[House Hearing, 111 Congress]
[From the U.S. Government Publishing Office]


 
            UNIVERSAL SERVICE: REFORMING THE HIGH-COST FUND 

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

                                HEARING

                               BEFORE THE

      SUBCOMMITTEE ON COMMUNICATIONS, TECHNOLOGY, AND THE INTERNET

                                 OF THE

                    COMMITTEE ON ENERGY AND COMMERCE
                        HOUSE OF REPRESENTATIVES

                     ONE HUNDRED ELEVENTH CONGRESS

                             FIRST SESSION

                               __________

                             MARCH 12, 2009

                               __________

                           Serial No. 111-13


      Printed for the use of the Committee on Energy and Commerce

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                    COMMITTEE ON ENERGY AND COMMERCE
                      HENRY A. WAXMAN, California
                               Chairman
JOHN D. DINGELL, Michigan            JOE BARTON, Texas
  Chairman Emeritus                    Ranking Member
EDWARD J. MARKEY, Massachusetts      RALPH M. HALL, Texas
RICK BOUCHER, Virginia               FRED UPTON, Michigan
FRANK PALLONE, Jr., New Jersey       CLIFF STEARNS, Florida
BART GORDON, Tennessee               NATHAN DEAL, Georgia
BOBBY L. RUSH, Illinois              ED WHITFIELD, Kentucky
ANNA G. ESHOO, California            JOHN SHIMKUS, Illinois
BART STUPAK, Michigan                JOHN B. SHADEGG, Arizona
ELIOT L. ENGEL, New York             ROY BLUNT, Missouri
GENE GREEN, Texas                    STEVE BUYER, Indiana
DIANA DeGETTE, Colorado              GEORGE RADANOVICH, California
  Vice Chairman                      JOSEPH R. PITTS, Pennsylvania
LOIS CAPPS, California               MARY BONO MACK, California
MICHAEL F. DOYLE, Pennsylvania       GREG WALDEN, Oregon
JANE HARMAN, California              LEE TERRY, Nebraska
TOM ALLEN, Maine                     MIKE ROGERS, Michigan
JANICE D. SCHAKOWSKY, Illinois       SUE WILKINS MYRICK, North Carolina
HILDA L. SOLIS, California           JOHN SULLIVAN, Oklahoma
CHARLES A. GONZALEZ, Texas           TIM MURPHY, Pennsylvania
JAY INSLEE, Washington               MICHAEL C. BURGESS, Texas
TAMMY BALDWIN, Wisconsin             MARSHA BLACKBURN, Tennessee
MIKE ROSS, Arkansas                  PHIL GINGREY, Georgia
ANTHONY D. WEINER, New York          STEVE SCALISE, Louisiana
JIM MATHESON, Utah
G.K. BUTTERFIELD, North Carolina
CHARLIE MELANCON, Louisiana
JOHN BARROW, Georgia
BARON P. HILL, Indiana
DORIS O. MATSUI, California
DONNA M. CHRISTENSEN, Virgin 
  Islands
KATHY CASTOR, Florida
JOHN P. SARBANES, Maryland
CHRISTOPHER MURPHY, Connecticut
ZACHARY T. SPACE, Ohio
JERRY McNERNEY, California
BETTY SUTTON, Ohio
BRUCE BRALEY, Iowa
PETER WELCH, Vermont    









      Subcommittee on Communications, Technology, and the Internet

                         RICK BOUCHER, Virginia
                                 Chairman
EDWARD J. MARKEY, Massachusetts      FRED UPTON, Michigan
BART GORDON, Tennessee                 Ranking Member
BOBBY L. RUSH, Illinois              J. DENNIS HASTERT, Illinois
ANNA G. ESHOO, California            CLIFF STEARNS, Florida
BART STUPAK, Michigan                NATHAN DEAL, Georgia
DIANA DeGETTE, Colorado              BARBARA CUBIN, Wyoming
MICHAEL F. DOYLE, Pennsylvania       JOHN SHIMKUS, Illinois
JAY INSLEE, Washington               HEATHER WILSON, New Mexico
ANTHONY D. WEINER, New York          CHARLES W. ``CHIP'' PICKERING, 
G.K. BUTTERFIELD, North Carolina         Mississippi
CHARLIE MELANCON, Louisiana          VITO FOSELLA, New York
BARON P. HILL, Indiana               GEORGE RADANOVICH, California
DORIS O. MATSUI, California          MARY BONO MACK, California
DONNA M. CHRISTENSEN, Virgin         GREG WALDEN, Oregon
    Islands                          LEE TERRY, Nebraska
KATHY CASTOR, Florida                MIKE FERGUSON, New Jersey
CHRISTOPHER S. MURPHY, Connecticut
ZACHARY T. SPACE, Ohio
JERRY McNERNEY, California
PETER WELCH, Vermont
JOHN D. DINGELL, Michigan (ex 
    officio)
  

























                             C O N T E N T S

                              ----------                              
                                                                   Page
Hon. Rick Boucher, a Representative in Congress from the 
  Commonwealth of Virginia, opening statement....................     1
    Prepared statement...........................................     4
Hon. Cliff Stearns, a Representative in Congress from the State 
  of Florida, opening statement..................................     6
Hon. Henry A. Waxman, a Representative in Congress from the State 
  of California, opening statement...............................    10
    Prepared statement...........................................    12
Hon. Zachary T. Space, a Representative in Congress from the 
  State of Ohio, prepared statement..............................    17
Hon. John D. Dingell, a Representative in Congress from the State 
  of Michigan, prepared statement................................   220

                               Witnesses

Steve Davis, Senior Vice President, Public Policy and Government 
  Relations, Qwest Corporation...................................    19
    Prepared statement...........................................    22
    Answers to submitted questions...............................   237
Joel E. Lubin, Vice President, Public Policy, AT&T...............    41
    Prepared statement...........................................    43
    Answers to submitted questions...............................   240
Leroy T. Carlson, Jr., Chairman of the Board, U.S. Cellular......    63
    Prepared statement...........................................    65
Mark Gailey, President and General Manager, Totah Communications.    85
    Prepared statement...........................................    87
Derek Turner, Research Director, Free Press......................    93
    Prepared statement...........................................    95
    Answers to submitted questions...............................   244
Tom Tauke, Executive Vice President, Public Affairs, Policy and 
  Communications, Verizon........................................   122
    Prepared statement...........................................   124
    Answers to submitted questions...............................   248
Tom Gerke, Chief Executive Officer, Embarq.......................   135
    Prepared statement...........................................   137
Gregory Hale, General Manager, Logan Telephone Cooperative, Inc..   142
    Prepared statement...........................................   144
Scott Wallsten, Vice President for Research and Senior Fellow, 
  The Technology Policy Institute................................   169
    Prepared statement...........................................   172

                           Submitted Material

Statement of Jerry Elig, Ph.D., Senior Research Fellow, Mercatus 
  Center, George Mason University, submitted by Mr. Boucher......   222
Statement of the American Homeowners Grassroots Alliance, 
  submitted by Mr. Boucher.......................................   231


            UNIVERSAL SERVICE: REFORMING THE HIGH-COST FUND

                              ----------                              


                        THURSDAY, MARCH 12, 2009

              House of Representatives,    
Subcommittee on Communications, Technology,
                                  and the Internet,
                          Committee on Energy and Commerce,
                                                    Washington, DC.
    The subcommittee met, pursuant to call, at 10:05 a.m., in 
Room 2123 of the Rayburn House Office Building, Hon. Rick 
Boucher (chairman) presiding.
    Members present: Representatives Boucher, Rush, Stupak, 
DeGette, Doyle, Weiner, Butterfield, Christensen, Castor, 
Space, McNerney, Welch, Waxman (ex officio), Stearns, Deal, 
Shimkus, Shadegg, Blunt, Radanovich, Walden, Terry, Blackburn 
and Barton (ex officio).
    Staff present: Amy Levine, Telecommunications Counsel; 
Roger Sherman, Senior Counsel; Tim Powderly, Counsel; Shawn 
Chang, Counsel; Greg Guice, Counsel; Jennifer Schneider, Mr. 
Boucher's Chief of Staff; Pat Delgado, Telecommunications 
Policy Coordinator; Philip Murphy, Legislative Clerk; Neil 
Fried, Minority Senior Counsel; Amy Bender, Minority Counsel; 
and Garrett Golding, Legislative Analyst.

             OPENING STATEMENT OF HON. RICK BOUCHER

    Mr. Boucher. The committee will come to order.
    Our subject this morning is comprehensive reform of the 
Universal Service High-Cost Fund, a matter on which the 
subcommittee will act in the near future. Universal service 
support is as essential to our national economic future as it 
has been historically. In this time when electronic 
communications are at the very heart of the national economy, 
it is perhaps more essential than ever before that all 
Americans remain connected. Affordable telephone service not 
only benefits the individual users of that service but at a 
time when electronic commerce and communications are central to 
national economy performance, having all of America connected 
should be a priority for rural and metropolitan residents 
alike.
    The Universal Service Fund that assures affordable rural 
telephone service has come under increasing pressure and 
comprehensive reform is now a necessity. New technologies and 
new business plans are combining to diminish the long-distance 
revenues that have historically been relied upon in order to 
support universal service, and broadband has emerged as a 
critical part of our telecommunications infrastructure. In 
reforming the USF, other funding sources must be tapped, and 
new controls must be placed on expenditures from the fund. We 
should also reexamine which networks and services deserve USF 
support.
    In an effort to achieve these goals in a manner that is 
fair to the rural telephone companies that are the net 
beneficiaries of USF support and the large regional carriers 
that are net contributors into the fund, my colleague from 
Nebraska, Mr. Terry, and I have worked together for the last 3 
years and in the last Congress introduced a comprehensive 
reform bill based on that 3 years of effort. We consulted with 
dozens of stakeholders and sought consensus among various 
competing interests. We intend to continue that process this 
year and shortly will introduce a revised version of that 
legislation, and we welcome the suggestions and the 
cosponsorship of our measure by other members of the 
subcommittee on a bipartisan basis.
    Our goal is to expand the revenue base for the fund. We 
would give the FCC discretion to use a revenues or a numbers 
approach to contributions or some combination of those two 
approaches. We would allow the assessment for the fund of 
intrastate as well as interstate revenues. We would also impose 
strict limitations on growth of the fund by capping the entire 
find and basing payments on a carrier's actual cost rather than 
the cost of the incumbent telecommunications carrier in the 
region. We would improve the efficiency of expenditures from 
the fund by requiring that all recipients meet minimum FCC 
standards in order to receive support. We would also future-
proof the fund by requiring that all recipients offer broadband 
at preset minimum speeds. To receive support that broadband 
offering would be a condition. Broadband is to communities 
today what electricity and basic telephone service were 100 
years ago. It is the new essential infrastructure for the 
commercial success of all communities and clearly deserving, in 
my view, of USF support.
    Other elements of our measure would include a better 
targeting of support to high-cost areas by switching from 
statewide to wire center averaging, fixing the phantom traffic 
problem by requiring carriers to pass through call identifying 
information, making rural exchanges more marketable for 
telephone companies that may desire to sell them by repairing 
the parent trap, and making permanent the Antideficiency Act 
exemption to the Universal Service Fund rather than requiring 
an annual appropriations waiver of that ADA provision, which 
happens at the present time.
    There are other matters that I think we should consider and 
about which I would welcome the insights of our distinguished 
panel this morning. For example, how, if at all, should the 
$7.2 billion of broadband stimulus money affect inclusion of 
broadband in the universal service reform measure? Another 
question is when we eliminate the identical support rule, how 
should the actual cost of the recipients of universal service 
funding be calculated? As another question, should we eliminate 
the distinction between rural and non-rural carriers presently 
embedded as a consequence of an FCC order? I hope that our 
witnesses will address this morning these and other matters.
    I want to thank today's witnesses for their participation, 
for preparing their testimony and engaging in this important 
discussion with us.
    [The prepared statement of Mr. Boucher follows:]

    [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
    
    Mr. Boucher. I now recognize the gentleman from Florida, 
the ranking Republican of our subcommittee, Mr. Stearns, for 5 
minutes.

            OPENING STATEMENT OF HON. CLIFF STEARNS

    Mr. Stearns. Good morning, and thank you, Mr. Chairman, and 
thank you for having this hearing. There has been many, many 
ideas including your legislation that have been discussed and 
so I look forward to hearing from our witnesses this morning 
and hearing how best to move forward.
    I think all of us this morning agree that the USF needs to 
be reformed and reformed quickly. The system is fraught with 
waste, fraud and abuse, in our opinion. A major overhaul is 
necessary. So a question before us this morning is what are the 
appropriate goals of the program and of course how best do we 
achieve them. The 1996 Telecom Act codified universal service 
but the concept goes back decades earlier to a time when there 
was really only one phone company. Now the landscape looks a 
whole lot different and yet the fund is still administered by 
outdated rules.
    This hearing will focus on the High-Cost Fund, the largest 
component of the USF and the program most in need of reform. 
The cost of this fund has more than tripled in the last decade, 
soaring from $1.3 billion in 1997 to almost $4.5 billion last 
year. The FCC's high-cost rules do not reflect the dramatic 
changes in the marketplace including multi-facilities-based 
providers entering markets throughout the Nation. Now nearly 
the entire country has access to phone service. We have more 
competition and better technology than ever before. Yet the 
Universal Service Fund has grown out of control and can 
continue to do this unless we adopt meaningful reforms.
    The universal service fees have topped 11 percent of the 
consumer's monthly bill. Accordingly, there is a need to reform 
the program away from subsidies, in our opinion, that may no 
longer be necessary as technology and services improve and 
become more and more widespread. Instead, we need to move 
towards a solution that ensures the goals of universal service 
but minimizes consumer cost. Without fundamental reform, now is 
not the time to expand the fund to include just broadband. The 
recently enacted stimulus package already provides $7 billion, 
an entire year's worth of USF, to bring broadband to unserved 
areas. It will take at least 2 years for the stimulus money to 
be fully distributed and the program to be completely 
implemented. For now let us take the 2 years while the stimulus 
package is being used and examine the effectiveness of the 
current program. Instead of adding new broadband requirements 
to universal service, we should engage in oversight evaluation 
of these existing programs.
    In addition, we should impose a firm cap to prevent 
uncontrolled growth in the fund. With a limitless pool of 
money, carriers have little incentive to operate more 
efficiently. The subsidy chills innovation by propping up older 
technologies and carriers and making it harder for new 
innovators to compete. Throwing additional money at this 
crumbling program makes no sense. Moreover, performance 
measurements are needed to ensure we are getting results from 
the over $50 billion we have spent in the last decade. What 
impact are these funds having when everyone already has access 
to phone service? This type of transparency and accountability 
goes a long way towards preventing abuse.
    To really add competitive pressure, however, we also need 
to move to market-based mechanisms that are technology-neutral 
and fund the carrier that can provide the most effective 
service in that area. A report by the GAO shows that the FCC 
needs to improve oversight and management of the USF. The GAO 
has also criticized the FCC for failing to develop specific 
performance goals and measurements for this high-cost program. 
One question we might ask is, how much has been lost to waste, 
fraud and abuse. The FCC's inspector general found error rates 
of close to 25 percent in the High-Cost Fund, which translates 
to improper payments of approximately $1 billion. The inspector 
general also found that all four universal service programs to 
be ``at risk.'' We need to take a hard look at this program and 
institute real reform.
    So Mr. Chairman, I again commend you for having this 
hearing to examine the goals and assess the results of the 
existing program. We all agree that the system needs reform. I 
hope we are able to work together towards a solution that is 
fair to all consumers.
    Mr. Boucher. Thank you very much, Mr. Stearns.
    The gentleman from Michigan, Mr. Stupak, is recognized for 
2 minutes.
    Mr. Stupak. Thank you, Mr. Boucher, and thank you for 
holding this hearing on how we should reform the Universal 
Service Fund. I appreciate that we are taking up this issue 
quickly considering we almost had the FCC make dramatic changes 
to the program late last year.
    USF is important to rural Americans so significant changes 
to the program should come from Congress where it can be done 
in an open manner with direct member input through the 
legislative process, not with the FCC. Now, this is not to say 
that this will be an easy process since there are many 
differing views on how we should reform USF but the one thing I 
think we can all agree on is that the USF should be reformed to 
promote broadband deployment. Communities that lack broadband 
access in today's world are at a disadvantage on all fronts. 
Businesses without broadband cannot compete in a globalized 
market. Schools without broadband cannot properly prepare their 
students today for the workforce of tomorrow and hospitals 
without broadband cannot access the latest advances in 
telemedicine.
    Reforming USF should mean retooling it so it reflects 
advancements in technology to meet the needs of tomorrow's 
economy. Reform should not be mischaracterized as a means to 
cut overall federal investment into our rural communities. We 
cannot obtain more broadband deployment with a smaller 
investment or a weaker support structure for rural 
telecommunications. I look forward to hearing from our 
witnesses on how we can modernize the USF to continue meeting 
its goal of providing universally accessible and affordable 
telecommunications for all Americans.
    Thank you, Mr. Chairman. I yield back the remaining 20 
seconds.
    Mr. Boucher. Thank you very much, Mr. Stupak.
    The gentleman from Missouri, Mr. Blunt, is recognized for 2 
minutes.
    Mr. Blunt. Thank you, Mr. Chairman, and thank you for 
holding this hearing today and to have the opportunity to hear 
from this group of really well-grounded and distinguished 
witnesses. I know this an area, Mr. Chairman, where you have 
shown great leadership in the past and I know all the members 
of the subcommittee are looking forward to working with you to 
see if we can find ways to reform and update the Universal 
Service Fund.
    We all understand the fund needs serious reform. The cost 
of the program soared, tripling in the past 12 years alone, and 
the impact on consumers is uneven and often arduous. 
Allegations of waste, fraud and abuse have arisen and no 
suitable accounting mechanism exists to appropriately monitor 
where the money is going. In short, this program is broken and 
the Congress should act. However, it should act responsibly and 
within the mission of ensuring that valuable services remain 
available to parts of the country that need it. Congress should 
carefully consider whether it is appropriate to add new 
components such as broadband access to the Universal Service 
Fund. We need to stop the soaring cost of the program but do it 
in a way that ensures that unserved communities continue to get 
service where the market is challenged to deliver it.
    I want to thank you, Mr. Chairman, for calling this 
hearing. I also want to thank both Mr. Terry and Mr. Barton, 
our full committee ranking, for their leadership on this issue. 
Most importantly, I want to thank our witnesses today who come 
with incredible information on this topic. I look forward to a 
bipartisan bill to address this program.
    Mr. Boucher. Thank you very much, Mr. Blunt. That is my 
goal as well.
    The gentleman from Pennsylvania, Mr. Doyle, is recognized 
for 2 minutes.
    Mr. Doyle. Thank you, Mr. Chairman, for holding this 
hearing on universal service. I hope that we are able to draw 
some conclusions after this hearing that will help us expedite 
the process to make sure that all Americans are able to 
communicate with each other however they choose.
    At our last subcommittee hearing on this issue, I said that 
the Universal Service Fund's best purpose as we conceived it in 
the Telecom Act in 1996 had fundamentally changed. At that time 
I said that ``we need to completely reform the fund by moving 
away from subsidizing telephone service and instead put our 
money towards the broadband future.'' For now I will call this 
needed reform Universal Service 2.0. Mr. Chairman, Universal 
Service 2.0 means that all Americans have access and are able 
to use fast broadband. Universal Service 2.0 recognizes that 
using cost-efficient technologies is critical when some parts 
of the country are asked to pay for others. Universal Service 
2.0 recognizes that competition is still vital to drive down 
consumer prices and required subsidies, and Mr. Chairman, 
Universal Service 2.0 means that local governments have a role 
to play, and I want to say to you, Mr. Chairman, that I will 
join you in educating anyone at today's witness table that 
disagrees that they do.
    Thanks, and I will yield back my time.
    Mr. Boucher. Thank you very much, Mr. Doyle.
    The gentleman from Oregon, Mr. Walden, is next. I believe 
he has departed at least temporarily. The gentleman from 
Nebraska, Mr. Terry, is recognized for 2 minutes.
    Mr. Terry. Well, thank you, Mr. Chairman, for holding this 
hearing on Universal Service Fund. I have enjoyed our time 
working together to develop this bill and the framework.
    I set out several years ago, almost 4 years ago, to reform 
USF because I felt that the principles and goals of universal 
service are relevant today just as they were at the origination 
of this program. However, the Universal Service Fund had failed 
to adapt to the changing telecommunications environment. The 
fact that broadband is still not a supported goal of USF 
reflects the need for reform. The FCC has built a tremendous 
record on USF reform over the last few years and now it is time 
for this committee to act.
    I will note that I represent an urban suburban area. I have 
more concrete than grass in my district yet I see the need to 
continue universal service and modernize it. I recognize the 
importance of ubiquitous broadband network and the value my 
constituents receive from being able to connect to anyone 
anywhere in the country and hope that my colleagues do too. 
Now, as we move forward on reform, we must not lose sight that 
USF is about providing customers in all regions of the Nation 
living in rural, insular and high-cost areas access to 
affordable telecommunications and information services.
    I yield back.
    Mr. Boucher. Thank you very much, Mr. Terry, and thank you 
for your outstanding work on this measure.
    The gentlelady from the Virgin Islands, Mrs. Christensen, 
is recognized for 2 minutes.
    Mrs. Christensen. Thank you, Mr. Chairman.
    Chairman Boucher and Ranking Member Stearns, as a 
representative of a district that is a high-cost insular area 
which reportedly received $25.5 million in high-cost support in 
2007 and has benefited from the other programs as well, I thank 
you for holding this hearing and for both of your long-term 
legislative efforts to try to keep the Universal Service Fund 
in sync with a rapidly changing landscape. I think everyone has 
agreed on the need for reform but also to preserving the intent 
codified in 1996 that all consumers across our Nation should 
have access to the broad spectrum of communication 
possibilities at affordable rates, although with some expansion 
of that.
    The broadband provisions in the recent recovery package 
will give a welcome boost to the goal of making technology 
equally accessible to everyone everywhere as well as create 
more demand for broadband as we look to transform our health 
care system beginning with health information technology, and 
so on the areas that present challenges to taking the Universal 
Service Fund into the 21st century, I look forward to the 
testimonies and welcome our panelists this morning.
    Mr. Boucher. Thank you very much, Mrs. Christensen.
    The gentleman from Georgia, Mr. Deal, is recognized for 2 
minutes.
    Mr. Deal. Thank you, Mr. Chairman. I want to welcome our 
witnesses, and in order to expedite the hearing of their 
testimony I will waive my opening statement.
    Mr. Boucher. Thank you very much, Mr. Deal. We will be 
pleased to add 2 minutes to your time for questioning our 
witnesses.
    The chairman of the full committee, the gentleman from 
California, Mr. Waxman, is recognized for 5 minutes.

           OPENING STATEMENT OF HON. HENRY A. WAXMAN

    Mr. Waxman. Thank you very much, Mr. Chairman. I am pleased 
that the subcommittee is beginning its review today of the 
Nation's Universal Service Fund. I suspect that we all agree 
that the program is in need of repair and that the High-Cost 
Fund is a good place to start.
    I would like to outline a few principles that will guide me 
during this process. First, I believe the goals of universal 
service are as important now in the age of broadband as they 
have ever been. Simply put, we cannot allow any part of the 
country, urban or rural, to be left behind.
    Second, we need to modify the program by looking forward, 
not by looking back. We need a Universal Service Fund that 
supports the broadband networks of the future, uses public 
money wisely and efficiently and spreads responsibility for the 
program as broadly and equitably as possible.
    Third, we must recognize that public obligations accompany 
public money. The $7 billion Universal Service Fund is financed 
by consumers. Service providers are simply conduits that 
transfer to the fund an 11 percent fee on top of the ordinary 
changes for the long-distance and international calls. We 
should ensure that recipients of these public funds meet 
certain obligations that benefit the consumers who pay these 
fees. For example, last Congress I introduced legislation to 
require wireless companies that receive USF subsidies to open 
their networks to other carriers for roaming purposes. I plan 
to reintroduce that measure shortly. Going forward, this 
committee will look closely at whether additional public 
interest conditions are appropriate.
    Fourth, we must ensure full accountability and transparency 
in this program. As GAO included in a June 2008 report, despite 
the investment of over $30 billion in the High-Cost Fund over 
the last 12 years, there are no data to show what this massive 
investment has produced. I know Ranking Member Barton feels 
strongly about this point, and I look forward to working with 
him and other committee members who share our concern about 
performance measures and potential waste, fraud and abuse.
    As chairman of the Committee on Oversight and Government 
Reform during the last Congress, I asked the FCC to provide a 
list of the 10 largest recipients of high-cost program subsidy 
dollars for 2006 through 2008 as well as a list of the 10 
largest per-line subsidies by location for 2006 and 2007. This 
was not secret information, but it had not been collected or 
released in this format before. The results of this inquiry 
raise additional questions about the high-cost program. For 
instance, three companies in Hawaii, Sandwich Isle 
Communications, Sprint Nextel and Moby PCS each receive a 
subsidy of close to $13,000 a year per line to serve the same 
insular area. Over the past 3 years these three companies 
received a total of more than $120 million in support. Under 
current rules, a single household in this part of Hawaii might 
have a landline phone connection from Sandwich Isle 
Communications, a wireless phone from Sprint Nextel and a 
wireless phone from Moby PCS, resulting in a federal subsidy of 
$39,000 per year.
    As we consider reforms to the High-Cost Fund, we should ask 
tough questions and be open to creative solutions. For example, 
where is the money going and to whom? Is this really the best 
use of public dollars? Are companies adequately demonstrating 
that funds are being used for their intended purposes? Are 
there less expensive ways to provide service by using different 
technologies? Should we consider competitive bidding for what 
are in effect government contracts? For how long and at what 
level should carriers be supported after they build facilities? 
Should we consider requiring State matching grants? Now that 
over 90 percent of American households have access to wireline 
broadband, should we consider shifting the funds to also 
support consumer adoption of broadband?
    I know universal service legislation is a priority for you, 
Mr. Chairman. I look forward to working with you, Ranking 
Members Stearns and Barton and the other members of this 
committee to figure out the best way forward. Thank you.
    [The prepared statement of Mr. Waxman follows:]

    [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
    
    Mr. Boucher. Thank you very much, Mr. Chairman, and I look 
forward to working with you and others on this committee on a 
bipartisan basis to achieve those goals.
    The gentleman from Arizona, Mr. Shadegg, is recognized for 
2 minutes.
    Mr. Shadegg. Thank you, Mr. Chairman, and thank you for 
holding this hearing.
    I want to begin by welcoming Mr. Steve Davis, the senior 
vice president of Public Policy and Government Relations for 
Qwest Communications. Qwest plays a large role in my 
Congressional district and I look forward to his testimony as 
well as that of the other witnesses.
    I would like to associate my views with the remarks of the 
ranking member, Mr. Stearns. I believe he articulated my views 
here well. I would also like to commend Congressman Lee Terry 
and Ranking Member Barton for their work in this area.
    I look forward to the discussion of the Universal Service 
Fund and to learning ways in which we should improve and reform 
the system. We have come a long way since the concept of a 
Universal Service Fund first came forward. We have worked as a 
Nation to ensure that affordable basic telecommunications 
services are available to everyone regardless of where they 
live but we are now at a crossroads as our technology evolves 
and improves, and I believe it is essential that we reevaluate 
the Universal Service Fund and how it is used. It is clear that 
some reform is necessary, and given the current status of our 
economy, we must find ways to make the system more cost-
effective. An audit from July 2006 to June 2007 revealed that 
roughly $1 billion of Universal Service Fund funds were awarded 
erroneously. We simply cannot afford nor defend that kind of 
waste in our system. We must find ways to make sure that these 
errors do not occur in the future because they will only hurt 
our economy and our constituents.
    I very much look forward to the testimony of our witnesses 
here today on how we can improve the system and use technology 
to make it better serve the Nation at a more economical cost, 
and again, Mr. Chairman, I thank you for the hearing.
    Mr. Boucher. Thank you very much, Mr. Shadegg.
    The gentleman from Vermont, Mr. Welch, is recognized for 2 
minutes.
    Mr. Welch. Thank you very much, Mr. Chairman.
    Two things. It has mostly been said. But, one, the need is 
enormous and it has to include broadband. That would make a 
huge difference everywhere but especially to rural States like 
Vermont. We get many companies that can decide whether to come 
to Vermont or not, depending on whether in the rural area they 
want to locate there is access to broadband.
    Second, we have to reform the amount of money and how it is 
being spent, how it is being deployed, it has been said, but 
just the witnesses here at this table represent companies who 
received in the range of $5 billion for the universal fund, and 
the question obviously is, to the users, to your customers, are 
you using that money well, are you getting the job done, and 
you face the tension because on the one hand, you have an 
obligation to the shareholders of your company that suggest 
that you maximize profit, but on the other hand, you have a 
public trust and that requires that you extend access to this 
essential utility service to every single American.
    I look forward to working with you, Mr. Chairman, and the 
members of the committee to improve this bill. Thank you.
    Mr. Boucher. Thank you very much, Mr. Welch.
    The gentleman from Oregon, Mr. Walden, is recognized for 2 
minutes.
    Mr. Walden. Thank you, Mr. Chairman. I am going to waive my 
opening statement in lieu of more time in the questioning 
period.
    Mr. Boucher. Thank you very much, Mr. Walden.
    The gentlelady from Florida, Ms. Castor, is recognized for 
2 minutes.
    Ms. Castor. Thank you, Mr. Chairman. I will ask unanimous 
consent to submit my opening statement for the record and waive 
at this time.
    Mr. Boucher. Without objection, the opening statements of 
all members who desire to submit them will be received for the 
record, and the chair thanks the gentlelady.
    [The prepared statement of Mr. Space follows:]

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    Mr. Boucher. The gentleman from Illinois, Mr. Shimkus, is 
recognized for 2 minutes.
    Mr. Shimkus. Thank you, Mr. Chairman. I will be brief.
    It is great to have the panel. We need to move on 
legislation. Broadband deployment is key in rural America. I 
represent 30 counties, parts of 30 of 102 in the State of 
Illinois, so this has been very helpful. I also co-chair with 
Congresswoman Eshoo the E-911 caucus, you know, stellar 
delivery and location identification is critical to rural 
America, especially when health and safety issues are 
concerned.
    We have some challenges as we move forward, Mr. Chairman, 
but I look forward to working with you as we make those 
challenges and accept those and move forward. I yield back.
    Mr. Boucher. Thank you very much, Mr. Shimkus.
    The gentleman from New York, Mr. Weiner, is recognized for 
2 minutes.
    Mr. Weiner. In the interest of more time for questions, I 
yield my opening statement.
    Mr. Boucher. Thank you, Mr. Weiner.
    The gentleman from California, Mr. McNerney, is recognized 
for 2 minutes.
    Mr. McNerney. Thank you, Mr. Chairman.
    Well, we certainly have seen a tremendous change in the 
technology since the last legislation on this in 1996. It was 
difficult then to foresee what we would be having now and it is 
going to be hard for us to see what we are going to see in the 
next 10 years, so we are going to look to you all to give us 
guidance on that. We are going to work on both sides of the 
aisle and we will come up with some good legislation. Thank 
you.
    Mr. Boucher. Thank you very much, Mr. McNerney.
    Mr. Rush from Illinois is recognized for 2 minutes.
    Mr. Rush. Mr. Chairman, I think I will defer for an 
additional 2 minutes of questioning.
    Mr. Boucher. Thank you, Mr. Rush.
    All members having been recognized for opening statements, 
we now turn to our panel of witnesses, and I want to express 
appreciation to each of them for their appearance here this 
morning and for their participation in this conversation 
regarding universal service reform. Our panel consists of Mr. 
Steve Davis, senior vice president for public and policy and 
government relations for Qwest; Mr. Joel Lubin, vice president 
for public policy at AT&T Mr. Ted Carlson, chairman of the 
Board of United States Cellular Corporation; Mr. Mark Gailey, 
chairman of the board of the Organization for the Promotion of 
Advancement of Small Telecommunications Companies and a board 
member of the Western Telecommunications Alliance; he is also 
president and general manager of Totah Communications. Mr. 
Derek Turner is research director at Free Press. Mr. Tom Tauke, 
a former member of this committee, is the executive vice 
president for public policy affairs and communications at 
Verizon. Mr. Tom Gerke is the chief executive officer of 
Embarq. Mr. Gregory Hale is speaking on behalf of the National 
Telecommunications Cooperative Association. He is general 
manager of the Logan Telephone Cooperative. And Mr. Scott 
Wallsten is vice president for research and a senior fellow at 
the Technology Policy Institute.
    Without objection, all of your prepared written statements 
will be entered into the record and we would welcome your oral 
summaries and ask that you keep those to approximately 5 
minutes so that we have ample time for questions. Mr. Davis, we 
will be pleased to hear from you first.

STATEMENTS OF STEVE DAVIS, SENIOR VICE PRESIDENT, PUBLIC POLICY 
  AND GOVERNMENT RELATIONS, QWEST CORPORATION; JOEL E. LUBIN, 
  VICE PRESIDENT, PUBLIC POLICY, AT&T LEROY T. CARLSON, JR., 
 CHAIRMAN OF THE BOARD, U.S. CELLULAR; MARK GAILEY, PRESIDENT 
   AND GENERAL MANAGER, TOTAH COMMUNICATIONS; DEREK TURNER, 
   RESEARCH DIRECTOR, FREE PRESS; TOM TAUKE, EXECUTIVE VICE 
PRESIDENT, PUBLIC AFFAIRS, POLICY AND COMMUNICATIONS, VERIZON; 
   TOM GERKE, CHIEF EXECUTIVE OFFICER, EMBARQ; GREGORY HALE, 
 GENERAL MANAGER, LOGAN TELEPHONE COOPERATIVE, INC.; AND SCOTT 
 WALLSTEN, VICE PRESIDENT FOR RESEARCH AND SENIOR FELLOW, THE 
                  TECHNOLOGY POLICY INSTITUTE

                    STATEMENT OF STEVE DAVIS

    Mr. Davis. Good morning. Thank you, Mr. Chairman, and 
members of the committee. My name is Steve Davis and I am 
senior vice president for public policy and government 
relations for Qwest. I appreciate the opportunity to share 
Qwest's views with you this morning on universal service.
    Before I address the universal service issues directly, I 
would like to tell you a bit about Qwest and why we care so 
much about these issues. Qwest provides voice data, Internet 
and video services nationwide and globally, and we provide 
local telephone service and broadband service in 14 western 
States. As of December 31, 2008, Qwest provided 11.6 million 
voice-grade access lines and 2.8 million broadband lines to 
customers in our territory, and we currently have broadband 
available to 86 percent of our customer base. Our local service 
territory is very diverse. It includes urban areas like Denver, 
Seattle, Minneapolis and Phoenix but it also includes many 
smaller towns and cities and many rural communities with low 
household density. In fact, 42 percent of our 1,300 wire 
centers serving 2.2 million homes and businesses are located 
outside of metropolitan areas. We have 34 wire centers that 
serve areas comparable or larger than the size of Rhode Island. 
Needless to say, these are very sparely populated areas.
    Although Qwest serves extremely rural areas in all the 14 
States in which we provide local service, we only receive high-
cost federal universal service support in four States. Qwest 
receives no high-cost support in such rural States as North 
Dakota, Idaho, Iowa, New Mexico. In 2009, Qwest is projected to 
receive approximately 1 percent of the total $2.3 billion 
federal high-cost assistance.
    I would like to commend Chairman Boucher for his 
longstanding recognition of the need for universal service 
reform and for holding this hearing to address these important 
issues. Qwest supported the proposed universal service reform 
bill of Chairman Boucher and Congressman Terry in the last 
Congress and we look forward to continued efforts to accomplish 
significant universal service reform in this Congress.
    Currently, there are different mechanisms for distributing 
high-cost support to carriers depending on whether they are 
deemed rural or non-rural under the FCC's rules, and despite 
the massive rural territory served by Qwest, under the FCC's 
rules we have been deemed a non-rural carrier and thus excluded 
from access to the vast majority of the federal high-cost 
assistance. Qwest and other non-rural carriers receive limited 
support under a mechanism that has twice been held invalid by 
the 10th Circuit Court of Appeals yet this flawed system for 
distributing high-cost support remains in place. High-cost 
support should be based on the areas served and not the size or 
identity of the carrier providing the service. Qwest agrees 
with the approach of Chairman Boucher and Congressman Terry's 
USF reform bill that high-cost support to non-rural carriers 
should be retargeted to individual wire centers.
    The purpose of high-cost support has been to enable 
telecommunications service in areas where it is not otherwise 
economic for a carrier to provide the service. It should not be 
used to support multiple carriers in an area where it is 
uneconomic for even one to provide service. Unfortunately, in 
many areas the current high-cost support program does just 
that. High-cost support to duplicate network providers, 
primarily wireless carriers, has caused the enormous growth in 
the High-Cost Support Fund in recent years. While high-cost 
support to incumbent carriers has been flat since 2003, support 
to these duplicative network providers has grown from 
approximately $17 million in 2001 to a projected $1.4 billion 
in 2009. In order to return the High-Cost Fund to its core 
principle of universal service, high-cost support for all 
carriers should be based on their costs of providing the 
support services.
    As Chairman Boucher, Congressman Terry and many others have 
recognized, it is also time to promote universal access to 
broadband through universal service support. Qwest currently 
offers broadband services to approximately 86 percent of the 
households in our region. However, in the absence of additional 
federal assistance, the necessary upgrades to expand our 
footprint are not economically feasible in many rural areas. 
The grants for broadband deployment established in the stimulus 
are a start but are not sufficient to result in ubiquitous 
deployment of high-speed broadband. There remains a crucial 
role for universal service funding.
    Qwest believes that the primary purpose of any broadband 
deployment subsidization should be to aid construction of 
facility in unserved areas but high-cost support should not 
provide ongoing operational subsidies nor should the support 
subsidize competition or build duplicate networks. In 2007, 
Qwest proposed a new federal universal service program that 
would provide one-time grants to selected applicants to deploy 
broadband to unserved areas, and we commend that proposal to 
the subcommittee for its consideration. Congress has an 
important opportunity here to structure an improved program for 
supporting universal access to basic telephone service and a 
new program for supporting universal access to broadband.
    Again, I thank you for the opportunity to testify today on 
these issues and I look forward to your questions.
    [The prepared statement of Mr. Davis follows:]

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    Mr. Boucher. Thank you very much, Mr. Davis.
    Mr. Lubin, we will be pleased to hear from you.

                   STATEMENT OF JOEL E. LUBIN

    Mr. Lubin. Good morning. Thank you, Chairman Boucher, 
Ranking Member Stearns and members of the subcommittee for 
inviting me here today. AT&T is a long-time supporter of our 
national policy of universal service and of recent efforts to 
sustain that policy through meaningful reform. In this regard, 
we salute your leadership and the work of the entire committee.
    AT&T is the single largest provider of telephone service in 
rural America today. AT&T provides service to 7 million rural 
telephone customers. AT&T remains committed to serve our 
customers regardless of where they live and where they work. 
AT&T's unique experience serving a diverse set of customers has 
shown us the value of broadband services.
    Today's hearing is on point. The current universal service 
high-cost system is broken and will not create the proper 
incentives for broadband deployment in high-cost areas. Let me 
explain with a personal experience of mine that happened 5 
years ago. Five years ago, my daughter and son-in-law came to 
us and said we have got some good news and bad news. I said 
share the bad news first. They said well, we live 6 miles away 
today, we are moving 6,000 miles tomorrow. I said what is the 
good news. The good news is, we will back in about 1 or 2 years 
but I already got online, I have an apartment, I got a 
broadband connection, and did you ever hear about this thing 
called voice over the Internet. I said yes. They said well, you 
know what, I can even keep the same local number. That was a 
big deal. That was a big deal for them because they didn't have 
to send out a number to everyone. It was a big deal for my wife 
and I because we could be in contact as a local call speaking 
to our granddaughter virtually every day.
    Let me try to unpack what I just said. I call old 
technology, let us call that the narrowband local service that 
you know and you have today. That narrowband pipe is paid by a 
combination of local rate line items on a customer's bill, 
State and federal access charges paid by carriers that are then 
in turn recovered not from that particular customer but from a 
host of customers including that one who has the pipe. In 
addition, it recovers who are paid by existing federal and 
State universal service funds. For this old technology to work, 
it is essential to know where the call originated and 
terminated. By the way, I am going to describe a new technology 
where it just doesn't matter. The new technology, let us call 
it a broadband pipe. It is paid directly by the end user. You 
will not need to know where the call, I actually should say 
packets, where the packets originate and terminate. Just like 
when my kids moved 6,000 miles away, I still dialed the same 
number and lo and behold it arrived and we spoke.
    I am sharing this story because it clearly shows that 
broadband technology is a disruptive technology. It simply 
redefines the game including the local calling area, not just 
to be the small local calling area but it redefines it to be in 
effect the whole USA or, in my example, the globe. In a 
broadband world, there are no access charges. There is no 
federal local service line charge on the bill. It also turns 
out that the broadband service offers much more capability to 
the customers. That is why we are talking about it. And I hope 
you see that it doesn't have the complexity of the old 
narrowband pipe nor do I hope we ever take the baggage of the 
old technology and drive it into the new world. What a shame 
that would be.
    So what to do? I would like to identify three things, 
because one needs to start thinking about a comprehensive 
solution to the dilemma and the issue is, do I want broadband 
deployed. We will talk about that shortly. But comprehensive 
reform needs to address three things.
    First, number one, we need to replace the existing 
collection mechanism from interstate retail revenues to a 
broader based collection mechanism which we would suggest 
telephone numbers or a combination of telephone numbers and 
connections, which is a more stable collection mechanism, 
reform intercarrier to preserve universal service during the 
transition to a fully deployed broadband world, and let me very 
clear on this point. Access charges are going to vaporize. They 
are going to go away. They are not going to exist, and it is an 
issue that needs to be dealt with. Reform of the existing 
federal high-cost funding mechanism to promote deployment of 
next-generation broadband and expanded and improved wireless 
service in rural areas is important.
    I would like to make one final point, and we need to 
clearly understand adjusting to the new world, this old world 
where you have very small local calling areas, and I am going 
to focus on a small rural calling area. That small rural 
calling area may have a local rate that is 40 to 50 percent 
lower than the urban rate but yet the cost of that service in 
the rural areas could be 5, 10, 20 or more times greater than 
the cost in the urban area. I just observe that the local 
calling area of the old world is going to ultimately expand to 
be in effect the whole USA or maybe the globe, and the issue 
here ultimately is, how do we reconcile these differences and 
create that comprehensive solution.
    My final point: remember, universal service funds and 
access charges didn't exist 25 years ago in 1984 and access 
charges won't exist in a broadband world.
    I look forward to your questions and working with you to 
find solutions. Thank you.
    [The prepared statement of Mr. Lubin follows:]

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    Mr. Boucher. Thank you very much, Mr. Lubin.
    Mr. Carlson.

               STATEMENT OF LEROY T. CARLSON, JR.

    Mr. Carlson. Chairman Boucher, Ranking Member Stearns and 
members of the----
    Mr. Boucher. Mr. Carlson, please pull the microphone over, 
get it very close, turn it on. Thank you.
    Mr. Carlson. There we go. Sorry about that.
    Mr. Boucher. A little technology lecture here. Thank you.
    Mr. Carlson. I am not an engineer. I am sorry.
    Chairman Boucher, Ranking Member Stearns and members of the 
subcommittee, good morning. As you continue your review of the 
universal service program, I have observed from my decades of 
experience, there are several core principles that should guide 
you when you reform the program.
    First, you must recognize----
    Mr. Boucher. Mr. Carlson, I hate to raise the issue, but I 
think your microphone is off.
    Mr. Carlson. No, it did go off there.
    Mr. Boucher. There we go.
    Mr. Carlson. First we must recognize that the money 
involved is not the government's as one of you said nor the 
telecommunications provider's; it is the consumer's money. 
Second, collectively, government and the participating carriers 
must be superb stewards of these precious funds. Third, while 
progress has been made, there are still many areas of the 
country that are expensive to reach and serve with quality 
service and without assistance will not be successfully served 
and thus the program continues to be needed. And finally, that 
the core principles of competitive telecommunications for every 
American remains an important and worthy goal.
    Based upon these principles, I believe there are three 
questions for the committee to address. First, what is the 
proper role and scope of the universal service program? One of 
you mentioned that. Second, what investments should be made in 
the future? And finally, how do you structure the program 
effectively and efficiently so as to maximize the benefits to 
consumers, as something you pointed out.
    As to the first question, I agree with the current law but 
the proper role of this program must be to ensure that high-
cost areas have modern, high-quality telecommunications 
services that are reasonably comparable to those available in 
our urban and suburban centers and at reasonably comparable 
rates. Because if universal service were limited to a phone 
that was tethered to the kitchen wall, rural Americans would be 
denied access to the mobility tools that they need to compete 
with urban citizens both here in the United States and abroad, 
and we commend your bill that you introduced in the prior 
session in that regard.
    With respect to the second question, there are two 
observations that I would offer. First, broadband services and 
mobile wireless services are two must-have functionalities that 
consumers expect and demand for personal and business use. 
Therefore, the program should be expanded to make broadband 
eligible for USF support. Second, however, significant 
additional investment is still required to bring high-quality 
mobile services to all Americans. Remaining committed to that 
investment in mobility will enable companies to bring essential 
economic development and public safety benefits to rural areas 
and through the network effect to all Americans. As a carrier 
that serves vast rural areas, I know that many Americans do not 
have sufficient access to high-quality mobile wireless 
services. My company's use of USF support has enabled us to 
extend service to literally hundreds of small communities that 
previously had no service or poor service, and we have made 
some huge coverage gains in places where we have been eligible 
for those funds such as Oregon, Washington and Maine. There is 
also much work still to be done extending and improving service 
in States represented on this committee such as Virginia, 
Illinois, North Carolina, Tennessee and Missouri, States where 
we have just recently been designated as an eligible 
telecommunications carrier.
    For those of you who represent rural districts or anyone 
who visits rural America, you know how your Smart Phone can 
stop working or you have noticed how dropped calls and dead 
zones can increase when you leave heavily traveled roads. I 
believe a reform program can effectively and efficiently 
address these problems, and if tailored correctly can be 
complementing the program that has just recently been 
authorized, the American Recovery and Reinvestment Act. To be 
clear, we now serve many rural areas that do not generate 
sufficient revenues to meet ongoing operations expenses and to 
maintain a high quality of service. There is no escaping the 
reality that the USF program is critically important to the 
viability of providing basic mobile services for millions of 
Americans.
    Some additional points that we would like to see we make 
sure that goes into the legislation from our standpoint, the 
legislation should not favor any class of carrier or technology 
because by not doing so, we will foster innovation and 
competition. We believe we should look at a cost model rather 
than carriers' own costs because a cost model would save 
significant cost and expense. And we believe that the 
legislation should reject any amendments that would foster a 
single market winner, for example, through reverse auctions, 
because a single market winner would relegate rural America to 
the days of a monopoly carrier requiring enormous and 
unnecessary regulatory oversight to protect consumers.
    Thank you.
    [The prepared statement of Mr. Carlson follows:]

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    Mr. Boucher. Thank you, very much, Mr. Carlson.
    Mr. Gailey.

                    STATEMENT OF MARK GAILEY

    Mr. Gailey. Chairman Boucher, Ranking Member Stearns and 
members of the subcommittee, thank you for inviting me here 
today. I am Mark Gailey, president and general manager of Totah 
Communications located in Ochelata, Oklahoma. Our family-owned 
company serves over 3,000 telephone subscribers and more than 
1,000 DSL subscribers in sparsely populated areas of Oklahoma 
and Kansas. I come before you as chairman of the board of the 
Organization for the Promotion and Advancement of Small 
Telecommunications Companies and as a board member of the 
Western Telecommunications Alliance. The companies and 
cooperatives represented by these associations provide numerous 
services to their communities including voice, broadband 
Internet access, video and wireless.
    The recent enactment of the American Recovery and 
Reinvestment Act of 2009 has brought more attention and focus 
than ever on the efforts to provide broadband service to all 
citizens of our Nation. The broadband infrastructure funding 
included in that law should further the goals set forth by 
Congress and the Administration. However, as significant as the 
funding levels were for broadband build-out, it will not get 
the entire job done, nor will these grants and loans provide 
for the ongoing operations, maintenance and upgrades of 
broadband networks.
    This brings me to the subject of today's hearing, the 
Federal Universal Service Fund. OPASTCO and WTA believe very 
strongly that the Universal Service Fund high-cost program 
should explicitly support broadband. The goal of universal 
service policy has been to ensure that every American 
regardless of their location has access to affordable, high-
quality public switch network. For rural incumbent local 
exchange carriers, high-cost universal service support is a 
cost recovery program designed to promote investment in areas 
where it would not otherwise be feasible for carriers to 
provide quality service today or in the future, and the future 
of communications, as we know, is broadband.
    While the availability of broadband service is necessary, 
just as important is the adoption of broadband service. There 
are many factors that spur adoption of broadband. Computer 
availability and training come to mind, but the major factors 
are price and speed of the service, and USF plays a very 
important role in making broadband both affordable and 
attractive for consumers. Health care, education and commerce 
have joined communications and entertainment as applications 
that now make high-speed broadband Internet connection a 
necessity.
    USF needs other significant reforms. The USF contribution 
base must be expanded to include all broadband and voice 
connections, thus leading to smaller USF line items on 
consumers' bills and more funding availability. The so-called 
Identical Support Rule should be eliminated, which would result 
in cost savings to the USF and prudent use of funds based on 
real investment levels of competitive carriers, not the 
investment levels of an incumbent carrier.
    OPASTCO and WTA strongly believe that no cap should be 
imposed on the high-cost program or any portion of it so that 
sufficient funds are available for ongoing broadband investment 
and upgrades. Continual investment is critical because 
broadband connections that are available today are not the 
networks that will enable rural areas and the rest of the 
country to compete globally 5 years from now. A high-quality 
broadband network can enable existing businesses in rural areas 
to grow as well as to attract new business to the areas, both 
of which will energize the local economy.
    We also request that the USF be permanently exempt from the 
Antideficiency Act accounting standards. The imposition of the 
ADA on the USF or even the threat of such action brings about 
uncertainty regarding future USF payments that thwart 
investment in communications and network services. OPASTCO and 
WTA also oppose the implementation of reverse auctions, State 
grants, vouchers and other mechanisms that will only diminish 
the usefulness of USF.
    Chairman Boucher, I wish to thank you and Congressman Terry 
for the insight and leadership you have shown on this issue. 
Introduced in the previous Congress, the Boucher-Terry USF 
reform legislation was supported by both OPASTCO and WTA. Many 
of the reforms to USF that we requested in this testimony were 
contained in that bill. We look forward to working with you 
once again to move forward with progressive reforms to this 
very important program.
    I would like to move to an important aspect of any USF 
reform effort: oversight and accountability. OPASTCO and WTA 
pledge to work with Congress and the Administration to continue 
the high-cost program's accountability to the public. On the 
issue of transparency and the operation of the USF, all parties 
involved must work toward realistic processes and fair 
solutions to better administer the funds collected from 
communications customers.
    In conclusion, for nearly 75 years our Nation has supported 
the policy of universal communications services for its 
citizens. Throughout those years, those meant 
telecommunications or voice service. Our country, our economy 
and in fact our entire world has vastly changed and it is well 
past time to reform the USF.
    Thank you.
    [The prepared statement of Mr. Gailey follows:]

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    Mr. Boucher. Thank you very much, Mr. Gailey.
    Mr. Turner.

                   STATEMENT OF DEREK TURNER

    Mr. Turner. Chairman Boucher, Ranking Member Stearns, Mr. 
Barton and members of the committee, I thank you for the 
opportunity to testify today on the important issue of high-
cost reform. I am the research director for Free Press, a 
public interest organization dedicated to public education and 
consumer advocacy on communications policy.
    Technology is rapidly changing the way Americans interact, 
learn and do business, and all for the better, but the rules 
governing our communications markets are not keeping up with 
this rapid pace of change and consumers are suffering as a 
result.
    When the current universal service regime was created in 
1996, the Internet was an application that rode on top of the 
telephone infrastructure. Today it is the opposite. Telephony 
is just one of many applications that ride on top of broadband 
infrastructure. With this convergence comes the opportunity to 
ensure universal affordable broadband access while also 
reducing the future burden on the fund. We strongly support the 
goals of universal service. Everyone benefits when rural 
consumers have access to affordable high-quality communications 
services. But as advocates for the consumers whose monthly 
bills support the fund, we want to ensure that our system of 
universal service is both fair and efficient.
    Consumers in the 21st century marketplace should not be 
forced to subsidize a 20th century technology. We believe a 
bold and transformative shift in USF policy is needed. Done 
properly, we can bring affordable broadband to all Americans 
while also substantially reducing the size of the fund in the 
long term. Here is how. We must begin by asking two basic 
questions: how much money is each USF supported line receiving 
each month, and is that support actually needed. Our research 
shows that 40 percent of the high-cost fund, nearly $2 billion 
annually, goes to subsidizing lines that receive less than $10 
per month. This is also true for small rate-of-return carriers. 
Two-thirds of these lines receive less than $10 per month in 
high-cost support. Now, these subsidies may be justified but it 
begs the question: Is this the best use of that $2 billion? We 
also should ask whether rates in these areas are already below 
the national average, and should we instead be using this money 
for broadband deployment to bring rural customers more than 
just a telephone line.
    The path to universal broadband and the ending of the over-
reliance on subsidies begins with recognizing how convergence 
has changed the business of telecommunications. Before 
broadband, carriers were only able to earn perhaps $20 per 
customer each month selling local phone service. In today's 
converged world, a carrier can earn well over $100 on that same 
line by offering phone, TV and Internet services. 
Unfortunately, our current regulatory structure does not 
account for this potential, ignoring that with this additional 
revenue many high-cost carriers can operate profitably without 
ongoing subsidies. Instead, it tries to clumsily separate out 
regulated from unregulated cost revenues and really results in 
overpayments and anticompetitive subsidies.
    As an alternative to this broken process, we suggest basing 
ongoing high-cost support on total revenue earning potential 
and forward-looking infrastructure costs calculated for each 
carrier on a granular disaggregated basis. This modernized 
regulatory structure will reduce the need for ongoing support 
as many carriers will be able to recoup network costs and earn 
healthy profits from triple-play services. However, for some 
carriers, the upfront cost for deploying broadband into 
currently unserved areas is just too high. Here is where we 
have the opportunity to turn the regulatory structure on its 
head. We should use the fund to pay these upfront costs and 
then only provide ongoing support where it is truly needed. We 
propose a 10-year transition where the new total cost potential 
revenue support model is phased in and the resulting cost 
savings are used to fund the build-out of open access broadband 
infrastructure into unserved areas. We estimate that after this 
transition, the total size of the High-Cost Fund could be 
reduced by two-thirds to less than $1.5 billion per year.
    Now, the $7 billion in broadband stimulus funds presents 
policymakers with a window of opportunity to transform USF. 
Here, a substantial portion of the upfront costs for rural 
networks may be financed by taxpayer dollars. The carriers 
operating these networks will thus have little capital costs to 
recover and therefore little need for ongoing support. But 
unless the FCC moves to modernize the regulatory structure, we 
may see double dipping. Now, by that I mean carriers might ask 
ratepayers to reimburse them for the networks already paid for 
by taxpayers.
    Now, getting universal service policy right isn't the only 
thing we need to do to ensure universal service. For rural 
carriers, the viability of the self-supporting triple-play 
business model depends on getting fair rates and terms for 
transport and special access services and getting fair access 
to video programming.
    In closing, we urge Congress to maintain its commitment to 
universal service but to do so with policies that are flexible 
and that benefit all consumers. I thank you for your attention 
and I look forward to your questions.
    [The prepared statement of Mr. Turner follows:]

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    Mr. Weiner [Presiding]. Thank you.
    Mr. Tauke, you are recognized for 5 minutes.

                     STATEMENT OF TOM TAUKE

    Mr. Tauke. Thank you, Mr. Chairman, Ranking Member Stearns 
and Ranking Member Barton. We appreciate the opportunity to 
testify before this committee on this important issue.
    We have come a long way. Just a year ago, we were spending 
our time talking about the need for a capital fund to cover the 
upfront investment costs for broadband and we were talking 
about the need to reform universal service in order to be able 
to ensure that it was focused on operational costs where 
necessary. We also talked about mapping in order to identify 
the areas of the country that were unserved so we could focus 
the money on the unserved areas. Well, now, a year later, the 
mapping legislation has been approved by the Congress, the 
capital funds are available through the stimulus package and we 
are now back to looking at the Universal Service Fund.
    I think it is fair to say that there is consensus that 
Universal Service Fund needs to be reformed. I would offer four 
quick suggestions as to what you should focus on in this 
reform.
    First, cap the fund. The bottom line is that is not that we 
are spending too little money. The problem is, we aren't 
targeting the money we spend to the right places. And so the 
first effort is to try to force that retargeting of money to 
broadband and to mobile wireless services.
    Second, consumers want access not just to fixed services or 
wireline services, they want access to wireless services, and 
the Congress recognized that 10 years ago. But the bottom line 
is, the mechanism for reimbursing mobile wireless carriers has 
been, well, it is frankly a travesty. Nobody any longer steps 
up and defends the Identical Support Rule, which says that 
every wireless carrier that comes into the community gets the 
same amount of support as the underlying wireline carrier in 
that community. Nobody defends that anymore. Now the argument 
is over what is the new mechanism for giving support to 
wireless carriers. We strongly urge you to use a mechanism of 
reverse auctions or competitive bidding in order to enter into 
contracts with wireless carriers to provide service to unserved 
areas.
    You know, today the reality of life is that we have four, 
five, six and in some cases more carriers receiving 
reimbursement to provide service to areas, areas where many 
carriers are providing service without subsidy. There just is 
no rationale for this. So some way we should use a cost-based 
system for all of those carriers that want to provide service. 
The first question is, why do we want to subsidize all of these 
carriers. But the second question is, what is the practical 
reality of trying to implement a cost-based system. A cost-
based system is a can of worms. Look, on the wireline side, you 
have infrastructure that is devoted to a single residence, and 
on the wireless side, you don't have that. On the wireline 
side, you have an accounting system that has in place for years 
to identify costs associated with that infrastructure that goes 
to the individual household. You don't have that on the 
wireless side. The bottom line is, trying to impose a cost 
system on the wireless side is going to be a mess. So we 
encourage you to take a hard look at having some kind of 
reverse auction or some kind of competitive bidding as you do 
for other government contracts when you are in essence 
purchasing services.
    Third point, middle mile. This hasn't received much 
discussion, but when you look at the world of broadband, here 
is the reality. The cost of the last mile is high but in many 
cases the cost of the middle mile from what we will call the 
central office to the long-haul network is even greater per 
customer. We haven't paid much attention to this issue in the 
past, but as we look more closely at delivering broadband 
services through more rural areas, we have to look at that 
middle mile issue, and in my written testimony I offer some 
suggestions.
    Finally, we should pay into the fund on the basis of 
numbers. Last year a broad coalition of players in this space 
filed with the FCC a numbers-based plan. I am not saying it is 
the only plan but I am saying a lot of work has been done, a 
lot of support has been developed from a broad coalition. It is 
simple, it is fair and it is workable, and therefore it is 
something that should be considered.
    We look forward to working with you, Mr. Chairman, and all 
the members of the committee in your efforts to reform this 
important program.
    [The prepared statement of Mr. Tauke follows:]

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    Mr. Boucher. Thank you very much, Mr. Tauke.
    Mr. Gerke.

                     STATEMENT OF TOM GERKE

    Mr. Gerke. Good morning, Chairman Boucher, Ranking Member 
Stearns and members of the committee. Thank you for the 
opportunity to testify today on behalf of my employer, Embarq, 
a primarily rural provider of voice, Internet, video and other 
services.
    Reforming the Federal Universal Service Fund offers an 
opportunity to accelerate broadband deployment to customers in 
unserved areas while maintaining affordable access to critical 
voice connectivity. Embarq commends Chairman Boucher and 
Congressman Terry on their introduction of H.R. 2054, the 
Universal Service Reform Act, which included a transition to a 
broadband-focused fund, a more targeted support mechanism and 
appropriate carrier-of-last-resort obligations, all critical 
elements of USF reform. We also commend Congressmen Barton and 
Stearns on some of the key provisions in H.R. 6356, the 
Universal Service Reform Accountability and Efficiency Act, 
which sought to more precisely direct USF support to truly 
high-cost areas and tie USF more directly to carrier-of-last-
resort obligations.
    Policymakers, stakeholders and providers are increasingly 
coming to the conclusion that the Universal Service Fund is 
ready to enhance its mission by adding a focus on expanding and 
supporting broadband availability to all Americans. After all, 
broadband is increasingly an essential service. It is important 
in keeping people connected, enhancing public safety, enabling 
education and telemedicine, and creating jobs. Of course, there 
are important considerations in this effort such as ensuring 
that the current mission of reliable, affordable voice service 
from a carrier of last resort is not abandoned and targeting 
USF support to places where the market would not otherwise 
deliver broadband.
    Incumbent phone providers have a very specific carrier-of-
last-resort mandate associated with universal service. To 
illustrate, we have brought a diagram today of a rural market 
in Goodland, Indiana. Each of the green dots here represents a 
household. As you can see, most of the households are clustered 
in a town center and that is the most economical place to 
serve, but as a carrier of last resort, we are required to 
serve all of the outlying areas as well where the cost to 
provide such service is much higher. In this case, costs are 
well over 10 times higher. The challenge here is, how to layer 
on and expand the availability of broadband throughout low-
density areas while maintaining the voice service that is 
critical.
    The policy of universal service was conceived to bring and 
maintain reliable, affordable service to places where the 
market forces alone would not otherwise provide it. The 
Universal Service Fund was created in 1996 because Congress 
realized that as competition emerged, service providers in 
high-cost rural areas would no longer be able to maintain the 
implicit urban-to-rural subsidies and they would need to be 
replaced with explicit support in the form of the Universal 
Service Fund. The contemplated competition has become a 
reality. Under today's system, universal service support has 
been calculated and distributed on the basis of broad statewide 
geographic study areas averaging together low- and high-density 
areas that could be literally hundreds of miles apart.
    In closing, and to illustrate our concerns, let us take 
another look at the map of Goodland, Indiana. The average cost 
to serve the 452 households clustered in or near the town 
center is $19 per line per month. The remaining households are 
dispersed throughout the outlying areas and the cost per line 
is $266 per month. With facts like these, here is what can 
happen. First, a dense area can knock out support for an 
extremely remote area. This is particularly egregious if the 
dense area is hundreds of miles away on the other side of the 
State. Second, without the carrier-of-last-resort requirement, 
you run the risk of multiple carriers receiving unnecessary 
support to serve only the town center, creating duplication and 
waste. If you think about the situation like a donut and a 
hole, the answer is crystal clear: The hole will take care of 
itself. The purpose of section 254 has always been to serve the 
donut. We look forward to working with you on USF reform to 
accomplish just that.
    [The prepared statement of Mr. Gerke follows:]

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    Mr. Boucher. Thank you, Mr. Gerke.
    Mr. Hale.

                   STATEMENT OF GREGORY HALE

    Mr. Hale. Thank you. Mr. Chairman, Ranking Member Stearns 
and subcommittee members, I thank you for the invitation to 
participate in today's discussion regarding the critical 
importance of the universal service program and how best to 
strengthen it for the future.
    I serve as general manager of Logan Telephone Cooperative 
in Auburn, Kentucky, and I also currently serve as the region 3 
director on the board of the National Telecommunications 
Cooperative Association, NTCA. My remarks today are on behalf 
of Logan Telephone as well as NTCA and our 579 other members 
that serve rural areas throughout the Nation. Organized as a 
cooperative, Logan Telephone's top priority has always been to 
provide every one of our customers, who are also our owners, 
with the very best telecommunications and customer service 
possible. We serve 5,961 customer lines across our 596-square-
mile service area, which adds up to about 10 customers per 
square mile. Rural is different. We have approximately 1,100 
small rural counterparts in our industry who together serve 50 
percent of the Nation's land mass yet less than 10 percent of 
the population. Rural Americans throughout the markets of NTCA 
member are enjoying universal telephone service, access to 
broadband Internet services, access to advanced video services 
and enhanced emergency preparedness.
    Now more than ever, our country's domestic, economic and 
personal security needs are intricately linked to our national 
universal service policy. American consumers and businesses are 
dramatically altering their communications expectations and 
rural communication providers continue to respond to this 
challenge, but the fulfillment of our mission is not without 
tremendous cost. Universal service plays an integral role in 
helping providers that are committed to serving the Nation's 
economically challenging markets and consumers overcome these 
financial challenges.
    Clearly, our highest priority must center on strengthening 
and preserving the universal service policies. We also 
emphatically support proper oversight and accountability of the 
program yet we do not believe this is occurring as is vividly 
detailed in a February 12th report from USAC, which I am making 
available for inclusion in your hearing record. We believe it 
is crucial that we work together to again acknowledge the 
program's value in a way that restores America's communications 
preeminence. Our specific recommendations include the 
following.
    One, include broadband in the definition of universal 
service and expand the contribution base to include all 
broadband service providers while retaining revenues as the 
basis for assessing contributions. Two, reform of universal 
service support should focus on providing consumers with 
affordable and comparable services and not be used to stimulate 
competition. Three, allow universal service and intercarrier 
compensation reform to occur simultaneously by reducing or 
freezing access rates and allowing carriers to recover lost 
access revenues through supplemental ICOS or IES support. And 
going along with that, we should require recipients of any new 
supplemental ICOS or IES access cost recovery to voluntarily 
agree to Title II regulation of the broadband services and 
forego the retention of any excess earnings.
    During the transition from the public switch telephone 
network to a complete IP broadband network, we must require all 
providers of IPPSTN traffic including interconnected VOIP 
traffic to pay applicable universal service access and 
intercarrier compensation charges. We should require tandem 
switching rates and special access transport rates to be cost 
based, strengthen the process for securing universal service 
eligibility, or ETC status, eliminate the Identical Support 
Rule and provide support based on a carrier's own costs, reject 
ideas to distribute support via auctions, vouchers or any other 
untested means, allow the program to operate as envisioned by 
lifting programs caps and freezes, and remove this private 
program from the federal budgeting process.
    Advanced communications services rely upon a healthy and 
robust network infrastructure. The biggest issue that must be 
resolved to ensure the existence of such a network is cost 
recovery. Without adequate cost recovery, there will be no 
network for any communication service to reach rural consumers, 
be it wireline, wireless or other medium. We may well need to 
modify the program periodically but the key is to have the 
network in existence and operational in the first place. We 
must invest in this critical infrastructure or be left behind 
by the world. The words of our new President ring true when we 
apply it to universal service: the challenges we face are real, 
they are serious and they are many but the members of NTCA are 
ready to meet these challenges to ensure that no one is left 
behind. Only through your help and maintaining a strong USF 
program will be able to succeed.
    Mr. Chairman, we are excited to have someone with your 
knowledge of our industry and your commitment to rural America 
and a position to lead and develop policies that will ensure 
America's broadband and communications preeminence will shine 
once again. I thank you for the opportunity to speak here today 
and I look forward to answering any questions from you or the 
subcommittee.
    [The prepared statement of Mr. Hale follows:]

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    Mr. Boucher. Thank you Mr. Hale.
    Mr. Wallsten.

                  STATEMENT OF SCOTT WALLSTEN

    Mr. Wallsten. Mr. Chairman and members of the committee, 
thank you for giving me the opportunity to testify here today.
    The current Universal Service High-Cost Fund is 
inefficient, inequitable and growing at an alarming rate, 
especially because the program is funded by taxes on 
telecommunications services paid by all users including low-
income people, most of whom get no benefit from any part of the 
Universal Service Fund. The program is in urgent need of 
reform. The good news is that we have the tools to increase 
build-out, increase penetration and reduce costs. We can do it 
by eliminating the current system and replacing it with 
competitive procurement.
    The current high-cost mechanism is not only expensive but 
also discourages competition and does little to benefit 
consumers. A study by Gregory Roston and Bradley Wimmer, for 
example, concluded that completely eliminating the High-Cost 
Fund would decrease telephone penetration by only about one-
half of 1 percent. This result is consistent with nearly every 
other economic study published in peer review journals. Since 
then the proliferation of wireless alternatives means that the 
effect on connections would probably be even less. The 1996 
Telecommunications Act tried to address the competition problem 
by opening up the system to entrants called competitive 
eligible telecommunications carriers, or CETCs. Some contend 
that we can control the growth by eliminating the rule under 
which CETCs receive the same subsidy as the incumbents. After 
all, they say, most of the increase in the fund is from 
subsidies to competitive entrants, most of which are wireless 
companies that have lower costs. That is partly correct. It 
makes no economic sense to pay entrants with lower costs the 
high subsidies that incumbents currently get. But it also makes 
no sense to subsidize a firm's high costs when a lower cost 
option is available. Thus, rather than eliminating the 
Identical Support Rule, we should rewrite it so that all firms 
including the incumbent get the smallest, not the biggest, 
subsidy required for a firm to provide service. So, for 
example, if a wireless entrant can provide service in the area 
for only half the subsidy the incumbent receives, then all 
eligible carriers in the area including the incumbent should 
receive only that smaller subsidy.
    But we can do even better than that. An efficient program 
would provide just enough of a subsidy to make it profitable to 
provide the service. The problem is, how to determine what that 
subsidy should be, or even whether a subsidy is really 
necessary. Fortunately, the government has a tried-and-true 
method for getting the biggest bang for its buck. When the 
government wants a good or service, it asks for bids and 
generally awards the contract to the lowest bidder, all else 
equal. The government uses competitive bidding for buying 
products as simple as paper to those as complex as weapons 
system. Everyone understands this concept and recognizes the 
importance of getting multiple bids, whether it is for work on 
your car or for providing services to the U.S. military in 
Iraq. This every day commonsense approach is sometimes called a 
reverse auction.
    Universal service is just another type of government 
procurement. In this case, the government is buying some 
minimum set of telecommunications services that society 
believes everyone should have at a specific price. The current 
system, however, is akin to awarding no-bid contracts that last 
forever. We know that no-bids contracts are more costly and 
less transparent than are contracts awarded in a more open and 
competitive manner. For that reason, we generally don't 
tolerate no-bid contracts yet they have become so accepted in 
universal service that anything else is considered radical.
    But there is no reason for the no-bid perpetual-contract 
approach to continue. The High-Cost Fund could begin procuring 
universal service using the same competitive bidding approach 
that the government uses for almost everything else. In reverse 
auction for universal service, firms tell the government how 
much of a subsidy they would need to provide particular telecom 
services in particular areas. The government then chooses the 
firm that can provide the service for the smallest subsidy.
    Reverse auctions are not a new idea. Aside from the 
government using them for nearly all procurement, other 
companies have already used this method to provide 
telecommunications services in rural areas. This experience, 
which I review in a paper forthcoming in the Federal 
Communications Law Journal and that I am submitting as part of 
my testimony, has important lessons. In particular, reverse 
auctions for universal service are feasible and typically lead 
to much smaller subsidies than the incumbent and beneficiaries 
previously said was necessary, thus using less taxpayer money 
to provide more services. In some cases, the auctions revealed 
that firms were willing to provide service with no subsidy at 
all, and the very worst outcome from using reverse auctions was 
one that ended up with the incumbents winning everything. In 
other words, the worst outcome from using reverse auctions in 
universal service was what we accept as the status quo today.
    I do not, however, want to give the impression that just 
because reverse auctions are feasible they would be easy. The 
details of the auction matter a lot. For example, would you 
want to allow multiple winners in any given area? Allowing 
multiple winners would facilitate service competition but could 
actually increase universal service obligations at least in the 
short run. Another issue is how to handle the incumbent. On the 
one hand, the incumbent may have an advantage in an auction 
because it already has facilities in the area, potentially 
discouraging other firms from bidding. On the other hand, if 
the incumbent loses, could it or should it still be the carrier 
of last resort.
    These problems, however, can be solved. Auctions for 
spectrum too were once widely considered impractical yet the 
FCC successfully implemented spectrum auctions and they are now 
used routinely around the world. Moving from no-bid perpetual 
contracts to competitive bidding for universal service 
provision would help bring the High-Cost Fund under control. 
Reducing the High-Cost Fund would in turn go a long way towards 
facilitating an efficient and fair universal service program.
    Thank you. I look forward to answering your questions.
    [The prepared statement of Mr. Wallsten follows:]

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    Mr. Boucher. Thank you very much, Mr. Wallsten, and thanks 
to all of our witnesses for their testimony here this morning. 
The chair recognizes himself for a first round of questions.
    In the recently enacted stimulus measure, fully $7.2 
billion has now been made available for broadband deployment. 
That money will be distributed through grants, loans, loan 
guarantees by NTA and by the Rural Utilities Service and the 
U.S. Department of Agriculture, and to my way of thinking, that 
to some extent changes the dynamic for how we should consider 
universal service and specifically broadband. So my questions 
to any who desire to respond would be this: how should we 
consider the availability of that stimulus money, $7.2 billion, 
as we consider, number one, making broadband an eligible 
expenditure for universal service funding, and potentially 
number two, requiring that the recipients of universal service 
funding provide broadband at certain minimum speeds throughout 
their entire service territory? Does the availability of that 
stimulus funding now make it feasible with a potential funding 
source in order to impose that requirement? And who would like 
to respond? Mr. Davis.
    Mr. Davis. At least I will start. Mr. Chairman, first we 
applaud the efforts of the Congress in the stimulus to address 
broadband and to create that stimulus package. We think it 
creates a very good starting point. When we look at the cost of 
deploying broadband to additional areas, rural areas of our 
territory, it appeared to us or we estimated that the cost of 
increasing our deployment from 85 percent to 95 percent would 
have taken around $3 billion or thereabouts. And so I think the 
stimulus package adopted by the Congress is a good starting 
point and will get us on the right path, but I think if we are 
talking about ubiquitous broadband across America, then I think 
it is a starting point but more needs to be done and that is 
why we suggest that universal service be extended to broadband 
facilities.
    I also think that it gives us a point to begin the 
discussion of what speeds are adequate with respect to 
deploying broadband, what is the speed that we need to meet 
today's needs and yet not goldplate the expenditures.
    Mr. Boucher. Let me put the question very specifically. 
Current law says that USF money may not be spent for broadband. 
I would assume there is fairly broad agreement here that we 
ought to modify that to at least say it is an eligible subject 
for expenditure. Would you agree with that, Mr. Davis?
    Mr. Davis. I would.
    Mr. Boucher. Would anyone disagree with that? There is no 
disagreement. The better question is whether or not as the 
draft that Mr. Terry and I have put forward would require that 
we actually impose an obligation on the recipients of universal 
service funding to provide broadband, to do so throughout their 
service territories and to do so at a certain minimum speed. It 
is a pretty low speed. I think we have got a megabit per 
second, which on today's metric is not extraordinarily high. So 
my question is this: Does the availability of 7.2 billion on a 
nationwide basis in the stimulus measure for broadband make it 
more feasible to impose that obligation, that if you are going 
to receive USF money, you have to deploy it.
    Mr. Davis. I think----
    Mr. Boucher. And Mr. Davis, I think a yes or no at this 
point from you, because I want to give others a chance.
    Mr. Davis. The answer would be no.
    Mr. Boucher. All right. Others care to comment on that? 
Yes, Mr. Gerke.
    Mr. Gerke. Thank you, Chairman. We certainly applaud the 
efforts in the stimulus and very much want to participate 
there. We definitely agree that broadband should be eligible. 
We have done a similar estimate to what Mr. Davis talked about, 
and for our part, to get us up to 100 percent, it would be 
about $2 billion. That would not be economical without 
assistance. So what we are going to get from stimulus, and you 
know how that works and hopefully it get directed to unserved 
areas, and what we can continue under USF would not come close 
to fulfilling that. We would certainly commit to utilize all 
the money that we get to continue to fulfill our USF obligation 
of extending the service, maintaining it and keeping that 
service alive and available to those rural residents.
    Mr. Boucher. All right. Others care to comment on that 
question? Mr. Hale?
    Mr. Hale. I would just say that most of our members are 
deploying broadband in their areas but there could be extremely 
high-cost areas with a cap on the fund where there wouldn't be 
cost recovery for those areas, so there could be extreme--you 
know, in general, yes, we would deploy it and we are deploying 
it but there could be very, very small rural areas that it 
would be difficult to deploy with the cap on the fund.
    Mr. Boucher. I am detecting some hesitation about whether 
or not we should impose that requirement. Mr. Tauke?
    Mr. Tauke. There is no question but it is a stretch for a 
lot of carriers to be able to meet a requirement to deliver 
broadband even at the speeds you mentioned within the 5-year 
period, but I think it really hard from a public policy 
perspective to say that we are going to indefinitely provide 
funding for voice services when voice services is not what the 
future is about. So whether it is 5 years or 7 years or 4 
years, I don't know the answer to that question, but I think 
once the mapping is completed and you have a better handle on 
what it is out there that is unserved, then you can begin to 
get a better handle on how much capital is needed in order to 
be able to meet those needs. Maybe there will have to be a 
little more capital provided besides what is in the stimulus 
package. But I don't think it is unreasonable to have some kind 
of requirement for broadband for those who are receiving those 
funds.
    Mr. Boucher. Thank you very much, Mr. Tauke.
    Mr. Tauke. I have one point that I would like to make, Mr. 
Chairman, if I could have the opportunity, is that I think it 
is really important that this committee provide good oversight 
and perhaps even direction to the Administration's agencies 
that are administering the stimulus funds. There are a lot of 
new people there, a lot of great people, but I think this 
committee has a lot of history and I think probably can give 
some good guidance the way in which these funds are 
administered to achieve the objective.
    Mr. Boucher. Thank you very much, Mr. Tauke, and I might 
comment that we are in the process of doing precisely that now 
through conversations with both of the grant-making agencies 
with the Administration and we will actually move to an 
oversight hearing on that very issue in the not too distant 
future.
    My time is expired. The gentleman from Florida is 
recognized for 5 minutes.
    Mr. Stearns. Thank you, Mr. Chairman.
    Mr. Wallsten, let me just ask a blunt question. I mean, 
obviously everybody in the room agrees that the Universal 
Service Fund is broken and it is not working to taxpayers' 
advantage and we need to do something. What about just 
eliminating the Universal Service Fund? Now, I say that because 
when AT&T started, they were the one carrier and that is how 
the program got started. Now you can go to--Mr. Gerke, even in 
my Congressional district, which you serve, is a lot of rural 
areas, they can get service from more than Embarq, so forget 
for a second broadband, just talking about Universal Service 
Fund for land lease lines. Why is it still necessary to do 
this?
    Mr. Wallsten. Well, I think that is a good point. It was 
originally started to make sure that we brought 
telecommunications services to areas and once it was there----
    Mr. Stearns. Can I just ask you, do you agree there is a 
possibility we don't even need Universal Service Fund for what 
it is doing now?
    Mr. Wallsten. I am sure there are definitely areas where 
that is true, and if we have reverse auctions in areas like 
that, if all carriers were eligible, you would find places 
where firms bid zero, possibly even were willing to pay.
    Mr. Stearns. In the bill that Mr. Barton and I dropped in 
the last Congress, we listed that we no longer have companies 
get reimbursed for artwork, cafeteria, lunchrooms, vending 
machines, charitable contributions, lobbying, public relations, 
janitorial service. All these were the costs that people like 
Mr. Gailey or Mr. Hale used in their reimbursement expenses 
that they would put on top and give to the FCC. And so in our 
bill we said, gee, we didn't think sewage or water utilities or 
membership fees in social and political clubs and recreational 
clubs were necessary to be expenses. So we said, you know, let 
us make sure that they don't be incurred. As Mr. Tauke said and 
I think Mr. Waxman is sort of looking at and which is very 
encouraging for me to talk about reverse auctions, and Mr. 
Wallsten, you had indicated that would be the key here, and 
particularly you talked about this Identical Support Rule and 
if we did away with that and we had reverse auctions, bingo, 
then we would be out of this business of getting reimbursed 
upon the membership fees and dues in social and political 
services. Is that correct?
    Mr. Wallsten. Yes. If these auctions were done correctly, 
firms are going to want to win the auction and they are not 
going to include costs like that because then they wouldn't 
win.
    Mr. Stearns. Now, Mr. Davis, I am a little concerned to 
hear you say when you talk about broadband the $7.2 billion 
that is in the stimulus package, you say that is just the 
beginning. So you are asking the government to continue to tax 
people who are getting phones lines for a lot more than the 
$7.2 billion. Because you realize, if we spend that $7.2 
billion this year and the Universal Service Fund is about $7 
billion now, so if we are going to tax them next year, it is 
going to go from 11 percent of the bill to 22 percent of the 
bill. So we are really working backwards. I think Mr. Gerke 
said we are going to spend $2 billion in broadband and we could 
use the help. I think those were your words. So now you are 
coming here and asking us here on the committee to give you 
$7.2 billion this year and more money this year, and if Mr. 
Gerke needs $2 billion, then I assume you need $2 billion, and 
I am sure everybody in this room including the people in the 
last row could use $2 billion.
    So Mr. Wallsten, am I wrong? I mean, why should I tax 
people when AT&T just announced it plans to spend $12 billion 
in capital expenditures on broadband in 2009? And I applaud 
them for doing that, you know, but if the private sector is 
going to go out and do it, I mean, I am not clear, Mr. Davis, 
why you are saying this is just the beginning, you want the 
government to continue to fund this through the Universal 
Service Fund. That is what you are saying.
    Mr. Davis. Mr. Congressman, what I would say first is that 
we believe that the size of the fund should not be increased. 
The size of the fund does not need----
    Mr. Stearns. But you----
    Mr. Davis. --larger for us to spend----
    Mr. Stearns. But you believe we should tax the people who 
use the phone for this money is what you are saying?
    Mr. Davis. I believe that we can more wisely use the fund, 
reform the fund without increasing the size of the fund, we can 
provide universal broadband service.
    Mr. Stearns. Mr. Wallsten, even if we do the reverse 
auction and we did away with the Identical Support Rule, and 
let us just talk about broadband, how in the world can we go 
back and ask the taxpayers to pay for this broadband when it 
looks like the private sector is willing to do it?
    Mr. Wallsten. Well, as you are pointing out and as others 
have pointed out here, there are two issues. One is how we 
raise the money and the other is how we distribute the funds, 
and the way we raise the money is especially inefficient. Every 
user of telecommunications services has to pay into this fund 
including low-income users, most of whom don't receive 
anything. There have been many studies on this. A paper by 
Jerry Houseman estimated that each dollar raised in taxes on 
wireless services costs the economy an extra 72 cents to $1.14. 
Jerry Ellig estimated that these taxes on wireless services and 
interstate long distance to support universal service reduced 
economic welfare by about $2 billion a year. So on raising the 
fund size, it is inefficient and inequitable, inefficient 
because it is not a good way to raise taxes. You are taxing a 
price-sensitive service. And it is inequitable because you are 
imposing the tax including low-income people, and then to turn 
around and use it to subsidize people who are not necessarily 
low income, so that is the----
    Mr. Stearns. Thank you, Mr. Chairman.
    Mr. Boucher. Thank you very much, Mr. Stearns.
    The gentlelady from the Virgin Islands, Mrs. Christensen, 
is recognized for 5 minutes.
    Mrs. Christensen. Thank you, Mr. Chairman. I hope my 
questions, well, they will probably let you know that I am new 
to telecommunications but I do have a few questions to ask.
    I will start with Mr. Tauke. You are a strong proponent of 
capping the High-Cost Fund, and opponents say that it could 
have unintended consequences that could undermine the universal 
service goals so how would you respond to that concern?
    Mr. Tauke. I think the key is to direct the money to the 
area where it is needed. Today we provide a lot of support for 
old technology and we provide support for multiple recipients 
in a given area, so using Mr. Gerke's chart before of Indiana, 
a lot of money is going into the hole in that donut when the 
need is outside in the donut itself, and so if you can redirect 
the funds to the area where it is needed, I think you can meet 
the needs without spending more money. But if you don't cap the 
fund, I think what will happen is, is that we will keep adding 
on more things, so we need to redirect, not just add on. 
Because consumers are paying the bill and right now the bill 
is, you know, hovering around 9\1/2\ to 11 percent on the 
bottom of the bill.
    Mrs. Christensen. Thank you.
    Mr. Davis, obviously this hearing is in part about some of 
the inequities in the system, and one you raise is how the 
rural side of your business, the services you provide to the 
rural areas doesn't get the support. Are you recommending the 
same treatment for rural and non-rural or are you just 
recommending that your service to your rural areas get the 
support even though you are not considered a rural provider?
    Mr. Davis. I am suggesting the same treatment for rural and 
non-rural carriers such that we look at the specific geography 
and whether or not it is rural and support it irrespective of 
whether or not the company also serves urban areas.
    Mrs. Christensen. I understand.
    Mr. Tauke and Mr. Lubin, as I understand, both of you 
support going to a numbers-based system. How would you address 
concerns raised that this could raise the cost to consumers?
    Mr. Lubin. With regard to the question, will it raise the 
cost to consumers, my belief is, I believe it will reduce the 
overall contribution paid by the residential consumer, that the 
value of having a telephone number collection mechanism is 
first you get certainty. You know what it is. It doesn't 
fluctuate month by month. Sometimes you will pay 50 cents 
because you are not making a lot of calls. The next month maybe 
you have some family positive life event and you make a 
significant amount of calls and all of a sudden you can see a 
USF line item for $5 because you made a lot of calls. So you 
see a lot more stability but the beauty of what the coalition 
did that Tom Tauke talked about, which AT&T participated in, is 
that the actual telephone number rate when you look at it in 
aggregate over the residential user was paying less. In 
addition, that coalition exempted lifeline customers. So a 
lifeline customer would not pay the line item. And you heard 
the previous speaker highlight that in the ways in which you 
collect it today, customers who are on lifeline are still 
contributing to it on certain portions of their revenue.
    Mr. Tauke. I would reiterate everything Mr. Lubin said. 
Bottom line is that the number system and the way it was 
designed and the submission that a number of us made to the FCC 
slightly shifts the cost from residential to consumer, or from 
consumer to commercial, so from residential to commercial. So 
it lowers the overall costs for consumers and at the same time 
it takes care of the low-income consumer.
    Mrs. Christensen. Mr. Wallsten, you are supportive of 
reverse auctions. Why not base it on carrier costs as others 
would suggest?
    Mr. Wallsten. The main problem with using carrier costs is 
that it is impossible to know what they are, and companies will 
always have an incentive to say that their costs are higher 
than they are so that they can increase their subsidy and it 
reduces any incentive for them to work more efficiently, 
because the higher their costs are, the bigger the subsidy they 
get and so you can end up in sort of a constant spiral of 
increasing subsidies.
    Mrs. Christensen. Thank you, Mr. Chairman. I have no 
further questions.
    Mr. Boucher. Thank you very much, Mrs. Christensen.
    The gentleman from Texas, Mr. Barton, the ranking member of 
the full committee, is recognized for 5 minutes.
    Mr. Barton. Well, thank you, Mr. Chairman. I commend you 
for rescuing me from climate change hearing fatigue. We have 
our second one of those of the week going on upstairs, so it is 
nice to come down and participate in a hearing that is on 
something else. It is also nice to have a hearing entitled 
``Universal Service Fund: Reforming High-Cost Support.'' We 
have got the word ``reform'' in there, which is good; universal 
service, which is good. I wish instead of ``reforming'' you 
would have ``repealing'' but that is just wishful thinking on 
my part.
    It is ironic to me that we have a program looking for a 
need to continue to exist. I would have voted for universal 
service in the beginning back in the 1930s when my district in 
rural Texas had very few telephones outside of the small 
communities and the few cities in the district. I still support 
some sort of a universal service requirement, I suppose, but I 
am at a loss to figure out why we need to change the 
definition. But maybe if you can't kill the snake, it may be 
time to change it in such a way that we get some benefit, and I 
thought your question, Mr. Chairman, about a requirement if you 
are going to receive universal service funds you should have to 
provide broadband. I think that is a very good question. If you 
can't kill it, at least require something that is useful today, 
so I am intrigued by that.
    Mr. Tauke, I thought you gave one of the more articulate 
opening statements. I know that is because you used to be a 
member of this committee, which is not widely known and you 
don't talk about in polite company much more these days, but 
you were a member of this committee. Why would somebody oppose 
a reverse auction or why would somebody support a cost-based 
system reimbursement? If we are going to have it, why not do 
reverse auctions? Why not do competitive bidding? I mean, 
obviously that would save money and you would still have the 
basic requirement to provide the services.
    Mr. Tauke. I am probably not the best person to answer that 
question since we support reverse auctions and competitive 
bidding, but as I understand the arguments of those who oppose 
it, the first argument is that they favor having multiple 
carriers in a given area. Parenthetically, I guess first we 
don't think--just as a company it is our view that----
    Mr. Barton. Well, then go to competitive bidding.
    Mr. Tauke. If you have an unserved area, we don't see why 
you should support multiple carriers in that area, especially 
because as technology develops, those multiple carriers are 
going to come anyway. But for the near term, why should the 
government subsidize multiple players?
    But secondly, if you decided you really wanted multiple 
players, you could through a competitive bidding process 
provide that support to two or three carriers if you wanted to 
do that. But to try to have a system that is focused on 
determining costs, I think, is going to be counterproductive in 
a whole variety of ways, which I have already alluded to.
    Mr. Barton. I am going to ask the gentleman next to you, 
who is an advocate of classic universal service, why couldn't 
you exist in a world of competitive bidding or reverse auction? 
I thought your chart was informative. You know, I still have 
areas in my district that have significant rural areas. So why 
couldn't you exist in a competitive bidding reverse auction 
world?
    Mr. Gerke. I think the most critical thing to emphasize is 
one of the points that Mr. Wallsten made, which is you have to 
tie it to carrier of last resort. A lot of the proposals with 
respect to reverse auctions allow people to come in, identify 
areas and cherry-pick those and then leave me or similarly 
situated people to try to figure out how you make a profit on 
$266 per month of cost and a $25 or whatever receipt, and so if 
we can't isolate and leave behind those Americans, which is 
exactly what 254 was intended to stop or avoid, I think it is 
absolutely key that that concept----
    Mr. Barton. Well, do you accept as a carrier of last resort 
that you can be served in a wireless mode as opposed to a 
wireline mode?
    Mr. Gerke. Well, that is my point. If a wireless carrier 
would win, they would need to take that obligation to serve the 
entire area and relieve the underlying carrier so we wouldn't 
have that unprofitable operation separated and forced upon you.
    Mr. Barton. I know my time is expired, but if we accepted 
that a wireless carrier is acceptable for the carrier of last 
resort, and I am not saying that you have to accept that, but 
if you do, is it not true that the cost to serve as last resort 
would not be $266 per month?
    Mr. Gerke. They would have to calculate their own costs. 
With our network already in the ground and because their CFOs 
don't have them building out to those most rural areas, I am 
assuming they have got a cost that doesn't make sense for them.
    Mr. Barton. Thank you, Mr. Chairman.
    Mr. Boucher. Thank you very much, Mr. Barton.
    The gentleman from Michigan, Mr. Stupak, is recognized for 
5 minutes.
    Mr. Stupak. Thank you, Mr. Chairman.
    Mr. Gerke, in your testimony you mentioned about using the 
data that we have from a broadband inventory map as a means to 
retarget high-cost support either at the wire center level or 
even more granular. Can you explain what you mean by a more 
granular targeting?
    Mr. Gerke. Well, I am just open to dialog among the 
industry and with the committee. My thought is, you want to 
make sure that you separate out from providing service or 
pollute the calculation with numbers that, you know, represent 
a different market than what is really being targeted under 
254, which is the rural market, and the statewide averaging 
does that, so the wire center is a great way to target it. I 
think it just was an expression of our openness to figure out 
what is the most laser-like manner in which we can proceed.
    Mr. Stupak. Right, but isn't the wire center at times 
targeting too narrow, considering the size of the rural area?
    Mr. Gerke. Well, as long as you are talking within a 
particular rural area, you can look at the different wire 
centers that are there and then calculate the cost based on 
that.
    Mr. Stupak. OK. Mr. Carlson, if I may, I share some of U.S. 
Cellular's concern that the FCC does not have accurate mobile 
wireless service coverage data. What level of detail do you 
believe is appropriate for the Commission to have to improve 
their ability to administer funds, and are we talking about 
creating something similar to the broadband inventory map for 
wireless carriers?
    Mr. Carlson. Yes. I think the detail needs to go down below 
the zip code level, because if you work with a zip code you 
could have areas that were both high density and low density 
within the same zip code, and I think ultimately what we need 
to do is identify the cost characteristics of each area so that 
we could introduce a cost model. That would take us away from 
this issue of subsidizing inefficient carriers. With a cost 
model approach, we would be subsidizing only those areas which 
truly were low density and therefore for any carrier to serve 
them with high-quality service would have relatively high cost. 
So we are advocates of high-cost model system which would 
require us to get down to that very granular, below zip code 
level.
    Mr. Stupak. OK. Thanks.
    Mr. Tauke, you raised an interesting proposal for the 
creation of the subsidy of the middle mile, the long haul 
between a rural Internet end user and the network. Are the 
costs associated with developing a connection not fully 
supported by the current USF because it is strictly broadband 
in nature?
    Mr. Tauke. The costs of the middle mile are not currently 
subsidized to the extent that it is necessary in order to 
deliver broadband services to consumers. So when we look at the 
challenges of delivering service to, let us say the eastern 
shore of Maryland or western Maryland or Congressman Boucher's 
district or parts of West Virginia, various areas we serve, the 
bottom line is that sometimes the costs of providing the last 
mile in a community or area is much less than the ongoing costs 
of the 50 miles of transport you have to build. And so that is 
why when we looked at this issue, we said this is an area that 
needs to be addressed, hopefully that some of the stimulus 
money would go to building that middle mile, but in the interim 
it seemed to us that there was a need for some kind of program 
to address that issue and that is why we proposed establishing 
a separate fund in that area. In some cases the cost is almost 
$100 a month that we have seen for just the transport piece per 
customer.
    Mr. Stupak. Well, you mentioned the economic recovery 
package, that that may be some source of it. Would it go for 
construction then, that money? Would you say that? Or are we 
talking about operations and maintenance? And since you are 
suggesting there be a temporary support, how long should it 
last?
    Mr. Tauke. We believe that the primary issue is an issue of 
construction or capital expenditure. Two things happen over 
time. One is that you get more broadband penetration so you 
have more customers using that middle mile, and once the middle 
mile is developed and the customers have access to broadband, 
they are buying more services so therefore the revenue per 
customer goes up. So the combination of more customers and more 
revenue per customer probably would allow for the operation and 
some maintenance costs of the last mile and the middle mile to 
be supported in most instances. But the upfront capital 
expenditure is big.
    Mr. Stupak. So how long it would last just depends on how 
long that middle mile got developed, how many users got in 
before you could----
    Mr. Tauke. We are working on it. Maybe I will have a better 
answer in weeks but right now I don't have a firm answer. Our 
sense is that, you know, it is something that should be looked 
at in 5 years. You could put it in place, have the FCC review 
it in 5 years, something like that, but I think that we just 
need to do more work and maybe we will come up with a better 
answer for you a few weeks down the road.
    Mr. Stupak. Thanks.
    Mr. Boucher. Thank you, Mr. Stupak.
    The gentleman from Oregon, Mr. Walden, is recognized for a 
total of 7 minutes.
    Mr. Walden. Thank you, Mr. Chairman. I appreciate it, and I 
appreciate all the testimony of the witnesses.
    Mr. Carlson, I want to especially draw some attention to 
you because I appreciate your company's willingness to come 
into the great metropolis of Fossil, Oregon, where there are 
208 households, 469 souls as of the 2000 census. I would like 
you to write down the words Ione, Oregon, population 321, also 
seeking cellular coverage for the first time in its history, 
and then they are approaching you and all. But I throw that out 
there because I know USF played a key role in serving an area. 
Fossil, by the way, is the county seat of Wheeler County, and 
there were very serious, legitimate concerns the community had 
about having no cell service when it gets a lot of people 
floating in the nearby river and there are traffic accidents 
and things, so I do appreciate that. Can you speak, though, a 
bit about the High-Cost Fund and how the wireline, the wireless 
industries each get out of this--what they get out and how much 
customers pay into the fund. How do we make this work so we get 
wireless service out there? What works for you and what would 
be detrimental to getting that first and only service out 
there?
    Mr. Carlson. Well, I think that today it is important to 
remember that wireless today, wireless is receiving only about 
25 percent of the total program funds as opposed to wireline, 
which receives about 75 percent, and, you know, I am not smart 
enough to know if that is the right balance or not but what I 
do know is that wireless more and more is becoming, you know, 
the dominant form of people communicating, certainly for voice 
services, and I think that the data services are growing 
rapidly with wireless. So I would hope that the committee in 
its judgment would consider to think about the future for 
technology and not be looking backward about where technology 
investments have been made but look at where the country needs 
to go, and I believe that when you think about that, wireless 
will play an ever-bigger role in bringing the best service, 
best quality service out to rural Americans.
    Mr. Walden. And I don't disagree with that. I think there 
are issues related to that compensation level and the costs, 
and I think that is something we are all going to struggle 
with, and I am not sure I agree with Mr. Wallsten about once it 
is built you can walk away from it, and maybe I am 
mischaracterizing your comments, sir, but I sense that once it 
is out there, then whoever is cheapest at providing the service 
should be the one that gets reimbursed or that is the 
reimbursement rate, and it strikes me that that means a 
cellular carrier who may have a lot cheaper ability to provide 
cellular service might set the rate and yet a lot of people may 
not have cell phones but have a line into their home, and if 
you are out in rural Wheeler County or Morrow County, it is 
going to be much more expensive to have that hard wireline, and 
I guess my question to you is, is that what you were saying in 
your testimony, that we find the cheapest reimbursement, the 
provider that can do it cheapest, and that would become the 
rate?
    Mr. Wallsten. Well, you have to first define what exactly 
it is that you want, and then you want to find the lowest cost 
method of reimbursing that, and if what you want is, well, in 
this case we are talking the fund currently focuses on voice 
service, then you do want the lowest cost mechanism of doing it 
and you don't want to continue supporting a very high-cost 
approach just because it has always been there.
    Mr. Walden. So I did understand you correctly then?
    Mr. Wallsten. If they can bid and can continue offering 
that service at a low cost, then that would be fine.
    Mr. Walden. OK. I want to go next to our witness from 
Verizon. What are the pros and cons of using actual cost versus 
a reverse auction or competitive bidding to determining the 
distribution of those amounts, Mr. Tauke?
    Mr. Tauke. First, to be clear, we favor reverse auctions 
for mobile carriers, not for fixed carriers, because in fixed 
carriers we have generally only one in a community. We think 
customers want both mobile and fixed in a community, and we 
have a mechanism in place whether we like it or not that works 
for determining cost for fixed carriers. For wireless carriers, 
the problem is that first, unlike wireline where you have an 
access line that goes to the home, with wireless--and you can 
measure how long that is, what the cost of it is and so on. 
With wireless, you don't have anything like that. There has 
been no structure in place from an auditing perspective or 
accounting perspective, I should say, to keep track of all the 
costs and how you assign then to individual residences. You 
have a host of other issues such as how you value the spectrum 
and so on would go into determining cost, so I think what I 
would say to you is, if you want years of legal challenges, go 
to a cost-based system for wireless and you will be in court 
for a long time, but if you want a system that will work, go to 
a competitive bidding system.
    Mr. Walden. But what you are suggesting is a competitive 
system for each type of service delivery, competitive for line 
if there is more than one carrier, or how do you----
    Mr. Tauke. For the time being we would stick with the cost-
based system for wireline; for wireless, use the competitive.
    Mr. Walden. The question I would have, if you can figure 
out the cost-based system for a wireline, are you suggesting 
that wireless can't figure out a cost-based system for 
delivering their service?
    Mr. Tauke. I am saying it is much harder for wireless 
because you don't have dedicated facilities. If you are talking 
about the donut, for example, and the area around it, you don't 
have dedicated facilities for the area around it so you can't 
figure out what the cost is for the area around it versus the 
area in the donut. Second point that I would make is that there 
has been a whole history of accounting systems set up to 
determine cost on the wireline side. We don't have anything 
like that on the wireless side. And so the challenge of putting 
a new system in place is very significant. So trying to come up 
with the cost will be tough, and as soon as you come up with a 
method, that is going to be challenged in court by the 
carriers.
    Mr. Walden. Mr. Davis, should a universal service broadband 
program operate in the same manner as voice telephone service 
program or should it be structured differently?
    Mr. Davis. I would structure the broadband system 
differently. I have learned from what we have done in the past. 
I would base the broadband grants on a bidding process. The low 
bidder for a particular geographic area would be the only 
carrier that would be subsidized. We would not subsidize mobile 
carriers and we would through the bidding process subsidize the 
low-cost carrier. The other thing I would do would make it a 
one-time grant, a grant necessary to build out the facilities 
at a certain service level and price but a one-time grant, not 
an ongoing subsidy.
    Mr. Walden. My time is going to run out. Mr. Lubin, and 
then I have just one comment I want to make.
    Mr. Lubin. I just want to make the following observation, 
given AT&T spending $17 billion to $18 billion in terms of its 
capital budget, roughly two-thirds of it going for broadband 
and wireless, and the bottom line is that even with that amount 
of expenditure, we are going to have to figure out if you want 
to see broadband and wireless in high-cost areas, there is 
going to have to be some way to address that, and so in the 
broadband world, what we highlight is a competitive bidding 
process, one-time dollars, and only one time, underserved areas 
and one party gets it.
    Mr. Walden. I thank you, and Mr. Chairman, I would just 
conclude by saying I would take disagreement with my ranking 
member's position that water and sewer shouldn't be included in 
the reimbursement mechanism because I actually favor flush 
toilets over the outhouse. Thank you, Mr. Chairman.
    Mr. Boucher. Thank you very much, Mr. Walden.
    The gentleman from New York, Mr. Weiner, is recognized for 
2 minutes.
    Mr. Weiner. It is actually news to this member that you 
have indoor plumbing in your district.
    Mr. Walden. Actually we do have both.
    Mr. Weiner. Let me just say it strikes me, and to some 
degree this is an economic question for the citizens of my 
district. They are not underserved. They wind up, though, being 
donor citizens in this program. We want it to succeed. We want 
broadband access and we want telephone services available. But 
it does beg the question that the chairman mentioned in his 
line of questioning. It seems if you are running pipes, if you 
are trying to envision how we get information, how we get 
technology to these homes, that we should look at it in a 
holistic way, especially since you have this money in the 
stimulus bill and we have a focus on extending broadband. It 
seems that we make mistakes in this Congress when we try to 
envision technology as it is today and write legislation for it 
when in fact what we should be doing is trying to create as 
open enough of a process that new technologies can emerge.
    You know, I think that the argument for the reverse auction 
is pretty powerful and I frankly don't see why you couldn't 
transition the present formula for wireline service to reverse 
auction as well. I mean, the ideas being we are trying to 
incentivize reduced costs and people think more efficiently and 
evolving technologies that might be able to do these things at 
lower cost. Let us just talk about the wireless side since that 
is the side that Mr. Tauke said would be the best for the 
reverse auction. Let me hear someone, and you can decide, 
someone make the best argument against the reverse auction 
model. Yes, sir.
    Mr. Carlson. Well, I tried to make some of that position 
against the reverse auction in my opening comments when I said 
that if you create a single winner system, what you will have 
will be a single wireless provider, which means that that 
single wireless provider would only provide the services that 
it chose to provide to the people.
    Mr. Weiner. Why could you not have a reverse auction that 
the top two bidders win or why could you not have a rolling 
system whereby if someone during the--look, we did something 
similar at the advent of cable television in places like New 
York City where we said listen, it is difficult, it probably 
doesn't make a lot of sense to have three or four people 
digging trenches, so let us go ahead and give one the 
opportunity and then as a result you then agree if you do that, 
you are going to be subjected to a greater regulatory regime to 
make sure you provide quality service and the like.
    Mr. Carlson. Well, I think that, you know, it kind of takes 
you back, what are you trying to create as a nation and I think 
that the 1996 Act recognized that monopoly provision of 
services was not in the interest of the Nation in an era when 
technology was driving huge opportunities for innovation, and 
by opening up to innovation we would create an immense amount 
of national wealth.
    Mr. Weiner. If I can interrupt here, but I mean, you are 
creating a straw man, are you not? Isn't the problem that we 
are trying to find areas that have zero service that yes, one 
service is definitely less advantageous than three or four but 
that is a false choice in the cases of most of these 
communities like those in Mr. Walden's district, is it not? 
Aren't we trying to first and foremost get a player to come in? 
Isn't that the purpose of the Universal Service Fund in the 
first place?
    Mr. Carlson. Well, we totally agree with that, that the 
program needs to have more targeting so that we direct more of 
the funds toward those areas that Congressman Walden spoke 
about which have no service today or very, very poor service, 
but we believe that that can be done within the context of the 
1996 Act where there is competition. What we need is giving 
direction to the FCC to target the funds toward those areas 
while preserving competition.
    Mr. Weiner. Right, but I think I see that. I guess the 
question that I am trying to get to here is, once you reach the 
point where you say all right, we want to target this community 
but we also want to do it in a way that we are incentivizing 
whoever comes in there to give us, meaning we, the taxpayer, 
the best possible deal to provide that service. It doesn't 
seem--I mean, I think we can almost stipulate to the idea that 
it doesn't seem we are getting the best possible value with the 
way this is structured presently. So if you have a model that 
incentivizes the players who are represented at that table and 
elsewhere to say you know what, I think I can go in there and 
provide this community service for an average whatever dollar 
per household and three other firms go in there and say I 
wonder if we can beat that, let us figure out how we can make 
it more efficient. We are operating now in an environment where 
we are trying to apportion scarce resources in a more efficient 
way, and I want to just caution you all, the challenge that you 
face is, you have lost confidence that this fund--people are 
wondering, and Mr. Barton is coming at it from one economic 
perspective, some of us come at it from a different one. If you 
don't figure out a way to start incentivizing the providers to 
do it in a more efficient way, we are going to lose complete 
confidence that this fund should exist at all, and I think one 
of the ways you do that is to say you know what, we are going 
to start making the marketplace work for us for a moment here, 
and I don't know if there is anyone else who wants to rise to 
the defense of the cost model here.
    Can I ask one other question then? You know, voice is a 
relatively tiny part of what the larger conversation about 
information is really about at this point. I mean, most of it 
is data, video and everything else. Why shouldn't we just take 
the stimulus money, take this money, put it into a big pot and 
say let us figure out using a model that works, it may be the 
reverse auction model or another one and say let us just see 
what technology, what people come to us and say you know what, 
we can provide the full panoply of services. Why are we saying 
that you know what, let us create a fund to get this little 
sliver of the service to these communities. I think that if we 
are going to do this for the amount of money that we are 
investing, let us figure out a way to do it right. Let us try 
to really figure out a way to grow the marketplace for the 
services that come along with broadband and everything else by 
putting everything in one basket and saying we are going to try 
to plow into these communities and give them the same 
opportunities that my constituents have. Why shouldn't we do 
that? Is that too ambitious? Yes, sir, American Telephone and 
Telegraph.
    Mr. Lubin. On one hand I would say what you are suggesting 
is a clever point, and the clever point is, let us see how much 
of the stimulus dollars get used in unserved areas, and so 
Chairman Boucher asked a question in the beginning, what is the 
linkage between the stimulus package and universal service. For 
me, the linkage is at some point however this $7 billion gets 
disbursed over the 2-year period, hopefully that gets used to 
get more broadband deployed. When that happens, you are going 
to have less unserved areas. My only point here is that you 
have money. That money is going to be put out there relatively 
quickly. Find out, can it work, and it is a bidding process so 
it is a competitive bidding process. So you will see, you will 
have empirical information if it works. My guess, as you heard 
the other speaker say, $7 billion is not enough. Maybe they are 
right, maybe they are wrong, but you will get empirical 
information once and for all. My own particular bias--and 
again, it is up to you. You are the policymakers that say if 
you want broadband and you are the policymaker that says do you 
want mobility, and if the answer is yes, then my particular 
belief is, you shouldn't be waiting, you should be figuring out 
how to create the sea change, figure it out in a way which is a 
coherent way, and if in fact this investment gets deployed and 
you have less unserved areas, that is a huge win and now you 
are going to have whatever remains and then you go from there.
    Mr. Weiner. Thank you, Mr. Chairman.
    Mr. Boucher. Thank you very much, Mr. Weiner.
    The gentleman from Nebraska, Mr. Terry, is recognized for 5 
minutes.
    Mr. Terry. Thank you, Mr. Chairman, and I want to thank the 
panel. This has been a great discussion and very helpful, I 
think. Every one of you have done an excellent job. A couple of 
points that I want to make is, first of all, we talk about 
advanced services, and frankly, advanced services a year ago 
are mainstream services today. I walked into the Verizon store 
with my wife trying to get her phone fixed for about the sixth 
time, but we won't go into that, but I saw their new VOIP 
system for homes. Very cool, nice monitor and we can do video 
on it and the whole nine yards. And now that is being sold with 
all the regular phones, a little bit more expensive right now. 
But the point is that in today's society what is advanced a few 
months ago or a few years is mainstream today and we have to 
think of it that way. I am pleased that Mr. Barton wants to 
treat the snake differently, and that is exactly the conclusion 
I came to is, how do we get ubiquitous rollout of broadband. 
Two advantages that this bill brings is, number one, we use the 
same pot of dollars that already exists without creating one 
new dollar on the taxpayer to get ubiquitous rollout within our 
rural America. Number two in that is that by making it 
mandatory, what we do is say for the Mr. Gaileys and Mr. Hales 
that represent really the sparsest areas, they have risen up 
and they provided without the help of universal service but 
just other revenues, they have rolled out high-speed broadband 
to their customers but not every rural provider has and I am 
not sure every rural provider would unless that is a 
requirement to take, and so this is the way that we really 
ensure that all the universal service dollars provide that 
universal telecommunications services that is mainstream today. 
But my colleagues bring up a couple of decent points about that 
universal service should be used in an accountable way for the 
services of which it is intended, whatever that service may be 
as determined by this committee hopefully and not the FCC.
    So Mr. Gailey and Mr. Hale, I want to ask you this general 
question of how should we go about ensuring that these tax 
dollars are properly used, what systems would you suggest to 
us--and by the way, I want to use the phrase here, that the 
analogy with the donut, make sure that you people that are 
serving that donut and not the hole, that the dough must go to 
the donut, OK? So Mr. Gailey first.
    Mr. Gailey. Well, the first thing I would like to say is 
that annually my company provides a cost--which tells them what 
the costs are that we have incurred in a year. That is 
submitted to USAC and then 2 years after we incur those costs 
we receive recovery on those costs. Annually we also go through 
an accounting audit by an independent accountant so we do have 
oversight over, in my opinion, my company today. Now, some of 
the stuff that is in the report from OIG has been contradicted 
in this report from USAC and we all know that some of the 
things that have been reported could be interpreted in one or 
two ways. Now, my company will go through a USAC audit in May 
so I can better address if there is any refinement needed to be 
made to that type of audit system but we haven't opposed an 
audit system per se. We just want to know what the rules are 
before we go through it.
    Mr. Hale. We think that audits should be performed. The 
ways that they are being performed are the problems that we 
have with the current system. In the past--I haven't been in 
the business as long as some of our other folks here but in the 
past there are cost models and those things have been looked 
at. It is just very difficult. At some point it always came to 
embedded costs because our membership, we are not alike. 
Sometimes someone looks at rural and says we are all rural but 
we are a very diverse membership that serves a lot of different 
geographic areas, so it is difficult, but I mean, we would be 
open to discussing those things, I think, but it is very 
difficult to do that with a model or that type of thing.
    Mr. Terry. My time is up but I will predict that will be 
one of the things that Rick and I work on for our last draft.
    Mr. Boucher. Thank you very much, Mr. Terry.
    The gentleman from Illinois, Mr. Rush, is recognized for 7 
minutes.
    Mr. Rush. Thank you, Mr. Chairman. First of all, Mr. 
Chairman, I want to just take a moment to welcome my friend 
from Chicago, Mr. Carlson, who is president of U.S. Cellular. 
We worked together on many issues and I am so glad to see you 
here as a part of this panel, and I want to extend a heartfelt 
welcome to you as well as to all the other panelists.
    Mr. Chairman, this panel and this hearing will not touch 
upon an area that I am intensely interested in, and that is the 
area of access to telephone services and the lessening of the 
burden that the cost of telephone services has been placed on 
low-income families, especially for those who are incarcerated. 
It is not the subject of this hearing, but Mr. Chairman, I do 
want us to at least take that up as a part of our future 
deliberations on the reforming of the Universal Service Fund. I 
do have a bill that I have introduced, H.R. 1133, the Family 
Telephone Connection Protection Act, that would require the FCC 
to regulate the rates so that they are reasonable. There are a 
lot of families who now are immensely overburdened because of 
the high cost that the telephone companies are charging 
incarcerated prisoners and their families to communicate with 
them, and so that will be a part of the discussion that I want 
to engage in in the future. It is not the subject right here.
    Mr. Boucher. Would the gentleman yield to me for a moment?
    Mr. Rush. Yes, Mr. Chairman.
    Mr. Boucher. I thank the gentleman for yielding. I share 
the gentleman's concern, and this is a matter that I also would 
like to look at and I look forward to working with the 
gentleman as we try to find a constructive way to address it.
    Mr. Rush. Thank you, Mr. Chairman, and with that I also 
just want to say hello to my friend, Charlie Sullivan, over 
there who has been a proponent of this for the last few years, 
for a lot of years, really.
    Mr. Chairman, I do have a number of questions. First of 
all, I want to ask all the panel for the limited time that I 
have remaining, I want to ask the panel to answer this first 
question with either a response of yes or no. We can go down 
the line. The question, is broadband really a universal 
service? Is it so essential to everyday life like electricity 
was a century ago that we should ensure that all Americans have 
access to broadband? Either yes or no.
    Mr. Davis. Yes.
    Mr. Lubin. Yes.
    Mr. Carlson. Yes, and I would add, it should be also mobile 
broadband.
    Mr. Gailey. I agree, yes, it should be.
    Mr. Turner. Yes, absolutely.
    Mr. Tauke. Yes.
    Mr. Gerke. Yes.
    Mr. Hale. Yes.
    Mr. Wallsten. As the economist, I will say it depends. I 
think our resources are limited and I would much prefer to 
first see things like health care be available to everybody.
    Mr. Rush. All right. So after we get the health care, then 
we get the broadband. Is that what you are saying? All right.
    Section 254 of the 1996 Telecom Act states that universal 
service policies shall promote, one, the availability of 
quality services at just, reasonable and affordable rates, and 
two, access to advanced telecommunications and information 
services in all regions of the Nation. Mr. Turner and the rest 
of the panel, do you think our universal service policies have 
achieved these goals?
    Mr. Turner. Not directly, sir. The problem is, is that the 
FCC has not updated its definitions of what services are 
supported to include broadband. However, through the magic of 
accounting, lots of USF-supported carriers have actually used 
the money that they are getting to deploy broadband services so 
I think instead of doing this funny and tricky accounting we 
should just make it explicit and actually recognize that 
broadband is already being supported by the fund and let us 
make it explicit and let us cost it out and let us see what 
support would actually be needed to bring it into the areas 
that don't currently have it.
    Mr. Rush. Is there anybody else on the panel that wants to 
respond?
    Mr. Hale. I think we are still working on the goal. I think 
there is a misconception that when we draw money from the fund 
the networks are paid for. Most of our companies or a lot of 
our companies are financing these networks through RUS loans 
and the amount of USF money they receive is based on the 
depreciation of that plant 2 years prior. So we still have debt 
service to do on the networks that we built for universal 
service, so I still think it is work in progress.
    Mr. Rush. Mr. Gerke.
    Mr. Gerke. Yes, Congressman. I agree it is a work in 
progress. I do think we have shown that we can deliver 
universal voice and have done a good job on it. I think the 
targeting that is suggested in this bill to get the money where 
it needs to go is important. I am very encouraged by people 
understanding the connection to the carrier-of-last-resort 
obligation and making that part of the discussion. Broadband's 
inclusion I think is a big plus and can move us forward. I 
agree with those comments. And last, I would echo that we are 
out every day making investment in new plants based on an 
understanding of the USF support that is there. We have 
maintenance, we have enhancement, words that come from 254 that 
we have to live up to, and we have shareholders who are 
expecting that when we make those kind of investments in a 
stable enough environment that it is predictable for them. The 
lack of stability sometimes really creates a challenge for us 
to move forward. Thank you, Congressman.
    Mr. Rush. Does anybody else want to comment on this?
    Mr. Carlson. I know that many members here, you know, don't 
want to talk about expanding the program but there was one 
element of the program that was not properly implemented by the 
FCC, and that was when the cap was imposed there were a number 
of States, and I could list some of them that we are familiar 
with, North Carolina, Nebraska, Virginia, Tennessee, Michigan, 
Oregon and Washington and a smaller amount in Illinois, States 
that were unfairly treated in the way in which the cap was 
imposed, and fixing that would cost about $350 million 
additional to the fund which would raise the contribution level 
from today 9\1/2\ percent to 10 percent, a very modest increase 
which would make it fair across America.
    Mr. Rush. Mr. Chairman, I see my time is up but I want to 
thank you for this opportunity.
    Mr. Boucher. Thank you very much, Mr. Rush.
    The gentleman from Illinois, Mr. Shimkus, is recognized for 
5 minutes.
    Mr. Shimkus. Thank you, Mr. Chairman. I was picking on you 
upstairs. You got the televised hearing. Climate change and the 
ending of the world did not, so kudos for you.
    Mr. Boucher. Thank you. We deserve a few pats on the back 
here today.
    Mr. Shimkus. You have more people at the panel by two. I 
have been bouncing back and forth. I apologize for that. I know 
the chairman would like to but he has to manage the chair here.
    Rural America, many of you know my district. We have 
benefited from USF. There are challenges. Let me just ask, as 
we look at USF funds to facilitate broadband deployment, does 
wireless broadband have a role, a practical application, and if 
we can just go quickly Mr. Davis through Mr. Wallsten.
    Mr. Davis. I think the broadband support should be 
technology-neutral, so I think that once we determine what the 
speed, the level of service and the price should be, it 
shouldn't depend--that any technology should be available.
    Mr. Shimkus. Thank you.
    Mr. Lubin. I also think it should be technology-neutral but 
I also think clearly the policymakers, namely yourselves, need 
to decide whether mobility, advanced mobility is important as 
well as fixed broadband, and if they are, then you need to 
figure out what is a rational plan for both.
    Mr. Shimkus. Because I have successfully tried to stay on 
the fence in this process so far so I am trying to figure it 
all out.
    Mr. Carlson.
    Mr. Carlson. Yes, I think both are important. I think the 
speed that is capable in a wired system is higher than it is in 
a mobile system so that target speed for mobility should be set 
a level that is different than the target speed for wireless.
    Mr. Shimkus. Mr. Gailey.
    Mr. Gailey. I would agree with Mr. Carlson that wired can 
provide bigger pipes to a residence. The mobile can provide a 
smaller pipe that you can carry with you to different 
locations.
    Mr. Shimkus. Keep going.
    Mr. Turner. I think they both have their utility. Wireless 
is definitely going to play a role in the areas that are most 
extremely high cost to service but wireless will always have 
the advantage of having more capacity and not being a shared 
medium. So I think we really need to look at that. I am not 
sure at this point that checking your Facebook while driving 70 
miles down the road is an essential service that should be 
subsidized.
    Mr. Shimkus. You haven't talked to my son yet.
    Mr. Tauke. Just to be clear, I think it should be fixed 
versus mobile, and fixed should be reimbursed as it is today 
and generally we call that wireline but it also can be fixed 
wireless, and the other is mobile and I think Americans today 
see mobile as essential.
    Mr. Shimkus. Well, I think that is a good point because I 
tell you, in a rural community that has a couple hundred 
residents, wire, hooking it up versus have a tower that is 
fixed wireless is a different ballgame than checking your 
Facebook as you are driving down the road.
    Mr. Gerke.
    Mr. Gerke. Yes, I think it is real important as mentioned 
before to define exactly the criteria you are going after. I 
think generally the wireline plan is what is going to get you 
there and then making sure that that obligation is to serve the 
entire donut that you don't just serve part of it but you have 
that carrier-of-last-resort obligation to serve all of it.
    Mr. Shimkus. And being in rural America, there are problems 
with line of sight and terrain and stuff, and I understand that 
also.
    Mr. Hale.
    Mr. Hale. I believe it should be technology-neutral. I 
don't think we can imagine tomorrow's technology, what we are 
going to ask to use for broadband deployment. As long as the 
minimum speeds and those standards are high enough to support 
what we need for the future of the country, technology 
shouldn't play a role.
    Mr. Shimkus. Mr. Wallsten.
    Mr. Wallsten. I mean, once you decide what type of service 
it is that you want to guarantee, then it should be, as 
everyone has said, basically be technology-neutral. I think the 
key is to make sure that you don't define the service in a way 
that arbitrarily benefits one type of provider just in order to 
benefit that provider.
    Mr. Shimkus. Thank you. Two final questions just to one 
panelist, Mr. Chairman, if I may.
    Mr. Turner, Ranking Member Barton has a credible beef of 
some of the abuse of the USF and that is going to cause a lot 
of challenge for us in this committee. Have you identified in 
the way high-cost funding is currently distributed to wireline 
or wireless carriers or what excesses have you identified?
    Mr. Turner. Well, I think one of the most important things 
that hasn't come up in this hearing is, is a lot of these rural 
carriers are supported based on historical cost when the most 
efficient way of supporting them should be a forward-looking 
cost if we are going to use cost models. The often talked about 
$970 million in overpayments identified by the FCC OIG, it is 
not that there was actually $970 million in overpayments, it is 
that these companies didn't keep good historical records of 
their costs and the audit triggered that being an overpayment. 
I think going forward with forward-looking costs is the best 
way to go. It is economical. I certainly would like to be able 
to recover the historical cost for my house that I bought 2 
years ago but unfortunately that is not what the market will 
bear today.
    Mr. Gerke. Congressman.
    Mr. Boucher. Mr. Gerke, go ahead.
    Mr. Gerke. I just want to make sure I get on the record, we 
absolutely encourage transparency and we are willing to make 
sure that we do whatever is necessary so that you can see that 
these dollars are spent exactly the way they should be. In 2008 
we had seven audits. No material weakness, deficiencies. We 
weren't penalized, no consent agreements. There was $92,000 
more that should have been paid to us. There was $18,000 more 
that we should have paid in, so net we were shorted $74,000. We 
are not looking for that. But it shows up as a $110,000 mistake 
the way it is counted, and so I don't know how much of those 
eight audits go into the 23 percent but I suspect whatever 
those dollars were, they actually were in our favor and the 
costs we incur, we want transparency, let us do it in a manner 
that doesn't drive costs that way, way exceed the numbers that 
we are talking about. Thank you very much.
    Mr. Shimkus. Thank you, Mr. Chairman. I would just end by 
saying, I wonder how much the actual audits cost.
    Mr. Boucher. Thank you very much, Mr. Shimkus, and I am 
glad you raised the question of the legitimacy of the audit 
itself because I think there are some substantial questions 
about the methodology that it used, and that is a matter into 
which we will inquire further at the proper time.
    The gentleman from North Carolina, Mr. Butterfield, is 
recognized for 5 minutes.
    Mr. Butterfield. Thank you, Mr. Chairman, for convening 
this very important hearing and I will try not to consume my 
entire 5 minutes. Like John Shimkus, I would like to apologize 
to you for being late for your hearing. We have been bouncing 
between two subcommittees both in this building, but thank you 
very much. I thank the witnesses for your testimony today.
    Mr. Chairman, I look forward to working with you as you 
chair this committee. You and I are friends and we have similar 
Congressional districts and I pledge to you my complete support 
as we go forward with this subcommittee.
    Mr. Chairman, according to a recent analysis from the 2007 
American Community Survey, my district in eastern North 
Carolina now has the fourth lowest median household income out 
of all 435 Congressional districts in the House. That figure 
along with the sprawling, very rural geographic characteristics 
of my Congressional district make issues like this very 
important to me. While there is no question that an escalating 
contribution factor is rightfully a concern for carriers and 
policymakers and certainly the FCC, I remain confident that a 
sensible resolution can be achieved that recognizes and upholds 
the universal service concept, makes advanced telecommunication 
service including broadband a part of the universal service 
scope and oppose those principles outlined in section 254, and 
so thank you very much for convening this hearing today. I 
thank the witnesses for coming including my good friend, Tom 
Gerke, who represents Embarq, who is a good corporate citizen 
in my district, and thank you for all that you do.
    I have one brief question and then I will close. Let me 
address this to my friend from Verizon, the former member of 
this body, Mr. Tauke. There have been proposals floated to 
allow the lifeline and linkup program to help lower-income 
people purchase computers so they can access the Internet. 
There were also proposals to allow the program to pay for 
broadband. Are these good ideas? Should the government be 
looking at other ways to increase computer ownership and 
subsidize monthly broadband access for low-income consumers?
    Mr. Tauke. First, on the issue of subsidizing broadband 
access for low-income consumers, we believe it is appropriate 
to look at the feasibility of having a lifeline-type program 
for broadband access. We don't have a specific proposal. I 
think there are issues that need to be addressed relating to 
it. But I think that it is something worth looking at and also 
that it should be done at the federal level since broadband 
services are federally regulated.
    On the issue of computers, I don't think we would look to 
use the Universal Service Fund to support computers because the 
Universal Service Fund is paid for, as Mr. Carlson noted, is 
really consumers' money that we collect and it is consumers of 
communication services, so while we would feel comfortable 
using that funding for communication services, I don't know 
that we would agree that it should be used for computers. 
However, if you ask my boss, the CEO of Verizon, what could we 
do to encourage broadband deployment, he would say the most 
important thing you can do is to increase demand and the most 
important way to increase demand is to get a computer in the 
hands of every kid in America. So I think we recognize that 
that is very valuable.
    Mr. Butterfield. Thank you. Would AT&T associate itself 
with those comments in substance?
    Mr. Lubin. Yes. In fact, AT&T has been looking and recently 
shared some thoughts in terms of how to potentially have a 
lifeline program on broadband and we would be glad to share 
that with you.
    Mr. Butterfield. Thank you very much.
    And speaking of association, Mr. Chairman, I also want to 
associate myself with the comments of Chairman Rush a few 
minutes ago about H.R. 1133. That is a very significant piece 
of legislation. Before I had a life in this body, I served as a 
judge and I received very heartbreaking letters from families 
about the expensive cost of long-distance phone calls for their 
loved ones in prison. It is an issue that we need to talk about 
and come to a sensible solution.
    I yield back.
    Mr. Boucher. Thank you very much, Mr. Butterfield, and I 
share the concerns you and Mr. Rush have expressed about that 
matter as well.
    I want to ask unanimous consent that there be included in 
the record a written statement from the Mercatus Center at 
George Mason University and a written statement of testimony 
from the American Homeowners Grassroots Alliance. Without 
objection, so ordered.
    [The information appears at the conclusion of the hearing.]
    Mr. Boucher. The record of this hearing will remain open 
for a reasonable period until members can submit written 
questions to our panel of witnesses. When they are received by 
you, I hope you will respond promptly, and with the chair's 
thanks for what has been, I think an interesting and 
stimulating discussion today. We appreciate your being with us 
and sharing your very useful information.
    This hearing is adjourned.
    [Whereupon, at 12:35 p.m., the subcommittee was adjourned.]
    [Material submitted for inclusion in the record follows:] 

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