[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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    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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