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

              H.R. 5828, THE UNIVERSAL SERVICE REFORM ACT OF 2010

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

                                    HEARING

                                   BEFORE THE

          SUBCOMMITTEE ON COMMUNICATIONS, TECHNOLOGY, AND THE INTERNET

                                     OF THE

                        COMMITTEE ON ENERGY AND COMMERCE
                            HOUSE OF REPRESENTATIVES

                         ONE HUNDRED ELEVENTH CONGRESS

                                 SECOND SESSION

                                   __________

                               SEPTEMBER 16, 2010

                                   __________

                               Serial No. 111-156

          Printed for the use of the Committee on Energy and Commerce

                            energycommerce.house.gov

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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 S. MURPHY, Connecticut
    ZACHARY T. SPACE, Ohio
    JERRY McNERNEY, California
    BETTY SUTTON, Ohio
    BRUCE L. 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              CLIFF STEARNS, Florida
    ANNA G. ESHOO, California            NATHAN DEAL, Georgia
    BART STUPAK, Michigan                JOHN SHIMKUS, Illinois
    DIANA DeGETTE, Colorado              GEORGE RADANOVICH, California
    MICHAEL F. DOYLE, Pennsylvania       MARY BONO MACK, California
    JAY INSLEE, Washington               GREG WALDEN, Oregon
    ANTHONY D. WEINER, New York          LEE TERRY, Nebraska
    G.K. BUTTERFIELD, North Carolina     MIKE FERGUSON, New Jersey
    CHARLIE MELANCON, Louisiana
    BARON P. HILL, Indiana
    DORIS O. MATSUI, California
    DONNA M. CHRISTENSEN, Virgin
        Islands
    KATHY CASTOR, Florida
    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..................................     7
    Hon. Henry A. Waxman, a Representative in Congress from the State
      of California, opening statement...............................     8
        Prepared statement...........................................    10
    Hon. Lee Terry, a Representative in Congress from the State of
      Nebraska, opening statement....................................    12
    Hon. Michael F. Doyle, a Representative in Congress from the
      Commonwealth of Pennsylvania, opening statement................    13
    Hon. Marsha Blackburn, a Representative in Congress from the
      State of Tennessee, opening statement..........................    13
    Hon. Doris O. Matsui, a Representative in Congress from the State
      of California, opening statement...............................    14
    Hon. Robert E. Latta, a Representative in Congress from the State
      of Ohio, opening statement.....................................    14
        Prepared statement...........................................    16
    Hon. Jerry McNerney, a Representative in Congress from the State
      of California, opening statement...............................    19
    Hon. Kathy Castor, a Representative in Congress from the State of
      Florida, opening statement.....................................    19
    Hon. John D. Dingell, a Representative in Congress from the State
      of Michigan, prepared statement................................   100
    Hon. Anna G. Eshoo, a Representative in Congress from the State
      of California, prepared statement..............................   101

                                   Witnesses

    Carol Mattey, Deputy Bureau Chief, Wireline Competition Bureau,
      Federal Communications Commission..............................    21
        Prepared statement...........................................    23
        Answers to submitted questions...............................   105
    Walter McCormick, President and Chief Executive Officer, United
      States Telecom Association.....................................    29
        Prepared statement...........................................    31
    Shirley Bloomfield, Chief Executive Officer, National
      Telecommunications Cooperative Association, NTCA...............    35
        Prepared statement...........................................    37
    Steven Davis, Senior Vice President for Public Policy and
      Government Relations, Qwest Corporation........................    50
        Prepared statement...........................................    52
    Kathleen Grillo, Senior Vice President, Verizon..................    68
        Prepared statement...........................................    70
    James Assey, Executive Vice President, National Cable and
      Telecommunications Association.................................    76
        Prepared statement...........................................    78

                               Submitted Material

    Letter of September 14, 2010, from American Farm Bureau
      Federation to the Subcommittee, submitted by Mr. Terry.........   103

              H.R. 5828, THE UNIVERSAL SERVICE REFORM ACT OF 2010

                                  ----------

                          THURSDAY, SEPTEMBER 16, 2010

                  House of Representatives,
    Subcommittee on Communications, Technology,
                                      and the Internet,
                              Committee on Energy and Commerce,
                                                        Washington, DC.
        The subcommittee met, pursuant to notice, at 10:04 a.m., in
    Room 2322, Rayburn House Office Building, Hon. Rick Boucher
    [chairman of the subcommittee] presiding.
        Present: Representatives Boucher, Stupak, Doyle, Inslee,
    Matsui, Christensen, Castor, Murphy, Space, McNerney, Waxman
    (ex officio), Stearns, Terry, Blackburn, and Latta.
        Staff Present: Amy Levine, Counsel; Greg Guice, Counsel;
    Sarah Fisher, Special Assistant; Josh Bercu, Intern; Tim
    Powderly, Counsel; Neil Fried, Minority Counsel; William Carty,
    Minority Professional Staff Member; and Jeanne Neal, Minority
    Research Analyst.

      OPENING STATEMENT OF HON. RICK BOUCHER, A REPRESENTATIVE IN
               CONGRESS FROM THE COMMONWEALTH OF VIRGINIA

        Mr. Boucher. The subcommittee will come to order.
        This morning's hearing is a legislative hearing on H.R.
    5828, the ``Universal Service Reform Act of 2010.'' The bill is
    a comprehensive reform of the Universal Service High-Cost Fund,
    and the measure before us this morning has been revised in
    various respects based on recommendations we have received
    during and following the subcommittee's last hearing on the
    legislation.
        H.R. 5828 is the product of a bipartisan effort that I
    undertook, beginning several years ago, with our subcommittee
    colleague, the gentleman from Nebraska, Mr. Terry. We have
    benefited from the advice and suggestions of other members of
    our subcommittee, members of the full committee, and a broad
    range, including dozens of interested parties.
        We have also conducted extensive conversations with a very
    broad audience. We have achieved consensus among a broad range
    of competing interests, and I think you will see that consensus
    clearly reflected here today in the testimony of our witnesses.
    You will hear this morning endorsements for the legislation
    from companies and trade associations that have long been in
    basic disagreement about the High-Cost Fund and how it should
    be reformed.
        Net contributors into the fund, such as AT&T and Verizon,
    are today in agreement with net beneficiaries from the fund,
    such as rural carriers represented by NTCA, OPATSCO, and WTA,
    that H.R. 5828 in the form in which it appears before the
    committee today should be approved. We also have endorsements
    for the legislation from Qwest, CenturyLink, Frontier, Vonage,
    the National Cable and Telecommunications Association, and
    USTelecom, reflecting a truly broad consensus.
        The High-Cost Fund, which assures affordable rural
    telephone service, has come under increasing pressure, and
    comprehensive reform to ensure its continued stability is
    urgently needed. New technologies and new business plans are
    combining to diminish the long-distance revenues that
    historically have been the base of support for universal
    service.
        The current USF contribution rate stands near its highest
    level ever, at more than 13 percent. In October, that rate will
    dip slightly to 12.9 percent, but all signs point to double-
    digit contribution rates going forward in the absence of
    comprehensive reform.
        In addition, the Universal Service Fund is clearly
    outdated, as it supports only voice-based telephone service.
    Our legislation extends the program to broadband and, in fact,
    contains a mandate that carriers deploy broadband throughout
    their service territories as a condition of their continued
    receipt of universal service funding.
        Many of the Federal Communications Commission's National
    Broadband Plan recommendations are reflected in our
    legislation. It gives the FCC the statutory authority that it
    needs to carry out its universal service goals. In addition,
    the legislation expands the fund's contribution base by
    assessing intrastate as well interstate and international
    revenues, and it requires that providers of broadband
    connections make a contribution into the fund.
        The bill grants the FCC the authority to implement
    competitive bidding for distributions of fund moneys to
    wireless carriers, with a limit of two winners per service
    area, avoiding the potential legal challenges from those who
    argue that competitive bidding does not comport with existing
    statutory universal service principles. Removing regulatory
    uncertainty in these areas will avoid the protracted litigation
    regarding commission authority that almost certainly will come,
    particularly in the wake of the D.C. Circuit's Comcast decision
    that further circumscribed FCC statutory authority. Passing
    this bill will allow for expeditious reform of the Universal
    Service Fund through appropriate action at the Federal
    Communications Commission.
        Our legislation would also direct the FCC to adopt a new
    cost model for USF support based on the provision of both voice
    and broadband service, while also limiting growth of the fund
    by providing that contribution burdens on consumers may not
    unreasonably increase.
        As I mentioned earlier, we mandate that all recipients of
    universal service support offer broadband throughout their
    service areas at minimum speeds that would be adjusted by the
    Commission from time to time. And we fully anticipate that
    these speeds will increase over time as technology permits.
        Other elements of our measure include fixing the phantom
    traffic problem by requiring that carriers pass through call
    identification information so that the terminating carriers
    know to whom to send the bill for call originations. We
    eliminate traffic pumping by prohibiting carriers from sharing
    access charge revenue with third parties where those third
    parties offer free or reduced-cost services.
        We make permanent the Anti-Deficiency Act exemption for USF
    so that an annual appropriations rider will no longer be
    necessary in order to continue financing for the fund. And we
    deny universal service support in areas where there is
    competition in the offering of voice-based telephone service, a
    new departure for the Universal Service Fund.
        The bill modernizes a program that ensures the availability
    of communications connections to millions of Americans,
    benefiting not just the rural residents who live in the high-
    cost areas but benefitting our entire Nation. We are a stronger
    Nation when we are all connected through telecommunications
    services. Having rural America connected is essential for
    efficient nationwide communications and gives Internet-based
    businesses, for example, access to millions of homes that would
    be disconnected as customers to these Internet-based companies
    if the Universal Service Fund did not exist and was not viable.
        I want to thank the Members, their staffs, and the dozens
    of stakeholders who have participated with us in drafting a
    reform measure that, as the testimony of our witnesses today
    will reveal, enjoys a true consensus and very broad-based
    support.
        I want to thank our witnesses for taking the time to join
    us here in the wake of their participation with us in
    formulating this measure. We very much look forward to your
    testimony.
        That concludes my opening statement. I am pleased now to
    recognize the ranking Republican member of our subcommittee,
    the gentleman from Florida, Mr. Stearns.
        [The prepared statement of Mr. Boucher follows:]

        [GRAPHIC] [TIFF OMITTED] T8133A.001

        [GRAPHIC] [TIFF OMITTED] T8133A.002

        [GRAPHIC] [TIFF OMITTED] T8133A.003

     OPENING STATEMENT OF HON. CLIFF STEARNS, A REPRESENTATIVE IN
                   CONGRESS FROM THE STATE OF FLORIDA

        Mr. Stearns. Good morning. And thank you, Mr. Chairman.
        I just apologize, as I am sure you also agree, to the
    limited space here, and I apologize to the people who are
    standing. We are not in the main room because there is a health
    markup on 21 bills, from H.R. 211 to H.R. 6110. I am sure it is
    pretty important, but considering everything, we are sorry that
    we don't have more room for you.
        But, Mr. Chairman, I want to thank all of you, thank you
    particularly for having this important legislative hearing on
    the ``Universal Service Reform Act of 2010.'' Also, I would
    like to commend my colleague, Mr. Terry, for his steadfast hard
    work in developing this legislation. You both received comments
    from many of us and have taken those into consideration.
        Reforming the broken Universal Service Fund I think is a
    top priority for everybody in this room. There is a bipartisan
    consensus, too, that the fund is broken. We can probably all
    agree that the system is fraught with waste, fraud, and abuse.
    A major overhaul is necessary. The question before us this
    morning is, what is the appropriate goal to accomplish this
    program and how do we achieve it?
        My colleagues, 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, yet the fund is still
    administered by outdated rules. So, accordingly, there is a
    need to reform the program away from subsidies that may no
    longer be necessary as technology and services improve and
    become more widespread. Instead, we need to move towards a
    solution that ensures the goals of universal service but
    minimizes consumer cost. Throwing additional money at this
    crumbling program I think makes little sense.
        Nearly everyone in the country has access to phone service,
    and we have more competition and better technology than ever
    before. Yet, instead of shrinking the Universal Service Fund,
    it has ballooned to more than $8 billion a year, about twice
    what it was in 2000. Approximately $4.5 billion of that comes
    from the high-cost program's subsidies to rural carriers, more
    than three times the $1.3 billion spent on that program in
    1997.
        And when the price tag for universal service goes up,
    subscribers, customers bear the burden. The FCC projects that
    almost 13 percent of the monthly long distance bill in the
    fourth quarter of 2010 will be universal service fees, up from
    5.7 percent in 2000.
        According to the FCC, however, the bill, as introduced--and
    this is their words--``could substantially increase the size of
    the fund.'' Among the reasons are provisions expanding the fund
    to broadband without--without--imposing a cap on the fund or
    ensuring sufficient offsetting savings.
        We should not support any Universal Service Fund reform
    legislation that is absent strong and statutory assurance that
    it will simply rein in the program. The prospect of expanding
    the program to subsidize broadband access raises serious
    concerns about potential huge cost increases. I would consider
    including broadband in the fund but, my colleagues, only if
    paired with reform that will constrain growth in the fund at a
    minimum and preferably shrink it. I mean, that is the whole
    purpose of what we are trying to do. Thus, cost-containment
    reforms must be part of the mix.
        I am encouraged that the bill requires the FCC to determine
    support for wireless carriers through a competitive bidding
    mechanism, and that is an important cost-cutting reform. Such a
    mechanism should also be applied to wireline providers. I also
    support provisions in the bill that require the FCC to act on
    needed reforms in other area, such as intercarrier compensation
    and traffic pumping.
        I am still concerned about a couple of things. We need to
    target the money to the places and the people who really need
    it. The bill requires the FCC to establish a cost model that
    sets subsidy levels rather than using a market-based mechanism
    to subsidize a single wireline carrier in areas otherwise
    uneconomic to serve. Only wireless carriers would be subject to
    competitive bidding, and up to two wireless carriers could be
    subsidized in an area in addition to the incumbent wireline
    providers.
        Carriers would also be allowed to continue under rate-of-
    return regulation. Although the FCC would not be allowed to
    ``unreasonably increase,'' end quote, the amount consumers pay,
    the contribution factor could still rise, and the fund would
    not be capped.
        So, Mr. Chairman, I appreciate you holding this hearing. It
    is important to reexamine the goals and assess the results of
    the current program. We all agree that the system needs reform,
    and 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 chairman of our full Energy and Commerce Committee, the
    gentleman from California, Mr. Waxman, is recognized for 5
    minutes.

    OPENING STATEMENT OF HON. HENRY A. WAXMAN, A REPRESENTATIVE IN
                 CONGRESS FROM THE STATE OF CALIFORNIA

        Mr. Waxman. I would like to begin my comments today by
    commending Chairman Boucher and Representative Terry for their
    efforts to bring forward legislation designed to reform the
    Universal Service High-Cost Fund. Chairman Boucher, in
    particular, has shown amazing leadership. We would not be here
    today without his dedication to universal service and his
    legislative acumen.
        As the FCC's National Broadband Plan recognized, broadband
    is a foundation for economic growth, job creation, global
    competitiveness, and a better way of life. It is one of the
    great infrastructure opportunities for the 21st century.
        The universal service program represents our Nation's
    historic commitment to ensure that all Americans have access to
    communications services, which has been a cornerstone of
    communications policy since the invention of the telephone.
    Before the adoption of the 1996 Telecommunications Act, this
    program was supported through a system of implicit subsidies
    designed to make phone service affordable in rural America.
    Some customers paid higher rates so that others could pay
    affordable rates.
        The Telecommunications Act of 1996 turned that implicit
    subsidy into an explicit system that supports affordable phone
    service in rural America as well as communications services to
    schools, libraries, and rural hospitals. The Telecom Act also
    codified the FCC Lifeline and Link-Up programs that ensure low-
    income Americans, regardless of geography, have access to
    essential communications services, an issued championed by
    Representative Doris Matsui.
        The challenge now, as the National Broadband Plan outlines,
    is to transform this program from one that supports telephone
    service to one that ensures that all Americans have access to
    broadband and to ensure that consumer contributions to the fund
    are being used for the intended purposes.
        The draft legislation takes several positive steps. First,
    the draft legislation better targets subsidies to the areas
    that most need them in three key respects: first, calculating
    the necessary subsidy on a more precise, granular basis than
    the one used today; second, eliminating subsidies in those
    areas where competition has demonstrated that service can be
    provided without a subsidy; and, third, considering all the
    revenues that a provider earns using the subsidized facility
    instead of just a portion of that revenue.
        The draft legislation also proposes a way to reduce the
    duplicative subsidies sometimes given to wireless providers by
    limiting the number of wireless carriers that are eligible for
    support.
        In addition, the draft legislation gives the FCC the
    ability to change the contribution mechanism to better reflect
    the realities of the communications marketplace. As
    stakeholders know, the distinctions between interstate and
    intrastate have been blurred to the point that they are
    irrelevant. Contributions to the USF must reflect that reality.
        There are areas where I have some questions, which I hope
    this hearing will help clarify. A key point of reform should be
    to make the system more efficient and save consumers money. I
    hope this hearing will help us understand how the savings and
    costs add up under the legislation.
        Another key objective of reform is to provide a broadband
    service to all Americans. There are broad waiver provisions in
    this bill. We need to examine those provisions and their impact
    on the goal of universal broadband coverage.
        In closing, I again want to thank the chairman and
    Representative Terry for their efforts. I look forward to
    working with them and other members of the committee as we move
    forward in this area.
        Thank you, Mr. Chairman.
        [The prepared statement of Mr. Waxman follows:]

        [GRAPHIC] [TIFF OMITTED] T8133A.004

        [GRAPHIC] [TIFF OMITTED] T8133A.005

        Mr. Boucher. Well, thank you very much, Chairman Waxman.
    And thank you for you and your staff participating so actively
    with us on this measure and offering very highly constructive
    recommendations, most of which we are seeking to reflect in
    this measure and believe we have embodied here.
        The gentleman from Nebraska, Mr. Terry, who I have
    partnered with on a bipartisan basis now for several years to
    bring this measure forward, is recognized for 2 minutes.

       OPENING STATEMENT OF HON. LEE TERRY, A REPRESENTATIVE IN
                  CONGRESS FROM THE STATE OF NEBRASKA

        Mr. Terry. Thank you, Mr. Chairman. I appreciate working
    with you and our esteemed witnesses here.
        This bill is about three C's: compromise, certainty, and
    cost savings.
        To say this bill is a product of compromise might be the
    understatement of the year. We have worked for years,
    soliciting everyone's input, including those from the committee
    as well as the industry. As one might imagine, not everyone
    sitting here today totally agrees on what the best fix is, but
    we have reached a delicate balance here where we have buy-in
    from almost every entity in the industry and from the
    committee. Our success in finding a compromise is personified
    in the long list of companies and trade organizations that have
    endorsed this bill.
        And, Mr. Chairman, if I can ask unanimous consent to add
    one more to the list, a letter from the American Farm Bureau
    Federation.
        Mr. Boucher. Without objection.
        [The information appears at the conclusion of the hearing.]
        Mr. Terry. ``Certainty,'' you hear that word a lot when I
    was home over the break from our small-business owners. Well,
    if you are a small telecom business, you want the same thing,
    especially if you are in a high-cost area in rural America. You
    want to know that the Universal Service Fund is going to be
    fixed and you can rely on it in the future.
        And now they will have the reassurance that the USF is
    reformed, it is efficient and able to continue to meet its goal
    that all should have access to the services at reasonable and
    comparable prices to those in suburban and urban areas. They no
    longer have to worry or wonder what might happen if the
    contribution factor continues to escalate. They will now have
    explicit support for their investments in broadband. Now they
    will have certainty.
        Lastly, we are taking the much-needed step of reforming the
    USF to produce cost savings. For a number of reasons, the fund
    has grown quickly within the last few years and has become
    unsustainable. We recognize this and address it by putting into
    place a number of cost-saving measures that will not only
    stabilize the fund but also reduce its size.
        Chairman Waxman outlined just a few of those cost-saving
    measures. Specifically, our bill implements a competitive
    bidding process for wireless carriers and eliminates USF
    support for wireline providers in competitive areas, while also
    ensuring that the contribution factor does not increase. In
    addition, the legislation finally directs the FCC to fix their
    intercarrier compensation system and fix phantom traffic.
        I would like to again thank our witnesses for being here
    today--it is an impressive panel--and their willingness to
    compromise. We have together produced a bill that will not only
    create cost savings but will provide much-needed certainty for
    those investing in today's telecommunications infrastructure.
    And I am proud to have worked with Chairman Boucher in this
    process and look forward to next week and the weeks coming on
    this bill.
        Thank you, and I yield back.
        Mr. Boucher. Thank you very much, Mr. Terry.
        The gentleman from Pennsylvania, Mr. Doyle, is recognized
    for 2 minutes.

    OPENING STATEMENT OF HON. MICHAEL F. DOYLE, A REPRESENTATIVE IN
             CONGRESS FROM THE COMMONWEALTH OF PENNSYLVANIA

        Mr. Doyle. Thank you, Mr. Chairman, for holding this
    hearing today on your bill to reform the Universal Service
    Fund.
        For Members of Congress on both sides of the aisle and both
    chambers, from mayors of towns without broadband, to consumers
    who are paying billions of dollars per year so that their
    friends and loved ones in rural areas can get connected, I
    think everybody agrees that the fund is broken.
        Your bill was an interesting approach to fixing it that I
    think merits thoughtful deliberation. I have a few technical
    questions on some topics, including traffic stimulation and
    implementation of the requirement that companies receiving
    Federal funding from the Universal Service Fund actually
    provide broadband. And I look forward to getting them answered
    today.
        And, with that, Mr. Chairman, I will yield back.
        Mr. Boucher. Well, thank you very much, Mr. Doyle.
        The gentlelady from Tennessee, Mrs. Blackburn, is
    recognized for 2 minutes.

    OPENING STATEMENT OF HON. MARSHA BLACKBURN, A REPRESENTATIVE IN
                  CONGRESS FROM THE STATE OF TENNESSEE

        Mrs. Blackburn. Thank you, Mr. Chairman.
        I want to welcome all of our witnesses that are here.
        And, Mr. Chairman, you mentioned that there has been some
    revisions and some give and take. And I applaud you, Ranking
    Member Stearns, and the staffs for all the work on this.
        I am encouraged by many of the proposals and reforms that
    are in this bill. Among those, I think that intercarrier
    compensation, the reforms there, that is important. I am
    pleased that the legislation takes a hard stance on traffic
    pumping. And it is long overdue that we introduce competitive
    bidding to the wireless industry.
        However, there are still some places that we are needing to
    do some work. As I have stated over and over again in this
    subcommittee, it is difficult for me to look at the USF and not
    see a typical regressive D.C. tax. It keeps getting bigger, and
    I am extremely disappointed that the bill does not put a cap on
    the fund or put a limit on how big it should be. We are talking
    about a declining-cost industry, where both technology and
    fiber are reducing their cost over time. So I would argue that
    the cost of support and maintenance of those services through
    the USF should also be declining, as well.
        And I am hopeful that today's hearing can help re-center
    some discussion on this issue and move forward to finding a
    completion and a bill that can go to the floor.
        I thank you. I yield back.
        Mr. Boucher. Thank you very much, Mrs. Blackburn.
        The gentlelady from California, Ms. Matsui, is recognized
    for 2 minutes.

    OPENING STATEMENT OF HON. DORIS O. MATSUI, A REPRESENTATIVE IN
                 CONGRESS FROM THE STATE OF CALIFORNIA

        Ms. Matsui. Thank you, Mr. Chairman. And thank you for
    calling today's hearing. I would like to commend you for your
    leadership on efforts to reform the Universal Service Fund.
        I would also like to welcome our witnesses.
        Unfortunately, millions of Americans, particularly those in
    tough economic times, simply cannot afford the costs associated
    with in-home broadband service. As a result, they are at a
    competitive disadvantage when it comes to employment,
    education, and other opportunities. So we are seeing more and
    more disabled Americans, seniors, and teenagers traveling
    several miles to their nearest community center or library just
    to get online.
        We know that broadband adoption rates are largely
    associated with income levels, and the cost of broadband
    services continues to be a barrier for hardworking families.
    According to the FCC, 28 million Americans do not subscribe
    purely because of affordability barriers.
        That is why, just about 1 year ago today, I introduced H.R.
    3646, the ``Broadband Affordability Act,'' which would expand
    the Universal Service Fund's Lifeline Assistance Program for
    universal broadband adoption.
        This proposal will ensure that all Americans living in
    urban and rural areas have access to affordable broadband
    services. We never know where the next great idea or invention
    will come, so we must continue to eliminate barriers to
    accessing broadband services for our constituents.
        And I strongly believe that any reform to the Universal
    Service Fund needs to address broadband affordability barriers.
    I look forward to continue working with Chairmen Boucher,
    Waxman, and my colleagues on reforming the Universal Service
    Fund, and yield back the remainder of my time.
        Mr. Boucher. Thank you very much, Ms. Matsui.
        The gentleman from Ohio, Mr. Latta, is recognized for 2
    minutes.

    OPENING STATEMENT OF HON. ROBERT E. LATTA, A REPRESENTATIVE IN
                    CONGRESS FROM THE STATE OF OHIO

        Mr. Latta. Thank you, Mr. Chairman, Ranking Member Stearns.
    Thank you very much for holding this hearing today on H.R.
    5828.
        I applaud the chairman and Mr. Terry for working on this
    legislation that addresses reform of the Universal Service
    Fund. There seems to be a consensus among stakeholders that
    action is needed, not only to ensure the feasibility and
    stability of the USF, but also to address the numerous issues
    surrounding its role in a changing marketplace.
        There is no doubt, since the USF began, it has assisted
    numerous rural areas of this country to have access to
    telecommunication services. As we have discussed in previous
    hearings on the National Broadband Plan with the goal of
    reaching the remaining 5 percent of those who do not have
    access to broadband, there is an opportunity for the USF to be
    used to reach these remaining areas. Representing Ohio's
    largest agricultural district, I am keenly aware of the
    importance broadband deployment plays in economic development
    and the nexus this access has to job creation.
        If the USF is expanded to include broadband services, I
    believe this should be done through the existing programs, not
    by creating a new funding stream or adding additional funding.
    It is my understanding that, in 1998, the total commitments to
    the fund totalled $3.56 billion and, in 2009, that amount grew
    to over $7.7 billion. This is tremendous growth over the past
    10 years, and I have serious concerns that the funding will
    increase since the legislation there--there is not currently a
    cap on the fund or anything to ensure that the savings are
    offset. A cap will prevent uncontrolled growth as well as bring
    stability to the USF.
        In addition to the concern about uncontrolled growth, there
    have been reports of fraud, waste, and abuse of the USF,
    especially in the E-Rate Program. I am pleased that this
    legislation establishes performance measures and audits of the
    USF to help ensure that fraud, waste, and abuse are not
    occurring in any of the USF programs.
        I am hopeful that the interested stakeholder groups will
    continue to work on this legislation and address the issues
    surrounding the USF. And I believe that the positive benefits
    to the rural districts like mine have access for
    telecommunication services.
        Again, I am opposed to an expansion of the government
    program that already has had increasing costs to consumers. It
    is my hope that the USF can be reformed without an increased
    cost to consumers directly or through the Federal Government's
    budget.
        And thank you, Mr. Chairman. I yield back.
        [The prepared statement of Mr. Latta follows:]

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        [GRAPHIC] [TIFF OMITTED] T8133A.008

        Mr. Boucher. Thank you, Mr. Latta.
        The gentleman from California, Mr. McNerney, is recognized
    for 2 minutes.

     OPENING STATEMENT OF HON. JERRY MCNERNEY, A REPRESENTATIVE IN
                 CONGRESS FROM THE STATE OF CALIFORNIA

        Mr. McNerney. Thank you, Mr. Chairman, for convening
    today's hearing to discuss the Universal Service Reform Act. It
    is good to see progress being made on this issue.
        The universal service program was created over 10 years
    ago. Well, that may not seem long in many contexts, but in
    telecommunications that is an eternity. With so many advances
    in our technology, such as the rapid expansions of Internet and
    cell phones, it is now a good time to reassess our current
    policy and make appropriate updates.
        I commend the chairman and Representative Terry for their
    bipartisan work and taking into consideration important issues
    such as ensuring broadband service to those who currently may
    not be adequately served.
        As we hear from today's witnesses, I hope to learn how we
    can continue to improve the bill and prevent any unintended
    negative consequences. We all want to develop legislation that
    benefits consumers and allows businesses to compete and thrive,
    and I look forward to working with my colleagues to craft the
    best possible legislation.
        Thank you, Mr. Chairman. And I yield back the balance of my
    time.
        Mr. Boucher. Thank you, Mr. McNerney.
        The gentleman from Washington State, Mr. Inslee, is
    recognized for 2 minutes.
        Mr. Inslee. Thank you.
        I just want to point out that we have a real need,
    connecting the talent in our tribal communities. And I am
    hopeful that, as this bill proceeds, we will find a way to get
    some tribal representation on the board making decisions here.
    I look forward to making sure we get that done.
        Thank you.
        Mr. Boucher. Thank you, Mr. Inslee.
        The gentlelady from Florida, Ms. Castor, is recognized for
    2 minutes.

      OPENING STATEMENT OF HON. KATHY CASTOR, A REPRESENTATIVE IN
                   CONGRESS FROM THE STATE OF FLORIDA

        Ms. Castor. Thank you, Mr. Chairman.
        And thank you to the witnesses for being here today.
        Universal service reform is an issue I have been concerned
    about for some time. I am a cosponsor of H.R. 3646, the
    ``Broadband Affordability Act,'' introduced by my colleague,
    Representative Matsui, which would reduce the cost of broadband
    services for low-income urban and rural customers along the
    lines of the Lifeline and Link-Up programs within the USF.
        Lifeline and Link-Up have helped thousands of families
    afford the cost of telephone service since the mid-1980s, but
    now it is cell phones and the Internet that have become the
    indispensable tools in our daily lives. Many of us take them
    for granted, but there are others in our communities who can't
    even afford the most basic services. So I am glad to see that
    the bill before us today gives the FCC the authority to include
    broadband within the USF.
        There is an assumption that urban areas have plenty of
    access to broadband, but there are significant gaps. For many,
    broadband is out of reach. But it doesn't have to be that way.
    Expanding the Lifeline and Link-Up program discounts would
    lower the cost of broadband for families living on the margins.
        We also must address the severe inequity in the USF. I have
    pointed out before, Floridians far overpay into the USF without
    receiving some sort of equitable return. The new cost model put
    forward by the FCC must correct this inequity as we implement
    the National Broadband Plan and reform the Universal Service
    Fund.
        Thank you very much. And I yield back.
        Mr. Boucher. Thank you, Ms. Castor.
        The gentleman from Connecticut, Mr. Murphy, is recognized
    for 2 minutes.
        Mr. Murphy. Thank you, Mr. Chairman. I look forward to
    hearing from the witnesses, and I will waive an opening
    statement.
        Mr. Boucher. Thank you, Mr. Murphy. We will add 2 minutes
    to your questioning time.
        The gentlelady from the Virgin Islands, Mrs. Christensen,
    is recognized for 2 minutes.
        Mrs. Christensen. Thank you, Mr. Chairman. I, too, would
    just like to welcome the witnesses and waive my opening
    statement.
        Mr. Boucher. Thank you, Mrs. Christensen. Two minutes to
    you also.
        That concludes opening statements by members of the
    subcommittee.
        I am pleased now to recognize and introduce briefly our
    panel of witnesses. And we want to thank each of you for
    joining us here today.
        Carol Mattey is the deputy bureau chief of the Wireline
    Competition Bureau at the Federal Communications Commission.
        Walter McCormick is president and chief executive officer
    of the United States Telecom Association.
        Shirley Bloomfield is chief executive officer of the
    National Telecommunications Cooperative Association, NTCA, and
    is testifying today on behalf of NTCA, OPATSCO, and the Western
    Telecommunications Alliance, all associations of rural
    carriers.
        Steve Davis is the senior vice president for public policy
    and government relations at Qwest Corporation.
        Kathleen Grillo is the senior vice president for Verizon.
        And James Assey is executive vice president of the National
    Cable and Telecommunications Association.
        We welcome each of you. And, without objection, your
    prepared written statements will be made part of our record. We
    would welcome your oral summaries and ask that you keep those
    to approximately 5 minutes.
        Ms. Mattey, we will be happy to begin with you.

       STATEMENTS OF CAROL MATTEY, DEPUTY BUREAU CHIEF, WIRELINE
     COMPETITION BUREAU, FEDERAL COMMUNICATIONS COMMISSION; WALTER
    MCCORMICK, PRESIDENT AND CHIEF EXECUTIVE OFFICER, UNITED STATES
       TELECOM ASSOCIATION; SHIRLEY BLOOMFIELD, CHIEF EXECUTIVE
     OFFICER, NATIONAL TELECOMMUNICATIONS COOPERATIVE ASSOCIATION,
    NTCA; STEVEN DAVIS, SENIOR VICE PRESIDENT FOR PUBLIC POLICY AND
       GOVERNMENT RELATIONS, QWEST CORPORATION; KATHLEEN GRILLO,
      SENIOR VICE PRESIDENT, VERIZON; JAMES ASSEY, EXECUTIVE VICE
      PRESIDENT, NATIONAL CABLE AND TELECOMMUNICATIONS ASSOCIATION

                       STATEMENT OF CAROL MATTEY

        Ms. Mattey. Thank you, Chairman Boucher, Ranking Member
    Stearns, members of the subcommittee. Thank you for the
    opportunity to testify today about the ``Universal Service
    Reform Act of 2010.''
        Universal service historically has been a significant
    success story in the United States. In addition to
    incentiuizing the private sector to bring affordable voice
    service to virtually all reaches of the country, the existing
    program has played an important role in strengthening
    communities and our economy by supporting modern networks
    capable of delivering broadband as well as voice service to
    many rural Americans.
        But the current system, which wasn't designed to explicitly
    support broadband, is not working for everyone. While consumers
    in some places in rural America have access to some of the best
    broadband networks in the country, others don't have access to
    broadband at all. While many speak of an urban-rural divide for
    broadband service, the more troubling trend is a rural-rural
    divide. Under the existing universal service rules, not all
    providers have the same incentives to upgrade their networks to
    provide broadband, and some have economic incentives to invest
    in areas already served by unsubsidized competitors.
        Maintaining the status quo is unlikely to achieve
    affordable and universal access to broadband. Critical elements
    of the current system, such as how we collect the money to
    support universal service and the intercarrier compensation
    framework, must be reexamined in light of changes in technology
    platforms and market dynamics, changes that the Universal
    Service Reform Act expressly contemplates.
        The Commission shares the goals expressed by Chairman
    Boucher and Representative Terry when they highlighted the need
    for comprehensive and forward-looking reform that will ensure
    that sufficient universal service support is available on a
    technology-neutral basis.
        In March of this year, the Commission unanimously adopted a
    joint statement on broadband, calling for the system to be
    comprehensively reformed to increase accountability and
    efficiency and encourage targeted investment in broadband
    infrastructure. I would like to elaborate briefly on a few
    shared principles that underlie the bill and the FCC's current
    efforts.
        First, forward-looking policies are critical. Simply
    because we have done things a certain way in the past does not
    mean those same policies make sense in a broadband world. It is
    incumbent upon all of us to take a close look at the current
    system to determine how to move forward towards our goal of
    advancing broadband. We need to find a foundation of continued
    private-sector investment and a pathway for broadband to evolve
    in the future. Our rules must be based on the technology and
    economic realities of today and tomorrow, not the last century.
        Second, targeted, technology-neutral, and sufficient levels
    of support are essential. We should target support only to
    those areas that really need it. We need to provide sufficient
    support to establish an effective public-private partnership in
    which support is made available in exchange for a commitment to
    meet reasonable public interest obligations.
        Third, a revamped program requires oversight and
    accountability. The bill's vision and ours is to ensure USF
    dollars are spent in a responsible way. This means maintaining
    effective oversight. Whoever receives funding should be
    accountable for building out, and we should ensure that USF
    benefits as many unserved and underserved Americans as possible
    with no more support than is truly necessary.
        Fourth, we should remember that universal service is
    fundamentally about consumers in all parts of the country.
    Ultimately, it is the consumer that pays for universal service.
    As we go through this process of making policy choices and
    compromises, we should never lose sight of the burden and
    benefits to consumers.
        Finally, we must move quickly but wisely. Market
    participants need clarity and regulatory predictability so that
    they can make informed business decisions. We hope that all
    stakeholders will actively and constructively engage so that we
    can move swiftly to establish clear and sensible policies for
    the future.
        To conclude, on a personal note, as a member of the
    Commission staff who has worked on universal service issues
    since 2000, I am very encouraged by the bipartisan consensus
    and recognition of the need for reform. We at the FCC
    appreciate the leadership of the chairman and Representative
    Terry in introducing this bill. And we look forward to working
    with the subcommittee and others to ensure that reform moves
    forward.
        Thank you again for the opportunity to testify, and I will
    be happy to answer any questions.
        [The prepared statement of Ms. Mattey follows:]

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        Mr. Boucher. Thank you very much, Ms. Mattey. We are
    delighted to have you here.
        Mr. McCormick?

                     STATEMENT OF WALTER MCCORMICK

        Mr. McCormick. Mr. Chairman, Ranking Member Stearns, Mr.
    Terry, and members of the subcommittee, thank you for the
    opportunity to testify today in support of this important
    legislation.
        It is hard to overestimate the importance of broadband to
    our Nation's economy, to America's competitiveness, to
    education, to health care, to environmental sustainability, to
    job creation, and to our citizens' quality of life. Today
    broadband has been built out to about every place in America
    where a reasonable business case can be made for deployment.
    Over the course of the last decade, broadband service providers
    have invested over $700 billion in deploying broadband
    infrastructure.
        According to the FCC's National Broadband Plan, fixed
    broadband service of 4 megabits or more is now available to 95
    percent of our population. This is an extraordinary
    accomplishment. Consider that earlier this year Congress passed
    universal health care that, when fully implemented some years
    from now, aims to cover 95 percent of Americans. We are there
    today with broadband.
        But getting to the last 5 percent of Americans, it is
    expensive. The FCC estimates that it is going to cost about $24
    billion. It can only be done if Congress and the FCC address
    the financial fundamentals that lie at the foundation of rural
    service, which are universal service and intercarrier
    compensation. This bill does that.
        We are grateful to you, Mr. Chairman, and to Mr. Terry for
    the thought that you put into this legislation, for the
    attention to detail, for the inclusive process that you
    employed, and for the consensus that you forged.
        This bill addresses each of the key issues that are central
    to the integrity of universal service going forward. It expands
    the contribution base to include new technologies. It reforms
    USF distributions to target support where it is most needed, to
    reduce duplication, to balance competing interests, and to
    focus on broadband. It mandates reform of intercarrier
    compensation, the means by which carriers receive payment for
    the use of their networks. It addresses the egregious abuses of
    the system that have arisen with regard to phantom traffic and
    traffic pumping. It reforms the audit process. It prevents the
    Commission from restricting high-cost support to primary lines.
    And it resolves the longstanding administrative problem
    associated with the Anti-Deficiency Act.
        So we endorse this bill. We do so cognizant of the fact
    that our industry did not get everything that it wanted. But we
    do so in the spirit of compromise, in the spirit of
    bipartisanship that characterizes this package, and with the
    recognition that it would be imprudent to let the perfect be
    the enemy of the good, both for our industry and for our
    Nation.
        This bill deals with complex matters. It allocates large
    sums of money, and it impacts a variety of competing interests.
    The balance that has been struck is a fair but very delicate
    one, and it could tip easily. We recognize that to pull at one
    thread is to unravel the fabric of an impressive blueprint for
    investment in 21st-century broadband communications.
        So, Mr. Chairman, based upon the substance of this package,
    coupled with clear assurances and a legislative history that
    assure our industry that it will not result in unfunded
    mandates, and this committee's commitment to close oversight of
    Commission implementation, we recommend its passage.
        Again, thank you for your extraordinary work on this very
    important issue.
        [The prepared statement of Mr. McCormick follows:]

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        Mr. Boucher. And thank you for that excellent testimony.
        Ms. Bloomfield?

                    STATEMENT OF SHIRLEY BLOOMFIELD

        Ms. Bloomfield. Thank you very much, Chairman Boucher,
    Ranking Member Stearns, Congressman Terry, members of the
    subcommittee. Good morning, and thank you very much for the
    invitation to testify today on H.R. 5828, the ``Universal
    Service Reform Act of 2010,'' which we are also very much in
    support of.
        NTCA, which represents more than 580 rural telephone
    companies, is who I am here on behalf of, along with my
    colleagues, OPATSCO and WTA. And, together, we represent 1,100
    rural, rate-of-return regulated, community-based communications
    and broadband service providers from around the Nation.
    Collectively, our member companies serve about one-third of the
    landmass of this country but about 5 percent of the total
    subscriber lines.
        So we would like to thank you very, very much for your
    leadership, Chairman Boucher and Congressman Terry, in
    particular, for your longstanding focus and understanding of
    both the critical importance of universal service support for
    today's communication networks and the need for reform to usher
    in a new era of advanced communications.
        As you know, OPATSCO and WTA and NTCA have endorsed 5828.
    The bill represents a laudable effort to seek compromise
    between many different viewpoints and interests on these very
    important issues. Your ability to find some common ground on
    such a complex topic is a testament to your efforts to the
    American public and a dedication to advancing
    telecommunications policy to better reflect the needs of the
    communications broadband-focused world.
        Universal service continues to be the cornerstone of our
    Nation's communications policy and ensures that Americans
    living all across the country, and particularly in rural areas,
    receive services that are comparable to those in performance
    and price to those living in urban areas. And it is an
    opportunity for everybody in this country to benefit from a
    nationwide, integrated, advanced communications network.
        A typical self-sustaining business model that works in an
    urban area is much more difficult to achieve in a rural market.
    And those of you who have rural areas in your congressional
    districts know what I mean, when you are driving for miles, how
    difficult it is to put a telecommunications plant in those
    markets.
        In those high-cost areas, universal service is critical to
    overcoming the economic challenges of deploying communications
    networks. So, as members of the industry and Members of
    Congress recognize, it is time to update the universal service
    program and to reflect the shift from voice to a broadband
    world.
        The ``Universal Service Reform Act of 2010'' contains a
    number of program modifications that we support and that we
    think are very important and that I detail a little bit more
    further in my testimony, but I do want to hit on a couple of
    them.
        The bill maintains rate-of-return regulation for eligible
    communication providers, ensuring the needed stability and
    predictability in cost recovery to promote investment in high-
    cost, low-density parts of our country. It defines universal
    service to include high-speed broadband service so that the
    support for the deployment and operation of broadband networks
    will be explicit. It also requires a contribution to the
    Universal Service Fund from a wider range of providers,
    including all broadband providers. And it requires the FCC to
    act on intercarrier comp reform in the near term and to allow
    the USF growth factor to accommodate intercarrier comp flows
    directed to it.
        So, although the bill contains these very important
    modifications to USF--our organizations do endorse the bill--we
    also have a couple of things that do raise some concerns for
    us: reducing or eliminating high-cost support in competitive
    areas and the implementation of a new, unproven cost model that
    may not permit rural providers to meet universal service goals
    of providing reasonable, comparable, and reliable service in
    high-cost areas.
        We are hopeful that if this legislation is adopted we can
    work with all of you to define and implement these measures in
    a way that acknowledges the critical role that rural
    telecommunication providers continue to play as carriers of
    last resort in their community. We also hope that the Congress
    and the FCC, if they are to act and implement any provisions,
    will recognize the very unique nature of some of these rural
    markets.
        Mr. Chairman, I want to thank you again for inviting me to
    be here with you. Your knowledge of the industry, your
    bipartisan efforts with Representative Terry, your commitment
    to strengthening and advancing communications for all
    Americans, both urban and rural, make us very fortunate to have
    you serving on this committee.
        The bill that we are discussing here today is a product of
    many hard years of work, a lot of effort on behalf of a lot of
    people. And we look forward to continuing to work with you to
    improve this measure and to answering any questions that the
    committee may have.
        Thank you very much.
        [The prepared statement of Ms. Bloomfield follows:]

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        Mr. Boucher. Thank you very much, Ms. Bloomfield. And we
    look forward to continuing our work with you.
        Mr. Davis?

                       STATEMENT OF STEVEN DAVIS

        Mr. Davis. Good morning, Chairman Boucher, Ranking Member
    Stearns, and members of the committee. I appreciate the
    opportunity to express Qwest's views this morning on the
    Universal Service Act of 2010, a bill which we do endorse.
        Qwest provides voice, data, Internet, and video services
    nationwide and globally and provides local telephone and high-
    speed Internet service in 14 western States. We provide
    approximately 10 million telephone lines and approximately 3
    million broadband lines and currently have broadband service
    available to more than 85 percent of our customers.
        Earlier this year, Qwest and CenturyLink announced their
    intent to merge. The merger will result in a combined company
    that will provide voice and broadband services in 37 States and
    operate a national 180,000-mile fiber network. The post-merger
    company will have over 17 million telephone lines and serve
    over 5 million broadband customers.
        It is expected that the strong financial position of the
    combined company will enable it to make more broadband
    investment in the vast rural areas which it will serve.
    However, irrespective of the company's size, there will remain
    many high-cost areas that are simply uneconomic to serve
    without financial support.
        Qwest's territory, like that of CenturyLink and other
    midsized carriers, includes many rural communities with very
    low household density. For example, in Douglas and Gillette,
    Wyoming, Qwest serves customers with local loops more than 75
    miles long. The cost of running basic telephone service and
    broadband service in these areas greatly exceeds the revenue
    opportunity. Yet the existing universal service program often
    fails to provide the support necessary to make these areas
    economic to serve. Reform is needed, and Qwest commends
    Chairman Boucher and Congressman Terry for their leadership in
    addressing this very difficult issue.
        The greatest flaw in the existing high-cost program is the
    use of State-level averaging to determine support. The current
    mechanism allocates high-cost support only if a company's
    average costs statewide exceed a national benchmark rate. As a
    result, many of the Nation's most sparsely populated
    communities served receive no Federal high-cost support
    whatsoever. So in Comstock, Minnesota, and Leonard, North
    Dakota, where Qwest's cost of serving customers is over $200 a
    month and local rates are around $20 a month, we receive no
    Federal high-cost support. There are hundreds of other
    examples.
        The existing funds assumption that Qwest can overcharge
    customers in larger cities to subsidize the low-cost prices in
    rural areas is the product of a long-past monopoly environment.
    Therefore, we support the bill's targeting of high-cost support
    to wire center and subwire center areas, which will result in
    support being efficiently targeted to truly high-cost areas.
        The bill also recognizes that support is inappropriate in
    areas where facilities-based competition exists. We agree. But
    sufficient high-cost support must be provided for the higher-
    cost areas where the competitor does not offer service. The
    bill anticipates this scenario.
        Qwest also strongly supports the provisions prohibiting
    traffic pumping, a harmful and illegitimate scheme that is
    costing the communications industry and consumers millions of
    dollars every year. Qwest appreciates that the bill's sponsors
    are addressing this serious issue.
        Additionally, Qwest supports the bill's provisions
    addressing phantom traffic by requiring identification of
    traffic that originates on a carrier's network and requiring
    intermediate carriers to pass through that identification
    information.
        Intercarrier compensation reform is also desperately
    needed, and a legislative mandate for the FCC to move forward
    and accomplish that reform may be the impetus we need to jump-
    start that process.
        Qwest also agrees with Chairman Boucher, Congressman Terry,
    the FCC, and others that it is time to explicitly and directly
    support the deployment of broadband-capable networks to
    unserved areas through a modified universal service program.
    Therefore, Qwest supports the bill's explicit authorization of
    universal service support for the provision and maintenance and
    upgrading of broadband service. And I commend the work of the
    FCC in developing and drafting the National Broadband Plan.
        As the bill requires, broadband universal service
    obligations, including carrier-of-last-resort obligations,
    should only extend to the areas for which broadband universal
    service support is provided. And in replacing existing support,
    we urge the Congress and the FCC to recognize the importance of
    a reasonable transition mechanism.
        In drafting this bill, Chairman Boucher and Congressman
    Terry have provided Congress with a means to create a new and
    improved program for supporting universal service and access to
    basic telephone service and high-speed broadband service
    throughout America. And they have proposed additional reforms
    to intercarrier relationships that will result in fairer
    responsibilities for customers and carriers alike.
        Qwest greatly appreciates the subcommittee's attention to
    these issues and renewed efforts to accomplish this much-needed
    reform. Thank you again for the opportunity to testify.
        [The prepared statement of Mr. Davis follows:]

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        Mr. Boucher. Thank you very much, Mr. Davis, and thanks for
    your thoughtful comments.
        Ms. Grillo.

                      STATEMENT OF KATHLEEN GRILLO

        Ms. Grillo. Chairman Boucher, Ranking Member Stearns, and
    members of the subcommittee, good morning. And thank you for
    the opportunity to discuss the universal service reform bill
    introduced by Chairman Boucher and Congressman Terry.
        Congress last updated the Universal Service Act in 1996,
    almost a decade and a half ago. A lot has changed since then.
    Now is the time to put in place the policies that will help
    expand the reach of broadband networks to all Americans.
    Verizon is pleased to endorse the Boucher-Terry bill and
    congratulates its authors on crafting legislation that has
    bipartisan and industry support.
        Since the subcommittee's last hearing on this topic, the
    FCC has submitted its National Broadband Plan to Congress. Like
    the USF reform bill, it represents the culmination of thousands
    of hours of work. It is a thoughtful, comprehensive approach
    aimed at maximizing the boundless power of the Internet and
    ensuring broadband access for every American.
        From our point of view, there are three priorities, and all
    of these issues are addressed in the bill before the
    subcommittee.
        First, universal service reform. There is no doubt about
    the critical need to revamp the high-cost universal service
    program. The High-Cost Fund is literally at a tipping point.
    The program has doubled over the last decade, and just to
    subsidize traditional voice service in rural areas.
        But plain old telephone service is rapidly becoming a thing
    of the past, and consumers demand much more. They want to surf
    the Internet, send e-mail, and download videos--and all over
    the same network connections. We must refocus the fund to
    reflect the way consumers live and work today.
        And as the bill repurposes the USF for broadband, we must
    keep in mind that consumers pay for the fund through charges on
    their monthly bills, and charges must be in line with what
    consumers can reasonably afford.
        As we have said before, the problem with universal service
    is not that we are spending too little money; it is that we are
    not spending it on the right services and in the right places.
    To that point, the bill takes an important step forward by
    putting in place a more rational, competitive bidding system
    for high-cost support to wireless carriers.
        Almost everybody recognizes that the way wireless carriers
    receive support today is problematic. Among other things,
    multiple wireless providers get support in the same areas, even
    where other carriers compete without any universal service
    support at all. And the right competitive bidding system will
    fix these problems.
        Second, intercarrier compensation. The system of charges
    between carriers for exchanging communications traffic is a
    mess. The current system is based upon distinctions which
    bundled services--phone, TV, and Internet access--have rendered
    meaningless. It is important to fix this broken system at the
    same time that the Universal Service Fund is updated. And the
    bill properly provides a firm deadline, 1 year from enactment,
    for the FCC to complete intercarrier compensation reform.
        And third, traffic pumping. The traffic-pumping scams that
    have plagued the industry in recent years must be stopped
    immediately. These scams have cost the industry hundreds of
    millions of dollars as so-called traffic pumpers game the
    current system by exploiting antiquated rules. This bill would
    appropriately cut off many of those scams.
        And, lastly, I would like to say a word about one issue
    that isn't addressed by the bill: broadband adoption in low-
    income households. Representative Matsui and others are leading
    voices on this issue. And for most Americans, broadband is an
    affordable service that offers tremendous value. That said, the
    price of broadband service is a real issue for some households.
    Digital literacy, affordability of a computer, and relevance
    are also significant factors. The National Broadband Plan
    proposed that the FCC launch pilot programs to test alternative
    solutions, and Verizon supports that approach.
        Thank you again for the subcommittee's continued leadership
    on sustainable universal service policies, and we look forward
    to working with the subcommittee as we move forward.
        [The prepared statement of Ms. Grillo follows:]

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        Mr. Boucher. Thank you very much, Ms. Grillo.
        Mr. Assey.

                        STATEMENT OF JAMES ASSEY

        Mr. Assey. Thank you, Chairman Boucher, Ranking Member
    Stearns, Congressman Terry, and other members of the
    subcommittee. My name is James Assey. I am the executive vice
    president of NCTA, the National Cable and Telecommunications
    Association. I am honored to be with you here again and testify
    today in support of H.R. 5828, the ``Universal Service Reform
    Act of 2010.''
        Mr. Chairman, as many of the other witnesses have already
    told us, we live in a communications marketplace today that is
    fundamentally different from the world that greeted
    policymakers in 1996. That was a world where industry was
    providing voice service over circuit-switched networks, a world
    where almost no one was on broadband, and only 23 percent of
    the country had dialup Internet access.
        The world we live in today is definitely very different. We
    believe that it is time, and in many respects past time, for us
    to begin the process of transitioning away from a monopoly-era
    support program to a more modern, a more neutral, and a more
    forward-looking, high-cost support mechanism that will bring
    broadband service to unserved areas and to underserved
    populations.
        We further believe that the FCC has provided us with a
    valuable resource in the National Broadband Plan, which
    synthesizes reams of data and helps us assess where we stand
    today, where we need to be, and what measures must be taken to
    ensure that our universal service system for the 21st century
    is efficient, effective, and maximizes the incentives for
    private investment in building broadband networks.
        Roughly 9 months ago, when the president of NCTA, Kyle
    McSlarrow, sat in this seat and testified on universal service
    reform, he suggested several elements that should be parts of
    any effort to reform universal service: first, that we must
    control the size of the High-Cost Fund to ensure that it does
    not impose unreasonable burdens on consumers or distort
    competition; second, that we must reduce or eliminate high-cost
    support in areas where it is demonstrated that service can be
    provided without support; third, that universal service support
    for broadband should be targeted to help extend capabilities in
    unserved areas that currently do not have broadband service;
    fourth, that the universal service contribution mechanism
    should be reformed to allow assessment based on telephone
    numbers or another appropriate mechanism that promotes
    stability and simplicity; and finally, that reform must reflect
    the modern-day principles of competitive neutrality with
    respect to eligibility for universal service support.
        Mr. Chairman, we continue to believe that these principles
    are the right ones and believe that H.R. 5828 helps to advance
    these principles in many significant respects.
        Chief among its virtues, the bill creates a permanent and
    ongoing mechanism to better calibrate high-cost support to
    current realities of a competitive marketplace by reducing or
    eliminating support in competitive areas. It also adds needed
    controls on the growth of the fund by allowing the FCC to
    consider all net revenues that a provider may obtain and also
    by ensuring that reforms will not unreasonably increase the
    contribution burden on consumers.
        In addition, we support the bill's efforts to complete
    intercarrier compensation reform within a year, to make
    broadband specifically eligible for universal service support
    without resorting to reclassification, to stating that USF
    support should be technology-neutral, and also including
    accountability provisions to ensure that moneys go where they
    are needed.
        Mr. Chairman, in sum, we are confident that H.R. 5828 is a
    deftly crafted compromise that can serve to remove
    jurisdictional impediments and help propel the FCC and our
    Nation towards meaningful and lasting reforms. And we look
    forward to working with you and the other members of the
    subcommittee.
        Thank you.
        [The prepared statement of Mr. Assey follows:]

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        Mr. Boucher. Mr. Assey, thank you very much.
        And thanks for the endorsements that were forthcoming today
    from all of our stakeholder private-sector witnesses. We
    appreciate your work with us and your support for the passage
    of this legislation, which reflects the results of that
    cooperative effort together.
        Ms. Grillo, let me direct a question to you, if I may. One
    of the things that we are doing in the bill to save money is
    moving from the current system of providing USF support to
    wireless, which essentially qualifies all of the wireless
    carriers in an area that meet the threshold and the
    qualifications for support, so you could have multiple carriers
    receiving support, and we are moving away from that in this
    bill to a competitive bidding model, where no more than two
    winners could be awarded support in a given study area.
        Have you done any cost estimating in terms of how much
    money we will save in terms of fund expenditures by moving to
    this competitive bidding model? At the present time, the
    wireless support is about $1.5 billion out of a $4 billion
    annual fund. Can you give us a sense of what the annual savings
    would be in terms of that wireless component if we move to this
    competitive bidding model?
        Ms. Grillo. We have looked at that. As you know, Verizon,
    in particular, has been a proponent of using competitive
    bidding. We used to call it ``reverse auction.'' We actually
    developed a fairly comprehensive proposal when the FCC was
    looking at this a few years ago, and what we did at the time
    was we tried to come up with an estimate of, sort of, the
    proposal that we had and how much money that would save. And
    what we have done is, sort of, use that to look at the
    structure that the legislation sets up and, you know, sort of,
    use some of the assumptions we used then and also take into
    account some of the changes.
        Some of it is difficult because there are provisions in the
    bill that the FCC will have discretion to interpret. But,
    bottom line, we think probably the higher end of the range
    would be $500 million and probably the lower end would be about
    $200 million.
        Mr. Boucher. So that is savings of potentially as much as
    $500 million, but at least as much as $200 million, depending
    on various factors that we can't predict at this point.
        Ms. Grillo. That is right. That is right.
        Mr. Boucher. OK. That is a pretty substantial savings, $200
    million on an annual basis, from just this one provision alone.
        Ms. Grillo. Right, that is just that one provision.
        Mr. Boucher. Yes, OK. Well, thank you, Ms. Grillo.
        Ms. Bloomfield, a question for you. We are, in this
    legislation, preserving the rate-of-return model, which is the
    current foundation for awarding supported universal service.
    And I know that your companies, those that you are speaking for
    today, are particularly interested in retaining this rate-of-
    return model.
        Can you explain to us why keeping that means of providing
    support is so important to the rural carriers that benefit from
    USF?
        Ms. Bloomfield. Thank you, Mr. Chairman. I would be very
    happy to answer that question.
        Rate-of-return regulation has actually really been part of
    the broadband success story in a lot of these rural markets.
    And what rate of return does is it allows the carriers to not
    get a guaranteed rate of return but it ensures that they are
    able to get some recovery of their costs, of the capital
    expenses that they are putting into these rural markets when
    they build these networks. It gives them stability. It gives
    them predictability. It also recognizes the fact that they are
    carriers of last resort in these markets, that they are
    building out to the markets and edges of the market where
    nobody else actually wants to serve and take on those
    obligations.
        It also is one of those forms of regulation that really
    does prevent waste, fraud, and abuse because it has a lot of
    oversight from the regulations and the regulators. And I think
    the other thing that is very important in contrast is the other
    form of regulation potentially could be price cap. And price
    cap is a form of regulation that really drives incentive to
    invest in those areas where it is lowest risk and you get the
    greatest return. Obviously, a lot of these rural markets, that
    is not an economic model that is efficient and that actually
    works.
        Mr. Boucher. OK.
        Ms. Mattey, I am going to ask if you want to engage on this
    subject. And I will set the foundation for this engagement. The
    Commission, as part of its National Broadband Plan, had
    suggested that there might be a movement from rate-of-return
    regulation as the basis for USF distributions to price caps.
        And I would note that, in the provision we have placed in
    this legislation, we would retain the rate-of-return formula,
    but you could reduce administratively the rate of return that,
    in fact, is allowed. Today, it is a fairly high number. It is
    about 11.4 percent, as I understand it. And there is nothing in
    this provision that would prohibit you from reducing that
    percentage. If you thought that a lower number made sense, you
    could reduce it.
        So my question to you is this: Given that tremendous
    flexibility to establish what the rate of return actually is
    based on investment, why is that not a sufficient model? Why
    would it not be appropriate to take that course, which Ms.
    Bloomfield has said is so important to the rural carriers in
    order to provide predictability and other necessary planning
    devices, when you are given the very broad flexibility to
    actually decide what the real rate of return is?
        Ms. Mattey?
        Ms. Mattey. Well, certainly, as you say, the FCC, under
    current rate-of-return regulation, could change the rate of
    return. And, as well, the FCC could look at other rules that
    apply to the current receipt of universal service high-cost
    support for the rate-of-return carriers.
        Mr. Boucher. OK. OK, fine.
        My time has expired, and I am pleased to recognize the
    gentleman from Florida, Mr. Stearns.
        Mr. Stearns. Thank you, Mr. Chairman.
        Ms. Mattey, I have here the report from the FCC called,
    ``Comparison: Universal Service Fund Transformation
    Recommendations, August 2010.'' And I go to page 5, and it has
    the Boucher-Terry bill, talking about the size of the fund. And
    it has three or four comments. And one of the comments says,
    ``The High-Cost Fund, not capped, may increase significantly.''
        Now, in the bill, they have the language that it can
    increase unreasonably--I mean charges can increase. There is no
    ceiling, there is no cap. It appears from what you are saying
    in this report--and I need your comments--that you are saying
    the bill, as it is written today, will not control the cost of
    the Universal Service Fund.
        Ms. Mattey. Well, as I understand it, the legislation does
    direct the Commission to not unreasonably increase the
    contribution burden on consumers. And, of course, we would very
    much appreciate any direction from Congress as to what
    constitutes an unreasonable burden.
        Mr. Stearns. Well, Ms. Grillo pointed out accurately that
    the High-Cost Universal Service Fund has doubled over the last
    decade. At the same time, I think the unserved has not
    increased dramatically. So the question would be, since the
    fund is increasing, as Ms. Grillo mentioned, doubled over the
    last decade, you know, why does the fund keep going up?
        And I think what many of us are worried about is, the way
    the language is in the bill and based upon what you are saying
    here, do you think the costs will increase dramatically again,
    like we saw in the last 10 years?
        Ms. Mattey. There are many reasons why the High-Cost Fund
    has increased over the last decade. Among the reasons are the
    loss of access lines that smaller carriers as well as larger
    carriers have incurred, as well as the growth in the funding
    provided to competitive ETCs.
        The bill has provisions that would address how funding
    should be provided to competitive ETCs. And, therefore, it
    would depend very much on how the bill would be implemented,
    you know, based on the direction from Congress.
        Mr. Stearns. OK, but what you are saying here is that--your
    language here is that it may increase significantly. And,
    really, the purpose of the bill is to take and cap it and
    really decrease the cost so we can put it to broadband. I mean,
    that has been the underlying assumption that many of us have
    gone along with the bill, that if we can save money here, we
    will give it to broadband. As Mr. McCormick said, we have 95
    percent of the market has up to 4 megabytes, I think Mr.
    McCormick said. We are looking at 5 percent, the last 5
    percent.
        And I would point out, this is true, but also the
    Departments of Agriculture and Commerce have not even finished
    off awarding $7 billion in broadband grants and loans that are
    in the stimulus bill. So a lot of us are just concerned when
    you point out that it is not capped and may increase
    significantly.
        I guess another question would be to you: Do you think this
    fund will likely shrink? Can you say categorically ``yes'' or
    ``no''?
        Ms. Mattey. Are you speaking about the High-Cost Fund?
        Mr. Stearns. The whole fund.
        Ms. Mattey. The whole fund. I do not believe the whole fund
    will shrink.
        Mr. Stearns. I think that is fair to say.
        Ms. Mattey. We submit our projections to the Office of
    Management and Budget. And our projections show that, over
    time, the fund will grow.
        Mr. Stearns. You are saying including under the bill, too?
        Ms. Mattey. I was referring to our projections that we
    submit, as required by law, to the Office of Management and
    Budget, you know, indicate that the fund overall will grow. And
    that is a matter----
        Mr. Stearns. Under this bill and under what you said, did
    you come up with a quantitative amount that you thought it
    would increase by?
        Ms. Mattey. No.
        Mr. Stearns. Did you have any projection at all?
        Ms. Mattey. We have not done an in-depth analysis of the
    specific provisions of the bill.
        Mr. Stearns. OK. What is your definition of an underserved
    household? Does that include wireless as well as land lease?
        Ms. Mattey. I would view, personally, an underserved
    household would be a household that has some form of broadband
    but perhaps does not have broadband of the speed that we are
    aiming for in the future. So it is a household that is beyond
    dial-up but perhaps does not have as robust a speed as we want
    as our goal.
        Mr. Stearns. Mr. Chairman, I don't see any clocks here, so
    I don't know how much time I have left or not.
        Mr. Boucher. Well, it is one of the technical malfunctions
    we have here this morning. We are sort of beset with them.
    Actually, the Health Committee should have been having this
    room. Well, anyway, that is an intramural debate for another
    day.
        Mr. Stearns. Well, I will just finish up with----
        Mr. Boucher. You actually have a few more seconds.
        Mr. Stearns. Oh, OK.
        Well, let me just ask each member of the panel if there is
    anything in the bill they would change, delete, or add. And
    just start with you, Ms. Mattey, and just work to my right.
        Ms. Mattey. Well, you know, the FCC has not taken a formal
    position on the bill or any of the provisions----
        Mr. Stearns. I am not asking for a position. I mean, is
    there anything you would change? I mean, just any dot or comma
    or colon you would change? Anything in this bill you would
    change?
        I mean, you have indicated that it will increase
    significantly. I assume you would like to put some language
    that would say that it can't go up and that the money has to be
    actually reduced.
        Ms. Mattey. Actually, there is one area that the bill
    doesn't really address, and that is the role of States in our
    shared Federal-State responsibility for universal service. And
    I would note that Nebraska actually has gone through the
    process of doing rate rebalancing and has established a State
    high-cost fund which supports the provision of service to
    carriers in that State.
        So that is an area that, you know, I don't see addressed in
    the bill, and I think it is something we certainly have been
    thinking about at the FCC.
        Mr. Stearns. OK.
        Mr. McCormick?
        Mr. McCormick. Well, there are a number of things that
    would sweeten the package for us. But, as I said, we know that
    this is a delicately balanced package, and we urge its package.
        Mr. Stearns. OK.
        Ms. Bloomfield?
        Ms. Bloomfield. We also support the delicate balance. I
    would say cost models are difficult. What works in Montana
    doesn't necessarily work in Alaska.
        Mr. Stearns. Mr. Davis?
        Mr. Davis. I think I am in the same place, in that, as a
    package, we support it. Are there things we would write
    differently? Sure, but is that going to cause some other
    component of the bill to fall apart?
        Mr. Stearns. Ms. Grillo?
        Ms. Grillo. I think we have concerns about the contribution
    system as it exists today and a revenues-based system. You
    know, in a perfect world, perhaps we would support language
    that would move away from revenues and move closer to a
    numbers- or connections-based system.
        Mr. Stearns. Mr. Assey?
        Mr. Assey. I would echo what my other colleagues have said.
    It is obviously a package. Obviously, we are very concerned
    about the cost controls, but we are comfortable with the bill
    as it stands.
        Mr. Stearns. Thank you, Mr. Chairman.
        Mr. Boucher. Thank you very much, Mr. Stearns.
        I would just note that our legislation only addresses the
    High-Cost Fund. It does not address the balance of universal
    service. So any thoughts about the overall fund perhaps growing
    really are not relevant to this specific legislation per se.
        The gentleman from Pennsylvania, Mr. Doyle, is recognized
    for 5 minutes.
        Mr. Doyle. Thank you, Mr. Chairman.
        I want to talk a little bit about paying for the USF by
    charging a fee for telephone numbers, this numbers approach. So
    I have three questions, and I am just looking for ``yes'' or
    ``no'' answers, But, I mean, it is not the SATs. You could say
    ``maybe'' or ``I don't know.'' And I am exempting Ms. Mattey
    from this. I just want to ask the five witnesses. So I will
    state the three questions first.
        First, universities have hundreds, often thousands, of
    direct-dial phone numbers. A group of university IT
    professionals have filed a letter at the FCC saying that if the
    numbers approach replaced the current USF funding mechanism,
    their USF bill would increase tenfold, meaning they would have
    to take out telephones in dorms and bus shelters, making their
    campuses less safe. Can you understand why universities would
    seek an exemption for their numbers or face the prospect of
    ripping out their emergency call boxes?
        Secondly, some but not all electronic book readers, like
    Amazon Kindle, have telephone numbers. And that is because they
    wirelessly download new books via a Sprint cell connection.
    Now, Sony readers make you sync the reader to a PC via wifi.
    Can you see why a company like Amazon would have to eliminate
    this feature unless it can get an exemption to pay into the
    fund because their competitors wouldn't have to?
        And, third, there are companies in my district, including
    Contact One Communications, that need thousands of numbers to
    sell services like call centers and telephone answering. Does
    it make sense that they would seek an exemption for their tens
    of thousands of numbers or risk paying tons and tons of new
    money to the Universal Service Fund?
        And maybe we will just start with Mr. McCormick and just go
    right down right down the line, ``yes,'' ``no,'' ``maybe,'' or
    ``I don't know.''
        Mr. McCormick. Well, first of all, yes, I understand the
    concern. But the legislation provides flexibility to the FCC in
    addressing those connections.
        And I would say that, in each and every one of those cases,
    particularly, like, the university telephones, universities are
    using those telephones to call into rural areas. I mean, the
    whole theory is that the utility of a telecommunications
    network, the utility of a broadband network is based upon----
        Mr. Doyle. Yes, but not for call boxes, certainly.
        Mr. McCormick. But what the legislation does is to provide
    flexibility so that they can use IP addresses, they can use
    telephone numbers, and they can take into account these kinds
    of, sort of, like, large call boxes.
        Mr. Doyle. Ms. Bloomfield?
        Ms. Bloomfield. We have historically supported a revenue-
    based assessment, which we have just found to be a little bit
    easier. But I do think the important part is looking to expand
    the base so you limit some of the pressure there.
        Mr. Doyle. Mr. Davis?
        Mr. Davis. Yes, no, no.
        No, I agree with Mr. McCormick, in that I think the
    legislation provides flexibility for the FCC to look at various
    circumstances, but I think it has to be recognized, as you go
    from one method of collection to another, some are going to pay
    less and some are going to pay more. It is just going to have
    that effect.
        Mr. Doyle. Uh-huh.
        Ms. Grillo. Yes, I mean, we agree that, you know, there are
    going to be concerns on all sides if you shift from revenues to
    numbers. And there has been a lot of talk, obviously, from
    universities and libraries.
        I guess what we would say is, the FCC has to keep in mind
    that the more exemptions there are, the higher the per-number
    charge or the per-connection charge would be. And that, you
    know, can be borne by consumers, by small-business owners. So
    that is just a consideration that I think the legislation would
    permit the FCC to take into account.
        Mr. Doyle. Uh-huh.
        Mr. Assey?
        Mr. Assey. Yes, I understand, and I agree it is exactly the
    sort of thing the FCC ought to be empowered to work through,
    for the reasons that Kathy articulated, because the more
    exemptions you have, the higher the per-number charge.
        Mr. Doyle. Yes, I mean, I think in these cases, Mr.
    Chairman, there is a good case to be made for a carveout, you
    know, in this numbers approach. But if the premise is that
    numbers is a cleaner way to do it, then the carveout sort of
    make it unclean. So perhaps we should just fix what is wrong on
    the contribution side by improving the revenue model instead.
        Let me ask Ms. Mattey, I have questions about the
    requirement in the bill that recipients of the Universal
    Service Fund provide broadband. Now, I wholeheartedly agree
    with that requirement, and I appreciate Mr. Boucher adding it.
    However, some witnesses state that waiver provisions are needed
    to ensure that recipients of Federal money won't have to
    provide broadband where it is most economically difficult. The
    bill would automatically grant waivers where the cost of
    deployment is more than three times the national average.
        Ms. Mattey, can you tell us, of the parts of America that
    aren't connected to broadband, what percentage of those would
    cost more than three times the national average to connect?
        Ms. Mattey. I can't answer that question definitively
    because we don't have complete information at this time to do
    that.
        I can say, based on extrapolating from our existing cost
    information that we have about, under our current rules, the
    provision of universal service for voice service, it looks
    like, ballpark, perhaps 1 to 2 percent might be over that 3
    percent threshold.
        Mr. Doyle. Uh-huh.
        Ms. Mattey. So it would be a situation, you know, where you
    would presumably be able to extend broadband to roughly two-
    thirds of the unserved. But there may be, you know, a quarter
    of the unserved that are still not served with such a waiver
    provision.
        But I really caution you that that is very much of an
    estimate and we don't have the information.
        Mr. Doyle. But is it fair to say it is the FCC's intent to
    look at the potential impact on your ability to require
    carriers to deploy broadband services to unserved areas on
    this? I mean, if we want to make sure that everyone that is
    getting this money deploys broadband, obviously what I am
    hearing is that is not going to happen, in some cases.
        Ms. Mattey. Well, obviously, we would defer to the
    direction from Congress as to, sort of, how far we should go.
    Everybody recognizes that it is very, very expensive to extend
    service to that last percent. And we would follow the lead
    wherever Congress tells us to draw the line.
        Mr. Doyle. Uh-huh.
        Mr. Chairman, thank you. I think I have used my time.
        Mr. Boucher. Thank you very much, Mr. Doyle.
        The gentleman from Nebraska, Mr. Terry, for 5 minutes.
        Mr. Terry. Thank you.
        A couple of observations. First of all, on the revenue
    side, the requirement that if your service is primarily voice,
    that you would contribute, understanding there would be a
    variety of technologies, one where you probably have to use a
    revenue model and maybe another type of technology model where
    the numbers model makes better sense, so we give that level of
    flexibility to the FCC so they can determine which is the
    appropriate mechanism for the revenue.
        And is that an adequate flexibility for the FCC, Ms.
    Mattey?
        Ms. Mattey. We very much appreciate the flexibility in this
    legislation.
        Mr. Terry. All right. Thank you.
        Ms. Bloomfield, in that regard, is your constituency oK
    with that?
        Ms. Bloomfield. Absolutely. I think the hybrid approach
    might be the one that makes the most sense. And we have been
    working closely with others in the industry and the FCC to,
    kind of, figure out what that forward-looking model is going to
    be on that.
        Mr. Terry. Ms. Grillo, you are the only one that seemed to
    be opposite of the flexibility.
        Ms. Grillo. Well, we are not opposite of the flexibility. I
    think we just--we have had a concern for a long time about the
    current system, and it really gets more intense every year just
    because the idea that you can separate information services
    from telecom services just gets more challenging every year.
        So we do appreciate the flexibility. And, obviously, you
    know, the FCC is the expert agency and should be making these
    determinations. But we do feel strongly that the time is now to
    move toward a more objective numbers-, connections-based
    contribution.
        Mr. Terry. Thank you.
        Back to you, Ms. Bloomfield. I am going to give this
    question to you because, frankly, it is your constituency that
    we started this process, to give them some level of certainty
    that the fund that they rely upon to provide services to the
    high-cost rural areas will exist in the future. There has been
    great concern about the cost-containment measures in here. And
    most of those cost-containment mechanisms in here really
    directly affect your constituency. And so I want to direct this
    question to you.
        And, first, before I make the question, we started this
    with a cap, and the cap was criticized. Your constituency
    opposed it pretty passionately. But we have gone to a different
    model where we specified the cost containment. Now the same
    people that criticize the cap are criticizing this mechanism
    now, which is a little frustrating to me.
        But I want to ask you, specifically, what are the cost-
    containment provisions in here, and how will they affect your
    constituents?
        Ms. Bloomfield. Thank you for asking the question.
        I think, you know, when you look at the cap, I think part
    of the thing--you almost have to go back to what Congress and
    what policymakers really want to achieve. And if you are really
    talking about universal broadband to all Americans, let's be
    clear, it is going to be a costly proposition. But I think the
    payback in the long run, you know, getting this country being
    broadband-deployed, is going to be very, very important for us
    moving forward.
        So I think it is hard to actually say, when you look at a
    cap and you say, well, what would the actual cap be, what would
    the cost be, what is the cost of getting broadband out there
    everywhere? And I think you have the pieces with the stimulus
    funding from NTIA and RUS going out the door; you look at the
    USF support. So I think there is kind of an unanswered question
    about what exactly that cost is.
        I think until you, kind of, look back at that and you, kind
    of, look at how do you expand the base, that you are including
    as many folks contributing as possible, I think a hard cap is
    very, very difficult.
        If you are in the process and you look at the waiver
    provision and you have that last 3 percent of your service
    territory that you need to build broadband out to but you are
    not quite sure what the cost is going to be because those
    customers are out on a very long loop, the cap is really going
    to stop some of that investment, and I think particularly at a
    time when you really want to be giving incentives for
    investment.
        Mr. Terry. Let me guide you towards the cost-savings
    measures that are in----
        Ms. Bloomfield. That are in the bill, OK. Let's do that.
        Mr. Terry [continuing]. This current version. And is that
    adequate for Mr. Stearns to have some level of confidence that
    this is not going to explode?
        And I guess we received this copy last night from the FCC,
    and I got it a few minutes ago, but, ``The High-Cost Fund, not
    capped, may significantly increase.'' I mean, our whole attempt
    was not to increase this. So, evidently, the FCC has said that
    we failed in that, but I think they misunderstand.
        Ms. Bloomfield. And I think there are a lot of provisions
    in the legislation that ensure. You know, I think when you look
    at how you are actually distributing the money, I think the
    effort in terms of the competitive bidding with the wireless
    providers, the multiple ETCs, has been something that I think
    the entire industry has, kind of, watched with frustration for
    a long period of time.
        I think that, as you look at more competition in some of
    these markets, I think you are going to see some of the
    declining costs. So I don't think you are going to see the
    explosion that has been projected. And, again, you know, you
    can't put a number on it because a number is hard to come up
    with.
        Mr. Terry. Mr. Assey, some of the cost-containment measures
    that you all brought forward to us have been adopted. Are you
    comfortable that those will actually be cost-saving measures?
        Mr. Assey. We are comfortable and hopeful that they will.
    You know, we live in a world where competition is not a static
    entity, and one of the most important things, I think, from our
    perspective, that this bill does is adopting a permanent and
    ongoing mechanism so that, as competition extends and we are
    able to provide broadband service in areas without support, we
    are not essentially picking one competitor versus another.
        Mr. Terry. Right. I think that made sense, too.
        My time is probably way up, so I yield back.
        Mr. Boucher. Thank you, Mr. Terry.
        We have a series of recorded votes pending on the House
    floor, and we have about 8 minutes to respond to those roll-
    calls. I think we probably have time for Ms. Matsui to propound
    her questions. I don't think we are going to have time for the
    other two colleagues to ask theirs. And Mr. Space says he is
    going to waive questions. I know Mr. Stupak has some questions.
        I am going to propose that we have Ms. Matsui's questions,
    and then we will ask you to wait, if you will, and we will come
    back for further questioning subsequently.
        Ms. Matsui?
        Ms. Matsui. Thank you, Mr. Chairman.
        As I mentioned previously in my opening statement, there
    are far too many households who just simply cannot afford
    broadband service. The USF low-income fund was created to
    ensure that qualified lower-income Americans living in urban
    areas and rural areas have a program where they can access
    affordable telecommunication services.
        As we promote the transition of USF from telephone service
    to broadband services, the USF low-income fund is a vehicle to
    ensure all Americans living in urban and rural areas have equal
    access to at-home broadband services. My legislation to expand
    the USF Lifeline Assistance program for universal broadband
    assistance adoption will ensure that transition from telephone
    service to broadband service is a reality for these low-income
    households.
        A question for Ms. Mattey: In the recent FCC broadband
    adoption survey, did the FCC find that the price of broadband
    service and related installation costs is a main reason why
    lower-income households do not subscribe to the Internet?
        Ms. Mattey. The survey indicated that typical non-adopters
    face multiple barriers, but cost was the one most frequently
    cited.
        Ms. Matsui. With respect to any broadband Lifeline pilot
    program, would it be the intent of the FCC to administer the
    program to ensure that eligible low-income consumers in both
    urban and rural America have an equal opportunity to
    participate in the program?
        Ms. Mattey. Oh, absolutely.
        Ms. Matsui. OK. What are some of the factors that the FCC
    will consider to ensure a cost-effective Lifeline/Link-Up
    program for broadband?
        Ms. Mattey. Well, we hosted a roundtable discussion about
    Lifeline in June, and we solicited information from a variety
    of stakeholders about how to effectively design pilots to test
    the provision of that subsidy for broadband.
        And we hope to very much also learn from the results of the
    BTOP awardees that will be announced and finished very, very
    soon, in the next week or 2.
        Ms. Matsui. OK, that is good to know. Thank you.
        Questions for Ms. Grillo and Mr. Assey: From an industry
    standpoint, what are some of the factors you would encourage
    the FCC to consider in implementing such a Lifeline/Link-Up
    pilot project?
        Ms. Grillo. Well, we have been involved in a pilot program
    similar to what you have described. Some of the other factors,
    other than cost to a consumer, may be relevance. Some
    consumers, you know, don't see the relevance of broadband in
    terms of their everyday life. Some of it may have to do with
    security: concerns about the security of a connection and the
    information transmitted over it, concerns about children and
    what children do online.
        So a lot of what we have tried to focus on in terms of a
    pilot is an examination, today, what really does drive
    consumers and what the government can include in a Lifeline-
    type program that would actually address all of those issues,
    not just price or cost. But, obviously, that is a concern for a
    lot of people.
        Ms. Matsui. Well, also, digital literacy.
        Ms. Grillo. Exactly.
        Ms. Matsui. OK.
        Mr. Assey?
        Mr. Assey. Yes, thank you for the question. This is
    obviously an area where the cable industry has done a lot of
    work, as well, and we are proud to support your bill because we
    do think it is on target.
        The cable industry developed an A-Plus program to really
    focus on this adoption problem, because we recognize that even
    though the cable industry can provide service to 92 percent of
    households, there are a lot of people who could get it who
    don't.
        What Ms. Mattey said, the data that was collected and
    talked about why people don't adopt broadband covered many
    factors. And we, kind of, focused on three, digital literacy
    probably being chief among them. And our program is designed to
    focus on middle-school children and really try to educate them
    about safety, security, privacy, and make them comfortable with
    being in a digital environment.
        The other point I would raise, when we talk about cost, I
    think we need to look at that factor a little bit more
    discretely, because, unlike the situation with telephone
    service, one of the biggest gating factors in cost is actually
    the cost of the computer, not necessarily the cost of the
    service. And the data actually reflects that.
        So, focusing on the hardware, focusing on the service,
    focusing on the digital literacy, that coordinated approach
    will give us our best chance at success.
        Ms. Matsui. OK, thank you.
        Ms. Bloomfield, in your view, would a Lifeline program for
    broadband increase adoption rates in rural America?
        Ms. Bloomfield. Absolutely. We think it goes really hand-
    in-hand with what the High-Cost Fund is already doing in terms
    of the deployment in rural America. So, the same incentives. We
    have the same issues in rural America as urban American does
    with low-income households.
        Ms. Matsui. Thank you.
        And a final question for Ms. Mattey: How long, in your
    view, does the FCC believe it will need to conduct pilot
    programs to gather the appropriate information required to
    develop the most cost-effective program possible?
        Ms. Mattey. We are still working on that internally. We
    have had a series of meetings with various interested
    stakeholders. And in the course of those meetings, some have
    suggested, you know, 1 year, 2 years, 3 years. Some have
    suggested things shorter and some longer, so we are still
    working on it.
        Ms. Matsui. I think my preference would be to have
    something shorter.
        Thank you very much. I yield back.
        Mr. Boucher. Thank you very much, Ms. Matsui. And we look
    forward to working with you on a broadband Lifeline provision.
    And I want to commend you for bringing that very well-developed
    idea before the subcommittee.
        The gentleman from Florida, Mr. Stearns, is recognized for
    a unanimous consent request.
        Mr. Stearns. Unanimous consent, Mr. Chairman, that the
    FCC's report, ``Comparison: Universal Service Fund
    Transformation Recommendations, August 2010,'' be part of the
    record.
        Mr. Boucher. Without objection.
        And we stand in recess until the conclusion of these votes.
        [Recess.]
        Mr. Boucher. I would like to ask our witnesses to resume at
    the witness table, please. Sorry for the delay. Thank you for
    your patience.
        At this time, I am pleased to recognize the gentleman from
    Michigan, Mr. Stupak, for 5 minutes.
        Mr. Stupak. Thank you, Mr. Chairman. We thank you, and we
    thank our witnesses for staying with us so we could ask a round
    of questions.
        First, Mr. Chairman, let me thank you and Mr. Terry for
    putting forth this legislation. It is a pretty good piece of
    legislation.
        As I mentioned to you as we are walking down to votes, I
    still have concerns I have raised before in this committee and
    I continue to raise because it is an issue we have to deal
    with, and that is--while you mentioned public safety on page 10
    of the bill, we don't talk about a public safety network,
    specifically public safety and interoperability broadband
    network. And I would certainly hope there would be some way we
    could work this out. Ms. Matsui talked about a lifeline, but
    there is no greater lifeline than having interoperability for
    our first responders, whether it is an ambulance, a police
    officer, or a firefighter. We do need that, and I hope there
    would be a way we could work that out. I know this bill has
    been put together carefully, and it might be hard to do it, but
    let's continue to explore possibilities.
        With that, let me ask Ms. Mattey a question, if I may. In
    your testimony, you note that, and I quote, ``We should be
    looking at ways to target support only to those areas that
    really need it, to deploy and sustain broadband networks
    capable of providing high-quality broadband and voice
    services.''
        So my question is, how would you or the FCC determine--or
    what factors will the FCC use to determine which areas need
    support and which areas don't need support?
        Ms. Mattey. Ultimately, the goal of universal service is to
    provide economic support to areas where there is no private-
    sector business case. So, in order to target support, one would
    look at the areas and determine whether or not, you know, there
    are multiple providers in that geographic area that are
    providing service without support and, conversely, is there
    only one provider in a particular area. So you need to look at,
    sort of, who is in the marketplace and figure out, from a
    business case perspective, where you need to add that
    supplemental investment coming from universal service.
        Mr. Stupak. You said a private provider, so if that
    provider in that area is a municipality, would you still
    consider that an underserved area then?
        Ms. Mattey. That is an interesting question I haven't
    really thought about. I am not aware of any municipalities that
    are actually providing voice service. And, obviously, we want
    to make sure that consumers continue to have voice service as
    well as broadband.
        Mr. Stupak. Well, let me ask you this because you brought
    it up and also Ms. Grillo brought it up. You mentioned the
    importance of ensuring that the burdens on the consumer never
    outweigh the benefits in the mission to provide support where
    it is needed.
        So where is the tipping point? When does the burden
    outweigh the benefits? Where is that point? Have you thought
    about that? Have you kicked that around at the FCC?
        Ms. Mattey. I have been thinking about that for a very long
    time.
        Mr. Stupak. And your answer is?
        Ms. Mattey. I wish someone would give me the answer.
        Mr. Stupak. Well, that is a valid point. And we talk about
    these concepts, but we have to--you know, what factors are we
    going to take into consideration to find what is the tipping
    point?
        Ms. Mattey. Right. I mean, ultimately, it is a political
    judgment, you know, and it is a collective judgment as a
    society. And we very much, you know, will take whatever
    direction Congress, you know, gives us in terms of deciding
    where that balance is.
        But, ultimately, you know, the point of the testimony was
    just to remember that consumers contribute to universal service
    as well as receive the benefits.
        Mr. Stupak. Well, let me ask you this question then. In Ms.
    Bloomfield's testimony, she points out that the FCC is in
    charge of determining the process for areas of losing or re-
    obtaining universal service support. Has the FCC thought about
    how they will develop the rulemaking for losing or re-
    obtaining?
        Ms. Mattey. I am sorry, was that a question to me? Are you
    referring to what she said?
        Mr. Stupak. To you. Ms. Bloomfield brought it up in her
    testimony, and I thought it was interesting. So has the FCC
    thought about how are you going to do this? What is the process
    for areas to determine if they are losing or re-obtaining
    universal service support?
        Ms. Mattey. I am not sure I completely understand the
    question. I apologize.
        Mr. Stupak. Ms. Bloomfield, do you want to elaborate a
    little bit on that? It was your testimony I am citing.
        Ms. Bloomfield. I think Congressman Stupak is referring to,
    you know, what happens as access lines are decreasing----
        Mr. Stupak. Right, decreased.
        Ms. Bloomfield [continuing]. And, you know, the impact of
    the line loss and what that does to the ultimate support that
    some of the providers are receiving today.
        Ms. Mattey. Right. Well, under the current system for the
    smaller rate-of-return companies, as they lose lines, the
    amount of support per line they receive will go up under the
    existing support program, because that is designed to ensure
    that the small rate-of-return companies recover the fixed costs
    of their network regardless of how many customers actually
    choose to subscribe from that provider.
        Mr. Stupak. OK.
        Mr. Davis, in your testimony, you point out that 14 million
    people living in 7 million housing units in the United States
    do not have access to broadband infrastructure. You go on to
    stress the importance of directly and explicitly supporting
    broadband service.
        Do you think the goal of providing broadband to unserved
    and underserved areas can be realized if the high-cost funding
    is reduced?
        Mr. Davis. Do I think it can be realized if all high-cost--
    --
        Mr. Stupak. Yes, if we start reducing high-cost funding.
        Mr. Davis. I think it depends over what period of time and
    whether you are talking about 100 percent coverage, as has been
    discussed. That gets extraordinarily expensive, and so we would
    have to look at that. But certainly----
        Mr. Stupak. Right. I am in one of those very expensive
    areas.
        Mr. Davis [continuing]. We can do a much better job of
    providing broadband support than we do today, and we can get
    broadband to a far higher percentage of customers than we do
    today with broadband support.
        Mr. Stupak. But if we reduced the high-cost funding, of
    course we would leave more and more areas behind, right?
        Mr. Davis. I think we can make the current high-cost
    coverage much more efficient, as is anticipated in the bill, by
    reducing support to wireless carriers in areas that really do
    not deserve support.
        Mr. Stupak. OK.
        Ms. Grillo, let me ask you this. In your testimony, you
    highlight the growing problems of traffic pumping and the
    urgent need to put a stop to the scams. You also mention that
    the Universal Service Reform Act will cut off many of the
    traffic-pumping scams.
        Do you think the bill's language is strong enough to put an
    end to traffic pumping, or is there more we need to do?
        Ms. Grillo. I think the language is strong enough to stop
    many, if not all, of the problems that we are seeing right now,
    yes.
        Mr. Stupak. OK.
        Ms. Bloomfield, if I may, in your testimony you raise
    concerns about small rural telecommunication providers.
    Specifically, you point out the provisions that call to reduce
    or eliminate high-cost support in competitive areas.
        Rural areas make up a large part of my district. Can you
    please elaborate on the problems you foresee in rural areas if
    high-cost support were eliminated?
        Ms. Bloomfield. Part of the problem is, when you talk about
    high-cost areas and whether or not they are competitive, a lot
    of that is going to depend on how you define ``competitive.''
        So let's say, for example, a carrier is able to build out
    to 98 percent of their service territory which is a very high-
    cost area but, you know, not able to, kind of, always get--you
    have, kind of, the doughnut and the hole, so it is very
    expensive to get to those outer regions.
        So when you look at competition, you know, is your
    competitor going to come in and actually provide service to
    just that center of the hole where you actually have that
    density and where it is actually a lower cost to be
    competitive? That leads to the question of what happens to
    those consumers at the very far reaches where it is very
    expensive to reach them.
        And the incumbents right now have the carrier-of-last-
    resort obligation.
        Mr. Stupak. Right.
        Ms. Bloomfield. So those carriers have to go out,
    regardless of the cost. So the problem is, if you kind of cut
    out the middle where it is ripe to be competitive, all you are
    doing is increasing the cost on the fringes.
        Mr. Stupak. Nothing, further, Mr. Chairman.
        Thank you. Thank you all for your testimony.
        Mr. Boucher. Well, Mr. Stupak, thank you very much for your
    thoughtful questions.
        Thanks again to our witnesses. I appreciate your very
    positive testimony today.
        Ms. Mattey, thank you for your informative testimony,
    coming from the Commission. I appreciate your attendance.
        I would simply note, in closing, that we have substantial
    savings that are contained within this legislation. Moving to
    competitive bidding on wireless, according to Ms. Grillo, saves
    between $200 million and $500 million every year, in terms of
    High-Cost Fund expenditures. We deny support in areas where
    there is competition in the offering of voice-based telephone
    service. That will result in savings, although we don't have a
    hard number on that. We address traffic pumping, which, in
    turn, is going to result in savings. And we say that net
    revenues from all supported services will be considered when
    determining the appropriate level of support.
        All of these are provisions that will result in savings
    from the High-Cost Fund. I felt compelled to note that, given
    some of the questions and comments that came forward this
    morning.
        Well, I want to thank everyone. This has been a very
    productive hearing. And we will have further proceedings on
    universal service.
        That said, this hearing is adjourned.
        [Whereupon, at 12:27 p.m., the subcommittee was adjourned.]
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