unintended consequences of paying one competitor a lower rate 
than paying another competitor. We think that it's part and 
parcel of the so-called ``competitive neutrality'' concept that 
really has caused the flourishing of both wireline and wireless 
networks in underserved areas. So, that's what we ask for.
    Senator Thune. Mr. Crothers, let's say that a reverse-
auction regime is put in place, for USF funding--and that 
Alltel wireless wins with the lowest bid in your service areas. 
What do you think happens, then, to your service offerings? I 
mean, do your folks pull up stakes? Would they defer new 
infrastructure investments? What happens in that type of a 
scenario?
    Mr. Crothers. Senator, it's almost impossible to tell. 
First of all, as we go toward this reverse-auction concept I 
think that it's going to become rapidly apparent the fatal 
flaws that are involved with it. We're talking about different 
technologies, we're talking about different service 
territories, we're talking about different technologies having 
different capacities. It's almost impossible to ever compare 
apples to apples and oranges to oranges. However, the one thing 
that we can state today, state yesterday and tomorrow, is that 
every one of a local exchange company's costs are approved. 
They are, throughout South Dakota. They are, throughout the 
world of independent telephone industry. If one receives 
Universal Service funding, they're done by form and approved by 
the Federal Communications Commission. In the last 18 months, 
there have been a tremendous amount of audits, and expanded 
auditing, of local exchange companies.
    And so, I think what you'll see is, those are absolutely 
proven correct for the wireline industry. So, if, in fact, they 
are correct, and they are no longer available, a number of 
things are going to happen. The number one is, prices would 
dramatically have to increase. That, of course, would force 
people off of the network. Number two is that companies--in 
many cases, the independent telephone companies--in South 
Dakota, virtually all locally owned--are no longer going to be 
able to invest in their networks.
    So, to me, sir--and I mentioned this at one point, and I 
believe it was in the written testimony--a reverse auction 
truly is a race to the bottom. The less you invest in your 
network, the less you invest in your subscribers, the less that 
you will have, the more impacted that the people of America 
will be. And it's going to be disproportionally harsh on rural 
Americans.
    Senator Thune. Just one last question, if I might, for Mr. 
Simmons.
    Tom, you had suggested that this only provides support for 
broadband deployment in areas that currently don't have it. Do 
you think there will be viable business models that will take 
advantage of a program that you've described? And would 
Midcontinent participate in that sort of a program?
    Mr. Simmons. In describing these programs are you talking 
about price supports on the broadband side?
    Senator Thune. Right.
    Mr. Simmons. Well, we've advocated that any level of 
support, whether it be from the Universal Service Fund or even 
from the Agriculture Department's Rural Utilities Service 
Funds, that they be allocated to serving unserved areas.
    We believe that might have been the original intent of the 
RUS program, but we have seen something quite different happen 
across our service areas, where, in fact, those funds were used 
to subsidize competition where service providers have been 
providing service for some time--not only one, but, in some 
cases, two providers--while still leaving a lot of areas 
unserved.
    But, frankly, the areas unserved in our part of the country 
are becoming either very remote or very limited. In the state 
of South Dakota, for example, there are only two communities 
with a population of more than 200 people that do not have 
broadband service, which I think is quite remarkable. We have a 
lot of competition in the markets where we provide broadband 
service. In the 200 communities where we provide service, we 
have broadband competitors in one-third of those, which is a 
pretty good number, since we serve very small communities. And, 
again, much to the credit of the rural telephone companies, 
they are, more often than not, our competitors in providing 
those broadband services.
    So, again, I understand the need for Universal Service 
support for those particular unserved communities, but maybe 
not in the communities where they're challenging us for 
subscribers. There may be an area outside of that part of the 
community that requires the help. That's why I was intrigued by 
Mr. Landis' statement, in the earlier panel, about granular 
information, to understand what this is really about, to 
clearly understand what is really going on in those 
communities. And I have had the privilege of hearing Mr. Landis 
testify at several NARUC meetings and certain seminars, where 
he has greatly endorsed the marketing approach to providing 
services in communities. And, again, citing the local cable 
companies and local telephone companies that provide those 
levels of service.
    Senator Thune. My time's up, I thank the panel for their 
testimony.
    Thank you, Mr. Chairman.
    The Chairman. Thank you very much.
    Senator Klobuchar?

               STATEMENT OF HON. AMY KLOBUCHAR, 
                  U.S. SENATOR FROM MINNESOTA

    Senator Klobuchar. Thank you, Mr. Chairman.
    And thank you, to the panel. I used to practice in this 
area, way back, before I was a prosecutor. So, I was actually 
thinking about all the times I had seen the USF language cited 
in briefs and things like that. We look back, and looked at it, 
and it said, in the Communications Act of 1934, that the 
fundamental purpose of the Fund is to ensure that all the 
people of the United States have access to, ``a rapid, 
efficient, nationwide and worldwide wire and radio 
communications service with adequate facilities at reasonable 
charges.'' And so, that's why I'm so concerned, representing a 
State that has a large metro area, but also rural, about this 
digital divide. And, you know, Mr. Simmons, you were talking 
about the communities in South Dakota that have access, but the 
issue has been acknowledged, is that we don't really have a 
tracking to know how many people have it. The FCC tracks it by 
Zip Code, so one person could have it within the zip code. But 
there was a study--the GAO reported, in May of 2006, that 
broadband take-up rates were 70 percent higher in suburban and 
urban homes than in rural homes. And a 2006 Pew study found a 
similar divide. And one more troubling statistic, more than one 
in ten rural counties don't even have a single high-speed 
Internet connection in the entire county.
    So, with that, I just wanted to explore a little more about 
how we can get to where we want to go. Mr. Massey, you have 
stated in your testimony that wireless--I heard you say this--
is often the only means of high-speed broadband access in rural 
areas. Could you talk about the implications for our national 
policy if we were to go that way?
    Mr. Massey. Well, in fact, Senator, we bought a company, 
Midwest Wireless, that's now a part of Alltel that was 
headquartered in Mankato, Minnesota, the southern, more rural 
part, as you know, and they have a vibrant wireless broadband 
practice. It delivers speeds that are close to DSL speeds. They 
were--they are, and were, selling it very well. But, frankly, 
there are a number of markets in the--really, in the more rural 
parts of southern Minnesota--as you know, a lot of farms, a lot 
of distance--and not a lot of--and maybe, I guess you'd almost 
say--there's a lot of low-income population. It's not 
profitable for us. We don't get a return for our shareholders 
to build a fully deployed broadband network in some of those 
rural southern Minnesota markets. We'd love to do it. We'd love 
to serve those customers. With a little help, we could do that. 
And we think that we could do that as efficiently as anybody at 
the table.
    So, we think wireless is not the--is not the sole answer to 
the broadband problem. I think it was--Vice Chairman Stevens 
was talking about the call-center--opportunity to return a lot 
of call-center jobs to rural America, let's say. Frankly, my 
guess is that the technology to really move that sort of 
traffic will always--well, at least for the foreseeable future, 
be--will be some sort of a ground-based technology. It'll be 
fiber of some kind. It would be very difficult and very 
expensive for us to build a--and probably the technology 
doesn't exist to build that fat a pipe for that sort of 
service. But for the people in your markets and the people in 
South Dakota and Arkansas and Tennessee that are agriculture- 
based, mining-based, farming-based, that want access to rapid 
data--and where they are in their jobs, not to have to get in 
the pickup and drive all the way back to the house to access 
the Internet, to order a combine part, but to get it where they 
are--we think wireless is the solution, and we think it should 
be a part of any broadband solution.
    Senator Klobuchar. Thank you.
    Mr. Tauke, I understand that many rural wireless carriers 
that Mr. Massey was referring to would like to provide 
broadband, but they can't do it effectively unless they get 
data-roaming agreements with larger carriers. I understand that 
you have a pretty standard voice roaming agreement with the 
smaller carriers. Does your company make it common practice to 
enter into data-roaming agreements? And what would you say 
about a policy of automatic roaming agreements?
    Mr. Tauke. Roaming agreements, for both voice and data, 
have generally been commercial agreements. We try to enter into 
agreements, where we can, that make sense in order to have as 
expanded a coverage as feasible for our own customers, because, 
obviously, when we enter into a roaming agreement with someone 
else, that gives us the ability to provide additional service 
to other customers.
    There are not many wireless carriers in--many of the 
smaller wireless carriers today--who deploy the kind of data 
capability that we do in our network.
    Senator Klobuchar. I mean, you also talked about how 
broadband should not be a part of Universal Service, in your 
view, because the issue is not affordable rates, I think you 
said, but, instead, the one-time capital investment. And I just 
wondered if some of the other panelists could comment on that, 
and where you stand on that.
    Mr. Crothers?
    Mr. Crothers. Senator, we believe that broadband should be 
part of Universal Service. It's been demonstrated over and 
over--the first panel emphasized it--that it really goes to the 
security and the competitiveness and the education of the 
American people. It isn't a luxury, it isn't an add-on. And I 
know the time is getting late, but I'll leave it at that. It's 
critical to our very being.
    Dr. Staihr. First, if we're going to support broadband, 
it's a given that the Fund would actually have to increase. OK? 
If we make that decision, we make that decision, and that's a 
good thing. It comes down to, do the benefits of supporting it 
outweigh the costs? And we know there are areas that, just as 
they're uneconomic to serve for voice, they are going to be 
uneconomic to serve for broadband without some help, regardless 
of the technology. Maybe wireline, maybe wireless. As an 
economist, I think the data is pretty clear that the benefits 
do outweigh the costs. So, a policy that supports broadband's 
inclusion as a supported service makes sense.
    Mr. Massey. I think you got my answer earlier, but----
    Senator Klobuchar. Yes.
    Mr. Massey.--just to make sure, we believe it ought to be 
part of that Universal Service Fund.
    Senator Klobuchar. OK.
    Mr. Simmons?
    Mr. Simmons. Senator, my comment would be, again, that 
granular component, and take a look at what it really is. Mr. 
Crothers said it's not entertainment. Yes, it is. IP video is a 
major portion of that. Lots of companies will make lots of 
money by providing almost a cable service over the broadband 
side of all that. The gaming components, and the time that are 
spent with those type of things that fall clearly under the 
entertainment side, might be something quite different than 
pure information flow or pure communications or Voice over 
Internet telephony.
    Senator Klobuchar. So, you would support it for certain 
components of it.
    Mr. Simmons. Well, I think it would be important to take a 
look at what is being subsidized and clearly understand what 
that service is used for, and if it really does merit support. 
Or if we have a case of unintended consequences where, down the 
road we're subsidizing a service that we shouldn't, which puts 
at risk someone else's private investment.
    Senator Klobuchar. And, you know, my concern is just that 
we're shipping jobs to other countries that have broadband 
available, and then we have small towns in Minnesota, where 
they don't have it available, where we could add to their 
employment if we did.
    Mr. Simmons. I'm not----
    Senator Klobuchar. And I don't think of that as videos and 
entertainment.
    Mr. Simmons. I'm not questioning the need in those areas 
that are unserved. I clearly think we need to do what we need 
to do to make sure that broadband is deployed into those 
particular areas.
    Senator Klobuchar. Mr. Tauke? That's my last question, 
then. Go ahead.
    Mr. Tauke. Senator, I just wanted to clarify our position. 
We believe that we need to ensure that broadband is available 
to all consumers. Second, we recognize that there are areas 
where there is no broadband today, and where there is need for 
assistance in order to provide that broadband. But the question 
is, Do you want a program which provides ongoing sustained 
funding, which is what you have with Universal Service, or do 
you need a program which provides significant capital--one-time 
capital investment? We think the latter is what's needed now. 
And so, you can't look to the Universal Service Fund as a 
solution to that particular problem.
    Senator Klobuchar. All right. Thank you for clarifying 
that.
    [The prepared statement of Senator Klobuchar follows:]

 Prepared Statement of Hon. Amy Klobuchar, U.S. Senator from Minnesota
    Thank you Mr. Chairman and Mr. Vice Chairman. I am pleased to be 
here to address the challenges facing the Universal Service Fund and to 
work on ways to reform it.
    The USF is not new to me--in my years as a telecoms lawyer I dealt 
frequently with USF issues. And in the past two years, I've been all 
over my home state, Minnesota, talking about the need to serve all of 
our communities with affordable and up-to-date telecommunications 
services.
    But I am a newcomer to the more recent debates about the best 
methods to sustain, reform, and fairly allocate the costs of the Fund.
    So I look forward to engaging with all of the stakeholders, with 
the FCC and the Joint Board, and with my colleagues, and to asking a 
number of important questions. They include:

        Should the contribution be assessed on a ``per connection'' 
        basis or a ``per working telephone number'' basis?

        How do ETCs fit into the purposes and operation of the Fund?

        How do we best allocate high cost support for non-rural 
        carriers?

        How do we improve our method of distribution from the Fund?

    Throughout this debate, I think it is vital that we remember the 
fundamental purpose of Universal Service, as stated in the 
Communications Act of 1934: It is to ensure that ``all the people of 
the United States,'' have access to ``a rapid, efficient, Nation-wide, 
and worldwide wire and radio communication service with adequate 
facilities at reasonable charges . . .''
    And that brings me to my top priority in this area: bridging the 
digital divide and bringing high-speed broadband to every community in 
Minnesota and every corner of this country.
    I have talked in previous hearings about the persistent urban-rural 
digital divide. In May 2006, the GAO reported that broadband takeup 
rates were 70 percent higher in suburban and urban homes than in rural 
homes. A 2006 Pew study found a similar divide.
    Here is another troubling statistic: more than 1 in 10 of the most 
rural counties do not even have a single high-speed Internet 
connection--in the entire county.
    A community that is left without affordable broadband access is a 
community that will be left behind. A 2006 MIT study found that towns 
which had mass-market broadband experienced markedly faster growth in 
employment and number of businesses.
    I am convinced that the market alone will not solve this problem. 
Broadband deployment will lag behind in rural areas because the private 
sector gets a much higher return in areas of high population density 
and high income. I am convinced that the Federal Government must assist 
underserved areas--especially rural areas--in partnership with states, 
towns, and the private sector.
    That much is clear to me. What is a little less clear is the 
precise form Federal Government that involvement should take.
    The FCC and the Joint Board have resisted adding broadband to the 
list of covered services under the USF. They have consistently decided 
not to. I want to explore that decision, especially in light of the 
fact that broadband meets one of the key criteria of the Fund: like 
plain-old telephone service decades ago, it has become ``essential to 
education, public health, and public safety.''
    I believe that an updated, reformed Universal Service Fund is very 
likely the best vehicle for bringing broadband to rural America. But I 
am willing to listen to those who say that some other vehicle will get 
us faster and more effectively to our destination.
    Some have talked about the possibilities of auctions, others about 
targeted grants and loans, others about tax credits. And, of course, 
any Federal approach must complement existing and emerging digital 
divide initiatives being undertaken at the state and local level.
    I intend to look at every possible vehicle, with a strong 
inclination toward adding broadband to the USF, and I do not intend to 
rest until we have met this challenge.
    Thank you.

    The Chairman. I thank you very much, Senator.
    I'd like to stay here a little longer to continue this 
discussion, but I'm already an hour late. I'm supposed to be on 
the floor right now. But I've just instructed the staff to add, 
to the in-depth briefing, wireless.
    I'm certain you have noted that the membership of this 
Committee is heavily rural. And, as a result, I can assure you 
that we will have some action here, if not the consideration of 
some measure on the floor. But in order to do that, we will 
have to take into consideration the concerns and interests of 
all the parties involved. It will be a challenge, but I can 
assure you we will take on that challenge.
    And, in the meantime, we'll be calling upon you for advice 
and counsel, because this is not the way to do policy and make 
decisions. A whole bunch of nonexperts here, we know very 
little about what is involved, but we will have to make the 
decisions. And so, we are counting on you.
    And, for the moment, I'll be submitting questions for your 
consideration. I'd like to get a better understanding of 
reverse auction, for example. I'd like to get your thoughts on 
that.
    So, with that, thank you very, very much.
    The hearing is adjourned.
    [Whereupon, at 12:20 p.m., the hearing was adjourned.]
                            A P P E N D I X

   Prepared Statement of Hon. Bill Nelson, U.S. Senator from Florida
    Mr. Chairman, thank you for holding this important hearing on the 
present and future of the Universal Service Fund.
    Today, the Universal Service Fund fills a critical role by ensuring 
that all Americans have access to telecommunications services at 
affordable prices. The E-Rate program, for example, has ensured that 
almost all American students have access to the Internet. Similarly, 
the Low-Income program provides affordable telephone service that is 
truly a ``Lifeline'' for many families.
    As we move toward the future, I look forward to exploring possible 
new uses of Universal Service funds, such as targeted support to bridge 
the urban-rural divide in broadband service penetration. Consumers in 
rural areas of Florida should have the same access to broadband 
services that consumers in urban areas, such as Miami or Tampa, have 
available.
    At the same time, however, we must also take steps to preserve the 
financial stability of the Universal Service Fund. This reform should 
start with controlling the growth of the Universal Service Fund and, in 
particular, growth of the High-Cost portion of the Fund.
    Unrestrained growth of the High-Cost portion of the Fund is causing 
an increased and substantial burden on consumers that pay into the 
Fund. Florida, for instance, is currently the largest net payer into 
the Fund--last year the State paid in more than $311 million more in 
contributions than it received in distributions.
    We need to move toward a system that shares both the costs and 
benefits of Universal Service more equally among all Americans.
    On the contribution side of the Universal Service equation, I look 
forward to reform that is sustainable, while still protecting low-
volume and low-income consumers from any spike in the amount they 
currently pay into the Fund.
    And on the distribution side, I look forward to hearing the details 
of various reform options--such as reverse auctions--that may limit 
unsustainable growth of the Fund.
    Working together, we can create a Universal Service Fund that is 
technologically flexible, fair to consumers, and sustainable for the 
future.
    Thank you.
                                 ______
                                 
          Prepared Statement of Gary Wallace, Vice President, 
                  Corporate Relations, ATX Group, Inc.
    Mr. Chairman, Vice Chairman and members of the Committee, on behalf 
of the ATX Group, Inc., thank you for giving ATX Group the opportunity 
to submit comments for the record to addresses the devastating effects 
that a ``one size fits all'' numbers-based Universal Service Fund (USF) 
contribution structure would have on consumers with automobiles 
equipped with integrated in-vehicle emergency communications systems.
    I applaud the Senate Commerce Committee for specifically 
recognizing in its 2006 proposed telecommunications law reforms that 
the unique circumstances of in-vehicle emergency communications should 
be taken into account in designing a Universal Service Fund 
contribution mechanism.
    In-vehicle emergency communications systems which provide automated 
crash notification, stolen vehicle recovery and mayday signals to 
trained emergency response professionals are often referred to as 
``telematics'' services. These intelligent vehicle technologies enhance 
response to highway emergencies. Every day these services save lives, 
speed emergency response and assist drivers. Systems deployed today on 
several million passenger vehicles provided by ATX, OnStar and others 
use the cellular network with communications devices which have 
individual telephone numbers. These systems, however, are extremely low 
volume network users.
    ATX currently pays Universal Service support payments through its 
carrier suppliers and for telecommunications services provided by its 
call center. As a matter of principal, ATX has no objections to making 
``equitable'' contributions to the Universal Service support system. 
The proposal to assess a flat Universal Service fee on all telephone 
numbers, regardless of level of use would have a profound, inequitable 
and burdensome affect on lifesaving telematics services.
    Even at $1.00 per month per phone number, the USF contributions for 
telematics services would approach the cost of the telecommunications 
services charged by the carrier. The fee would violate the 
Telecommunications Act of 1996 requirement that Universal Service 
contributions be ``equitable and nondiscriminatory.'' It would also be 
against the public interest to slow the broader rollout of telematics 
based safety and security services to the mass auto market. This would 
be contrary to the long held transportation and public safety policies 
of encouraging drivers to adopt intelligent transportation 
technologies.
    ATX provides core automotive telematics services to several auto 
Original Equipment Manufacturers (OEMs). Core telematics services 
include GPS satellite location-enhanced, automatic collision 
notification; a dedicated in-vehicle ``May Day'' button to summon 
emergency assistance; and vehicle theft recovery. Neither ATX nor its 
automotive OEM customers currently offer a personal calling service as 
part of their telematics packages. The core service allows a vehicle 
occupant to communicate with a call center to request assistance.
    Additionally, upon deployment of a vehicle's airbag and/or 
activation of emergency pretensioners in seat belts, a signal is 
transmitted to the call center, which will respond to the automatic 
crash notification (ACN). Whether by call or ACN signal, a vehicle's 
transmission is only to the ATX call center and only the call center 
may place a call to the vehicle. The technology uses the cellular 
network, with GPS location capability, and each activated vehicle is 
assigned one telephone number.
    An overwhelming number of vehicles have no communication with the 
call center during a year. Of those who do communicate with the call 
center the average call is of very short duration. The presence of a 
phone number reflects neither network use nor the ability to 
communicate outside the call center and vehicle. A consumer purchases 
core telematics services to summon assistance in an emergency. A ``one 
size fits all'' numbers-based USF assessment will have substantial 
impact on consumer behavior, will encourage arbitrage opportunities 
between mobile communications technologies and be damaging to the 
effort to bring emergency communications capabilities to all vehicles.
    In a hypothetical 350,000 telematics equipped vehicle fleet, a 
$1.00 per month fee against each telephone number results in a USF 
contribution of $350,000 per month. The current USF fee for the same 
fleet would be approximately $10,000. The proposed USF assessment 
approaches the cost paid for the airtime and the underlying services 
provided by the carrier. Notably, the carrier's services encompass not 
only airtime, but its expertise and administrative assistance in 
assigning numbers, arranging for toll free platforms, initializing a 
vehicle's capability to transmit and receive, maintaining databases and 
overall assisting in the delivery of emergency telematics services.
    The Communications Act of 1934, as amended, section 254(b)(4), 
establishes the standard by which the FCC then may assess a fee to 
support the Universal Service program. That standard requires that the 
contribution be ``equitable and nondiscriminatory.'' A contribution 
mechanism that approaches the cost charged and revenue collected by the 
carrier for its services clearly violates this standard.
    The courts have addressed the importance of how the fee must be 
fair. In Texas Office of Public Utility Counsel v. FCC, 183 F.3d 393, 
431 (CA 5 1999), the Court of Appeals for the Fifth Circuit ruled that 
a Universal Service fee that exceeded a carrier's revenue violates the 
law's equitable and nondiscriminatory standard. The Court held that 
where a carrier was assessed a fee in excess of its interstate 
revenues, the underlying premise required of any contribution mechanism 
was violated. There must be fairness in the allocation of contribution 
duties. It characterized the assessment as a ``heavy inequity'' and 
that the cost imposed was ``prohibitive.''
    The Fifth Circuit addressed the circumstances where a carrier had 
minimal interstate traffic and significant international traffic. The 
core telematics circumstance is even more egregious. Here, with the 
ability only to communicate between call center and vehicle, and where 
most consumers make no calls, network use is nominal and confined. The 
fundamental value of telematics is the ability to transmit a call or 
signal to the call center in those infrequent circumstances when 
emergency assistance is needed. The current USF contribution model, 
based on revenues, recognizes and accommodates the vast disparity 
between general consumer use of the cellular network and the minimal 
use of core telematics equipped vehicles.
    A ``one size fits all'' phone number assessment structure does not 
comprehend that while automotive telematics services are assigned a 
large number of phone numbers, the extent and frequency of use of the 
network is extremely low and confined. The FCC's own decisions 
recognize that a contribution model must recognize and accommodate such 
disparity. See In the Matters of the Federal-State Joint Board on 
Universal Service and Access Charge Reform, 15 FCC Rcd 1679, FCC 99-290 
at paragraphs 23-25 (1999).
    A $1.00 monthly fee on each telematics vehicle is inequitable and 
discriminatory. Under this assessment, ATX's customers would see their 
monthly USF contributions increase nearly 3,000 percent, approaching 
the cost of the wireless service. Even under the 50 percent discount 
proposed by the cellular carriers for their ``buckets of minutes'' 
customers, where several numbers are assigned yet only one bill is 
rendered, the proposed USF fee to core telematics vehicles is still 
enormous. Such an assessment will disrupt a market that today is 
delivering an important public safety feature--the ability to locate 
expeditiously and dispatch aid to individuals involved in an in-vehicle 
emergency or collision--ubiquitously and without limitation to the 
technical capabilities of local Public Safety Answering Points.
    If the expansion of location-based automatic crash notification and 
emergency response services are slowed, it will profoundly affect rural 
areas where these services have the greatest impact on highway deaths 
and injuries. Because distances are so great, the speed of emergency 
response in a rural setting is the difference between life and death as 
well as recovery and permanent injury.
    In summary, ATX urges the Congress and the Federal Communications 
Commission to recognize what the Senate Commerce Committee recognized 
last year. A ``one size fits all'' numbers based systems is profoundly 
unfair and inequitable to drivers of vehicles equipped with integrated 
in-vehicle emergency communications systems.
                                 ______
                                 
         Prepared Statement of F.J. Pollak, President and CEO, 
                        TracFone Wireless, Inc.
    My name is F.J. Pollak. I am President and Chief Executive Officer 
of TracFone Wireless, Inc. TracFone is headquartered in Miami, Florida. 
With more than 8 million customers, TracFone is the Nation's leading 
provider of prepaid wireless telecommunications services and TracFone 
is also the 6th largest wireless carrier in the United States. (The 
only larger wireless carriers are AT&T/Cingular, Verizon Wireless, 
Sprint Nextel, T-Mobile, and Alltel). Since its inception in 1996, 
TracFone has been able to grow its business to over 8 million customers 
by focusing on a segment of the wireless marketplace largely ignored by 
other wireless companies. Specifically, TracFone's service is directed 
mainly to low volume, often low income, consumers who normally make an 
average of 1 call a day. TracFone offers a ``pay-as-you-go'' service. 
There are no duration or volume commitments, no early termination 
penalties, no advance deposits; no credit checks. TracFone's customers 
pay only for the wireless service they need, when they need it. For 
many TracFone customers, wireless telephone service would otherwise be 
unavailable or, if available, would be unaffordable. As such, TracFone 
thinks of itself as a true Universal Service Provider--and it provides 
affordable, easy-to-use prepaid wireless service without receipt of any 
subsidies from the Universal Service Fund.
    As a provider of interstate telecommunications services, TracFone 
is required to contribute to the Federal Universal Service Fund (USF). 
Although TracFone contributes to the USF based on its actual interstate 
revenues, it has no way to recover its USF contribution costs from 
consumers in the form of billed surcharges. Unlike traditional 
providers of post-paid wireline and wireless services, prepaid 
providers do not send monthly invoices to their customers and 
therefore, have no opportunity to add Federal Universal Service Fund 
surcharges as line items on customer bills. With no means to recover 
its USF contributions from its customers, today, TracFone contributes 
over $10 million a year into USF out of its shareholders' pockets. As 
such, TracFone is a substantial contributor to the Fund and is a very 
meaningful voice in the USF debate.
    TracFone believes that the current USF contribution methodology 
based on interstate revenues is fair to all and is consistent with the 
legal requirements of the Communications Act. To the extent that there 
are concerns about the ability of the current, interstate revenues-
based system to provide sufficient support for the USF, TracFone 
believes that certain adjustments could significantly increase the 
level of USF funding. Specifically, there no longer is any need for a 
wireless safe harbor as wireless providers are able to identify which 
of their usage is interstate. In that regard, TracFone believes that 
the FCC took an important step in the right direction last June when it 
increased the wireless safe harbor from 28.5 percent to 37.1 percent. 
In addition, TracFone supports the decision of the FCC to subject 
Internet-based telephone calling services (often called Voice over the 
Internet Protocol or ``VoIP'') to USF contribution requirements. Also, 
the law empowers the FCC to impose USF contribution obligations on 
others who provide services which use interstate telecommunications 
including, for example, broadband Internet access services. TracFone 
believes that the contribution base could be expanded to include those 
services with no reduction in demand for those services. Inclusion of 
providers of broadband Internet access services in the USF funding 
mechanism seems especially appropriate in light of proposals which 
would expand the USF to subsidize such services in high-cost areas.
    A contribution methodology based on working telephone numbers would 
significantly and unnecessarily increase the costs of service for low 
volume low income consumers. Today, based on its actual interstate 
revenues, TracFone remits to the USF about $0.10 per customer per 
month. While this may seem like a small amount, TracFone's average 
revenue per user is only $14.00 per month as compared with the wireless 
industry average of about $56.00. Moreover, TracFone customers, like 
most prepaid wireless customers, make few interstate calls. Indeed, 
many TracFone customers make no interstate calls. Therefore, almost all 
of its customers' $14.00 average revenue is derived from intrastate and 
local service--services which, by law, may not be subject to assessment 
for the Federal USF.
    If the FCC were to implement a numbers-based contribution 
methodology and the initial per number charge were to be set at $1.20 
per month (an amount projected by a group called the USF By The Numbers 
Coalition in a January report), TracFone's monthly per customer USF 
contribution would increase from $0.10 to $1.20--more than a 1,200 
percent increase, effectively creating almost a $100 million a year tax 
increase. Since TracFone's customer base has grown rapidly--by 
approximately 1.8 million customers in 2006, future increases under a 
numbers-based plan would be much greater. As discussed above, TracFone 
has no means to recover USF contributions from its customers through 
billed surcharges, TracFone would have to absorb the entirety of these 
increases from its operating revenues since raising its rates is not a 
viable, competitive option.
    The reason why TracFone and other prepaid providers cannot raise 
their rates to incorporate their USF contribution costs is the nature 
of the competitive market in which telecom services in general, and 
wireless services in particular, are provided. Traditional post-paid 
providers (those who render bills for services) widely advertise the 
price of their services without reference to USF surcharges or other 
additions to those advertised prices. Such carriers widely advertise 
services such as 400 minutes for $39.95, or $0.10 per minute, etc. 
However, their bills sent in arrears are for much higher amounts--
amounts which include USF and other taxes, surcharges and fees imposed 
by the carriers but not included in their advertised price. Companies 
like TracFone compete with those providers. Unlike post-paid providers 
who can add taxes, fees and surcharges, including USF charges, to their 
advertised prices, TracFone and other prepaid providers must include in 
their advertised prices all taxes, fees, and surcharges, since they 
have no billing mechanism to add those charges later. This creates a 
significant competitive disadvantage since consumers compare providers' 
advertised prices with each other, without realizing that some 
providers' advertised prices do not include taxes, fees and surcharges 
which will be added to their bills, while prepaid providers' advertised 
prices are all-inclusive.
    Some providers of prepaid service--those who provide service using 
their own switches--are able to take from their customers' prepaid 
account balances usage amounts equivalent to the amount of the USF 
surcharge. This method is often called the ``Sufficient Positive 
Balance'' method since the providers will debit the customers' accounts 
only if there are in the accounts a sufficient positive balance to 
cover the amount of the debit. Unlike those providers, TracFone does 
not have any switches of its own. It provides service by purchasing 
capacity from other providers. As a result, TracFone customers' account 
balances are stored directly in the customers' wireless phones, not in 
a central switch. TracFone does not have real time access to its 
customers' phones or to the prepaid account balances stored in those 
phones, and it could not debit those accounts to recover its USF costs 
even if it wanted to. Accordingly, neither raising rates nor debiting 
customer accounts to recover USF costs are viable options for providers 
like TracFone. In short, a numbers-based contribution plan would not 
work for certain types of telecom providers, including prepaid wireless 
providers. Not only are those companies' services not billed, those 
companies do not provide service on a monthly basis. Some consumers 
make multiple purchases of prepaid airtime in a month; other consumers 
may go several months or more without making any airtime purchases.
    Consumer groups have recognized that a numbers-based plan would 
dramatically increase the costs of the USF borne by low income low 
volume consumers. That is why a coalition of such groups called the 
Keep USF Fair Coalition as well as the National Association of State 
Utility Consumer Advocates has opposed the implementation of a numbers-
based contribution proposal at the FCC. In a report released February 
27, 2006 entitled ``Exposing the Hoax: The Phony `Crisis' of the 
Universal Service Fund,'' the Keep USF Fair Coalition articulated the 
view that a flat per-working telephone number tax would significantly 
increase the monthly telecommunications costs for low volume consumers 
and would force many low income consumers to drop their telephone 
service. The Coalition report also demonstrated that abandonment of a 
revenues-based system in favor of a numbers tax is not necessary, 
pointing out that the contribution base has been stable and that 
available data demonstrate that there will not be a sharp decline in 
interstate telecommunications revenues.
    Moreover, the potentially devastating impact of a regressive 
numbers tax to finance Universal Service is not limited to residential 
consumers. Many so-called ``enterprise'' customers--users of large 
quantities of telephone numbers--would also be hit hard by a numbers 
tax. One prominent example of such users is the higher education 
community. The FCC has heard from numerous colleges and universities, 
large and small, about how their telecom costs will increase 
dramatically if a per number tax is implemented. For example, Harvard 
University estimates that its annual USF contributions would increase 
from $70,000 to $400,000; Rice University anticipates monthly increases 
from $400 to $10,000; Southern Illinois estimates that its annual USF 
fees would increase from $12,000 to more than $200,000 per year; Calvin 
College, a small liberal arts college in Michigan, would have its 
monthly USF costs skyrocket from $700 to over $11,000. The list goes 
on.
    These institutions differ from each other in many respects. 
However, the ability of each institution to provide telecommunications 
services to its students and faculty would be undermined by the FCC 
numbers tax proposal. Several (including Harvard) even report that 
their ability to provide E-911 access for their students would be 
jeopardized. Given the high priority which the FCC properly has placed 
on mandatory E-911 access availability, it would be a sad and cruel 
irony if the FCC's numbers tax had the perverse impact of limiting E-
911 access for students residing on college campuses throughout the 
country.
    There is another problem with a numbers tax. Typically, telephone 
numbers are provided as part of local telecommunications service. Many 
customers of wireline and wireless telephone service make few, if any, 
interstate calls. Yet the FCC's proposed monthly numbers tax to finance 
the Federal Universal Service Fund would be imposed on such customers 
without regard to whether consumers derived any interstate usage 
whatsoever in any given month. Imposition of USF funding obligations on 
such consumers was not what Congress had in mind in enacting Section 
254 of the Communications Act; nor would it be sound public policy to 
require that consumers who use little, if any, interstate service, bear 
a large--and increasing--share of underwriting the Federal USF.
    If the FCC adopts a numbers tax to fund universal service, it will 
be necessary for it to provide alternative contribution mechanisms for 
certain types of carriers. Many providers of interstate 
telecommunications service do not provide customers with working 
telephone numbers as part of their service offerings. Since the law 
requires that ``every'' provider of interstate telecommunications 
service must contribute to the USF, there must be a mechanism 
appropriate for all carriers.
    TracFone recommends that those interstate telecommunications 
service providers who are unable to recover their USF contributions 
through billed charges to their customers be allowed to continue to 
have their contributions based on their interstate revenues. 
Alternatively, in order to prevent pricing their services beyond the 
reach of the low volume, low income users they serve, TracFone suggests 
that those carriers' USF contributions under any methodology be capped 
at the levels of their contributions under the current revenues-based 
methodology.
    Finally, TracFone reminds the Committee that another component of 
the efforts to ensure that USF contributions not unduly burden the 
provision of telecommunications services is to demand that the Fund's 
growth be limited and distribution of USF resources carefully managed. 
TracFone urges the Committee to continue to encourage the FCC to 
protect against waste, fraud and abuse, and other sources unintended 
and avoidable growth of the USF. In this regard, TracFone believes that 
the most critical Universal Service issue is the rising size of the 
Fund and the increasing burden being borne by the Nation's 
telecommunications consumers to support that unrestrained growth. The 
use of reverse auctions as a means for distributing USF high-cost 
support has the potential to significantly limit growth of the fund. 
The reverse auctions proposal is currently before the Federal-State 
Joint Board on Universal Service and a recommendation to the FCC is 
expected some time this spring. TracFone encourages the Joint Board and 
the FCC to give careful consideration to reverse auctions and other 
proposals to limit fund growth and to ensure that USF resources are 
distributed in an efficient manner. Congress and the FCC must enact and 
implement requirements and procedures which limit availability of USF 
support to those who truly need the support and which ensure that the 
funds are disbursed in an efficient and targeted manner, with 
safeguards to prevent waste, fraud and abuse. Implementation of such 
requirements and procedures will ensure that there will be a sufficient 
USF in the future without the need for disruptive and inequitable 
numbers taxes imposed on consumers and on those enterprise customers, 
including colleges and universities and healthcare institutions, which 
utilize large quantities of phone numbers.
                                 ______
                                 
                             Golden West Telecommunications
                                                      March 8, 2007
Hon. Daniel K. Inouye,
Chairman,
Senate Commerce, Science, and Transportation Committee
Washington, DC.

Dear Senator Inouye:

    On behalf of Golden West Telecommunications, I commend your 
leadership in the Senate Commerce, Science, and Transportation 
Committee. I have watched with admiration as you and other members of 
the Committee work to ensure the long-term stability of the Universal 
Service Fund. While policy positions of small and large companies may 
differ on this issue, we are in agreement that accurate, complete and 
factual testimony is the foundation for sound public policy. 
Unfortunately, we do not believe this goal has been met.
    During his testimony on March 1, 2007, Richard Massey, who 
currently serves as Executive Vice President, Corporate Secretary and 
General Counsel of Alltel Wireless, testified about the successes that 
Alltel has had across rural America. In his pre-filed testimony Massey 
stated:

        ``For example, on the Pine Ridge Reservation in South Dakota, 
        the tribe estimated that less than 30 percent of the population 
        had telephone service prior to Alltel's entry into the market 
        as a wireless Universal Service provider. Today more than 80 
        percent of the population on the Pine Ridge Reservation has 
        access to wireless telephone service.''

    In addition, during his oral statement before the Committee, Massey 
stated:

        ``It's Pine Ridge Reservation, it's included in one of the 
        poorest counties in the United States. When we found this 
        market some years ago, it included an incumbent wireline 
        provider that receives Universal Service funds, and yet only 20 
        percent of the population on this reservation actually used 
        telephones. We received competitive ETC money and built the 
        wireless network there and today 80 percent of that population 
        are wireless consumers.''

    The statistics Mr. Massey uses in his statements are simply not 
correct. Attached is information from two government reports, Telephone 
Subscribership on American Indian Reservations and Off-Reservation 
Trust Lands released by the Federal Communications Commission in May 
2003 and the Telecommunications Challenges to Assessing and Improving 
Telecommunications for Native Americans on Tribal Lands released by the 
U.S. Government Accountability Office in January 2006. The reports, 
both based on the 2000 Census, provide the best neutral analysis of 
wireline penetration rates on American Indian Reservations and Off-
Reservation Trust Lands. As stated, wireline penetration rates on the 
Pine Ridge Reservation were greater than 75 percent for American Indian 
housing units by 2000. This level of penetration is remarkable when one 
takes into account that the two poorest counties in the United States 
are part of the Pine Ridge Reservation.
    Achieving this remarkable number was South Dakota-based Golden West 
Telecommunications, which serves over 48,000 customers in South Dakota 
(including three reservations) with telephone, cable, high-speed 
Internet and other advanced telecommunication services.
    With regard to Mr. Massey's prc-filed testimony and oral testimony, 
Western Wireless, now Alltel, did not deploy wireless service until 
November 2000 and did not receive eligible telecommunications carrier 
status until October 2001. Given this, it is evident that Mr. Massey's 
claim that telephone penetration rates on the Pine Ridge Reservation 
improved from less than 30 percent to more than 80 percent penetration 
is clearly inaccurate. It is not possible for them to claim any portion 
of success given the timing of their service provision and the FCC's 
and GAO's documentation of wireline penetration rates. Alltel has 
stated these inaccurate numbers in countless news articles and more 
than once in testimony before Congressional panels.
    I respectfully request that this letter along with its attachments 
be submitted to the Committee's hearing record for March 1, 2007 to 
ensure that inaccurate information does not continue to be presented 
regarding this matter. We recognize the need for accurate information 
to reflect the reality of rural telecommunications so that sound policy 
can secure the long-term success of the rural telecommunications 
industry and for the Universal Service Fund. Thank you for your time 
and consideration on this matter.
            Sincerely,
                                          George Strandell,
                                           General Manager and CEO,
                                        Golden West Telecommunications.

cc: Hon. Ted Stevens,
Ranking Member,
Senate Commerce, Science, and Transportation Committee,
Washington, DC.

Hon. John Thune,
Member,
Senate Commerce, Science, and Transportation Committee,
U.S. Senate
Washington, DC.
                              Attachments
   Telephone Subscribership on American Indian Reservations and Off/
       Reservation Trust Lands--(Data From 2000 Decennial Census)
          * * * * * * *

          [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
          
 GAO-06-189 Telecommunications: Challenges to Assessing and Improving 
        Telecommunications For Native Americans on Tribal Lands
          * * * * * * *

          [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
          
                                 ______
                                 
  Response to Written Questions Submitted by Hon. Daniel K. Inouye to 
                        Hon. Deborah Taylor Tate
    Question 1. In 1997, the FCC adopted the principle that its 
Universal Service policies should be ``competitively neutral.'' In 
explaining this principle, the FCC concluded that ``competitive 
neutrality means that Universal Service support mechanisms and rules 
neither unfairly advantage nor disadvantage one provider over another, 
and neither unfairly favor nor disfavor one technology over another.'' 
But it seems that people have different views as to how that principle 
should be applied, particularly when it comes to providing support for 
different kinds of communications platforms. As members of the Joint 
Board, do you believe that this remains a valuable principle, and how 
should it be applied to competition both among and between 
communications platforms?
    Answer. Competitive neutrality absolutely remains a valid and 
valuable principle. Indeed, I believe that our goal should be a 
sustainable Universal Service system that is, to the greatest extent 
possible, agnostic to the technology and platform supported. Our 
current rules, however, set support levels based on the costs incurred 
by incumbent local exchange carriers (LEC) while allowing all other 
competitive eligible telecommunications carriers (CETCs)--regardless of 
their costs--to receive an equal amount of support on a per line basis. 
While this means that all CETCs in an area receive an equal amount of 
support per line, only the incumbent LECs' support is actually cost 
based. Given the incredibly rapid growth of the CETC portion of the 
high-cost fund, it is incumbent upon the Joint Board and the Commission 
to consider whether these rules still make sense. Thus, the Joint Board 
is actively reviewing this ``equal support rule.'' See 47 C.F.R.  
54.307. One potential alternative to the equal support rule would be 
the use of ``reverse auctions'' to establish the number of competitors 
and the level of support in an area, given a specific set of service 
criteria. Reverse auctions present one way to identify the appropriate 
level of ETC support in a market-based and competitively neutral 
manner.

    Question 2. Section 254(c) of the Telecommunications Act of 1996 
defines Universal Service as ``an evolving level of telecommunications 
services'' and also sets forth criteria that the FCC considers when it 
decides which services qualify as ``supported services'' eligible for 
Universal Service support. At present, it is my understanding that the 
Universal Service Fund does not support broadband service. But then, 
the question always arises--should it? And if so, when? Do you think 
that Universal Service should evolve to support broadband services, and 
if so, what would trigger such a determination?
    Answer. It is important to note that, in many instances, the 
Universal Service Fund (USF) presently supports broadband services in 
an indirect manner. For example, carrier infrastructure investments 
funded through the USF frequently can be upgraded to provide broadband 
at considerably reduced levels of expense and effort. In rural areas, 
schools and libraries connected to the Internet under the E-Rate 
program often serve as ``anchor clients'' for advanced service 
providers that could not otherwise economically provide broadband 
service to a community.
    That being said, I believe that the USF should, and will, evolve to 
directly support broadband services. Section 254(c) of the Act requires 
the Joint Board to consider the evolving level of telecommunications 
services that should be supported, ``taking into account advances in 
telecommunications and information technologies and services.'' In 
considering the evolution of supported services, the Act requires that 
we consider ``the extent to which such telecommunications services--(A) 
are essential to education, public health, or public safety; (B) have, 
through the operation of market choices by customers, been subscribed 
to by a substantial majority of residential customers; (C) are being 
deployed in public telecommunications networks by telecommunications 
carriers; and (D) are consistent with the public interest, convenience, 
and necessity.'' 47 U.S.C.  254(c). I believe that broadband may now, 
or soon will, meet each of these standards.

    Question 2a. Given that the law defines Universal Service as an 
evolving level of ``telecommunications services'' and given that the 
FCC has classified cable modem and DSL services as ``information 
services,'' would the Congress need to change the statute to make 
broadband eligible for support?
    Answer. Section 254(b) of the Act establishes access to ``advanced 
telecommunications and information services'' as a fundamental 
principle of universal service. Section 254(c) of the Act requires the 
Commission to take into account ``advances in telecommunications and 
information technologies and services'' in defining the services that 
are supported by USF. The Commission may well, as a result, already 
have the authority it needs to support advanced services that are not 
classified as ``telecommunications services'' under the Act. Express 
clarification from Congress would, however, eliminate any doubt.

    Question 3. Currently the wireless eligible telecommunications 
carriers (ETCs) receive Universal Service support on a ``per customer'' 
basis based on the ``per line'' costs of the wireline carrier in the 
same geographic area. This is sometimes called the ``identical support 
rule'' and ensures that different communications platform providers 
receive the same amount of ``per line'' support. One criticism of the 
so-called ``identical support rule'' for Universal Service is that it 
results in overly generous support to wireless carriers because levels 
of support are not based on the per line cost of providing wireless 
services. As a result, I have two questions----
    First, do you believe that Universal Service should support both 
wireline and wireless services in rural America?
    Answer. The Commission's current rules broadly support voice grade 
access to the public-switched telephone network. Competitors, including 
both wireline and wireless carriers, bring a dazzling array of services 
to the rural areas of our country. Indeed, wireless services have added 
a new dimension to connectivity--mobility--that is very important to 
many consumers. Of course, as the steward of these consumer-derived 
funds, we must ensure that our policies are sustainable and will allow 
new generations of Americans to have access to the latest generation of 
services so that our country is able to compete in the increasingly 
global economy. The key is for consumers throughout the country have 
access to such services at just, reasonable and affordable rates.

    Question 3a. Second, would it be possible to construct a model for 
wireless carriers that would calculate support based on costs of 
wireless carriers, and what effect might that have on the size of the 
fund?
    Answer. It is my understanding from experts such as David 
Bodenhamer and Jim Stegeman, each of whom testified at the en banc, 
that it would be possible to develop a wireless cost model. Such a 
model could provide some temporary reduction in outlays from the fund. 
It is important to note, however, that the per line amount of support 
provided to wireless CETCs is only one factor contributing to the 
incredible rate of growth of the CETC portion of the high-cost fund. 
Indeed, the fact that we currently fund multiple networks in high-cost 
areas--areas that require high-cost support for even a single provider 
to serve--also is a major ingredient in the rapid growth of the high-
cost fund.

    Question 4. Commissioner Tate, it is my understanding that there 
are currently two matters for decision pending before the Joint Board. 
One, referred by the FCC in June 2004, examines what the rules should 
be governing the rural high-cost support mechanism. The other, referred 
by the FCC in November 2002, considers how high-cost, Universal Service 
support should be calculated in competitive service areas. Could you 
give the Committee a sense of when the Joint Board might make a 
recommendation to the Commission on these issues? What steps must be 
taken before any recommendation can be made?
    Answer. The Joint Board is poised to act in the next several weeks 
to make a short-term recommendation to stabilize the high-cost fund to 
the full Commission. The Joint Board's recommendation on longer range 
solutions likely will take several months longer. Joint Board 
recommendations are the product of an ongoing process of negotiation 
and dialogue--a process which currently is leading to significant 
forward progress.

    Question 4a. Am I correct that the FCC must act on any 
recommendation made by the Joint Board within 1 year?
    Answer. Yes. Section 254(a)(2) of the Act states, ``the Commission 
shall complete any proceeding to implement subsequent recommendations 
from any Joint Board on Universal Service within 1 year after receiving 
such recommendations.'' I hope we will be able to act more quickly.
                                 ______
                                 
    Response to Written Questions Submitted by Hon. Bill Nelson to 
                        Hon. Deborah Taylor Tate
    Question 1. There has been a lot of talk about reforming the USF 
contribution assessment system. Much of this discussion has focused on 
moving toward a ``numbers-based'' system that would assess a per-line 
fee on all working telephone lines. Do you believe that this could be 
implemented in a way that would not harm low-volume and low-income 
telecommunications consumers?
    Answer. Yes. Proponents of this change advocate that it will, among 
other things, stabilize revenues, improve consumer understanding of the 
fees, and help to optimize use of our limited numbering resources. 
Others have voiced concerns that moving toward a numbers-based 
contribution assessment may negatively impact some consumers, 
particularly low-volume and low-income consumers. While no proposal is 
directly before me at this time, I believe that when the Commission 
does consider reforming the USF contribution assessment system, we must 
carefully evaluate the impact of each proposal on consumers. I remain 
open to ideas that will improve our Universal Service contribution 
policies, but will insist that the solution we ultimately adopt be 
tailored to benefit, rather than burden, consumers.

    Question 2. The concept of reverse auctions has been widely 
discussed as one solution to the problem of unchecked High-Cost Fund 
growth. How fast do you believe a reverse auction program could be 
implemented? Why is it better than other approaches--such as study area 
caps or disaggregation? And, if implemented, what sort of savings do 
you think reverse auctions would provide?
    Answer. The amount of time it will take to implement a reverse 
auction program will depend on the nature of the proposal. One proposal 
already in the record suggests a phased in approach that could take 
several years. Other proposals likely could be implemented on a shorter 
timeline.
    Reverse auctions present one way to identify the appropriate level 
of ETC support in high-cost areas in a market-based and competitively 
neutral manner. This potentially is a technology neutral solution to 
one of the policy dilemmas we currently face with our ``equal support 
rule,'' a policy that sets support levels based on the costs incurred 
by incumbent local exchange carriers while allowing all other 
competitive eligible telecommunications carriers--regardless of their 
costs--to receive an equal amount of support on a per line basis. 
Reverse auction rules also could result in a reduction in the number of 
CETCs drawing high-cost support. The Joint Board also is considering 
other policy proposals, such as disaggregation. The Joint Board has not 
yet made a decision regarding which proposals it will recommend to the 
Commission.

    Question 3. Can reverse auctions be implemented in a manner that is 
truly competitively and technologically neutral? Wouldn't such a plan 
inevitably mandate technology-based ``winners'' and ``losers?''
    Answer. I believe it is possible to create a reverse auctions 
system that is competitively and technologically neutral. Many 
commenters believe that this is one of the significant benefits of 
utilizing reverse auctions. The Joint Board is cognizant of the 
difficult changes that technological convergence is causing in the 
application of our Universal Service policies and is working to make 
policy recommendations that recognize these marketplace changes in a 
manner that will promote access to advanced telecommunications and 
information services at just, reasonable and affordable rates 
throughout the Nation. Any recommendation made by the Joint Board will 
be made on the basis of input from industry, state regulators, 
consumers, and other stakeholders.

    Question 4. Do you believe that the FCC currently has all the 
authority it needs to implement a reverse auction process? What about 
authority to implement other reforms (such as study area caps or 
disaggregation)?
    Answer. Yes--the Commission's authority to implement Universal 
Service programs is broad. Any distribution mechanism would, however, 
necessarily have to adhere to the principles set forth in the Act. See 
47 U.S.C.  254(b). While this is one of the issues on which the Joint 
Board sought public comment last fall, I believe that the Commission 
does have the authority necessary to implement a reverse auctions 
process. The Commission previously has instituted rules permissively 
allowing disaggregation of support areas for certain purposes. See 47 
C.F.R.  54.315.
                                 ______
                                 
   Response to Written Questions Submitted by Hon. Maria Cantwell to 
                        Hon. Deborah Taylor Tate
    Question 1. Commissioner Tate, under the current rules in place for 
the Universal Service high-cost fund, can local exchange carriers 
obtain broadband equipment? If so, under what circumstances can they 
obtain broadband equipment? Is there any data regarding the extent to 
which local exchange carriers are obtaining broadband equipment with 
Universal Service high-cost support funds?
    Answer. Section 254(e) of the Act requires that, ``[a] carrier that 
receives [universal service] support shall use that support only for 
the provision, maintenance, and upgrading of facilities and services 
for which the support is intended.'' Under the high-cost fund, the 
Commission has permitted carriers to obtain support to be used to 
upgrade loop facilities in a manner that permits the carrier to offer 
broadband services in addition to voice service. See Federal-State 
Joint Board on Universal Service, CC Docket No. 96-45, Fourteenth 
Report and Order and Twenty-Second Order on Reconsideration, Multi-
Association Group (MAG) Plan for Regulation of Interstate Services of 
Non-Price Cap Incumbent Local Exchange Carriers and Interexchange 
Carriers, CC Docket No. 00-256, Report and Order, 16 FCC Rcd 11244, 
11320-23, paras. 194-201 (2001) (Rural Task Force Order). The high-cost 
fund does, therefore, indirectly support investment in broadband 
capable networks. Other than this high-cost loop support, I am not 
aware of other high-cost support mechanisms that directly support the 
acquisition of broadband equipment.

    Question 2. Commissioner Tate, do you believe that legislative 
changes to the Universal Service Fund program should be completed prior 
to, concurrent with, or subsequent to any Commission action on 
intercarrier compensation? Do you see Universal Service reform and 
intercarrier compensation reform as linked or as separate issues?
    Answer. While guidance from Congress is always welcome, especially 
as we work through the difficult legal and policy issues inherent to 
intercarrier compensation reform, I believe that the Commission can 
take action in this area under the current Act.
    Intercarrier compensation reform is linked to Universal Service in 
some ways. For example, the ``Missoula Plan'' would add significant 
payment obligations to the Universal Service Fund. Thus, while I 
believe that the two issues do not necessarily have to be addressed 
simultaneously, reform of both systems must be complementary.

    Question 3. Commissioner Tate, in some rural parts of Washington 
State, there are Wireless Internet Service Providers (WISP) that 
provide wireless phone service and Internet access over the same 
device. Under the current rules could WISP's be eligible to be an ETC 
as long as it provides wireless service?
    Answer. Section 214(e) requires common carriers seeking ETC status 
to be designated an ETC by a state commission or the Federal 
Communications Commission. See 47 U.S.C.  214(e). Wireline and 
wireless carriers designated as ETCs must offer the telecommunications 
services or functions that are designated for USF support by the 
Commission in Section 54.101 of its rules. See 47 U.S.C.  214(e)(1); 
47 U.S.C.  254(c); 47 C.F.R.  54.101. ETCs also must file 
certifications that all support received will be used only for the 
provision, maintenance, and upgrading of facilities and services for 
which the support is intended. See 47 U.S.C.  254(e); 47 C.F.R.  
54.7.
                                 ______
                                 
  Response to Written Questions Submitted by Hon. Daniel K. Inouye to 
                         Hon. Michael J. Copps
    Question 1. In 1997, the FCC adopted the principle that its 
Universal Service policies should be ``competitively neutral.'' In 
explaining this principle, the FCC concluded that ``competitive 
neutrality means that Universal Service support mechanisms and rules 
neither unfairly advantage nor disadvantage one provider over another, 
and neither unfairly favor nor disfavor one technology over another.'' 
But it seems that people have different views as to how that principle 
should be applied, particularly when it comes to providing support for 
different kinds of communications platforms. As members of the Joint 
Board, do you believe that this remains a valuable principle, and how 
should it be applied to competition both among and between 
communications platforms?
    Answer. I believe that competitive neutrality remains a valuable 
principle. Different types of technologies can benefit consumers and 
universal service. However, I believe we need to take a closer look at 
how the system works today. We should take into account the realities 
of the marketplace, the difficulties in achieving strict competitive 
neutrality, and the differences in technology, including their costs, 
to ensure that we don't unnecessarily favor one technology or company 
over another. If we do that, I believe that consumers can benefit from 
multiple technologies while the Universal Service system still supports 
them in a rational manner.

    Question 2. Section 254(c) of the Telecommunications Act of 1996 
defines Universal Service as ``an evolving level of telecommunications 
services'' and also sets forth criteria that the FCC considers when it 
decides which services qualify as ``supported services'' eligible for 
Universal Service support. At present, it is my understanding that the 
Universal Service Fund does not support broadband service. But then, 
the question always arises--should it? Do you think that Universal 
Service should evolve to support broadband services, and if so, what 
would trigger such a determination?
    Answer. I believe that the time has come to very explicitly include 
broadband as part of our Universal Service system. I believe a good 
case can be made that the Commission has statutory authority already to 
do this, but in light of FCC inaction over the years, further guidance 
from Congress appears needed.
    The Commission is charged with preserving and advancing universal 
service. That means ensuring everyone, from the inner city to the most 
rural reaches of the country, has access to the wonders of 
communications. The challenge we face in meeting this great objective 
is ensuring that our Universal Service mechanisms are sustainable. As 
more of our networks and communications migrate to broadband 
technology, I believe the key to sustainability lies in modernizing the 
Universal Service system. That means having broadband both contribute 
to and receive support from the Universal Service Fund.

    Question 2a. Given that the law defines Universal Service as an 
evolving level of ``telecommunications services'' and given that the 
FCC has classified cable modem and DSL services as ``information 
services,'' would the Congress need to change the statute to make 
broadband eligible for support?
    Answer. When the Commission started down the road of reclassifying 
telecommunications services I was concerned that the Commission did not 
take the time to think ahead to the possible intended and unintended 
consequences of our actions. One serious source of concern was the real 
possibility that we would create impediments to bringing broadband to 
all of America. Nevertheless, I believe that Congress provided the 
Commission with the statutory authority to make broadband eligible for 
support when it told the Commission to base its Universal Service 
policies on ``access to advanced telecommunications and information 
services.'' It may be the case, however, that all of my colleagues do 
not support such a view. For this reason, the Commission would benefit 
from additional Congressional guidance in this area.

    Question 3. Currently the wireless eligible telecommunications 
carriers (ETCs) receive Universal Service support on a ``per customer'' 
basis based on the ``per line'' costs of the wireline carrier in the 
same geographic area. This is sometimes called the ``identical support 
rule'' and ensures that different communications platform providers 
receive the same amount of ``per line'' support. One criticism of the 
so-called ``identical support rule'' for Universal Service is that it 
results in overly generous support to wireless carriers because levels 
of support are not based on the per line cost of providing wireless 
services. As a result, I have two questions----
    First, do you believe that Universal Service should support both 
wireline and wireless services in rural America?
    Answer. Yes. I believe that there is a place for wireless and 
wireline services in our Universal Service system and we should treat 
them fairly.

    Question 3a. Second, would it be possible to construct a model for 
wireless carriers that would calculate support based on costs of 
wireless carriers, and what effect might that have on the size of the 
fund?
    Answer. It is clear to me that the costs of investing and 
maintaining wireless and wireline infrastructure are inherently 
different. The Commission's current rules for determining wireless 
eligible telecommunications carriers' costs are both irrational and 
costly as they are based on the wireline incumbent carrier's costs. As 
I said at the hearing, I believe that one of the things we can do to 
stabilize the Universal Service Fund is eliminate the Commission's 
identical support rule. But to do so, we need to have an alternative 
mechanism for calculating support based on wireless carriers' costs. 
Calculating these costs based on a model is certainly possible and 
worth considering. At this time, it is difficult to know what the 
impact of a model approach will have on the size of the Fund because 
the size of these costs will be based on the model's mechanics.
                                 ______
                                 
    Response to Written Questions Submitted by Hon. Bill Nelson to 
                         Hon. Michael J. Copps
    Question 1. There has been a lot of talk about reforming the USF 
contribution assessment system. Much of this discussion has focused on 
moving toward a ``numbers-based'' system that would assess a per-line 
fee on all working telephone lines. Do you believe that this could be 
implemented in a way that would not harm low-volume and low-income 
telecommunications consumers?
    Answer. My preference has leaned toward a revenue-based system, 
because it makes intuitive sense that those who use the network more, 
pay more. But the current interstate revenue-based system may not be 
sustainable. The boundaries between local and long distance are 
eroding, while new Internet-based services are growing. So the 
Commission may have to consider other approaches like a numbers based 
approach to secure the future of universal service. But the way I see 
it, the devil is in the details. Before supporting any such plan, I 
would need to understand its impact on low-volume and low-income 
consumers. At the end of the day, whatever methodology we choose, I 
must be convinced that it benefits consumers.

    Question 2. The concept of reverse auctions has been widely 
discussed as one solution to the problem of unchecked High-Cost Fund 
growth. How fast do you believe a reverse auction program could be 
implemented? Why is it better than other approaches--such as study area 
caps or disaggregation? And, if implemented, what sort of savings do 
you think reverse auctions would provide?
    Answer. I am concerned about the impact of an auction-based 
Universal Service system on rural areas in this country. So are many 
commenters on record at the FCC. Congress charged the Commission with 
ensuring that consumers in all regions of the Nation have access to 
comparable services at comparable rates. It is not yet clear to me that 
an auction-based system would ensure adequate levels of support and 
meet this Congressional objective. In addition, it appears that it 
would take years before a reverse auction program could be implemented 
on a national basis though it would be shorter to implement a pilot 
program as some have suggested. There are many ideas other than reverse 
auctions that the Joint Board has before it, including study area caps 
and disaggregation that would likely take a shorter time to implement. 
Finally, without more detail on the types of reverse auctions to be 
implemented it is difficult to determine what, if any savings, will be 
accomplished.

    Question 3. Can reverse auctions be implemented in a manner that is 
truly competitively and technologically neutral? Wouldn't such a plan 
inevitably mandate technology-based ``winners'' and ``losers?''
    Answer. There are many different ways to implement a reverse 
auction. In fact, both wireless carriers and wireline carriers have 
submitted proposals on how a reverse auction would work. Whether a 
reverse auction actually met the Commission's policy of competitive 
neutrality would depend on the details of each proposal. However, it is 
not yet clear to me that an auction-based system that rewards the 
least-cost provider will guarantee comparable services at comparable 
rates, which is another core principle of universal service. When the 
Commission previously considered the use of auctions in 1997, it noted 
``it is unlikely that there will be competition in a significant number 
of rural, insular, or high-cost areas in the near future. Consequently, 
it is unlikely that competitive bidding mechanisms would be useful in 
many areas in the near future.'' Before moving ahead here, it is 
imperative that we understand what has changed since the Commission 
reached this conclusion. As part of this analysis, we must consider 
whether any such proposal would be competitively and technology 
neutral.

    Question 4. Do you believe that the FCC currently has all the 
authority it needs to implement a reverse auction process? What about 
authority to implement other reforms (such as study area caps or 
disaggregation)?
    Answer. The Commission is charged with the preservation and 
advancement of Universal Service based on the principles set forth in 
section 254(b), including ensuring that all Americans have quality 
services at reasonable rates, have access to advanced 
telecommunications and information services, and have access to 
comparable service at comparable rates. To the extent that Universal 
Service proposals concerning the distribution of funds, such as reverse 
auctions, study area caps and disaggregation, are designed to comport 
with these principles, I believe that the Commission has the authority 
to implement them. However, to the extent that Congress believes that a 
particular mechanism is inconsistent with these core principles, we 
would surely benefit from additional guidance.
                                 ______
                                 
   Response to Written Questions Submitted by Hon. Maria Cantwell to 
                         Hon. Michael J. Copps
    Question 1. Commissioner Copps, under the current rules in place 
for the Universal Service high-cost fund, can local exchange carriers 
obtain broadband equipment? If so, under what circumstances can they 
obtain broadband equipment? Is there any data regarding the extent to 
which local exchange carriers are obtaining broadband equipment with 
Universal Service high-cost support fund?
    Answer. The High Cost program is already indirectly subsidizing 
broadband. Investments in telephone networks subsidized by the program 
end up subsidizing broadband because most telephone equipment is 
capable of providing voice and data services. Also, the Department of 
Agriculture's Rural Utilities Service makes low-interest loans to 
companies that invest in telephone networks capable of providing 
broadband as well as voice telephone service. Many of those loans were 
made for equipment that subsequently formed part of the cost basis for 
USF support. I am not aware of data regarding how much high-cost 
support is used to support broadband.

    Question 2. Commissioner Copps, do you believe that legislative 
changes to the Universal Service Fund program should be completed prior 
to, concurrent with, or subsequent to any Commission action on 
intercarrier compensation? Do you see Universal Service reform and 
intercarrier compensation reform as linked or as separate issues?
    Answer. I believe that that one thing that could be done to 
stabilize the Fund is to adjust the contribution rules to ensure that 
it is funded by intrastate and interstate revenues. With the boundaries 
between local and long distance eroding, and the growth of any-distance 
calling plans, assessing only on interstate services is growing more 
difficult over time. However, such a change would require action by 
Congress. There does not appear to be a magic formula as to the timing 
of changes to Universal Service and intercarrier compensation. However, 
any changes we make to one program could require offsetting changes in 
the other. Thus any action must be done in a comprehensive way.

    Question 3. Commissioner Copps, in some rural parts of Washington 
State, there are Wireless Internet Service Providers (WISP) that 
provide wireless phone service and Internet access over the same 
device. Under the current rules could WISP's be eligible to be an ETC 
as long as it provides wireless service?
    Answer. The states have primary responsibility for designating 
telecommunications carriers as eligible telecommunications carriers 
(ETCs). It is my understanding that the FCC has not considered any 
carrier applications from Washington State for designation as an ETC. 
In the case of Washington State, the Utilities and Transportation 
Commission has the authority and has approved such applications. 
Therefore, whether a wireless Internet service provider is eligible for 
ETC status under Washington State's rules is a decision for the state 
commission to determine.
                                 ______
                                 
  Response to Written Questions Submitted by Hon. Daniel K. Inouye to 
                            Larry S. Landis
    Question 1. In 1997, the FCC adopted the principle that its 
Universal Service policies should be ``competitively neutral.'' In 
explaining this principle, the FCC concluded that ``competitive 
neutrality means that Universal Service support mechanisms and rules 
neither unfairly advantage nor disadvantage one provider over another, 
and neither unfairly favor nor disfavor one technology over another.'' 
But it seems that people have different views as to how that principle 
should be applied, particularly when it comes to providing support for 
different kinds of communications platforms. As members of the Joint 
Board, do you believe that this remains a valuable principle, and how 
should it be applied to competition both among and between 
communications platforms?
    Answer. I believe that ``competitive neutrality'' is a key concept, 
but so is seeing that Universal Service funds are appropriately 
deployed, that legitimate needs are met, and that accountability, 
efficiency, and performance are demanded. The focus should be on the 
service provided to consumers not necessarily the companies or 
technologies providing the service.
    Seeking to establish a ``competitively neutral'' regime is an 
important principle, but its application must be tempered by the 
specific legal requirements contained in 47 U.S.C.  254(b)(3) and 
(b)(5) respectively. When it emerged, competitive neutrality seemed 
like it should be a driving focus and the only logical choice for 
policymakers. Logically enough, the issue has become achieving a 
competitively neutral definition of ``competitive neutrality.'' Shifts 
in the market, including the pace of changes occurring in technology, 
corporate consolidation, and corporate realignment have been so great 
that this goal has become troublesome to operationalize with specific 
policy reforms.
    In designing a next-generation policy, we need to take some time 
not only to listen to the lawyers but also to the marketers, since the 
former are paid to be ``close'' to policymakers whereas marketers are 
paid to be ``close'' to the market.
    The wireless industry has spoken justifiably, aggressively and 
articulately about the achievements which have been made possible in an 
environment where there is a light regulatory touch. And they have also 
pointed to those customers who have ``cut the cord'' as evidence of 
wireless' success story.
    The reality however, is that the market still has significantly 
different expectations of the existing wireline and wireless 
technologies. The overwhelming majority of customers have and use both 
technologies, but use them differently. Moreover, customer expectations 
of wireless, while rising steadily, are still not ``competitively 
neutral'', if, for example, by competitive neutrality you mean ``number 
of dropped calls,'' or other measures of quality of service.
    A leading national wireless company has made ``fewest dropped 
calls'' the keystone of its marketing element, because that claim is 
meaningful to a large segment of the wireless market. No wireline 
company would make such a claim because such a claim would not be 
relevant to either the experience or the expectations of its customers. 
For equally obvious reasons, wireline companies choose not to compete 
in the ``mobile convenience'' segment of the market.
    Market-based issues aside, the requirements of reasonably 
comparable rates and services as well as the pursuit of affordable 
rates and services are among the primary foci and drivers of our 
policies. Many predict we are moving toward the day when there will be 
one converged, efficient network capable of provisioning multiple 
layers of applications and services. Many companies have moved their 
business models to this notion and means of operation, and to its 
companion marketing proposal . . . the ``triple'' or the ``quadruple 
play,'' with emphasis on expanding the share of total communications 
wallet and driving both consolidation and partnering.

    Question 2. Section 254(c) of the Telecommunications Act of 1996 
defines Universal Service as ``an evolving level of telecommunications 
services'' and also sets forth criteria that the FCC considers when it 
decides which services qualify as ``supported services'' eligible for 
Universal Service support. At present, it is my understanding that the 
Universal Service Fund does not support broadband service. But then, 
the question always arises--should it? And if so, when? Do you think 
that Universal Service should evolve to support broadband services, and 
if so, what would trigger such a determination?

    Question 2a. Given that the law defines Universal Service as an 
evolving level of ``telecommunications services'' and given that the 
FCC has classified cable modem and DSL services as ``information 
services,'' would the Congress need to change the statute to make 
broadband eligible for support?
    Answer. As indicated by my colleagues in the March 1 hearing, there 
are specific criteria set forth under 47 U.S.C.  254(c) which direct 
the Joint Board to recommend to the FCC, and for the FCC to establish, 
a definition of the telecommunications services which should be 
supported by Universal Service mechanisms.
    Section 254(c) states that when adopting this list of 
telecommunications services, the Joint Board and Commission ``shall 
consider'' whether the service is: (1) essential to education, public 
health, or public safety; (2) subscribed to by a substantial majority 
of residential consumers; (3) being deployed by telecommunications 
carriers in public telecommunications networks; and (4) consistent with 
the public interest, convenience and necessity.
    The Commission has concluded that each of these criteria must be 
considered, ``but each not necessarily met'', before a service may be 
included within the general definition of universal service, should it 
be in the public interest.
    In July of 2003, the FCC released its Definitions Order under CC 
Docket No. 96-45, upon which the Joint Board had made its 
recommendations. A part of that Order was the consideration of advanced 
or high-speed services. The Commission stated that it declined to 
expand the definition of supported services to include advanced or 
high-speed services at that time.
    Although the Commission agreed with certain of those who filed 
comments in that proceeding that broadband services were becoming 
increasingly important for consumers in all regions of the Nation, they 
also agreed with the Joint Board and the majority of commenters that 
high-speed and advanced services currently [i.e., as of 2003] did not 
meet the Act's criteria for inclusion on the list of supported 
services.
    Furthermore, the Commission went on to say that although 
telecommunications carriers increasingly were deploying infrastructure 
capable of providing advanced and high-speed services, the Commission 
agreed with the Joint Board and commenters that advanced services were 
not subscribed to by a substantial majority of residential consumers. 
In fact, the Commission's own data showed that as of December 31, 2002, 
there were approximately 17.4 million high-speed lines serving 
residential and small business subscribers, which represented just 16 
percent of all U.S. households.
    It is evident that broadband services are becoming increasingly 
pervasive and moving in the direction of the ``substantial majority'' 
test, and it is also evident that independent of the criteria set up in 
47 U.S.C.  254(c), there is strong anecdotal evidence to support the 
need for pervasive buildout.
    It would be prudent for the FCC to refer this matter to the Joint 
Board for further consideration, given that we may soon fulfill the 
``substantial majority'' criterion.
    The threshold legal question of whether or not advanced services, 
as they relate to cable modems, DSL and other similarly situated 
services, would have to be reclassified from information services to 
telecommunications services for purposes of USF support presents a 
potential legal quagmire for the FCC and the Joint Board. Such 
reclassification could potentially reopen the door to litigation over 
jurisdictional and related issues which had been largely resolved.
    It would seem to be less troublesome for Congress to pass a 
narrowly focused amendment to the Telecommunications Act of 1996 
allowing broadband services to be supported, thereby investing the 
policy decision with statutory authority.
    If a decision is made to move toward support of broadband services 
either through the FCC or through Congress, it also becomes important 
to consider whether broadband support should take the same general form 
as has High Cost support, or whether that support should concentrate 
primarily or exclusively on the cost of buildout. I believe the latter 
approach is preferable, and clearly more affordable.
    The first question is whether and to what extent High Cost support 
is currently advantaging the use of a second line for Internet access 
via dial-up, as opposed to a single-line solution which rolls up POTS 
(or its VoIP surrogate) together with high-speed access. An 
artificially depressed ``take rate'' created perversely through a 
legacy technology subsidy could significantly impact the business plans 
of those providers which are weighing broadband buildout and deciding 
where it is economical to implement it.
    For other areas, implementation of a second tier incentive in the 
form of specific tax breaks could prove sufficient to assure build out 
where the business model suggests that a positive return without 
incentives is unlikely or improbable.
    Finally, the Wyoming and Kentucky studies suggest there are remote 
areas (perhaps as few as 2-5 percent of total customers) where the cost 
of building out a single loop or equivalent may run as high as $10,000 
or more, depending on circumstances and the technology involved. In 
such instances, a straight subsidy of some sort is clearly required to 
produce the desired ubiquitous buildout.
    However, the Wyoming study has also shown that significant 
intermodal distinctions exist among technologies. In that case, any 
provider (regardless of technology) should be allowed to bid for the 
opportunity to build out to those ``highest cost'' customers, with the 
subsidy being awarded to the lowest bidder, but in no case should a 
subsidy greater than the cost of the lowest price technology be 
granted.
    Hypothetically, if the cost of buildout to a specific customer is 
projected at $2,500 for cable, $3,700 for wireless and $10,000 for a 
wireline provider, any provider should be able to bid to serve that 
customer . . . but in no case should the winning bidder receive more 
than the $2,500 representing the lowest cost provider.

    Question 3. Currently the wireless eligible telecommunications 
carriers (ETCs) receive Universal Service support on a ``per customer'' 
basis based on the ``per line'' costs of the wireline carrier in the 
same geographic area. This is sometimes called the ``identical support 
rule'' and ensures that different communications platform providers 
receive the same amount of ``per line'' support. One criticism of the 
so-called ``identical support rule'' for Universal Service is that it 
results in overly generous support to wireless carriers because levels 
of support are not based on the per line cost of providing wireless 
services. As a result, I have two questions----
    First, do you believe that Universal Service should support both 
wireline and wireless services in rural America?
    Second, would it be possible to construct a model for wireless 
carriers that would calculate support based on costs of wireless 
carriers, and what effect might that have on the size of the fund?
    Answer. Yes, I believe that in truly high-cost rural areas, there 
is room both in terms of public policy and funding to support both 
wireline and wireless services in rural America. However, I have great 
difficulty accepting the notion that it is necessary for multiple 
wireless companies to receive what amount to multiple government 
subsidies in the process of bringing both wireless and wireline 
services to ``truly rural'' areas.
    In many if not most cases, the cities, towns and villages where the 
wireline providers locate their central offices and wire centers, are 
contestable. It is not unusual in relatively small communities to find 
a wireline, wireless and cable provider competing for customers in 
those core areas.
    I believe that the current system of equal support, while well-
intentioned, does little to achieve competitive neutrality. The 
identical support rule demonstrates the unintended consequences which 
are produced when a strong desire to achieve competitive neutrality 
doesn't take into account differing cost structures.
    Many in the industry readily admit in moments of candor that the 
identical support rule has become, in many instances, a means to game 
the system. Given the current circumstances, State Commissions need to 
be more vigilant in their review and approval process for CETC 
applicants, e.g., undertaking the sort of assessment which the FCC 
contemplated in its 2005 ETC Order.\1\
---------------------------------------------------------------------------
    \1\ FCC Docket 96-45, 05-46 rel. March 17, 2005.
---------------------------------------------------------------------------
    Under the current structure, as CETCs, wireless carriers receive 
the same per-line support as their wireline counterparts while in most 
cases their cost structure is significantly less than that of the 
incumbent wireline carrier.
    Also, as noted in Q. 1, carriers operate under a separate set of 
both policy and service expectations. How can anyone realistically 
argue that wireline and wireless companies are being treated in a 
competitively neutral manner when many wireless companies and advocates 
admit privately that their costs are, in many cases, significantly 
lower that those of the ILECs?
    At the same time, RLEC recipients of High Cost Line Support 
continue to receive funding based on legacy investment and business 
decisions which may have been made decades ago. It is arguable that 
this produces business decisions which resemble those of the Big 3 auto 
makers, with their legacy cost structure and legacy investments.
    It is largely because of this identical support that we have seen 
first-hand the size of the Fund grow exponentially over the last 
several years.
    On an interim basis, as a preliminary threshold matter, I believe 
that CETCs should receive support based on their own costs, not those 
of the incumbent wireline carrier.
    I believe that a model could be constructed to capture a wireless 
carrier's costs as long as the relevant agency accounts for the type of 
territory that will be served--determining, e.g., is it rural or urban, 
what type of terrain is it encompassing, farm land or mountainous? 
These types of considerations can be built into a model in a much more 
efficient manner today than they were in previous iterations of the 
current high-cost model.
    As long as the companies seeking funding understand that they must 
justify that funding with a cost analysis or model, I believe there is 
a strong incentive--currently at $1 billion and doubling each year in 
recent years--to provide such cost justification.
                                 ______
                                 
    Response to Written Questions Submitted by Hon. Bill Nelson to 
                            Larry S. Landis
    Question 1. There has been a lot of talk about reforming the USF 
contribution assessment system. Much of this discussion has focused on 
moving toward a ``numbers-based'' system that would assess a per-line 
fee on all working telephone lines. Do you believe that this could be 
implemented in a way that would not harm low-volume and low-income 
telecommunications consumers?
    Answer. Yes. I believe using a numbers-based methodology could be 
useful and not harmful to low-volume or low-income consumers as long as 
the contributions base is expanded to include wireless carriers, VoIP 
providers, and voice-grade equivalents to capture special access and 
private lines, particularly for businesses.
    The key to avoiding an undue burden for any segment of the 
population is to spread the responsibility across all segments so that 
no one segment (i.e., low income users) is unduly burdened.
    Currently, everyone who is connected to the system is receiving 
full value from the system regardless of the price paid; if that were 
not the case, they would disconnect from the system. So we should not 
necessarily assume that just because someone does not make a high 
volume of calls, that person is being harmed by the price per call 
paid. That person may place a higher value on each call, or simply on 
the ability to access the network at will, than does the higher volume 
user.
    In the event Congress should determine that additional steps should 
be taken to avoid burdening low-income consumers, there are multiple 
options available, including increasing Lifeline support or indexing to 
income level, but such a move should be based on appropriate and 
totally objective 3rd party data to make certain the focus is squarely 
on the target population.

    Question 2. The concept of reverse auctions has been widely 
discussed as one solution to the problem of unchecked High-Cost Fund 
growth. How fast do you believe a reverse auction program could be 
implemented? Why is it better than other approaches--such as study area 
caps or disaggregation? And, if implemented, what sort of savings do 
you think reverse auctions would provide?
    Answer. I believe that if implemented nationwide, a reverse auction 
system could be functional within two to 3 years. I would personally 
prefer an approach in which reverse auctions were first tested, perhaps 
as a means of identifying providers in unserved areas or of selecting a 
``winner'' or ``winners'' (depending on the model adopted) in a 
representative group of states, before being implemented nationally. 
Many key questions must be addressed, as I'm sure the members of the 
Committee are well aware.
    Every aspect of the design of a reverse auction needs to be 
carefully considered, especially including who ``wins,'' which is 
directly related to the question of whether the design is to be 
``winner'' takes all, ``winner'' takes more [as proposed in at least 
one wireless CETC auction model in response to the Request for 
Comment], or whether there is one ``winner'' for each sector--i.e., 
wireline and wireless.
    If the design which is ultimately selected were to be ``one winner 
takes all,'' there are numerous issues to be resolved in the event the 
incumbent local exchange (wireline) carrier is not successful in the 
auction process, including what happens to that incumbent's network and 
overall presence in the market if the wireline incumbent is 
unsuccessful and does not ``win'' the auction.
    Since most wireless providers are still dependent on wireline 
incumbents' networks for transport, the question of what constitutes 
fair compensation for continued use of portions of the network of a 
``losing'' incumbent by a ``winning'' CETC is a critical issue.
    Further, we also need to be prepared to offer a transition 
mechanism for incumbents that might ``lose'' in an auction setting, 
since their business plans are premised on the current USF disbursement 
system rather than on a significantly different mechanism.
    In our current proceeding we are examining how, on a broad basis, 
we deal with the possibility of partial or full re-monopolization of 
the marketplace in certain regions. This threshold policy question is 
important because some rural and insular areas of the United States may 
not be able to support more than one carrier, yet under the current USF 
structure, multiple carriers are funded. This is a political and 
economic reality, yet we are very mindful that this system cannot be 
unwound overnight, assuming a consensus emerges that implementation of 
a reverse auction approach is a worthy goal.
    That is why the answers are dependent upon the implementation 
rules--i.e., the design and structure of the auction[s] if such an 
approach were to be adopted--and without such details being addressed, 
it is almost impossible to quantify and assess what possible savings or 
costs would be produced.
    Interim measures, including a cap on funding, are essential in 
order to stem the accelerating growth spiral of the Fund in the short 
term. As my colleague Billy Jack Gregg said in response to a question 
at the March 1 hearing, that interim cap must be applied where the 
problem exists . . . where the growth is occurring. Like Willie Sutton 
in Director Gregg's response, we need to go ``where the money is,'' and 
apply the temporary cap there.
    Put another way, an EMT responding to a serious accident does not 
apply a tourniquet to a victim's leg if that accident victim is 
hemorrhaging from the arm. And this analogy is appropriate in more ways 
than one, because a proposed interim cap, like a tourniquet, is only 
intended to be a temporary measure to address an acute need until the 
patient can be fully triaged and comprehensively treated.
    This step would allow the Joint Board sufficient time to address 
longer-term issues without leaving the Fund in jeopardy of implosion 
because it cannot sustain itself. It also has the advantage of being an 
admittedly imperfect remedy, dramatically increasing the likelihood 
that neither the Joint Board nor the FCC will find it a necessary and 
sufficient solution and thereby make it possible to ``declare 
victory''.
    Disaggregation is not a new concept for the FCC's consideration. In 
the Rural Task Force Order of 2001, the FCC recommended disaggregation 
for rural carriers; however, only a small minority of all rural 
carriers took advantage of this opportunity. I believe that 
disaggregation is essential and not incompatible with a properly-
designed reverse auction solution or other alternative for USF reform, 
including a models-based solution, provided anti-``gaming'' protections 
are built in.

    Question 3. Can reverse auctions be implemented in a manner that is 
truly competitively and technologically neutral? Wouldn't such a plan 
inevitably mandate technology-based ``winners'' and ``losers?''
    Answer. Yes, a reverse auction approach can be adopted which is 
both competitively and technologically neutral. As I have advocated 
previously, a reverse auction may well need to be linked to other 
reforms such as disaggregation to assure both neutrality and compliance 
with legislative intent.
    Taken as a whole, the current framework, well-intentioned as it 
was, is all about choosing winners and losers. In too many cases, 
providers are not being held to account or expected to appropriately 
steward the funds which they receive. A relative handful of states are 
according a virtual free pass to USF funding through their failure to 
implement the voluntary guidelines for screening CETC applicants 
promulgated by the FCC in its March 17, 2005 ETC Order.\1\
---------------------------------------------------------------------------
    \1\ FCC Docket 96-45, 05-46 rel. March 17, 2005.
---------------------------------------------------------------------------
    As long as these circumstances exist, those of us who shape public 
policy--whether serving in Congress, on the FCC, or as a member of a 
State Commission--are choosing winners, even if that is usually as an 
act of omission rather than of commission. When we do so, we are also 
choosing losers: the American people, in the form of higher-than-
necessary USF levies placed upon ratepayers.
    Virtually any form of reverse auction which has been discussed in 
conjunction with the Joint Board's current proceeding will produce 
``losers,'' by design. The whole purpose of a reverse auction model is 
to derive the greatest value for the least possible investment of 
``high-cost dollars'' for the customer. In some circumstances one 
technology may advantage its user over the differing technologies of 
other providers competing to serve in the same geographic area. But in 
a reverse auction, each provider is free to determine how little s/he 
is willing to accept in return for the ``franchise'' to serve an area. 
If s/he is willing to pay more dearly by accepting a lower level of 
compensation than the competition--regardless of cost differentials 
which may exist intermodally--then s/he will be the ``winner.'' Thus 
the ``winner'' is the bidder who brings the greatest value for the 
least cost to the customer. The question is whether it would be deemed 
politically acceptable.
    The winners/losers issue depends on vendors' definitions of the 
value of subsidy. A higher cost vendor may elect to receive a lower 
margin than his/her competitors, in order to retain or gain the 
incremental revenue produced through high-cost support. So the vendors 
themselves determine what is ``fair,'' by the full value they place on 
``winning.''
    When you let the bidders determine the value of the subsidy they 
are eligible to receive as the successful bidder or bidders, then by 
definition the winner receives full value, and all ``losers'' are 
losers because they set a higher value than the market (through the 
reverse auction mechanism) was willing to attach to provision of 
service.
                                 ______
                                 
  Response to Written Questions Submitted by Hon. Daniel K. Inouye to 
                         Hon. John Downes Burke
    Question 1. In 1997, the FCC adopted the principle that its 
Universal Service policies should be ``competitively neutral.'' In 
explaining this principle, the FCC concluded that ``competitive 
neutrality means that Universal Service support mechanisms and rules 
neither unfairly advantage nor disadvantage one provider over another, 
and neither unfairly favor nor disfavor one technology over another.'' 
But it seems that people have different views as to how that principle 
should be applied, particularly when it comes to providing support for 
different kinds of communications platforms. As members of the Joint 
Board, do you believe that this remains a valuable principle, and how 
should it be applied to competition both among and between 
communications platforms?
    Answer. Competitive neutrality seemed an appropriate and important 
principle when the FCC and the Joint Board were first trying to 
implement the 1996 Act. At that time the overwhelming objective of 
Federal policy was to open the local exchange network to competition, 
and many new policies were aimed at giving a boost to the infant CLEC 
industry. But Universal Service was also an important goal under the 
Act. Competitive neutrality should not be an obstacle to the primary 
goal of preserving and advancing universal service. Neutrality does not 
provide a sufficient basis for a subsidy that does not demonstrably 
advance Universal Service goals, particularly when it inflates the 
contributions required from telephone subscribers.
The Identical Support
    Competitive neutrality is often today considered synonymous with 
the ``Identical Support Rule'' (``ISR''). Under ISR, a Competitive 
Eligible Telecommunications Carrier (``CETC'') receives per-line 
support equal to that given to the Incumbent Local Exchange Carriers 
(``ILEC'') serving a customer. If ILEC ``A'' and an CETC ``B'' have 
customers with billing addresses in the same ILEC wire center, they 
receive equal per-line support.
    The ISR, although motivated by competitive neutrality, is not 
neutral. The ISR allows that carriers A and B both get support based on 
carrier A's costs. A competitively neutral rule would, for example, 
award support to each based on its own cost; or it might award support 
to both based upon some third factor not dependent upon either's 
network.
    Nor does the ISR produce competitively neutral results. While the 
support amounts are the same for A and B, they may have vastly 
different cost structures. Most CETCs are wireless carriers. Wireless 
technology finds classical wire center boundaries largely irrelevant. 
Wireless carrier costs and deployment are significantly affected by 
factors, such as topography, that are less important for wireline 
carriers. Moreover, for many rural customers, their address is largely 
irrelevant because they cannot receive wireless service at home, but 
subscribe because they travel. There is no reason to believe that a 
support dollar given to a CETC under the ISR will produce results 
anything like the results of giving that dollar to an ILEC.
    A second major problem with the ISR is that it, when combined with 
the legacy procedures for calculating ILEC support, has generated 
enormous Fund growth. CETCs support has been growing at an annual rate 
of 101 percent since 2002. CETCs received almost $1 billion in 2006. 
Because wireless carriers are now applying for CETC status in droves, 
CETCs are on track to receive over $1.5 billion in 2007.\1\
---------------------------------------------------------------------------
    \1\ AT&T ex parte filing in Docket No. 96-45 on March 22, 2007.
---------------------------------------------------------------------------
    The ISR did not contemplate that a household would retain its 
landline and add three or four supported wireless phones as well. Under 
the ISR, all of these phones can receive an equal subsidy.
    There is another and more complex reason for the increase. ISR 
works in tandem with legacy support mechanism of ILECs.\2\ The 
following table illustrates how competition could increase total 
support in a high-cost area more than tenfold, even without the total 
number of lines increasing.\3\
---------------------------------------------------------------------------
    \2\ Legacy support mechanisms for ILECs are intended to provide 
sufficient support for the ILECs to operate a wireline network. When an 
ILEC has fewer lines supporting its network that generally increases 
per-line cost, and that increases per-line support for the ILEC's 
remaining customers. The EPR then equally increases per-line support to 
CETCs. Total support thereby increases rapidly as more customers are 
served by CETCs.
    \3\ The support mechanism illustrated here is to provide support 
equal to 76 percent of the difference between per-line cost per month 
and $30 per month. This is most similar to the support mechanism 
current used for nonrural carriers. The ``intense competition'' example 
here assumes that the ILEC loses 90 percent of its original lines. This 
is an extreme case chosen to illustrate the point, but it is not 
totally implausible given the inroads now being made by wireless and 
VoIP, and the impending widespread availability of VoIP over cable 
systems.

----------------------------------------------------------------------------------------------------------------
                                  Network
                                 Operation    ILEC      ILEC      ILEC      ILEC      CETC      CETC      Total
                                   Cost       lines   per-line   Support   Support    Lines    Support   Support
                                  (000s)                 cost   per line   (000s)              (000s)    (000s)
----------------------------------------------------------------------------------------------------------------
No competition                     $1,000    10,000      $100       $53      $532         -         -      $532
Slight                                900     8,000       113        63       502     2,000      $125       627
competition
Intense                               800     1,000       800       585       585     9,000     5,267     5,852
competition
----------------------------------------------------------------------------------------------------------------

    Commonly, CETC access lines increase faster than ILEC lines 
decrease. Modifying the preceding analysis to reflect that fact would 
only increase CETC support more rapidly.
    The combined effect of these ISR and legacy ILEC mechanisms has 
been to subsidize the construction of second, third and fourth networks 
in high-cost areas where it was historically difficult to finance 
construction of the original network. This might be a good result in 
the narrow case of a wireless network extending service to a previously 
unserved rural area, but is not a sound general policy. There is no 
indication that the USF was designed, even in part, to subsidize robust 
competition in hard-to-serve areas.
    A third major problem with the ISR is that it generally provides 
too much or too little support to CETCs. Even if one assumes that there 
is sufficient support for ILECs,\4\ the ISR generally will produce 
more-than-sufficient or less-than-sufficient support for CETCs.
---------------------------------------------------------------------------
    \4\ The Tenth Circuit Court of Appeals found in 2005 that the FCC 
had not demonstrably provided sufficient support to customers of so-
called ``nonrural'' carriers. Qwest v. FCC, 398 F.3d 1222 (10th Cir. 
2005).
---------------------------------------------------------------------------
    As the table above shows, support to CETCs can easily be more than 
sufficient. In a market with intense competition, a CETC with a high 
market share can receive many times the per-line support ($585) that 
the incumbent received before competitors arrived ($53). This is 
particularly incongruous if the CETC has superior technology that 
provides telecommunications services more efficiently than the legacy 
technology.
    Support to CETCs can also be less than sufficient to support a 
network capable of serving all customers in the service area. Two 
wireless CETCs might share a market, for example, and might have 
similar facilities and receive equal per-line support payments. Yet if 
one CETC has an 50 percent market share and the second CETC has a 1 
percent market share, the first will receive 50 times as much support 
as the second. This is no recipe for maintaining continued service by 
the second CETC. On the contrary, this is a potentially unstable 
condition in which Federal support might be used by larger carriers to 
drive out smaller competitors.
    A fourth major problem with the ISR is that it awards support 
without any clear objective or meaningful performance expectation. The 
great majority of CETC money actually goes to wireless carriers, but 
this has little demonstrable relation to Universal Service goals.
    Wireless carriers generally offer nationwide rates. Therefore, 
although support to a wireless carrier may promote greater service 
availability, it does not have an effect on whether a customer living 
in a high-cost area receives wireless service at affordable and 
comparable rates.
    Much of the money transferred to CETCs under the ISR is based on 
the ``IAS'' and ``ICLS'' programs. This funding for ILECs was 
historically derived from specific access rate reduction decisions by 
the FCC. The connection to CETCs is tenuous. In other words, CETCs 
today are receiving millions of dollars in support because the local 
ILEC once had high interstate access rates. For the ILECs, this money 
may once have had a connection to Universal Service objectives. Porting 
it over to CETCs does not significantly advance any Universal Service 
objectives.
Alternatives
    The arrival of real competition in high-cost rural areas forces us 
to face several unpleasant alternatives. If we keep the ISR, the Fund 
will continue to grow exponentially, and we will pay more to CETCs than 
they need to provide service.
    On the other hand, abandoning the ISR will require us to grapple 
with some difficult problems. The most immediate would be to determine 
how many networks merit support in a given area, and how they should be 
selected. This could conceivably be done by auctions, but auctions have 
myriad administrative difficulties, and it is not clear these can all 
be solved.
    Second, we would need to decide whether the inherent differences 
among networks should affect support. Different networks have different 
cost structures and present different subsidy considerations. Wireless 
uses different types of facilities with different kinds of propagation 
characteristics, and this certainly leads to a cost structure that is 
much different than ILECs. Moreover, wireless carriers often build 
facilities to serve customers who have billing addresses tens or 
hundreds of miles away. Wireless carriers also have different kinds of 
revenues and costs from intercarrier transactions. All of this could be 
relevant to a support mechanism for wireless carriers.
    Another possibility is to cap the total support offered in a study 
area or state. This has significant risks also. Capped support may not 
be sufficient for ILECs to keep their retail rates affordable and 
reasonably comparable. With a cap, there is a risk that all networks 
would fail or, more likely, constrain service to the lowest cost areas. 
Failure of the ILEC would be particularly problematic where a CETC 
depends (as do most wireless carriers) on the ILEC for network 
transport functions.
    Finally, one could adopt separate wireline and wireless Universal 
Service systems. Such a system would be able to acknowledge the 
differences between the technologies, derive an appropriate business 
model for each that leads to a support amount, and thereby provide 
sufficient support to meet the statutory objectives in Section 254.
Conclusion
    My primary conclusion is that the principle of competitive 
neutrality should be made secondary to other, more important, 
principles, such as:

   Universal Service support payments should produce a 
        demonstrable benefit to consumers, either in the form of 
        reduced rates or increased availability.

   Funding should be sufficient to ensure that customers 
        everywhere have access to at least one telecommunications 
        service that provides acceptable service at comparable rates. 
        That should include broadband service, at a specific date in 
        the future.

   Public funds should not be provided automatically to every 
        network that is constructed with private capital. Subsidies 
        should go to only a limited number of networks in high-cost 
        areas. For discussion purposes, I would suggest that funding be 
        available in any area to only one wireline and one wireless 
        network. This is not intended to limit in any way the uses of 
        private capital or to limit competition among privately 
        financed networks.

   Universal Service policy can legitimately differentiate 
        among competing telecommunications technologies. Funding should 
        impose an obligation to meet minimum standards, even if this 
        would effectively disqualify a particular technology.

   Universal Service support should be based upon the 
        reasonable financial needs of the supported carrier. This 
        requires consideration of revenues available from all sources, 
        including intercarrier revenues and all subscriber revenues 
        from regulated and nonregulated activities.

    My second conclusion is that the ISR should be abandoned. No 
carrier should receive support based upon another carrier's costs and 
revenues. Support to wireless carriers could conceivably be based upon 
a wireless cost model, but these carriers may also need to submit 
actual cost information and actual facility location information as a 
prerequisite to support.

    Question 2. Section 254(c) of the Telecommunications Act of 1996 
defines Universal Service as ``an evolving level of telecommunications 
services'' and also sets forth criteria that the FCC considers when it 
decides which services qualify as ``supported services'' eligible for 
Universal Service support. At present, it is my understanding that the 
Universal Service Fund does not support broadband service. But then, 
the question always arises--should it? And if so, when? Do you think 
that Universal Service should evolve to support broadband services, and 
if so, what would trigger such a determination? Given that the law 
defines Universal Service as an evolving level of ``telecommunications 
services'' and given that the FCC has classified cable modem and DSL 
services as ``information services,'' would the Congress need to change 
the statute to make broadband eligible for support?
    Answer. Yes, Universal Service should evolve to support broadband 
services. That decision should be made now, and reasonable target dates 
should be set for compliance. For example, it might be reasonable to 
set a target that 95 percent of the American public would have access 
to a broadband service by 2010. In this context ``access'' would mean 
that a person could purchase broadband at his or her residence or place 
of business from one or more sources at a rate that is reasonably 
comparable to urban rates. Broadband should be defined in a way that 
encourages maturation of the network, but that does not disqualify 
services that are now widely subscribed to.
    Congress should amend section 254 of the Act. Regardless of whether 
it explicitly defines broadband as an ``eligible service,'' it should 
amend subsections 254(c) and 254(e).
Subsection 254(c)
    Subsection 254(c) envisions a binary decision on telecommunications 
services; services are either included or not included. If broadband 
were defined as an ``eligible service,'' then three consequences 
follow: (1) broadband would become part of the minimum standard for 
eligibility as an Eligible Telecommunications Carrier (``ETC''); (2) 
broadband costs may be considered when calculating support; and (3) 
ETCs may spend Universal Service support to maintain broadband 
facilities. In other words, the current statute requires that each 
particular service be both mandatory and permitted, or neither.
    Some existing ETCs do not offer broadband to all their customers. 
Therefore if broadband is added to the list under section 254(c), some 
existing ETCs might be disqualified unless they could offer broadband 
to all their customers. In my opinion, such mass disqualification would 
be undesirable, but it is not clear how to avoid this result if 
broadband is added to the list of supported services. This tension 
between mandatory and permissive services makes it difficult for the 
FCC to add services to the list. Although the express intent of section 
254 was for Universal Service standards to evolve over time, the 
structure of section 254(c) makes such evolution a very high stakes 
process with possibly punitive results.
    I do not want to imply that the statute has been an absolute 
barrier to progress. Universal service payments have actually supported 
the development of broadband networks in some areas. Notably, the 
``High Cost Loop'' (``HCL'') program, the FCC's largest single high-
cost program,\5\ supports the ``loop cost'' of hundreds of smaller so-
called ``rural'' carriers. HCL support is calculated based on the 
carrier's investment level in its ``loop'' facilities, the wires and 
distributed platforms that are outside central offices. Many rural 
carriers have built broadband networks capable of providing DSL 
services, and some have even built fiber networks capable of delivering 
video. In most cases these investments have generated HCL support.
---------------------------------------------------------------------------
    \5\ The HCL program's annualized cost is $1.4 billion.
---------------------------------------------------------------------------
    Not only does the HCL program support broadband buildout, it seems 
to have developed a preference for broadband. The HCL program is 
capped. Many rural carriers increased their per-line investment, and 
the differential effect has been to draw support away from carriers 
that merely provide voice service, while adding support to carriers 
that have broadband-capable and even video-capable networks.
    Thus, although broadband has not yet become a supported service, 
one major FCC program is currently providing de facto support for 
broadband. This result was explained through the Joint Board's policy 
of avoiding ``barriers'' to broadband.\6\ While this was a creative way 
to advance broadband deployment, it has been controversial, and it has 
not been applied to all carriers equally. In most states, nearly all of 
the customers of ``rural'' carriers have access to advanced broadband 
networks; but it is also common to learn that their rural neighbors who 
happen to be served by larger carriers cannot get DSL.
---------------------------------------------------------------------------
    \6\ This policy was suggested in 2000 by the ``Rural Task Force,'' 
which said that there should be ``no barriers to advanced services.'' 
See Federal-State Joint Board on Universal Service, CC Docket No. 96-
45, Rural Task Force Recommendation To The Federal-State Joint Board On 
Universal Service, released Sept. 29, 2000, at 22 (policy should 
incorporate the following principles: a. Universal Service funding 
should support plant that can, either as built or with the addition of 
plant elements, when available, provide access to advanced services. 
State commissions could facilitate this infrastructure evolution and 
may make an exception for carriers with functional but non-complying 
facilities. b. Telecommunications carriers should be encouraged by 
regulatory measures to remove infrastructure barriers relating to 
access to advanced services. c. The Federal Universal Service support 
fund should be sized so that it presents no barriers to investment in 
plant needed to provide access to advanced services. Specifically, to 
remain ``sufficient'' under the 1996 Act, the Fund should be sized so 
that investment in rural infrastructure will be permitted to grow.)
---------------------------------------------------------------------------
    Congress should consider amending section 254 in a way that 
authorizes support for broadband, but that does not unintentionally 
disqualify existing ETCs. The chosen path should provide support in 
rural areas without regard to the size of the carrier that happens to 
serve the area. One step in the right direction would be to amend 
section 254(c) to allow some services to be supportable without also 
being mandatory.
Subsection 254(e)
    Congress might also clarify the statutory injunction in section 
254(e). This statute limits the uses of support ``only for the 
provision, maintenance, and upgrading of facilities and services for 
which the support is intended.'' Several ambiguities arise under this 
language. Incumbent LECs sometimes argue that this language requires no 
more than that they continue to provide minimally adequate service over 
their existing facilities. Since all Federal high-cost support becomes 
revenue to these carriers, and since they provide the minimally 
acceptable level of service, this standard in some cases does not have 
much effect on either services or rates.
    Under FCC guidance, ETCs must today make annual reports to the 
FCC.\7\ Those reports must include a report on progress under the 
carrier's ``five-year service quality improvement plan.'' \8\ However, 
nothing in the current rules requires network improvement plans to 
include broadband by any date-certain. The reports must also include 
``the number of requests for service from potential customers . . . 
that were unfulfilled during the past year'' and how the carrier 
``attempted to provide service to those potential customers.'' \9\
---------------------------------------------------------------------------
    \7\ See 47 C.F.R.  54.209.
    \8\ See 47 C.F.R.  54.209(a)(1).
    \9\ See 47 C.F.R.  54.209(a)(3).
---------------------------------------------------------------------------
    More rigorous approaches are possible. For example, Verizon-
Vermont's ``Model-based'' high-cost support increased significantly in 
2000. That increase has been distributed as explicit credits on monthly 
customer bills.\10\
---------------------------------------------------------------------------
    \10\ The current credit for residential customers is $1.41. Higher 
credits are given to business customers, because they have larger 
bills.
---------------------------------------------------------------------------
    If Congress wishes to achieve more significant or more demonstrable 
results from Universal Service support, it might clarify subsection 
254(e). One option would be to mandate that all high-cost funds appear 
as explicit credits on customer bills.\11\ Alternatively, if Congress 
wishes to allow carriers to continue treating Universal Service support 
as carrier revenue, it might directly mandate that carriers adopt 
service quality improvement plans and further mandate that those plans 
call for broadband by a specific date.
---------------------------------------------------------------------------
    \11\ Carriers are currently explicitly permitted to show Universal 
Service contributions as explicit charges, and all or nearly all do so.
---------------------------------------------------------------------------
Information Services
    As the last part of the question suggests, recent FCC decisions 
narrowing the definition of ``telecommunications services'' may have 
created a barrier to providing Universal Service support to broadband.
    Some broadband services still are telecommunications services,\12\ 
but the FCC has declared a wide range of retail broadband services to 
be ``information services,'' including cable modem service \13\ and 
``facilities-based wireline broadband Internet access service'' 
(DSL).\14\ Moreover, the FCC has repeatedly stated that when a service 
is an ``information service'' it cannot also be a ``telecommunications 
service.''
---------------------------------------------------------------------------
    \12\ For example, special access circuits are broadband services, 
but they do not necessarily connect to the Internet.
    \13\ Inquiry Concerning High-Speed Access to the Internet Over 
Cable and Other Facilities, Internet Over Cable Declaratory Ruling, 
Appropriate Regulatory Treatment for Broadband Access to the Internet 
Over Cable Facilities, GN Docket No. 00-185 & CS Docket No. 02-52, 
Declaratory Ruling and Notice of Proposed Rulemaking, 17 FCC Rcd 4798 
(2002) (Cable Modem Declaratory Ruling and NPRM); aff'd National Cable 
& Telecommunications Ass'n v. Brand X Internet Services, 125 S. Ct. 
2688 (2005).
    \14\ Appropriate Framework For Broadband Access To The Internet 
Over Wireline Facilities, CC Docket No. 02-33, Report and Order and 
Notice of Proposed Rulemaking, released Sept. 23, 2005, 20 FCC Rcd. 
14,853.
---------------------------------------------------------------------------
    Various provisions of 47 U.S.C.  254 suggest that Federal support 
may be provided only to support ``telecommunications services.'' For 
example, subsection (c)(1) says that ``[u]niversal service is an 
evolving level of telecommunications services.'' A more specific 
passage in that same paragraph states:

        The Joint Board in recommending, and the Commission in 
        establishing, the definition of the services that are supported 
        by Federal Universal Service support mechanisms shall consider 
        the extent to which such telecommunications services. . . .\15\
---------------------------------------------------------------------------
    \15\ See 47 U.S.C.  254(c).

    This implies that only telecommunications services may be included 
in the definition of ``services that are supported by Federal Universal 
Service support mechanisms.'' The argument is only strengthened by 
subdivision (c)(3) which allows the schools and libraries and 
healthcare programs to support ``additional services'' not on the 
official list.
    On the contrary, it is also clear that section 254 establishes an 
overall goal of promoting access to advanced services. This is evident 
in subdivision (b)(2) which sets the goal of providing ``Access to 
advanced telecommunications and information services in all regions of 
the Nation.'' However, such a general goal may not be sufficient to 
override specific contrary terms in the operational parts of section 
254.
    On balance, I believe that under the existing statute there are 
serious questions about:

        1. whether Federal funds may be used to support services that 
        are not on the list of supported services under section 
        254(c)(1); and

        2. whether an information service can be a supported service.

    I recommend that Congress clarify subsection 254(c) on these 
points.

    Question 3. Currently the wireless eligible telecommunications 
carriers (ETCs) receive Universal Service support on a ``per customer'' 
basis based on the ``per line'' costs of the wireline carrier in the 
same geographic area. This is sometimes called the ``identical support 
rule'' and ensures that different communications platform providers 
receive the same amount of ``per line'' support. One criticism of the 
so-called ``identical support rule'' for Universal Service is that it 
results in overly generous support to wireless carriers because levels 
of support are not based on the per line cost of providing wireless 
services. As a result, I have two questions----

   First, do you believe that Universal Service should support 
        both wireline and wireless services in rural America?

   Second, would it be possible to construct a model for 
        wireless carriers that would calculate support based on costs 
        of wireless carriers, and what effect might that have on the 
        size of the fund?
    Answer.
Wireline and Wireless
    Yes, I do believe that Universal Service should support both 
wireline and wireless services in rural America. However, as I 
explained above in some detail I have serious reservations about the 
Identical Support Rule.
    We should seriously consider supporting wireless under a separate 
program. This would allow the separate programs to be designed more 
sensibly. They could reflect differences in signal propagation 
characteristics, differences in the extent of existing deployment, 
different deployment and service goals, and possibly by different 
expectations about how funds will be used and accounted for.
    I would encourage the Congress to authorize matching grants as a 
way to increase deployment of both wireless and wireline broadband 
technologies. While these technologies can create significant revenue 
streams once facilities have been built, the initial construction costs 
are daunting, particularly in areas of low density and in areas where 
rugged terrain limits the propagation of wireless signals.
    In my state, we face very real limits in current broadband 
deployment; but we are working hard to improve the situation. I don't 
think Vermont is unique in this regard. States can have very detailed 
and relevant knowledge about where broadband improvements are needed. 
Particularly if Federal funds are matched, Congress can be sure they 
will be spent wisely.
Wireless Cost Model
    Yes, it is possible to construct a model of wireless costs, and 
that work is largely complete. A commercially available model was used, 
for example, in the recent Wyoming project that Commissioner Landis 
described in his March 1 oral testimony.\16\ There might be issues 
adapting it for FCC purposes, such as making all of the inputs public, 
but most of the technical challenges have been solved.
---------------------------------------------------------------------------
    \16\ The model is sold by CostQuest, a company located in 
Cincinnati, Ohio.
---------------------------------------------------------------------------
    However, that is only a partial answer because a cost model only 
calculates costs. One also needs a support model to calculate support. 
Support models require additional data inputs and policy decisions. 
Support models also present the most difficult policy challenges, 
because they confront most directly the tension between competition and 
universal service.
    One difficult issue for support models is carrier revenues. The 
common goal of support programs is to manage the payments that the 
carrier ultimately demands from its subscriber. Support is adjusted to 
keep these payments within limits, using standards such as 
``affordable'' or ``reasonably comparable.'' In reality, those customer 
payments are affected by the carrier's entire business model, and that 
certainly includes payments made to and revenues received from other 
carriers. Carriers now produce many kinds of revenues, only some of 
which are ``regulated'' in the classical sense. Although this is a 
complex policy area, current FCC support mechanisms could be improved 
to make these revenue assumptions more explicit and more comprehensive. 
Notably, we should carefully consider whether to include revenue from 
unregulated services.
    Another difficult issue is the location of the service. Support 
models typically associate support with particular areas, and they 
locate customers by their billing addresses. For wireline service, this 
practice makes sense because wireline customers typically receive and 
use the service at their billing location. That is not true for 
wireless, however. A wireless customer's billing address can have 
little relationship to service; some wireless customers cannot even get 
a signal at home. Moreover, wireless facilities are often constructed 
primarily to serve passing customers who are billed in other places. 
Consider a cell tower located next to a remote stretch of interstate 
highway. The number of customers who have a nearby billing address 
bears no relation to the reason that tower was built, and it would be a 
mistake to assume that the tower is serving only those customers who 
have local billing addresses.
    The most difficult issue for both cost models and support models is 
how to account for multiple networks. Consider wireline carrier ``A'' 
that provides retail telephone service and also provides special 
access. Consider also wireless carrier ``B'' that uses A's special 
access circuits to connect its cell sites.
    First, consider the complications for the cost model. A realistic 
estimate of B's costs requires one to know how much B must pay A for 
those special access circuits. Furthermore, A and B may share some 
facilities.\17\
---------------------------------------------------------------------------
    \17\ Similar issues arise between competing wireline carriers. Cost 
models must make assumptions about the sharing of facilities that are 
used in common.
---------------------------------------------------------------------------
    For the support model the issues are even more complex, and they 
are fraught with policy judgments about whether support should be used 
to maintain multiple networks. Carrier A's support might be reduced, 
for example, to the extent it draws (or ought to draw) special access 
revenue from B. Conversely, if we expect B to continue providing 
service, it might be necessary to increase A's support as B captures 
more of A's retail customers. This is exactly contrary to the original 
expectations of the Joint Board about how competition would affect 
support, which assumed that support would move away from A when B 
captured A's customer.
    In short, even if one has already developed a good wireless cost 
model, calculating support still requires resolution of several 
significant policy issues. Therefore, the availability of a wireless 
cost model is only the first of several difficult steps in developing a 
support mechanism.
    The current size of the high-cost fund, $4.3 billion, is probably 
sufficient to maintain a quality wireline and a quality wireless 
network. However, there are major tasks ahead. We should establish 
universal or near-universal wireless coverage and broadband coverage, 
and we should reduce existing inequities that treat some rural 
customers much better than others. Solving these problems will require 
us to make a difficult choice between either allowing the Fund to grow 
still larger or reallocating existing support by employing a new and 
more rational allocation system.
                                 ______
                                 
    Response to Written Questions Submitted by Hon. Bill Nelson to 
                         Hon. John Downes Burke
    Question 1. There has been a lot of talk about reforming the USF 
contribution assessment system. Much of this discussion has focused on 
moving toward a ``numbers-based'' system that would assess a per-line 
fee on all working telephone lines. Do you believe that this could be 
implemented in a way that would not harm low-volume and low-income 
telecommunications consumers?
    Answer. Yes, a numbers-based contribution method could be 
implemented without harm to low-income and low-volume consumers, but 
some versions of a numbers-based plan could cause harm.
    Currently USF contributions are made as a percentage of interstate 
and international retail phone bills. Some carriers, such as wireless 
carriers and VoIP providers, are allowed to use a ``safe harbor'' 
calculation that presumes that a fixed percentage of their traffic is 
interstate and subject to the USF charge.
    A customer who avoids all usage charges for interstate and 
international calls (``toll-free customer'') typically pays the USF 
charge only on the Subscriber Line Charge (SLC). Currently the national 
average residential SLC is $5.81 and the current USF rate is 11.7 
percent. Therefore, an average toll-free customer currently contributes 
about $0.68 per month to USF.
Low-Volume Customers
    Shifting the contribution basis from revenues to numbers would have 
two effects.

   It would reduce contributions from customers who have large 
        interstate or international service bills but few telephone 
        numbers. Such customers likely include many business customers 
        who have substantial expenditures for interstate services such 
        as toll services and interstate ``special access'' (point-to-
        point) lines. Some residential customers also have substantial 
        interstate or international toll calling bills.

   It would increase contributions from customers who have 
        modest interstate service bills or many telephone numbers. Most 
        customers who make few telephone calls would pay larger 
        contributions.

    Some proposals for shifting to telephone numbers also would impose 
the unit USF charge on ``connections'' or special point-to-point 
circuits. This question should not be overlooked.
    For example, a ``T-1'' or ``DS-1''telephone line can be thought of 
as a single ``connection'' or as 24 voice-grade channels. A ``T-3'' or 
``DS-3'' line can be thought of as one ``connection'' or as 672 voice-
grade channels. A contribution mechanism that imposes some form of 
charge on such special access circuits would likely reduce charges on 
low-volume customers. A plan that requires greater contributions from 
larger capacity special access circuits would further reduce any 
potential harm to low-volume customers.
    As noted above, the current USF charge for a toll-free wireline 
customer is probably about $0.70 per month. Estimates of a numbers-
based contribution methodology were recently filed with the FCC in its 
intercarrier compensation docket.\18\ That filing estimated the effect 
of collecting Universal Service revenues through a surcharge imposed on 
614 million telephone numbers and special access connections.\19\ Based 
on that estimate, current USF costs \20\ could be covered by a uniform 
surcharge of almost exactly $1.00. \21\ Therefore a telephone number-
based contribution method would likely increase payments by toll-free 
wireline customers by about $0.30 per month.
---------------------------------------------------------------------------
    \18\ See Letter to Marlene Dortch, Secretary of FCC, January 30, 
2007, in CC Docket No. 01-92, Missoula Plan Amendment to Incorporate a 
Federal Benchmark Mechanism, filed by Indiana Utility Regulatory 
Commission, Maine Public Utilities Commission, Nebraska Public Service 
Commission, Vermont Department of Public Service, Vermont Public 
Service Board, Wyoming Public Service Commission.
    \19\ Lifeline customers were excluded.
    \20\ The second quarter USAC report shows high-cost programs 
costing, on an annualized basis, $4.35 billion, and the entire USF 
program at $7.36 billion.
    \21\ The intercarrier compensation filing estimated a charge of 
$0.95 producing $6.97 billion.
---------------------------------------------------------------------------
    Prepaid wireless users often have small monthly bills as well. The 
current USF charge for a minimally used prepaid wireless customer is 
about $0.45 per month.\22\ A plan that would increase contributions to 
$1.00 per month would therefore roughly double the burden of USF 
charges on such customers. This could also produce significant harm to 
the carriers that offer prepaid wireless service, reducing the cost 
advantage they currently enjoy as against post-paid wireless plans.
---------------------------------------------------------------------------
    \22\ Prepaid wireless customers ordinarily have monthly bills of 
about $10. Under the FCC's safe-harbor rule for wireless, 37.1% of such 
retail bills are considered interstate. At the current USF rate of 
11.7%, a prepaid wireless customer would pay $0.43 per month in USF 
charges.
---------------------------------------------------------------------------
Low-Income
    Many low-income wireline customers limit their toll calls, and they 
can also be expected to avoid the more expensive ``bundles'' that 
include unlimited toll services. Therefore, a wireline customer who is 
a low-volume customer is likely to be a low-income customer as well. 
The same is true of wireless services. Prepaid wireless services are 
substantially less expensive than post-paid subscriptions provided by 
the major carriers. Prepaid wireless carriers assert that they serve 
predominantly low-income customers.\23\  Therefore a change that 
increases the burden on low-volume customers is likely to increase the 
burden on low-income customers.
---------------------------------------------------------------------------
    \23\ For example, TracFone Wireles, Inc. filed comments at the FCC 
in 2002 asserting:

    ``As a prepaid wireless carrier, TracFone appeals to many low-
income customers who are unable to pass a credit check or to afford 
security deposits required by other CMRS carriers, as well as many 
wireline carriers. Approximately 11 percent of TracFone's customers 
have annual incomes of less than $15,000 and approximately 16 percent 
of TracFone's customers have incomes under $25,000.''

    Comments of TracFone Wireless, Inc., filed April 22, 2002 in 
Federal-State Joint Board on Universal Service, FCC Docket 96-45.
---------------------------------------------------------------------------
    If a per-number contribution mechanism would indeed harm low-income 
customers, that harm might be mitigated or even offset by exempting 
Lifeline customers from paying the USF charge.\24\
---------------------------------------------------------------------------
    \24\ This was a feature of the per-number mechanism mentioned above 
that was filed in the FCC's intercarrier compensation docket by several 
state commissions.

    Question 2. The concept of reverse auctions has been widely 
discussed as one solution to the problem of unchecked High-Cost Fund 
growth. How fast do you believe a reverse auction program could be 
implemented? Why is it better than other approaches--such as study area 
caps or disaggregation? And, if implemented, what sort of savings do 
you think reverse auctions would provide?
    Answer. As I discussed above, current Universal Service policy 
takes a pro-competitive stance about the number of competitors who can 
receive support in a single area. The Identical Support Rule (``ISR'') 
treats all ETCs as equal, but it has shown itself incapable of 
restraining fund growth. I believe we should replace the ISR with a 
plan that supports fewer carriers in high-cost areas. However, this 
will require us to differentiate between the winners who will get 
support and the losers who will not. This is a difficult and 
distasteful task because of the economic effects of Universal Service 
support. If we give Universal Service support to a single carrier, that 
carrier will have an enormous competitive advantage. It may be 
sufficient to effectively block robust wireline competition in that 
local exchange market.
    Auctions offer the conceptual possibility that we could select one 
or two networks for support, but without the usual dilemmas. With 
auctions, the FCC might be able to use a facially neutral process that 
rewards the most efficient competitor, but without having to overtly 
pick an exclusive franchisee. In short, auctions offer a theoretical 
possibility that we could limit fund size in a way that minimally harms 
competition and which lets the process, rather than the regulators pick 
the winners.
    But I am not convinced that auctions can be implemented 
successfully as a full replacement for the existing systems. We have 
received many proposals, but they differ radically on fundamental 
points. These include:

   Should auctions be held in all areas or only in competitive 
        areas?

   Should there be a separate wireless auction?

   Should there be one winner or many?

   What Carrier of Last Resort obligations should be imposed on 
        winners?

    In addition, I have several practical concerns about auctions:

   An auction might simply fail. Bids might be higher than the 
        current amount of support, or there might be no bids at all.

   Networks are interdependent, and awarding support through an 
        auction process disturbs that system. Bidders may be forced to 
        assume that their competitor's wholesale services will always 
        be available.

   Two years ago the FCC was told by the Tenth Circuit Court of 
        Appeals, for the second time, that our current support 
        mechanism for large carriers does not provide demonstrably 
        sufficient support. This is an important problem for rural 
        customers in many parts of the country who happen to be served 
        by Bell companies. Auctions are not likely to address that 
        issue fully.

    Study area caps might be imposed to halt growth in the Fund size, 
but this should be only a very short-term solution because it would 
perpetuate the inequities in the current system. To the extent that the 
current system provides too much support to some small suburban 
carriers, and too little support to some large rural carriers, a cap 
would likely prevent adjustments to those support levels. Networks are 
dynamic, and telecommunications policies are changing rapidly. Freezing 
the status quo for Universal Service support would ignore the dynamic 
nature of this network and make the system's current imbalances even 
worse over time.
    Disaggregation is an interesting idea, and it may be desirable, but 
it is not a plan for fundamental reform. First, most exchanges in the 
U.S. are already disaggregated. The FCC simply mandated that support be 
disaggregated for areas served by large, so-called ``nonrural'' 
companies. In these areas, changing line counts every quarter increase 
or decrease the support received by ILECs and CETCs alike. Therefore, 
disaggregation, even if it were mandated, would likely affect a small 
number of customers.
    Second, disaggregation does not always save money. While the 
carriers have shown that it would reduce their support in particular 
cases, this has not been shown to be generally true.
    Third, disaggregation maintains the Identical Service Rule 
(``ISR'') but applies it in a more geographically precise way. I 
explained above my concerns about the ISR. In brief, it relies upon the 
wireline carrier's exchange boundaries and the wireline carrier's 
exchange costs in order to calculate support for a carrier that often 
does not have exchange boundaries and that has different costs. Making 
such a rule more geographically sensitive might be an improvement, but 
it ignores more fundamental issues.

    Question 3. Can reverse auctions be implemented in a manner that is 
truly competitively and technologically neutral? Wouldn't such a plan 
inevitably mandate technology-based ``winners'' and ``losers?''
    Answer. I am not sure that it is possible for any Universal Service 
mechanism that distributes a finite support amount to be ``truly 
competitively and technologically neutral.'' Inevitably, Universal 
Service support presents a dilemma. We cannot afford to pay support to 
all carriers, nor would that accomplish anything useful. Nevertheless, 
we consider it repugnant to provide support to only one or two 
carriers, thinking that is inconsistent with neutrality.
    The current Fund growth among CETCs illustrates, in my view, why we 
cannot afford a solution that is truly competitively and 
technologically neutral. At most, I would suggest that we should seek 
competitive neutrality within the constraints imposed by other more 
basic principles.
    It is difficult to design an auction that has no technological 
bias. Wireline and wireless services have different characteristics and 
deployment levels, and any such difference could be disqualifying. For 
example, cell site backup batteries generally cannot sustain operations 
for 12 hours without a recharge. Suppose an auction process required 
bidders to provide fully functional service for 24 hours following a 
power failure. That requirement would prevent most wireless carriers 
from offering bids and thus would not be considered as competitively 
neutral.
    Even when an auction is facially neutral, the award of support to a 
single bidder is itself likely to create a preferential result. 
Universal service support can provide a significant competitive 
advantage to the carriers that receive it.
                                 ______
                                 
  Response to Written Questions Submitted by Hon. Daniel K. Inouye to 
                         Hon. Billy Jack Gregg
    Question 1. In 1997, the FCC adopted the principle that its 
Universal Service policies should be ``competitively neutral.'' In 
explaining this principle, the FCC concluded that ``competitive 
neutrality means that Universal Service support mechanisms and rules 
neither unfairly advantage nor disadvantage one provider over another, 
and neither unfairly favor nor disfavor one technology over another.'' 
But it seems that people have different views as to how that principle 
should be applied, particularly when it comes to providing support for 
different kinds of communications platforms. As members of the Joint 
Board, do you believe that this remains a valuable principle, and how 
should it be applied to competition both among and between 
communications platforms?
    Answer. Competitive neutrality remains a valuable principle of 
universal service. All eligible telecommunications carriers (ETCs) 
should be eligible for USF support, regardless of the technology used 
to provide service. However, many people confuse the issue of 
competitive neutrality with the issue of equal per line support. The 
two issues are not necessarily the same.
    As originally conceived, all high-cost support for all carriers was 
to be based on the forward-looking economic costs of serving each area, 
as determined by an econometric model.\1\ As a result, the costs of 
serving a particular area would not be based on any individual 
carrier's costs, and the per line support available for serving a 
customer in that area would be the same regardless of the technology 
used to serve the customer. ETCs, using whatever technology they chose, 
would compete for this support by competing for customers. Whichever 
ETC could provide high-quality service in the most cost-effective 
manner would garner more support than other ETCs. Under this approach 
new technologies could enter a market and compete on equal footing with 
entrenched incumbents. In other words, legacy high-cost support would 
not confer an unfair advantage to the incumbent carrier.
---------------------------------------------------------------------------
    \1\ See, In re: Federal State Joint Board on Universal Service, CC 
Docket No. 96-45, ``First Report & Order'' (May 7, 1997),  223; 273; 
293-295. Larger non-rural carriers were to be moved to model-determined 
support first, followed later by smaller rural carriers.
---------------------------------------------------------------------------
    Unfortunately, this is not the way it has worked out. Support based 
on forward-looking economic cost has never been extended to rural 
carriers. Instead, support for rural carriers is still based on each 
rural carrier's embedded (legacy) costs. In addition, access 
replacement support for both rural and non-rural carriers is still 
based on embedded costs.\2\ Under the equal support rule ETCs with very 
different cost structures than an incumbent wireline carrier 
nevertheless receive the same amount of per line support as the 
incumbent carrier. Ironically, as an incumbent rural carrier loses 
lines, the amount of per line support goes up, increasing the per line 
support for the competitive ETC as well.\3\
---------------------------------------------------------------------------
    \2\ Access replacement support is provided by the Interstate Access 
Support mechanism for price cap carriers and Interstate Common Line 
Support mechanism for rate of return and average schedule carriers. 
These two mechanisms paid out $1.95 billion in support in 2006. The FCC 
has never explained how it will transition away from these embedded 
cost mechanisms.
    \3\ See, 47 C.F.R.  36.601 et seq.
---------------------------------------------------------------------------
    Even worse, ETCs rarely compete for support. Since the FCC adopted 
a policy in 1999 of supporting all lines of all ETCs in high-cost 
areas, wireless ETCs have been able to receive support for providing 
supplementary lines in high-cost areas. In other words, wireless ETCs--
sometimes several wireless ETCs in the same high-cost area--are able to 
draw new support while the incumbent does not lose any support.\4\ This 
has caused the amount of high-cost support to multiply in many high-
cost areas. For example, within the ATT/BellSouth service territory in 
Mississippi, ATT/BellSouth draws $101.2 million in high-cost support, 
while sixteen competitive ETCs draw $118.5 million.\5\
---------------------------------------------------------------------------
    \4\ In some instances wireless carriers were already providing 
wireless service without a subsidy for many years. Upon becoming an 
ETC, the wireless carrier is showered with support dollars simply for 
serving the customers that the carrier was already serving. In these 
cases, high-cost support to wireless ETCs is truly ``found money.''
    \5\ Universal Service Administrative Company, Federal Universal 
Service Support Mechanisms Fund Size Projections for the Second Quarter 
2007 (Nov. 2, 2006), Appendix HC01.
---------------------------------------------------------------------------
    The Commission needs to address the equal support rule if support 
for all carriers is not going to be based on forward-looking costs. As 
an interim step, the FCC should require support in rural study areas to 
be based on each ETCs own costs, capped at the costs of the incumbent 
carrier. While this action may trim some excess, it will do little to 
address the runaway growth of the Fund which is caused by supporting 
multiple ETCs in high-cost areas. The high-cost fund can be placed on a 
sustainable basis only by limiting the amount of support available for 
each high-cost area, and (1) requiring the ETCs to compete for the 
limited amount of support, or (2) limiting the support to only one ETC 
within each area. The first option would place the decision on which 
carrier wins the subsidy in the hands of the customer. The second 
option would require a regulatory authority to determine winners and 
losers among ETCs. This could be accomplished through a reverse auction 
mechanism.

    Question 2. Section 254(c) of the Telecommunications Act of 1996 
defines Universal Service as ``an evolving level of telecommunications 
services'' and also sets forth criteria that the FCC considers when it 
decides which services qualify as ``supported services'' eligible for 
Universal Service support. At present, it is my understanding that the 
Universal Service Fund does not support broadband service. But then, 
the question always arises--should it? And if so, when? Do you think 
that Universal Service should evolve to support broadband services, and 
if so, what would trigger such a determination?

    Question 2a. Given that the law defines Universal Service as an 
evolving level of ``telecommunications services'' and given that the 
FCC has classified cable modem and DSL services as ``information 
services,'' would the Congress need to change the statute to make 
broadband eligible for support?
    Answer. Section 254(c)(1) sets forth the criteria which the Joint 
Board must consider in determining whether to add services to the 
definition of ``universal service.'' One of the most important of these 
criteria is that the service has ``through the operation of market 
choices by customers, been subscribed to by a substantial majority of 
residential customers.'' \6\ The last time the Joint Board considered 
adding broadband to the list of supported services in 2002, only 7 
percent of residential customers actually subscribed to broadband.\7\ 
According to the FCC's latest report on advanced services, 43.6 percent 
of residential customers subscribed to broadband as of June 30, 
2006.\8\ I believe that residential subscribership to broadband has now 
passed 50 percent, and it is time for the Joint Board to once again 
consider adding broadband to the list of supported services. However, 
there may be statutory impediments to taking this action, as discussed 
in the answer to the next question.
---------------------------------------------------------------------------
    \6\ Section 254(c)(1)(B) of the Act.
    \7\ In the Matter of Federal-State Joint Board on Universal 
Service, CC Docket No. 96-45, ``Recommended Decision'' (July 10, 2002), 
at  13.
    \8\ High Speed Services for Internet Access as of June 30, 2006, 
FCC Industry Analysis & Technology Division, Wireline Competition 
Bureau (Jan. 2007). As shown on Table 3, 50.2 million residential 
customers subscribed to high-speed broadband services as of June 30, 
2006. This represents 43.6 percent of the 115 million households in the 
United States.
---------------------------------------------------------------------------
    Answer. Obviously, Section 254 is not a model of clear 
draftsmanship. Section 254(c)(1) states: ``Universal service is an 
evolving level of telecommunications services that the Commission shall 
establish periodically under this section, taking into account advances 
in telecommunications and information technologies and services.'' I 
believe the clear intent of Congress was to allow the definition of 
Universal Service to expand to include broadband when broadband 
services become a widespread and essential part of the national 
telecommunications landscape. However, because the FCC has defined 
cable, wireline and wireless broadband services as ``information 
services'' with a ``telecommunications component,'' \9\ broadband may 
not qualify for inclusion in the definition of Universal Service since 
it is not a ``telecommunications service'' as required by the current 
wording of Section 254(c)(1).
---------------------------------------------------------------------------
    \9\ See for example, In the Matter of Appropriate Framework for 
Broadband Access to the Internet over Wireline Facilities, CC Docket 
No. 02-33, ``Report & Order & Notice of Proposed Rulemaking'' (Sept. 
23, 2005), at  12; 105: `` The record demonstrates that end-users of 
wireline broadband Internet access service receive and pay for a 
single, functionally integrated service, not two distinct services. 
This conclusion also is consistent with certain past Commission 
pronouncements that the categories of `information service' and 
`telecommunications service' are mutually exclusive. . . . We conclude 
now, based on the record before us, that wireline broadband Internet 
access service is, as discussed above, a functionally integrated, 
finished product, rather than both an information service and a 
telecommunications service.''
---------------------------------------------------------------------------
    In Section 706 of the Act, the term ``advanced telecommunications 
capability'' is defined as ``high-speed, switched, broadband 
telecommunications capability that enables users to originate and 
receive high-quality voice, data, graphics, and video 
telecommunications using any technology.'' In the Second Report on 
Advanced Services the FCC defined ``advanced telecommunications 
capability'' and ``advanced services'' as services providing 
transmission speeds of more than 200 kilobits per second in both 
directions (upstream and downstream).\10\ The FCC's usage of the term 
``advanced services'' has generally been synonymous with the term 
``broadband.''
---------------------------------------------------------------------------
    \10\ In the Matter of Inquiry concerning the Deployment of Advanced 
Telecommunications Capability to All Americans, CC Docket No. 98-146, 
``Second Report'' (Aug. 21, 2000), at  11.
---------------------------------------------------------------------------
    The linkage of Universal Service to advanced services is obvious in 
the wording of the Act. Section 254(b)(2) states: ``Access to advanced 
telecommunications and information services should be provided in all 
regions of the Nation.'' Section 254(b)(3) states: ``Customers in all 
regions of the Nation, including low-income consumers and those in 
rural, insular, and high-cost areas, should have access to 
telecommunications and information services, including interexchange 
services and advanced telecommunications and information services, that 
are reasonably comparable to those services provided in urban areas and 
that are available at rates that are reasonably comparable to rates 
charged for similar services in urban areas.'' Section 254(b)(6) 
states: ``Elementary and secondary schools and classrooms, healthcare 
providers, and libraries should have access to advanced 
telecommunications services as described in subsection (h) of this 
subsection.'' \11\
---------------------------------------------------------------------------
    \11\ Section 254(h)(1)(B) requires that telecommunications services 
included in the definition of Universal Service be provided to schools 
and libraries ``at rates less than the amounts charged for similar 
services to other parties,'' while Section 254(h)(2) requires the 
Commission to establish rules ``to enhance, to the extent technically 
feasible and economically reasonable, access to advanced 
telecommunications and information services for all public and 
nonprofit elementary and secondary school classrooms, healthcare 
providers, and libraries . . .''.
---------------------------------------------------------------------------
    The above-quoted portions of Section 254 appear to give the FCC 
sufficient authority to support advanced services. In fact, advanced 
services are currently supported under both the Schools & Libraries 
Fund and the Rural Health Care Fund of the USF, even though advanced 
services or broadband are not currently included in the definition of 
``universal service.'' While an argument could be made that broadband 
can be supported under the current language of Section 254, to remove 
all doubt it may be necessary to amend Section 254(c)(1) as follows: 
``Universal service is an evolving level of telecommunications and 
information services that the Commission shall establish periodically 
under this section, taking into account advances in telecommunications 
and information technologies and services.'' (New language in italics.)

    Question 3. Currently the wireless eligible telecommunications 
carriers (ETCs) receive Universal Service support on a ``per customer'' 
basis based on the ``per line'' costs of the wireline carrier in the 
same geographic area. This is sometimes called the ``identical support 
rule'' and ensures that different communications platform providers 
receive the same amount of ``per line'' support. One criticism of the 
so-called ``identical support rule'' for Universal Service is that it 
results in overly generous support to wireless carriers because levels 
of support are not based on the per line cost of providing wireless 
services. As a result, I have two questions----

   First, do you believe that Universal Service should support 
        both wireline and wireless services in rural America?
    Answer. Please see my response to the first question above. 
Currently, both wireline and wireless services are supported. During 
2006 wireless ETCs received $1 billion in high-cost support. As 
discussed above, the problem with the current system is that it 
supports all lines of all ETCs in high-cost area without any 
restriction on the total amount of support and without requiring ETCs 
to compete for the support. The result has been runaway growth of the 
high-cost fund, from $1.7 billion in 1999 to $4.1 billion in 2006. 
Under either solution to this unsustainable growth--competition among 
ETCs or limitation of support to a single ETC--wireless ETCs should be 
allowed to compete on the same basis as wireline incumbent carriers.
    Another alternative would be to create a separate wireless 
infrastructure fund, similar to the Schools & Libraries Fund, to 
promote wireless build-out in rural areas. Under this approach, a set 
amount of support would be made available each year specifically to 
subsidize construction of additional wireless tower sites in rural 
areas where such construction is currently uneconomic. Over time, a 
wireless infrastructure fund would ensure that customers in rural areas 
would have access to the same level of ubiquitous wireless service as 
is enjoyed by urban customers.

    Question 3a. Second, would it be possible to construct a model for 
wireless carriers that would calculate support based on costs of 
wireless carriers, and what effect might that have on the size of the 
fund?
    Answer. While it would certainly be possible to construct a 
separate model for wireless carriers, it would have little impact on 
the overall size of the high-cost fund. As stated above, the main issue 
driving the size of the Fund is not equal per line support, or how that 
per line support is calculated; it is the fact that the current system 
supports all lines of all ETCs in high-cost areas. It makes no sense to 
subsidize two, three or more providers in areas where costs are so high 
that not even a single carrier can provide service without a subsidy. 
As discussed in answer to the first question above, support should 
normally go to the carrier that can provide service in the most cost-
effective manner in high-cost areas, irrespective of whether that 
carrier is a wireline carrier or a wireless carrier. As discussed 
below, one way to get direct information on different carriers' costs 
is head-to-head competition through reverse auctions.
                                 ______
                                 
    Response to Written Questions Submitted by Hon. Bill Nelson to 
                         Hon. Billy Jack Gregg
    Question 1. There has been a lot of talk about reforming the USF 
contribution assessment system. Much of this discussion has focused on 
moving toward a ``numbers-based'' system that would assess a per-line 
fee on all working telephone lines. Do you believe that this could be 
implemented in a way that would not harm low-volume and low-income 
telecommunications consumers?
    Answer. No. Any move from a USF contribution system based on usage 
to a contribution system based on access will inevitably shift cost 
responsibility from high-volume users of telecommunications services to 
low-volume users. An access-based contribution system, whether it uses 
numbers or connections, assesses every point of access the same, 
regardless of the amount of usage through that point of access. As a 
result, a customer with $1,000 of monthly usage through a point of 
access would pay the same USF contribution as a customer with $0 
monthly usage. While it may be possible to mitigate the impact on low-
usage customers by placing more USF revenue responsibility on high-
capacity data lines, the cost shift to low-usage customers cannot be 
eliminated.
    I believe a better approach to increasing the contribution base 
would be to remove the current statutory restriction on assessing all 
revenues. Section 254(b)(4) states: ``All providers of 
telecommunications services should make an equitable and 
nondiscriminatory contribution to the preservation and advancement of 
universal service.'' However, Section 254(d) limits this obligation to 
``Every telecommunications carrier that provides interstate 
telecommunications services. . . .'' The Fifth Circuit Court of Appeals 
ruled in 1999 that the statutory language in Section 254(d) limits the 
FCC to assessing only interstate revenues as the basis for 
contributions to the USF.\12\ In 2003 the Joint Board forwarded to 
Congress recommended language to broaden the FCC's assessment 
authority.\13\ I continue to support that recommendation. The proposed 
statutory changes to Section 254(d) are as follows: ``Notwithstanding 
the provisions of Section 152(b) of this Title, Eevery 
telecommunications carrier that provides interstate telecommunications 
services shall contribute, on an equitable and nondiscriminatory basis, 
to the specific, predictable, and sufficient mechanisms established by 
the Commission to preserve and advance universal service.'' (Additions 
underlined; deletions of existing language marked by strike-throughs.)
---------------------------------------------------------------------------
    \12\ Texas Office of Public Utility Counsel v. FCC, 183 F.3d 393, 
448 (5th Cir. 1999).
    \13\ Letter from the Federal-State Joint Board on Universal Service 
to the Hon. Conrad Burns, dated May 19, 2003.

    Question 2. The concept of reverse auctions has been widely 
discussed as one solution to the problem of unchecked High-Cost Fund 
growth. How fast do you believe a reverse auction program could be 
implemented? Why is it better than other approaches--such as study area 
caps or disaggregation? And, if implemented, what sort of savings do 
you think reverse auctions would provide?
    Answer. A reverse auction program could be implemented rather 
quickly if it was done in the manner suggested by Verizon.\14\ Verizon 
proposes that the high-cost fund first be capped by study area, with a 
separate cap for wireline and wireless ETCs. Reverse auctions would 
first be conducted in study areas with multiple wireless ETCs to 
determine which single wireless ETC would receive support. Reverse 
auctions could later be conducted between the wireline ETC and wireless 
ETC in each study area (or within subdivisions of the study area) to 
determine which single ETC would receive support.
---------------------------------------------------------------------------
    \14\ See Verizon ex parte filing with the FCC, February 9, 2007.
---------------------------------------------------------------------------
    As discussed above, reverse auctions would be used in conjunction 
with study area caps to maintain stability in the Fund while the 
auctions were phased in. Over time, reverse auctions should reduce the 
overall size of the Fund as support for multiple ETCs within the same 
study area is eliminated. One of the most attractive features of 
auctions is that they allow market forces to be injected into the USF 
support system. Periodic reverse auctions will also capture changes in 
technologies and underlying costs over time.
    Savings achieved by auctions in study areas with excessive support 
could be used along with disaggregation to address the issue of the 
current maldistribution of support among states and among study areas. 
In other words, while there are high-cost areas which currently receive 
too much support, such as the example of Mississippi cited above, there 
are other high-cost areas that receive no support. This is usually due 
to the fact that these high-cost areas are served by non-rural instead 
of rural incumbent carriers. Updated computer models could determine 
the forward-looking economic cost to serve every area in the United 
States, irrespective of which incumbent carrier serves that area. These 
disaggregated costs could then be used as the basis for ``reserve 
prices'' in future auctions.\15\ Reserve prices could be adjusted to 
fit whatever total amount of support is available.
---------------------------------------------------------------------------
    \15\ A ``reserve price'' is a price above which bids will not be 
accepted. Stated another way, a reserve price is the highest level of 
support a regulator is willing to pay in a particular area.

    Question 3. Can reverse auctions be implemented in a manner that is 
truly competitively and technologically neutral? Wouldn't such a plan 
inevitably mandate technology-based ``winners'' and ``losers?''
    Answer. By its very nature, a reverse auction will be competitive 
and will inevitably determine winners and losers of the explicit USF 
subsidy for serving high-cost areas. If price is the only criteria 
considered in a reverse auction, then the auction process will favor 
those technologies with the lowest cost structures. This would tend to 
favor wireless carriers in most parts of the Nation. However, in any 
reverse auction the determination of the criteria that all bidders must 
meet is critical. Under Section 214(e) of the Act, an ETC must be able 
to deliver all of the supported services throughout the designated 
area. This may be difficult to achieve for many wireless carriers, 
especially those that have not built out their networks in rural areas. 
This is why I suggested above that a separate rural wireless 
infrastructure fund may be the most appropriate way to ensure the build 
out of wireless service to all parts of our Nation.
                                 ______
                                 
  Response to Written Question Submitted by Hon. Daniel K. Inouye to 
                             David Crothers
    Question. There is a proposal before the FCC to restrain the growth 
of the Universal Service Fund by using ``reverse auctions.'' Under this 
proposal, carriers would bid for the right to provide service in a 
given service area, for a given time with the entity making the lowest 
bid winning the right to receive support. While I appreciate the 
benefits of reverse auctions, I also worry about potential costs like 
lower service quality in rural areas, and the potential for creating 
``stranded costs'' for auction losers that might harm access to 
capital.

   What effect would the possibility of losing support have on 
        the ability of carriers to attract private investment from 
        capital markets?

   What would happen if a provider wins the auction by bidding 
        too much, and then responds later by raising prices or reducing 
        service quality?

   What effect would reverse auctions have on those providers 
        that fail to win support and their ability to roll out new 
        services in rural America?

    Answer. Senator, the North Dakota Association of Telecommunications 
Cooperatives (NDATC), the National Telecommunications Cooperative 
Association (NTCA) and the universe of rural communications providers 
that are members of these two organizations certainly share your 
concerns with regard to the general concept of reverse auctions for the 
primary reason that they most certainly would lead to stranded 
investment, placing systems that were built with Universal Service 
dollars and Federal Rural Utilities Service loans at great risk of 
failure. Indeed, last October, NTCA commissioned a review of the 
subject of using reverse auctions to distribute Universal Service 
support which concluded that moving in this direction with regard to 
areas with existing infrastructure and ubiquitous service would be a 
serious mistake. The paper prepared by Alaska Pacific University 
Professor Dale E. Lehman demonstrates the difficulties and dangers and 
inherent issues in applying reverse auctions in areas with existing 
infrastructure. Based on Lehman's findings, correctly designing and 
implementing an effective reverse auction mechanism for rural markets 
will prove tremendously challenging, if not impossible.
    According to the comments, while reverse auctions may be an 
appealing theoretical concept, their practical application is fraught 
with uncertainty and risk. Additionally, a reverse auction would be 
time and labor intensive, prohibitively expensive, and technically 
burdensome. The cost of administering the reverse auctions, preventing 
fraud, and monitoring the results would ultimately increase the size of 
the Universal Service Fund and could outweigh any potential benefits 
gained from the process according to the author.
    With regard to your specific question of what effect the 
possibility of losing support via an auction process would have on a 
carriers ability to attract private investment, we believe it is 
undeniable that the impact would be dramatic. For the Nation's smallest 
carriers the impact would be particularly devastating. Today, policy 
modifications, or even the potential of such modifications is turning 
our industry's cost recovery ability and stability on its head. Rural 
carriers have traditionally not been of a size that they are able to 
attract the interest of capital markets either nationally or locally. 
This is why Universal Service is so important to rural carriers. It is 
a cost recovery source, but it is also a necessary revenue stream that 
is essential to their ability to secure financing from the three 
primary sources of capital that are available to them, the Rural 
Utilities Service, CoBank, and the Rural Telephone Finance Cooperative 
(RTFC).
    Your question regarding what would happen if a provider wins the 
auction by bidding too much and then responds later by raising prices 
or reducing service quality is entirely justified. This is a fear that 
we outlined in our comments to the Federal Communications Commission on 
the subject of reverse auctions. Indeed, it would be virtually 
impossible to prevent this sort of scenario from playing out under a 
reverse auction system. And as your question alludes, the real loser 
would not be the provider, but the consumer. Again, we think questions 
like this raise such dramatic possibilities as to invalidate the 
concept from being considered any further whatsoever.
    Finally, on the matter of what would happen to providers that fail 
to win support under a reverse auction system, the response is very 
simple. They would quickly fail and their most rural consumers would be 
those most hurt by the company's demise because any new carrier would 
be highly unlikely to extend support beyond the easiest to reach 
consumers that reside within the town or community itself. There are 
reasons why the Universal Service policy has evolved in the manner it 
has to best serve rural markets and that is because they simply cannot 
be squeezed into an economic theory and be expected to work. During the 
extensive debate leading to the development of the Telecommunications 
Act of 1996, NTCA and its Rural Telephone Coalition partners, OPASTCO 
and WTA prepared and widely circulated a report titled Rural Is 
Different. While its underlying message was so simple and so obvious, 
it was amazing at how hard we had to work to convince policymakers of 
its truth. Sadly it appears that only 10 years later, many of your 
colleagues have already forgotten the reality of this message.
                                 ______
                                 
    Response to Written Questions Submitted by Hon. Bill Nelson to 
                             David Crothers
    Question 1. Is a reverse auction process the best way to reduce 
overall Fund growth? What do members of the panel think of other 
options, such as breaking up (or disaggregating) study areas to target 
funds to areas that are truly ``High-Cost?''
    Answer. Absolutely not! And we have been stating this fact ad-
nausea for the past decade. Frankly Senator, NDATC, NTCA, and their 
hundreds of members cannot comprehend the reluctance of policymakers, 
either here on Capitol Hill, or at the Federal Communications 
Commission (FCC) to look to and apply the most obvious and simple 
remedies that would easily control the growth of the Universal Service 
Fund. Repeatedly we have suggested four ideas to accomplish this 
objective:

        1. Apply a meaningful public interest test when considering 
        future eligible telecommunications carrier (ETC) designations;

        2. Eliminate the identical support rule that today provides 
        support to competitors based on an incumbent's costs;

        3. Provide alternative cost-based support to rural wireless 
        ETCs; and,

        4. Expand the base of USF contributors to include all broadband 
        service providers.

    Implementing this simple four pronged plan would immediately stem 
the flow of Universal Service dollars and restore the confidence of all 
Americans in this time-tested cornerstone of our national 
communications policy.

    Question 2. If we move to a reverse auction process, isn't there a 
possibility that some providers may bid so low that they end up 
financially unable to provide service? Furthermore, if an ``auction 
winner'' went bankrupt, how can we be sure that households in that area 
continue to receive service?
    Answer. Sir, these are exactly the sorts of questions we posed in 
our filings to the FCC and in the Lehman paper referenced in our 
response to Senator Inouye's questions on this subject. That paper was 
formally filed with the hearing record of this committee. At any rate, 
we think this is the sort of gamesmanship that could easily take place 
under the reverse auction scenario. At the very time when so many of 
your colleagues appear to be concerned about waste, fraud, and abuse 
with this or any other Federal oriented program, we think it would be 
unjustified to move in the direction of a concept such as this that 
sounds interesting in theory but falls apart immediately when looked at 
as a serious option. And of course you are right--consumers would be 
the ultimate losers in this scenario. Certainly, if the incumbent 
carrier had lost the auction to a low bidder, our viewpoint would be 
that the incumbent no longer has a responsibility of carrier of last 
resort obligations because they would not have the financial resources 
to make such a commitment. And, the entity that submitted the 
unrealistically low bid would be unable to fulfill the commitment as 
well, so there really would not be a good option for consumers in such 
a situation. That is why we believe reverse actions have no place in 
this discussion.
                                 ______
                                 
  Response to Written Questions Submitted by Hon. Daniel K. Inouye to 
                         Brian K. Staihr, Ph.D.
    Question 1. There is a proposal before the FCC to restrain the 
growth of the Universal Service Fund by using ``reverse auctions.'' 
Under this proposal, carriers would bid for the right to provide 
service in a given service area, for a given time with the entity 
making the lowest bid winning the right to receive support. While I 
appreciate the benefits of reverse auctions, I also worry about 
potential costs like lower service quality in rural areas, and the 
potential for creating ``stranded costs'' for auction losers that might 
harm access to capital. What effect would the possibility of losing 
support have on the ability of carriers to attract private investment 
from capital markets?
    Answer. Telecom networks are highly capital-intensive to operate, 
particularly in rural areas, and investors seek a commensurate level of 
security to offset the risk associated with the costs of network 
investments over time. In markets that are otherwise uneconomical to 
serve, Universal Service support is an important part of that cost 
recovery. Less certainty over the continued receipt of Universal 
Service support will translate into a higher cost of capital for 
telecom operators. In the case of reverse auctions, that uncertainty 
would have to be addressed by rules that ensure support will be 
specific, predictable and sufficient.

    Question 1a. What would happen if a provider wins the auction by 
bidding too much, and then responds later by raising prices or reducing 
service quality?
    Answer. Ensuring appropriate network investment, service quality 
and comparability of pricing is a challenge facing any reform of 
Universal Service programs. In the case of reverse auctions, we assume 
participants would be bidding to (at least) meet minimum requirements 
in each of these categories, as well as living up to the carrier-of-
last-resort (COLR) requirements currently imposed on the incumbent 
carrier. We also assume there would have to be a failsafe mechanism to 
prevent a winning bidder from defaulting on those requirements.

    Question 1b. What effect would reverse auctions have on those 
providers that fail to win support and their ability to roll out new 
services in rural America?
    Answer. For the rural areas that are truly uneconomic to serve, the 
withdrawal of support would lead to a substantial elimination of new 
investment and likely discontinuance of services by those providers, 
because the ability to recover costs and earn a reasonable economic 
return on investment would no longer be there. While some rural town 
centers might continue to receive service from a carrier that failed to 
win support, those in the outlying areas would have to rely on the 
provider that did win support for service, and it would only be fair to 
transfer the carrier of last resort (COLR) requirement to the new 
provider (which would ultimately require cooperation with, or 
preemption of state authorities). For this reason, it is very important 
to target support to the geographic areas that need it the most.

    Question 2. Dr. Staihr, I was interested in your testimony arguing 
that support should be provided on a more granular basis. Is this type 
of granular analysis administratively feasible and what steps would the 
FCC need to take to institute such a model?
    Answer. Especially in recent years, with advancement in computing 
technologies, mapping software and the online availability of free 
mapping information, a granular analysis has become administratively 
feasible. Embarq has demonstrated this to its satisfaction by 
performing granular analysis on some of our serving areas for proof-of-
concept purposes, and it was affirmed by two other witnesses at the 
February 20, 2007 en banc hearing of the Federal-State Joint Board on 
Universal Service. In an April 12 filing to the Joint Board, Embarq 
outlined 5 steps that the FCC could take to gather the information 
necessary for such a model:

        1. Collect population density data from companies choosing to 
        submit such data for study purposes;

        2. Validate the population density data using Census data and 
        establish the need for granular analysis;

        3. Collect customer location data from the companies that 
        qualify for granular analysis;

        4. Select a suitable model for estimating cost of service; and

        5. Identify the high-cost areas at a granular level using the 
        selected model and submitted data.

    These steps are explained in more detail, beginning on page 160 of 
our ex parte presentation, which I've attached, and we would be happy 
to discuss our proposal in further detail at your convenience.

    Question 2a. Also, if distributions were made on a more granular 
level, what effect would it have on the overall size of the Fund and on 
the distribution of funds among carriers?
    Answer. Making distributions on a more granular level would create 
countervailing pressures on the size of the Universal Service Fund. On 
the one hand, an appropriately targeted fund, by dispensing with 
statewide averaging for some carriers, would bring support to some very 
rural areas that currently receive no support at all, replacing 
unsustainable cross subsidies with explicit support.
    At the same time, considering town centers separately from outlying 
areas could eliminate many of the most egregious arbitrage and windfall 
opportunities that are causing the Fund to grow out of control today. 
Ultimately, the impact on the Fund size would depend on the particular 
choices made in implementing more granular targeting. Eliminating the 
windfall opportunities and supporting rural areas independent of 
statewide averaging would create a much more equitable distribution 
among carriers and allow universal services distributions to be more 
closely aligned with economic costs.

    Question 2b. What steps would states and/or the FCC need to take to 
do this kind of mapping?
    Answer. Embarq's proposed steps are outlined in our ex parte, 
attached to this document. We have proposed a cooperative system where 
carriers could share data, but USAC could also gather publicly 
available data on population density and other factors affecting 
network costs.
                                 ______
                                 
    Response to Written Questions Submitted by Hon. Bill Nelson to 
                         Brian K. Staihr, Ph.D.
    Question 1. Is a reverse auction process the best way to reduce 
overall Fund growth? What do members of the panel think of other 
options, such as breaking up (or disaggregating) study areas to target 
funds to areas that are truly ``High-Cost?''
    Answer. I've attached Embarq's April 12 ex parte detailing our 
proposal for more granular targeting of support, which has the benefit 
of eliminating some of the windfall and arbitrage opportunities that 
are causing the Fund to grow, and ensuring that support flows to the 
most high-cost areas.
    We believe such granular targeting is an important component of any 
attempt to reform Universal Service, regardless of whether the FCC 
pursues reverse auctions, provides explicit support for broadband, 
limits support to one carrier per geographic area or addresses many of 
the other difficult issues at hand.
    After the March 1 Commerce Committee hearing and the tremendous 
focus on support for broadband, we believe that if Congress or the FCC 
made the decision to explicitly support broadband, identifying and 
targeting to the most high-cost areas would be an indispensable step to 
lay the foundations for such a move.

    Question 2. If we move to a reverse auction process, isn't there a 
possibility that some providers may bid so low that they end up 
financially unable to provide service? Furthermore, if an ``auction 
winner'' went bankrupt, how can we be sure that households in that area 
continue to receive service?
    Answer. Both good points. We assume any reverse auction system 
would have to include a qualification system to ensure that those who 
bid for support are capable of meeting the carrier-of-last-resort 
(COLR) requirements for that area, and are financially stable enough to 
minimize the risk of bankruptcy. In any event, any kind of USF reform 
would need a fail-safe mechanism to ensure that consumers and local 
businesses do not lose service.
                            EmbarqTM Corporation
                                                     April 12, 2007
Commissioner Deborah Taylor Tate,
Federal Chair, Federal-State Joint Board on Universal Service
Federal Communications Commission
Washington, DC.

Commissioner Ray Baum,
State Chair, Federal-State Joint Board on Universal Service
Oregon Public Utilities Commission
Salem, OR.
                                              Ex Parte Presentation
Re: High-Cost Universal Service Support, WC Docket 05-337; Federal-
    State Joint Board on Universal Service, CC Docket 96-45.

    Dear Commissioner Tate and Commissioner Baum:

    Embarq strongly supports the substantial and continuing efforts of 
the Federal-State Joint Board on Universal Service (the Joint Board) to 
reform the Federal Universal Service Fund (USF) so it may better 
advance the Universal Service goals set forth in the Telecommunications 
Act of 1996. Telecommunications markets have changed substantially in 
the decade since the current Federal USF was created and, accordingly, 
substantial reform is necessary to accomplish those goals. To this end, 
the Joint Board can best ensure that USF reform fulfills the statutory 
goals for Universal Service by recommending that the Federal 
Communications Commission:

        1. Focus on correcting the structural problems caused by the 
        multiplicity of support recipients and the misallocation of 
        support;

        2. Stabilize the current system of Universal Service support;

        3. Limit the duration of a freeze or cap so as to make it 
        temporary;

        4. Initiate a study to identify the highest-cost areas at a 
        granular level; and

        5. Follow a clear and achievable process to complete the study, 
        and then provide support dollars to the areas identified by the 
        study.

    If the Joint Board recommends these steps, and the Commission 
adopts them, Federal USF will become the ``specific, predictable and 
sufficient'' \1\ program called for in the statute. Federal USF finally 
will provide ``explicit'' \2\ support to those high-cost areas where it 
is truly uneconomic to provide service--that is to say where the 
marketplace conditions would not provide sufficient incentives for any 
carrier to offer service. This, in turn, will ensure that ``quality 
services [are] be available at just, reasonable, and affordable rates'' 
\3\ that are that are ``reasonably comparable'' in rural and urban 
areas.\4\
---------------------------------------------------------------------------
    \1\ 47 U.S.C.  254(b)(5).
    \2\ 47 U.S.C.  254(e).
    \3\ 47 U.S.C.  254(b)(1).
    \4\ 47 U.S.C.  254(b)(3).
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I. The Joint Board Should Recommend Correction of the Structural 
        Problems Caused by the Multiplicity of Support Recipients and 
        the Misallocation of Support
    There is widespread recognition that the current USF suffers from 
significant structural problems. In particular, the current USF does 
not satisfy important statutory criteria set forth in Section 254 of 
the Communications Act. It does not provide specific, predictable, and 
sufficient support in all (or even most) high-cost areas. The Federal 
USF does not adequately preserve and advance universal service, and it 
continues to rely on implicit rather than explicit support through 
extensive use of cost averaging in the face of competition that renders 
such an approach unspecific, unpredictable, and insufficient. Finally, 
the Federal USF does not ensure access to supported services at rates 
that are affordable, reasonable, and comparable to rates in urban 
areas.\4\
    At the outset, Embarq emphasizes that USF reform need not impact 
many carriers, such as many small and mid-sized, rural incumbent local 
exchange carriers (ILECs), that are unaffected by the structural 
problems identified below. Indeed, these carriers would retain all of 
their current options under Embarq's proposals in this document, which 
would not necessarily alter USF treatment for those carriers. In 
particular, the study to more accurately identify high-cost areas to 
support that which Embarq proposes herein would be voluntary and any 
new support provided to previously-overlooked areas would come directly 
from correcting the structural problem of duplicative support. The 
study and related granular targeting of support would not, therefore, 
necessarily disturb USF treatment of currently-supported ILECs.
    The record in this docket contains hundreds of filings, a great 
many of them detailing the problems and the urgent need for reform, and 
the Joint Board itself identified the problems and the need for reform 
at its last en banc hearing.\5\ This evidence and analysis leads 
inexorably to the conclusion that the Joint Board should recommend, and 
the Commission should promptly reform two critically important 
structural flaws in Federal USF.
---------------------------------------------------------------------------
    \5\ Federal-State Joint Board on Universal Service En Banc Meeting 
February 20, 2007.

        1. Duplicative support is being awarded to multiple competitive 
        eligible telecommunications carriers (CETCs) operating in a 
        single market area. This policy has been the primary source of 
        excessive growth in USF support, as noted by Chairman Martin 
        and others.\6\ The multiplicity of support and excessive USF 
        growth harms consumers everywhere by increasing both the cost 
        to provide service and the aggregate demand for USF 
        contributions.
---------------------------------------------------------------------------
    \6\ Opening remarks of Chairman Kevin Martin, Federal-State Joint 
Board on Universal Service En Banc Meeting February 20, 2007.

        2. At the same time, however, many of the highest-cost areas--
        many designated as ``rural'' and many others designated as 
        ``non-rural''--do not receive ``sufficient'' high-cost support. 
        This was confirmed by the United States Court of Appeals for 
        the Tenth Circuit \7\ for the non-rural fund, and it is equally 
        true for many carriers that receive support under the rural 
        fund due to the current practice of using averages (on a 
        statewide or study area basis) to determine the need for 
        support.\8\ This failure to direct specific, predictable, and 
        sufficient support to all areas that are truly uneconomic to 
        serve harms consumers by inhibiting network investment in high-
        cost areas and perpetuating implicit subsidies in lower-cost 
        areas.
---------------------------------------------------------------------------
    \7\ Qwest v. FCC, 398 F.3d 1222, 1234 (10th Cir. 2005).
    \8\ E.g., letter from Eric N. Einhorn, Windstream, to Deborah 
Taylor Tate, FCC and Ray Baum, Or. Pub. Serv. Cmm'n, WC Docket No. 05-
337 filed April 2, 2007 (``Windstream Ex Parte'').

    The Joint Board can best accomplish its objectives by issuing a 
Recommended Decision that focuses on steps to eliminate these 
structural flaws. In particular, Embarq agrees with Windstream that the 
Joint Board should ``recommend forward-looking and rational Universal 
Service reforms that target adequate explicit support to high-cost 
areas. To do otherwise, would perpetuate the inequities and 
insufficiencies in the current mechanism to the detriment of rural 
consumers and the Nation.'' \9\ Moreover, by fixing this structural 
flaw, the Commission can finally comply with statutory mandates and the 
remand in Qwest v. FCC.
---------------------------------------------------------------------------
    \9\ Windstream Ex Parte, at 3.
---------------------------------------------------------------------------
II. The Joint Board Should Recommend Stabilizing the Current System of 
        Universal Service Support
    The first step to fixing the USF structural flaws is to prevent 
further harm, and to do so sooner rather than later. The current growth 
in support, particularly increases that fund competition in areas where 
it is uneconomic for a single provider to offer service, harm consumers 
and investment. AT&T and Verizon \10\ have each recently filed plans 
addressing this issue. Both of these plans propose that USF reform 
occur in two stages: (1) imposing a temporary freeze or cap on USF 
distributions to stabilize the system and permit the Commission to 
address current concerns regarding fund size, fund growth, and 
magnitude of contribution factor; and (2) restructuring the method by 
which USF support is distributed.
---------------------------------------------------------------------------
    \10\ See Letter from Robert W. Quinn Jr., AT&T, to Deborah Taylor 
Tate, FCC and Ray Baum, Or. Pub. Serv. Comm'n, WC Docket No. 05-337 
filed March 22, 2007 (``AT&T Ex Parte''). See also letter from Kathleen 
Grillo, Verizon, to Deborah Taylor Tate, FCC and Ray Baum, Or. Pub. 
Serv. Comm'n, WC Docket No. 05-337 filed February 9, 2007 (``Verizon Ex 
Parte'').
---------------------------------------------------------------------------
    As the first phase of a two-phase plan, a temporary freeze or cap 
would accomplish the important goal of immediately eliminating any 
additional upward pressure on the end-user USF assessment, which is 
currently up to 11.7 percent. For the past 4 years, the overwhelming 
majority of the growth in high-cost support has been driven by growth 
in wireless receipts while wireline receipts having stayed constant or 
declined.\11\ This has happened because wireline support has long been 
subject to a cap. Therefore, the most direct and narrowly-tailored, and 
competitively-neutral approach to the problem is to address wireless 
support during this interim period.
---------------------------------------------------------------------------
    \11\ See Letter from Jamie M. ``Mike'' Tan, AT&T, to Marlene 
Dortch, FCC in WC Docket No. 05-337 filed April 2, 2007.
---------------------------------------------------------------------------
    Given that the purpose and justification for a temporary freeze or 
cap is to support longterm reform, it is critical that the freeze or 
cap be accompanied by a study to identify the truly high-cost areas in 
the United States. The Joint Board should recommend, therefore, that 
the Commission conduct such a study during the course of a temporary 
freeze or cap. The public interest is best served through informed 
decisionmaking, which can only be helped through a study of the cost of 
providing service. In fact, this information is vital to any reform the 
Commission may consider, as explained below. A temporary freeze or cap 
will help ensure that the study results are relevant (the freeze or cap 
will help maintain the conditions that will be revealed through study) 
and accurate (the freeze or cap will help minimize gaming).
    All other things being equal, a temporary freeze would be 
preferable to a cap in economic terms since it ensures that no 
individual recipient would be made any worse off or any better off as a 
direct result of the freeze during the interim timeframe. Conversely, a 
cap on funds may allow for the possibility of individual winners and 
losers underneath the cap as relative support amounts continue to be 
adjusted. This would be undesirable from a policy perspective as it 
would make study results less accurate and relevant to the Commission's 
objectives.
III. The Joint Board Should Recommend That Any Freeze or Cap Be 
        Temporary
    There are, of course, some risks involved in implementing any type 
of freeze or cap; one being the natural tendency to apply a temporary 
remedy and then act as if the problem has been solved. The Joint Board 
must emphasize, therefore, that any temporary freeze or cap is a means 
to an end, rather than an end in and of itself. Accordingly, Embarq 
agrees with AT&T when it proposes strict time limitations--a maximum of 
2 years--on the duration of any freeze or cap.\12\ A freeze or cap of 
any longer duration would only perpetuate the implicit subsidies that 
plague the current USF.\13\
---------------------------------------------------------------------------
    \12\ AT&T Ex Parte.
    \13\ See, 47 U.S.C.  254 (directing that implicit subsidies be 
made explicit).
---------------------------------------------------------------------------
    The Commission has the authority to impose a temporary freeze or 
cap, particularly in a case like this where the Commission requires 
market stability while it studies where and how to best allocate USF 
support to the high-cost areas that most need it. The implementation of 
a temporary freeze or cap on USF support is logical because it is 
imperative that the Joint Board and the Commission address the 
underlying structural problems that are inherent in the current USF 
system. A temporary freeze or cap will provide the Joint Board and 
Commission with the necessary stability and time needed to accomplish 
this structural reform in a manner that ensures the ongoing 
sufficiency, specificity and predictability of the Federal mechanism.
    The Commission enjoys considerable discretion to adopt interim 
rules while it undertakes long-term changes to its regulations. This is 
particularly so where the interim rules merely ``maintain the status 
quo so that the objectives of a pending rulemaking proceeding will not 
be frustrated.'' \14\ In the case of USF reform, a temporary freeze or 
cap is particularly appropriate given the rapid increases in overall 
support and the substantial changes in support levels for individual 
carriers, including substantial decreases in support for some carriers. 
As the United States Court of Appeals for the District of Columbia 
Circuit has explained, ``[a]voidance of [such] market disruption 
pending broader reforms is, of course, a standard and accepted 
justification for a temporary rule.'' \15\
---------------------------------------------------------------------------
    \14\ MCI Telecoms. Corp. v. FCC, 750 F.2d 135, 141 (D.C. Cir. 
1984); see also CompTel v. FCC, 117 F.3d 1068 (8th Cir. 1997).
    \15\ CompTel v. FCC, 309 F.3d 8, 14 (D.C. Cir. 2002) (citing MCI 
Telecoms. Corp., 750 F.2d at 141; ACS of Anchorage v. FCC, 290 F.3d 
403, 410 (D.C. Cir. 2002)).
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IV. The Joint Board Should Recommend a Study To Identify the Highest-
        Cost Areas at a Granular Level
    During the course of a temporary freeze or cap, the Commission will 
be in a position to undertake a detailed study that will identify the 
best means for addressing the structural problems identified above. 
Windstream is correct when it observes that the public interest will 
not be served by perpetuating the current system, which is rife with 
inequities and logical failings. Therefore, the Joint Board should 
recommend solutions for both structural problems discussed above--
duplicative support in some areas and inadequate support in others. One 
approach to solving both problems would be to direct support freed up 
by fixing the duplicative support problem toward fixing the inadequate 
support problem.
    As described at length during the Joint Board's recent en banc on 
universal service, the ability to accurately identify high-cost areas 
at a very granular level has reached a level of precision that was 
unimaginable only a few years ago.\16\ Through a combination of 
advances in modeling, better data, and ever-increasing computing power 
the Commission has at its disposal a set of tools capable of producing 
a study to ensure that all high-cost areas that truly require explicit 
support are adequately supported. This is in stark contrast to the data 
and modeling capability that was available nearly 10 years ago, when 
the Commission and Joint Board first considered using a study to 
determine USF needs.
---------------------------------------------------------------------------
    \16\ See presentation of Jim Stegeman, CostQuest Associates, 
Federal-State Joint Board on Universal Service En Banc Meeting, 
February 20, 2007.
---------------------------------------------------------------------------
    A study would support, and would be a necessary precondition to 
implementing a proposal like, AT&T's. AT&T states as much in its ex 
parte presentation where it wrote that, in order to ensure sufficiency 
of support to all high-cost areas--including areas that do not 
currently receive high-cost support due to averaging--it is necessary 
to determine the need for support at a more granular level (``. . . in 
narrower geographic areas, such as wire centers or Census Block 
Groups'').\17\ The Joint Board should recommend this be done by 
undertaking a comprehensive study that more accurately identifies high-
cost areas at a wire center or sub-wire center level.
---------------------------------------------------------------------------
    \17\ AT&T Ex Parte, at 8.
---------------------------------------------------------------------------
    A study would also facilitate and accelerate the implementation of 
any recommendation along the lines of a proposal like Verizon's. Should 
the Commission ultimately choose auctions as the best mechanism for 
addressing the problem of duplicative support awarded to multiple CETCs 
in a single area, it is important that the Commission identify the 
areas that most need support. Conducting a study would help the 
Commission avoid many of the uncertainties and risks inherent in using 
an untested approach such as reverse auctions to determine which areas 
would be in need of support. The structural problems with the current 
USF make it a poor guide for identifying the right areas to support. 
Moreover, it is important to understand the costs of serving areas on a 
granular level in order to correctly size the individual auction areas. 
Therefore, a granular understanding of which areas are truly high-cost 
is essential to ensure that the areas to be ``bid'' on in any auctions 
are those that best serve the public interest and fulfill the 
objectives of the Communications Act.
    In sum, a granular study would facilitate any long-term USF 
solution, and it would do no harm. Moreover, a granular study 
identifying the truly high-cost areas to serve will also produce the 
information needed by the Joint Board and Commission to evaluate future 
directions for the Federal USF mechanism and for USF policy in general. 
For example, the granular study would serve as an effective tool for 
identifying areas where it is uneconomic for the market to deploy 
broadband. The Commission's long-stated goal of advancing broadband 
deployment--whether as a supported service or not--requires a 
comprehensive understanding of the geographic hurdles (density, 
distance, absence of critical mass of consumers) and incremental 
investment needs that currently providers face as they bring advanced 
services to the most rural, high-cost areas.
V. The Commission Should Follow a Clear and Achievable Process To Study 
        High-Cost Areas, and Then Provide Support Dollars to the Areas 
        Identified by the Study
    The actual process for conducting a study to identify high-cost 
areas in need of USF support is clear and achievable. First, Embarq 
proposes that the Commission should maintain the support rules for 
companies that choose not to submit data for a study. Then, the 
Commission should follow a five-step process to study high-cost areas 
and identify new areas that should receive support. Finally, the 
Commission should use study results to direct adequate support to the 
newly-identified high-cost areas.
A. The Commission Should Maintain the Support Rules for Companies That 
        Choose Not To Submit Data for a Study
    Embarq proposes that ETCs have the option not to participate in the 
study. Such ETCs would continue to receive support as they do today. 
They would, however, remain subject to any applicable reforms, such as 
auctions (which may only apply to a subset of ETCs under some of the 
proposals before the Joint Board). It is also important to note that a 
solution to this structural problem concerns identifying which areas 
should receive support and directing to those areas the support that is 
currently misallocated due to the first structural flaw discussed 
above--supporting duplicative ETCs. The question of which carriers 
should receive support and how that support is to be calculated will be 
resolved in these new areas using the same methodologies that are 
chosen for currently-supported areas. In particular, ILEC costs are 
used to identify high-cost areas today, and the study would follow this 
approach.
B. The Commission Should Follow a Five-Step Process To Study High-Cost 
        Areas and Identify New Areas That Should Receive Support
    The Joint Board should recommend that the Commission determine that 
cost of service is directly related to population density, and that 
study-area averaging masks wide variations in the true cost of service. 
In general, low density translates to high-cost. Because all network 
technologies (even wireless) exhibit economies of scale and economies 
of density, there is a strong inverse relationship between cost and 
customer density. This relationship can be used to begin the process of 
accurately identifying high-cost areas. Many study areas exhibit a 
large degree of variation in density, which translates to a large 
degree of variation in costs. The current system of using study area 
averages masks this variation in costs within a single study area. In 
particular, the assumption that costs can be averaged is no longer 
valid because of competition in low-cost areas, which prevents 
companies from realizing greater margins in those areas and using those 
returns to support below-cost service in high-cost areas.
    The actual process for completing such a study is relatively 
straightforward, and the study can be completed within the two-year 
time-frame of the freeze or cap. The Joint Board should, therefore, 
recommend that the Commission take the following actions:

        1. Collect population density data from companies choosing to 
        submit such data for study purposes;

        2. Validate the population density data using Census data and 
        establish the need for granular analysis;

        3. Collect customer location data from the companies that 
        qualify for granular analysis;

        4. Select a suitable model for estimating cost of service; and

        5. Identify the high-cost areas at a granular level using the 
        selected model and submitted data.

    1. Collect population density data from companies choosing to 
submit such data for study purposes. In the first phase, if a company 
believes that the use of study area averaging masks its high-cost 
areas, and therefore its need for USF support, such companies could 
choose to submit disaggregated density data (for example, by wire 
center or at a sub-wire center level) to the Universal Service 
Administration Company (USAC). The National Exchange Carrier 
Association (NECA) could also submit data on behalf of pooling 
companies that choose to participate but which may not feasibly be able 
to submit their own data. The purpose of this showing would be to 
demonstrate that significant variation in the density of areas served 
by the carrier causes the carrier to experience significant variation 
in costs.\18\
---------------------------------------------------------------------------
    \18\ Until and unless a rule change is implemented that wireless 
carriers would receive USF support based on something other than ILEC 
costs there would be no need for wireless carriers to submit data. If 
such a change is made, competitive ETCs could, at their own choosing, 
also submit density data regarding their designated service areas 
(which in many cases mirror existing study areas.)
---------------------------------------------------------------------------
    2. Validate the population density data using Census data and 
establish the need for granular analysis. USAC would independently 
verify this data using publicly available Census data to determine 
whether the data showed significant variation in density. If so, the 
strong density/cost correlation would allow USAC to conclude that this 
area exhibited significant variation in costs (regardless of how costs 
might be calculated). The preliminary evaluation would serve as an 
initial bright-line test that this company's need for USF support must 
be determined at a more granular level.
    3. Collect customer location data from the companies that qualify 
for granular analysis. At that point, a company that had initially 
submitted density data and passed the bright-line test would then have 
the option of providing additional data to USAC regarding wire center 
boundaries (just as it now provides Form 477 data at a Zip Code level). 
The company would also have the option of submitting customer location 
data to USAC. Location data could be actual geo-coded locations, 
billing addresses, or service addresses.\19\ This data would remain 
proprietary and would be held by USAC. It would be combined with public 
data (such as CB boundaries, road systems) to be used to calculate 
costs (and ultimately, support).
---------------------------------------------------------------------------
    \19\ Since wireless recipients are already required to provide 
``line'' counts to USAC at the wire center level all wireless companies 
that are USF recipients already have the capability of providing their 
customers' locations ``by wire center'' even though they themselves do 
not operate a network based on the concept of wire centers, if such a 
rule change occurred as described in the footnote above.
---------------------------------------------------------------------------
    4. Select a suitable model for estimating cost of service. Because 
companies' actual cost records do not generally exist at granular 
levels, it will be necessary to use a model to estimate the cost of 
providing service of companies that choose to submit the above-
referenced data. The Commission would direct USAC to identify a model 
that would most accurately estimate costs and partner with the model's 
developer on an ongoing basis to ensure that the use of the model would 
achieve the goals set forth by Congress for Universal Service support 
mechanisms. Models are currently available that are capable of 
producing cost estimates for the entire country at an extremely precise 
level, such as a single census block (CB) as identified by the U.S. 
Census Bureau. To attain the level of accuracy necessary, the model 
must incorporate--to the greatest extent possible--real-world 
engineering practices and real-world network characteristics (such as 
road systems), as well as geo-coded customer locations into its 
forward-looking costing methodology.
    5. Identify the high-cost areas at a granular level using the 
selected model and submitted data. To determine which areas are 
uneconomic to serve and therefore require support, the company-provided 
data (combined with publicly available data) would be input into the 
selected model. Costs would be calculated and then produced at a level 
below the study area level to maintain a reasonable degree of 
granularity. Results would initially be produced at the individual wire 
center level, which would yield an independently-identified list of 
high-cost wire centers that are currently masked by the averaging 
process.\20\ This would give the Commission an accurate compilation of 
high-cost areas--in some cases entire study areas, in some cases 
individual wire centers (or possibly zones)--all of which are truly 
uneconomic to serve and therefore in need of explicit support.
---------------------------------------------------------------------------
    \20\ A carrier could also request the calculation of an added level 
of granularity. In many cases there is significant cost variation 
within a single wire center, as described in Embarq's many filings in 
this docket. This variation can be masked by the wire center's average 
cost, just as wire-center-level variation often is masked within a 
study area average. A carrier requesting increased granularity could 
request that the model's results (which would have been calculated by 
that time) be disaggregated to a more granular level, such as zones 
within a wire center. This would be a very simple procedure because the 
actual model processing operates even more granularly. For a company 
that requested additional granularity, the CB level costs could be 
aggregated up to (for example) an inner- and outer-zone per wire 
center, based on contiguous CBs above-or-below a certain density. The 
result, in this case, would be an independently-identified list of 
high-cost zones whose cost characteristics are currently masked by the 
averaging process.
---------------------------------------------------------------------------
C. The Commission Should Use Study Results To Direct Adequate Support 
        to the Newly-Identified High-Cost Areas
    Upon completion of the study, the Commission would still need to 
determine how to provide adequate support to high-cost areas that are 
not currently receiving it. In particular, the Commission would likely 
want to consider how support could be provided to these areas without 
significantly increasing the size of USF. In the short term the 
Commission could implement a pilot program to begin providing some 
level of support to the highest-cost wire centers that had been 
identified by the study; wire centers where the need for explicit 
support has been masked by the use of study area averages. Funding for 
this support could come, for example, from AT&T's proposal for a 25 
percent reduction in wireless receipts from the IAS and ICLS funds.\21\
---------------------------------------------------------------------------
    \21\ AT&T Ex Parte at 10-11.
---------------------------------------------------------------------------
    In the longer term, the answer can be found through a solution to 
the first structural problem listed above--that of duplicative support 
going to multiple ETCs in a single geographic area. To the extent the 
Commission undertakes action to reduce the number of recipients in an 
area--and thereby reduce the dollars flowing to those redundant ETCs--
the existing support dollars that are ``freed up'' can be distributed 
to the newly identified high-cost areas using the cost of providing 
service and an appropriate revenue benchmark.
VI. Conclusion
    In conclusion, the Joint Board can best ensure that USF reform 
serves the public interest and benefits consumers by recommending that 
the Federal Communications Commission: (a) focus on correcting the 
structural problems caused by the multiplicity of support recipients 
and the misallocation of support; (b) stabilize the current system of 
Universal Service support; (c) limit the duration of a freeze or cap so 
as to make it temporary; (d) initiate a study to identify the highest-
cost areas at a granular level; and (e) follow a clear and achievable 
process to complete the study, and then provide support dollars to the 
areas identified by the study. Through this process, the Commission 
will accomplish all of its goals; it will:

   Eliminate redundant, duplicative support;

   Control fund growth; and

   Identify accurately and direct support to all high-cost 
        areas, including those that have been overlooked because of the 
        Commission's study-area averaging approach.

            Respectfully submitted,
                                     Brian K. Staihr, Ph.D.

                                          David C. Bartlett
                                         Jeffrey S. Lanning
    cc: Members and Staff of the Federal-State Joint Board on Universal 
Service
                                 ______
                                 
  Response to Written Questions Submitted by Hon. Daniel K. Inouye to 
                           Richard N. Massey
General Comments On Recent Joint Board Recommendation
    The Joint Board recently adopted a Recommended Decision proposing a 
``cap'' on funding to competitive ETCs, while continuing to ensure that 
ILECs receive every dollar that is currently disbursed to them. The 
Joint Board's proposal would cut funding to wireless and other 
competitive providers of Universal Service by 50 percent or more, while 
having no impact at all on funding to ILECs. This unfair and anti-
competitive recommendation effectively would hinder Universal Service 
by making it harder for rural consumers to access the type of services 
that a majority of consumers want--affordable, high-quality mobile 
universal service.
    The statutory principle of competitive neutrality prohibits the 
discriminatory approach recommended by the Joint Board, which both 
Democratic and Republican members of this Committee have directly 
opposed. The Joint Board's recommendation flies in the face of S. 101, 
introduced in 2007 by Sen. Stevens, which properly would codify the 
existing requirement that ``[u]niversal service support mechanisms and 
rules should be competitively neutral''--i.e., that such rules must 
``neither unfairly advantage nor disadvantage one provider over 
another, and neither unfairly favor nor disfavor one technology over 
another.'' The version of H.R. 5252 adopted by this Committee in 2006 
included an identical provision. The Joint Board's recommendation also 
defies the request of Senators Rockefeller, Pryor, Dorgan, Klobuchar, 
and Smith, not to adopt a purportedly ``interim'' cap, ``especially one 
imposed only on certain carriers,'' because it would ``limit[] rural 
consumers' options'' and would impede the development of 
``competitively neutral'' and ``even-handed interim and long-term 
reform measures.'' Likewise, the Joint Board ignored Senators Sununu, 
McCain, DeMint and Ensign, who urged the Board not to adopt a ``plan 
that would cap only one select group of providers but not another as we 
believe such a fix would unfairly skew the marketplace.'' These 
Senators urged the Board ``not to use interim measures, such as a 
temporary cap,'' and not to ``pick winners and losers or favor one 
technology over another.''
    Alltel recognizes the widespread interest in controlling the growth 
of the Universal Service Fund. But such controls can and must be 
accomplished without compromising the principle of competitive 
neutrality or interfering with consumers' access to wireless and 
broadband services. As Commissioner Copps recognized in his testimony 
before this Committee, ``Bringing high-speed broadband to every corner 
of the country is the central infrastructure challenge we face.'' In 
dissenting from the Joint Board's recommendation, Commissioner Copps 
also expressed ``serious concerns that such a cap will be 
misinterpreted as a solution, even though it does not address--or 
pretend to address--the fundamental, comprehensive reforms needed to 
carry a viable and improved system of Universal Service forward in the 
twenty-first century.''
    The Universal Service system must be reformed in a manner that 
advances that core objective, not in a way that obstructs the 
deployment of competitive broadband facilities and services. 
Significantly, FCC data confirm that wireless carriers are rolling out 
broadband services to consumers much more rapidly than any other 
telecommunications industry sector. Consumers in rural and high-cost 
areas would be the ultimate losers under proposals that would 
substantially reduce or eliminate the support needed to stimulate the 
deployment of wireless broadband networks and services.

    Question 1. There is a proposal before the FCC to restrain the 
growth of the Universal Service Fund by using ``reverse auctions.'' 
Under this proposal, carriers would bid for the right to provide 
service in a given service area, for a given time with the entity 
making the lowest bid winning the right to receive support. While I 
appreciate the benefits of reverse auctions, I also worry about 
potential costs like lower service quality in rural areas, and the 
potential for creating ``stranded costs'' for auction losers that might 
harm access to capital.

   What effect would the possibility of losing support have on 
        the ability of carriers to attract private investment from 
        capital markets?

   What would happen if a provider wins the auction by bidding 
        too much, and then responds later by raising prices or reducing 
        service quality?

   What effect would reverse auctions have on those providers 
        that fail to win support and their ability to roll out new 
        services in rural America?
    Answer. Alltel shares many of these concerns. A ``winner takes 
all'' auction--in which only one provider could receive support funds 
at the end of the auction--would eliminate support for many wireless 
and wireline carriers that currently provide Universal Service 
throughout their designated service areas. This would make it difficult 
or impossible for these wireless and wireline carriers to continue 
investing resources to provide high-quality, ubiquitous service in 
these high-cost areas.
    Alltel believes that the public interest would not be served either 
by reverse auctions or by other changes to the high-cost funding 
rules--whether characterized as ``interim'' or long-term--in which 
arbitrary reductions in support are imposed on certain carriers or 
categories of carriers. Universal Service reform--whether through 
auctions or some other reform measure--must be based on rational, well-
supported, analysis and decisionmaking.
    Alltel has proposed a modest $25 million pilot program using 
reverse auctions to promote broadband deployment in unserved or 
underserved rural markets that would be designed to supplement, rather 
than replace, existing support mechanisms. Under Alltel's pilot 
proposal, and under any other form of competitive bidding process, 
reverse auctions should not be used to select a single ETC to receive 
support in any geographic area, but only to set the amount of high-cost 
support funding per line for all ETCs in each area. ``Winner takes 
all'' auctions would improperly distort competition by having the 
government pick winners or losers. Instead, auctions should be used, if 
at all, only to determine an efficient level of support that is the 
minimum necessary to ensure the desired level of service in each 
geographic area. Once that level of support is established, all 
carriers that satisfy the ETC requirements should receive the same (or 
comparable) amount of support per line, regardless of which one submits 
the lowest bid. In other words, rather than trying to use competitive 
bidding as a substitute for actual competition, an auction-based 
funding system could complement the competitive market's incentives for 
carriers to efficiently invest in rural markets and to provide high-
quality service to rural consumers.
    Such an auction structure would avoid distorting the marketplace 
after the auction is concluded and ensure that consumers receive the 
benefits of both Universal Service and competition. It also would 
address concerns about a single auction winner later undermining 
Universal Service by raising prices or reducing service quality. If 
multiple ETCs are receiving funds and providing the supported universal 
services after the auction, then market competition would protect 
consumers. If one ETC were to raise prices or reduce service quality, 
then consumers could opt to purchase service from an alternative 
carrier that also receives the needed support to serve the area. Also, 
an auction in which multiple carriers continue to receive support would 
reduce the likelihood that any one auction participant would offer an 
unreasonably low bid, because each bidder, as an ETC, would be required 
to provide all the required elements of Universal Service to all 
consumers throughout the area, consistent with  214(e)(1) of the Act.
    Alltel opposes proposals, such as the Verizon plan, to use auctions 
for competitive carriers, while retaining existing support mechanisms 
for the ILECs. These anti-competitive plans would likely eliminate 
funding for the majority of wireless carriers, lead to substantial 
reductions in funding to remaining wireless Universal Service 
providers, while maintaining existing funding for wireline ILECs in 
most cases. This outcome would unreasonably discriminate against 
wireless companies, in violation of the Act and well established law, 
and to the detriment of consumers and intermodal, facilities-based 
competition. It also would thwart efficient investment in rural areas. 
Instead, if any reverse auction plan were adopted, it must be 
structured to have all ETCs in a given geographic area participate in a 
single auction, regardless of the technology they use and regardless 
whether they are incumbents or competitive entrants.

    Question 2. Mr. Massey, would it be possible to construct a 
Universal Service support mechanism for wireless providers that would 
be based on the cost of providing wireless services?

   In your view, what would be wrong with such an approach?

   What effect would tying wireless support to wireless costs 
        have on the size of the fund?
    Answer. Cost models could be developed to estimate the costs of 
providing service in rural areas using both wireless or wireline 
technologies, and Universal Service mechanisms could be developed to 
set support levels based on those costs. Ideally, however, the 
Universal Service support mechanism would provide funding to every ETC 
based on the cost of the most efficient (least cost) technology 
available to serve all customers in the geographic area--wireless or 
wireline. This would ``right size'' the Universal Service Fund by 
preventing excessive disbursements to some carriers just because those 
carriers have received large amounts in the past, while also ensuring 
that sufficient funds are available to enable carriers to provide the 
supported services in high-cost areas. It also would create incentives 
for all carriers to operate as efficiently as possible and would avoid 
giving discriminatory advantages to one group of carriers and 
disadvantages to others.
    Most importantly, a competitively neutral Universal Service 
system--based on the costs of the most efficient technology, rather 
than based on an individual carrier's past investment decisions--would 
avoid distorting competition and would protect consumers' rights to 
select their preferred services in a competitive marketplace. By 
contrast, it would make no sense to provide greater funding to more 
inefficient carriers (those that incur greater costs to serve consumers 
in a given area) and less funding to more efficient carriers. Such a 
non-competitively neutral system would create perverse incentives for 
carriers to operate as inefficiently as possible. It also would 
discriminate against efficient service providers by depriving them of 
revenues that are available to carriers that operate in a more costly 
manner.\1\
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    \1\ For similar reasons, the public interest requires the 
elimination of the so-called ``rate of return'' system, in which some 
components of the existing Universal Service system reimburse ILECs for 
each dollar they spend. This system creates perverse incentives for 
these carriers to operate as inefficiently as possible, and unfairly 
guarantees these carriers' revenue streams while imposing marketplace 
risks on competitive carriers. The FCC has stated repeatedly, ever 
since 1997, that it intended to eliminate this obsolete system, and 
Alltel filed a petition asking it to do so in 2003. But thus far the 
FCC has failed to deliver on this commitment.
---------------------------------------------------------------------------
    The 1996 Act requires that all Universal Service funding be 
competitively neutral. In order to ensure competitive neutrality, all 
funds must be ``portable''--i.e., available regardless whether a 
consumer decides to purchase service from an ILEC or a competitive 
ETC--as West Virginia consumer advocate Billy Jack Gregg explained in 
his March 1, 2007 testimony (see page 21), and as the FCC and the 
courts have affirmed many times. This means that neither a wireline 
company nor a wireless company should receive different amounts of 
support funding for providing service to a given customer in a 
particular geographic area.
    It would be inappropriate to depart from competitive neutrality by 
retaining current funding levels (based primarily on embedded or 
historical costs) for ILECs and disbursing a reduced level of support 
to wireless or other competitive ETCs. The answer does not lie in 
trying to develop a new, separate set of rules for funding competitive 
ETCs, while allowing the ILECs to continue to operate under a monopoly-
inspired form of regulation, e.g., guaranteed rate of return on 
embedded costs, regardless of efficiency and effectiveness in serving 
rural areas. And it would be impossible as a practical matter to set 
wireless carriers' funding based on their ``own'' embedded costs, using 
cost studies that parallels the approaches used by the rural ILECs--
i.e., using factors such as nationwide average cost per loop, 
subscriber line charge revenue and DEM weighting. The application of 
these monopoly-oriented, ILEC-based standards to wireless carriers 
would be a contrived and convoluted process, and ultimately would make 
no sense.
                                 ______
                                 
    Response to Written Questions Submitted by Hon. Bill Nelson to 
                           Richard N. Massey
    Question 1. Is a reverse auction process the best way to reduce 
overall Fund growth? What do members of the panel think of other 
options, such as breaking up (or disaggregating) study areas to target 
funds to areas that are truly ``High-Cost?''
    Answer. In the very short-term, the best way to limit overall Fund 
growth would be to adopt a competitively neutral proposal such as that 
advanced by West Virginia consumer advocate Billy Jack Gregg. As an 
interim measure, Mr. Gregg has proposed a single inflation-adjusted cap 
on the growth of the total high-cost support disbursed to all 
categories of ETCs (including ILECs and competitors). Funding would be 
distributed among all eligible wireline and wireless carriers in each 
area, with proportional adjustments based on each ETC's share of 
customer lines. Mr. Gregg's proposal would prevent undue growth in the 
overall level of funding while also spreading the impact of the Fund 
growth limitation proportionately among all ETCs. Unlike a wireless-
specific fund cap, Mr. Gregg's proposal would avoid severe reductions 
in total support or per-line support to any category of carriers, would 
avoid distorting competition or favoring one technology over another in 
rural areas, and would avoid imposing barriers to entry.
    In the medium- to long-term, Alltel agrees with Senators 
Rockefeller, Pryor, Dorgan, Klobuchar, and Smith that ``the Board 
should seriously consider competitively-neutral proposals, ensure 
accountability for how funds are used, and promote advanced services in 
rural regions through effective targeting of funds to high-cost 
areas.'' In particular, regulators could control Fund size while also 
advancing Universal Service more effectively by targeting funds to the 
highest cost ``disaggregated'' geographic areas, regardless of whether 
those areas were served by a small, mid-sized, or large ILEC in the 
past. The current system disburses much more funding to smaller ILEC 
``study areas'' (even where the supposedly small ILEC operating 
companies are owned by large holding companies), and improperly 
requires mid-size and larger ILECs to support the high-cost portions of 
their study areas using implicit subsidies from low cost to high-cost 
areas. This system also harms wireless ETCs such as Alltel that focus 
on serving consumers in rural areas. Instead, high-cost support funding 
should be targeted to consumers in outlying rural areas.
    Alltel also believes Fund growth can be controlled by imposing more 
rigorous oversight to ensure that Funds are actually being used in a 
manner that furthers the goals of the Universal Service Fund. 
Competitive ETCs are currently required to submit detailed annual 
reports regarding their plans for network construction and service 
quality improvement, as well as information on the amounts of Universal 
Service support received and how such support was used to improve their 
networks and benefit consumers. However, in most states ILECs are not 
subject to comparably rigorous reporting standards--but they should be, 
in order to ensure the integrity of the program. In addition, the 
oversight and processing of ILEC funding should be entrusted to a 
neutral administrator subject to strict FCC oversight (i.e., USAC), 
rather than the rural ILEC-controlled advocacy organization (NECA) that 
controls this process today.

    Question 2. If we move to a reverse auction process, isn't there a 
possibility that some providers may bid so low that they end up 
financially unable to provide service? Furthermore, if an ``auction 
winner'' went bankrupt, how can we be sure that households in that area 
continue to receive service?
    Answer. Alltel shares many of these concerns, and we have addressed 
them in the response to Chairman Inouye's questions for the record. In 
short, we oppose a ``winner takes all'' auction, in which the auction 
would select a single ETC to receive support and other ETCs would 
receive no support funds. Such a system would have government pick 
winners and losers and would deprive consumers in these high-cost areas 
of access to service from a range of competing service providers. 
Instead, reverse auctions should be used, if at all, only to set the 
efficient level of high-cost support funding per line for all ETCs in 
each area.
    Such an auction structure would avoid distorting the marketplace 
after the auction is concluded and ensure that consumers receive the 
benefits of both Universal Service and competition. It also would 
address concerns about a single auction winner later undermining 
Universal Service by raising prices or reducing service quality. If 
multiple ETCs are receiving funds and providing the supported universal 
services after the auction, then market competition would protect 
consumers. If one ETC were to raise prices or reduce service quality, 
then consumers could opt to purchase service from an alternative 
carrier that also receives the needed support to serve the area. Also, 
an auction in which multiple carriers continue to receive support would 
reduce the likelihood that any one auction participant would offer an 
unreasonably low bid, because each bidder, as an ETC, would be required 
to provide all the required elements of Universal Service to all 
consumers throughout the area, consistent with  214(e)(1) of the Act.

    Question 3. Alltel and Verizon have presented separate proposals 
for a reverse auction process. Can you explain what specifically makes 
your proposal superior? Also, how do your plans differ from the reverse 
auction proposal presented by CTIA?
    Answer. Alltel opposes Verizon's plan and other proposals to 
conduct multiple separate auctions for different technologies or 
classes of carriers. These anti-competitive plans would likely 
eliminate funding for the majority of wireless carriers, lead to 
substantial reductions in funding to remaining wireless Universal 
Service providers, while maintaining existing funding for wireline 
ILECs in most cases. This outcome would unreasonably discriminate 
against wireless companies, in violation of the Act and well 
established law, and to the detriment of consumers and intermodal, 
facilities-based competition. It also would thwart efficient investment 
in rural areas. Instead, if any reverse auction plan were adopted, it 
must be structured to have all ETCs in a given geographic area 
participate in a single auction, regardless of the technology they use 
and regardless whether they are incumbents or competitive entrants.
    By contrast to Verizon, Alltel has proposed a modest $25 million 
pilot program using reverse auctions to promote broadband deployment in 
unserved or underserved rural markets that would be designed to 
supplement, rather than replace, existing support mechanisms. Verizon's 
plan would continue to focus funding on traditional ``plain old 
telephone service;'' Alltel's reverse auction plan is more forward-
looking because it would target funding to encourage deployment of new 
broadband networks and services.
    Alltel's and CTIA's auction plans are similar in most respects. 
Both Alltel and CTIA support auctions in which multiple ETCs would be 
able to compete in the provision of supported services after the 
auction concludes, and both Alltel and CTIA oppose ``winner takes all'' 
auctions, for the reasons discussed above. CTIA has indicated that, if 
needed to encourage low bidding, the auction winner (i.e., the lowest 
bidder) could receive slightly more funding per line than other ETCs in 
the area (``winner takes more''). Alltel believes that it would be 
preferable for all ETCs to receive the same amount of funding, but 
would not object to CTIA's approach as long as there is only a small 
difference between the amounts disbursed to low bidders and to other 
qualifying ETCs.
                                 ______
                                 
  Response to Written Questions Submitted by Hon. Daniel K. Inouye to 
                            Thomas J. Tauke
    Question 1. There is a proposal before the FCC to restrain the 
growth of the Universal Service Fund by using ``reverse auctions.'' 
Under this proposal, carriers would bid for the right to provide 
service in a given service area, for a given time with the entity 
making the lowest bid winning the right to receive support. While I 
appreciate the benefits of reverse auctions, I also worry about 
potential costs like lower service quality in rural areas, and the 
potential for creating ``stranded costs'' for auction losers that might 
harm access to capital. What effect would the possibility of losing 
support have on the ability of carriers to attract private investment 
from capital markets?
    Answer. There are several different proposals before the FCC 
regarding the use of competitive bidding or reverse auctions to 
distribute Universal Service support. Under Verizon's proposal, the 
only carriers that could ``lose'' USF support are those in areas where 
the system is supporting more than one network. Those carriers that 
demonstrate their efficiency by winning the auction will continue to 
receive support in the amount of their bids. Thus, the auction process 
itself will help capital markets identify efficient carriers, which 
could well promote private investment.
    Verizon's proposal would not ``flash cut'' to auctions, but would 
phase them in over time, and would provide sufficient transitions for 
carriers that are currently receiving support. Verizon has proposed 
that the FCC phase in separate and parallel auctions: one auction in 
areas with more than one wireless provider receiving USF funds and one 
auction in areas with more than one wireline provider receiving USF 
funds.
    Auctions initially would be held only among wireless ETCs and only 
in areas where there is more than one wireless ETC. In this first 
phase, auctions would not affect funding for rural telephone companies. 
After the wireless auctions have been completed, the FCC would hold 
auctions among wireline ETCs in areas where there is at least one 
wireline ETC. Because there are relatively few wireline CETCs today, 
this part of Verizon's proposal would affect very few areas. After both 
sets of auctions are completed, Verizon suggests that the FCC could 
assess the results of the auctions held so far, and determine next 
steps.

    Question 1a. What would happen if a provider wins the auction by 
bidding too much, and then responds later by raising prices or reducing 
service quality?
    Answer. Consumer choice is the most effective check on prices, and 
that would not change if auctions are used to identify the most 
efficient carriers in high-cost areas. More than ever before, consumers 
of communications services have options--from both traditional service 
providers and new offerings by cable, Voice over IP, and wireless 
providers--and they are taking advantage of them. Many of these 
providers operate without any Universal Service support, which 
constrains the prices all carriers can charge. There may be some areas 
where wireline providers do not face competition; in those areas, 
Verizon does not propose to hold USF auctions, and in any event the 
auction process would not impact existing price regulations.
    Every purchasing government agency that uses contractors must be 
concerned with quality of service. In this context, as in the 
government procurement context, the auction process itself can ensure 
that a supported provider offers a minimum level of service. In an USF 
auction, a document like an RFP (request for proposal) or an RFQ 
(request for a quote), which are used in other types of government 
procurement, would be issued. That document would define the 
obligations of the winning bidder in an auction. The bidder would know 
these obligations in advance and, by bidding, would agree to accept 
them. Once the auction was over, the winning bidder would also sign a 
contract that would outline these responsibilities and which would help 
ensure that service quality benchmarks are satisfied.

    Question 1b. What effect would reverse auctions have on those 
providers that fail to win support and their ability to roll out new 
services in rural America?
    Answer. Auctions do not prevent carriers, even those carriers that 
participate in but do not win the auction, from providing service in an 
area. Again, many providers--especially new intermodal providers--
operate without any Universal Service support, and would presumably 
continue to do so even in areas where an auction has been held. Verizon 
supports targeting USF support to where it is truly needed; in areas 
where a provider is able to operate without support, the presumption 
should be that we do not need USF in that area to ensure that consumers 
have affordable access. Moreover, auction results would not stand 
forever. Carriers that do not win the auction will have opportunities 
to bid again for support in the same areas and to nominate other areas 
for auction.
    We also must remember that today's Universal Service system, which 
bases support on a carrier's costs, does not create ideal incentives 
for carriers to innovate and develop new services. In contrast, an 
auction process would reward carriers for introducing new services 
because those carriers would have a stronger business plan and would be 
better positioned to win an auction. Competition in the marketplace has 
served American consumers well, and Verizon's proposal would bring 
those same incentives to bear for the benefit of consumers in rural 
areas.
                                 ______
                                 
    Response to Written Questions Submitted by Hon. Bill Nelson to 
                            Thomas J. Tauke
    Question 1. Is a reverse auction process the best way to reduce 
overall Fund growth? What do members of the panel think of other 
options, such as breaking up (or disaggregating) study areas to target 
funds to areas that are truly ``High-Cost?''
    Answer. Disaggregation of support from study areas to wire centers 
or the sub-wire center level is one potential solution, but it is a 
potential solution for a different problem--how to better target high-
cost funds to areas where they are truly needed.
    We should keep in mind that targeting to smaller geographic areas 
is not a way to control the Fund's size. On the contrary, if the 
current funding mechanism were to be modified to use smaller geographic 
areas to distribute support, the result could be a much larger fund.
    Verizon is supportive of efforts to target support to areas where 
the need is greatest. In fact, our proposal makes it possible to target 
the funding to smaller geographic areas without making the Fund bigger, 
because we also suggest a cap that provides immediate control of Fund 
growth and an auction mechanism that determines just the right amount 
of support for each targeted area. Gaining control of fund growth 
through a reasonable cap is a critical first step that will give us 
breathing room to implement fundamental, long-term reforms.

    Question 2. If we move to a reverse auction process, isn't there a 
possibility that some providers may bid so low that they end up 
financially unable to provide service? Furthermore, if an ``auction 
winner'' went bankrupt, how can we be sure that households in that area 
continue to receive service?
    Answer. In any government procurement process, the responsible 
entity must ensure that the winning bidder will perform as specified in 
the contract. Auctioning USF obligations is no different.
    In the USF context, this can be accomplished by qualifying 
prospective bidders to ensure that they are technically and financially 
able to perform, posting of bonds, and the enforcement of penalties for 
nonperformance. Another enforcement mechanism could be disqualification 
from future bidding if a company fails to perform.

    Question 3. Alltel and Verizon have presented separate proposals 
for a reverse auction process. Can you explain what specifically makes 
your proposal superior? Also, how do your plans differ from the reverse 
auction proposal presented by CTIA?
    Answer. Verizon has proposed the most effective and workable path 
to Universal Service reform. We propose immediate action in the form of 
reasonable caps at current funding levels to address the most immediate 
crisis the Fund faces: its rapid and unsustainable growth. We propose 
implementing competitive bidding quickly but on limited basis (first in 
areas with multiple wireless ETCs), and where it can provide the 
greatest benefit. We then propose to give the Joint Board and the FCC 
the flexibility to assess the results of these steps and to decide 
whether to extend the reforms more broadly.
    In contrast, Alltel does not propose a solution that will properly 
stabilize and rationalize the fund. Alltel proposes only to cap the 
per-line amount of support in each area. This capping proposal would be 
ineffective. It ignores the main source of growth in the fund: support 
provided to the growing number of wireless handsets. Moreover, Alltel 
only supports the use of auctions for a small fraction of the Fund ($25 
million) and only for new broadband services. If it is necessary for 
government to intervene in broadband deployment, there are better ways 
to target broadband support than by including broadband in the 
definition of services supported by the current Fund.
    CTIA is supportive of auctions, but suggests that auctions should 
be designed so that multiple providers continue to receive support with 
the auction winner receiving a higher amount of support (which CTIA 
calls ``winner takes more.'') However, an auction that has more than 
one winner and no ``losers'' would neither rationalize nor stabilize 
the system, and would not contain the growth of the fund.
    A ``winner takes more'' approach does not provide the proper 
incentives for participants to submit bids that are no larger than 
necessary to provide supported services, and could lead to collusion 
and strategic behavior that would skew the auction's results. For 
example, if all the bidders knew that no bidder could truly lose the 
auction, there would be strong incentives for all the bidders to 
collude and submit large bids so that all of the participants received 
higher levels of support.
                                 ______
                                 
  Response to Written Question Submitted by Hon. Daniel K. Inouye to 
                             W. Tom Simmons
    Question. There is a proposal before the FCC to restrain the growth 
of the Universal Service Fund by using ``reverse auctions.'' Under this 
proposal, carriers would bid for the right to provide service in a 
given service area, for a given time with the entity making the lowest 
bid winning the right to receive support. While I appreciate the 
benefits of reverse auctions, I also worry about potential costs like 
lower service quality in rural areas, and the potential for creating 
``stranded costs'' for auction losers that might harm access to 
capital.
   What effect would the possibility of losing support have on 
        the ability of carriers to attract private investment from 
        capital markets?

   What would happen if a provider wins the auction by bidding 
        too much, and then responds later by raising prices or reducing 
        service quality?

   What effect would reverse auctions have on those providers 
        that fail to win support and their ability to roll out new 
        services in rural America?
    Answer. As stated in my written testimony, the continued growth in 
the size of the Universal Service Fund is a matter of significant 
concern to the cable industry for a simple reason--these costs 
ultimately are borne by consumers. Based on the anticipated growth of 
cable telephony services, and the corresponding growth in the share of 
the program that will be funded by cable consumers, our industry 
supports efforts to reduce the burden of Federal support programs by 
more efficiently distributing support.
    The above questions suggest concern about the impact reverse 
auctions would have on existing networks. As network-based companies, 
we appreciate that concern. In reforming the program for distribution 
of Federal Universal Service support, however, it is important to keep 
in mind that the program was created to benefit consumers, not 
carriers. The subsidization of networks through a government fund is 
simply a means to that end in situations where market forces would not 
otherwise meet consumers' needs. Where market forces can meet those 
needs, as is increasingly likely given the growth of cable voice 
services, government subsidization is unnecessary and potentially 
counterproductive.
    Reverse auctions are a mechanism by which government can take 
advantage of market forces (i.e., the presence of multiple networks in 
areas previously served by a single network) to distribute support more 
efficiently. If structured properly, they offer an opportunity not only 
to reduce the size of the fund, but also to promote competition in 
high-cost areas by making support available on a more equitable basis. 
The challenge is to reduce the burden on consumers and promote 
competition, without sacrificing the level of service provided in these 
areas today. We believe that an auction program can do this by 
specifying minimum levels of service to be offered and establishing 
obligations to be met by all bidders. This should include some sort of 
carrier-of-last-resort obligation, which will ensure that the 
fundamental goal of providing service to all consumers is met. Any 
facilities-based provider that commits to meeting these requirements 
should be eligible to participate in the auction.
    Implementing a reverse auction process for Universal Service should 
not result in stranded costs. If the auction takes place in an area 
with multiple networks, all those networks have an incentive to compete 
for customers (because they need the revenue to cover their costs) 
regardless of whether they win or lose the auction. Even if an ILEC 
loses customers, the investment generally is not stranded because it 
can be used if the carrier wins the customer back, which it has every 
incentive to do.
                                 ______
                                 
    Response to Written Questions Submitted by Hon. Bill Nelson to 
                             W. Tom Simmons
    Question 1. Is a reverse auction process the best way to reduce 
overall Fund growth? What do members of the panel think of other 
options, such as breaking up (or disaggregating) study areas to target 
funds to areas that are truly ``High-Cost?''
    Answer. As stated in response to Chairman Inouye's question above, 
we believe that reverse auctions, if structured properly, offer an 
opportunity not only to reduce the size of the fund, but also to 
promote competition in high-cost areas by making support available on a 
more equitable basis. NCTA's view is that reverse auctions can be 
effective only if they cover relatively small service areas. Not only 
is this critical to ensuring that the bidding process is competitively 
and technologically neutral, it also has the effect of targeting more 
support to truly high-cost areas while reducing support to those areas 
where market forces are most active. NCTA would not oppose 
consideration of other methods of targeting support if they could be 
accomplished in a manner that reduces overall Fund size.

    Question 2. If we move to a reverse auction process, isn't there a 
possibility that some providers may bid so low that they end up 
financially unable to provide service? Furthermore, if an ``auction 
winner'' went bankrupt, how can we be sure that households in that area 
continue to receive service?
    Answer. As noted above, NCTA believes that a minimum set of binding 
service obligations should be part of any auction program. In addition, 
in establishing the ground rules for such a program, the FCC could 
establish procedures to ensure continuation of service and to address 
the consequences of a bankruptcy filing.

                                  
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