[Senate Hearing 113-211]
[From the U.S. Government Publishing Office]



                                                     S. Hrg. 113-211
 
                   THE STATE OF RURAL COMMUNICATIONS

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



                                HEARING

                               before the

      SUBCOMMITTEE ON COMMUNICATIONS, TECHNOLOGY, AND THE INTERNET

                                 of the

                         COMMITTEE ON COMMERCE,

                      SCIENCE, AND TRANSPORTATION

                          UNITED STATES SENATE

                    ONE HUNDRED THIRTEENTH CONGRESS

                             FIRST SESSION

                               __________

                             APRIL 9, 2013

                               __________

    Printed for the use of the Committee on Commerce, Science, and 
                             Transportation





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       SENATE COMMITTEE ON COMMERCE, SCIENCE, AND TRANSPORTATION

                    ONE HUNDRED THIRTEENTH CONGRESS

                             FIRST SESSION

            JOHN D. ROCKEFELLER IV, West Virginia, Chairman
BARBARA BOXER, California            JOHN THUNE, South Dakota, Ranking
BILL NELSON, Florida                 ROGER F. WICKER, Mississippi
MARIA CANTWELL, Washington           ROY BLUNT, Missouri
FRANK R. LAUTENBERG, New Jersey      MARCO RUBIO, Florida
MARK PRYOR, Arkansas                 KELLY AYOTTE, New Hampshire
CLAIRE McCASKILL, Missouri           DEAN HELLER, Nevada
AMY KLOBUCHAR, Minnesota             DAN COATS, Indiana
MARK WARNER, Virginia                TIM SCOTT, South Carolina
MARK BEGICH, Alaska                  TED CRUZ, Texas
RICHARD BLUMENTHAL, Connecticut      DEB FISCHER, Nebraska
BRIAN SCHATZ, Hawaii                 RON JOHNSON, Wisconsin
WILLIAM COWAN, Massachusetts
                    Ellen L. Doneski, Staff Director
                   James Reid, Deputy Staff Director
                     John Williams, General Counsel
              David Schwietert, Republican Staff Director
              Nick Rossi, Republican Deputy Staff Director
   Rebecca Seidel, Republican General Counsel and Chief Investigator
                                 ------                                

              SUBCOMMITTEE ON COMMUNICATIONS, TECHNOLOGY, 
                            AND THE INTERNET

MARK PRYOR, Arkansas, Chairman       ROGER F. WICKER, Mississippi, 
BARBARA BOXER, California                Ranking Member
BILL NELSON, Florida                 ROY BLUNT, Missouri
MARIA CANTWELL, Washington           MARCO RUBIO, Florida
FRANK R. LAUTENBERG, New Jersey      KELLY AYOTTE, New Hampshire,
CLAIRE McCASKILL, Missouri           DEAN HELLER, Nevada
AMY KLOBUCHAR, Minnesota             DAN COATS, Indiana
MARK WARNER, Virginia                TIM SCOTT, South Carolina
MARK BEGICH, Alaska                  TED CRUZ, Texas
RICHARD BLUMENTHAL, Connecticut      DEB FISCHER, Nebraska
BRIAN SCHATZ, Hawaii                 RON JOHNSON, Wisconsin
WILLIAM COWAN, Massachusetts



                            C O N T E N T S

                              ----------                              
                                                                   Page
Hearing held on April 9, 2013....................................     1
Statement of Senator Pryor.......................................     1
Statement of Senator Wicker......................................     2
Statement of Senator Thune.......................................    42
    Prepared statement...........................................    42
Statement of Senator Begich......................................    45
Statement of Senator Blunt.......................................    47
Statement of Senator Fischer.....................................    49
Statement of Senator Klobuchar...................................    50
Statement of Senator Ayotte......................................    53

                               Witnesses

John Strode, Vice President--External Affairs, Ritter 
  Communications.................................................     3
    Prepared statement...........................................     5
Steve Davis, Executive Vice President, Public Policy and 
  Government Relations, CenturyLink..............................    13
    Prepared statement...........................................    15
LeRoy T. Carlson, Jr., Chairman. United States Cellular 
  Corporation....................................................    17
    Prepared statement...........................................    18
Patricia Jo Boyers, President and Chief Executive Officer, BOYCOM 
  Cablevision, Inc. and Board Member, American Cable Association.    32
    Prepared statement...........................................    34

                                Appendix

Hon. Frank R. Lautenberg, U.S. Senator from New Jersey, prepared 
  statement......................................................    59
Albert S.N. Hee, President, Sandwich Isles Communications, Inc., 
  prepared statement.............................................    59
Memorandum dated April 9, 2013 from Jon Saunders, General 
  Manager, SECOM, Inc.; Vince Kropp, CEO/GM, PC Telecom; and 
  Thomas J. Kern, President, Northwest Colorado Broadband, Inc. 
  to United States Senate Committee on Commerce, Science, and 
  Transportation--Subcommittee on Communications, Technology, and 
  the Internet...................................................    61
Response to written questions submitted to John Strode by:
    Hon. Barbara Boxer...........................................    62
    Hon. Amy Klobuchar...........................................    64
    Hon. Richard Blumenthal......................................    65
Response to written questions submitted to Steve Davis by:
    Hon. Barbara Boxer...........................................    66
    Hon. Amy Klobuchar...........................................    66
    Hon. Richard Blumenthal......................................    67
Response to written questions submitted to LeRoy T. Carlson, Jr. 
  by:
    Hon. Barbara Boxer...........................................    67
    Hon. Amy Klobuchar...........................................    68
    Hon. Kelly Ayotte............................................    68
Response to written questions submitted to Patricia Jo Boyers by:
    Hon. Barbara Boxer...........................................    70
    Hon. Amy Klobuchar...........................................    72
    Hon. Richard Blumenthal......................................    72


                   THE STATE OF RURAL COMMUNICATIONS

                              ----------                              


                         TUESDAY, APRIL 9, 2013

                               U.S. Senate,
Subcommittee on Communications, Technology, and the 
                                          Internet,
        Committee on Commerce, Science, and Transportation,
                                                    Washington, DC.
    The Subcommittee met, pursuant to notice, at 10:33 a.m., in 
room SR-253, Russell Senate Office Building, Hon. Mark Pryor, 
presiding.

             OPENING STATEMENT OF HON. MARK PRYOR, 
                   U.S. SENATOR FROM AKANSAS

    Senator Pryor. Let's go ahead and have our witnesses take 
their seats and have the audience sit down. Thank you all. Call 
this meeting to order.
    I want to say good morning and welcome to the 
Communications Subcommittee's hearing on the state of rural 
communications. I want to thank all the witnesses for being 
here today.
    This is actually the first in a series of hearings that we 
intend to hold on the state of the communications in the United 
States. So, this is state of rural, and we'll have others in 
the coming weeks. These hearings will serve as an important 
snapshot on the various communications sectors around the 
country. They will help educate our subcommittee members on a 
lot of these issues. And it's an important chance for us to 
listen to the stakeholders to find out how they see the lay of 
the land. And also, it's going to be important for the 
Subcommittee itself to help hear from other members on the 
Subcommittee about their views on the state of communications 
around the country.
    Beginning with the Communications Act of 1934, Congress has 
stood by the principle that all Americans should have access to 
communications, whether they live in the urban or rural parts 
of the country. That principle has meant that 98 percent of all 
Americans have access to wireline communications. And, of 
course, the USF is a big part of that. There's other policies 
involved. And it's an important principle that continues to 
underpin our push to make sure that rural Americans have access 
to wireless communications, video services, and, even more 
importantly, high-speed broadband. And I think broadband is the 
basic fundamental communications network of tomorrow. High-
speed broadband in rural America means jobs, it offers access 
to worldwide markets and digital economy. It provides advances 
in healthcare and education, and it makes possible the new 
forms of civic and social engagement for the 21st century.
    So, for example, in my state, I've seen, firsthand, the 
benefits of broadband. We have companies, such as Goggles and 
Glasses in Batesville, an online eyewear retailer, and BriteSun 
Data Services in Maumelle, a data network installation company. 
These businesses are increasingly utilizing broadband to expand 
and take full advantage of their potential.
    The companies before us today, and the folks that they 
represent, and many others around the Nation, have invested 
billions of dollars in their networks to make their services 
available to rural customers. I look forward to hearing from 
our witnesses today about their businesses and their 
experiences serving our nation's rural customers.
    I also would like to know about the challenges that your 
companies face in serving rural America. How do we bridge the 
digital divide and meet the core principles of universal 
service enshrined in the Communications Act? And how do we 
ensure that rural consumers have the same quality of service as 
their urban counterparts?
    So, I know the members of the Subcommittee will benefit 
from listening to what you have to offer. And, like I said, 
we'd love to hear your perspectives.
    Now, what I thought I would do is recognize Senator Wicker, 
the ranking member of the Committee, and then, if it's okay 
with the other Committee members, I may dispense with further 
opening statements, just to allow us to get to the witnesses.
    But, Senator Wicker, you're up.

              STATEMENT OF HON. ROGER F. WICKER, 
                 U.S. SENATOR FROM MISSISSIPPI

    Senator Wicker. Thank you very much, Mr. Chairman.
    This is the first hearing of the Subcommittee on 
Communications, Technology, and the Internet, and I would like 
to express my enthusiasm about working alongside my good friend 
and colleague, Senator Pryor. I also appreciate Senator Pryor's 
stated desire for us, up here, to get our talking done quickly 
and let the witnesses have a chance to give us their expertise.
    Mr. Chairman, you have put forward an ambitious agenda, 
covering a broad cross-section of topics. I hope this will 
position our subcommittee, not only as a forum for education 
and debate on the current state of communications policy in our 
nation, but also as a vehicle for identifying the best path 
forward to ensure rapid, quality broadband for all Americans, 
including rural Americans.
    I am particularly glad that the first subcommittee hearing 
is focused on the state of rural communications, a topic near 
and dear to me. We, in Congress, must ensure that any digital 
divide that exists between urban and rural areas is effectively 
bridged, and that all Americans have the tools necessary to 
take full advantage of our broadband economy.
    The impact that high-speed broadband can have on economic 
development in rural areas, like Mississippi and Arkansas and 
Missouri and Nebraska and Wisconsin, cannot be overstated, and 
strides have, indeed, been made. In particular, I'd like to 
recognize the work of CSpire Wireless, for example, a regional 
wireless provider headquartered in my home state. CSpire 
provides nearly one million customers with mobile voice and 
broadband access, and generates roughly $1.5 billion in 
incremental positive economic impact on local, state, and 
regional economies.
    I would also like to highlight the nearly $975 million 
investment by AT&T in its Mississippi wireless and wireline 
networks in--with a focus on expanding 4G LTE mobile Internet 
coverage across the state of Mississippi. I am confident that 
these success stories are not only indicative of Mississippi, 
but can be found across America.
    I would like to welcome our witnesses and thank them for 
testifying this morning. While not all inclusive, the companies 
represented cover a broad range of providers with extensive 
footprints in rural America, from wireline to wireless to 
cable. I'm looking forward to learning about the work our 
witnesses are doing to maximize broadband access and adoption.
    At the same time, it is equally important for this 
committee to learn about the regulatory obstacles providers 
face, and how Congress can help clear those obstacles.
    Thank you again, Mr. Chairman, for holding this important 
opening hearing, and I look forward to working with you and all 
the members of this subcommittee as we begin to examine the 
varied and complex communication policies and the issues facing 
our emerging broadband economy.
    Thank you, sir.
    Senator Pryor. Thank you.
    What I thought I would do is, unless any of our colleagues 
here would like to make their opening statements, I thought I 
would just jump right into hearing from our witnesses today. 
And I could do these long introductions. All of them have great 
credentials and offer--and bring a lot to the table today. But, 
I thought I'd just very briefly introduce each one and then 
allow them to make their 5-minute opening statement.
    We would love for you to keep your opening statement to 5 
minutes each, if possible.
    First, Mr. John Strode, of--he's Vice President, External 
Affairs of Ritter Communications; that's based in Jonesboro, 
Arkansas. Mr. Steven Davis, he's Vice President of CenturyLink. 
Ms. Patricia Jo Boyers, she's President and CEO Of BOYCOM 
Cablevision, up in Missouri. And Mr. LeRoy T. Carlson, Jr., 
Chairman of U.S. Cingular.
    So, Mr. Strode, if you wouldn't mind? Thank you.

  STATEMENT OF JOHN STRODE, VICE PRESIDENT--EXTERNAL AFFAIRS, 
                     RITTER COMMUNICATIONS

    Mr. Strode. Thank you, Mr. Chairman.
    Chairman Pryor, Ranking Member Wicker, Committee members, 
thank you for the opportunity to testify on this very important 
topic. I am John Strode, Vice President of External Affairs for 
Ritter Communications Holdings. Ritter operates in Arkansas and 
Tennessee, employs about 280 people, serves nearly 33,000 
telephone access lines, 26,000 broadband customers, and 20,000 
basic cable subscribers.
    The challenges we face, in terms of customer density and 
distance, are similar to those faced by nearly 1,100 other 
rural carriers who, together, serve about 5 percent of the 
Nation's population but 40 percent of its geography. The cost 
recovery necessary to serve such vast regions has historically 
come from a mix of universal service support, intercarrier 
compensation, and customer rates. Considering our success in 
building out broadband over the past decade, with minimal 
growth in USF support and declining intercarrier compensation 
revenues, this strategy has clearly worked.
    Unfortunately, ongoing efforts to transform this delicately 
balanced structure have generated uncertainty and stalled 
investment, leaving customers and broadband advancement in the 
lurch. In the face of these regulatory shifts, many companies 
are cutting costs, letting employees go, scaling back services, 
and/or increasing rates, and hope that they can continue to 
repay loans taken out to build advanced networks.
    Regulatory uncertainty arising out of the changes already 
adopted and the threat of more changes to come has led many 
small companies to pull back on investment, and left all of us 
with limited visibility into what rural broadband will look 
like for consumers in the long run.
    This uncertainty can be traced to two primary sources.
    First, the FCC's quantile regression analysis model caps 
USF support, based on a pool of data that is difficult to 
analyze, contains acknowledged data errors, and is 
unpredictable. Rural providers are not looking for guarantees, 
but, like any small business, we need a reasonable capability 
to develop and execute a business plan. The law recognizes 
this, requiring that USF support be sufficient, predictable, 
and specific. But, the unsettled nature of the QRA model leaves 
many--leaves even a company that is not yet capped fearing that 
potential investments may result in the company being penalized 
for trying to provide the services that the national broadband 
plan calls for.
    Second, the FCC continues to consider additional caps, 
cuts, and constraints on cost recovery before the dust has even 
settled with respect to the reforms adopted in 2011 that are 
now being implemented. We remain hopeful that the agency will 
hold true to its commitment for a data-driven transformation 
process and first consider the effects on consumers of those 
changes already adopted before racing forward with further 
modifications.
    A recent survey conducted by NTCA, the rural broadband 
association, underscores the impacts of this regulatory 
uncertainty. Out of 185 small-carrier respondents, 127 
indicated that they have either postponed or canceled plans to 
upgrade network infrastructure due to this uncertainty; 101 of 
those respondents indicated that the combined value of the 
projects put on hold equaled more than $492 million.
    So, how can we get rural broadband investment back on 
track? Three key steps should be taken:
    First, the FCC should reevaluate the QRA models and caps to 
ensure greater transparency, accuracy, and predictability. They 
should also employ the caps as triggers for further review 
rather than as automatic disqualifiers of support.
    Second, the FCC should refrain from any further cuts, caps, 
or constraints until the effects of these changes that are now 
being implemented can be evaluated.
    And, third, it's important that the FCC define a path 
forward for a sustainable broadband future for all rural 
consumers.
    On another note, but just as critical to the concept of 
universal service, rural telcos have, for years now, confronted 
the problem of calls failing to reach rural customers. The 
industry has been seeking to shed light on the routing 
practices that are the source of this problem. The FCC has 
taken several steps, including issuing a declaratory ruling, in 
February 2012, and a consent decree with Level 3, in March 
2013, that required a contribution to the U.S. Treasury and a 
compliance plan, going forward. The industry is appreciative of 
the spotlight placed on this issue by Congress and the FCC, yet 
the problem persists. It is clear that the problem is not 
limited to just one entity, and it is essential that the FCC 
undertake further enforcement to ensure that its recent consent 
decree is not a one-time event.
    While I was unable to cover every issue facing rural 
carriers, I respectfully request that you review my full 
written statement, which describes other challenges the small 
carriers continue to confront with regard to deployment for 
wireless services and access to affordable video content. Small 
rural carriers, like Ritter, have been at the forefront of 
technological evolution driven by a commitment to the 
communities they serve.
    We look forward to working with this committee to continue 
delivering on that commitment.
    Thank you.
    [The prepared statement of Mr. Strode follows:]

      Prepared Statement of John Strode, Vice President--External 
  Communications, Ritter Communications, on behalf of NTCA-The Rural 
                         Broadband Association
    Chairman Pryor, Ranking Member Wicker, committee members, thank you 
for the opportunity to testify on this very important topic. My name is 
John Strode, and I am the Vice President-External Affairs of E. Ritter 
Communications Holdings, Inc. (Ritter).
    Ritter was formed under the laws of the State of Arkansas on April 
11, 1990. Ritter's parent company has been in business since 1886 and 
has operated rural telecommunications companies since 1906. Today, 
Ritter owns and operates three rural incumbent local exchange carriers 
(ILECs), two in Arkansas and one in Tennessee; a facilities-based 
competitive local exchange carrier (CLEC) and fiber network in 
Jonesboro, Arkansas serving primarily small and medium-sized 
businesses; and three cable television systems, one in a six-county 
area of Northeast Arkansas and one county in southeast Missouri, one 
serving a three-county area in North Central Arkansas; and one in a two 
county area of West Tennessee. Ritter has also developed a fiber 
network consortium extending from West Tennessee across Northern 
Arkansas to Fayetteville in Northwest Arkansas. Ritter currently 
provides broadband service, local and long-distance voice service, 
switched access service, special access and private line services, and 
cable television service.
    Ritter has about 280 employees, with about 180 in Arkansas and 100 
in Tennessee. Between all of its communications operations, Ritter 
serves nearly 33,000 telephone access lines, 26,000 broadband customers 
and 20,000 basic cable subscribers.
    I have been involved with the communications industry in one form 
or fashion for more than three decades. Specifically, for the past 17 
years I have been employed by Ritter and previously I worked for the 
Arkansas Public Service Commission. I am here to represent the hundreds 
of small ILECs across the country who strive everyday to provide 
quality voice, broadband, and other advanced services for all residents 
in their service territories. The areas these companies serve range 
from the Arctic Slope of Alaska to the outskirts of the Florida 
Everglades. Companies like Ritter across the rural telecommunications 
industry serve approximately 5 percent of the Nation's population, but 
approximately 40 percent of the Nation's land mass.
    While the size of the companies, the geographic and topographical 
challenges they face, and their customer densities might all be 
different, one thing remains constant--the dedication they have to 
their communities. Many of the companies have invested in their 
communities through scholarships, community development programs, 
training programs, and most importantly well paying jobs. Companies 
such as Ritter live and work in the communities they serve, they are 
sources of economic development opportunities at home and critical 
links to economic development opportunities in distant markets, and 
they ultimately are the last line of defense in ensuring that the 
Nation's universal service policies represent more than just words on a 
page.
Universal Service/Intercarrier Compensation Modernization
    The Federal Universal Service Fund (USF) and Intercarrier 
Compensation (ICC) mechanisms have served as critical components of 
cost recovery for network investments and service delivery in high-
cost, rural areas for decades. The need for reform of these mechanisms 
has been discussed for a number of years, and there was a general 
recognition over the past several years that these systems needed 
modernization to realize their potential in a ``broadband era.'' 
Unfortunately, the transformation order released by the Federal 
Communications Commission (FCC) in November 2011 has instead injected 
uncertainty into the business of deploying broadband networks and 
offering advanced services in rural America. Given the long-term nature 
of investing in advanced networks, it is essential that some degree of 
reasonable predictability be restored--and a reasonable path forward 
for the recovery of such investments better defined--if our Nation is 
to see the objectives of universal service truly achieved in this 
broadband era.
    In previous appearances before the Senate Commerce Committee, 
representatives of the FCC have repeatedly expressed their intent to 
employ a data driven process in undertaking USF and ICC reforms. The 
FCC has also identified four pillars of reform that guided its efforts: 
(1) modernization; (2) fiscal responsibility; (3) accountability; and 
(4) incentive-based policies. We concur generally with these broad 
themes. There were indeed aspects of the USF program that needed 
updating to perform well over the longer-term and to reposition the 
system to support broadband-capable networks and shifting consumer 
demands. But unfortunately the data in the wake of the reform--and 
Ritter's own experiences as a network operator in hard-to-serve, high-
cost areas for over 100 years--indicate that the recent changes should 
be revisited, or at the very least recalibrated, to achieve the 
ultimate objective of universal service: ensuring that every American 
has access to affordable, robust, sustainable broadband, voice, and 
other critical communications services.
    When one considers that rural carriers were doing a ``commendable 
job'' advancing broadband deployment even as of several years ago 
(according to a group of FCC commissioners and state regulators) \1\, 
and when one considers that rural telcos have been doing this work even 
in the face of declining ICC revenues and only minimal--approximately 3 
percent annual--growth in USF, it becomes apparent that, even if the 
USF program may have needed modernization, it was also performing 
reasonably well in terms of advancing broadband in the most rural 
reaches of the United States within a fiscally responsible system. 
Moreover, accountability could be measured best and most easily through 
results. Even as more remains to be done to get broadband from basic 
speeds to the kinds of speeds demanded by consumers and businesses 
today, rural telcos were already doing a ``commendable job'' of 
reinvesting in network deployment to further this cause.
---------------------------------------------------------------------------
    \1\ High-Cost Universal Service Support, Federal-State Joint Board 
on Universal Service: Recommended Decision, WC Docket No. 05-337, CC 
Docket No. 96-45, FCC 07J-4, at para. 30 (2007).
---------------------------------------------------------------------------
    Modernization therefore could have taken a different track than 
what transpired, building upon the best of what worked but 
repositioning critical USF systems for the future. Instead, in the wake 
of the FCC's changes, there are a number of rural telcos adversely 
affected by new caps, cuts, and constraints on their cost recovery 
mechanisms. The reasons those telcos are affected by the changes vary, 
and each change needs to be evaluated carefully, consistent with a 
data-driven analysis, to see whether the regulatory changes are in fact 
helping to preserve and advance universal service objectives.
    As a representative of Ritter, however, I bring a unique 
perspective, in that our company is not as adversely affected as many 
others--at least yet--by the FCC's changes in terms of lost USF 
support. But, as we stand here today, these regulatory changes and the 
threat of more to come undermine predictability in the cost recovery 
mechanisms. This has in turn made it increasingly difficult for my 
company and many others like ours to decide whether and to what degree 
to invest further in advancing broadband. It is important that 
policymakers take steps as soon as possible to examine and address 
these concerns, to inject reasonable predictability into the cost 
recovery mechanisms for long-term network investments, and to promote 
continuing investment in rural broadband.
    A good deal of the current regulatory uncertainty can be traced to 
two sources.
    First, there is the FCC's ongoing consideration of whether to adopt 
additional changes, such as further reductions to ICC revenue streams 
or other USF changes such as reductions in the prescribed rate of 
return, on top of those already adopted. Given that the ``dust has not 
even settled'' on the changes already made and still being implemented, 
it is hard to see why one would race forward with additional changes 
that might only raise consumer rates further, reduce broadband 
investment, and/or threaten the payback of loans, including Federal 
loans due to the Rural Utilities Service. It is hard to square such an 
approach with a commitment to a ``data-driven'' process.
    Second, the FCC has adopted a model based upon ``quantile 
regression analysis'' (or QRA) that applies caps to USF support based 
upon a pool of data that appears to contain a number of errors and is 
difficult, if not impossible, for any single company manager to 
analyze. Moreover, the QRA model and resulting caps, at least for now, 
shift from year-to-year in ways that cannot be easily predicted. To be 
clear, rural providers like Ritter are not looking for guarantees with 
respect to revenue streams -we simply want some reasonable visibility 
into USF support and the ability to plan our businesses accordingly. 
The law requires that USF support be ``sufficient, predictable and 
specific''--and the QRA in its current form does not permit company 
managers to make reasonable predictions about cost recovery revenues to 
be obtained even a few years out, never mind over the 20-year-plus life 
of telecom networks.
    In fact, Ritter's multiple operating companies provide an 
interesting perspective on the flaws of the current QRA model. Based on 
the data used in the QRA model, it would seem at first blush that two 
of Ritter's subsidiaries, E. Ritter and Tri-County, are somewhat 
similarly situated based upon their ``access lines per square mile'' 
and several other factors. On the other hand, E. Ritter is located in 
the Mississippi River Delta where the soil is very rich and allows for 
cable to be buried, which provides a lower cost in the long run; while 
Tri-County is situated in the Ozark Mountains where the cable must be 
strung up on poles and overcome a 2,000 feet elevation change. The cost 
characteristics of Tri-County are many times greater than E. Ritter and 
Tri-County is very close to the caps set by the regression. There are 
many legitimate reasons that some companies have high costs and the 
regression should be used as a tool to identify companies that need 
further examination, not as a blunt instrument to excise funding based 
on an arbitrarily determined percentile.
    Such oddities in the caps are compounded by data errors in the 
underlying QRA model that is used to develop the caps. For example, 
Tri-County's service area is 120 square miles larger than the FCC's 
accounting in the model. Similar calculation errors have been found in 
companies across the country. While each data issue on its own might 
not seem troubling, because of the way in which the model looks at all 
telcos nationwide, a change in any given factor for a single company 
can actually cause significant fluctuations in the USF support that 
telcos across the country receive. The FCC is taking steps now to 
address a number of these data errors--but this will result in the 
entire model and the QRA caps effectively being reset at the end of 
this year, adding to the unpredictability as we all hold our collective 
breath waiting for the new caps to come out.
    While much attention has been paid to the so-called Connect America 
Fund Phase 1--which is aimed at giving larger carriers a near-term 
incentive to invest in rural areas--smaller rural carriers have been 
forced to put many significant investments on hold for the time being 
pending the resolution of the regulatory uncertainties described above. 
A recent survey conducted by NTCA-The Rural Broadband Association \2\ 
underscores just how real the impacts have been. Out of 185 small 
carrier respondents, 127 indicated they have either postponed or 
cancelled plans to upgrade their network infrastructure due to 
lingering regulatory uncertainty. One-hundred and one of these 
respondents indicated that the combined value of the projects put on 
hold equaled more than $492 million.
---------------------------------------------------------------------------
    \2\ This survey can be found through the following link: http://
www.ntca.org/2013-press-releases/survey-shows-rural-telecommunications-
carriers-postponing-delaying-network-upgrades-because-of-regulatory-
uncertainty.html.
---------------------------------------------------------------------------
    More recently, a publicly filed outline of a meeting between U.S. 
Department of Agriculture (USDA) Secretary Thomas Vilsack and FCC 
Chairman Julius Genachowski further underscored these concerns.\3\ That 
filing outlined the importance of the USDA's historic role of promoting 
rural economic development and financing rural utilities 
infrastructure. It also noted that the economic stability of rural 
areas depends on the availability of resilient robust communications 
infrastructure. But the filing then indicated that, in Fiscal Year 
2012, only 37 percent of the telecom infrastructure financing made 
available through the USDA was used. USDA specifically cited 
communications from current and prospective borrowers of the program 
regarding hesitation to increase outstanding debt and move forward with 
planned construction due to the recent regulatory changes. In other 
words, it is not as if demand by carriers and consumers is not there--
to the contrary, it is quite clear that consumers across the country 
are seeking increased levels of broadband, and as always, rural telcos 
are willing and eager to serve them. Rather, the concerns that have 
reduced loan demand arise out of whether the regulatory changes now 
being implemented and those perhaps still to come will preclude the 
payback of loans taken out to advance deployment of broadband-capable 
networks in rural areas.
---------------------------------------------------------------------------
    \3\ See Ex Parte letter filed on 2/15/13 by Acting Administrator 
Padalino which can be accessed here: http://apps.fcc.gov/ecfs/document/
view?id=7022122079
---------------------------------------------------------------------------
    Such developments are disappointing when one considers what rural 
broadband investment means to the country as a whole. For example, the 
Hudson Institute released a paper in October 2011 highlighting the 
significant investment that rural providers provide beyond their own 
local economies--the study showed that they contributed $14.5 billion 
to the economies of the states in which they operated in 2009.\4\ An 
earlier study indicated that every one percentage point increase in 
broadband penetration increases overall employment by 0.2 percent to 
0.3 percent a year.\5\ In short, broadband investment translates into 
jobs in the near-term, valuable infrastructure in the long-term, and 
benefits that flow not only locally, but regionally and nationally as 
well.
---------------------------------------------------------------------------
    \4\ The Hudson Institute study is available through the following 
link: http://www.hudson.org/files/publications/RuralTelecomOct2011.pdf
    \5\ (n.d.). Retrieved from website: http://www.brookings.edu//
media/Files/rc/papers/2007/06labor_crandall/06labor_crandall.pdf.
---------------------------------------------------------------------------
    So how can we address these concerns as a country and get rural 
broadband investment back on track? Three key steps can and should be 
taken in short order.
    First, the FCC should re-evaluate the QRA model and the caps it 
produces to ensure greater transparency, accuracy, predictability, and 
methodological integrity in their application. The caps should be 
phased-in over a longer period of time--especially given that the caps 
still need further development and particularly to the extent that they 
apply inappropriately to limit recovery of investments made years ago, 
before the rules were changed. The caps should also be used ultimately 
as a ``trigger'' that flags a carrier for additional review, rather 
than serving as an automatic disqualifier of recovery of certain costs.
    Second, consistent with its commitment to a ``data-driven'' 
approach, the FCC should not adopt additional cuts, caps, and 
constraints on USF support and ICC cost recovery until it has fully 
implemented the changes already adopted and evaluated their impact on 
consumers. A number of the reforms already adopted and just now being 
implemented will result in rate increases on rural consumers and are 
slowing down broadband investment as noted above. Before undertaking 
changes that may only exacerbate these concerns, the FCC should take 
stock of the effects of its reforms on broadband deployment, broadband 
adoption, and end-user rates through a data-driven analysis.
    Third, the FCC needs to define a path forward for a sustainable 
broadband future for consumers in areas served by smaller carriers like 
Ritter. The FCC created a Connect America Fund for larger carriers, but 
it left in place legacy USF programs for smaller carriers that reflect, 
on the whole, reductions in USF and ICC revenues. And the irony is that 
this legacy system still needs updating to serve the objective of 
universal service in a broadband-enabled world. Today, if a Ritter 
customer wants to stop buying plain old telephone service from our 
company and just wants broadband alone, that customer's broadband rates 
would increase because USF support on that line goes away under the 
legacy rules that are still in place. It is essential that the FCC 
update its USF mechanisms to avoid this result--it can and should 
create a targeted Connect America Fund in areas served by smaller rural 
carriers by providing sufficient support for the networks (both last-
mile and transport) that enable the availability of advanced services 
of all kind in rural markets, regardless of whether each customer 
chooses to buy just plain old telephone service on those networks. This 
does not require massive changes or reworking of the existing 
mechanisms along the lines of the Connect America Fund that is still in 
its second year of development for larger carriers--all that is 
required here is a technical fix to the existing rules to achieve the 
FCC's modernization objectives.
    In the end, small carriers like Ritter and their representatives in 
Washington, D.C. remain committed to working with the FCC and other 
policymakers to ensure that the statutory promise of universal service 
is realized. The experience over the past decade proves that 
sufficient, predictable, and specific USF and ICC mechanisms drive 
investment, improve the quality of life, create jobs, and increase 
economic opportunities in rural markets. We believe that the several 
simple and straightforward steps noted above will make a significant 
difference in providing clarity to network operators, lenders, and 
investors, thereby allowing them to make informed judgments about where 
and when to deploy capital to build broadband-capable networks. We 
believe that these steps are consistent with the statutory objectives 
of universal service and the pillars of reform previously identified by 
the FCC. And, finally and most importantly, we believe that consumers 
and businesses in rural areas will benefit from efforts to facilitate 
greater certainty in communications markets and to define a path 
forward for sustainable rural broadband.
Contribution Reform
    While debate has raged regarding the distribution side of the USF, 
many policymakers and industry parties alike continue to hope the FCC 
will soon finally tackle the contribution side as well. There are many 
in the industry and policymakers as well, who feel the FCC should have 
at least tacked contributions and distributions at the same time, if 
not tacking contributions first to better ensure a foundation for and 
appropriate ``sizing'' of the fund for the jobs required of it.
    Contributions to USF are currently based upon interstate and 
international revenues from certain telecommunications providers. As 
consumer preferences shift, it has been widely recognized that the 
eligible pool of revenue that can be assessed to fulfill the statutory 
mandates of all four USF programs is declining.
    The contributions system must be updated, much like the 
distribution side of USF, to account for these shifts and to ensure 
that those that rely upon next-generation networks contribute to their 
universal availability and access. Contrary to what many may wish to 
believe, the cost of deploying and using communications infrastructure 
is not costless--even in an ``IP world,'' data must be moved from one 
location to another, and that takes transport facilities, routing, and 
delivery in even the most efficient and advanced of networks. We must 
therefore take steps to ensure that the USF is sustainable by capturing 
the broadest possible swath of those who benefit from the universal 
availability of the network; casting the contribution obligations more 
broadly will also help to reduce the burdens now being borne by only a 
subset of customers, most of whom are making only minimal use of 
communications networks as compared to other bandwidth-intensive users.
    Some have questioned the FCC's authority to expand the contribution 
base, but the FCC has ample authority under Section 254(d) to expand 
the list of assessable services to any services delivered by providers 
of ``telecommunications.'' It has used this authority for years to 
assess contributions upon providers of interconnected VoIP services, 
and the FCC also long ago concluded (as upheld by the U.S. Supreme 
Court), even in classifying broadband Internet access service as an 
information service, that broadband Internet access service also 
includes a ``telecommunications'' component. There is thus no 
``classification'' barrier to be resolved in rationalizing 
contributions, because the legal path to assess contributions on the 
provision of broadband Internet access services is clearly laid out in 
the Act and already well-supported under existing FCC policy and 
precedent.
    Furthermore, it makes sense in the current environment, when the 
USF distribution mechanisms are being reformed to focus more on 
promoting broadband deployment, that the contributions system should 
also look to broadband to support such deployment. Indeed, if the FCC 
can distribute USF support to enable the deployment of broadband-
capable networks, as it has done in the wake of its November 2011 
reforms pursuant to Section 254(c) (which refers expressly to 
``telecommunications services'') and Section 254(e) (which refers to 
``facilities and services for which the support is intended''), Section 
254(d) provides an even more straightforward route to require USF 
contributions based upon the clear and unquestioned fact that broadband 
Internet access service incorporates a ``telecommunications'' 
component. Taking this step to ``broaden the base'' and update the 
contributions mechanisms in short order is essential to make sure the 
USF is sustainable and to realize the Nation's shared broadband goals.
IP Technology Evolution
    Communications networks are evolving, along with consumer 
preferences and the demand for advanced services. As noted earlier in 
my testimony, rural network operators and service providers have been 
at the vanguard of anticipating and responding to these changes, doing 
a ``commendable job'' according to a group of FCC commissioners and 
state regulators charged several years ago with evaluating the progress 
of investment in advanced infrastructure.
    The numbers bear this out--they show that small rural carriers are 
no longer interested in just being telephone companies. Instead, these 
small businesses have been at the forefront of investing in their 
networks and making all kinds of cutting-edge services available to 
consumers. A recent survey released by NTCA found that its entire 
membership of small rural telecom providers now include broadband 
within their service offerings;\6\ a study a few years ago by the 
National Exchange Carrier Association (NECA) further found that smaller 
rural carriers could deliver at least basic levels of broadband to 92 
percent of their customers as of 2010, and that more than half of 
smaller carriers had deployed or had plans to deploy next-generation, 
IP-enabled switching and routing technology in place of legacy 
telephone switches by 2011.\7\
---------------------------------------------------------------------------
    \6\ This survey can be found through the following link: http://
www.ntca.org/images/stories/Documents/Advocacy/SurveyReports/
2012ntcabroadbandsurveyreport.pdf.
    \7\ This survey can be found through the following link: https://
www.neca.org/cms400min/NECA_Templates/PublicInterior.aspx?id=100.
---------------------------------------------------------------------------
    Consumer demand for services on these advanced networks is on the 
increase as well--the above-referenced NTCA survey indicated that the 
consumer ``take rate'' for broadband (i.e., the rate at which consumers 
who can get access to broadband are choosing to purchase it) is nearing 
70 percent. In other words, these rural networks are not being built 
just for their own sake, but precisely because real customer demand is 
driving them--including demands for higher-speeds that require 
additional investment and upgrade beyond the basic levels of broadband 
that many small rural carriers can make available today. Small carriers 
have demonstrated their commitment to promoting broadband adoption in a 
variety of ways beyond just trying to deploy the best possible ``future 
proof'' networks. From providing home-network installation and 
computer/online literacy training to participating in the FCC's 
Broadband Lifeline pilot program, rural telcos are looking to make sure 
that as many consumers as possible get onto the network and that they 
recognize and realize the value of the services provided. Broadband 
adoption is not just a one-time event--it requires a commitment to 
ensure that each customer finds good reason to stay on the network once 
they've chosen to subscribe, and as community-based providers, small 
rural carriers are as well-positioned as any to make that case.
    The question then becomes how do we promote and sustain this 
evolution to next-generation network technologies, including IP-enabled 
services that depend upon a robust broadband foundation. To be clear, 
it is not as if the public switched telephone network is ``dying'' or 
that it needs to be ``shut off'' by regulatory mandate at some point. 
Nor is it the case that an IP-enabled service equals ``the Internet.'' 
IP is just a technology, and there is nothing special about a network 
that uses IP that makes it the ``Internet.'' There are plenty of 
networks maintained by firms ranging in size from the smallest rural 
telco to AT&T and Comcast that are privately managed and provide 
quality-of-service that is unavailable and unobtainable on the public 
Internet. Moreover, the evolution to IP technology is already occurring 
as the ``public switched telephone network'' becomes more of a ``public 
routed communications network.''
    So it is an utter red herring to contend that this migration to IP-
enabled services and underlying higher-speed networks necessarily means 
that everything is moving ``to the Internet.'' IP may be a technology 
that is used in the Internet, but to be unmistakably clear, IP does not 
equal the Internet. Instead, what we are seeing is an evolution in 
technology that, while representing a significant leap in capacity and 
capability, is analogous to when we moved from analog to digital 
technology in networks decades ago. This is not to say that we should 
maintain the same old regulations as we migrate to newer network 
technologies--this is just to stay that we should not assume that the 
existing regulations are inapplicable or of no use as new technologies 
come on line simply because IP happens to have ``Internet'' in its 
name. In the end, core statutory principles relating to protection of 
consumers, promotion of competition, and assurance of universal service 
apply by law to all communications, regardless of the technology used 
on underlying networks.
    It is important that policymakers approach the debate over how to 
promote and sustain the ongoing IP evolution with this backdrop in 
mind. The FCC is considering such questions now in the context of a 
pair of petitions filed by NTCA and AT&T in late 2012. Our belief is 
that policymakers can best promote and sustain this ongoing evolution 
through carefully designed regulatory policies that do not ``prejudge'' 
the value (or inapplicability) of specific rules upfront. Policymakers 
should neither dismantle the current regulatory framework simply 
because services are being provided via IP technologies, nor should 
they leave existing rules in place and simply hope that they serve the 
same purpose they once did.
    The former option, which NTCA has characterized as taking a 
sledgehammer to existing regulations, would create a regulatory vacuum 
that undermines the interests of consumers and defeats the objective of 
providing regulatory certainty. Customers have felt the negative 
impacts from the absence of adequate regulatory oversight of services. 
Those impacts are underscored by rural call completion issues. Those 
impacts are felt by customers whether the services are IP-enabled or 
otherwise. The latter option, meanwhile, would turn a blind eye to the 
fact that consumer expectations are changing and services are evolving 
and that regulations must be re-evaluated periodically to determine if 
they have redeeming value and purpose.
    The NTCA petition therefore charts a middle course that would look 
at existing rules to see if each rule still has value in serving the 
statutory goals of consumer protection, promotion of competition, and 
universal service. This approach has the benefit of starting from a 
well-known regulatory framework that gives certainty to consumers, 
investors, lenders, and the industry, but recognizing that there may be 
the need to modify or discard elements of that framework to the extent 
needed to address technological change or other factors. We support 
such a comprehensive and thoughtful review of the regulatory framework, 
and we also encourage the FCC to take certain targeted steps in the 
near-term to accelerate the IP evolution--such as tailoring universal 
service support to support broadband more directly and ensuring 
reasonable interconnection between IP-enabled carrier networks.
Call Completion
    Rural consumers and the carriers that serve them are losing faith 
in the ability of regulators to ensure seamless connections across 
critical communications networks. Increasingly over the past few years, 
calls do not get through to rural areas--or when they do, they often 
have quality problems. This large scale problem is seriously and 
negatively affecting not only consumers, but public safety and the 
viability of businesses that are located in rural areas.
    The problem stems from choices made by originating long distance 
carriers to use the cheapest possible route to transmit calls to rural 
areas--with the apparent sense that, if the calls should happen not to 
get there because the least-cost router in the middle failed to deliver 
the call, there is little regulatory or economic consequence (if any) 
for such failures. The solution to this problem lies with the 
originating long distance carriers that need to better police their 
service quality, and meaningful oversight and enforcement action by the 
FCC is needed to prompt such a solution.
    The FCC recently released a Notice of Proposed Rulemaking (NPRM) 
which would force carriers to retain information so that the scope of 
the problem could be ascertained on a company-by-company basis and 
enforcement action could be pursued. However, to date, that NPRM has 
not been published in the Federal Register and no comments have been 
filed--this is more than 2 years after rural carriers and their trade 
associations first brought this issue to the attention of the FCC. The 
FCC also recently announced a ``Consent Decree'' with Level 3 
Communications, in which the carrier paid a ``voluntary contribution,'' 
to monitor its call completion performance, and to pay additional 
amounts if its performance failed to satisfy certain metrics.
    In the interim, unfortunately, there has been no measurable and 
sustained improvement in overall call completion rates to rural areas, 
and calls continue to fail at an alarming rate. The FCC has made it 
clear that carriers may not block, choke, or restrict traffic. But 
these words have done little to deter call failures on their own, and 
only strong oversight paired with effective FCC enforcement action 
against offending carriers will ultimately put an end to the problem.
Video Issues
    Small carriers have been providing video service to their consumers 
for many years. In some areas this is done in direct competition with 
large cable companies, enhancing consumer choice. In more remote places 
where over-the-air signals may be weak and unreliable, this is a 
critical service to customers who need access to local news and weather 
reports.
    Video provision is also a broadband issue, as small carriers 
frequently use the same infrastructure to deliver both video and 
broadband services. In fact, the FCC has found that these services are 
intrinsically linked.\8\ When small carriers are able to offer video 
and broadband services together, data shows that broadband adoption 
goes up 24 percent,\9\ which makes it more feasible to invest in 
broadband networks. However, small carriers' ability to deliver video 
and broadband services are impeded by outdated program access rules 
that make the business case increasingly difficult even for the 
Nation's largest cable companies.
---------------------------------------------------------------------------
    \8\ MB Docket No. 05-311, 22 FCC Rcd 5101, 5132-33,  62 (2007).
    \9\ See NECA comments, GN Docket Nos. 09-47, 09-51, 09-137 (filed 
Dec. 7, 2009), p. 6.
---------------------------------------------------------------------------
    Retransmission consent rules that are now over twenty years old--
and thus reflect a very different video marketplace--give programmers a 
stranglehold over video content and prevent small providers from 
negotiating market-based rates for programming. Increasingly, customers 
are facing blackouts of channels due to programmers' ``take it or leave 
it'' tactics, which are technically prohibited but occur frequently. In 
addition, evidence suggests that small and medium video providers pay 
up to twice the rates that large companies do for the same programming. 
And some types of content that is necessary for a viable service 
offering, notably sports programming, may be subject to even higher 
rates if it is available at all.
    In addition, recent years have seen a spike in instances where 
separately owned stations within the same market coordinate their 
retransmission consent negotiations. Such collusion has enabled these 
separately-owned broadcasters to command retransmission consent prices 
that are 21 percent to 161 percent higher than each station negotiating 
on its own behalf could command on its own.\10\ These high rates are in 
turn passed on to consumers and decrease competition in the local 
television market.
---------------------------------------------------------------------------
    \10\ See ACA comments, MB Docket Nos. 09-182 and 07-294 (fil. Mar. 
5, 2012), p. 9.
---------------------------------------------------------------------------
    Customers must also pay ever-higher prices for video programming 
they do not even want because programmers force providers to buy 
multiple unwanted channels, and place them in basic service tiers, in 
order to have access to channels that customers demand. This ``forced 
tying'' prevents small providers from offering more affordable packages 
of channels, and is raising prices to unsustainable levels.
    Technology and the video marketplace have changed drastically since 
the current program access regime was enacted over 20 years ago. Just 
as we are talking about the need to re-evaluate rules in the context of 
an IP evolution in communications networks, it is far past time for 
policy makers to reform these outdated rules and encourage, rather than 
impede, video competition and broadband deployment.
Wireless Issues
    Rural consumers require access to a strong and reliable wireless 
network and rural carriers are attempting to meet that demand despite 
monumental challenges. A lack of interoperability across the 700 MHz 
spectrum may lead to spectrum lying fallow or islands of rural service 
with devices that cannot be used outside of a customer's home service 
area. A lack of fair and reasonable data roaming agreements with large 
carriers compounds the problem, creating barriers even when spectrum is 
interoperable. Furthermore, rural carriers often lack access to the 
equipment and handsets that are available to larger carriers.
    The anti-competitive actions and advocacy efforts of larger 
carriers are pushing smaller players out of the wireless market, to the 
detriment of rural consumers whose only option for wireless service is 
often the local community-based telecommunications provider.
Conclusion
    Small rural carriers like Ritter have been at the forefront of 
technological evolution and deployment of advanced services, driven by 
a commitment to the communities in which they live and operate and 
supported by cost recovery mechanisms that, while in need of updating, 
enabled them to invest in high-quality networks in some of the most 
challenging corners of the United States. Small rural carriers also 
represent the lifeblood of economic development in their communities, 
providing well-paying jobs and critical connections to distant markets.
    Universal service is a national policy codified in Federal law. But 
it is much more than that--it is also a sensible reflection of the 
notion that our networks are made more valuable by the number of 
connections to them, and the data show real and meaningful payback to 
regional economies and the national economy through rural broadband 
investment. Universal service is therefore too important to be the 
subject of experiment or theory. We also cannot look at universal 
service merely as a question of ``how many customers are connected 
right now?'' Universal service cannot be viewed as a snapshot 
``scoreboard'' of the number of customer connections in place at any 
given time. Instead, universal service will only succeed, and the 
universal service dollars put into network investments will only be 
effective and efficient and provide a return to the country as a whole, 
if the connections are sustainable--that is, if the networks that are 
built through universal service dollars are ``future-proof'' in terms 
of capacity and if the services that are available on those networks 
remain high-quality and affordable.
    Small rural carriers remain committed to their communities and the 
consumers they serve in the face of changing technologies and shifting 
consumer preferences. But we can only carry out the mission of customer 
service in today's and tomorrow's communications markets if network 
operators have reasonable visibility into the ability to recover 
investments over time and if we can provide consumers in the hardest-
to-serve parts of the country with the affordable, reliable cutting-
edge telephone, broadband, video, and wireless services that they 
demand and deserve. The future of rural communications could be in 
question if small rural carriers cannot reasonably plan for the next 
round of network builds, or if calls do not complete to rural areas, or 
if consumers cannot gain access to affordable video or wireless 
services. We hope that Congress and the FCC will help make the promise 
of rural communications a reality through effective and sensible 
oversight that protects consumers, promotes competition, and ensures 
universal service.

    Senator Pryor. Thank you.
    Mr. Davis.

  STATEMENT OF STEVE DAVIS, EXECUTIVE VICE PRESIDENT, PUBLIC 
          POLICY AND GOVERNMENT RELATIONS, CenturyLink

    Mr. Davis. Good morning, Mr. Chairman and members of the 
Committee. We appreciate your leadership in calling today's 
meeting on the state of rural communications.
    In our view, the central issue in rural communications is 
the availability of broadband access and the challenge of 
bringing it to markets with low population densities in often 
very challenging terrain.
    CenturyLink serves thousands of rural communities, often 
with household densities below 15 people per square mile, many 
of which do not have access to any other provider of voice 
service or terrestrial broadband. By comparison, the population 
of the greater Washington, D.C., metropolitan area is about 
13,000 people per square mile.
    Over the past 5 years, CenturyLink has invested more than 
$4 billion to bring broadband access to every corner of our 
service territory where it is economically feasible to do so. 
And, despite the rural nature of our markets, we are making 
high-speed Internet service available to more than 91 percent 
of the homes and businesses within our local service area.
    America is a vast country, and there are many diverse 
places in almost every state where the cost of investment is 
too great and broadband availability simply won't be feasible 
under today's system. According to the FCC, nearly 18 million 
consumers in rural areas still lack access to broadband and, as 
such, aren't yet at the table in today's digital economy. These 
rural customers want high-speed fiber-fed broadband networks 
that are capable of delivering access to new educational 
opportunities, cloud computing services, healthcare 
applications, IP television, and streaming video. CenturyLink 
and other large rural providers have the opportunity to reach 
nearly 80 percent of those who do not have broadband today. 
Fiber-fed broadband brings the capacity that will be needed to 
meet the service demands of both wireline and wireless 
customers for the foreseeable future.
    In the last several years, Federal policies have sought to 
address these challenges in a number of ways. As a result of 
market realities and the reform process, we now believe there 
is broad consensus for the following four guiding principles:
    First, we must target support on a granular level to places 
where market forces would not otherwise make broadband 
available.
    Second, we must ensure that support goes only to those 
uneconomic places and where there is not an unsubsidized 
competitor providing adequate service.
    Third, we must ensure that support and services are 
reasonably equivalent to those available in urban markets, in 
features, quality, price.
    And, finally, we must match support and obligations to 
serve. Obligations cannot exceed the available support, and 
they should be limited to the supported areas.
    In the near term, the challenge is to keep reaching 
unserved households and bring more consumers and communities 
into the broadband economy. A critical feature of the FCC's 
broadband deployment plan is the interim support component of 
the Connect America Fund, frequently referred to as CAF-1--C-A-
F-1. This fund is intended to jumpstart the unserved deployment 
process by allocating approximately $300 million in 2012 and 
2013 to the deployment of broadband services in high-cost, 
unserved areas. These funds have already been collected from 
customers, as directed by the FCC.
    Unfortunately, only a small fraction of the dollars 
targeted for unserved markets have been put to use. The states 
and local markets that will benefit from this funding are eager 
to see the release and use of these CAF-1 funds to build 
broadband networks and take part in the services that will be 
provided. With spring's arrival, the time for providers to 
build new networks is now.
    Unsurprisingly, support for moving forward with this 
approach has been bipartisan and widespread across both urban 
and rural affiliations. Nearly 100 Members of Congress, 
including members of this committee, have contacted the FCC 
within the last 90 days about completing its work on CAF-1 
incremental support. The good news is that it appears the FCC 
is listening and is ready to move forward on this important 
initiative. CenturyLink will continue to work with the FCC and 
the industry to achieve good broadband outcomes for unserved 
areas.
    Too often, conversations in rural America take place among 
neighbors, family, and friends about helpful technologies and 
advances that they have witnessed in other parts of the 
country. Sadly, they are accustomed to waiting many years for 
these advances to be available in their part of the country. 
The challenge of bringing robust broadband services to rural 
America is not an easy one, as members of this committee can 
attest, but it's an important one, and we look forward to 
working with the FCC and the Congress, in 2013 and beyond, to 
continue improving the state of rural communications.
    Thank you.
    [The prepared statement of Mr. Davis follows:]

  Prepared Statement of Steve Davis, Executive Vice President, Public 
              Policy and Government Relations, CenturyLink
    Good morning, Mr. Chairman and Members of the Committee. My name is 
Steve Davis, and I am Executive Vice President for Public Policy and 
Government Relations for CenturyLink. CenturyLink offers communications 
services to over 14 million homes and businesses in all 50 states and 
select international markets. Our services include voice, broadband, 
video entertainment and data, as well as fiber backhaul, cloud 
computing and managed security solutions.
    We appreciate your leadership in calling today's hearing on ``The 
State of Rural Communications.'' In our view, the central issue in 
rural communications is the availability of broadband access and the 
challenge of bringing it to markets with low population densities and 
often challenging terrain. In the 21st Century economy, being connected 
has become an integral part of nearly everything we do, in work, 
education, medicine, agriculture and numerous other pursuits. And for 
rural communities seeking economic development, a robust broadband 
infrastructure is often a prerequisite before any business, large or 
small, will consider moving to that area.
    CenturyLink's local service territory encompasses 37 states, with a 
handful of major urban areas, numerous smaller cities and towns, vast 
plains of rural agricultural communities, national parks and forests, 
tribal lands, mountainous and desert regions, and areas with a great 
number of lakes. In other words, our service footprint is 
representative of the various markets in your respective states. 
CenturyLink serves thousands of rural communities, often with household 
densities below 15 people per square mile, many of which do not have 
access to any other provider of voice or terrestrial broadband. By 
comparison, the population of the greater Washington, D.C. metropolitan 
area is about 13,000 people per square mile.
    Over the past five years, under the current system of Universal 
Service and intercarrier compensation, CenturyLink has invested more 
than $4 billion of its own capital to bring broadband access to every 
corner of our service territory where it is economically feasible. And 
despite the rural nature of our markets, we are making high speed 
Internet service available to more than 91 percent of the homes and 
businesses in our local service areas. This includes many places where 
CenturyLink is the only terrestrial broadband provider and where, 
without such support, the investment would not be sustainable.
    America is a vast country, however, and there are many far-flung 
places, away from town centers and spread over challenging terrain, 
where the cost of investment is too great and terrestrial broadband 
availability simply won't be feasible under today's system. According 
to the Federal Communications Commission (FCC), nearly 18 million 
consumers in rural areas still do not have access to broadband and, as 
such, aren't even at the table in today's digital economy. This is a 
scope and scale problem that can be largely addressed through targeted 
investments to areas where the greatest opportunities lie to reach 
hundreds of thousands of Americans as quickly as possible. CenturyLink 
and other large rural providers have the opportunity to reach nearly 80 
percent of those who do not have broadband today. In addition, the 
fiber-fed broadband we deploy is important to the provision of both 
fixed and mobile broadband services. Wireless broadband is generally 
provided today with fiber connections to the towers that communicate 
with handsets.
    In the last several years, Federal policies have sought to address 
these challenges in a number of ways, through the FCC's National 
Broadband Plan, various policies to eliminate barriers to deployment, 
and the USF/ICC Transformation Order. Broadband availability has 
definitely increased, but more must be done. As the FCC and rural 
providers of every stripe have worked together, several guiding 
principles that have emerged over time:

   We must target support on a granular basis, to places where 
        market forces would not otherwise make it available.

   We must ensure that support goes only to those uneconomic 
        places and where there is not an unsubsidized competitor 
        providing adequate service.

   We must ensure that supported services are reasonably 
        equivalent to those available in urban markets, in features, 
        quality and price.

   We must match support and obligations to serve--obligations 
        cannot exceed the available support and they should be limited 
        to the supported areas.

    In the near term, the challenge is to keep reaching unserved 
households and bring more consumers and communities into the broadband 
economy. A critical feature of the FCC's broadband deployment plan is 
the interim support component of the Connect America Fund (frequently 
referred to as CAF I). This fund is intended to jumpstart the unserved 
deployment process by allocating approximately $300 million annually to 
the deployment of broadband services in high cost, unserved areas. 
These funds have already been collected from customers, as directed by 
the FCC.
    Unfortunately, only a small portion of these CAF I funds have been 
allocated for use. Specifically, only $115 million of the $600 million 
targeted for unserved markets has been accepted for deployment in the 
field. The states and local markets that will benefit from this funding 
are eager to see the release and use of these CAF I funds to build 
broadband networks and take part in the services that will be provided. 
With spring's arrival, the time for providers to build networks is now. 
Most of us in this room know there are hundreds of thousands of 
consumers who are still unserved, and are eager to be connected.
    Unsurprisingly, support for moving forward with this approach has 
been bipartisan and widespread across both urban and rural 
affiliations. Nearly 100 members of Congress, including members of this 
Committee, have contacted the FCC within the last 90 days about 
completing its work on CAF I incremental support. Governors, mayors, 
business owners and consumers from across the country have also weighed 
in with their letters and words of support. Timely FCC action could 
significantly narrow the rural digital divide, and faster broadband 
speeds and greater availability of broadband services will give rural 
consumers access to new educational opportunities, cloud computing 
services, healthcare applications, IP television, streaming video and 
faster wireless speeds. These are just some of the important components 
you must consider in determining the true ``State of Rural 
Communications.''
    The good news is that it appears the FCC is ready to move forward 
on this important initiative. We believe and hope that the FCC is 
prepared to adopt an order which would lay the groundwork for use of 
these CAF I dollars sooner rather than later. For the hundreds of 
thousands of households and businesses that have little hope of 
receiving high speed Internet services today, a speedy decision by the 
FCC would be a welcome and meaningful action from Washington that would 
improve both lives and economies in these markets for years to come.
    You should also be aware of the accountability aspects of the CAF I 
funding process. The ability of CenturyLink and other large rural 
providers to invest millions of dollars of their own capital 
demonstrates both a willingness and a firm commitment to help our 
country close its broadband gaps and accelerate the deployment of these 
high speed networks in areas where it would not otherwise be 
economically efficient to do so and others will not serve.
    Because this hearing focuses on the State of Rural Communications 
in America, we must also talk about the country's long-term broadband 
deployment goals and challenges. The FCC is also working on Phase II of 
Connect America Fund (CAF II) support for high-cost areas served by 
large rural carriers where there are no unsubsidized competitors and 
where broadband will not exist without support.
    We are hopeful this program will move forward successfully, with 
most of the funding being accepted and put to work supporting expanded 
broadband availability in high-cost rural areas where remaining gaps 
still exist. For this to happen, the cost model must provide adequate 
support, while also avoiding overpayment. In this regard, CenturyLink 
supports a forward-looking, or ``greenfield'' approach, which is the 
approach the FCC has consistently adopted for cost modeling extending 
back at least to passage of the 1996 Act.
    We must also acknowledge America's rural broadband challenges are 
greater than any one provider or group of companies. At CenturyLink, we 
recognize the challenges faced by our smaller industry contemporaries, 
particularly those operating under rate-of-return regulation in high 
cost areas. The different forms of regulation have created different 
incentives and obligations for many years, and this disparate treatment 
has only increased with recent reforms. However, consumers who do not 
have broadband service today do not care about obscure regulatory 
regimes that may delay deployment in their areas. We believe the FCC 
should work with rate-of-return carriers to address their concerns and 
can do so in a way that does not slow the benefits of reform for the 80 
percent of rural customers served by CenturyLink and other large rural 
carriers. Small carriers and large carriers receive support from 
separate USF mechanisms. Moving forward on one does not hurt the other. 
The ``greater good'' is bringing as many people online as quickly as 
possible and remaining focused on helping the rest as quickly as 
possible.
    Too often, conversations in rural America take place among 
neighbors, family and friends about helpful technologies and advances 
that they have witnessed in other parts of the country. Sadly, they are 
accustomed to waiting many years for these advances to be available in 
their part of the country. The challenge of bringing robust broadband 
services to rural America is not an easy one, as members of this 
committee can attest, but it's an important one, and we look forward to 
working with the FCC and Congress in 2013 and beyond to continue 
improving the state of rural communications.

    Senator Pryor. Thank you.
    Mr. Carlson.

         STATEMENT OF LeRoy T. CARLSON, JR., CHAIRMAN. 
               UNITED STATES CELLULAR CORPORATION

    Mr. Carlson. Yes, thank you. Chairman Pryor, Ranking Member 
Wicker, and--excuse me, we'll get that. Thank you very much. 
Chairman Pryor, Ranking Member Wicker, and members of the 
Subcommittee, good morning, and thank you for this opportunity 
to speak with you today about the challenges confronting those 
companies that want to serve rural America.
    At U.S. Cellular, we focus on having the world's best 
customer service and delivering industry-leading innovations 
across our entire territory. We are expanding our world-class 
4G LTE high-speed broadband network and will cover 87 percent 
of our customers with this network by the end of this year.
    So, as a company that serves West Virginia, Missouri, 
Washington, Nebraska, New Hampshire, Indiana, Wisconsin, 
Minnesota, Virginia, and many other states, I can affirm our 
commitment to excellent service. I'm also proud of the fact 
that U.S. Cellular has served these rural areas and been 
recognized with awards for offering the, ``highest network 
quality performance among wireless cell phone users,'' as well 
as being identified as the, ``best place to buy a cell phone.'' 
In short, what this means is that rural customers can be 
provided with the best elements of a 21st century network, and 
that being rural doesn't have to equate to being left behind.
    Providing those services in less densely populated areas 
does present a different set of business and regulatory 
challenges. We believe there are several core principles, in 
addition to the ones that have been mentioned here, that should 
guide your efforts to improve rural communications in this 
country.
    First, the government must ensure that sufficient spectrum 
is made available to a broad range of wireless carriers, 
including midsized and smaller carriers operating in rural 
America. Spectrum is the raw material of the wireless industry. 
Without sufficient spectrum, calls won't be completed, and 
consumers' demand for high-speed mobile broadband will go 
unmet.
    In regard to the upcoming incentive auctions, the FCC must 
adopt small geographic area sizes that will allow carriers, 
such as U.S. Cellular, to compete for spectrum in the areas 
that they serve, without being required to bid against national 
carriers for giant cities. For the same reason, package bidding 
needs to be rejected by the FCC. National carriers shouldn't be 
allowed to foreclose midsize and smaller carriers from access 
to spectrum in rural markets by tying those markets to more 
expensive licenses for big urban markets.
    Second, FCC rules must provide for interoperability across 
spectrum bands to ensure consumer needs, such as roaming and 
device portability, are met. A huge problem exists today in the 
700 megahertz band, which was auctioned several years ago. 
Decisions by national carriers to deploy handsets that used 
customized designer bands, subset bands, has led to handsets 
that only work on one or two carriers' networks, which 
suppresses intercarrier roaming opportunities for 4G service 
and effectively assures that customers are locked into a large 
carrier's network.
    Today's increasingly concentrated wireless industry does 
pose a threat to competition. The FCC must fix this problem in 
the 700 megahertz band and restore interoperability by adopting 
proposals to solve this problem. And the FCC should act before 
the 600 megahertz auction repeats this problem, because the 600 
megahertz band also is very essential to providing service in 
rural areas.
    Third, we must acknowledge that consumers desire both 
wireless and wireline services, and the distribution of support 
under the Federal Universal Service Program needs to 
appropriately balance those interests. We did not agree with 
all of the decisions the FCC made, and we're actively asking 
the Commission to fine-tune the mobility fund programs, going 
forward. Consumer demand for mobile broadband continues to 
skyrocket at a time when deployment to the most rural areas of 
the country remains uneconomic and, thus, still incomplete. 
Unfortunately, the FCC's Mobility Fund fails to allocate 
sufficient resources to wireless. Less than 10 percent of the 
overall funding is going to wireless.
    In conclusion, the challenges that we face in rural America 
are not insurmountable. The issue is how to ensure that the 
regulatory regime is sensitive to the business challenges of 
serving rural markets for equipment that could serve 250,000 
people in an urban market has to see its costs spread over 
maybe 5,000 or 10,000 people in a rural area. Government 
support is necessary, in some instances, where the economics 
will never work for the private sector to invest alone.
    Your urgent attention to these three major issues is kindly 
requested by our company and by other companies that are like 
us that intend to serve rural America to the best of our 
abilities.
    Thank you for the opportunity to testify.
    [The prepared statement of Mr. Carlson follows:]

        Prepared Statement of LeRoy T. Carlson, Jr., Chairman, 
                   United States Cellular Corporation
    Chairman Pryor, Ranking Member Wicker and members of the 
Subcommittee, I am Ted Carlson, Chairman of United States Cellular 
Corporation. Thank you for the opportunity to speak with you today. I 
am pleased to provide you with my observations on the state of rural 
communications and the challenges we face in serving the people of 
rural America.
Introduction
    At U.S. Cellular, we deliver a world class customer experience and 
industry-leading innovations across our entire territory, not just in 
densely populated urban markets. We are expanding our state of the art 
4G LTE network and will cover 87 percent of our customers by the end of 
this year. As the Chairman of a company that serves West Virginia, 
Missouri, Washington, Nebraska, New Hampshire, Indiana, Wisconsin, 
Minnesota, Virginia, and many other states, I can affirm that our 
commitment to a superior network and excellent customer service not 
only rivals, but beats, what is provided to consumers in urban areas. 
We are proud of the fact that, despite challenges of serving rural 
markets, U.S. Cellular has been recognized with awards for offering the 
``Highest Network Quality Performance Among Wireless Cell Phone Users'' 
as well as being identified by various sources as the ``Best Place to 
Buy a Cell Phone'' and the ``Number One Large Company to Work For.'' We 
have proven that rural consumers don't have to settle for second best 
and that being ``rural'' doesn't equate to being left behind.
    But providing those services in less densely populated areas does 
present a different set of business and regulatory challenges that 
urban providers don't encounter. That is why we appreciate the 
Committee's willingness to take the time today to examine those 
differences and, we hope, consider effective solutions to them.
    For nearly thirty years, U.S. Cellular has been a leader in 
providing high-quality mobile wireless telecommunications and 
information services in rural America. Today, we operate in over 150 
FCC-licensed markets throughout the nation, serving over 5 million 
customers, employing approximately 8000 associates, deploying the 
latest 4G mobile broadband technology and providing our customers with 
excellent service.
    Providing an outstanding customer experience is an integral part of 
our success and should reassure you that ``rural'' can also mean 
``excellence'' when it comes to communications services. We have won 
the J.D. Power Award for Highest Network Quality in the North Central 
Region of the United States for fifteen consecutive periods over eight 
years. We scored first in Forrester's 2013 Customer Experience Index 
for wireless providers, surpassing the ``big four'' wireless carriers 
by a wide margin.\1\ For the last three years, Consumer Reports has 
named U.S. Cellular the top service provider amongst post paid wireless 
carriers.\2\
---------------------------------------------------------------------------
    \1\ See Forrester Research, http://www.forrester.com/home 
(registration required); See also, ``Ninetendo, Fios, U.S. Cellular Top 
Forrester's Consumer Rankings,'' http://news.cnet.com/8301-1023_3-
57565208-93/nintendo-fios-us-cellular-top-forresters-consumer-
rankings/.
    \2\ www.consumerreports.org/cro/phoneplans0113.htm
---------------------------------------------------------------------------
    Despite our consistently high performance, the wireless industry 
remains very challenging, especially for mid-sized and smaller carriers 
like us who tend to focus on rural areas. Let me provide some 
observations on what we're seeing in the marketplace, the challenges we 
face as rural wireless providers, and some solutions.
Lower 700 MHz Interoperability
    First, as wireless providers deploy services in new spectrum bands, 
FCC rules must provide for interoperability across those bands in order 
to ensure that consumer needs such as roaming and device portability 
are met. A huge problem exists today in the 700 MHz Band. Decisions by 
national carriers to deploy handsets using customized designer band 
classes, have fractured the handset ecosystem, suppressed inter-carrier 
roaming opportunities for 4G service and locked customers into large 
carrier networks. Interoperability in the wireless industry is a pro-
competitive concept that was first adopted by the Reagan-era FCC which 
recognized the potential for the then-dominant wireline companies to 
exclude non-affiliated cellular providers from the emerging wireless 
equipment ecosystem. The FCC must return to these principles, fix the 
problem in 700 MHz, and once again restore interoperability and, thus, 
competition and broader consumer choice, by adopting the proposals made 
by our Company, The Competitive Carriers Association (``CCA''), and the 
Interoperability Alliance. The FCC must also act to avoid a repeat of 
this problem as it considers the rules for 600 MHz incentive auctions. 
Failure to do so would undermine the competitive marketplace and have a 
significant adverse impact on auction revenues in the incentive 
auctions. Wireless interoperability was established by the Reagan era 
FCC at the start of the industry in order to foster a level playing 
field and to drive the development of roaming and a robust device 
ecosystem.
    Fast forwarding to today, we face a world where a lack of device 
interoperability across the Lower 700 MHz band has largely prevented 
Lower 700 MHz A Block licensees from gaining access to consumer devices 
capable of operating on their spectrum. In turn, this lack of available 
devices has significantly hindered network deployments by these 
licensees. Notably, because ``a significant number of Lower A Block 
licenses are held by smaller, rural, and regional licensees,'' \3\these 
deployment difficulties have had a disproportionate negative effect on 
consumers in rural and unserved areas.
---------------------------------------------------------------------------
    \3\ Promoting Interoperability in the 700 MHz Commercial Spectrum, 
Notice of Proposed Rulemaking, 27 FCC Rcd 3521, 3532 (2012) 
(``Interoperability NPRM'').
---------------------------------------------------------------------------
    This lack of interoperability arose because the 3rd Generation 
Partnership Project (``3GPP'') developed two separate, duplicative, and 
incompatible band classes for Long-Term Evolution (``LTE'') wireless 
broadband operations in the Lower 700 MHz band. Specifically, Band 12 
covers operations in the Lower A, B, and C Blocks, whereas Band 17 only 
covers operations in the Lower B and C Blocks. AT&T, the only national 
carrier providing service in the Lower 700 MHz band, operates in the 
Lower 700 MHz using only Band 17 equipment, which cannot be used by 
Lower A Block licensees. Because AT&T is the only licensee operating in 
Lower 700 MHz band which is large enough to be capable of driving the 
device ecosystem, the Lower A Block licensees have found themselves 
with essentially no LTE mobile devices to sell to their existing and 
prospective subscribers. The lone exception is U.S. Cellular, which, 
through great effort, managed to secure a small portfolio of LTE 
devices capable of operating on band 12 and thus utilizing the Lower A 
Block spectrum. The 2012 launch of LTE service by U.S. Cellular in 
conjunction with its partner, King Street Wireless, remains the only 
Band 12 network launch since Lower 700 MHz licenses were auctioned in 
2008. However, U.S. Cellular is the exception, and even it remains 
constrained in its ability to gain access to a wide variety of LTE-
capable devices. Notably, because of the ongoing lack of 
interoperability between Band 12 and Band 17 in the Lower 700 MHz band, 
a number of Lower A Block licensees were compelled to request an 
extension of their interim construction benchmark deadlines, which the 
FCC recently granted.\4\
---------------------------------------------------------------------------
    \4\ See Wireless Telecommunications Bureau Extends 700 MHz A Block 
Licensee Interim Construction Benchmark Deadline Until December 13, 
2013, Public Notice, DA 13-210 (rel. Feb. 13, 2013).
---------------------------------------------------------------------------
    The industry has been actively seeking intervention by the FCC 
since 2009. Back in September of that year, after discovering that AT&T 
had begun to issue Requests for Proposals that specified Band 17-only 
equipment, an alliance of Lower 700 MHz A Block licensees (the ``Good 
Faith Alliance'') filed a petition for rulemaking asking the FCC to 
adopt an interoperability requirement for the Lower 700 MHz band.\5\ In 
doing so, the Good Faith Alliance warned the FCC that various public 
interest harms would arise if it failed to prohibit AT&T from deploying 
Band 17-only devices. The FCC sought comment on this petition in 
2010.\6\ Commenters in support of the petition included small and 
regional 700 MHz licensees, a coalition including Sprint Nextel and T-
Mobile, trade associations representing rural and smaller providers, a 
coalition of public interest groups, and public safety associations. 
Nevertheless, the FCC took no further action regarding the lack of 
interoperability in the Lower 700 MHz band until March 2012, when it 
released a Notice of Proposed Rulemaking seeking additional comment on 
the issue.\7\ Once again, the vast majority of commenters, representing 
various carriers and organizations, urged the FCC to adopt an 
interoperability requirement. Unfortunately, although it has been more 
than three and a half years since the Good Faith Alliance filed its 
petition, the FCC still has not adopted an order in that proceeding. 
And this is despite the fact that the FCC has acknowledged that ``a 
unified band class across the Lower 700 MHz band has the potential to 
yield significant benefits for all licensees.'' \8\
---------------------------------------------------------------------------
    \5\ See Petition for Rulemaking Regarding the Need for 700 MHz 
Mobile Equipment to be Capable of Operation on All Paired Commercial 
700 MHz Frequency Blocks, 700 MHz Block A Good Faith Purchasers 
Alliance, RM-11592 (filed Sept. 29, 2009).
    \6\ See Wireless Telecommunications Bureau Seeks Comment on 
Petition for Rulemaking Regarding 700 MHz Band Mobile Equipment Design 
and Procurement Practices, Public Notice, 25 FCC Rcd 1464 (2010).
    \7\ See Interoperability NPRM, 27 FCC Rcd 3521 (2012).
    \8\ See id.at 3522.
---------------------------------------------------------------------------
    Interoperability across the Lower 700 MHz band would greatly 
benefit the public. For instance, as noted, the current and ongoing 
lack of interoperability has severely impeded the competitive roll-out 
of LTE broadband coverage by Lower A Block licensees because the lack 
of interoperability undermines the business case for smaller carriers 
to deploy networks. In turn, the lack of interoperability has impeded 
access to broadband services in the many parts of the U.S. not served 
by AT&T. In other words, consumers across the country are being 
deprived of the substantial benefits of broadband access due to the 
lack of interoperability in the Lower 700 MHz bands.
    More broadly, the difficulties faced by Lower A Block licensees 
decrease competition in the wireless marketplace to the detriment of 
consumers. This is because significant opportunities for small and 
regional carriers--who otherwise would be in a position to provide 
robust competition to the dominant national carriers--have been lost 
due to the artificial barriers created by their inability to obtain 
devices capable of operating on their spectrum holdings. The importance 
of continuing to advance robust competition is especially crucial at 
this time given that the wireless industry is in its most precarious 
competitive state in over a decade. For instance, in its most recent 
Competition Report issued in March, the FCC, for the third straight 
year, was unable to find the existence of ``effective competition'' in 
the wireless industry.\9\ In fact, the weighted average of the FCC's 
Herfindahl-Hirschman Index (``HHI'') calculations increased to 2873 
since the FCC's previous report.\10\ Notably, an HHI exceeding 2500 
indicates that a market is ``highly concentrated.'' \11\ The FCC also 
noted that, from 2003 to year-end 2011, the average HHI has increased 
from 2151 to 2873, which represents a 33.6 percent increase in market 
concentration over this time.\12\If Lower A Block licensees are 
provided a level playing field, they could help to correct this 
competitive imbalance. Unfortunately, at this time, the potential for 
Lower 700 MHz A Block deployments to spur increased competition has not 
come to fruition because additional competitive carrier LTE deployments 
have been delayed and/or limited by the continued fragmentation of the 
Lower 700 MHz spectrum band.
---------------------------------------------------------------------------
    \9\ See Implementation of Section 6002(b) of the Omnibus Budget 
Reconciliation Act of 1993; Annual Report and Analysis of Competitive 
Market Conditions With Respect to Mobile Wireless, Including Commercial 
Mobile Services, Sixteenth Report, WT Docket No. 11-186, FCC 13-34,  2 
(rel. Mar. 21, 2013) (``Sixteenth Competition Report'').
    \10\ See id.  59.
    \11\ See id.at  54.
    \12\ See id.at  59.
---------------------------------------------------------------------------
    Moreover, absent interoperability, Lower A Block licensees likely 
will never be capable of providing effective competition because they 
will not be able to provide the quantity and quality of devices 
necessary to attract a substantial customer base. As the Commission 
recognized in the Sixteenth Competition Report, mobile handsets and 
devices ``directly affect the quality of a consumer's mobile wireless 
experience and can factor into a consumer's choice of a wireless 
provider.'' \13\ As such, a carrier's ``portfolio of handsets and 
devices may be a significant non-price factor affecting its ability to 
compete for customers.'' \14\
---------------------------------------------------------------------------
    \13\ Id. at 83.
    \14\ Id.
---------------------------------------------------------------------------
    To date, Lower A Block licensees have found themselves with 
essentially no LTE mobile devices to sell to their existing and 
prospective customers, which is not surprising considering that vendors 
seek first to serve the demands of their largest possible customers, 
where volume (and profitability) is greatest. Smaller carriers simply 
cannot drive handset development. Moreover, even if smaller carriers 
manage to gain access to some devices, those devices will cost more 
because these carriers lack the economies of scale necessary to reduce 
costs. These higher device costs for Lower A Block licensees must 
either be passed on to the consumer (in the form of higher retail 
prices, which most consumers will not pay if given the choice of 
service providers), or absorbed by the Lower A Block licensee if it 
chooses to instead price LTE devices comparably to similar devices 
offered by the national operators. The consequences of this latter 
approach, however, would be unsustainable. Because device subsidies 
result in slim--or in some cases nonexistent or negative--profit 
margins, Lower A Block licensees may become unprofitable and could 
eventually be forced out of business, which results in even less 
marketplace competition.
    In addition to increasing their negotiating leverage and economies 
of scale, volume purchases afford the larger carriers with considerable 
market power vis-a-vis handset manufacturers, which can be used to 
demand particular customer features, compel prioritization of 
proprietary specifications, and achieve exclusive or extended first-to-
market positions. As a result, even if additional Band 12 devices 
become available, they likely will be delayed for months or years after 
the introduction and refinement of multiple Band 13 \15\ and Band 17 
devices. Lower A Block licensees therefore will not have available to 
them all of the ``cutting edge'' phones, further entrenching the 
largest carriers' dominant market positions. In sum, Lower A Block 
licensees, like all carriers, require a sufficient quantity and variety 
of handsets to meet consumer demand.\16\ However, the lack of 
interoperability has produced a device ecosystem in which widely 
available, economically reasonable handsets cannot function on the 
Lower A Block spectrum. The resulting higher device costs and the 
associated lack of a device ecosystem for Band 12 devices slows 
deployment by Lower A Block licensees and puts these carriers at an 
even greater competitive disadvantage.\17\
---------------------------------------------------------------------------
    \15\ Band 13 supports the Upper 700 MHz C Block, the vast majority 
of which is licensed to Verizon Wireless.
    \16\ See id. at  220 (``In addition to competing on price and 
network quality, mobile wireless providers continue to compete by 
offering consumers a variety of different mobile wireless devices with 
innovative features.'').
    \17\ See id. at  184 (``When competing mobile wireless service 
providers deploy compatible network technologies, greater economies of 
scale in the production of both end-user devices and network 
infrastructure equipment can result, lowering the unit cost of 
handsets, chipsets, and other network equipment. This, in turn, may 
promote more rapid adoption of mobile wireless services, a greater 
variety of handsets, and more price competition.'').
---------------------------------------------------------------------------
    Moreover, even if most Lower A Block licensees managed to obtain a 
sufficient quantity and quality of handsets and could find a way to 
cost-justify deploying their networks, they would find themselves at a 
serious competitive disadvantage because large carriers already will 
have established a substantial customer base that, absent 
interoperability, will not be able to take their phones and switch to 
competitors, no matter how much better or less expensive the competing 
service may be. Thus, in addition to conflicting with consumers' 
expectations, the inability of a subscriber to seamlessly switch to 
another carrier further exacerbates the ``head-start advantage'' large 
carriers already enjoy because consumers will be less willing or likely 
to seek service from Lower A Block licensees for a considerable period 
of time. As a result, unless the FCC promptly adopts an 
interoperability requirement, the harms to both Lower A Block licensees 
and, more importantly, the consumers they serve, will be baked into the 
competitive landscape and will continue indefinitely.
    The current, and potentially future, dearth of rural LTE networks 
will be problematic not only for potential customers and for commercial 
licensees in rural markets, but also for public safety users who may 
desire to roam on commercial systems in those areas. This is 
significant because FirstNet, the First Responder Network, is required 
to enter into roaming agreements with commercial providers to ensure 
nationwide coverage, and the nature of any interoperability requirement 
for commercial users will have a profound impact on the ability of 
FirstNet and the FCC to meet these roaming obligations. Moreover, 
because Lower A Block licensees include many rural carriers, the areas 
they serve are exactly the places where public safety may most need to 
roam onto commercial networks. A lack of interoperability therefore 
could impede first responders' ability to respond to emergencies.
    Likewise, absent an interoperability requirement, roaming options 
for Lower A Block licensees will remain severely limited because they 
still would be prevented from roaming on AT&T's network. And, because 
AT&T is the only carrier that can be expected to operate a nationwide 
LTE network using Lower 700 MHz spectrum, the result will be that Lower 
A Block licensees will have no potential nationwide roaming partner. In 
other words, the existence of Band 17 has the effect of denying any 
carrier using Band 12 access to nationwide roaming on the Lower 700 MHz 
spectrum.\18\ As the FCC recently acknowledged, ``roaming remains 
particularly important for small and regional providers with limited 
network population coverage to remain competitive by meeting their 
customers' needs for nationwide service.'' \19\Thus, the absence of 
nationwide roaming likely will cause many consumers to avoid regional A 
Block licensees in favor of the national networks of AT&T or Verizon.
---------------------------------------------------------------------------
    \18\ See id.at  208 (``Many of these non-nationwide providers are 
able to offer voice coverage and service plans that are national in 
scope through roaming agreements with other mobile wireless 
providers.'').
    \19\ Id.
---------------------------------------------------------------------------
    Although the FCC would prefer an industry solution to the current 
lack of interoperability in the Lower 700 MHz band,\20\ no industry 
solution has been forthcoming since this issue was identified over 
three and a half years ago. And there is no reason to believe that the 
industry will change its course absent a regulatory requirement. In a 
highly concentrated market, large carriers gain little, and could 
potentially lose much, by voluntarily agreeing to interoperability. 
Large carriers derive little or no benefit from affording their 
customers the ability to roam on rival networks because these carriers 
own geographically extensive networks, making the potential incremental 
coverage available to them (and to their customers) via roaming quite 
small. Moreover, interoperability would enhance the competitiveness of 
rival carriers by affording them the ability to offer their customers a 
variety of cutting edge devices and comparable geographic coverage.
---------------------------------------------------------------------------
    \20\ SeeInteroperability NPRM, 27 FCC Rcd at 3543.
---------------------------------------------------------------------------
    Ensuring that the core principles and rules that support 
interoperability are maintained also would reduce customer switching 
costs, and thus enhance the potential for increased churn by making it 
easier for customers to migrate to rival providers. In sum, the current 
competitive state of the wireless industry, as well as ongoing 
resistance to interoperability in the Lower 700 MHz band by the largest 
carriers, demonstrates that the possibility of a voluntary industry 
solution is highly unlikely. As a consequence, Commission action is 
necessary.
    In terms of a regulatory solution, U.S. Cellular has offered a 
measured and incremental proposal to the FCC in order to restore 
interoperability across the Lower 700 MHz band while minimizing the 
impact on existing network deployments by AT&T. Specifically, the FCC 
should require that, within six months of the FCC's adoption of an 
order in its interoperability proceeding, all Lower 700 MHz licensees 
provide only devices that are capable of operating on all paired Lower 
700 MHz bands. The only hardware design change required by this 
approach is replacing, on newly ordered devices, the Band 17 duplexer 
and RX filter with Band 12 components as well as a simple software 
update that would be required to support both Band 12 and Band 17. 
These new devices deployed going forward would be able to operate on 
Band 12 or Band 17 networks. In other words, network upgrades would not 
be required. Such a regulatory requirement would be consistent with the 
Commission's ``longstanding interest in promoting the interoperability 
of mobile user equipment in a variety of contexts as a means to promote 
the widest possible deployment of mobile services, ensure the most 
efficient use of spectrum, and protect and promote competition.'' \21\
---------------------------------------------------------------------------
    \21\ Id. at 3523, n. 5.
---------------------------------------------------------------------------
    In the early 1980s the FCC wisely perceived the potential risks to 
competition if the wireline incumbents were permitted to build an 
exclusive ecosystem that lacked interoperability with their ``non-
wireline'' competitors. As competition blossomed in the wireless 
industry, the market ensured continued interoperability as, by 
necessity, the industry worked together to foster a vibrant ecosystem. 
As the wireless industry has again reached high levels of 
concentration, preserving the viability of strong, rural-focused 
competitors demands that we restore interoperability.
600 MHz
    In addition to restoring broad interoperability of networks and 
user devices, the government must ensure that the primary ``raw 
material'' of the wireless industry, licensed spectrum, is made 
available to a broad range of wireless carriers, including smaller 
carriers focused on rural America. Without sufficient spectrum, 
consumers' insatiable demand for high speed broadband will go unmet. 
U.S. Cellular wholeheartedly congratulates this Committee for its 
efforts and success in the 2012 Middle Class Tax Relief and Jobs 
Creation Act (``Spectrum Act'') \22\ to identify and free up additional 
commercial spectrum.
---------------------------------------------------------------------------
    \22\ See Pub. L. No 112-96, 125 Stat 156 (2012)
---------------------------------------------------------------------------
    The FCC must auction spectrum using geographic area sizes that 
allow smaller, non-national carriers to compete. There are a number of 
benefits enabled by this. First, smaller geographic areas will increase 
the number of bidders, which has been proven to generate more revenue. 
Second, smaller license areas ensure that rural markets that are won at 
auction will see faster build out than if those areas are the merely 
the most sparsely populated zones within larger regions. A build out 
requirement, applied to each license, will result in the urban areas 
being built long before the more rural areas see any attention.
    For the same reason, package bidding must be rejected by the FCC. 
Smaller carriers whose aspirations are rural should not be handicapped 
in the bidding process simply because they don't have business plans 
that allow them to bid on a large aggregation of licenses.
    A third core principle is that the government should endeavor to 
maximize the amount of spectrum auctioned not only in order to meet 
consumer demand and foster competition, but also to raise revenues and 
provide funding for FirstNet, which is a national priority.
    While these efforts will help address the increasing demand for 
spectrum, we also know that even more spectrum will need to be 
repurposed to keep up with consumer demands. Therefore, further work 
needs to be done to identify additional spectrum, some of which is 
currently used by Federal agencies including the Department of Defense.
    So how should the government approach this situation? We believe 
the 600 MHz incentive auction provides a unique opportunity to address 
our Nation's skyrocketing spectrum demands, and meeting those spectrum 
needs ``is essential to continuing U.S. leadership in technological 
innovation, growing our economy, and maintaining our global 
competitiveness.'' \23\ Led by the efforts of CTIA, CCA, and others, 
many in the wireless industry are devoting significant efforts towards 
making this auction a success. In response to the FCC's Incentive 
Auction NPRM, U.S. Cellular focused on several issues critical to 
ensuring that the substantial public interest benefits made possible by 
the Spectrum Act's grant of incentive auction authority are fully 
realized. For instance, U.S. Cellular urged the FCC to maximize the 
amount of paired spectrum made available in the forward auction for 
wireless broadband services, which will greatly promote the 
availability of wireless broadband services in rural locations. The 
excellent propagation characteristics of the 600 MHz band make this 
spectrum particularly well-suited for the rapid and efficient 
deployment of mobile and other advanced services in high-cost rural 
areas. This is true because sub-1 GHz frequencies travel farther at a 
given power level, which enables a larger area to be served from a 
single cell site. In other words, the superior propagation performance 
of this spectrum means that fewer towers will be needed to serve a 
given area, and thus networks can be deployed at lower cost. 
Accordingly, the 600 MHz band provides a particularly valuable 
opportunity for licensees to provide cost-effective services in rural 
and underserved areas.
---------------------------------------------------------------------------
    \23\ Expanding the Economic and Innovation Opportunities of 
Spectrum Through Incentive Auctions, Notice of Proposed Rulemaking, 27 
FCC Rcd 12357, 12358 (2012) (``Incentive Auction NPRM'').
---------------------------------------------------------------------------
    But identifying, repurposing, and auctioning the spectrum is only 
part of the story. It is also critically important that, the FCC adopt 
interoperability requirements for the 600 MHz band. Otherwise, it would 
risk a situation like that in the Lower 700 MHz band, which has 
stranded investment in spectrum licenses and drastically delayed the 
deployment of advanced services to many rural and underserved areas. As 
detailed in this testimony, an interoperability requirement would 
expand roaming opportunities, enhance economies of scale, promote 
network deployment, and increase competition in the wireless industry, 
which would spur investment and innovation and lower costs for 
consumers. Also as noted, absent an interoperability requirement, the 
financial incentives of the largest carriers, which drive device 
development, would drastically reduce the likelihood of an 
interoperable 600 MHz band. For that reason, interoperability in the 
600 MHz band, and the substantial benefits it would create, will only 
become a reality through an express requirement. Adopting an 
interoperability rule at this stage also is necessary so that potential 
bidders that are not large enough to drive device development will know 
in advance that the 600 MHz band will conform to the FCC's traditional 
model of full interoperability. In other words, if the FCC declines to 
adopt an interoperability requirement, this failure would deter auction 
participation by all but the largest carriers, and thus harm the 
competitiveness of the forward auction.
    Several licensing and auction rules also are critical to ensure 
adequate opportunities for small and regional carriers to purchase 600 
MHz licenses and thereafter deploy rural networks. Providing such 
opportunities to these carriers is critical in light of the current 
state of sub-1 GHz spectrum holdings. Specifically, when measured on a 
licensed MHz-POP basis, Verizon Wireless holds approximately 45 percent 
of the currently licensed sub-1 GHz spectrum, while AT&T holds 
approximately 39 percent.\24\
---------------------------------------------------------------------------
    \24\ See id.at  129.
---------------------------------------------------------------------------
    In this respect, U.S. Cellular urged the FCC to license the 600 MHz 
band on the basis of geographic license areas no larger than Economic 
Areas (``EAs''). Only by offering smaller license areas can the FCC 
preserve opportunities for small and regional carriers, as well as new 
entrants, to provide an important source of competition, variety, and 
diversity in rural and less densely populated areas. Small license 
areas permit entities which are only interested in serving rural areas 
to acquire licenses for these areas alone and avoid acquiring licenses 
covering high population areas that would be prohibitively expensive 
for these carriers.
    Of vital relevance to today's hearing, licensing the 600 MHz band 
using service areas no larger than EAs therefore would be the most 
effective means for the FCC to foster the prompt availability of 
competitive wireless broadband services to rural markets. At the same 
time, all carriers would benefit because small license areas would 
allow more targeted spectrum acquisitions, while not discriminating in 
favor of any single business plan.
    In contrast, nationwide or super regional license areas, which U.S. 
Cellular strongly opposes, would significantly disadvantage small and 
regional carriers, as well as consumers in small and rural markets, to 
the benefit of the already dominant national carriers. The use of these 
large service areas skews auctions in favor of large financially 
stronger bidders, effectively foreclosing smaller bidders from 
participating in an auction. Not only do small carriers lack the need 
for large swaths of territory, they lack the financial resources to 
compete for nationwide or large regional licenses. Unlike the national 
carriers, smaller carriers cannot afford to acquire and ``warehouse'' 
spectrum for future use that does not meet their near-term business 
objectives. Thus, the practical effect of having a band plan that 
includes very large market areas is to place a significant portion of 
the auctioned spectrum in the hands of the few national carriers, which 
historically have not given priority to small and rural markets. As a 
consequence, rural deployment of the innovative and advanced types of 
services made possible by the 600 MHz spectrum would likely be 
significantly delayed, if not precluded entirely, if the FCC licenses 
this spectrum on a nationwide or large regional basis. At the same 
time, larger carriers would not be disadvantaged by the use of smaller 
license areas because they would still have realistic opportunities to 
aggregate licenses individually.\25\ In other words, auctioning small 
license areas benefits all carriers by allowing them to take a building 
block approach and assemble as much coverage area as is needed.
---------------------------------------------------------------------------
    \25\ See Incentive Auction NPRM, 27 FCC Rcd at 12411 (``EAs nest 
within and may be aggregated up to larger license areas . . . for 
operators seeking larger service areas.'').
---------------------------------------------------------------------------
    U.S. Cellular further urged the FCC to ensure that smaller carriers 
are adequately protected if the FCC decides to auction generic licenses 
in the forward auction. For instance, the generic licenses should be as 
similar and technically interchangeable as possible, and the FCC should 
establish only two classes of generic licenses--those for paired 
spectrum blocks and those for supplemental, downlink-only blocks. Not 
only would additional subdivisions further complicate the auction, they 
would make interoperability less likely because the largest carriers 
could dominate a particular subdivision to the exclusion of other 
bidders. In addition, the subsequent license assignment process must be 
entirely random. If the FCC instead incorporates any preferences into 
this process, it would greatly advantage the largest carriers, which 
will be both more likely to have multiple blocks in the same market and 
licenses in adjacent markets. The result could be to force all other 
600 MHz licensees into distinct portions of the 600 MHz band that are 
devoid of the largest carriers and their ability to drive the device 
ecosystem. Even more important, under no circumstances should the FCC 
establish an allocation process that involves additional bids. Such a 
process would leave bidders who have already made financial commitments 
subject to an uncertain further commitment and would increase the 
likelihood of relegating smaller carriers to spectrum assignments which 
lack any of the largest carriers and a device ecosystem.
    Another action necessary to ensure adequate opportunities for small 
and regional carriers is for the FCC to adopt an auction-specific 
spectrum aggregation limit that prohibits any applicant from acquiring 
more than 25 percent of the 600 MHz spectrum made available in a single 
geographic market. Absent such a limit, the FCC would risk another 
Auction 73, which was dominated by the two largest carriers and which 
resulted in a lack of interoperability among Lower 700 MHz band 
handsets and the ``stranding'' of 700 MHz A Block licenses. Such a 
limit also would be consistent with the mandate of Section 309(j)(3)(B) 
of the Communications Act \26\ to ``avoid excessive concentration of 
licenses'' and to disseminate licenses among ``a wide variety of 
applicants.'' \27\The FCC should impose this limit in advance of the 
forward auction, which would deter applicants from acquiring more 
spectrum than they can use and preventing smaller bidders from 
acquiring the spectrum. Allowing post-auction divestitures is not 
really a solution because this would enable the largest carriers to 
choose among the competitors to which to divest their spectrum, which 
could further harm competition. U.S. Cellular does not ask for a ban on 
the ability of the largest carriers to participate, but only a 
reasonable limit on how much spectrum one carrier may acquire. 
Prohibiting the use of combinatorial, or ``package,'' bidding is 
another action necessary to ensure adequate competition during the 
auction by small and regional carriers. Permitting combinatorial 
bidding for any portion of the 600 MHz licenses would harm small, rural 
and regional carriers, as well as prospective new entrants, while 
benefiting only the largest carriers. Combinatorial bidding would add 
unnecessary complexity to what is already likely to be the most 
complicated spectrum auction in the Nation's history. The burden of 
such complexity and the increased risk it creates, would fall 
disproportionately on smaller bidders and could deter their 
participation. The lesson of past auctions is clear. The rules required 
to enable combinatorial bidding create unintended opportunities for 
larger bidders to enhance their bidding power, exploit the rules, and 
ultimately win licenses at lower prices. Even absent the use of 
``strategic bidding'', combinatorial bidding would increase the 
likelihood that large bidders will tie-up multiple licenses in 
nationwide or super-regional package bids, and thereby exclude smaller 
carriers with targeted business plans from acquiring the spectrum 
necessary to serve rural areas. The benefits achieved by offering small 
geographic license areas can be undone by package bidding rules.
---------------------------------------------------------------------------
    \26\ 47 U.S.C. Sec. 309(j)(3)(B).
    \27\ See Incentive Auction NRPM, 27 FCC Rcd at 12484.
---------------------------------------------------------------------------
    Further, unlike a license-by-license aggregation strategy, 
combinatorial bidding could create a situation where the FCC is forced 
to accept a package bid for a group of licenses even though small or 
rural carriers may have placed higher bids, on a per-pop basis, for one 
or more of the licenses included in the package. The result is that 
combinatorial bidding biases auction results in favor of the 
combination bid, disadvantaging all but the largest bidders and likely 
excluding small bidders from any meaningful auction success. These 
adverse consequences of combinatorial bidding raise legal issues as to 
whether the Commission has actually granted licenses to the parties 
that valued them most highly. Moreover, the bias against all but the 
largest bidders potentially has the effect of forcing all other bidders 
to bid more aggressively on the remaining licenses that are not 
included in any package. This distortion would increase the prices of 
these licenses, resulting in an extra burden on smaller bidders that 
may easily deprive them of licenses. At the same time, package bidding 
is unnecessary because adequate spectrum aggregation opportunities are 
available under the FCC's standard auction procedures.
    Similarly, if the FCC is seeking a robust auction that will truly 
allow the spectrum to be sold at its highest value, all participants 
should know the identities of the other bidders, their bid amounts, and 
their eligibility. Particularly for smaller bidders, license valuations 
are based on certain factors that are dependent on the business plans 
of other licensees, who together provide the scale to support an 
interoperable ecosystem of devices, network equipment, and roaming 
arrangements. While a large bidder may be able to ``go it alone'' and 
may in fact be advantaged by an exclusive ecosystem, smaller bidders 
need to know they will have help building that ecosystem. Because these 
opportunities are essential for a smaller carrier's network to be 
economically viable, a lack of such information would create 
substantial risks for these bidders, likely reducing or eliminating 
their participation in the forward auction.
    A transparent auction process is particularly important for small 
and regional carriers for other reasons as well. For instance, the 
process of valuing spectrum is extremely complex and challenging, all 
the more so here because of the uncertainty about what spectrum will be 
available in the forward auction. In this way, smaller bidders face 
additional risks from the use of blind bidding because they lack the 
more sophisticated market intelligence and analytical capabilities of 
the larger bidders. An open auction therefore would help to level the 
playing field, as well as to provide information that is uniquely 
beneficial to smaller bidders. For instance, because smaller bidders 
may have less experience with spectrum auctions and lack the resources 
used by large carriers in making valuation decisions, smaller bidders 
often find it helpful to take note of how larger carriers value 
spectrum. Smaller bidders also may assign a lower value to a market in 
a region dominated by a few larger carriers, compared to a region with 
several other smaller carriers. Because blind bidding prevents these 
carriers from knowing this information, they face greater risks in the 
auction process compared to large bidders, and therefore rationally 
reduce their level of participation and the size of their bids. For 
these reasons, the information disparities created by blind bidding 
will have a disproportionately adverse effect on smaller bidders.
    Further, while blind bidding gives rise to substantial public 
interest harms, its advantages are largely theoretical and marginal, 
making blind bidding unnecessary. There have been no serious 
allegations of collusive bidding in recent auctions and, since the 
early auctions that were affected by collusion, the FCC and the 
Department of Justice have revised their standards and pursued 
enforcement actions. Moreover, publicly disclosing bidding information 
actually assists the FCC with enforcing its anti-collusion rules 
because the FCC is most likely to learn of collusive behavior by being 
alerted to suspicious activity by other auction participants. In 
contrast, when participants are denied bidding information, they are 
less likely to be able to identify and disclose suspicious bidding 
patterns.
Additional Federal and Non-Federal Auction Spectrum
    As the FCC recently noted, it is critical that additional spectrum 
be made available for mobile broadband in order to ``help ensure that 
the speed, capacity, and ubiquity of the Nation's wireless networks 
keeps pace with the skyrocketing demand for mobile service.'' \28\ It 
is for this reason that the Spectrum Act required the FCC and NTIA to 
take a number of actions to make additional wireless broadband spectrum 
available for commercial licensed use. Specifically, the Spectrum Act 
identified the spectrum to be withdrawn from Federal uses so that it 
could be allocated, auctioned, and licensed by the FCC for commercial 
use. It also required the FCC to auction and license additional non-
Federal bands and set a February 2015 deadline by which the auctioning 
and licensing of all such Federal and non-Federal spectrum must be 
completed.
---------------------------------------------------------------------------
    \28\ See Service Rules for the Advanced Wireless Services H Block--
Implementing Section 6401 of the Middle Class Tax Relief and Job 
Creation Act of 2012 Related to the 1915-1920 MHz and 1995-2000 MHz 
Bands, Notice of Proposed Rulemaking, 27 FCC Rcd 16258, 16259 (2012).
---------------------------------------------------------------------------
    The FCC is currently preparing to hold the auctions involving three 
sets of spectrum that must be auctioned and licensed before the 
February 2015 statutory deadline, including: (i)an auction of AWS-2/H 
Block non-Federal spectrum commencing possibly late in 2013; (ii) 1.6 
GHz reallocated Federal spectrum to be paired with unidentified 
spectrum commencing in 2014; and (iii) a proposed auction of 1.7 GHz 
reallocated Federal spectrum to be paired with AWS-3/Upper J Block non-
Federal spectrum to be held in late 2014/early 2015. The following 
table provides additional detail regarding these auctions, which likely 
will be completed prior to the 600 MHz incentive auction, which is not 
subject to the same statutory deadline.

------------------------------------------------------------------------
                      Auction/  Date
      Service            Sequence           Frequency       Bureau /Rule
                        (Estimate)
------------------------------------------------------------------------
Auction of AWS-2/H  4th Qtr. 2013       1915-1920 MHz and  WTB/Part 27
 Block PCS          Subject to           1995-2000 MHz
                     resolution of
                     technical
                     interference
                     issues affecting
                     PCS spectrum
------------------------------------------------------------------------
Auction of 1.6 GHz  2014                1695-1710 MHz,     WTB/Part 27
 paired with 15     NTIA Recommended     and (as
 MHz of spectrum     Federal             determined by
 to be identified    Reallocation of     FCC)
 by FCC              1695-1710 (per
                     Spectrum Act);
                     FCC has not
                     identified 15 MHz
                     for this pairing
                     (2095-2110 MHz is
                     an option)
------------------------------------------------------------------------
Auction of 1.7 GHz  Late 2014/Early     1755-1780 MHz,     WTB/Part 27
 paired with 2.1     2015                2155-2180 MHz
 GHz (Proposed      Contingent on
 Pairing Supported   Federal
 by FCC) \29\        Reallocation
                     which is
                     currently under
                     consideration by
                     NTIA
------------------------------------------------------------------------

    Considering the skyrocketing demand for mobile broadband services 
and the fact that the last FCC auction for commercial mobile spectrum 
took place more than five years ago, deployment of the spectrum to be 
offered in these upcoming FCC auctions is expected to play a critical 
role in ensuring that rural carriers, as well as other wireless 
providers, meet rising consumer demand and continue to provide the 
public with transformative innovations. This spectrum is particularly 
well-suited for mobile broadband as it is adjacent to the widely-
deployed PCS and AWS bands, which are used by carriers of various sizes 
to offer mobile service across the Nation. The fact that this spectrum 
can be auctioned and made available for deployment sooner than the 600 
MHz band also makes this spectrum uniquely valuable to rural and 
regional providers in meeting their near-term needs, considering that 
they have not been able to meet their spectrum needs through auction 
purchases for many years.
---------------------------------------------------------------------------
    \29\ The 1.7 GHz portion of the 1.7-2.1 GHz pairing will only be 
available for auction if it is repurposed from Federal to non-Federal 
uses, which the FCC requested that NTIA consider in a recent FCC letter 
to The Honorable Lawrence E. Strickling dated March 20. 2013.The upper 
half of this pairing particularly AWS-3 is required by statute to be 
auctioned before February of 2015.
---------------------------------------------------------------------------
    For the same reasons discussed above in connection with the 600 MHz 
incentive auction, U.S. Cellular strongly supports the competitive 
participation of rural and regional providers in each of these three 
upcoming spectrum auctions. The spectrum blocks to be offered in these 
auctions should not be so large as to make them unaffordable by the 
smaller rural and regional providers. The H Block already has a 2x5 MHz 
pairing, which is suitable. We recommend that a similar 2x5 MHz channel 
block size be uniformly implemented as the basic spectrum block size to 
be offered in the other two upcoming auctions. U.S. Cellular also 
supports small geographic license areas, such as CMAs, that match the 
service needs of rural and regional providers, and opposes any license 
area size larger than EAs. We also reiterate our opposition to the use 
of package bidding and blind bidding procedures in these auctions.
Universal Service Support is Critical to Improving Service in Rural 
        Areas
    We must acknowledge that consumers desire both wired and wireline 
services and the distribution of support under the Federal Universal 
Service Program needs to appropriately balance those interests in areas 
that are simply uneconomic to serve without effectively managed support 
mechanisms. The FCC's underlying goals to reform the Universal Service 
Program back in 2011 are to be applauded. Although we supported the 
FCC's overall goals, we did not agree with all of the decisions the FCC 
made, and are actively asking the Commission to fine tune the Mobility 
Fund programs going forward. As we have stated before, consumer demand 
for mobile broadband continues to skyrocket. Unfortunately, the FCC's 
Mobility Fund auction failed to allocate sufficient resources to 
wireless (less than 10 percent of overall funding) and two-thirds less 
than was allocated under the legacy program that is currently being 
phased out. Even though it is readily apparent that consumers suffer 
from inadequate coverage in many rural areas across the country, the 
Commission failed to allocate any funding to a number of states 
including a significant number of the states represented on this 
Committee. This resulted in an unfair and uneven distribution of funds 
that may not reflect the true needs of consumers. Those oversights must 
be addressed if we hope to address the needs of rural consumers 
everywhere.
    In late 2011 the FCC revamped the Federal universal service 
program. Market participants from all quarters have praised and 
criticized the FCC's decision, and it will be another year before the 
U.S. Court of Appeals for the Tenth Circuit decides its fate. Today, 
our focus is on what the program has done, and can do going forward, to 
improve mobile coverage in rural areas.
How Universal Service Has Helped Rural Areas We Serve
    Historically, our government has furthered the societal benefit of 
ensuring that basic services are made available to all of our citizens. 
We are a stronger country when everyone has access to modern services. 
A high-quality mobile wireless network is critical to public safety, it 
accelerates economic development, and it ensures the viability of rural 
areas in the same way that water, electricity and basic telephone 
service did in the last century.
    We have strongly endorsed the universal service program and our use 
of funding support over the years has delivered high-quality services 
to rural areas that would not otherwise have had them. To summarize, in 
1997, we began applying for eligibility to participate in the universal 
service fund and by 2008 we were eligible in sixteen states. Using 
Federal support, we have built well over 1000 new towers and upgraded 
many more in areas where we would not otherwise have built, and in 
areas that oftentimes had no access to wireless service. We built 
towers in places with just a few hundred residents. We built in remote 
areas of West Virginia, in eastern Washington, eastern Oregon, central 
Maine, central Virginia, northern Wisconsin, central and northern 
Missouri, central Nebraska, and many more.
    In some of these areas, Federal funding has helped us keep cell 
sites on the air when customer revenue was insufficient. We have also 
used universal service funds to build links between cell sites and add 
power generators in remote areas, providing critical redundancies that 
ensure continuous service during catastrophes. In every state where we 
are eligible, our coverage and service quality has improved 
commensurate with the support we received. As you might expect, we 
invested more in areas where we received significant amounts of 
support. Wherever support was made available, our rural networks are 
now demonstrably better as a result, and our customers see it. I also 
truly believe a significant part of the company's success in J.D. Power 
network and Forrester customer experience satisfaction surveys is the 
high-quality network experience we provide in rural areas.
    Investments made possible with support generate additional economic 
activity from local businesses. This is known as the multiplier effect. 
When we enter a community, it takes people to perform a myriad of jobs. 
Among other things, people build networks, construct stores, sell 
devices, and advertise our services. These are high-quality, good 
paying jobs. In addition, local businesses use mobile wireless service 
to become more efficient and to access markets around the world. This 
creates more jobs and local economic activity. Every place we construct 
a cell site is now a candidate to attract investment from business 
owners considering a potential move away from areas that lack 
sufficient telecommunications infrastructure.
    The FCC's discontinued mechanism is phasing out support to 
participating carriers. As of July 1, 2013, our support will be reduced 
by 40 percent and by July 1 of 2016 our support will be gone. As a 
result of the reduction in support, we are adjusting our investments in 
new cell sites accordingly, reducing our capital expenditures and using 
remaining funds to cover operating expenses in existing rural areas we 
serve. At its peak in the latter part of the last decade, we were 
building over 200 cell sites per year with this support. This year, 
we're planning to construct only 35 sites and as of this date we have 
no plans to build additional universal service sites in areas funded by 
the legacy program after 2013 due to this reduction of the program's 
funds. We have made that painful decision because we know there simply 
is no business rationale to build in areas that will never be 
profitable even though we know from conversations with Federal 
officials, local officials, and consumers that there is a desperate 
need for those services.
    In our experience, the FCC's now discontinued Federal universal 
service mechanism was very effective in enabling us to build 
telecommunications facilities in rural areas. We embraced that program 
and successfully expanded service in ways that would not otherwise have 
been possible, to the benefit of rural citizens. As discussed below, we 
are now turning to the new FCC Mobility Fund to assist us in 
constructing 4G networks in rural areas.
Observations on the FCC's Mobility Fund
    We participated in the FCC's first auction of mobility fund 
support, held in September of 2012. This auction provided $300 million 
in ``one time'' support for eligible carriers to invest in modern 3G 
and 4G networks. We won the right to access approximately $40 million 
in Federal support, which must be used to serve 2,162 total road miles 
in 10 states. We anticipate that the FCC will grant our applications in 
the near future and we intend to implement 4G mobile broadband service 
in all of those eligible areas. This is a very exciting time for us as 
a builder of rural networks, to be able to tell rural communities that 
high-quality mobile broadband service is on the way.
    It is important for this Committee to understand the magnitude of 
the task at hand for our nation. The map below, taken from the FCC's 
website, illustrates where Mobility Fund Support was awarded in the 
Continental United States.\30\ As you can see from the FCC's mapping 
software, the blue areas represent how small are areas that the $300 
million in Mobility Fund will cover infilling in dead zones.
---------------------------------------------------------------------------
    \30\ Support was also awarded in Alaska, however, we have not 
included a map here. Suffice it to say there remain significant 
unserved areas in places where Alaskans live, work and travel.


    When you compare this map to the one above, you get a sense of the 
magnitude of the gap to be bridged. The FCC's National Broadband Plan 
estimated that $24 billion is needed to provide access to terrestrial 
broadband infrastructure for the 14 million people who currently do not 
have such access. If half of that gap were filled by private 
investment, then the FCC could finish the job of providing access in 
twelve years by allocating $1 billion per year to the task. That is 
roughly 30 percent less than the FCC was providing to mobile carriers 
under the legacy universal service program.
    My observation here is that the task of finishing ubiquitous 
deployment is too large for the amount of funding that the FCC 
allocated to mobile broadband. Rural communities can't wait twenty more 
years. If the Committee believes as I do that mobile broadband is so 
critical, then we must bring to bear sufficient resources to cover 
substantially all of the area where rural people live, work and travel.
    Moreover, the current Mobility Fund auction mechanism was designed 
to provide funds to the lowest-cost areas first, in order to maximize 
the number of road miles covered. While we do not dispute that there is 
value in the FCC's choice of how to distribute funds, it has left 
behind the highest-cost areas. For example, none of our bids to cover 
rural New Hampshire were selected, simply because we had to bid more 
per road mile to cover more mountainous areas in the central and 
northern areas of the state.
    Within the next year, the FCC is expected to conduct Phase II of 
the Mobility Fund. It proposes to distribute up to $500 million per 
year, dedicated to construction and operational support for mobile 
broadband infrastructure. We are active in the FCC's rulemaking 
proceeding that will finalize rules for how support is distributed.
    We continue to oppose the use of auctions to distribute support, 
because while auctions may create competition in the auction room, they 
drive out competition in the markets themselves. We believe the better 
course is for the FCC to use a forward-looking cost model, as they are 
proposing to do in the Connect America Fund, to determine how much 
support is needed in a particular area, and then permit carriers to 
compete for that support in the marketplace, with the same construction 
obligations currently expected of all carriers receiving funds. In our 
experience, providing support only to the service providers that 
consumers choose drives greater efficiency, investment and competition. 
We support a mechanism where carriers charge a market price and 
consumers receive a credit for any service they choose. The carrier 
with the most efficient cost structure, lowest prices, and best 
services would have the advantage, as they should in a normally 
functioning marketplace.
    In sum, our observation is that basic economic forces apply here. 
It costs more to serve some areas and policy makers must seek efficient 
providers to deliver services at the lowest possible cost. Without 
additional funding and increased efficiency, the higher cost areas are 
going to be left behind for a substantial period of time. We therefore 
urge both the Congress and the FCC to reassess the task at hand and set 
a goal to deliver mobile wireless coverage to substantially all of 
rural America within ten years.
Suggestions for Increasing Program Efficiency
    At the outset, it is important to note that the FCC has decided to 
reduce universal service funding for mobile broadband by two-thirds, at 
a time when consumer demand for mobility is skyrocketing and when the 
coverage maps show much work left to be done.
    We are mindful of the program's financial constraints and competing 
policy interests. So, we are suggesting ways to increase funding for 
mobile networks without increasing the overall fund.
    First, there is approximately $185 million of unused support from 
the Connect America Fund Phase I program. Some $300 million was offered 
to telephone companies and only $115 million was accepted. The rejected 
funding lies fallow. The FCC could easily add that $185 million to the 
Mobility Fund, where wireless carriers are ready, willing and able to 
deploy service to rural areas and their bids to serve additional areas 
of Rural America went unfunded. We ask for your support in getting 
those funds invested in rural areas at the earliest possible date.
    Second, we would support the same result for any funds that may be 
rejected by winners of the Mobility Fund Phase I auction. If any 
winning bidder does not follow on auction bids, the funding can be 
distributed to fund the bids that were not accepted at the initial 
auction. Rural areas where bidders, including us, sought funding to 
construct would see immediate benefits.
    Third, in the new Connect America Fund for wireline carriers, the 
FCC adopted a Right of First Refusal (``RoFR'') which allows the 
largest carriers to accept an amount of support offered by the FCC for 
five years, without competition. We have opposed this from the very 
beginning, because reserving support for one class of carrier for five 
years will inevitably confer enormous market power on that carrier.
    Here is the worst thing about the RoFR: A large wireline carrier 
that also owns wireless licenses can meet its wireline build out 
obligations by building a 4G wireless network. That is, the FCC will 
provide exclusive support to a wireline carrier based on the costs of 
building a wireline network, but if it is more cost effective to use 4G 
wireless, the carrier is free to do so and to pocket the windfall. 
Ironically, the FCC just rejected this methodology for distributing 
support when it did away with the identical support rule for wireless 
carriers.
    There is no public benefit to segregating support to one carrier in 
a market, and then allowing that carrier to build without competition. 
As explained by William P. Rogerson, Professor of Economics at 
Northwestern University and formerly the FCC's Chief Economist, 
limiting universal service support to a single carrier in a market may 
create:

        very powerful competition for the market that can be used to 
        drive down the price of the subsidy that government pays. 
        However, the cost of creating this very powerful competition 
        for the market is that after a winner is declared, there will 
        be a significant reduction in competition within the market for 
        customers. . . . It is local competition among competing 
        carriers that creates powerful ongoing incentives for firms to 
        charge lower prices, to improve their quality of service and 
        level of coverage, and to introduce new advanced services as 
        rapidly as possible.\31\
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    \31\ Ex Parte Letter from David A. LaFuria, Counsel to U.S. 
Cellular, to Marlene H. Dortch, Secretary, FCC, GN Docket No. 09-51, et 
al., filed Jan. 28, 2010, Enclosure, William P. Rogerson, ``Problems 
with Using Reverse Auctions To Determine Universal Service Subsidies 
for Wireless Carriers,'' Jan. 14, 2010 (prepared for U.S. Cellular) at 
6-7 (emphasis in original). http://apps.fcc.gov/ecfs/document/
view?id=7020384141

    Our position represents healthy competition policy because it 
extracts efficiency from the marketplace: The FCC should immediately do 
away with the RoFR and allow any carrier willing to take on the 
universal service obligations to compete for customers and support. If 
a competitor can deliver broadband to an area for less money than 
another carrier, why should the government fund the less efficient 
provider?
    There is no valid public policy rationale supporting the FCC's RoFR 
decision and we urge the committee to ask the FCC to reconsider this 
policy, as a way of stretching program dollars much farther in rural 
areas and ensuring that universal service mechanisms do not drive out 
competition in rural areas. The costs of imposing antiquated monopoly-
era price regulation in areas where competition fails are very high and 
in the end consumers are not well-served.
Infrastructure Built With Support Can Be Leveraged to Accelerate 
        Construction of a Nationwide Interoperable Public Safety 
        Network
    All of the above actions we recommend are intended to increase 
construction of new towers in rural areas. They will also accelerate 
deployment of a nationwide interoperable public safety network. For 
U.S. Cellular's part, we want to see the public safety network 
constructed as soon as possible, and we can help. The FCC has mandated 
that all towers we build with support must be made available for 
collocation--that is--we must permit others to install antennas on our 
towers at a reasonable cost. In rural areas, we can think of no better 
way to leverage the government's investment in our towers through 
universal service than to collocate public safety transmitters that 
will enable first responders to deliver critical health and safety 
benefits to rural citizens.
    In closing my testimony on universal service, we urge Congress to 
continue to support policies that promote access to high-quality mobile 
networks so that rural citizens receive the public safety and economic 
development benefits already available to urban citizens. Although we 
sometimes disagree with how the FCC has implemented the National 
Broadband Plan, we agree completely that Federal universal service 
funds must be used to invest in our Nation's broadband infrastructure, 
both mobile and fixed. With these investments, rural areas will have 
access to the most powerful economic development tools of the new 
century. Without them, there will be a flight of capital and talent 
toward only those areas that are connected.
Infrastructure Deployment is Critical to Rural Citizens
    The era of mobile broadband is now exploding upon us, with an 
incredible array of devices enabling our citizens to do truly amazing 
things. Throughout the country, wireless carriers are deploying 4G 
networks that enable our citizens to access e-mail, applications and 
the Internet at download speeds that are supersonic compared to the 2G 
networks deployed a decade ago. Even faster speeds are on the near-term 
horizon.
    Anyone who owns one of the latest 4G enabled smartphones knows how 
amazing they are at these speeds. But this growth in appeal and usage 
presents a critical challenge as well: In the U.S., wireless data 
traffic has increased by 486 percent from the second half of 2009 to 
the first half of 2012 and demands for capacity are going to continue 
to escalate, meaning we cannot rest on our current achievements or 
infrastructure. We must continually build and upgrade to keep the U.S. 
consumer at the cutting edge of technology and innovation.
    Smartphones are increasingly considered to be a necessity by 
consumers across the country. Over the past three years, American 
smartphone adoption has increased from 16.9 percent to 54.9 percent. 
and smartphones currently account for 133 million of these devices. By 
2014, the number of smartphones used by consumers in the United States 
is projected to exceed the number of consumers' personal computers by 
more than 200 million units.
    Widespread consumer adoption of mobile broadband has also fueled 
rapid growth and innovation in mobile applications. For example, the 
number of applications available at the iPhone App Store has grown 
1,900 percent from April 2009 to September 2012, and the number of 
Android applications reached 700,000 in the fourth quarter of last 
year. To take another example, a recent study forecasts that within the 
next five years about 50 percent of all new car radios sold in the 
North American market will feature downloadable apps.
    Among low-income households, many of whom cannot afford multiple 
subscriptions, the primary means to access the Internet is a high-speed 
mobile device. For example, the Center for Disease Control's June 2012 
report shows that 51.4 percent of adults living in poverty lived in 
households with only wireless telephones, compared with 39.6 percent of 
adults living near poverty and 28.9 percent of higher income adults.
    These are startling facts which begs one of the main questions we 
confront as a company and government must confront in its policy 
analysis. How can we ensure that these high-speed networks and 
incredible devices are not available only in urban and suburban areas? 
I'm sure each member of this committee has traveled in rural areas 
within your respective states where coverage is lacking, service 
quality is poor, and modern 4G service is unavailable.
    As you know, rural economic development increasingly depends upon 
the availability of high-speed mobile broadband. Just a few weeks ago 
at the Mobile World Congress in Barcelona, one of the keynote speakers 
reported that in developing countries a 10 percent increase in mobile 
data penetration is associated with a 1.21 to 1.38 percent increase in 
GDP. Every 4G cell we build multiplies economic activity and increases 
consumer welfare in its coverage area. In areas receiving improved 
coverage, E911 and location-based services save lives and enable 
critical communications. In areas where a competitor enters, consumers 
receive improved service and greater choices.
    As shown in the FCC's National Broadband Map, high-speed mobile 
wireless service (>6 MBps) is now available in many urban areas, but 
not in most rural areas. There remains a lot of work to do to provide 
rural citizens with service quality that is reasonably comparable to 
that which is available in urban areas, as envisioned by the 1996 
Telecom Act. Many communities can receive service from only one 
wireless provider and citizens living in these areas do not receive the 
benefit of competitive choice. We therefore urge the adoption of 
policies that could increase competition and reduce the need for 
monopoly-era regulatory structures. These better policies include 
allocation of more spectrum, the use of small geographic license areas, 
promoting market-based universal service mechanisms, increasing 
interoperability of devices, as well as other reforms which we have not 
focused on here today but which are important, including 
interconnection rights and special access reform.
Conclusion
    In conclusion, the challenges that we face are not insurmountable. 
Companies like U.S. Cellular have it in their business DNA to bring 
great communications services to the people of rural America.. The 
issue is how we can ensure that the regulatory regime that governs the 
market place is sensitive to the business challenges of serving markets 
where a piece of equipment that might serve 250,000 people in an urban 
market may serve just a few thousand or a few hundred. Government 
support may be necessary in some instances where the economics will 
never work for the private sector to invest alone, but ensuring that 
rural service providers have meaningful access to spectrum, have 
interoperability standards that make devices truly affordable, and that 
middle mile and backhaul services are at reasonable rates, all play a 
critical role in maintaining a healthy and robust industry.
    Your time and attention to each of these items is extremely 
important for your constituents and our consumers and I thank you for 
inviting me to appear before you today.

    Senator Pryor. Thank you.
    Ms. Boyers.

STATEMENT OF PATRICIA JO BOYERS, PRESIDENT AND CHIEF EXECUTIVE 
 OFFICER, BOYCOM CABLEVISION, INC. AND BOARD MEMBER, AMERICAN 
                       CABLE ASSOCIATION

    Ms. Boyers. Well, good morning. Thank you for giving me the 
opportunity to tell my story.
    My husband and I started our small cable business in 1993. 
With our own money, we built our first system to serve 
consumers in the foothills of the Ozark Mountains of southeast 
Missouri. Real close to you, Senator. To stay competitive, we 
continuously reinvest in our network to provide digital and 
advanced services. Because banks aren't eager to lend to small 
rural providers and getting RUS loans as a cable operator is 
nearly impossible, we did it on our own, which meant taking out 
a second mortgage on our home and our farm as collateral for 
our capital investment.
    Now, we've always said that we have done so much for so 
long with so little that we are absolutely qualified to do 
everything with nothing at all. So, we obtained our broadband 
equipment and services through the National Cable TV 
Cooperative. We can secure better prices from vendors who can--
before we could obtain than on our own. We provide broadband to 
about 3,000 residential subscribers. We also provide broadband 
to local businesses and anchor institutions, including free 
service to our middle and elementary schools. Our private 
investments have allowed us to offer broadband speeds 
comparable to those in the urban areas. With the new--the 
DOCSIS 3.0 technology, BOYCOM will cost-effectively deliver 100 
megabytes over our existing networks, and we continually seek 
to push our services out to unserved markets, wherever 
possible.
    Now, when I say ``rural,'' we have a population density of 
18 homes per mile passed. All eight of our core systems are 
located in what Missouri calls ``perpetually impoverished 
counties,'' which means they have been below the poverty line 
consistently since the 1960 census. Now, when combined, these 
statistics mean we have a very price-sensitive population that 
is expensive to reach in those end-of-the-world-and-turn-left-
places. Now, that said, BOYCOM has not had a rate increase in 4 
years, because our customers just simply can't afford it.
    Now, despite these significant challenges, small cable 
operators are delivering broadband services in rural areas. 
We've benefited from the historic light touch of broadband 
regulation. Now, this must continue. We need flexibility in the 
way we manage our networks and that we charge our customers. 
It's also vital that the government not subsidize the buildout 
of broadband networks in areas where unsubsidized companies 
already provide that service. When we spend private capital to 
bring broadband to communities, there's no reason for the 
government to step in and aid others. The FCC is now fixing 
this problem regarding USF, but it continues to be a problem 
with RUS.
    As the Committee with the oversight responsibility over the 
implementation of the Connect America Fund, there are three 
policies that are essential to be part of this program:
    First, no support should go where competitive providers are 
already offering that service.
    Second, support must be distributed efficiently, and only 
in the amounts necessary to deliver the level of service 
required by the FCC.
    Third, all providers, including cable operators, should be 
able to participate when the FCC holds the reverse auctions.
    Therefore, we urge you to exercise your oversight, because 
the unintended consequences are severe for rural consumers.
    Now, there are targeted areas where government can play an 
important role. The government needs to address the cost of 
middle-mile transport facilities that carry local broadband 
traffic to an Internet backbone access point. Now, due to the 
distance traveled and the lack of competitive choice, the 
middle-mile cost for rural providers is significantly higher. 
As consumer demand for broadband capacity increases, the cost 
differential will only get worse.
    We also need to revisit that 1978 Pole Attachment Act to 
expand the FCC's authority to address the practices of the 
exempt electric cooperatives and municipalities. The 
unregulated co-ops charge us between $12.50 and $15 a pole per 
year, while others just charge us 3 bucks. While not 
particularly sexy, pole attachment rates are one of the core 
issues that affect our deployment. As I said earlier, I've got 
a population of 18 homes per mile passed. Now, that's a lot of 
poles to reach those folks. Government must also be sensitive 
to the reality that there are rules and regulations that cannot 
be borne by small providers. Even well-intentioned regulations 
often fail to take account of our size.
    Now, due in large part to increased regulatory costs like 
these, on December 31, 2011, my company shut down 13 rural 
systems, causing these communities to go black. And once a 
small cable system shuts down, it eliminates the prospect of 
future broadband connections to the Internet from the system.
    Finally, skyrocketing program costs are reducing available 
capital for broadband. The video programming market for pay-TV 
providers is becoming unviable, particularly for smaller ones. 
The market is governed by outdated rules and regulations that 
were enacted before residential broadband even existed. So, 
therefore, we urge you to revisit these rules and ensure that 
regulations reflect marketplace realities. My company is 
offering service to rural areas, but the business is tough. 
What we've accomplished so far has been with brains, balls, and 
bald money, not necessarily in that order.
    [Laughter.]
    Ms. Boyers. Now, all I can really ask is that y'all 
continue to keep a heightened awareness of the challenges that 
rural providers face, and remember that those solutions that 
address the concerns of St. Louis would not work in the Ozarks.
    Thanks, y'all.
    [The prepared statement of Ms. Boyers follows:]

Prepared Statement of Patricia Jo Boyers, President and Chief Executive 
  Officer, BOYCOM Cablevision, Inc. and Board Member, American Cable 
                              Association
    BOYCOM Cablevision and the other small and medium-sized cable 
operator members of the American Cable Association (ACA) provide three 
vital services throughout smaller markets and rural areas--video, voice 
and broadband Internet. Often, we serve very rural areas--those ``end-
of-the-World-and-turn-left'' areas that no large company wants to 
touch. I am proud of what BOYCOM and other small cable operators have 
brought to their communities in these past decades, and there continues 
to be opportunity for us to invest private capital to maintain and 
expand our state-of-the-art communications networks and services.
    When my husband and I started our business in 1993, many people 
thought we were crazy. We faced a new law, the 1992 Cable Act, which 
imposed a lot of regulations on the cable industry. There was plenty of 
doom and gloom in those days. Still we built our first system in rural 
Missouri. Today we have 5 core systems in the region that provide video 
to about 2,000 subscribers and broadband to 3,000. However, it hasn't 
been easy. We've always said that ``we have done so much, for so long, 
with so little that we are now qualified to do absolutely everything 
with nothing at all.''
    Our story is similar to other small cable operators who have 
invested huge amounts of their own money in rural areas to build, 
maintain, upgrade, and expand their networks. In fact, we actually have 
a second mortgage on our personal residence as collateral for our 
capital investment. The industry initially invested billions to deliver 
analog cable service throughout the country, and then in the 1990s, we 
reinvested billions more to upgrade our plant to provide more advanced 
services. The cable industry is still in the midst of this great 
privately funded evolution. As a result of all our investment, cable 
today is the best catalyst for broadband growth.
Cable Operators are the Country's Leaders in Broadband
    Today the cable industry offers access to broadband service to 95 
percent of the country with nearly all cable operators providing 
download speeds of at least 4 Mbps and upload speeds of at least 1. 
With the advent of DOCSIS 3.0, these operators can deliver speeds of 
100 Mbps over their existing fiber/coaxial networks. The next 
generation, DOCSIS 3.1, which is moving from the lab to market, will 
provide even greater capabilities. By keeping pace with technological 
change and investing in our networks, we have become the country's 
leaders in broadband deployment. The recent Federal Communications 
Commission (FCC) report ``Measuring Broadband America'' once again 
demonstrated that when it comes to broadband, cable operators deliver 
what they promise.
    I know the President wants to get broadband into ``the rural-est of 
rurals,'' and small cable operators, like my company, are key to 
achieving that goal. It's not only the larger operators in urban areas 
making these investments, but I'm proud to say that BOYCOM and nearly 
850 other small and medium-sized members of ACA are investing to bring 
these capabilities to small and rural markets. For instance, BOYCOM is 
deploying fiber-to-the-home in all of our core systems. This will 
ensure that our customers will have the broadband performance 
capabilities they need for their businesses, education, health-care, as 
well as for just interacting with each other. For rural areas, this 
capability is critical to their future viability. We are not the 
exception. There are many ACA companies like ours, with fewer than 
5,000 total subscribers, serving smaller markets and rural areas, which 
now have the opportunity to be full participants in the Nation's 
broadband future.
    Of course, as smaller operators in rural areas, we sometimes need 
to be more creative in addressing the needs of our customers and 
overcoming some of the market disadvantages we face. The National Cable 
Television Cooperative (NCTC), a national buying group serving all ACA 
members, helps in this regard. By providing market efficiencies to 
broadband equipment manufacturers and service providers, the NCTC can 
negotiate lower prices from these vendors than individual broadband 
providers can on their own. Members, like BOYCOM, can then opt into 
NCTC's master agreements, which enable us to lower the costs of 
broadband services. NCTC is an important actor in independent cable's 
broadband deployment story and will continue to play an important role 
in the future.
    The cable story is not just about upgrading our existing 
infrastructure. Small cable operators like BOYCOM are also expanding 
their footprint to provide broadband to previously unserved areas.
    In the foothills of the Ozarks, as you know, that presents a 
challenge. But we have developed an efficient way to build plant using 
a combination of fiber and wireless. We take fiber all the way out as 
far as it is economical and then install a wireless tower. This 
provides coverage to those folks that are still in those ``hills and 
hollers where you have to have your own Tom Cat if you want kittens,'' 
and it is working really well.
    Cable operators in rural areas also are expanding in other ways. We 
have found that demand from owners of cell towers for fiber backhaul 
connections presents new business opportunities to deploy fiber into 
less densely populated communities. Once the connections to cell towers 
are made, the cost to branch off the installed fiber to residences is 
lower. It provides an economic means to provide high speed Internet to 
the households along the fiber route, enabling us to serve previously 
unserved areas, and to do so without any government support.
    And our story is not just about providing households with our 
state-of-the-art networks. Many of us have also moved into providing 
dedicated broadband services and other related services to business 
customers. Moreover, we're helping to connect anchor institutions, such 
as K-12 schools, universities, libraries, hospitals/emergency medical 
facilities, and public safety facilities. These are great opportunities 
for us, especially as our old video business model changes.
    All of us understand that our networks provide an incredible 
platform for our future. Our networks allow us to innovate in ways 
unthinkable just a short time ago, enabling us to respond to our 
customers and create new services that meet their needs. Our networks 
are not only our fundamental asset. They are a fundamental asset for 
our communities. They enable people and local institutions to interact. 
They enable businesses to develop and grow. They enable community 
discussion and political debate.
    Because we understand the tremendous value of our networks, we 
continue to invest to upgrade them with new capabilities and to build 
them out to new areas.
Challenges Facing Small Cable Operators Serving Rural Areas
    That said, smaller cable operators serving rural areas still face 
significant challenges. Some of these are also faced by big companies 
serving urban areas, but some are unique to small rural providers.
    When it comes to broadband Internet service, upon which our 
customers rely increasingly for essential activities, we are constantly 
working to ensure a great experience for all. That sometimes means we 
need to control those few customers who use excessive amounts of 
bandwidth through reasonable network management and billing practices. 
We also need to be able to tailor our broadband service to unique 
customer needs by offering specialized or ``managed'' services. As 
someone who oversees our networks, develops our services, and works 
with our customers, I need to emphasize how critically important it is 
that Congress and the FCC continue its historic ``light touch'' 
regulation of broadband Internet services. In an industry that is so 
dynamic, that has so many competitors, and that requires continuing and 
significant levels of investment, it would be counterproductive for the 
government to impose any greater regulation, particularly on small 
rural providers, like BOYCOM.
    Moreover, as some Senators have already recognized, it is vital 
that the government not subsidize competitors to build their networks 
in areas where our companies already provide broadband. When we spend 
our own capital to bring broadband and other services to communities, 
there is absolutely no reason for the government to step in and aid 
others. Not only does this discourage private investment, it is a waste 
of taxpayer dollars.
    This is not to say the government should not work to bring 
broadband to all communities. Many ACA members, which include rate-of-
return and price cap carriers, are the sole providers of broadband in 
high-cost areas. These are places where it will never be economically 
viable for the private sector to fully shoulder the financing of 
buildout because the cost to do so cannot be recovered in these 
markets. Some partnership with the Federal Government may be necessary 
in these places. However, if support is given, we need to make sure 
that support is targeted to only areas that lack an unsubsidized 
broadband provider and that it is distributed efficiently. This has 
been a problem with the old universal service fund, and other 
government programs, but recently the FCC has correctly recognized that 
the world has changed, and the universal service program must change 
along with it. It is critical that the FCC hold true to its stated 
goals and that other programs that support broadband deployment, like 
the U.S. Department of Agriculture's (USDA) Rural Broadband Loan 
Program that is administered by the Rural Utilities Service (RUS), are 
changed to make sure the government does not subsidize competitors to 
privately funded broadband providers.
The FCC's Implementation of the Connect America Fund
    With respect to the implementation of the FCC's reform of the 
universal service fund and establishment of the broadband Connect 
America Fund (CAF), there are three principles that must be followed. 
First, as I just indicated, no support should be provided in areas 
where competitive providers already offer broadband service. Second, 
support should be distributed efficiently, that is, support should be 
only the amount necessary to deliver the level of broadband service 
required by the Commission. Third, all broadband providers, including 
cable operators, should have a fair opportunity to access support when 
the Commission holds reverse auctions.
    Let me elaborate on how these principles should be implemented by 
the FCC with respect to the development of the cost model for CAF Phase 
II, the program that will be used to award $9 billion in support over 5 
years in high-cost areas served by the larger telephone companies, the 
so-called price cap telephone carriers. The purpose of the cost model 
is to precisely estimate the amount of support that would be required 
to build baseline broadband (4/1 Mbps) in areas unserved by any 
competitor. As a consumer who contributes to the USF program, and as a 
small cable operator who competes against a price cap carrier, it is 
critical that the FCC gets the model right. Otherwise, the American 
consumer could be paying in excess of hundreds of millions of dollars 
per year for something but getting nothing in return. As a rural cable 
operator, my concern is that this excessive support, could be used to 
compete with me and other ACA members. We urge this Committee to 
exercise its oversight authority regarding this matter.
    Another important part of CAF implementation is the plan to hold 
reverse auctions to provide broadband services in areas where the large 
price cap telephone companies do not accept CAF Phase II funding. We 
support the use of reverse auctions. This process can result in the 
selection of the best and most efficient providers if as many broadband 
providers as possible can participate, including cable operators. 
However, there is a major barrier standing in the way--under the law 
today, only an ``Eligible Telecommunications Carrier'' (ETC) can 
participate. Few cable operators are ETCs because the state-run process 
to become an ETC is so onerous, and ETC status comes with burdensome 
requirements. Quite frankly, ETC status is irrelevant to reverse 
auction participation because it is the FCC who establishes all the 
requirements to obtain CAF support. The FCC can remedy this problem. We 
ask that Congress encourage the FCC to take steps to make it easier and 
less burdensome for cable operators to become ETCs so that they may 
participate in the reverse auctions when such auctions are used.
    In addition to the issues associated with the CAF implementation, 
there are four specific areas where government has an important role to 
play in helping ensure that broadband is brought to all Americans: the 
lack of middle mile infrastructure and rising middle-mile costs; 
outdated pole access attachment regulations that result in both higher 
fees and delayed access; challenges to obtaining public and private 
rights-of-way; and decreasing resources available to small cable 
operators to offer broadband due to the imposition of onerous 
regulations and declining video margins.
The Lack of Middle Mile Infrastructure and Rising Middle-Mile Costs
    First, the marketplace is rapidly changing--demand for bandwidth 
has been rising exponentially over recent years as consumers expect 
increasingly fast connection speeds to access new services such as 
streaming video. And this is expected to continue, with U.S. broadband 
speeds estimated to more than triple by 2016. While this trend holds 
true in urban and rural areas alike, it is significantly more difficult 
for smaller cable operators to meet this new demand than it is for 
larger operators with scale. That is, the high cost to serve rural 
areas with essential facilities is getting higher.
    As our customers increase their use of broadband service, we need 
to upgrade not only our last-mile connections to the home, but also the 
``middle-mile'' pipes which carry traffic from our local networks to an 
Internet backbone access point. This presents a number of challenges 
for ACA members. The FCC has recognized that middle-mile costs increase 
as the distance from the network to the backbone access point grows, 
and rural providers generally operate networks that are among the 
farthest from these access points.
    Additionally, unlike in urban areas, there may be few middle-mile 
links available. In fact in many rural areas there may be only a single 
link. And many of these links use outdated technologies, which means we 
often can only access lower capacity pipes--this in turn limits the 
data speeds we can provide to our customers. It also means we often pay 
much higher prices for each byte we transmit.
    Some of us have explored constructing our own middle-mile links, 
but because the distances involved are extremely long and the density 
of our users too low, the cost is prohibitive. As our subscribers 
continue to expect faster connection speeds, poor middle mile 
infrastructure and rising middle-mile costs make it more difficult for 
us to maintain current prices, upgrade our services, and build out to 
new locations.
    In its National Broadband Plan, the FCC identified the lack of 
adequate middle-mile infrastructure and the high costs of access to be 
a significant problem. The FCC is examining the issue in a further 
rulemaking with respect to CAF implementation. The record in this 
proceeding closed one year ago, and we urge the FCC to conclude its 
work shortly and issue a decision. Where prices are too high, it should 
use its regulatory authority to ensure they are consistent with 
competitive market rates. Where capacity is inadequate, it should use 
the CAF to support the deployment of middle-mile capacity.
Outdated Pole Attachment Regulations That Result in Both Higher Fees 
        and Delayed Access
    Second, smaller operators generally serve less dense areas, which 
necessitates that to reach each location their networks must attach to 
many more poles than larger operators serving more urban areas. While 
the FCC has done much to improve the cost and speed of pole access, the 
1978 Pole Attachment Act stands in the way of the Commission addressing 
some significant problems in the market. For instance, it does not 
contemplate access for standalone broadband service. It only permits 
the FCC to regulate via national rules where states decline to act. 
Moreover, it does not cover cooperative and municipal pole owners, who 
remain exempt from any regulation, allowing them to set much higher 
fees and delay access. All of this drives up costs and makes broadband 
deployment even more uneconomical in rural areas.
    The FCC's National Broadband Plan wisely suggested that Congress 
should eliminate the exemption for cooperatives and municipalities to 
restore fairness and competitive rates to the market. We encourage 
Congress to take action to deal with the obvious shortcomings in the 
existing law.
Challenges Obtaining Public and Private Rights-of-Way That Hinder 
        Broadband 
        Deployment
    Third, ACA members face many restrictions, delays, excessive fees, 
and competitively discriminatory policies imposed by private and public 
entities when they seek to extend service to new communities. These 
problems stem from public and private entities that control rights-of-
way. ACA members like BOYCOM generally do not have teams of lawyers and 
consultants to deal with all these ``gatekeepers'' and so are 
particularly vulnerable to unfair, unreasonable and discriminatory 
treatment.
    We were pleased last year when the President issued an executive 
order requiring Federal agencies to develop new uniform policies and 
practices for accessing the Federal Government's assets for the purpose 
of broadband deployment. It included the ``dig once'' provision, a 
smart idea that was previously recognized by some Senators and 
Representatives, which would require the deployment of conduit for 
broadband facilities in conjunction with Federal or federally assisted 
highway construction whenever possible.
    However, the executive order only applies to Federal lands, 
buildings, and rights of way, federally assisted highways, and tribal 
and individual Indian trust lands (tribal lands). More needs to be 
done. We need the government's assistance to ensure we are treated 
fairly and reasonably when seeking access to all rights-of-ways.
Decreasing Resources Available to Small Cable Operators to Offer 
        Broadband Due to Onerous Regulations and Declining Video 
        Margins
    Fourth, many smaller operators face increasing burdens stemming 
from new regulatory compliance obligations and decreasing video margins 
which cut into the financial resources available to build, maintain, 
upgrade, and expand broadband.
    Despite the commendable efforts of the FCC to minimize the burdens 
on smaller operators regarding some new rules and regulations, smaller 
operators have been unable to obtain exemptions to avoid being forced 
to upgrade their Emergency Alert Service (EAS) equipment; participate 
in the National EAS test and associated reporting requirements; comply 
with new Communications and Video Accessibility Act of 2010 (``CVAA'') 
requirements and recordkeeping obligations; and to satisfy new Open 
Internet disclosure requirements. In addition, the FCC is considering 
imposing additional compliance obligations on small operators, such as 
the FCC's recent comprehensive and mandatory special access data 
collection and requirements to include home networking functionalities 
in deployed two-way HD set top boxes. Moreover, there are additional 
CVAA related obligations on the horizon. While such efforts seek to 
achieve commendable public policy goals, the cost of these many 
separate compliance obligations adds up, straining the resources of 
smaller operators, and making the offering of broadband services at 
reasonable prices more difficult.
    For decades, cable operators supported infrastructure and service 
investment through revenues derived solely from the provision of video 
services. However, a lot has changed in the last twenty years. In 1992, 
cable was the dominant provider of video service in their markets. It 
was a time before direct broadcast satellite and before telephone 
companies launched video. It was before the Internet and over-the-top 
video providers such as Netflix and Hulu. Today, cable faces robust 
competition across the country, and its share of the market has 
steadily decreased. In many rural areas, satellite TV has more 
subscribers than cable, and Internet video traffic represents the 
majority of overall Internet traffic. At the same time, the cost of 
video programming has increased sharply, particularly for 
retransmission consent and sports networks offered regionally and 
nationally. While video revenue has increased for most cable operators, 
video expenses have grown faster, sending video margins to historic 
lows five years running, according to respected industry analyst SNL 
Kagan. The story is a little bit different for BOYCOM. The state of 
Missouri has seventeen ``Perpetually Impoverished Counties''--counties 
with an average income below the national poverty level since the 1960 
Census. BOYCOM services are available in five Missouri counties and all 
five counties are ``Perpetually Impoverished.'' As such, BOYCOM has not 
been able to have a rate increase in four years. Our subscriber base 
simply cannot afford to pay another dime. We're eating the cost 
increases. The reduced profit from video puts pressure on cable 
operators, particularly smaller ones, and reduces available capital for 
broadband. This is one area where the sad irony of competition at the 
retail video level has resulted in higher wholesale programming prices 
as new entrants have been willing to ``pay up'' simply to enter the 
market. Making matters worse, the video market continues to be governed 
by outdated rules and regulations passed decades earlier. We urge 
Congress to revisit these rules, and ensure that regulation reflects 
marketplace realities.
    For cable operators, all of these problems are driving many to shut 
down their smallest systems. For the FCC's 14th Annual Report on Video 
Competition, ACA presented data showing that the number of cable 
systems has significantly decreased over the past five years. Using the 
FCC's own data, ACA calculated that since October 2005, the number of 
cable systems has declined by 26 percent (from 7,208 to 5,312) and that 
for systems with fewer than 10,000 subscribers, the percentage drop in 
the number of systems was even greater. ACA also has presented data 
from the NCTC that shows similar results. During the last five years, 
NCTC members closed a total of 793 small and rural cable systems 
serving a total of more than 35,000 customers. BOYCOM is a perfect 
example of this harsh reality. On December 31, 2011 we were forced to 
shut down thirteen very small rural systems in Southeast and South 
Central Missouri-causing these communities to ``go dark.'' Congress 
must take notice of the changing landscape for facilities-based 
operators because when a small cable system serving a rural area shuts 
down, it not only results in the loss of multichannel video service, 
including local TV service, but also the prospect of future broadband 
connections to the Internet.
The Government Can Help Small Cable Bring Comparable Broadband to More 
        Rural Areas
    These concerns--the lack of middle mile infrastructure and rising 
middle-mile costs; outdated pole access attachment regulations that 
result in both higher fees and delayed access; challenges to obtaining 
public and private rights-of-way; decreasing resources available to 
small cable operators to offer broadband due to the imposition of 
onerous regulations and declining video margins--each require Congress' 
attention so that small cable operators like BOYCOM can continue to 
compete and can invest in modern networks that are capable of providing 
faster broadband to greater numbers of rural communities.

    Senator Pryor. All right. Well, thank you.
    Mr. Strode, let me go ahead and ask you the first question.
    By the way, we're going to do 5-minute rounds. I was not 
planning on doing a second round, but if anyone wants to stay 
until the end and ask some cleanup questions, we'll be glad to 
do that.
    So, Mr. Strode, let me start with you. And I would just 
like to hear a little bit more from you on USF and how your 
company has relied on it, and how your customers have benefited 
over the years from USF. And then also--you laid out some of 
the things that we need to make sure, on USF, as we go forward, 
and I'd just like to get a sense from you of how you think it's 
working right now, and how we can make it better, going 
forward.
    Mr. Strode. Yes, Senator.
    The Universal Service Fund has worked well. In the rural 
areas where we serve, we are able to provide broadband to 95 
percent of the customers that we provide voice services to. 
That has been through a lot of effort, a lot of investment, 
both recovery from Universal Service Fund, but a lot of private 
investment in there, as well. And the system has worked well, 
so far. But, the uncertainty that we have now, because of the 
factors I mentioned, especially the regression analysis, has 
put us in a position where it's hard for us to plan, hard for 
us to know what investments to make, because the recovery is--a 
part of that recovery is uncertain. The regression analysis has 
drawn a hard line at 90 percent. Companies that are above the 
90th percentile in costs of similarly situated companies are 
penalized; their recovery is capped at that 90th percentile 
level, with no examination of why they're above the 90th 
percentile. There are legitimate reasons that companies are--
have costs that are above the 90th percentile. You know, some 
of the service territories--very, very expensive to serve in. 
And you're familiar with some of our service territory, the--80 
miles of the Buffalo River runs through our service territory. 
That's rugged terrain.
    The regression analysis--I'll make a real, hopefully, 
quick, simple analogy--imagine 10 cars going down the highway. 
State police stop all 10 of them, say, ``We measured your 
speed, a couple of miles back down the road, and, car number 3, 
you were the fastest, so we're going to write you a ticket.'' 
Doesn't matter whether they were over the speed limit or not; 
they were the fastest, so they get a ticket. And then they say, 
``We're going to check you again further down the road, and 
whoever is fastest is going to get another ticket.'' And so, 
everybody slows down. But, still, somebody is going to be the 
fastest. You can't see the other cars; you don't know how fast 
they're going. And so, somebody gets a ticket after the next 
checkpoint. And so on and so on as they go down the road. So, 
that's what the FCC's doing. They're saying, ``Somebody's most 
expensive, somebody's in the top 10 percent of costs. We're 
going to penalize them, with no indication that they've done 
anything wrong.''
    At the same time, the FCC's requiring us to provide 5-year 
plans of the investments we're going to make to push broadband 
further out into our networks, and, every year, update that 5-
year plan and report on the progress that we've made. So, 
while, on one hand, we're being pushed to make more investment, 
on the other hand, we don't know which investment is going to 
be penalized, put us over the limit.
    Senator Pryor. All right. I'm going to reserve some of my 
time for the end.
    Senator Wicker?
    Senator Wicker. Thank you very much.
    Mr. Davis, when the FCC created the Connect America Fund, 
which we'll call CAF-1, they really had companies like 
CenturyLink in mind. You state, in your testimony, that, 
unfortunately, only a small part of these CAF-1 funds have been 
allocated for use; specifically, only $115 million targeted for 
unserved markets has been accepted for deployment in the field. 
Did CenturyLink accept these funds?
    Mr. Davis. Senator, that's an important question. And the 
answer is that CenturyLink accepted a portion of the funds that 
were available to us. The FCC set a benchmark as to how the 
funds would be allocated per customer household or business. 
And the benchmark they set was insufficient for CenturyLink and 
many other companies to deploy broadband into the higher-cost 
area. So, some areas that were relatively lower-cost still--
substantially above the benchmark, because we add a substantial 
of our own capital, as did the other companies. So, we did use 
some of the money to get to the next tier of areas. But, what 
we need to do now is look at the customers that still don't 
have broadband and can't be served, even with private capital 
on that benchmark, to create another standard so we can get 
broadband out to those areas.
    Senator Wicker. How much did you accept?
    Mr. Davis. I believe we accepted about $35 million, 
Senator.
    Senator Wicker. OK. And explain, then, if you will, the 
problem with the benchmarks, specifically.
    Mr. Davis. OK. So, what the FCC did----
    Senator Wicker. For example.
    Mr. Davis. For example, the FCC said, ``We will contribute 
$775 per household for deploying broadband to new areas that 
are unserved.'' And the certain amount was made available to 
different companies. So, we looked at that, and we said, 
``Well, we can afford to put in this much of our own capital,'' 
and so, we added our own capital to it, and were able to use 
about 300--about $35 million of their capital, a significant 
amount of our own capital, and, together, that's how far we 
could go. But, when you go to the next tier, broadband can--
becomes more expensive and more expensive. So, the FCC needs to 
re-address the benchmark so we get it further out, and look at 
it from a customer perspective, in how we get service to 
customers.
    Senator Wicker. Is it your understanding that the FCC is 
moving in that direction with CAF-2?
    Mr. Davis. Based upon the public comments that we've seen 
and the conversations we have, we're hopeful that they're 
moving that direction to complete CAF-1, and we're also 
simultaneously working on CAF-2, and we're hopeful that they're 
moving forward on both of those. I believe that CAF-1--
completing CAF-1 is immediate and will create additional 
substantial investment in rural America, and then CAF-2 will be 
a long-term solution that will continue that and provide 
additional service to additional households.
    Senator Wicker. But, in the meantime, it's not working so 
great.
    Mr. Davis. CAF-1 has not worked the way we intended. I 
don't think it's worked the way the FCC intended. But, I 
believe we can--we're on track to fix that, if we just move 
forward.
    Senator Wicker. OK. Now, are you on the same page with Mrs. 
Boyers--where, in her testimony, she says, ``Three principles 
must be followed with the Connect America Fund: First, no 
support should be provided in areas where competitive providers 
offer broadband services. Second, support should be distributed 
efficiently. And, third, all broadband providers, including 
cable operators, should have fair opportunity to access support 
when the Commission holds reverse auctions''? Do you differ 
from Mrs. Boyers position?
    Mr. Davis. I don't believe so. I think those were the 
principles that I announced, as well, is that we need to target 
the money to places that don't have service, where there's not 
an unsubsidized competitor, and--and I do agree that, when 
there's a competitive bidding process, allow all technologies 
to compete, so long as they provide the level of service that 
is deemed appropriate and necessary for that particular area or 
for that customer.
    Senator Wicker. Mrs. Boyers, has Mr. Davis pretty well 
outlined it correctly, or would you like to elaborate?
    Ms. Boyers. Yes, he has. But, one of the most important 
things is the oversight of that. You know, the FCC is moving 
toward what they are calling ``greenfield approach,'' which 
means--greenfield means building it from day 1, from the ground 
up. What will be done initially with these CAF dollars, it's my 
understanding, is that they will be upgrading existing systems, 
which is called the ``brownfield approach.'' And so, the FCC 
has been bantering back and forth with this, and seem to be 
leaning toward green field. But, whenever the price-cap 
companies, who are the only providers allowed access to these 
CAF-1/CAF-2 funds--whenever they get that money for greenfield, 
and then they use it to upgrade existing, what happens to the 
excess money? That's what I--that's where the oversight comes 
in. That's where I want to know how I can be assured that, in 
my Van Buren, Missouri, system, on the current river of the 
Scenic Ozark National Riverways, that they're not coming in 
there, CenturyLink, which we compete with them in that market--
they've been great competitors, great competitors, very 
respectful of our plant, we're respectful of their plant, but 
we're just a little small mom-and-pop. I'm the mom. The pop's 
sitting two rows behind me.
    [Laughter.]
    Ms. Boyers. So, we can't compete with those big guys.
    We can't compete with government-subsidized money. We just 
simply----
    Senator Wicker. I'm not going to ask which of those three 
aspects he's supplying, there.
    [Laughter.]
    Ms. Boyers. I'll be glad to speak with you after the 
hearing.
    Senator Wicker. Let me just say--my time is out, and----
    Ms. Boyers. We just want the oversight. We believe it when 
they----
    Senator Wicker. We're going to need all four of you to help 
us with follow-up testimony for the record as to how we can 
make CAF-1 and CAF-2 work better for rural America.
    Ms. Boyers. Thank you.
    Senator Wicker. Thank you very much.
    Senator Pryor. Thank you.
    And we've been joined by our Ranking Member, Senator Thune, 
and I'll go ahead and recognize you now for your questions.
    Thank you.

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

    Senator Thune. Thank you, Mr. Chairman.
    I appreciate you, Mr. Chairman, and Ranking Member Wicker, 
having this hearing and leading off with a very ambitious 
agenda for the Communications Subcommittee, and particularly 
focusing on rural areas, which you know is very important to 
me.
    And I am interested, not only in deployment in rural areas, 
but also adoption, and trying to do more to get people to adopt 
broadband services in rural areas. And that is something I 
address in an opening statement, which I'd like to have 
included for the record, if I might, Mr. Chairman.
    [The prepared statement of Senator Thune follows:]

 Prepared Statement of Hon. John Thune, U.S. Senator from South Dakota
    Chairman Pryor, thank you and Ranking Member Wicker for working 
together on an ambitious agenda for the Communications Subcommittee and 
for leading things off with a hearing focused on rural America, 
something that is obviously very important to me.
    The Commerce Committee has several new members, and I know we will 
all benefit from an up-to-date look at today's communications 
landscape.
    I do think, however, that the Committee could have been served well 
by also hearing from a satellite provider today.
    For many households, satellite is their only option for video and 
Internet services.
    While satellite broadband has a reputation of being the option of 
last resort, my understanding is that a new generation of satellites 
may offer many Americans a competitive alternative to wired broadband 
choices.
    To tackle the so-called ``digital divide,'' we should seek to 
understand the entire communications experience in rural areas, and 
satellite is certainly part of that story.
    As the subcommittee begins its work, we have an opportunity to 
examine these critical issues from many angles.
    For example, policymakers have spent a lot of time focusing on 
deploying networks in unserved areas, which is certainly very 
important, but I also think it is necessary for us to examine broadband 
adoption in rural communities.
    Census Bureau surveys show that nearly 60 percent of rural 
households not connected to the Internet say they either do not need it 
or it is too expensive; lack of availability is cited by less than 6 
percent of rural non-adopters.
    But even when rural Americans see the benefit of the Internet, 
sometimes they still do not go online.
    In a recent survey of South Dakota farmers, 85 percent said that 
the Internet adds value to their agricultural operations but only 69 
percent actually use the Internet.
    Even though these folks can get online to check commodities prices, 
pay bills, or research new agricultural products, they are choosing not 
to do so despite the acknowledged benefits.
    What is keeping these people off the Internet? And are the 
broadband adoption challenges in rural America unique from the issues 
seen in the big cities? We should explore the answers to those 
questions.
    Thanks to companies like CenturyLink, South Dakota is one of the 
national leaders in fiber deployment, ranking third amongst the states 
with nearly 70 percent availability according to the National Broadband 
Map.
    But the tremendous benefit of that kind of connectivity may be 
wasted if people aren't taking advantage of it.
    I hope that the witnesses today will spend some time talking about 
the demand side of rural communications and that we further explore the 
actual experiences of rural broadband users in future hearings.
    Thank you.

    Senator Thune. But, if I could just ask a quick question 
and have you react to it, if you would.
    For those of you who compete head to head with other 
providers of voice, video, and Internet services, do you feel 
that you are competing on an even regulatory playing field with 
your competitors? And, if not, could you identify what you 
believe are the main regulatory disparities?
    Anybody want to take--feel free. Mr. Carlson.
    Mr. Carlson. Well, I'll--thank you very much. I will speak 
to the wireless area. And one of the key areas that we feel 
there is not a level playing field today is the 700 megahertz 
and the issue of the lower 700 megahertz band interoperability. 
We, like many midsized and smaller carriers, went into the 
auction, 3 years ago, acquired licenses on the A block, only to 
find, after the auction, that one--the two largest companies in 
the Nation changed the way the frequency allocations were 
aggregated to effectively exclude the A block from their 
handsets. As a result of that, manufacturers--many 
manufacturers will not produce handsets that include the lower 
700 megahertz A block, which means that our handset selection 
at U.S. Cellular is not as extensive as other carriers. In 
fact, some of the most popular handsets in America, we cannot 
get access to for our newly launched LTE broadband network on 
700 megahertz. We can't get access to that. So, that's a lack 
of consumer choice that was created because the FCC did not 
require interoperability across the lower 700 megahertz band.
    That's very, very important to correct. The FCC, to their 
credit, has a proceeding in front of them to correct that. We 
would hope that, as soon as the new leadership of the 
Commission is settled, that they will get that across the 
finish line. And we would ask for your help in doing that.
    Senator Thune. Anything else?
    Mr. Davis. Senator, I--as an incumbent telephone company, 
we are subject to substantial regulations regarding the 
provision of service, obligations to serve, unbundling of our 
networks. So, there are a number of obligations that are 
imposed on incumbent telephone companies that don't apply to 
cable or don't apply to wireless. And so, the regulatory field 
is not level; it has different bumps and bruises, but it's not 
level.
    The one thing I would also just mention very briefly about 
adoption, which you raised, is that we find that when we bring 
broadband to a community, there is a great need for it and a 
great desire for it. And so, adoption does occur very rapidly 
across a very broad base. We also offer a discounted $9.95 
broadband offer for low income customers. So, we're trying to 
do things to address adoption through various communications, 
but as well as looking at lower income customers and deciding 
if there's something we can do there.
    Mr. Strode. If I may.
    Senator Thune. Go ahead.
    Mr. Strode. Not necessarily in areas where we're competing, 
but just the regulatory burden on small companies, particularly 
companies like ours, and smaller than ours, the regulatory 
burden is very heavy. You know, the company I work for, we're 
fortunate--we're actually large, in the realm of some small 
companies, but I can tell you that the regulatory burden is 
difficult for us to comply with. We spend--it takes a great 
deal of my time, and our staff, trying to comply with the 
reports that are required of us, both as an incumbent telephone 
provider and as a cable and broadband provider. And for smaller 
companies, I can't imagine how they are able to keep up. I know 
it's a terrible challenge for them.
    On adoption, we have engaged in making some promotional 
offerings. A couple of schools in the areas we serve got grants 
to provide children, in one grade, laptop computers.
    We offered a promotional broadband offering to those 
students' families so that they could make complete use of 
those computers. We have worked with community organizations, 
trying to provide Internet education, broadband education, 
classes for adults. A problem--a common problem is the--their 
children know more about the Internet than they do, and they're 
concerned about the things that are out there in the world. 
They want to keep their children safe. And we've tried to 
develop some programs to help educate them so they can engage 
in monitoring their children's usage and being able to keep 
them--have some comfort that their children are safe.
    Senator Thune. Thank you, Mr. Chairman.
    I thank all of you for your input and perspective.
    Senator Pryor. Thank you.
    Senator Begich.

                STATEMENT OF HON. MARK BEGICH, 
                    U.S. SENATOR FROM ALASKA

    Senator Begich. Thank you very much, Mr. Chairman. Thank 
you for holding this hearing and an opportunity to kind of 
explore the issues of remote areas.
    And I use the word ``remote'' because, in Alaska, rural is 
one thing, but remote is clearly what we are, with 200 villages 
off the road system, almost 600,000 square miles of land, when 
you think of the size. It's enormous. And some of you have 
mentioned how hard it is to do some of your areas; you can 
imagine what it is in Alaska.
    And I know, Mr. Strode, in your written testimony, you 
noted, I think, Barrow, if I remember right, in the North 
Slope. And so, I thank you for that.
    You know, we've been fortunate, with some work with the USF 
fund, the RUS loan program, the stimulus program, to start to 
reach out and make some efforts. But, some of your testimony is 
pointing out some areas we still need to go.
    So, I want to start, if I can, Mr. Strode, in your 
comments. And I--and, as you know, Congress retired the NTIA to 
develop a--with assistance from the FCC--a national broadband 
map. And, you know, we hear rumblings, a little bit, of our 
accurate the map is, but can you give me a little feedback on 
how you see this map and how accurate their broadband map is, 
at this point?
    Mr. Strode. We have diligently tried to provide information 
to the organization that's doing the mapping for our States, 
and tried to make sure that the map was accurately--accurately 
reflects where we provide service.
    I believe the method that's used is--presents a--perhaps an 
uneven picture of the ability of our--of where we have service.
    Senator Begich. Is it fair to say it's not that accurate?
    Mr. Strode. Well, it's just not----
    Senator Begich. In the rural areas.
    Mr. Strode. It's--it--we have--as you're, I'm sure, 
familiar with, there--if you look at the map, it looks like 
there are great unserved areas. And the reason it's--some of 
those areas are unserved is because there's no one there.
    Senator Begich. Right.
    Mr. Strode. There's no one there to provide service to. I 
have concerns that the map does not accurately reflect the 
service that's available from some of our competitors. I think 
it perhaps overstates what some of the competitors can do.
    Senator Begich. Do you think they're being--do you think 
they'll be receptive, or not, in trying to get these maps more 
accurate? Because it is important for the consumer to know 
where the service is and where it's not.
    Mr. Strode. It's very important. And, like I said, we've 
worked with the organization that's doing the mapping in our 
State, and I think it pretty accurately reflects where we are; 
and they've been good to work with, in trying to do that. Like 
I said, I--one of my concerns is that it overstates what some 
of our competitors can provide and do provide.
    Senator Begich. I understand.
    Let me ask you another question, on intercarrier 
compensation. As you know what the purpose of this is. It's 
money the telephone company is paid to transport and--and as 
that continues to go down, which pretty much almost nothing at 
some point, what are you doing, as a company, to try to 
compensate what that--particularly where USF is kind of 
stagnant or lacking in its capacity? What do you do, as a 
company, to compensate for that?
    Mr. Strode. Well, we have made staff reductions. We've 
engaged in taking a hard look at our expenses, trying to 
control costs. We are looking at other lines of business, other 
ways to expand our business. We've been fortunate to get into 
the transport business. We're providing back haul for cellular 
companies from their towers. Looking at other ways to provide 
revenue to replace that lost revenue.
    Senator Begich. Gotcha. Let me ask you--and this will--one 
area that I want to ask you particularly about, and then I'm 
going to broaden it to the 700 megahertz issue--and that is the 
issue of roaming agreements. Tell me just kind of your ability 
or fairness, or what's--how do you see that?
    Mr. Strode. I don't have direct experience. Our company's 
not a provider of wireless services, but I know other companies 
that are similarly situated to us have problems getting roaming 
agreements that let their customers be able to use their 
service at reasonable prices when they travel outside of their 
home area. It's a--it is a major problem for----
    Senator Begich. It's a big challenge.
    Mr. Strode.--small/mid-sized carriers.
    Senator Begich. Very good.
    Mr. Carlson, I'm going to ask you this, because you 
mentioned it. First, on the 700 megahertz, I--that's very good 
testimony, and I--I'm hopeful that they'll get through their 
next order. You mentioned that they're in the process. And I 
always get concerned about how long FCC takes on these orders. 
They--it seems like a never-ending cycle. But, you mentioned 
the 600 megahertz issue that--to make sure we don't repeat the 
problem. I don't--I may have expanded the verbiage there, but 
explain that to me, just so I understand.
    I understand the 700. We've got some issues there. And 
hopefully the order will help rectify that. And it sounds like 
they're moving that way. But, my worry is always, again, FCC 
moving in a timely manner. But, the 600, tell me what your 
issue there was.
    Mr. Carlson. Well, the 600 megahertz auction will be even 
larger, in terms of--at least many people think it will be--in 
terms of spectrum availability, than the 700 megahertz auction 
was. And the 600 megahertz auction is expected to come either 
late 2014 or early 2015. And the rules for 600 megahertz are 
probably going to be written this year by the FCC. So, it's 
very important to get those rules right.
    So, we believe, as do many midsized and small companies, 
that we need to have interoperability standards established at 
the beginning----
    Senator Begich. Instead of what we did with the 700.
    Mr. Carlson. Exactly.
    Senator Begich. Gotcha.
    Mr. Carlson. Before the auction instead of after the 
auction.
    Senator Begich. And do you think the FCC is responsive to 
that?
    Mr. Carlson. Well, I would certainly hope so. I think so. 
At the staff----
    Senator Begich. I knew you were going to say ``hope so.'' 
Let me----
    Mr. Carlson. No, I will say this. I think many of the staff 
members are responsive----
    Senator Begich. OK.
    Mr. Carlson.--to that. And, of course, you know, the 
commissioners, you know, are--I would hope they would be 
responsive. And we'll do our best to educate them. But, the old 
kind of oversight that Patty talked about is wonderful and--to 
make sure that they realize that, you know, that's part of 
their responsibility, too.
    Senator Begich. OK, let--thank you very much. My time has 
run out.
    Mr. Chairman, that is obviously--because the 700 megahertz 
has taught us some lessons. It may be worthwhile, as the 
Committee just--this is one of those issues we should dog to 
make sure we're not here, 2 years from now, having this same 
panel, having the same conversation. Just food for thought.
    But, thank you all very much.
    Senator Pryor. Thank you. And we are keeping the record 
open for 2 weeks, so if you want to submit additional 
questions----
    Senator Begich. Excellent. I have a couple more. I'll do 
that.
    Senator Pryor. Great.
    Senator Begich. Thank you.
    Senator Pryor. Senator Blunt.

                 STATEMENT OF HON. ROY BLUNT, 
                   U.S. SENATOR FROM MISSOURI

    Senator Blunt. Thank you, Mr. Chairman. And thanks, to you 
and Senator Wicker, for holding this hearing.
    You know, when we had the commissioners in the other day, I 
asked them specifically about the underserved, unserved, how we 
really focus on people who don't have service out--Ms. Boyers, 
I know, of course, you and Steve well. I'm glad you're both 
here today. I know you're also involved in the American Cable 
Association. And, from that perspective, do you think it's 
possible for the FCC to develop a set of rules that really 
allow money to be spent only as it's targeted toward people who 
don't currently have service? How--what kind of advice would 
you give there as to how they should set these standards?
    Ms. Boyers. I certainly think that it's possible. I just 
don't know if the focus will be there. Because if the money is 
allocated and goes out the door first, then it's really hard to 
close the barn door after the cows have already gotten out. I 
mean, it just really is. Once the money goes out and they 
decide that it's going to be spent in greenfield components 
rather than brownfield, and before they would have to present 
plans--or even the way RUS does it on a loan--you have to spend 
the money before they give you the money. So, maybe an--I don't 
know how they would do that, Senator, but I do know that it 
must be done, because little people like us--and I say ``little 
people,'' figuratively speaking--little folks like us have no 
recourse, you know.
    I understand USF. I understand--I get that. I get the CAF 
fund. I get that. Because I understand where we're at in the 
concept of the--of ``but for.'' But for United Service Fund, 
you couldn't call your grandmother in Blue Eye, Missouri, if 
you liked in New York City. That's what universal service is 
all about. The Connect America Fund is the same thing. But, you 
can't use those funds, much like RUS has done in the past, to 
subsidize someone else to overbuild a suburban area, where an 
unregulated company that's using private company, unsubsidized, 
is already serving. That's where the rubber meets the road for 
the BOYCOMs of the United States.
    Senator Blunt. Right.
    Ms. Boyers. Because we have no recourse, we have no voice 
but y'all.
    Senator Blunt. Thank you. Thank you all for--that you for 
that comment.
    Mr. Davis and Mr. Carlson, both, you know, we really 
haven't had any buildout in Missouri, based on the USF reform 
order. Do you have a sense as to why that is and what can be 
done to further encourage buildout in the parts of the country 
that haven't had it yet?
    Mr. Davis first.
    Mr. Davis. Well, I think that--first of all, I do 
absolutely agree that subsidies should not go to areas where 
there's an unsubsidized competitor providing adequate service. 
And so, I agree with that concept. And I think part of the 
problem with the current round of the CAF-1 funding that the 
FCC has authorized is that it was insufficient to allow 
companies like ours to go to the higher-cost areas. And so, the 
purpose of the fund is to do that, to get us to the higher-cost 
areas. So, we need a new benchmark. We need the FCC to 
readdress the CAF-1 funding, which we are hopeful and believe 
they are trying to do. But, they need to look at the--how much 
it costs to get to some of these areas. And it's not without 
additional capital from private companies, also, but to 
recognize that these areas are very expensive, and getting that 
broadband out there benefits those customers, but also benefits 
everybody across the country, to have everyone engaged in the 
digital economy.
    Senator Blunt. Yes.
    Mr. Carlson?
    Mr. Carlson. Yes. So, in the wireless world, the way the 
FCC has organized the new Mobility Fund, which is the one that 
did not provide funding for Missouri, is that that fund is 
targeted at those highway miles that are the least expensive to 
serve that have not yet been covered by good service. So, it 
has a very specific targeting. And the amount of the fund being 
only $300 million, compared to $1.2 billion per year of funding 
under the prior Universal Service Program for wireless, meant 
that the fund availability was much, much smaller.
    So, areas like Missouri, which is--are more difficult to 
serve per highway mile, under the current FCC regime will be 
forced to wait--and we don't know how long--until the areas 
that are the least expensive to serve of the unserved areas are 
served and we work our way up to the more expensive areas to 
serve.
    This was not one of our ideas as a company. We wanted to 
continue with a system which allocated funds based on all areas 
that had high cost, which would have covered states like your 
own, sir, states like New Hampshire and other states. But, this 
is what the FCC currently has decided to do.
    We would recommend that more funding be provided for 
mobility and that the FCC take a new look at this method of 
funding that only targets the least expensive areas to serve.
    Senator Blunt. Right.
    My time's up. I'm going to submit a question--Mr. Carlson, 
you reminded me, there in your comment, of whether that 300 
million was all subscribed, and, if it was subscribed, if it's 
all, then, being used, or do we have some idle money sitting 
around that was designed for a specific purpose that's not 
being used for that purpose of connecting these highway miles. 
And I'll submit that in writing.
    Thank you, Chairman.
    Senator Pryor. Thank you.
    Senator Fischer.

                STATEMENT OF HON. DEB FISCHER, 
                   U.S. SENATOR FROM NEBRASKA

    Senator Fischer. Thank you, Mr. Chairman.
    I'd like to focus on a concern that many companies in my 
state have problems with. They believe it's hindering their 
goal to meet the needs of their customers. And that's the QRA. 
They're concerned about the formula, which we've talked about, 
and also about the unpredictability of the year-to-year caps.
    And, Mr. Strode, I'd like to ask you some questions on 
that. With your experience, how do you believe that these QRA 
caps are affecting the companies that you represent? And I'd 
like you to talk about the planning process and the problems 
that some of these companies may have in even forming a 
business plan because of that unpredictability. And you 
mentioned, I think, earlier in your testimony, about a 5-year 
plan. And is that required?
    Mr. Strode. Thank you, Senator. Yes. The FCC requires from 
us a 5-year plan, starting this year, on July 1. By July 1, we 
have to submit a 5-year plan of how we're going to make 
broadband available in areas where it's not available now or 
increase bandwidth in areas where it is available today. So, 
it's investment in broadband services. We are required to make 
that plan, provide some other information, in terms of 
unfulfilled requests, if there are any, for broadband services, 
and submit that plan by July 1, describing how we're using 
Universal Service funds that we receive.
    A year from now, or in July 2014, we're going to have to 
submit another 5-year plan, update, you know, prospective 5-
year plan, and report on the progress that we've made on the 5-
year plan that we presented the year before.
    In a environment in which we don't know, are unable to 
accurately predict what our recovery is going to be on 
investments that we make because of the QRA, the regression 
analysis, we don't know what companies are in the same group 
with us. We can't--we don't know how we're investing, in 
comparison to them. We don't know if we're making investments 
that are going to push us over the 90 percentile, or not. It's 
very difficult to make plans, to know that this investment is 
going to--what recovery, what revenues we will receive from the 
Universal Service Fund on that investment. And so, it makes it 
difficult to look into the future for 5 years and make plans, 
not knowing what's next, in terms of recovery. And, as I said, 
the Commission is still considering further caps and cuts in 
the fund, and we don't know what impacts those will have. So, 
trying to make a 5-year plan is extremely difficult.
    Senator Fischer. You know, I have a company in my state 
that--in their plan, I believe it is, that they need a million 
dollars for investment, and they received, I think, $125,000. 
How would you suggest a company can plan, unless we change it? 
Should the Commission be looking at maybe a--at regions instead 
of the entire country with regards to the formula to look--
instead of having such diverse companies involved in trying to 
divvy out the money that way, should you look more for 
companies that are alike, at least in the regions that they 
serve?
    Mr. Strode. My understanding is that the companies that are 
in the sample, or that are in the regression analysis with our 
companies, are companies that are similarly situated, have 
similar terrain, similar customer densities. My recommendation 
is that the FCC use the regression analysis, not as a hard cut, 
at 90th percentile, but use that as a method to identify 
companies that need further investigation. Rather than saying, 
``Because you're above the 90th percentile, we're going to 
limit you,'' look at the companies that are above the 90th 
percentile and say, ``Okay, why is it expensive to serve in 
that area? Show us what you've done. Justify these costs to 
us.'' And if a company can't justify the costs, then limit 
their receipts.
    But, if the company is spending that money in a good faith 
effort to provide broadband to customers in its service 
territory who aren't going to get it otherwise, in many cases, 
then they shouldn't be penalized simply because the areas where 
they serve is very expensive to serve in.
    Senator Fischer. Thank you very much.
    Mr. Strode. Thank you.
    Senator Pryor. Thank you.
    Senator Klobuchar.

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

    Senator Klobuchar. Thank you very much, Chairman Pryor.
    Thank you, to our witnesses. I'm--this is incredibly 
important to my state and other states here. I truly believe 
people that grow up, kids that grow up, in rural Minnesota 
should be able to stay in rural Minnesota. And, in today's 
world, that means they have to have Internet that works, they 
have to have phone service that works. And this is truly our 
rural electrification issue of our century, and that means 
expanding broadband. And I'm going to put some questions on the 
record on that, especially with the middle-mile issue.
    But, there are two things I want to focus on today. First, 
the call-completion issue, which, I have to tell you, was a 
complete surprise to me, about a year ago, when I was visiting 
a town that was almost decimated by a tornado, and all they 
wanted--they missed the tornado, but all they wanted to talk 
about was their ``phone tornado,'' which was that their calls 
were not being completed.
    And, just recently, we've had an uptick in call-completion 
complaints, and I know the FCC is making progress, that there 
was a settlement with one company, with Level 3. But, in 
Minnesota, businesses like Up North Sports, in Bemidji, John 
Deere dealers that sell $300,000 worth of tractors in Hoffman, 
they depend on quality phone service. And, bizarrely, I guess 
to save money, some of these companies are not just--they're 
just bumping these calls and not completing them, because it 
costs too much. And they literally have shown me graphs of when 
this happens.
    Mr. Strode, do you want to comment about this and what your 
experience is and what you hear from customers and businesses?
    Mr. Strode. Yes, Senator, thank you.
    We have experienced call-completion issues in our service 
territories. A manufacturing plant in Marked Tree, Arkansas, 
one of our exchanges, was unable to receive calls either from 
customers or suppliers. They were--they called us, desperate. 
They were complaining that, ``You've got to come over here and 
fix this problem.'' And when they described the problem to us, 
we said, ``It's not our problem. We'll be glad''--and we went 
to them and worked with them to show them that it's not our 
fault----
    Senator Klobuchar. Right.
    Mr. Strode.--that the problem is on the originating end.
    Senator Klobuchar. I understand.
    Mr. Strode. And we were able to create a workaround for 
them, create--we set up a number, in another area that was not 
having call-completion issues, and let them give that number 
out, then we route that across our network to deliver it to 
their facility so that they could get those calls. They're a 
major employer in our service territory, and we were trying to 
help them be able to continue in business.
    I appreciate what the FCC's done on--in their settlement 
with Level 3. However, we don't--have not seen a significant 
change----
    Senator Klobuchar. Agree.
    Mr. Strode.--in the amount of call-completion issues we 
have.
    Senator Klobuchar. Yes.
    Mr. Strode. I confirmed that yesterday. I was----
    Senator Klobuchar. Thank you.
    Mr. Strode.--in contact with one of our offices, and they 
confirmed that we're still having problems. Had two calls 
yesterday----
    Senator Klobuchar. It's----
    Mr. Strode.--from customers----
    Senator Klobuchar. I think people, in this day and age, 
would be shocked that we can't have high enough quality 
service--and it's not because we don't have the capability, 
it's because they're choosing to shut them off.
    And I just wanted to read one letter, and then go on to one 
last issue, from one of our small phone companies. And they 
said, ``The level of frustration has reached such a height 
that, rather than enforcing, educating, and assisting rural 
customers and companies, our regulatory bodies are informing a 
customer to switch their local provider to a bigger company, 
even though the local provider,'' as you pointed out, Mr 
Strode, ``has no control of the situation and is fully 
compliant with FCC rules.''
    So, I know that we've had a bipartisan letter on this with 
a large number of Senators, and I think we're going to have to 
do something more. The Level 3 settlement was good, but it's 
clearly not enough, when, in response, we're now seeing an 
uptick.
    Mr. Strode. Yes. It--we actually, in working with that 
manufacturing plan in Marked Tree, they told the people who 
were trying to call them, you know, that the problem was on 
their end. And when the callers contacted their phone company, 
they were told that the problem was because the manufacturing 
plant was in an area that was served by a small telephone 
company that just did not have----
    Senator Klobuchar. No, this just----
    Mr. Strode.--the facilities to provide that service.
    Senator Klobuchar. Right. This just can't be how business 
works in America, ``Sorry, you have a small carrier, so you 
don't get service,'' even though it's not their fault. That's 
what they're saying.
    OK, the second thing is unlocking of cell phone service, 
something that--there are a number of bills out there right 
now, coming out of a recent issue, which is too detailed, 
legally, to go into right now. I'm a strong believer in 
unlocking. I think it'll lead to more competition. I have a 
bill with Senator Mike Lee to require the FCC to put rules 
forth so that, basically, and especially in rural areas, that 
you're not locked into your carrier when you have a phone, and 
that you can keep your number, and that you can--if you're--
move or if you are in another part of your--especially a rural 
area, where the phone service isn't working, you don't have to 
change your phone.
    I guess I would start with you, Mr. Carlson, if you agree 
that unlocking is an impediment for consumers choosing to 
switch carriers, and, therefore, a barrier to competition.
    Mr. Carlson. Yes, Senator, we would agree with you, that 
unlocking is something that is a good thing to do, and is a 
necessary thing to do.
    The only thing we would add is that if you unlock and you 
have not gotten interoperability, then the unlocking may not 
really have any effect, in certain cases.
    Senator Klobuchar. Right. Could you just follow up on that? 
And then, I'm out of time; I'll do the rest on the record, 
here. But, how does the lack of interoperability impact the 
rollout of, say, 4G service to rural areas?
    Mr. Carlson. Right. Well, to give you another example, many 
of the licenses in the 700 megahertz were won by companies 
smaller than ourselves, and they, frankly, were not able to get 
any manufacturers to produce phones for them. So, as a result, 
a large percentage of the 700 megahertz A-block licenses, which 
probably, in aggregate, are worth hundreds of millions, if not 
billions, of dollars are sitting unused today, even though 
that's clean spectrum, good spectrum that could be put to work 
in rural America for the benefit of the public, all because we 
lack interoperability.
    Senator Klobuchar. OK, very good.
    I want to thank all of you and just put everyone on notice, 
here, that you just can't mess around with rural areas by not 
completing calls. This is not going to work, so there must be a 
better solution. And that I think there's a lot of hope here, 
and bipartisan interest, in doing something on unlocking.
    Thank you.
    Senator Pryor. Thank you.
    Senator Ayotte.

                STATEMENT OF HON. KELLY AYOTTE, 
                U.S. SENATOR FROM NEW HAMPSHIRE

    Senator Ayotte. Thank you, Mr. Chairman.
    I want to thank the witnesses for being here.
    And, Ms. Boyers, I wanted to follow up on some of the 
questions you were asked by Senator Blunt. I've had a lot of 
concerns about the Universal Service Fund. You know, New 
Hampshire's a $25 million annual net donor to this fund, yet 
we've got areas of New Hampshire that are rural, particularly 
in Coos and Grafton Counties, that are not getting the capacity 
that would provide very needed economic development and 
broadband access. So, as I look at your experience, you are 
receiving no government subsidies, and yet, in many instances, 
you're having to compete your distinction between greenfields 
of money not, for example, going to places where, because of 
the rural nature, we do need the assistance to build capacity. 
Instead, it's going to brownfields to upgrade systems where 
there already are systems in place and where competition would 
take care of itself.
    So, I'm really concerned about that. I appreciate your 
testimony. And one of the ideas I wanted to get your thought on 
is, since we give the money up front, is there a phased way we 
could give the money? Is there a way that we can make sure 
that--you said FCC oversight, that this money doesn't go to 
brownfields to subsidize areas where--for example, you're 
competing against them with no subsidies? There are areas that 
are underserved that really exemplify the purpose of the 
Universal Service Fund. What thoughts do you have on how we 
could have greater oversight on how funding is allocated? 
Because it seems to me, that would be the greatest area of 
oversight we could push forward.
    Ms. Boyers. Well, thank you, Senator. One of the benchmarks 
that the FCC has set forth is a 4 megahertz availability for 
downstreaming, and upstreaming of 1 megabyte. So, that is the--
that says this area is underserved or it's unserved. So, if you 
have a system that already exists, and you're only offering 3 
megabytes, and that's the max that you can offer, they will go 
in, and they're going to get money to rebuild the whole thing, 
but they're just going to--just going to revamp it so that they 
can get it up to the level that the FCC is requiring, which is 
the 4 megabytes, but then you've got the rest of this money out 
there. That gets----
    Senator Ayotte. But, tell that to the people that don't 
have any access.
    Ms. Boyers. That's exactly right. If you are truly building 
brand new plant in areas where there is absolutely no one 
serving, then greenfield is the only way to go, because it 
truly is greenfield. But, that's where the oversight comes in. 
That's where the FCC--and, quite frankly, I have been the 
recipient of a $9.3 million RUS loan, of which we sent back--we 
didn't send it back--we only took $1.5 million of it, and then 
adjusted our loan documents so that that's all that we took 
from them, because of the laborious process that we have to 
reprove our loan every time. We get to a next--new point of our 
project, we have to present all the invoices, then we get our 
money.
    I have no problem with the FCC making that happen with the 
CAF fund. That's accountability. You know? Put your money where 
your mouth is, and then we'll reimburse you. But, that's the 
way--that's the way most construction loans--for a home, you 
get your money, there it sits. You go in, you present your 
invoices and your lien waivers from your carpenters, and 
everybody signs off, they get their check. I don't have a 
problem with that. I think that would be an excellent way to do 
it. That's the way I've been required to do it with an RUS 
loan, so why not do that with the RUS stimulus money or with 
the CAF fund?
    Senator Ayotte. That way, we know it's going to places 
where we really need it.
    Ms. Boyers. Absolutely.
    Senator Ayotte. I appreciate your advice on that.
    And, Mr. Davis, I know that, when it comes to New 
Hampshire, we're similarly situated to Missouri, in that we did 
not receive any of the Connect America funds. And, in fact, as 
I understand it, there certainly have been applications that 
were denied for New Hampshire because of the cost of a 
mountainous terrain. It's a beautiful state, but the areas that 
aren't covered, there's a reason why they're not covered: the 
geography and the nature of those areas. Yet, there is huge 
economic capability there if we could have broadband access. 
So, what do we need to do for states like New Hampshire?
    Mr. Davis. Well, yes. And I think one of the changes the 
FCC is making, or is intending to make as they move from the 
Universal Service Fund to the Connect America Fund, is to fund 
only areas which they've identified, through a national 
broadband map or through whatever research they have, as not 
having service. So, find areas that don't have adequate 
service, and only provide support in those areas.
    But, what we need to do, what the FCC needs to do is--
they've set a benchmark, and that benchmark allowed a limited 
amount of funding to be used, and of broadband to be deployed. 
And what we need is--in the CAF-1 process, is to refine the 
benchmark. The benchmark needs to be changed so that we get 
more money out there, we get more broadband deployed, and we 
bring it to areas of rural Massachusetts, rural Missouri, of 
all 50 states, where we don't have broadband.
    Senator Ayotte. And can we combine that with a proposal to 
make sure that it goes to the areas that really need it: the 
greenfields capacity? Because, I do think it ends up being 
unfair that you're subsidizing competitors, where there are 
places that don't have capacity.
    Mr. Davis. Yes. Right. I agree that we should not be 
subsidizing a competitor where another competitor is already 
providing adequate service. I absolutely agree with that. The 
greenfield/brownfield discussion goes into the cost model that 
the FCC is looking at, with respect to the long-term CAF 
funding and how do you base that model. The FCC has always 
looked at a greenfield model. They did so when they adopted the 
unbundled network elements, because that was the cheapest way 
to price those. So, it's a more difficult discussion regarding 
cost modeling, which we can have, but that's kind of the 
greenfield/brownfield. It's not that we're in any way 
suggesting subsidies of areas where someone's already providing 
broadband service.
    Senator Ayotte. Thank you.
    And I may have some follow-up questions for the record, but 
I want to thank all of our witnesses for being here for this 
important issue.
    Senator Pryor. Thank you.
    Senator Fischer.
    Senator Fischer. Thank you, Mr. Chairman.
    I have--just have a couple of questions I wanted to follow 
up on since we have a few minutes left.
    Mr. Davis, when Senator Wicker and, I think, Senator Blunt 
also was asking you about the CAF-1 question, and the money 
that was accepted--I think it was $115 million, is that 
correct?--and that----
    Mr. Davis. That's correct.
    Senator Fischer.--was out of $300 million?
    Mr. Davis. That's correct.
    Senator Fischer. Can you tell me how many carriers accepted 
the money?
    Mr. Davis. I don't know the actual number. We can provide 
that for you, though.
    Senator Fischer. OK. And do you know how many were turned 
down?
    Mr. Davis. The----
    Senator Fischer. Were there any?
    Mr. Davis. It was not as much ``turned down'' as the--the 
commitment would be to build to a certain number of households 
for every $775 received. And so, I don't believe any were, per 
se, turned down. Proposals that companies made to provide 
different benchmarks were turned down.
    Senator Fischer. By the companies that didn't receive the 
money, correct?
    Mr. Davis. By companies who had the option to receive the 
money but could not make----
    Senator Fischer. They didn't----
    Mr. Davis.--$775 work for their rural constituents.
    Senator Fischer. They didn't reach the benchmarks that were 
set. Were those benchmarks realistic?
    Mr. Davis. The benchmark, as it turns out, was not 
realistic for most rural customers. And so, it was set too low 
to serve the vast majority of rural unserved customers.
    Senator Fischer. Have you or any of the other companies 
given suggestions on how those benchmarks might be changed?
    Mr. Davis. We have. We've had extensive discussions with 
the FCC about creating new benchmarks that allows us to put 
this money to use. It's just sitting on the sidelines. And we 
are hopeful--and I--and members of this committee and the 
Congress have weighed in and said, ``Let's get this money and 
put it to use and build broadband in unserved parts of 
America.'' And we're hopeful that the FCC is moving that 
direction.
    Senator Fischer. OK, thank you.
    And then, Mr. Strode, a follow-up question for you. You 
outlined three steps in--that the FCC should take to uphold the 
legal requirement, that the funds should support sufficient--
that fund support should be sufficient, predictable, and 
specific. So, what are the steps that you think need to be 
phased in for the caps over a longer period of time in order to 
meet those?
    Mr. Strode. Well, the QRA analysis, the regression 
analysis, should be clarified and used, as I said earlier, as a 
tool rather than--it should be used as a tool to identify areas 
that need further examination. The FCC should not implement any 
new changes until they evaluate the changes that have been made 
and see what impact they've had, see if they've helped.
    The FCC needs to also define a clear path, a plan for the 
broadband for rural areas that is understandable and 
achievable, and that gives rural--people in rural areas a 
realistic opportunity to receive broadband services that work, 
that are comparable--reasonably comparable to what's available 
in the urban areas.
    Senator Fischer. Right. But, do you believe that the FCC 
should phase in those caps over a certain amount of time? And 
what kind of timeline would you give them?
    Mr. Strode. I'm--I don't agree that the caps are 
necessarily appropriate. Like I said, there are legitimate 
reasons that companies' costs are high. And I--while I 
understand that the FCC has set a budget and is trying to work 
with that budget, I think they've got the regulatory cart 
before the horse. They set a budget before they knew what the 
real cost to provide broadband to people in rural areas is.
    You know, it's--I don't agree that caps are necessary or 
that they're even useful if they prevent people in rural areas 
from getting broadband services.
    Senator Fischer. OK, thank you.
    Thank you, Mr. Chair.
    Senator Pryor. Thank you.
    I do have just a very few follow-ups, as well.
    Mr. Strode, let me start with you. Earlier in your 
testimony, and in response to a question, you talked about the 
regulatory burden. And, just for clarification, is that 
regulatory burden coming from the Federal Government, State 
governments, or local governments, or all of the above?
    Mr. Strode. Primarily from the Federal Government. The 
regulatory burden at the State level is much less than it was 
at one time. Regulatory burden from local governments is very 
small. It's primarily from the Federal Government, from the 
FCC.
    Senator Pryor. Thank you.
    And, Mr. Carlson, I do want to follow up on a couple of the 
questions that my colleagues have asked, and that is about 
interoperability, and also data roaming. Are those issues 
different in a rural setting compared to a more urban or 
suburban setting, or are they sort of the same wherever you 
are?
    Mr. Carlson. Well, I think the interoperability is 
particularly acute in a rural setting, because the 700 and 600 
megahertz licenses are particularly useful in rural areas. In 
other words, those spectrum bands, the signal travels farther 
and can be used to serve rural areas effectively. And those are 
two bands that the FCC can really do something about in the 
near term. So, I would say there is something different there.
    In terms of data roaming, I think the data roaming need is 
universal. Fortunately, there was a court decision that upheld 
the FCC on roaming. And so, we--we're very encouraged by that. 
But, that will need continual oversight, from all of you here 
in the Senate, to make sure that the FCC continues to be 
aggressive in making sure that roaming is possible between 
carriers.
    Senator Pryor. OK. I want to say thank you to our entire 
panel.
    We are going to leave the record open for 2 weeks. And, by 
the way, we know that we had a very small sliver of the 
industry here today, and I don't want to create a myth, here, 
that it's only small carriers that serve rural America. If the 
larger carriers were here, they'd tell you they've invested 
billions in rural America to try to provide service, as well. 
But, we would love for the Senators to submit further 
questions, if they have them. We also would welcome any 
comments from the public to be part of this record.
    And I just want to say thank you very much to all of our 
panelists today. We're going to leave the record open for 2 
weeks. And I just want to, again, say thank you all for coming. 
Some of you traveled a great distance to be here.
    Thank you.
    [Whereupon, at 12 p.m., the hearing was adjourned.]
                            A P P E N D I X

            Prepared Statement of Hon. Frank R. Lautenberg, 
                      U.S. Senator from New Jersey
    Mr. Chairman, our nation's telecommunications networks are some of 
our most valuable assets. Wide access to broadband, in addition to 
voice and video, is critical to spreading economic growth and 
opportunity to every corner of the country. But far too many Americans, 
including some in New Jersey, live in areas where there is no broadband 
access. Too many others live in areas where there may as well be no 
access because broadband is so expensive. So we must continue to look 
for ways to ensure that residents in rural and low-income areas have 
affordable broadband access.
    In underserved areas, we need to look beyond traditional means to 
make sure everyone has access to broadband. For example, we should 
consider the role that municipal governments can play in providing 
access. Municipal broadband can help lower costs and expand access in 
areas that currently lack service, or where service is insufficient or 
unaffordable. The United States should be encouraging these innovative 
networks. Yet, many states have already passed laws that restrict 
municipal broadband access. Instead of creating obstacles for 
municipalities that want to provide affordable broadband access, we 
should be working to ensure everyone has access to the Internet.
    Another important issue is improving how we fund the extension of 
broadband access. I have long supported the Universal Service Fund. But 
as it stands, states like New Jersey--large net-contributor states--
bear too much of the financial burden, donating nearly $200 million a 
year to the fund. We certainly recognize the value and importance of 
the USF, but if we are to make it a sustainable program that helps make 
universal broadband access a reality, we must reassess the way we 
contribute to the fund. As the Federal Communications Commission works 
towards contribution reform efforts, it must consider the impact of any 
reform proposals on net contributor states.
    I thank the Chairman for calling this hearing on our 
telecommunications network, which is important to this country's 
continued growth, and I thank the witnesses for speaking about the 
communications needs of the Nation.
                                 ______
                                 
           Prepared Statement of Albert S.N. Hee, President, 
                  Sandwich Isles Communications, Inc.
    Chairman Pryor, Ranking Member Wicker, and distinguished members of 
the Committee, thank you for holding this hearing to address the State 
of Rural Communications. My name is Al Hee and I am the Founder and 
President of Sandwich Isles Communications, Inc. (SIC), the only Rural 
Local Exchange Carrier (RLEC) located in Hawaii. SIC provides service 
to Hawaii's indigenous people on Hawaiian Home Lands (HHL), Hawaii's 
``tribal lands'', which were created by Congress through the Hawaiian 
Homes Commission Act of 1921 (HHCA). The Hawaiian Homes Commission 
(HHC) approached me twenty-five (25) years ago to insure the lands set 
aside by Congress by the HHCA would have adequate communications 
services. SIC is a beneficiary owned RLEC which has provided advanced 
telecommunications services since 1995.
    Prior to SIC, the only HHL areas receiving telephone service from 
the monopoly incumbent local exchange carrier (ILEC) were those where 
HHL paid for the infrastructure improvements. This resulted in the vast 
majority of HHL not having service. SIC worked with the Department of 
Agriculture, Rural Utilities Service (RUS) to design and build 
communications infrastructure capable of delivering both voice and 
broadband. Repayment of the loans is dependent on receiving Universal 
Service Funds (USF). SIC then borrowed the money from RUS to pay for 
the infrastructure. These plans were reviewed and approved by RUS and 
all information about the plans submitted to the FCC. SIC is audited 
every year and has had numerous annual and special reviews by both the 
RUS and FCC since beginning to provide service.
    SIC provided comments in the numerous efforts leading up to the 
final Transformation Order finalized in December 2011. However, the 
final Transformation Order differs from the draft(s) substantially. We 
viewed the Transformation Order as pivotal in keeping up with the 
changes that are occurring in communications. These changes are not 
only technological, but more importantly the changes are societal. In 
its' Transformation Order, the FCC took great pains to meet the 
requirements of the underlying statute in particular Section 254 of the 
statute specifying that ``support must be sufficient and predictable.'' 
The Transformation Order contains a ``waiver'' to meet the ``sufficient 
and predictable'' statutory requirement.\1\ In addition to the waiver, 
the Transformation Order contains a 45 day timetable to act on the 
waiver petition when the petitioner is serving Tribal Lands.
---------------------------------------------------------------------------
    \1\ In Re: FCC 11-161; On Petitions for Review of an Order of the 
FCC; U.S. Tenth Circuit Court of Appeals; No. 11-9900; Federal 
Respondents' Uncited Response to Tribal Carriers' Principal Brief, 
March 20, 2013.
---------------------------------------------------------------------------
    Ten months ago, I testified before the Senate Committee on Indian 
Affairs about the devastating impacts the FCC's Transformation Order 
issued in December 2011 had and would continue to have on insuring 
Tribal Lands obtained advanced communications services. At that time, I 
believed the impacts were unintended. However, today it is difficult 
for me to understand how the devastating impacts can be anything other 
than intentional.
    SIC was the first to file a petition for waiver in December 2011. 
We are now sixteen months from our petition date and we have not 
received a ruling despite the 45 day rule. We have however, learned the 
following: i) the FCC does not believe it has any obligation to 
continue to support any legal financial obligations a company made 
under the previous rules; and, ii) any waiver will not be retroactive 
regardless of when the petition was filed or when the ruling should 
have been made.
    Communications infrastructure requires millions of dollars of loans 
that are paid back over a period of 20 plus years. Furthermore, 
utilities customarily enter into long term obligations to lease 
facilities, real estate and rights of ways. SIC did all of these and 
based our waiver petition on fulfilling only the obligations made under 
the old rules. Before the Transformation Order SIC met these 
obligations primarily through the USF payments received under the FCC's 
rules. SIC has been told it must renegotiate these obligations before 
the waiver can be acted upon. SIC does business with several affiliate 
companies. All of the necessary transactions are in accordance with 
existing FCC rules and reviewable. SIC has never been told these 
transactions are in violation of rules, fraudulent or unethical. 
However, SIC has been told to eliminate all affiliate transactions 
including those which are necessary to continue to provide service. You 
heard oral testimony about the Regression Analysis singling out the 
company receiving the most support, regardless of whether that support 
is justified. Rural companies are therefore not making any future 
investments. Despite overwhelming evidence that the cost of doing 
business in Hawaii is more expensive than in the continental US, the 
regression analysis does not account for this. Therefore, SIC cannot 
make future investments nor can it meet its obligations for investments 
made under the old rules.
    Not only has the FCC not acted as per the 45 day period, SIC is now 
being told any action will not be retroactive. We are now approaching 
500 days since SIC filed its waiver petition. SIC filed the waiver 
petition quickly in hopes of averting the devastating financial impact 
of the Transformation Order. SIC has been using its own monies, not 
paying some creditors, reducing the number of employees and where 
possible deferring payments. SIC has also tried to use those portions 
of the Transformation Order to increase its revenues by serving more 
customers with its existing infrastructure. The Order contains a 
streamlined process to expand a carrier's study area, a process that 
normally takes years and requires voluminous filings and comments. SIC 
has been planning for years to expand its study area to include all of 
HHL however, has not done so because of the time and expense it takes 
under the old rules. SIC filed to expand its study area under this 
streamlined provision in the Order however, because the FCC has not 
acted on SIC waiver petition, the streamlined process of expanding 
SIC's study area is not available to SIC.
    In issuing the new Order, the FCC seems to have forgotten the 
reason this universal service program exists. There are and always will 
be high cost areas that the incumbent exchange carriers will not serve. 
If Congress continues to believe that all citizens deserve a universal 
level of communications, then the Transformation Order must be amended.
    Thank you for the opportunity to submit comments.
                                 ______
                                 
[Each of these people individually submitted the following memorandum.]

Jon Saunders, General Manager, SECOM, Inc.

Vince Kropp, CEO/GM, PC Telecom

Thomas J. Kern, President, Northwest Colorado Broadband, Inc.

To: United States Senate Committee on Commerce, Science, and 
            Transportation, Subcommittee on Communications, Technology 
            and the Internet

Re: April 9, 2013 hearing entitled ``State of Rural Communications''

        ``Broadband is the great infrastructure challenge of the early 
        21st century.'' See, Federal Communications Commission, 
        National Broadband Plan, Introduction, p. 19 (2010) (available 
        at http://download.broadband.gov/plan/national-broadband-
        planchapter-1-introduction.pdf (emphasis in original).

    By way of introduction, Colorado is the Nation's eighth largest 
state covering more than 104,000 square miles. It could contain the 
states of Maryland, Virginia, West Virginia, New Jersey, Connecticut, 
Delaware and Rhode Island and still have more than 4,000 square miles 
to spare. Several of Colorado's counties are the size of small states. 
And Colorado is the Nation's most mountainous state, boasting 54 peaks 
over 14,000 feet in elevation, 1,000 peaks over 10,000 feet in 
elevation and the highest mean elevation (6,800 feet) of any state in 
the Nation. Colorado also is the only U.S. state that lies entirely 
above 1,000 meters (3,281 feet) elevation. The lowest point (3,317 
feet) in the state is higher than the highest elevation point of 18 
states and Washington, D.C. As a result, Colorado's topography presents 
unique infrastructure challenges. This is especially true in 
mountainous areas where population densities are extremely low, 
construction windows narrow due to mountain weather, and construction 
methods extremely difficult due to topography.
    Silverton Colorado, for example, lies at 10,000 feet above sea 
level. Travel in and out of Silverton is accomplished via two routes 
one of them being Red Mountain pass, known as the ``million dollar 
highway'' as it was carved right into the side of near vertical rock 
walls and cost a million dollars a mile to build at the time. Right now 
Silverton relies on long haul microwave relay systems built decades 
ago. Other towns like Steamboat and Craig are served by only a single 
fiber optic route spanning hundreds of miles and may pay up to $100 per 
megabit for Internet connectivity when urban networks charge less than 
a 1/10th of that. Mountain towns throughout Colorado have suffered 
lengthy and extensive outages because any fault or cut along the route 
renders entire counties without any means of communication to the 
outside world for up to a day at a time. One need not think for long to 
imagine the crippling economic impact that can have in today's always-
on, location independent, hyperconnected world.
    At the same time, there are private market providing 100mbps down/
50mbps capacities across areas the size of West Virginia at prices 
competitive with Denverites receiving 20mbps down/6mpbs up capacities. 
Carriers have built very high capacity networks in the world's highest 
alpine valley the San Luis Valley--including six diverse routes in and 
out of that area and offer 50mpbt capacities or better.
    Still, intense challenges remain in mountain communities and with 
the recent extensive overbuilds by the NTIA's BTOP-funded entity 
EagleNet Alliance (ENA), including complete duplication of several 
rural fiber optic networks and entry into these markets as a 
government-backed competitor, means that this state's rural broadband 
connectivity challenges have been exacerbated rather than improved by 
ENA. The American Recovery and Reinvestment Act of 2009 appropriated 
funds to the NTIA to provide broadband infrastructure and services to 
unserved and underserved parts of rural America. In September, 2010, 
NTIA awarded $100.6 million to Colorado's EAGLE-Net Alliance (ENA) to 
build broadband to parts of rural Colorado that lack the high-speed 
Internet service needed by schools, businesses and Colorado residents. 
ENA has committed roughly $70 million of that $100 million. Coloradans 
statewide are working very hard to see this money redeployed to where 
it is needed.
    What the state has learned from its rural broadband failures and 
successes, however, is the following:

  1.  Rural telecommunications providers have successfully provided 
        fiber optic and high speed dedicated connections statewide. 
        Overbuilding these carriers irreparably impairs rural 
        connectivity and harms local economies.

  2.  Rural connectivity is a difficult and expensive undertaking. 
        Funds must be prioritized for unserved and underserved areas. 
        Any thought that government funds would be used to create 
        competition are severely damaging, misguided and result in 
        wasteful duplicative spending.

  3.  Government funds must be accountable to local interests. 
        Throughout the state of Colorado local communities have worked 
        hand in hand with their local providers to identify places 
        lacking connectivity. These are precisely the areas where money 
        can be efficiently spent.

  4.  Where there is direct government investment, it should be limited 
        to infrastructure--conduit and cable--and leave the 
        complexities and economic bets on rapidly changing private 
        markets to the private market.

  5.  Given the apparent failure of ENA to build where there is true 
        need, the network must be turned over to carrier and community 
        control. New funds must be apportioned to address the broadband 
        limitations in the truly unserved western slope communities.

    On a statewide basis, rural carriers and communities statewide 
recommend an infrastructure-based approach to locally controlled and 
supported public/private partnerships. While the rules may be state or 
national level, implementation and accountability must occur on the 
ground at the local level. This avoids the government entering into and 
disrupting through use of taxpayer money very complex and rapidly 
changing private markets. It allows government to lower barriers to 
entry in high cost/low density rural markets while simultaneously 
invigorating local private investment.
    We recommend that the United States Senate Committee on Commerce, 
Science and Technology, Subcommittee on Communications, Technology and 
the Internet adopt policies along these lines and recommend to the FCC 
and NTIA both that an infrastructure-based approach to government 
investment in unserved and underserved communities leverages the best 
of what the government has to offer, empowers local private markets and 
ensures long-term viability of local community economies.
                                 ______
                                 
   Response to Written Questions Submitted by Hon. Barbara Boxer to 
                              John Strode
    Question 1. How is Ritter Communications approaching the industry-
wide transition from time-division multiplexing (TDM) to Internet 
Protocol (IP) based communications?
    Answer. Ritter has embraced the transition from TDM to IP in order 
to improve network efficiency and gain the survivability inherent to IP 
based communications systems. While clearly the dominant protocol 
utilized by our customer base, we are deploying Ethernet/packet-based 
transport to provide a more flexible foundation to support IP services 
than the complexity introduced by going to all IP.
    We have made significant investments over the last 5 years to 
transition our service and access platforms (voice switching, DSL, 
GPON, etc.) to IP or Ethernet based systems. In our opinion this is the 
necessary first step in transitioning the entire infrastructure to 
efficiently support current and future IP demands.
    At this point, our service platforms are 75 percent transitioned to 
IP and our access infrastructure remains approximately 40 percent TDM. 
We are continuing to make investments in 2013 and 2014 to complete the 
transition of these components to 100 percent packet-based.
    We are also continuing to make investments in our backbone/core to 
convert the remaining 60 percent to packet-based transport by the end 
of 2014.

    Question 2. In your comments, you state that Ritter Communications 
is not as adversely affected as many other rural telecommunications 
providers by the FCC's recent changes to the Universal Service Fund and 
intercarrier compensation. Which categories of telecommunications 
providers are most--and least--affected by changes to USF and 
intercarrier compensation?
    Answer. The telecommunications industry embraces many categories of 
providers. For purposes of this discussion, I will address two 
categories of providers who provide services in rural areas. They are, 
specifically, locally-owned and operated rural providers (RLECs) and 
large, national providers (e.g., AT&T, Verizon and others).
    The RLECs were very concerned as the FCC publicized notice of 
potential changes to the USF and ICC structures, and during the periods 
leading up to and following publication of the final rules, the RLEC 
industry alerted policymakers to the adverse impacts certain changes 
would precipitate. Unfortunately, those predictions have proven correct 
as the combination of retroactively-applied rules and regulatory 
uncertainty has depressed investor confidence.
    These assertions are not mere rhetoric. In February 2013, the 
Honorable Thomas J. Vilsack, Secretary of the U.S. Department of 
Agriculture, informed then FCC Chairman Julius Genachowski that demand 
for RUS loan funds dropped to roughly 37 percent of the total amount of 
loan funds appropriated by Congress in FY 2012. Current and prospective 
RUS borrowers have communicated their hesitation to increase their 
outstanding debt and move forward with planned construction due to the 
recently implemented reductions in USF support and Inter-Carrier 
Compensation (ICC) payments.'' See, Connect America Fund; National 
Broadband Plan for Our Future; Establishing Just and Reasonable Rates 
for Local Exchange Carriers; High-Cost Universal Service Support; 
Developing a Unified Intercarrier Compensation Regime; Federal-State 
Joint Board on Universal Service; Universal Service Reform Mobility 
Fund: Ex Parte Presentation of United States Department of Agriculture, 
Rural Development, Docket Nos. 10-90, 09-51, 07-135, 05-337, 01-92, 10-
208 (Feb. 15, 2013) (available at http://apps.fcc.gov/ecfs/document/
view?id
=7022122067).
    It should be noted that RUS telecom borrowers have a sterling 
record of repayment, and that these programs actually generate income 
to the Federal Treasury. The slowdown in these loans results in 
diminished revenues for the Federal Government, and the potential for 
repayment failures could result in a negative impact on the Federal 
budget.
    Decreased interest in investment can be viewed from another 
National perspective, as well. A survey of NTCA members in January 2013 
found that 69 percent of respondents had postponed or cancelled fixed 
network upgrades as a result of the uncertainty surrounding the FCC's 
on-going USF and ICC reform. The total aggregate value of those 
postponed or cancelled projects was $492 million. The average was $4.9 
million; the median was $2.0 million; the high was $145 million; and, 
the low was $80,000. These impacts are especially disturbing given the 
impact of the rural telecom industry on the National economy. A 2011 
study found the rural telecom industry generates $14.4 billion in 
economic activity, translating to more than 70,000 jobs (based on 2009 
data). Notably, 66 percent of the economic activity ($9.5 billion) and 
45.7 percent of the jobs (32,385) were found to accrue to urban areas, 
demonstrating that rural telecom policy affects the entire Nation. See, 
``The Economic Impact of Rural Telecommunications: The Greater Gains,'' 
Hanns Kuttner, Hudson Institute, Washington, D.C. (2011) (available at 
http://www
.frs.org/images/documents/hudson-study-paper.pdf).
    A recently-released study found that in Iowa alone, changes to the 
USF and ICC regulations will result in a decrease of $47.1 million to 
Iowa RLECs from 2012-2017. During this period, that reduced cost 
recovery will result in a direct loss of employment of 9.7 percent, 
translating to a direct loss of $14.9 million in wages among the 
companies. The indirect impacts show a total statewide wage loss of 
approximately $25.8 million and an estimated $2.3 million decrease in 
sales and tax revenues during that period. See, ``Impact Analysis of 
the USF Transformation Order on the State of Iowa,'' Center for 
Economic Development and Business Research, W. Frank Barton School of 
Business, Wichita State University (2013) (available at http://
c.ymcdn.com/sites/www.broadband4iowa.com/resource/resmgr/news
letter/usf_impact_study_may_2013_fi.pdf).
    Although Ritter Communications has not had the same level of 
immediate support cuts as many other RLECs, the regulatory uncertainty 
arising out of the FCC's reforms has affected Ritter (and every other 
RLEC) adversely. As I said in my testimony, the FCC's Quantile 
Regression Analysis (QRA) caps prevent any company from having a clear 
picture of their standing within the model, or how other companies' 
investments could alter their USF receipts over time. In fact, because 
of the way the USF and the QRA are structured, investments that RLECs 
made two years ago determine the amount of USF they are eligible for 
going forward. Additionally, regardless of what the companies in the 
industry do to prevent cuts from occurring, they will occur to at least 
10 percent of them. This is because the very nature of a QRA is that 10 
percent (or whatever percentage the FCC picks) will be cast as 
outliers, regardless of the actual investment or cuts made by an 
individual company. It is because of the potentially ever-shifting 
nature of the QRA, together with the prospect of the FCC dropping even 
more retroactive changes atop the USF and ICC support mechanisms upon 
which we rely, that investment in the RLEC sector of the 
telecommunications industry has ground to a halt.
    While the USF/ICC changes have precipitated negative impacts on the 
RLECs, corollary impacts arising out of ICC reductions have accrued to 
the Nation's largest carriers that will be required to pay diminishing 
amounts of ICC compensation to the rural carriers. Over the first six 
years of the transition alone, the FCC has estimated the total ICC 
``savings'' to be realized by long distance and wireless carriers at $9 
billion--with no specific commitment for those billions of dollars in 
``savings'' to flow through to consumers or to be reinvested in 
broadband-capable networks in rural or other hard-to-serve areas.

    Question 2a. How is Ritter Communications adapting or planning to 
adapt to these changes?
    Answer. Ritter Communications has taken several steps to adapt to 
the changes in the USF/ICC mechanisms and expects to make more moves in 
the future. Ritter recognized several years ago that changes were going 
to come at some point and began expanding into different lines of 
business in the communications sector. Ritter has started a CLEC, 
invested in cable television systems and made significant investments 
in transport facilities in an effort to spread overheads, gain 
operational synergies and access wholesale markets more directly to 
reduce costs of Internet access and long distance termination. Ritter 
has also provided incentives to employees to retire/leave to reduce 
payroll expenses.
    Ritter continues to review its operations and anticipated revenues/
expenses to identify changes necessitated by the expected impacts of 
the USF/ICC transformation.

    Question 3. For years, rural telephone consumers across the country 
have been reporting that they frequently experience dropped calls and 
poor call quality. The FCC is currently investigating the causes of 
these problems. Has Ritter Communications received similar complaints 
from its subscribers?
    Answer. Yes, Ritter has had numerous complaints from customers who 
were experiencing call completion problems.

    Question 3a. What is the extent of the rural call completion 
problem in the communities you serve?
    Answer. Call completion problems have been experienced by customers 
of Ritter Communications at both ILECs operated by Ritter in Arkansas. 
It is difficult to quantify because there are likely many more problems 
than get reported to Ritter. Suffice it to say that it is significant 
and that even one call dropped because a carrier doesn't want to pay 
lawful access charges to complete the call is one too many.

    Question 3b. How has Ritter Communications responded to rural call 
completion issues?
    Answer. Ritter customer service representatives have spent a great 
deal of time with customers trying to explain to them what causes the 
problem and in many cases helping the customer prove that the problem 
is not caused by any problem in the Ritter system. In addition, we have 
worked with businesses to either establish toll-free numbers for their 
vendors and customers to call or implementing work-arounds that involve 
giving the customer a number in another exchange served by Ritter's 
CLEC and forwarding calls to that number across Ritter's network to 
deliver them to the manufacturing facility that is a major employer in 
Ritter's rural service area. We have also, unfortunately, spent time 
responding to inquiries from the FCC and the Arkansas Public Service 
Commission trying to help them understand that the problem lies with 
underlying long distance carriers and is not a problem in the network 
of Ritter Communications of other similarly situated rural carriers.
                                 ______
                                 
   Response to Written Questions Submitted by Hon. Amy Klobuchar to 
                              John Strode
    Question 1. Middle mile projects that connect the backbone of the 
network to the hubs are an underappreciated aspect of broadband 
expansion projects. Every communications service from wireless to cable 
needs a strong backbone, which means investing in middle mile lines in 
order to bring higher speeds and quality to rural consumers. How does 
access to middle-mile facilities affect your business model?
    Answer. Access to middle mile facilities plays a major role in 
managing the cost of our services, as well as the overall performance 
for our customers. With limited access to middle mile suppliers, we see 
this component contributing as high as 60 percent to the cost of our 
services.

    Question 1a. Mr. Strode--Can you speak to the importance of middle 
mile investment and discuss any barriers to investing in upgrading or 
building out?
    Answer. Ritter is making investments to build many of our middle 
mile connections in order to see a cost reduction over our current 
leased facilities over the next 5 years. While this is feasible in some 
of our serving areas, the cost to construct will not provide a return 
in our more rural properties. These rural properties continue to 
require leased facilities from a limited amount of suppliers which 
keeps the lease costs of these facilities anchored at a very high price 
point.
                                 ______
                                 
 Response to Written Questions Submitted by Hon. Richard Blumenthal to 
                              John Strode
    Question 1. Lifeline Program and Broadband Adoption. Your companies 
and the FCC have been working very hard to expand the availability of 
broadband access across the country. Yet, while more homes have 
broadband available to them, the actual adoption of the service seems 
to have stagnated of the past several years. This seems to especially 
be the case in rural areas. According the FCC, only 36.8 percent of 
rural Americans with broadband service available have actually 
purchased the service. In the past, when the Commerce Department has 
studied the issue of adoption they have found two major obstacles--
digital literacy and the cost of service.
    Mr. Strode, what can your companies do to make broadband service 
more affordable for households that have yet to adopt the service? What 
can the FCC do to help increase adoption?
    Answer. There are many steps both individual companies like Ritter 
Communications and the FCC can take to ensure increased adoption rates 
across the country. It is worth noting in the first instance that the 
high-cost portion of the universal service fund (USF) program supports 
both availability and adoption. This is often overlooked--especially in 
recent years as people focus on using USF support to build out in 
``unserved'' areas--but the fact is that high-cost USF support helps to 
ensure that rates are ``reasonably comparable'' in rural and urban 
areas. Without sufficient USF support, consumers in high-cost rural 
areas would need to pay far in excess of what consumers in urban areas 
pay for the same service. Thus, high-cost USF should be seen as the 
primary adoption program in rural America.
    The FCC should therefore seek out ways to ensure regulatory 
certainty through more predictable and sufficient support mechanisms 
for high-cost areas. Consumers in rural America will not be able to see 
the full benefits of a robust, reasonably comparable broadband 
connection if companies that serve these high-cost areas face cuts, 
caps, and constraints in the form of ever-changing models and further 
proposals to reduce USF support. Additionally, the FCC should seek out 
ways to ensure that regulatory burdens do not push the cost of 
broadband further upwards, pricing many groups out of the market.
    RLECs, on the other hand, can and do take their own steps to 
promote adoption of their services and productive use of their 
networks. Specifically, RLECs are able to identify unique ways to serve 
their communities because the employees also live in their service 
territory. For example, a company can work with the local community 
college, library, or school district to design a series of classes on 
computer basics tailored to fit an individual community's needs. 
Additionally, the local telecom provider can work with a local hospital 
to provide remote monitoring or telemedicine services targeted towards 
senior citizens or other population groups which might not see the 
relevance of broadband until they learn about uses beyond accessing the 
World Wide Web.

    Question 1a. Mr. Strode, in your assessment, would low income 
households benefit from an expansion of the Lifeline and Linkup 
programs to broadband services? What has been the experience of rural 
telecommunications companies with the FCC's Lifeline Broadband Pilot 
program?
    Answer. The FCC's Lifeline Broadband Pilot program is in the very 
beginning stages of implementation. NTCA-The Rural Broadband 
Association, an association representing nearly 900 companies of which 
Ritter Communications is a member, has 11 participating member 
companies in the Pilot. In much of the research surrounding barriers to 
adoption, cost of Internet has been identified by reluctant broadband 
adopters. This program should assist both the FCC and 
telecommunications providers create best practices to ensure that as 
the Lifeline fund shifts towards broadband network support the program 
will be able to target adoption efforts to proven strategies and 
techniques. But it is also worth noting once again that rural networks 
will not be built in the first instance, and reasonably priced services 
will not be available to rural consumers in the first instance, without 
an underlying high-cost program that is sufficient and predictable as 
well.
                                 ______
                                 
   Response to Written Questions Submitted by Hon. Barbara Boxer to 
                              Steve Davis
    Question 1. How has CenturyLink been affected by the FCC's recent 
changes to the Universal Service Fund and intercarrier compensation?
    Answer. The FCC's November 2011 ``USF/ICC Transformation Order'' 
and subsequent implementation have had a significant impact on the way 
companies like CenturyLink provide voice and broadband service to 
rural, high-cost communities, bringing long-needed reform to the 
Universal Service Fund.
    Most significantly, the order created the Connect America Fund 
(CAF) to support broadband service on a targeted, granular basis in 
those places where it would not be available without such support. By 
supporting broadband explicitly and targeting support on a granular 
basis, the Order sought to bring broadband access to many places that 
were left behind under the previous rules, while avoiding those places 
where unsubsidized competitors were already providing service.
    So far, CenturyLink has been awarded roughly $87 million under the 
CAF Interim Support (``CAF 1'') program, enabling us to begin extending 
service to more than 250,000 previously unserved customers. The Connect 
America Fund implementation process is still ongoing, and we are 
working with the FCC to ensure its success. Once the final ``CAF 2'' 
changes are implemented, we'll be able to provide a complete picture of 
its impact on CenturyLink and our customers.

    Question 2. Do you believe it is necessary for the contribution 
base for the Universal Service Fund to be broadened?
    Answer. Yes, we believe the contribution base for the Universal 
Service Fund should be broadened in a way that is competitively 
neutral, sufficient to fund program's goals, and administratively 
efficient.

    Question 3. According to the FCC, approximately one third of 
Americans who have access to broadband do not to subscribe to the 
service, and the broadband adoption rate in non-urban areas is 
significantly lower than in urban areas. In your experience, what are 
the barriers to broadband adoption in the United States?
    Answer. While broadband adoption has risen steadily in recent 
years, we understand from leading studies by the Pew Foundation and 
others, that the most common barriers to broadband adoption are the 
cost of service, the perceived relevance to individual users, the level 
of digital literacy among users, and the availability of broadband 
access.

    Question 3a. Which of these barriers to broadband adoption 
contribute most to the gap between urban and non-urban adoption rates?
    Answer. Because areas of low population density are generally more 
expensive to serve, a higher percentage of rural households do not have 
broadband access to begin with. Among those who do have broadband 
access, surveys by the Pew Foundation and others indicate that 
broadband adoption rates are generally higher among younger customers 
and those with higher household incomes, while the population 
demographics in rural communities generally skew toward older consumers 
and lower income households.
                                 ______
                                 
   Response to Written Questions Submitted by Hon. Amy Klobuchar to 
                              Steve Davis
    Question 1. Middle mile projects that connect the backbone of the 
network to the hubs are an underappreciated aspect of broadband 
expansion projects. Every communications service from wireless to cable 
needs a strong backbone, which means investing in middle mile lines in 
order to bring higher speeds and quality to rural consumers. How does 
access to middle-mile facilities affect your business model?
    Answer. Middle mile facilities are a significant part of the 
company's capital investment, and like all parts of our network, must 
be justified by a reasonable cost recovery outlook.

    Question 2. As CenturyLink is a provider of middle mile backbone 
you acknowledge that the fiber-fed broadband you deploy is important to 
the provision of both fixed and mobile broadband services. How do you 
determine where to invest in middle mile and what are some of the 
barriers you and other carriers face in building out middle mile?
    Answer. CenturyLink generally bases its decisions to invest in 
middle mile and other facilities on the outlook for cost recovery, 
which is affected by the cost of investment, the number of potential 
customers, the likely adoption rate, the presence of anchor 
institutions, the danger of adverse price regulation, and the 
availability of additional sources of support, such as the Connect 
America Fund.
    Some of the barriers we face in building out middle mile 
infrastructure include the longer routes and fewer customers in rural 
areas, permitting and right-of-way access, as well as weather and 
difficult terrain conditions in some regions.
                                 ______
                                 
 Response to Written Question Submitted by Hon. Richard Blumenthal to 
                              Steve Davis
    Question. Lifeline Program and Broadband Adoption. Your companies 
and the FCC have been working very hard to expand the availability of 
broadband access across the country. Yet, while more homes have 
broadband available to them, the actual adoption of the service seems 
to have stagnated of the past several years. This seems to especially 
be the case in rural areas. According the FCC, only 36.8 percent of 
rural Americans with broadband service available have actually 
purchased the service. In the past, when the Commerce Department has 
studied the issue of adoption they have found two major obstacles--
digital literacy and the cost of service.
    Mr. Davis, what can your companies do to make broadband service 
more affordable for households that have yet to adopt the service? What 
can the FCC do to help increase adoption?
    Answer. CenturyLink has already taken measures to make broadband 
more affordable to low-income households through our ``Internet 
Basics'' program. Through this program, any household that qualifies 
for the FCC's Lifeline program can also receive discounted broadband 
service for $9.95 per month for up to three years and a discounted 
netbook computer for $150.
    The FCC has so far encouraged broadband providers to pursue a 
variety of approaches to boost broadband adoption and eliminate 
barriers to adoption. Continuing this flexible approach can help 
increase adoption as providers are able to observe each other's 
successes and setbacks and use the lessons to improve their own 
approaches.
                                 ______
                                 
   Response to Written Questions Submitted by Hon. Barbara Boxer to 
                         LeRoy T. Carlson, Jr.
    Question 1. Last month, the FCC released its Sixteenth Mobile 
Competition Report, which states that, based on its Herfindahl-
Hirschman Index calculations, wireless market concentration has 
increased by 33.6 percent since 2003. In your comments, you note that 
many consumers have access to only one wireless provider and recommend 
the adoption of policies to increase competition among wireless 
providers. In your experience, is there effective competition in the 
wireless market?
    Answer. For the last three years, the Commission has concluded that 
the wireless industry is highly concentrated, and becoming more 
concentrated. That trend unfortunately continues, to the detriment of 
competitive carriers, and ultimately consumers. The Commission should 
use its latest analysis of wireless competition as a springboard to 
focus more intensely on developing and implementing pro-competitive, 
pro-consumer policies that reduce concentration, restore competition, 
and ensure that competitive carriers have a level playing field to 
compete with the supercarriers. Specifically, the overly concentrated 
status of the wireless sector has caused scarce spectrum to be amassed 
in the hands of the two largest carriers, to the detriment of smaller 
rivals. In addition, the market power enjoyed by the two largest super 
carriers has enabled them to thwart interoperability across the 700 MHz 
band. Non-interoperability, coupled with exclusivity arrangements for 
cutting-edge devices, has hindered deployment by competitive carriers. 
Unless the Commission acts to restore competition and creates a 
regulatory structure that will protect all carriers' access to these 
critical inputs, competition will suffer.

    Question 1a. If not, how has the lack of competition affected 
consumers?
    Answer. For consumers, effective competition offers greater 
innovation for applications and devices, lower prices, and better 
quality network service. In markets where consumers are captured by the 
two major providers it means there is less pressure to control costs of 
service and devices. A competitive marketplace creates essential 
incentives for companies to invest in their networks while keeping 
prices as low as possible.
                                 ______
                                 
   Response to Written Questions Submitted by Hon. Amy Klobuchar to 
                         LeRoy T. Carlson, Jr.
    Question 1. Middle mile projects that connect the backbone of the 
network to the hubs are an underappreciated aspect of broadband 
expansion projects. Every communications service from wireless to cable 
needs a strong backbone, which means investing in middle mile lines in 
order to bring higher speeds and quality to rural consumers. How does 
access to middle-mile facilities affect your business model?
    Answer. Middle mile, also referred to as special access, is 
essential for deploying rural wireless broadband service. It is a 
significant operating expense for regional wireless carriers. Excessive 
special access charges divert funds from network expansion and 
broadband upgrades. Middle mile lacks competitive alternatives in many 
rural areas which lead to higher costs. Middle mile cost can be 25 
times higher in rural than urban areas. With the dramatic reductions in 
universal service support for wireless carriers occurring under the 
FCC's USF Reform Order, the cost of middle mile facilities is becoming 
a bigger impediment to not only maintaining existing network coverage 
but to expanding it. The FCC is evaluating the proper regulatory 
framework to adopt for special access service pricing, which is 
necessary to protect consumers, spur market entry and foster 
competition. Such evaluation needs to consider the implications of the 
conversion of traditional special access back haul facilities to IP 
based transmission facilities which are key to the expansion of 
broadband services supporting 4G technology we support robust reform of 
special access regulations.

    Question 2. Mr. Carlson--Many people don't realize that wireless 
service is built on a wired network. How does larger and faster 
capacity middle mile to your towers impact the service that consumers 
get?
    Answer. Access to high capacity middle mile is crucial to providing 
LTE services. Consumer demand for mobile broadband is expected to reach 
nine times current levels by 2016. U.S. Cellular is launching LTE 
service throughout the country, but in order for our customers to 
receive the significant benefits of LTE capacity and speed, our 
advanced LTE radio systems must be accompanied by robust, high capacity 
backhaul and core networks. Without sufficient middle mile capacity, 
the powerful innovation engine of LTE is simply not possible. Our 
challenge is to build out both the wireless and wired infrastructure in 
the most rural areas of the country. Our commitment to our customers is 
to provide the most advanced service no matter where they live in our 
service areas. Sufficient middle mile capacity from wired networks, as 
well as the use of fixed microwave are each important components of 
providing LTE to consumers.
                                 ______
                                 
    Response to Written Question Submitted by Hon. Kelly Ayotte to 
                         LeRoy T. Carlson, Jr.
    Question. Mr. Carlson, in your testimony you state that none of 
your bids to cover rural New Hampshire were selected, simply because 
you had to bid more per road mile to cover more mountainous areas in 
the central and northern areas of my state. How do you suggest the 
mobility fund be structured in Phase II to account for these challenges 
that companies such as yours face?
    Answer. Senator Ayotte, it was a privilege to testify before the 
Committee and I thank you for the question. Our company competes with 
the Nation's largest carriers by building high-quality networks and 
delivering superior service. In areas that are sparsely populated and 
difficult to serve, assistance from Federal and state universal service 
mechanisms are critical to building new cell towers.
    In Phase I of the FCC's new Mobility Fund, the FCC awarded bids 
based on the cost per road mile served. This mechanism was designed to 
stretch the limited funds available to cover the most road miles. As a 
result, the lowest-cost rural areas were awarded support first, while 
the higher-cost areas were not. Mountains and trees in rural New 
Hampshire limit a cell site's coverage, increasing costs to serve. As a 
result, our bids in New Hampshire were higher than other areas, and 
they fell ``below the line'' in the FCC's auction process. That is, the 
$300 million in funding ran out before our bids were reached. For your 
reference, a copy of the bids as posted by the FCC is attached hereto 
as Exhibit A.
    This is not the first time that the State of New Hampshire has 
drawn the short straw in obtaining access to Universal Service funding. 
In 2008, the FCC implemented a cap to the original universal service 
program for wireless carriers which froze funding at whatever amount an 
individual state was receiving at the time. As a consequence of this 
policy decision by the FCC, New Hampshire continued to receive annual 
funding of approximately $250,000. That amount is enough to build New 
Hampshire one new cell site every two years and is a tiny fraction of 
the overall universal service fund for rural areas, $4.3 billion. New 
Hampshire's citizens, who have paid into the fund since its inception, 
have never received the benefits that Congress intended for the program 
to deliver.
    In Phase II, the FCC will award $400 million each year (plus 
another $100 million to tribal lands) in Mobility Fund support and I 
fear that New Hampshire, an undeniably rural state,may fare no better 
than it has in the past. There are, however, numerous things the FCC 
can do to ensure that rural areas such as those in New Hampshire 
participate in a meaningful way in the program. Below, I discuss just a 
few.
1. Repurpose CAF I Funds That Large Carriers Refused to Invest
    In Phase I of the FCC's Connect America Fund (``CAF'') program, the 
Commission awarded $300 million to the Nation's largest wireline 
carriers, to build broadband in rural areas.
    This $300 million in funding became available because the FCC 
reduced support to wireless carriers by nearly $1 billion per year.
    Of the $300 million offered, carriers declined over $180 million of 
that amount, ostensibly because it was insufficient. This suggests that 
a more efficient alternative should be considered.
    The FCC could rapidly accelerate investment in rural areas, 
including in New Hampshire, by quickly repurposing the $180 million of 
rejected funds over to Mobility Fund Phase I. When you look at Exhibit 
A, you can see that a number of bids, including those in New Hampshire, 
did not win an award because funding ran out. It is well within the 
FCC's authority to decide to repurpose the rejected funding and award 
it to Mobility Fund bidders, who have declared themselves ready to 
construct networks at the prices bid. Alternatively, the funds could be 
added to the FCC's upcoming Mobility Phase II auction.
    Instead, the FCC just last month proposed to offer the largest 
wireline carriers an additional $480 million in Phase I support, 
representing $300 million plus the funds previously declined by such 
carriers. And the Commission proposed to relax the standards for such 
companies to receive this funding.
    It may be too late to reverse this decision without a court action, 
however it is bad policy that short changes rural Americans who live, 
work and travel in areas with poor mobile broadband service. 
Unquestionably, the fastest way to increase access to broadband in 
rural America today is through the rapid deployment of fast, 4G LTE 
broadband services. If the FCC is not willing to reverse its decision, 
then they should simply increase the amount of funding within the 
existing program for the services that provide the most bang for the 
buck and which consumers want most. Unquestionably that is mobile 
broadband.
2. Require Some Baseline Level of Funding for Each State
    Every citizen who incurs charges for interstate or international 
calling pays into the Federal universal service fund. For over a 
decade, the FCC's formula for providing support to rural New Hampshire 
yielded enough funding to build a single cell site approximately every 
18 months. Other states saw many millions in support flow in, resulting 
in higher quality wireless networks that give such places a competitive 
advantage. This is not fair to New Hampshire's rural citizens, who pay 
into the fund but do not get the benefits that Congress intended in the 
1996 Act (i.e., access to reasonably comparable services and prices as 
are available in our Nation's urban areas).
    The FCC could make a rule that every state must receive some 
baseline amount of support, based on a formula such as the percentage 
of state road miles or households that are unserved or underserved in 
that state. It could serve to ensure that difficult to serve places 
such as rural New England and the Appalachian region receive investment 
sufficient to achieve meaningful infrastructure improvement.
3. Reverse the Right of First Refusal
    Perhaps the most regressive decision made by the FCC in its CAF 
Order was to allow the Nation's largest wireline carriers to have a 
``right of first refusal'' (``RoFR'') for five years in the CAF Phase 
II process. This means, the carriers may file an election with the FCC, 
allowing them to be the sole recipient of support in the states they 
serve. This prevents any other carrier from competing with them for 
support for five years. In year six, they will have a huge advantage 
when competition for support is permitted, having built a subsidized 
network free from competitive forces.
    In addition to providing this five year set aside, the FCC has 
bestowed a potentially large windfall on the largest wireline carriers 
who also own wireless networks. The FCC intends to provide support in 
CAF Phase II based on the modeled cost of providing wireline service in 
a rural area. That is, when a wireline carrier builds in an area, the 
amount of support is not determined by its actual costs, but on what it 
should cost, as determined by a model. That model estimates the cost of 
building wireline broadband.
    Here is the problem: The FCC will allow a wireline carrier to use 
mobile broadband to meet its build out obligations. Thus, a wireline 
carrier can build an efficient mobile broadband network that 
potentially costs much less, while at the same time receiving support 
based on the higher cost of building a wireline network. There is no 
downward adjustment in support when a wireline carrier does this.
    Essentially, this is the continuation of the FCC's ``identical 
support rule,'' which it did away with in the CAF Order for wireless 
carriers. Worse yet, it is identical support without the possibility of 
competition.
    To sum up:

   Support will be reserved for one class of carrier for five 
        years.

   Independent wireless companies seeking to compete in the 
        broadband market will now face subsidized competition from the 
        Nation's largest telecommunications companies for five years, 
        potentially freezing new investments.

   The largest wireline carriers are free to build lower-cost 
        wireless facilities while receiving support based on the cost 
        of building wireline networks.

    There is no reason why support should be reserved for one class of 
carrier, and we have appealed this decision to the courts. It is not 
too late for the FCC to reverse itself and permit any company willing 
to participate in the CAF Phase II process to compete for the funding 
needed to build out rural high-cost areas with modern broadband 
infrastructure.
4. Target Scarce Public Dollars to Mobile Broadband Service
    Prior to the adoption of the FCC's 2011 Connect America Fund Order, 
the FCC provided mobile wireless carriers with $1.4 billion per year 
construct wireless networks in rural areas. This amount was twenty 
percent of the total universal service fund of $7 billion. The Connect 
America Fund Order reduced funding for mobility to a mere $400 million, 
while funding available for wireline deployment is being increased to 
over $3 billion.
    Given the substantial abandonment of wireline services by ``cord 
cutters'' over the past decade--where according to the CDC's latest 
data nearly 40 percent of households use wireless communications 
exclusively, this is exactly backwards policy. The FCC should restore 
balance to funding for mobile services and restore the $1B in annual 
mobility funding which has been redirected to wireline networks that 
consumers continue to abandon in droves. This is the surest way to 
ensure that states like New Hampshire and its residents receive their 
fair share of a fund that they have been paying into for almost twenty 
years.
                                 ______
                                 
   Response to Written Questions Submitted by Hon. Barbara Boxer to 
                           Patricia Jo Boyers
    Question 1. How is BOYCOM Cablevision approaching the industry-wide 
transition from time-division multiplexing (TDM) to Internet Protocol 
(IP) based communications?
    Answer. Although TDM networks remain widely in use, particularly by 
Incumbent Local Exchange Carriers (ILECSs), BOYCOM Cablevision launched 
voice services over a Cable Modem Termination System (CMTS) with an 
advanced symmetrical Ethernet IP service--it's an Internet Protocol 
(IP) based communications network. Provided that the interconnection 
rules continue to apply to telecommunications providers whether they 
employ TDM or IP based communications, we have no concerns with ILECs 
transitioning from TDM to IP networks.

    Question 2. In your comments, you state that ``the video market 
continues to be governed by outdated rules and regulations passed 
decades earlier.'' How have the FCC's regulations governing video 
providers adversely affected BOYCOM Cablevision?
    Answer. First and foremost, outdated retransmission consent rules 
have adversely affected our company and its customers. BOYCOM's 
retransmission costs have increased an average of 133 percent between 
January 2008 and January 2012, and because of escalation clauses in our 
existing contracts, our per-subscriber rates for individual broadcast 
stations will continue to increase through December 2014. 
Comparatively, a sampling of satellite delivered programming in one of 
our systems increased and average of 29.3 percent from January 2008 to 
January 2012.
    Second, rules intended to assure the commercial availability of 
cable set-top boxes have adversely affected our company and customers. 
The FCC's integration ban, which prohibits cable operators from 
providing consumers with boxes in which the security functions are 
integrated with other functions, was adopted in 2007. As a result of 
this regulation, the price of set-top boxes increased significantly. 
Although imposing the integration ban on only the largest cable 
operators would have been sufficient to achieve the FCC's public policy 
goals, the FCC imposed this regulation on all cable operators. There 
were no exemptions for small cable operators. The integration ban 
adversely affected BOYCOM and its customers because it needlessly 
increased the costs of our set-top boxes. Moreover, the higher costs 
delayed our company's digital transition plans, stalling the 
reclamation of bandwidth that could be used for broadband and other 
advanced services.
    Finally, while the FCC has done much to improve the cost and speed 
of pole access, the 1978 Pole Attachment Act stands in the way of the 
FCC's addressing some significant problems in the market. In 
particular, the Act does not cover cooperative and municipal pole 
owners, who remain exempt from any regulation and leverage it to set 
much higher fees and delay access. In areas where BOYCOM provides 
service, our company must rely upon poles that are owned by 
cooperatives, and the lack of regulation adversely affects our company 
and our customers.

    Question 2a. In what ways do these regulations need to be updated?
    Answer. Retransmission consent rules should be updated in at least 
the following three ways:

        First, Congress or the FCC should prohibit separately owned, 
        same market broadcasters from coordinating their retransmission 
        consent negotiations. Small cable operators have documented 
        separately owned broadcasters operating in the same market 
        colluding in the sale of retransmission consent in at least 43 
        television markets. Available evidence shows that when 
        broadcasters engage in this anticompetitive conduct, they can 
        extract at least 22 percent higher fees than if they negotiate 
        separately. To put this price increase in perspective, 
        antitrust authorities are generally concerned whenever 
        horizontal consolidation results in price increases greater 
        than 5 percent. These price increases are passed along to 
        consumers, who end up paying for them in higher costs.

        Second, Congress should eliminate the basic service tier buy 
        through obligation imposed on cable operators. Cable operators 
        are required by regulation to offer a basic service tier that 
        must include all local broadcast television stations that all 
        subscribers must purchase before subscribing to additional 
        video programming. Tier placement and subscriber penetration 
        levels are critical terms of negotiation between cable 
        operators and non-broadcast programmers. Non-broadcast 
        programmers highly value lower tier placement and higher 
        subscriber penetration, and cable operators who provide lower 
        tier placement and higher subscriber penetration pay lower 
        carriage fees. By providing broadcasters who elect 
        retransmission consent an automatic right to appear on the 
        basic service tier and obtain 100 percent cable subscriber 
        penetration, Congress has taken off the table a critical term 
        of negotiation that cable operators could leverage with 
        broadcasters to obtain lower rates.

        Third, Congress should prevent broadcasters from pulling 
        signals from cable operators during sweeps periods if the 
        retransmission consent agreement expires during sweeps, or 
        other times important to consumers as Congress deems 
        appropriate (i.e., marquee events). In 2012, millions of 
        Americans went without access to their local broadcast signals 
        after station owners cut off programming 91 times. This was a 
        78 percent increase over `11, and even more over `10. Existing 
        law prevents a cable operator from pulling a station during the 
        sweeps period if its retransmission consent agreement expires 
        during sweeps. Such periods are the four national four-week 
        ratings periods--generally including February, May, July and 
        November. While cable operators are prohibited from pulling 
        broadcast signals during periods of time financially important 
        to broadcasters, there is no constraint on broadcasters pulling 
        signals from cable operators during these same periods or other 
        times important to consumers  (i.e., marquee events). In fact, 
        broadcasters often pull signals from cable operators during 
        periods of time important to consumers in order to extract 
        higher fees from cable operators (e.g., ABC pulled its signal 
        from Cablevision prior to the Academy Awards; Fox pulled its 
        signal from Cablevision during baseball playoffs.)

    With respect to the FCC's integration ban, Congress should repeal 
Section 629 of the Communications Act--Competitive Availability of 
Navigation Devices--or at least limit application of the provision to 
the extent it applies to small MVPDs through statute or direction to 
the FCC.
    Finally, the FCC's National Broadband Plan wisely suggested that 
Congress should eliminate the exemption for cooperatives and 
municipalities to restore fairness and competitive rates to the market. 
We encourage Congress to take action to deal with the obvious 
shortcomings in the existing law.
                                 ______
                                 
   Response to Written Questions Submitted by Hon. Amy Klobuchar to 
                           Patricia Jo Boyers
    Question 1. Middle mile projects that connect the backbone of the 
network to the hubs are an underappreciated aspect of broadband 
expansion projects. Every communications service from wireless to cable 
needs a strong backbone, which means investing in middle mile lines in 
order to bring higher speeds and quality to rural consumers. How does 
access to middle-mile facilities affect your business model?
    Answer. As our subscribers continue to expect faster connection 
speeds, poor middle mile infrastructure and rising middle-mile costs--a 
particular problem in rural areas--make it more difficult for BOYCOM to 
maintain current broadband prices, provide speeds that meet consumer 
demand, and build out to new locations.

    Question 2. Ms. Boyers--Can you speak to the importance of middle 
mile investment and discuss any barriers to investing in upgrading or 
building out?
    Answer. As discussed above, in order to keep broadband pricing at 
current levels, deliver speeds that meet subscriber demand, and deploy 
services to new areas, especially those that are unserved, it is 
important to have access to capable middle mile infrastructure at 
reasonable costs. The need to upgrade the middle mile pipes that BOYCOM 
uses to carry traffic from our local networks to an Internet backbone 
access point is not unique: nearly all broadband providers will need to 
obtain higher capacity pipes in the years ahead. However, obtaining 
access to robust pipes at reasonable costs is more difficult for 
smaller broadband providers serving rural areas than for larger 
operators in urban areas. Middle-mile costs increase as the distance 
from the network to the backbone access point grows, and rural 
providers generally operate networks that are among the farthest from 
these access points. It means rural providers using these pipes often 
pay much higher prices for each byte transmitted. Additionally, unlike 
in urban areas, there are often few middle-mile links available. In 
fact, in many rural areas there may be only a single link. And many of 
these links use outdated technologies, meaning there is often access 
only to lower capacity pipes--which in turn limits the data speeds that 
can be provided to customers. Some broadband providers, including 
BOYCOM, have explored constructing our own middlemile links, but 
because the distances involved are extremely long and the density of 
our users too low, the cost is prohibitive without outside support.
    In its National Broadband Plan, the FCC identified the lack of 
adequate middle-mile infrastructure and the high costs of access to be 
a significant problem. The FCC is examining the issue in a further 
rulemaking with respect to the Connect America Fund. The record in this 
proceeding closed one year ago, and we urge the FCC to conclude its 
work shortly and issue a decision. Where capacity is inadequate, it 
should use the CAF to support the deployment of middlemile capacity. 
Further, where prices are too high, it should use its regulatory 
authority to ensure they are consistent with competitive market rates.
                                 ______
                                 
 Response to Written Question Submitted by Hon. Richard Blumenthal to 
                           Patricia Jo Boyers
    Question. Lifeline Program and Broadband Adoption. Your companies 
and the FCC have been working very hard to expand the availability of 
broadband access across the country. Yet, while more homes have 
broadband available to them, the actual adoption of the service seems 
to have stagnated over the past several years.
    This seems to especially be the case in rural areas. According to 
the FCC, only 36.8 percent of rural Americans with broadband service 
available have actually purchased the service. In the past, when the 
Commerce Department has studied the issue of adoption it has found two 
major obstacles--digital literacy and the cost of service.
    Ms. Boyers, what can your company do to make broadband service more 
affordable for households that have yet to adopt the service? What can 
the FCC do to help increase adoption?
    Answer. Broadband services and current prices for consumers in 
rural areas are highly dependent on the availability and cost of bulk 
bandwidth from middlemile providers. Although technology continues to 
improve and advanced broadband services become more available and 
affordable to households, the ``cost'' of bandwidth is still one of the 
biggest expenses in delivering these advanced services.
    The FCC should use its regulatory authority to ensure that middle-
mile rates are consistent with competitive market rates. If we can get 
the cost of middlemile broadband services reduced, the price to the end 
user will become more economical. Moreover, the FCC can focus on 
increasing digital literacy among consumers that have not yet adopted 
broadband, and consider other competitively neutral strategies.

                                  
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