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Printed Hearing The Committee on Energy and Commerce The Future of Universal Service <DOC>
[108th Congress House Hearings]
[From the U.S. Government Printing Office via GPO Access]
[DOCID: f:89965.wais]
THE FUTURE OF UNIVERSAL SERVICE
=======================================================================
HEARING
before the
SUBCOMMITTEE ON TELECOMMUNICATIONS AND THE INTERNET
of the
COMMITTEE ON ENERGY AND COMMERCE
HOUSE OF REPRESENTATIVES
ONE HUNDRED EIGHTH CONGRESS
FIRST SESSION
__________
SEPTEMBER 24, 2003
__________
Serial No. 108-49
__________
Printed for the use of the Committee on Energy and Commerce
Available via the World Wide Web: http://www.access.gpo.gov/congress/
house
__________
U.S. GOVERNMENT PRINTING OFFICE
89-965 WASHINGTON : 2003
_____________________________________________________________________________
For Sale by the Superintendent of Documents, U.S. Government Printing Office
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------------------------------
COMMITTEE ON ENERGY AND COMMERCE
W.J. ``BILLY'' TAUZIN, Louisiana, Chairman
MICHAEL BILIRAKIS, Florida JOHN D. DINGELL, Michigan
JOE BARTON, Texas Ranking Member
FRED UPTON, Michigan HENRY A. WAXMAN, California
CLIFF STEARNS, Florida EDWARD J. MARKEY, Massachusetts
PAUL E. GILLMOR, Ohio RALPH M. HALL, Texas
JAMES C. GREENWOOD, Pennsylvania RICK BOUCHER, Virginia
CHRISTOPHER COX, California EDOLPHUS TOWNS, New York
NATHAN DEAL, Georgia FRANK PALLONE, Jr., New Jersey
RICHARD BURR, North Carolina SHERROD BROWN, Ohio
Vice Chairman BART GORDON, Tennessee
ED WHITFIELD, Kentucky PETER DEUTSCH, Florida
CHARLIE NORWOOD, Georgia BOBBY L. RUSH, Illinois
BARBARA CUBIN, Wyoming ANNA G. ESHOO, California
JOHN SHIMKUS, Illinois BART STUPAK, Michigan
HEATHER WILSON, New Mexico ELIOT L. ENGEL, New York
JOHN B. SHADEGG, Arizona ALBERT R. WYNN, Maryland
CHARLES W. ``CHIP'' PICKERING, GENE GREEN, Texas
Mississippi KAREN McCARTHY, Missouri
VITO FOSSELLA, New York TED STRICKLAND, Ohio
ROY BLUNT, Missouri DIANA DeGETTE, Colorado
STEVE BUYER, Indiana LOIS CAPPS, California
GEORGE RADANOVICH, California MICHAEL F. DOYLE, Pennsylvania
CHARLES F. BASS, New Hampshire CHRISTOPHER JOHN, Louisiana
JOSEPH R. PITTS, Pennsylvania TOM ALLEN, Maine
MARY BONO, California JIM DAVIS, Florida
GREG WALDEN, Oregon JAN SCHAKOWSKY, Illinois
LEE TERRY, Nebraska HILDA L. SOLIS, California
ERNIE FLETCHER, Kentucky
MIKE FERGUSON, New Jersey
MIKE ROGERS, Michigan
DARRELL E. ISSA, California
C.L. ``BUTCH'' OTTER, Idaho
Dan R. Brouillette, Staff Director
James D. Barnette, General Counsel
Reid P.F. Stuntz, Minority Staff Director and Chief Counsel
______
Subcommittee on Telecommunications and the Internet
FRED UPTON, Michigan, Chairman
MICHAEL BILIRAKIS, Florida EDWARD J. MARKEY, Massachusetts
JOE BARTON, Texas Ranking Member
CLIFF STEARNS, Florida BOBBY L. RUSH, Illinois
Vice Chairman KAREN McCARTHY, Missouri
PAUL E. GILLMOR, Ohio MICHAEL F. DOYLE, Pennsylvania
CHRISTOPHER COX, California JIM DAVIS, Florida
NATHAN DEAL, Georgia RICK BOUCHER, Virginia
ED WHITFIELD, Kentucky EDOLPHUS TOWNS, New York
BARBARA CUBIN, Wyoming BART GORDON, Tennessee
JOHN SHIMKUS, Illinois PETER DEUTSCH, Florida
HEATHER WILSON, New Mexico ANNA G. ESHOO, California
CHARLES W. ``CHIP'' PICKERING, BART STUPAK, Michigan
Mississippi ELIOT L. ENGEL, New York
VITO FOSSELLA, New York ALBERT R. WYNN, Maryland
CHARLES F. BASS, New Hampshire GENE GREEN, Texas
MARY BONO, California JOHN D. DINGELL, Michigan,
GREG WALDEN, Oregon (Ex Officio)
LEE TERRY, Nebraska
W.J. ``BILLY'' TAUZIN, Louisiana
(Ex Officio)
(ii)
C O N T E N T S
__________
Page
Testimony of:
Abernathy, Kathleen Q., Commissioner, Federal Communications
Commission................................................. 13
Greene, Margaret H., President, Regulatory and External
Affairs, BellSouth Corporation............................. 51
Gregg, Billy Jack, Director, Consumer Advocate Division,
Public Service Commission of West Virginia................. 38
Lubin, Joel, Vice President, AT&T Corporation................ 55
Post, Glen F., Chairman and Chief Executive Officer,
CenturyTel, Inc............................................ 59
Rowe, Bob, Chairman, Montana Public Service Commission....... 19
Shank, Sidney, General Manager, Bloomingdale Telephone Co.... 64
Stanton, John W., Chairman and Chief Executive Officer,
Western Wireless Corporation............................... 70
Material submitted for the record by:
Certner, David, Diector, Federal Affairs, AARP, letter dated
April 28, 2002............................................. 106
Cheek, John, Executive Director, National Indian Education
Association, letter dated April 18, 2003................... 114
Community Action Partnership, American Association of People
with Disabilities, Consumer Action and Rainbow-Push
Coalition, reply comments of............................... 108
Crawford, Charles, Executive Director, American Council of
the Blind, letter dated June 27, 2002...................... 107
Hargraves, Dirck A., Counsel, Telecommunications Research and
Action Center, letter dated April 18, 2003................. 116
League of United Latin American Citizens, letter dated April
18, 2003................................................... 110
Lestina, Dale, President, OCRE, letter dated July 17, 2003... 115
National Association of Development Organizations, letter
dated September 2, 2003.................................... 118
Pollak, F.J., President and CEO, TracFone Wireless, Inc.,
prepared statement of...................................... 105
Shelton, Hilary O., Director, NAACP, letter dated April 18,
2003....................................................... 111
Watson, Leroy, Director of Legislative Affairs, The National
Grange, reply comments of.................................. 112
(iii)
THE FUTURE OF UNIVERSAL SERVICE
----------
WEDNESDAY, SEPTEMBER 24, 2003
House of Representatives,
Committee on Energy and Commerce,
Subcommittee on Telecommunications
and the Internet,
Washington, DC.
The subcommittee met, pursuant to notice, at 1 p.m., in
room 2123, Rayburn House Office Building, Hon. Fred Upton
(chairman) presiding.
Members present: Representatives Upton, Gillmor, Cox, Deal,
Whitfield, Shimkus, Wilson, Pickering, Bass, Bono, Walden,
Terry, Tauzin (ex officio), Markey, Rush, Boucher, Gordon,
Deutsch, Stupak, Wynn, Green, and Dingell (ex officio).
Staff present: Dan Brouillette, staff director; Howard
Waltzman, majority counsel; Will Nordwind, majority counsel and
policy coordinator; William Carty, legislative clerk; Greg
Rothschild, minority counsel; and Jessica McNiece, minority
staff assistant.
Mr. Upton. Sorry for the delay. We had a number of votes on
the floor. And I understand that we are going to have votes
about every hour. A couple of votes will not be able to roll
this like we are able to do from time to time.
So good afternoon. Today's hearing is entitled ``The Future
of Universal Service.'' We have before us a very distinguished
and very large panel of witnesses. So I am going to keep my
opening remarks brief.
At the outset, I want to offer a special welcome to one of
our witnesses, Sid Shank of Bloomingdale Telephone Company,
which is located in my district. Over the years, I have made
many visits to Bloomingdale and Paw Paw, where she lives, with
its one four-way blinking traffic light; yellow, by the way--I
think it's yellow anyway--and have seen what a terrific
difference the nearly 100-year-old Bloomingdale Telephone
Company has made in the lives of the 2,000 customers that it
currently serves. As a result, I have witnessed firsthand the
valuable byproduct of universal service.
Universal service is a cherished principle of our Nation's
telecommunications system, which has been and continues to be a
vital link for rural America and those most in need. However,
coming from Michigan, the auto State, I would say that while
the car is still running, the engine light has come on,
suggesting that the universal service engine needs an overhaul
if we are going to keep it running for another 100,000 miles
and beyond. Today we are lifting up the hood and checking
things out.
We know that competitive forces, which have evolved since
the Telecommunications Act of 1996, are putting great strain on
the universal service engine.
On the contribution side, trends suggest that the amount of
money coming into universal service is declining. CLECs are
competing for business and urban residential customers, which
is an implicit source of universal service funding for the
ILECs serving rural customers.
Also, different technologies are competing against one
another. So, instead of making traditional land line long
distance calls an explicit source of universal service funding,
people are using e-mail, wireless phones, voice over internet
protocols, which currently contribute less or nothing to the
universal service relative to traditional land line long
distance calls.
Meanwhile, on the demand side, trends suggest that it is
increasing at a rapid pace as more and more wireless companies
are seeking universal service funding in rural areas where
rural ILECs aren't currently serving and receiving universal
service. Many rural carriers are also seeking to use universal
service funds to build the infrastructure to provide advanced
services.
Of course, every one of our constituents shoulders the
burden of universal service on their phone bills. So we need to
be ever mindful about our responsibility to them and their
family budgets.
All of these pressures suggest that the current system is
unsustainable. And it is our job to make sure that it is fixed,
not only for today but also for whatever the telecommunications
future may bring.
Today we are going to hear about the problems and some of
the proposed solutions. I suspect that there will be some
difference with respect to the solutions, but I certainly look
forward to working with every member of this subcommittee as we
take stock of today's testimonies and answers to our questions
so that we can best prepare ourselves for the job ahead of us
in the coming days.
At this point, I will remind all members that if they waive
their opening statement, they will get an extra 3 minutes on
their first round of questions. And with that inducement, that
will raise to my friend Mr. Gordon from Tennessee.
Mr. Gordon. It sounds like ``Let's Make a Deal'' here.
Mr. Upton. Yes.
Mr. Gordon. You are right. We have a lot of witnesses. We
need to get on with this. I will just briefly say that my
district is well-represented by BellSouth. And, Ms. Greene, you
do a good job with that organization.
And, as you know, I represent the wealthiest part of
Tennessee, the suburbs of Nashville, and the poorest part,
there in the root of the Appalachian part of Tennessee. So it's
interesting how you are able to serve both of these well. And I
hope the panel as we go through today will talk a little bit
about whether there should be standards and how we should go
about assessing and having standards for people or for
organizations that have to serve this diverse type of groups,
from the wealthiest to the poorest. I think that that is
something that we need to be looking at, and I hope that you
will address it.
Thank you.
Mr. Upton. I would yield for an opening statement from Mr.
Gillmor.
Mr. Gillmor. Thank you very much, Mr. Chairman. I have a
very profound and insightful statement that is on the way from
my office. It's not here, but I will enter it into the record
when it gets here. I do want to commend you for going forward
with these hearings.
This is a very important subject area where the changes in
the marketplace are making a significant difference in how we
take care of a universal service fund. There are also some
serious questions of fairness in the way the burden is mapped.
And I'm glad that we're taking a look at it. I hope that we
will continue to do it in even more depth.
Thank you.
[The prepared statement of Hon. Paul Gillmor follows:]
Prepared Statement of Hon. Paul E. Gillmor, a Representative in
Congress from the State of Ohio
I thank the Chairman for the opportunity to address the future of
Universal Service, a critical issue in states with rural, high-cost
areas, such as mine. Although the goals and performance of this program
have been successful, a majority of the telecommunications sector and
many Members here today recognize the fund's current situation, in
which competition and technology have begun to wear away at the
Universal Service system. More specifically, the cost of the fund
continues to grow and revenues diminish as consumers have migrated to
data services such as email and voice-over Internet.
Furthermore, the current formula has flaws that in some cases have
led to unfair results. For example, under the existing system, larger
carriers that serve rural customers often shortchange millions of rural
Americans, as carriers in a few states currently receive up to 80
percent of the funding. In my home state of Ohio, residents pay almost
$7 million into the fund for non-rural carriers, but none of this
funding actually reaches rural Ohio. As a consequence, rural Ohioans
are subsidizing the telephone service of rural residents in other
states.
While certainly a worthy issue to address, I also look forward to
hearing from the well-balanced panel of witnesses concerning a
comprehensive approach to ensuring the continued viability of Universal
Service in addition to other immediate and long-term solutions.
Again, I thank the Chairman for holding this timely hearing and
yield back the remainder of my time.
Mr. Upton. I yield to Mr. Dingell, the ranking member of
the full committee.
Mr. Dingell. Mr. Chairman, I thank you for your courtesy
and commend you for holding these hearings. This is a great
opportunity, and it is one that I hope this committee will take
advantage of.
I am pleased that we are examining this very important
issue of universal service and its future because I am becoming
increasingly concerned about the future stability of universal
service support mechanisms. Providing high-quality
telecommunications services at affordable rates to all
Americans has long been a cornerstone of our Nation's
telecommunications policy and was enacted into law in the
Telecommunications Act of 1996.
As this committee embarks on critical examination of the
universal service and how to ensure that it is sustained in the
future, we must be willing to ask tough questions of those
companies who have benefited handsomely from deregulation and
make sure that the players are all asked to contribute in an
equitable manner.
In 1996, the Congress believed that universal service
programs could be supported by assessing a charge against
interstate telecommunications services.
As we all know, much has changed in the telecommunications
landscape since 1996. And these changes now demand a thorough
reexamination of the manner in which we support universal
service.
The explosive growth in the use of e-mail and wireless
services has replaced traditional long distance voice service
for many Americans, and has dramatically slowed the growth of
wire line interstate minutes. At the same time, cost per minute
has fallen. These events have dramatically decreased the pool
of revenue available to support universal service and caused
the assessment on consumers' bills to rise to 9.5 percent.
Also important, as networks become digital and capable of
offering multiple types of service, carriers have begun to
bundle products to consumers in attractive commercial
offerings. In many regions, the consumer can purchase local and
long distance voice service, high-speed internet service, and
wireless service from a single carrier at a single price. This
is wonderful for consumers, who are realizing the savings and
convenience of real competition, but it is beginning to wreak
havoc on those who must determine which portion of that bundled
rate is for interstate service and can, thus, be assessed for
purchased purposes of universal service.
Finally, the present system also leads to several
marketplace inequities. For example, though cable companies and
phone companies offer comparable broadband products to
consumers, only telco DSL service offered by the phone
companies must support universal service.
As the Federal Communications Commission and our committee
contemplate action to address these issues, I suggest that we
begin to adhere to certain principles. First, all providers--
and I mean all, A-L-L, providers--of telecommunications should
provide equitably for contributions to support universal
service. There is absolutely no reason to exempt certain
products offered by particular industries simply because those
industries have traditionally provided video rather than common
carrier services.
Next, all communications and not simply interstate
communications should be assessed. In a world of packeted
networks and bundled service offerings, it is simply nonsense
for the FCC to determine which communications are interstate,
rather than intrastate, in nature.
Finally, as new services come on line, such as voice over
the internet protocol, we should be careful not to play
favorites for the so-called new technologies. Contrary to what
some might say, we are not stifling the growth of new services
by asking them to play by exactly the same rules as their
competitors play and to confront the same challenges and
difficulties that they confront. Rather, if we allow carriers
to evade universal service requirements simply because of the
technology or type of technology of their network, then not
only will we be shortchanging universal service support
mechanisms, but we will be picking winners and the losers in
the marketplace. And, worse, we will be stacking the deck
unfairly against certain participants in the industry.
Mr. Chairman, I look forward to working with you and with
Chairman Tauzin on the issue. We must stand ready to make tough
choices to ensure the continued service of the
telecommunications industry to our people and the continued
success of that service. I thank you for your courtesy to me.
Mr. Upton. Thank you, Mr. Dingell.
I recognize Mr. Cox for an opening statement.
Mr. Cox. Thank you, Mr. Chairman. I welcome our witnesses
here. I thank you for holding this hearing on an issue that is
of great import to many of us who are determined not to repeat
the disastrous history of overregulation in the traditional
telephone market.
When we debated in this committee the 1996 act, there was a
consideration at that time of an amendment that I proposed that
would have limited universal service to voice-grade telephony.
The truth is that we are living in a world right now where
voice and data are merging, where, indeed, what we call data is
very difficult to define. And the kinds of telecommunications
services that consumers can avail themselves of are expanding
very rapidly.
One of the reasons that this program is in trouble is that
demand for funds has been growing while the support base has
not been growing with it. We need to look at ways to limit what
might otherwise be an inexorable expansion of a program that
would at that point be in search of a purpose.
I think the fundamental purposes that need to be maintained
for universal service include making sure that everyone,
whether they can afford it or not, has a lifeline. They ought
to be able to call 911. People should not be so shut out from
the rest of society that they can't get an ambulance to take
them to the emergency room. But at the same time, we ought not
ask most consumers to pay taxes to subsidize people getting
video conferencing or getting all of the services that might
someday be available in the form of data over what used to be
telephone lines. We certainly don't want to be paying for
movies on demand or any such thing. And I think it is time for
us to take a very, very hard look at what is it that we are
trying to accomplish with this program. And I would think that
the lessons that we have learned since 1996 would be very
instructive in this respect but that now because of the
financial problems of this program would be a fine time to
explicitly describe universal service as voice-grade telephony
and use it as a lifeline program.
I thank the chairman. I yield back.
Mr. Upton. Thank you.
Mr. Stupak?
Mr. Stupak. Thank you, Mr. Chairman.
The Federal Universal Service Program is of critical
importance to rural parts of America, including my district.
Universal service ensures that households in all parts of
America have access to basic telecommunications services, even
in the most rural areas. But the FCC's program for non-rural
carriers is no longer effectively meeting these goals.
Overwhelmingly, the program benefits carriers and customers in
three States, and millions of rural customers served by non-
rural carriers receive no benefit at all. The FCC itself
compiled a chart that illustrates this clearly.
According to the FCC, residents in Michigan pay more than
$5 million into the non-rural part of USF Program. Yet,
carriers and consumers in Michigan receive no money for the
program in return. Similar cases exist in 42 other States as
well.
And I would ask unanimous consent to submit this chart from
the FCC into the record.
[The chart follows:]
USF Net Dollar Flow for High-Cost Rural Areas Served by Mixed Carriers: 2001
(Annual Payments and Contributions in Millions)
High-Cost, Non-Rural Fund ONLY
----------------------------------------------------------------------------------------------------------------
Contribs to
State USF* Paymts from USF Net Dollar Flow
----------------------------------------------------------------------------------------------------------------
Alabama.................................................... 2,650,000.29 42,863,000.88 40,213,000.59
Alaska..................................................... 497,000.70 0.00 -497,000.70
Arizona.................................................... 4,074,000.18 0.00 -4,074,000.18
Arkansas................................................... 1,584,000.18 0.00 -1,584,000.18
California................................................. 19,405,000.93 0.00 -19,405,000.93
Colorado................................................... 3,997,000.10 0.00 -3,997,000.10
Connecticut................................................ 3,131,000.86 0.00 -3,131,000.86
Delaware................................................... 779,000.03 0.00 -779,000.03
Florida.................................................... 13,334,000.32 0.00 -13,334,000.32
Georgia.................................................... 6,483,000.90 0.00 -6,483,000.90
Hawaii..................................................... 800,000.08 0.00 -800,000.08
Idaho...................................................... 1,031,000.32 0.00 -1,031,000.32
Illinois................................................... 8,842,000.11 0.00 -8,842,000.11
Indiana.................................................... 3,700,000.57 0.00 -3,700,000.57
Iowa....................................................... 1,775,000.15 0.00 -1,775,000.15
Kansas..................................................... 1,886,000.91 0.00 -1,886,000.91
Kentucky................................................... 2,468,000.49 0.00 -2,468,000.49
Louisiana.................................................. 2,635,000.49 0.00 -2,635,000.49
Maine...................................................... 937,000.83 6,629,000.32 5,691,000.50
Maryland................................................... 4,517,000.17 0.00 -4,517,000.17
Massachusetts.............................................. 5,480,000.82 0.00 -5,480,000.82
Michigan................................................... 5,674,000.50 0.00 -5,674,000.50
Minnesota.................................................. 3,503,000.19 0.00 -3,503,000.19
Mississippi................................................ 1,664,000.31 103,960,000.88 102,296,000.57
Missouri................................................... 3,801,000.38 0.00 -3,801,000.38
Montana.................................................... 733,000.33 4,334,000.25 3,600,000.92
Nebraska................................................... 1,184,000.37 0.00 -1,184,000.37
Nevada..................................................... 1,863,000.09 0.00 -1,863,000.09
New Hampshire.............................................. 1,249,000.82 0.00 -1,249,000.82
New Jersey................................................. 8,371,000.35 0.00 -8,371,000.35
New Mexico................................................. 1,256,000.82 0.00 -1,256,000.82
New York................................................... 13,745,000.77 0.00 -13,745,000.77
North Carolina............................................. 5,804,000.34 0.00 -5,804,000.34
North Dakota............................................... 555,000.01 0.00 -555,000.01
Ohio....................................................... 6,791,000.80 0.00 -6,791,000.80
Oklahoma................................................... 2,102,000.54 0.00 -2,102,000.54
Oregon..................................................... 2,592,000.57 0.00 -2,592,000.57
Pennsylvania............................................... 8,344,000.42 0.00 -8,344,000.42
Rhode Island............................................... 857,000.75 0.00 -857,000.75
South Carolina............................................. 2,790,000.75 0.00 -2,790,000.75
South Dakota............................................... 584,000.43 0.00 -584,000.43
Tennessee.................................................. 3,721,000.83 0.00 -3,721,000.83
Texas...................................................... 12,880,000.80 0.00 -12,880,000.80
Utah....................................................... 1,532,000.46 0.00 -1,532,000.46
Vermont.................................................... 560,000.33 10,026,000.78 9,466,000.45
Virginia................................................... 6,038,000.66 0.00 -6,038,000.66
Washington................................................. 4,434,000.74 0.00 -4,434,000.74
West Virginia.............................................. 1,161,000.21 25,894,000.38 24,733,000.17
Wisconsin.................................................. 3,232,000.07 0.00 -3,232,000.07
Wyoming.................................................... 463,000.12 6,138,000.62 5,675,000.51
TOTAL.................................................... 199,848,000.13 199,848,000.13 0.00
----------------------------------------------------------------------------------------------------------------
Source: FCC Universal Service Monitoring Report, CC Docket No. 98-202, October 2002, Table 3.17, page 3-26.
Notes: Figures may not add due to rounding. Support payments do not include quarterly true-ups. USF is an
abbreviation for the Universal Service Fund, which funds the high-cost support mechanisms.
* Carriers make payments into the fund based on end-user interstate telecom revenues. The estimates in this
column are computed by multiplying the state's share of end-user revenue times the nationwide total at the
bottom of this column. For the methodology used to derive the state's share, see the technical appendix to
Chapter 1 of the source document.
Mr. Upton. Without objection.
Mr. Stupak. When I first learned about this, I was amazed.
Apparently, the rationale that leads to this inequity is as
follows: The FCC uses the average cost of the non-rural
carriers serving the State and compares that with the National
average cost of providing telephone service. If a State's
average is more than 135 percent of the National average, the
State is eligible for funding. If the State is below 135
percent, it is not eligible for funding.
On the face of it, this approach makes sense. However, it
has flaws. First, the cost of providing service in a State is
skewed downward if a non-rural carrier provides service to
residents in a city in that State.
In addition, this method ignores the intent of Congress.
Congress told the FCC to ensure comparable rates between urban
and rural areas. Universal service is designed to ensure that
rural residents in all parts of the country are afforded access
to telephone service that is comparable in price and quality to
service in cities. A scheme that sends 70 percent of the funds
to two States does nothing to advance urban, rural rate
compatibility in my State or most States in the Nation.
The Universal Service Fairness Act that Representative
Terry and I have introduced would solve this problem by
assessing each rural area independently. Each telephone company
wire center is compared to a National benchmark. If the wire
center is over the benchmark, it would receive support. If the
wire center is below the benchmark, it would not. This method
would enable residents, rural residents, across America to be
treated fairly. And it ensures that lower-cost areas would not
benefit.
Mr. Chairman, I share the view of many of the members of
this subcommittee that we should undertake a review of the
entire USF Program. The program has many challenges. However, I
believe that we should consider moving to fix inequities that
do rural customers a great disservice while we continue to
grapple with the larger issues as well.
With that, I yield back the remaining 6 seconds of my time.
Mr. Upton. The gentleman's time has expired. I recognize
the gentleman from Nebraska, Mr. Terry, certainly.
Mr. Terry. Thank you, Mr. Chairman, for holding this
important hearing.
I would like to as well focus my comments on one aspect of
universal service fund. And that's the high-cost, non-rural
fund. Now, although the FCC calls it non-rural carriers, in
fact, actually, this service serves more than 70 percent of
rural Americans.
This program may be one of the most poorly targeted
programs in the Federal Government. More than half of the
program, $120 million out of $234 million, benefits one single
State. Nearly 85 percent of this program goes to carriers in
only three States. And only eight States receive any funding
under this program. It's interesting to note that some of the
rural States that do not benefit from this program include
Texas, who donates over $12 million to this program, and
receives nothing; Tennessee, $3.7 million and receives nothing.
Nebraska receives nothing.
Ironically, the States that do benefit from this program,
although rural and deserving of some support, are not the most
rural States in America. For example, by almost every measure,
my State, Nebraska, is considered rural. According to the cost
and the most recent Census data, Nebraska is one-third as
densely populated as Mississippi. Yet, carriers serving
residents in Nebraska receive no support under this program.
I am proud to partner with Mr. Stupak in a bill that would
correct this, as he has outlined in his opening statement. By
using a different formula, 40 States, more than 40 States, will
receive some degree of funding, as opposed to just 8.
Now, Mr. Chairman, you and I have discussed the necessity
to review and work toward complete reform of the USF Program.
And I want you to know, as I have told you on the floor,
consider me a partner in that effort.
I do agree that we need to completely reform the Universal
Service Program on the distribution, on the revenue side, but
let's also recognize that that is going to be a very arduous,
tedious, and lengthy process. And I would respectfully request
that we not punish in that time States like mine, Nebraska. And
let's resolve the inequities while we can now.
With that, I look forward to working with you on the
Universal Service Fund and continue to plead that we at least
do what we can and move the Terry-Stupak bill.
I yield back my 9 seconds.
Mr. Upton. The gentleman yields back the balance of his
time.
We recognize Mr. Green for an opening statement.
Mr. Green. Thank you, Mr. Chairman. I appreciate the offer
of the extra 3 minutes, but I think I want to say what I have
so it will get into the record now. And I thank you for calling
the hearing on the future of universal service.
I expect that we will hear agreement from our panelists
today and from many members that the universal service fund
needs to be preserved. We may have different reasons for that.
Mine is because I believe we must have a healthy fund to
improve education through our schools and library funding known
as the e-rate.
People who are talking about reducing claims on the fund
should be warned that if they try to scale back or limit e-rate
funding, I think we will see a tremendous outcry from our
teachers and our parents and our school districts across the
country. I don't want to get into the nuts and bolts of e-rate
or some of its recent publicity, but I want to talk about what
e-rate has done for the school children in my hometown in
Houston.
With their recent receipt of over $50 million in year 6,
the Houston Independent School District, very urban district,
200,000-plus children, has received approximately $200 million
in universal service funding through e-rate.
Between 1998 and 2001, internet access in our minority
classrooms jumped from 37 percent to 81 percent. And we were
successful in bridging that digital divide because of the
universal service fund. I believe these investments will be
paid back many times over when these children fully enter our
society and our workforce.
Ninety-five percent of all of our Houston public school
classrooms are now connected, with over 90 percent using high-
speed connections. Teachers are connected to their schools'
resources at their homes. And hopefully students will also be
able to connect through their homes.
Smaller districts also benefit. I have a number of
districts other than Houston Independent School District. I
have one small district that's 80 percent economically
disadvantaged. And they received more than $1.5 million in e-
rate funding. This low-income district is now scoring 90
percent on all their State achievement tests. And the school
administrators say that it couldn't have happened without e-
rate-provided funding from the universal service fund. So
improving educational opportunities for these schools is my
motivation for seeking solutions to the coming crunch for the
universal service fund.
I don't know the solution on how to make the deposits and
withdrawals on the fund match up. And I look forward to hearing
from our distinguished panelists on how this may be
accomplished. But I do know the approach should be
comprehensive in considering all aspects of the universal
service, both within and without the actual universal service
fund.
Before we hear about potential solutions for universal
service in general and the fund in particular, I will make one
observation. If the FCC is going to continue to demand that the
incumbent local exchange carriers subsidize their competitors
to pick off their high-value customers through the UNE-P system
and the TELRIC pricing mechanism behind it, the incumbents are
going to become less and less able to have their business
models support the majority of rural and high-cost customers,
whom they now serve.
And if incumbents that do not draw much from the fund can
no longer afford to serve these rural customers, then other
companies will move in using the universal service fund dollars
to serve these customers. If we think the fund is in trouble
now, it may get a lot worse if action is not taken. It is a
complicated relationship, but if balance were restored to this
industry by eliminating UNE-P or the TELRIC pricing, we would
retain the ability of the incumbents to provide universal
service without causing increased burden on the fund.
If incumbents cannot serve their current rural customers,
the burden on the fund is going to get bigger. And soon people
are talking about making more folks pay into the fund, causing
a lot more pain.
All the while, we have critical needs in our schools and
our school children and need telecommunication investments. If
these investments are hit because we would rather subsidize a
few companies, I think that would be particularly a shame.
And, again, I'm glad the panel is here, Mr. Chairman. I am
glad you are holding this hearing. Thank you.
Mr. Upton. Thank you, Mr. Green.
Mr. Walden?
Mr. Walden. Mr. Chairman, I will waive an opening
statement.
Mr. Upton. Good for you.
Ms. Bono?
Ms. Bono. I'll waive also.
Mr. Upton. Mr. Whitfield?
Mr. Whitfield. I'll waive also.
Mr. Upton. Mr. Bass?
Mr. Bass. I'll waive.
Mr. Upton. Ms. Wilson?
Mrs. Wilson. Enter it into the record.
Mr. Upton. Without objection.
All members' statements will be a part of the record. So do
you defer as well?
Mrs. Wilson. I'll waive.
Mr. Upton. Mr. Pickering?
Mr. Pickering. I will defer as well.
Mr. Upton. Mr. Boucher?
Mr. Boucher. Well, thank you, Mr. Chairman. I do have
something to say.
As a representative of a rural Virginia district, I have a
very strong interest in assuring that the longstanding
commitment our Nation has made to affordable telephone service
for everyone remains at the core of our Federal
telecommunications policy.
We have a telephone service penetration rate in the high 90
percentile Nationwide, an achievement that few Nations can
claim. That sterling accomplishment is a consequence of and is
directly attributable to this commitment to universal service,
through which the residents of high-cost rural areas receive
the basic local telephone service at the same monthly rate as
the residents of the easier-to-serve metropolitan regions.
In the absence of our universal service policy, the high
cost of stringing telephone lines over large distances and
mountainous terrain would place the cost of telephone service
beyond the reach of tens of thousands of my constituents and
tens of millions of rural Americans.
And so, as we embark on these timely hearings--and I think
they are timely--to survey the changes and the universal
service funding and delivery mechanisms, which the arrival of
competition in the telecommunications industry makes necessary,
I will urge the members to retain our core basic universal
service policy: affordable local telephone service for everyone
with the same basic monthly rate for rural and urban residents
alike. But changes must come in the mechanics by which we
achieve that result.
In an era of highly competitive markets for both wired and
wireless telephone service, the universal service policy is
still based on the concept of a local telephone monopoly with a
single wire line provider for all voice service. To a large
extent, the policy is still based on the notion of a vertically
integrated system with a single provider for both local and
long distance service, a condition which has not prevailed in
the United States for 20 years.
All universal service revenues, the system's money end, are
derived from charges on interstate services while purely
intrastate services escape any universal service charge. CLECs,
who serve business customers only, take the cream off the top,
depriving the universal service fund of much of its traditional
revenue service resource, which leaving the incumbent CLEC with
an even greater universal service funding responsibility.
Telephony offered by cable systems through the cable modem
service in packaged switching format looks and feels exactly
like local telephone service, but it escapes any universal
service payment responsibility.
These matters only scratch the surface in a complex system
for which changes must come. I want to commend the chairman for
launching the committee's deliberations on universal service. I
very much look forward to the witnesses who have joined us here
today. And I want to join the chairman in thanking them for
their participation. And I look forward to participating with
the members as we make the changes which must be made while
reserving our core principle of affordable service for
everyone.
Thank you, Mr. Chairman.
Mr. Upton. Thank you, Mr. Boucher.
Mr. Rush?
Mr. Rush. Thank you, Mr. Chairman. Mr. Chairman, I join
with my colleagues on the committee in applauding you for
holding this hearing on universal services.
Oversight of universal service programs is critical for all
parts of the country. And it is indeed important to residents
of cities and suburbs. We contribute the lion's share of
funding for this program. And it is important to rural America
also to ensure that rural residents have access to quality
affordable telephone services.
Seven years after the passage of the Telecommunications
Act, the goals of the act remain the same to both reserve and
advance universal services. However, the future of the fund is
now in danger.
Mr. Chairman, since we passed the 1996 Telecommunications
Act, the technological landscape has certainly drastically
changed, never to return. We are now witnessing an explosion of
wireless and internet technologies. And they're offering a
bundle of services, which, in part, is great for the consumer
but, on the other hand, has the potential to shrink the base of
revenues for the universal service fund. This is, in part, due
to the funding mechanism, which is totally reliant on
interstate and international end user telecommunication
revenues, thereby increasing the difficulty of identifying
interstate revenues.
As we continue to fund notable programs, like the E-rate
Program and the Rural Health Care Program, reform will be
necessary to ensure the sustainability of the fund in the long
term. That said, Mr. Chairman, I look forward to hearing the
testimonies of our distinguished panelists, who offer proposals
on how we can best restructure the universal service fund so
that we can ensure that it is being used responsibly and fairly
and that it indeed is fully funded.
Thank you, Mr. Chairman. I yield back the balance of my
time.
Mr. Upton. Thank you, Mr. Rush. I know you are rooting for
the Cubs tonight, too.
Mr. Rush. I predict a victory, Mr. Chairman.
Mr. Upton. For the Red Sox for Mr. Markey here. He will be
here. He's at the health conference.
[Additional statements submitted for the record follow:]
Prepared Statement of Hon. Barbara Cubin, a Representative in Congress
from the State of Wyoming
Thank you, Mr. Chairman.
I would like to thank you for holding this hearing to examine the
state of Universal Service, and jump-starting the effort to ensure the
solvency of this important fund. We must make certain that the USF
continues to assist rural and high cost communities--and low income
Americans--stay connected in our modern world.
Being from a rural state, I can appreciate how difficult it is to
provide ubiquitous, affordable phone service across states like
Wyoming. Those who are fortunate enough to live in Wyoming, however,
should not have the misfortune of exorbitant telephone rates. After
all, a phone in New York City is worthless if there isn't anyone on the
other end of the line.
We have come a long way from the initial concept of Universal
Service, and the means of communication hardly resemble the rotary dial
phone that I grew up with. With new and emerging technologies changing
how we stay connected, there have also emerged new questions on how the
USF should operate. For this to be an effective process, we need to
assess the role of telecommunications providers regarding their
obligations to the fund as well as examine who is receiving a subsidy
from the fund. Spiraling contribution rates are not the sign of a
balanced program. And no consumer wants to open his or her phone bill
and see a regularly ballooning USF contribution.
I am certain that ensuring the solvency of the USF has as many
different potential solutions as the witnesses we have testifying
today--if not more. Hopefully, there are some common themes we can
build upon and reach a consensus approach that will be widely supported
throughout communities, the industry and Congress.
As a result of this hearing, I would like to learn from our panel
just what changes they would propose to ensure the viability of
Universal Service. I would also like to hear everyone's thoughts on how
we arrived at this precipice . . . what went wrong?
We have a unique opportunity to take today's pending troubles with
the fund and craft a common sense, dependable solution. One that had
broad support and one that is rock-solid, so that we won't be holding a
hearing a few more years down the road and asking, ``What went wrong?''
again.
Thank you Mr. Chairman, I yield back the balance of my time.
______
Prepared Statement of Hon. W.J. ``Billy'' Tauzin, Chairman, Committee
on Energy and Commerce
Mr. Chairman, thank you for calling this hearing today. Universal
service is a complicated, but important, topic, and this subcommittee
needs to begin to understand its current status and what lies in its
future.
Ensuring that all Americans have access to affordable telephone
service has been an important public policy goal for more than fifty
years. However, competitive forces created after the '96 Act have made
the current system unsustainable. Unless key changes are made in the
universal service regime, I fear that the fund will spiral out of
control, and that many of our rural constituents, including those in my
district in Louisiana, will be without affordable telephone service.
Competition has impacted universal service in three respects.
First, competition among local exchange carriers for business and urban
residential customers has eroded a primary source of implicit universal
service funding for incumbent local exchange carriers (ILECs).
Competition is great for consumers, but it requires changes in
universal service policies.
Second, competition among technologies has begun to reduce the pot
of money from which universal service derives its funding. People send
emails rather than make long-distance phone calls. That drains revenues
from interstate revenues. People use their wireless phones rather than
wireline phones. And burgeoning technologies like Voice over Internet
Protocol (VOIP) do not currently contribute to universal service
funding.
Third, competition has begun among different services for universal
service dollars. Wireless companies are beginning to use universal
service funds to serve wireless carriers. And wireless companies are
receiving universal service dollars even though a particular customer
is still being served by a wireline company that uses universal service
dollars. In addition, some people want to use universal service money
to fund broadband in rural areas. This has greatly increased the demand
on universal service money.
All of these competitive trends have put unprecedented pressure on
the universal service program. The program needs to be modernized to
reflect all of these trends.
I look forward to hearing the testimony of our witnesses today so
that we can begin to educate members regarding different ideas for
universal service reform. I hope this committee will engage in a
vigorous debate about this issue and coalesce around a strategy for
reform. I look forward to working with Chairman Upton, Mr. Dingell, and
other interested parties to ensure that we bring long-term
sustainability to the universal service program.
Mr. Upton. We are delighted to have a distinguished panel
with us this afternoon. And we are joined by Ms. Kathleen
Abernathy, a commissioner of the FCC; Mr. Bob Rowe, Chairman of
the Montana Public Service Commission; Mr. Billy Jack Gregg,
Director of the Consumer Advocate Division, Public Service
Commission of West Virginia; Ms. Margaret Greene, President of
the Regulatory and External Affairs of BellSouth; Mr. Joel
Lubin, Vice President of AT&T; Mr. Glen Post, Chairman and
Chief Executive Officer of CenturyTel; Ms. Sid Shank, General
Manager of Bloomingdale Telephone Company from the greatest
city of Michigan; and Mr. John Stanton, Chairman and CEO of
Western Wireless Corporation.
Ladies and gentlemen, your testimony has been made a part
of the record in its entirety. We appreciate very much that you
sent it up early so we had a chance to look at it last night,
for me, my staff, and other members of the committee. It's made
a part of the record.
We are going to try to limit your remarks to 5 minutes.
Ms. Commissioner Abernathy, we will start with you. Welcome
back.
STATEMENTS OF KATHLEEN Q. ABERNATHY, COMMISSIONER, FEDERAL
COMMUNICATIONS COMMISSION; BOB ROWE, CHAIRMAN, MONTANA PUBLIC
SERVICE COMMISSION; BILLY JACK GREGG, DIRECTOR, CONSUMER
ADVOCATE DIVISION, PUBLIC SERVICE COMMISSION OF WEST VIRGINIA;
MARGARET H. GREENE, PRESIDENT, REGULATORY AND EXTERNAL AFFAIRS,
BELLSOUTH CORPORATION; JOEL LUBIN, VICE PRESIDENT, AT&T
CORPORATION; GLEN POST, CHAIRMAN AND CHIEF EXECUTIVE OFFICER,
CENTURYTEL, INC.; SIDNEY SHANK, GENERAL MANAGER, BLOOMINGDALE
TELEPHONE CO.; AND JOHN STANTON, CHAIRMAN AND CHIEF EXECUTIVE
OFFICER, WESTERN WIRELESS CORPORATION
Ms. Abernathy. Thank you very much, Chairman Upton and
distinguished members of the subcommittee. It is a pleasure to
be here today. And I appreciate the opportunity to discuss the
future of universal service. And I also applaud you for taking
the time and energy to tackle this very difficult issue.
As pointed out by all of you, I think, the goal of
providing high-quality telecommunications services to all
Americans at affordable rates is a cherished principle in U.S.
telecommunications policy and one of the cornerstones of the
act. All too often, we forget that in the not too distant past,
phone service was a luxury that few in rural America could
afford. Today, however, universal service funding has
guaranteed citizens throughout the country the ability to
communicate at reasonable rates.
I know that every member of this subcommittee understands
the importance of universal service. And as chair of the
Federal-state joint board on universal service, I also make it
a top priority.
My written statement provides details on the challenges
confronting universal service and the various rulemaking
proceedings that we have pending at the FCC. So what I thought
I would do this afternoon is highlight two key issues
identified in my written statement; first, the contribution
methodology debate; and, second, the issues surrounding who
qualifies for universal service support in areas served by
rural telephone companies. I think everyone agrees that for
universal service to remain vital, we must ensure that
sufficient funds continue to flow into the system and that the
funding burden is spread among contributors in an equitable and
a nondiscriminatory manner.
The commission took some important steps last December to
stabilize the universal service contribution factor in an
effort to mitigate the growing funding burden on some
consumers. But the existing regime remains in jeopardy for
several reasons. And I believe that more fundamental reforms
will be necessary to protect universal service in the long
term.
I think, as anyone with a cell phone can attest, the
telecom market has evolved away from reliance on traditional
long distance service and toward new services, like wireless
and e-mail and more recently voice over IP.
Since universal service funding comes only from interstate
revenues and there is a Federal court decision that said the
FCC is not permitted under section 254 of the act to assess
intrastate revenues, then this continuing decline in interstate
revenue base has forced the FCC to increase the contribution
factor substantially to meet funding demands.
Another concern arises from the increasing prevalence of
bundled service offerings. And I know a number of you mentioned
that. While these bundles are great for consumers because
they're convenient, they save us money, that's fine, but they
also make it extremely difficult to identify that part of the
bundle that is the interstate telecommunications piece.
Since the FCC's existing rules only allow us to assess
contributions on the interstate minutes, somehow we have to try
and isolate those revenues from the revenues that are generated
from intrastate services or from other information services. At
the same time, however, simple economics will likely lead
carriers to attempt to minimize their contribution obligations
by shifting revenues to categories of service that are not
assessed USF obligations.
So how do we respond to these marketplace and technological
changes? One option is for Congress to give the FCC the
authority to assess contributions on both interstate and
intrastate revenues. This total revenue assessment approach
would be more predictable and would make it harder for carriers
to shield some of their revenues in different categories.
In addition, however, the FCC is considering whether to
adopt alternative contribution methodologies under our existing
authority. So, for example, a system based on physical
connections or assigned telephone numbers might be more stable
than the revenue model we currently use. And proponents note
that these alternatives would eliminate the need to consider
this whole debate about interstate versus intrastate
jurisdiction or telecom service versus information service
monies. But these proposals, nevertheless, remain
controversial, in large part, because they would shift
contribution obligations away from long distance carriers and
into the pockets of the LECs and the wireless carriers.
While universal service charges, as we all know, are
ultimately passed through to consumers, industry segments,
nevertheless, strive to minimize the charges on their own bills
for competitive reasons.
Finally, the FCC has also sought comment on broadening the
contribution base to include the telecom component of all
broadband services, including both DSL and cable model
services. Spreading the contribution burden across a broader
base of services would necessarily drive down the USF charge
imposed on any single service. Those are proposals that are
currently in front of us.
Now, apart from the contribution methodology, the other
primary source of instability in the universal service regime
is the support mechanisms for those carriers that serve rural
America. This component has grown substantially over time. And
this increase in demand for funds when combined with the
decreasing revenue base is responsible for the fact that we now
have a contribution factor that is approaching double digits.
Another funding issue that has received particular
attention is the intersection of competition and universal
service in rural areas. While new competitors, including
wireless providers, currently receive a very small percentage
of overall USF support, their share has been growing rapidly
along with a surge in applications to become eligible telecom
carriers who were entitled to support.
This trend, together with the fact that incumbent carriers
do not lose any support if a customer switches to a
competitor's service, suggests that rule changes may be
necessary to avoid placing unreasonable strains on the overall
high-cost support mechanisms. And, therefore, the FCC has asked
the USF joint board to consider a variety of issues relating to
the designation of competitive ETCs and the manner in which all
ETCs receive support.
In closing, while universal service is facing a number of
challenges, I am confident that with your help and your
guidance and the commitment of the FCC, that we will be able to
ensure the sustainability of the various support mechanisms. We
have initiated the necessary rulemaking proceedings. Together I
think we can respond to the challenges ahead.
And I want to thank you for the opportunity to testify. And
I look forward to answering any questions you may have. Thank
you.
[The prepared statement of Kathleen Q. Abernathy follows:]
Prepared Statement of Hon. Kathleen Q. Abernathy, Commissioner, Federal
Communications Commission
Good afternoon, Chairman Upton and distinguished members of the
Subcommittee. I appreciate the opportunity to appear before you to
discuss the challenges confronting universal service and the FCC's
efforts to preserve and advance this critical policy objective.
The goal of providing high-quality telecommunications services to
all Americans at affordable rates is a cherished principle in U.S.
telecommunications policy and one of the cornerstones of the
Telecommunications Act of 1996. I know that every member of this
Subcommittee understands the importance of universal service, and, as
Chair of the Federal-State Board on Universal Service, I make it a top
priority to ensure that the federal support mechanisms fulfill their
objectives.
The 1996 Act directed the FCC to promote two key goals that at
times appear to be in tension with one another: opening local markets
to competition and preserving universal service. The prior monopoly
environment enabled regulators to promote universal service by building
implicit subsidies into local and long distance rate structures. In a
competitive environment, however, these implicit subsidies cannot be
sustained, since the rates that provided surplus funds--such as
business rates in urban areas--are undercut by new entrants and
eventually driven down to a cost-based level. Congress accordingly
directed the FCC to adopt explicit support mechanisms that would be
sufficient to ensure that rates remain affordable and reasonably
comparable throughout the nation. In response, the FCC developed
several explicit support mechanisms for carriers that provide service
in high-cost areas. High-cost support will total approximately $3.3
billion in 2003.
The 1996 Act also expanded the scope of universal service by
directing the Commission to establish support mechanisms for schools
and libraries and for rural health care facilities. The schools and
libraries program (often called the E-Rate program) provides up to
$2.25 billion in annual support and has enabled millions of school
children and library patrons to gain access to advanced
telecommunications and Internet services. While the rural health
program generally has been underutilized, the FCC is considering a
variety of measures to strengthen it, as discussed below.
In addition to the high-cost support mechanisms and the programs
supporting schools, libraries, and rural health clinics, the FCC's
Lifeline and LinkUp programs provide discounts off monthly service
charges and connection fees to ensure that low-income consumers have
access to basic telephone service. This year, these programs will
provide approximately $691 million in support.
All of these programs promote the universal service goals set forth
in section 254(b) of the Act, including the availability of quality
services at affordable rates; access to advanced services in all
regions of the Nation; comparable access to telecommunications services
for all consumers, including low-income consumers and those living in
rural, insular, and other high-cost areas; and access to advanced
services for schools, libraries, and rural health care facilities.
Shortly after Congress's enactment of the 1996 Act, the FCC adopted
rules regarding the collection and distribution of universal service
support. Now, with several years of experience under our belts, we are
engaged in a reexamination of many aspects of the program to ensure
that each component is administered as efficiently and effectively as
possible and that the overall program remains sustainable. A host of
marketplace and technological developments have already prompted some
course corrections, and may ultimately cause us to reassess certain
fundamental policy choices made in the initial implementation period.
As we engage in this review, our commitment to preserving and advancing
universal service remains unwavering.
I describe below some of the challenges confronting universal
service and the efforts the FCC has underway to ensure that each
component of the universal service program remains faithful to the
principles set forth in section 254 of the Act. These proceedings aim
to improve and strengthen all of our support mechanisms, and therefore
will benefit consumers in high-cost areas, families with low income,
and patrons of schools, libraries, and rural health care facilities. In
my opinion, the FCC will soon need to revise its rules regarding the
collection of funds and their distribution through the various support
mechanisms. I will begin with the contribution methodology and then
discuss issues pertaining to the distribution of support.
contribution methodology
The Commission collects funds for the various universal service
support programs pursuant to section 254(d) of the Communications Act.
Service providers must pay a percentage of their revenues from
interstate end-user telecommunications services to the Universal
Service Fund. This percentage fee, called the contribution factor,
changes on a quarterly basis depending on the demand for funding and
the base of reported revenues. The current contribution factor is 9.5
percent.
Several trends have combined to put upward pressure on the
contribution factor, which in turn has increased the funding burden on
some consumers. While long distance revenues grew between 1984 and
1997, they have since been flat or in decline as a result of price
competition and substitution of wireless services, e-mail, and, more
recently, Voice Over Internet Protocol (VOIP) services. Because federal
universal service contributions under existing rules are assessed only
on interstate revenues from end-user telecommunications services, this
shrinking of the applicable revenue base has contributed to a steady
rise in the contribution factor over time--it has increased by more
than six percentage points over the last six years. While the
contribution factor for the fourth quarter of this year will be 9.2
percent, the slight reduction from the current factor likely represents
a one-time reprieve resulting from an earlier over-collection,
considering that the reported revenue base remains in decline.
Another important trend has been the increasing prevalence of
bundled service plans. For years, wireless carriers have offered
buckets of any-distance minutes at flat rates, and now wireline
carriers are offering packages including local and long distance for a
single price. In addition, many carriers offer business customers
bundles that include local and long distance voice services, Internet
access, and customer premises equipment. Such bundling has been a boon
for consumers but has made it difficult to isolate revenues from
interstate telecommunications services. And the problem is likely to
get worse as bundling becomes more and more popular.
In December 2002, the Commission adopted a number of measures to
stabilize the universal service contribution factor in an effort to
mitigate the growing funding burden on consumers. For example, the
Commission increased from 15% to 28.5% the safe harbor that wireless
carriers may use to determine the interstate percentage of their
revenues. The Commission also eliminated the lag between the reporting
of revenues and the recovery of contribution costs, which lessened the
competitive disadvantages facing long distance carriers with sharply
declining revenues. And the Commission prohibited mark-ups of
contribution costs on customers' bills to ensure that carriers cannot
profit from inflated line charges.
While these were important steps, I believe that more fundamental
reform will be necessary to ensure the sustainability of universal
service funding in the long term. Bundling together interstate and
intrastate services--and telecommunications and information services--
gives carriers the opportunity and incentive to understate the portion
of their revenues that are subject to assessment and increases the
difficulty of identifying interstate revenues. Contribution factors
therefore are likely to continue their ascent under a contribution
methodology based on interstate telecommunications service revenues.
For this reason, the Federal-State Joint Board has recommended that
Congress amend section 254 to provide the FCC with authority to assess
intrastate revenues, in addition to interstate revenues. A total
revenue assessment would be far lower and more stable than one based
solely on interstate revenues, and, just as importantly, it would
prevent carriers from avoiding their contribution obligations by
allocating revenues to the intrastate jurisdiction.
In addition, the Commission has been considering whether to make
substantial changes under its existing statutory authority. The
Commission has sought comment on alternative methodologies based (in
whole or in part) on end-user connections or assigned telephone
numbers, because such approaches arguably would create a more
sustainable model for funding universal service in the future. The
number of end-user connections has been more stable than the pool of
interstate revenues, and connection-based charges can be adjusted based
on the capacity of each connection to ensure an equitable distribution
of the funding burden among business and residential customers.
Moreover, proponents of a contribution methodology based on telephone
numbers (with connection-based charges for high-capacity business
lines) argue that it would not only be more stable but also promote
number conservation. Critics of these proposals--including carriers
that would face increased assessments based on connections or telephone
numbers--argue that reducing the contributions of long-distance
carriers (which have very few assigned telephone numbers or end-user
connections) would violate the statutory requirement that all carriers
contribute on an equitable and nondiscriminatory basis.
Finally, the Commission also has sought comment, in the Wireline
Broadband NPRM, on whether all facilities-based providers of broadband
services should be subject to the same contribution obligations. While
a total-revenue methodology or one based on end-user connections or
telephone numbers would address problems arising from the blurring of
the line between interstate and intrastate telecommunications services,
such changes would not necessarily broaden the contribution base to
include all broadband transmission services and new services such as
VOIP. The Commission accordingly sought comment on whether or not to
change the contribution pool to include new services that currently are
not assessed. Regardless of whether such services are classified as
telecommunications services or information services, section 254 gives
the FCC permissive authority to assess contributions on
``telecommunications,'' which underlies both types of services.
distribution of support
The steady increases in the contribution factor have resulted not
only from the shrinking of the interstate revenue base, but also from
the significant increases in the demand for funding. Much of the
increased demand has resulted from the FCC's reform of interstate
access charges: Many incumbent LECs now recover from the Universal
Service Fund costs that previously were recovered from long distance
carriers. In addition, the increasing entry of wireless carriers and
other competitors as eligible telecommunications carriers (ETCs) has
raised questions about the long-term sustainability of the high-cost
support mechanisms. Demand growth has been less of an issue with
respect to the mechanisms that support schools and libraries, rural
health clinics, and low-income consumers, but I describe below the
FCC's recent initiatives to revise those programs to ensure that they
remain efficient and effective.
high-cost support
1. ETC/Portability Issues
Before enactment of the 1996 Act, only incumbent LECs received
universal service support. In recent years, however, wireless carriers
and competitive LECs have been designated as ETCs. While competitive
ETCs receive a very small percentage of high-cost funds overall, their
share has been increasing dramatically in recent months along with a
surge in the number of ETC applications. Competitive ETCs receive
support under the ``identical support'' rule (also called ``portable
support''), which provides per-line support based on the incumbent
ETC's costs. Incumbents do not lose support when a competitive ETC
captures lines; rather, both carriers receive universal service
funding. Rural LECs have argued that this regime creates uneconomic
arbitrage opportunities and threatens the viability of universal
service, while competitive ETCs generally contend that providing
identical support--whether based on the incumbent LEC's embedded costs
or based on forward-looking economic costs--is essential to competitive
neutrality.
In November 2002, the Commission asked the Federal-State Joint
Board to consider the intersection of competition and universal service
in rural areas. The Joint Board subsequently sought comment on several
key issues, including the manner in which competitive ETCs receive
support and the impact of providing support to competitive ETCs on the
growth of the universal service fund. The Joint Board also sought
comment on the process for designating ETCs and whether the FCC should
establish guidelines for consideration by the state commissions that
make these determinations under section 214(e)(2). In July, the Joint
Board held a public forum on these issues, and a wide range of industry
representatives, consumer advocates, and state commissioners provided
valuable insights.
Parties advanced a variety of proposals in their comments and at
the public forum. Several groups of incumbent LECs argue that
competitive ETCs should receive support based on their own embedded
costs. Some competitive ETCs argue that incumbents and competitors
should receive support based on forward-looking economic costs. To
control growth, some parties advocate capping support upon entry of a
competitor and dividing the funds pro-rata based on the percentage of
lines each carrier serves; other parties advocate supporting only a
single connection per household (current rules do not limit the number
of wireline or wireless connections that are funded). Incumbent LECs
generally oppose these proposals, arguing that reforming the ETC-
designation process--in particular, making the public interest analysis
more exacting--would suffice to keep the Universal Service Fund from
growing too large.
The Joint Board is now considering the record and plans to provide
a recommended decision to the FCC as expeditiously as possible.
2. Support for Non-Rural Carriers
While the rural high-cost support mechanism provides the lion's
share of the funding--and correspondingly has received most of the
attention--``non-rural'' carriers (the Bell operating companies and
other relatively large LECs) also receive high-cost support. Whereas
rural carriers receive support based on their embedded costs, non-rural
funding is determined based on forward-looking economic costs. Non-
rural carriers receive support in a particular state if the statewide
average cost per line, as determined by a computer cost model, exceeds
the national average cost by a certain margin. Currently, non-rural
carriers receive support in eight states (Alabama, Kentucky, Maine,
Mississippi, Montana, Vermont, West Virginia, and Wyoming). While non-
rural carriers in other states serve many high-cost wire centers, their
statewide average costs are not sufficiently high to receive support.
Moreover, rural carriers receive substantial support in each of the
states for which non-rural support is unavailable.
I understand that this Subcommittee is considering legislation that
would alter the distribution of non-rural support. The Commission is
nearing completion of its own review of this support mechanism in
response to a remand by the Tenth Circuit Court of Appeals. The court
ruled that the Commission did not adequately explain how the non-rural
support mechanism is sufficient to enable states to set affordable
rates that are reasonably comparable in both rural and urban areas. In
addition, the court directed the Commission to consider how to induce
states to develop their own support mechanisms to fund high-cost areas
within their borders, since the federal mechanism aims primarily to
mitigate cost differentials among the states. The Joint Board issued
its recommendations last October, and the Commission will complete its
consideration of these issues next month.
low-income support
A separate component of the federal universal service program is
the low-income support mechanism, Lifeline/LinkUp. These programs
provide funding that enables low-income consumers to receive discounts
on monthly service and installation charges. An additional layer of
discounts is available for eligible consumers living on Indian tribal
lands. Earlier this year, the Joint Board released a Recommended
Decision on proposals to bolster the effectiveness of Lifeline and
LinkUp. This Recommended Decision suggests new ways for low-income
consumers to qualify for support and also addresses questions regarding
states' efforts to engage in outreach and to verify program
eligibility. The goal of the pending rulemaking is to remove
impediments to beneficiaries' receiving support while simultaneously
preserving the integrity and enhancing the efficiency of the program.
schools and libraries and rural health care facilities
Finally, the Schools and Libraries support mechanism (E-Rate) and
the support mechanism for rural health care facilities provide
additional support that enables these institutions to receive discounts
on basic and advanced telecommunications services (as well as internal
connections in the E-Rate program). Now that the Commission has had
significant experience overseeing these programs, we are considering a
variety of rule changes in pending rulemaking proceedings. These
proceedings, like the Lifeline/LinkUp rulemaking, aim to eliminate red
tape while ensuring continued program integrity.
In particular, the Commission will soon consider an Order that
would modify the rural health care mechanism. This support mechanism
has been underutilized, so the notice of proposed rulemaking sought
comment on ways to alter eligibility requirements to eliminate
obstacles to rural health clinics' receiving support, while remaining
faithful to the statutory purposes. Facilitating telemedicine by
connecting rural health clinics to regional hospitals and universities
has always been an important goal, and it takes on added importance in
light of the increased threat of bioterrorism.
Taken together, the reforms being considered by the Commission
should ensure the continued vitality of the federal universal service
support mechanisms. The Commission has no higher priority than
delivering on the promise of ubiquitous, high-quality, and affordable
services. I would like to thank you, Mr. Chairman, for calling this
hearing, and I look forward to working with you and other members of
the Subcommittee on these challenging and critical issues.
Mr. Upton. Thank you very much.
Mr. Rowe, welcome.
STATEMENT OF BOB ROWE
Mr. Rowe. Thank you. Mr. Chairman, members of the
committee, I am Bob Rowe. I am Chairman of the Montana
Commission, also a member of the Federal-state board on
universal service. I am speaking here today entirely in my own
capacity.
I join in commending you for holding this terribly
important hearing. I am very honored to be sitting here between
two good friends of mine and with this very distinguished
panel. I am going to speak fast, like a Yankee, to stay within
my timeframe.
This program does face real crucial and time-sensitive
challenges. All of you in your opening statements did a superb
job laying out what those challenges are.
I am actually more optimistic now than I have been in years
that we are going to really get at this and make progress. I am
optimistic based on the experience we have had and the
appreciation by industry and consumer groups, by the FCC, the
joint board, and by Members of Congress that we have to act
quickly and we have to act wisely because the risk of failure
is so high. And, again, I think your thoughtful and
intellectually diverse opening statements coupled with the
great work being done on the Senate, led particularly by
Senator Burns and Senator Dorgan, really can give us some
optimism that we can get it right.
I start with two basic questions. The first question is, is
universal service the problem or the solution as the saying
goes? I would argue that section 254 may be the most successful
part of the Telecommunications Act. And as I drive around
Montana, as I visit other States every day, I appreciate the
successes of all four elements of the Universal Service
Program.
In my testimony, I describe, in particular, some of the
good work being done by the rural independents and cooperatives
in Montana, deploying really remarkable services in very tough-
to-serve, very costly to serve areas. Consistent with Mr. Cox's
point, most of the services, the advanced services they
provide, aren't funded directly by universal service, but the
network over which both basic and advanced services typically
are provided is supported in part, the loop and the switch
elements, by universal service. That's the no-barriers base
approach.
There are good things happening in rural America. And those
are very much associated with the success of the Universal
Service Program.
The second basic question, are we more concerned about
supporting individual customers or supporting a network? My
answer is both. In my testimony, I discuss the key role of
support to individuals, but I also describe the history of
universal service coming out of the system that was put in
place over the Twentieth Century to support the network with
payments back and forth between carriers. This system was
modified, became more complicated after the breakup of AT&T,
and was again modified after the 1996 act, particularly through
creation of the CALLS and MAG Programs. So, again, we're
supporting both networks and being mindful to the needs of
individual customers, who take service over those networks.
In terms of what is driving growth in the fund, I include
some charts provided by NECA at the back of my testimony. Two
key factors in recent years: first, again, the movement away
from inter-carrier payments or so-called implicit support to
explicit support. An enormous amount of the growth in the fund
is the result of the CALLS and MAG Programs putting money
explicitly on universal service-type payments.
The second issue--it's a new issue in the last several
years, but it's growing--is, of course, the relatively rapid
uptake of competitive eligible telecommunications providers,
particularly but not entirely, wireless. And, again, I go into
that in more detail in my testimony.
What are the issues? In my written testimony, I describe in
more detail issues in the contribution area. I think others
will go into those in some detail, lay out the alternatives. I
have been on record since actually 1996 in supporting an
assessment on all telecommunications revenue. That's not the
only solution, but it is a good solution.
Telecommunications revenues are increasing. Interstate
revenues are declining. That is one solution. It is a solution
addressed in a letter the joint board sent to Senator Burns
earlier this year.
The second set of issues has to do with eligibility. The
third set has to do with the cost basis for payment. Both of
these complicated sets of issues are being addressed by the
joint board right now. And I'm encouraged that we are going to
make some progress.
In the large company area that a number of the members
discussed,--and by ``large company,'' I am referring to large
companies, the Bell companies, that serve rural America--I have
two concerns. The first has to do with the hybrid cost proxy
model that is the basis for determining costs by these
companies. There are fundamental problems with that model. I
have certainly addressed it with the FCC. And they are issues
that the FCC commissioners are mindful of.
The second is that the payment, the statute that you passed
says rates and services in rural and urban America are to be
reasonably comparable. The standard adopted by the FCC
addressed by the court in the Tenth Circuit and then ultimately
proposed for some modification by the joint board instead
compares rural costs to a National average. And there is a very
big difference between a National average and an urban average.
The final set of issues I address is whether there should
be further modification of inter-carrier payments. I know a
number of people on the panel will speak to that issue. My
concern is that to the degree that issue was addressed, that
the particular effects on the rural carriers be factored in.
They are, if anything, more dependent upon so-called access
revenue and have less ability to average that revenue somewhere
else if it goes away. If it is replaced with universal service-
type funds to some extent, that again puts more pressure on the
funds. So you have to have a robust base. But we have to
understand what we are doing there.
In my testimony, I recommend basically a three-part
approach. The first, I do think focused legislation would be
very helpful. And, again, both you and your colleagues in the
Senate are looking at that. Second, I think the joint board
with congressional oversight will make progress on the so-
called portability issues having to do with contribution and
eligibility. And, third, to the degree that we are going to
address inter-carrier payments, I think we need a very
structured, a very rigorous approach to do that.
We spend our days in the weeds, in the details of this.
From your opening statements, you know the details very well as
well. But ultimately your job is to basically provide a beacon
to us to get us out of the woods and back on the path to making
this program the success that you intended it to be.
Again, when I drive around Montana, look at the
telemedicine facilities, the great facilities being deployed in
schools and libraries as well as the basic high-cost fund
programs, I am optimistic. And I recognize that this is an
important program. Once you modify the program, I think we need
to do so in light of its successes and in light of the critical
place that you in passing the act gave it.
Thank you very much, Mr. Chairman.
[The prepared statement of Bob Rowe follows:]
Prepared Statement of Bob Rowe, Chairman, Montana Public Service
Commission
Mr. Chairman and Members of the Committee, I am Bob Rowe, Chairman
of the Montana Public Service Commission, and a member of the Federal-
State Joint Board on Universal Service. I am speaking only on my own
behalf. I commend you for holding this important and timely hearing. I
am truly honored to be here.
Real challenges face the federal universal system, as they do the
entire telecommunications sector. However, I have perhaps more optimism
now about the ability to address the challenges facing universal
service than I have in quite some time.
Why am I optimistic? Experience and an appreciation of the risks of
failure to act wisely have made the discussion of universal service
issues more informed and constructive. I credit that to hard work among
industry and consumer stakeholders, to an engaged and effective Joint
Board and FCC, and to leadership by Congress. More on that later.
My testimony will briefly cover the following areas:
1. Several basic questions about universal service.
2. Factors driving the past and future growth in the fund.
3. Summary of current key issues in universal service.
4. Narrow versus broad approaches to issue resolution.
5. The critical role of Congress.
I will conclude by suggesting a combination of measures, including
strong and continuing Congressional oversight. These suggestions build
in part on approaches developed throughk the Universal Service Summits
convened by Senators Burns and Dorgan, along with focused legislation
in several areas, especially contributions to support universal
service. I also suggest for consideration a possible approach to
addressing difficult issues in intercarrier compensation.
a. several basic questions about universal service.
Two questions seem especially important to me, and help shape the
solutions we craft:
1. Is universal service the problem or the solution?
2. Is universal service best understood mainly as a support system for
customers or for networks that serve customers?
Is universal service the problem or the solution?
It is disturbingly easy to encounter those who believe that the
universal service system is itself ``the problem,'' especially the high
cost fund portion. I believe that the programs embodied in Section 254
may perhaps be the Telecommunications Act's most tangible success. Each
of the four programs--high cost fund, schools and libraries, rural
telemedicine, and lifeline-link-up--has produced real achievements. In
particular, the high cost support programs have allowed service
providers to maintain their networks while keeping rates affordable.
Universal service really is working in Montana. The seventeen rural
carriers have built high quality networks capable of supporting a wide
range of services. They have deployed DSL in 183 rural communities,
including remote, low income areas such as Crow Agency on the
Crow Reservation.<SUP>1</SUP> Rural carriers have formed consortia
to provide switched ATM backbone and to provide at least 123 state-of-
the-art video studios (Vision Net, Mid-Rivers and Range) for everything
from distance learning to supporting local businesses. Every Native
American Indian Reservation in Montana has, for example, at least one
video studio operated by Vision Net. Most of these efforts are not
supported by universal service,<SUP>2</SUP> but the high cost fund has
helped pay for the critical local network facilities over which all
these services originate and terminate, facilities on which services
such as DSL are directly deployed.<SUP>3</SUP> A map of facilities
deployed by rural Montana carriers is attached to this testimony.
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\1\ All four of the Project exchanges on the Crow Reservation have
DSL. Exchanges with as few as seventy lines have been provisioned with
DSL.
\2\ For example, universal service does not support transport,
which can be a key cost driver for everything from connecting remote
households [Joint Board Recommended Decision, Released July 10, 2002
(FCC 02J-1), Bob Rowe Separate Statement Concurring in Part Dissenting
In Part (pp. 43-53)], to getting broadband traffic back to the Tier 1
Internet [Victor Glass, ``NECA Rural Broadband Cost Study: Summary of
Results,'' June 21, 2000; Victor Glass, ``Rural Realities: Will rural
dwellers be forgotten in the broadband boom?'' July 15, 2002].
\3\ .Support for the loop has also likely allowed carriers to
allocate more resources for advanced services deployment than otherwise
would have been the case.
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The other programs supported by universal service have also
produced real successes.<SUP>4</SUP>
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\4\ On June 9, 2003, the FCC issued a Notice of Proposed
Rulemaking, requesting comments on a Joint Board recommendation
concerning the Lifeline and Link-up programs.
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The very high level of service provided in some of the nation's
most challenging areas shows that the program is successful and
important. Essential reforms should be built upon this foundation.
Support for customers or for the network?
Many still argue that the existing high cost support system should
be replaced with one that makes payments to individual customers, as
does the current Lifeline program. Congress resolved this issue in the
1996 Act, saying that rates and services should be reasonably
comparable between urban and rural or insular areas, not customers. It
is worth noting, however, that factors such as small local calling
areas in many rural areas (compared to the hundreds of thousands who
may be within an urban local calling area make rural customers' total
phone bills higher than urban customers' even where the nominal local
exchange rate is lower. Moreover, non-metropolitan status correlates
very closely with low per capita income. I offer two examples:
1. InterBel Telephone Cooperative serves about 3110 access lines in
several small communities in Northwest Montana. The residential
and business basic exchange rates, including the Subscriber
Line Charge, are $18.50 and $26.20. Without universal service
support, these figures would be $81 higher each month. The per
capita income in Eureka is $12,619 <SUP>5</SUP>. For the State
of Montana as a whole the per capita income was $17, 151.
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\5\ U.S. Census Bureau, 2000 Census.
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2. If it were not for universal service support, local rates on the
Crow Reservation could be as high as $60 for residential
customers and $70 for business customers. Per capita income on
the Crow Reservation was $9,440 dollars in 1999, with 21.8
percent unemployment.
Getting services to customers at affordable and comparable rates is
obviously a fundamental goal. However, we must also remember that
existing universal service arrangements arose out of the system of
payments created over the years to pay for building, maintaining, and
operating the ``network of networks'' that served most
telecommunications carriers and most of their customers. Initially,
most of this occurred by the independent companies allocating some of
their costs to the interstate jurisdiction. These costs were then
recovered through the ``settlements'' between AT&T and the independent
carriers.<SUP>6</SUP> With divestiture, this system was modified to
incorporate ``access payments'' by the inter-exchange carriers to the
local carriers, to support the local network required by IXC customers
to originate and terminate long distance calls. This has been compared
to ``rent'' paid for use of the local networks. The FCC created a
variety of programs to support specific services, such as high-cost
loops and switches deployed by smaller carriers. At the same time, a
portion of the ``non-traffic sensitive'' costs were moved to end user
payments, and the ``subscriber line charge'' (SLC) was created.
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\6\ The initial ``Ozark Plan,'' following out of the 1934 Act, was
driven by the distance traffic had to be hauled and the hold time for
interstate calls, and resulted in as much as 85 percent of costs being
assigned to the interstate jurisdiction for some rural carriers. From
1981 to 1997, the interstate allocation of loop costs was gradually
moved to a uniform 25 percent.
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After passage of the 1996 Act, even more costs where shifted to end
users, as the FCC tried to make ``implicit'' support explicit (at least
as to interstate costs), to lower interstate access charges, and to
move more ``non-traffic sensitive'' costs to end users. The CALLS
(Coalition for Affordable Local and Long Distance Service) program for
large companies and the MAG (Multi-Association Group) program for small
companies are the prime examples.
As will be noted below, a network focus, in addition to a customer
focus, helps provide analytical clarity, sheds additional light on one
of the key cost drivers (further replacement of access by universal
service type payments), and helps focus the discussion about what
services should be covered by universal service. This history shows
that one cannot understand universal service solely as a program for
reducing customers' rates. Equally important, it has been used as a
method of financing the construction of quality plant in high-cost
areas.
b. factors driving growth in the fund.
High cost loop support was capped by the FCC in 1994. The cap was
intended to be temporary, while universal service was ``reformed.''
Instead the cap has remained in place, although modified when the FCC
adopted recommendations of the Rural Task Force. The attached tables
and charts were provided by NECA <SUP>7</SUP> at my request.
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\7\ NECA operates the various intercarrier rate pools, conducts
economic and technical analysis, and provides other services to the
telecommunications industry. It does not take positions on policy
issues. Use of this material does not constitute an endorsement by NECA
for any position in this testimony. This information was derived by
NECA from reports filed with USAC and other publicly-available
information.
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Illustration 2 summarizes the current elements of universal
service. Rural health care ($20 million per year), and the Lifeline and
Link-up programs for low income customers ($741 million) are by far the
smallest components. The Schools and Libraries program is substantial,
but has been capped at $2.25 billion since 1997, and therefore is not a
driver of current fund growth. Programs comprising the High Cost Fund
are projected to total $3.4 billion for 2003. Illustration 3 shows the
growth in total high cost fund support since 1998, roughly a doubling
in size.
Illustration 4 shows growth in the High Cost Fund from 1998 through
2003, by components. The most significant increases in recent years, by
far, have resulted from two similar decisions. First, the ``CALLS''
plan adopted by the FCC caused a roughly $650 million increase in the
high cost fund. This new money limits how much SLC charges may increase
in rural areas as a result of the decision to reduce access payments
paid to price cap regulated (mainly large) ILECs. Then, the ``MAG
plan'' as adopted by the FCC, created a similar support plan, the
Interstate Common Line Support (ICLS) program for rate-of-return
regulated (mainly small) ILECs. This program now costs about $425
million per year. These two programs, costing more than $1 billion per
year, were designed to reduce interstate access charges.
Other factors have also caused costs to increase.<SUP>8</SUP>
Illustration 5 shows estimated ILEC and Competitive Eligible
Telecommunications Carrier (CETC) funding, annualized, based on third
quarter, 2003, numbers. ILECs will receive $3.41 billion this year.
CETCs will receive $251 million. Recent analysis indicates this figure
may be exceeded.
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\8\ Loop support increased due to regulatory changes resulting from
MAG and RTF implementation, where the cap was increased and the payment
calculation modified to incorporate growth in the number of loops and
in DGP-CPI.
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Illustration 6 shows the growth in the number of CETCs and funding
from the third quarter of 2002 to the third quarter of 2003. There were
30 CETCs in the third quarter of 2002, and 165 one year later. CETCs
received $56 million (1.8 percent of the fund) in 2002 and $ 252
million (7.3 percent of the fund) one year later. It is generally
agreed that there is substantial potential for further growth from CETC
certification.
c. summary of issues in universal service.
1. Contributions.<SUP>9</SUP> Currently, universal service is
supported by an assessment on interstate revenue. The FCC has made
several adjustments to the contribution base (most notably increasing
the portion of wireless revenue assumed to be interstate and therefore
subject to the assessment from 15% to 28.5% and basing assessments on
prospective revenues). As a result, the assessment has temporarily
stabilized at slightly above nine percent. However, most observers
expect this to be a temporary reprieve from an increasing assessment on
a decreasing base. Alternatives proposed by various parties include:
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\9\ The ``contribution'' issue was not referred by the FCC to the
Joint Board. However, the Joint Board did hold a public meeting on the
subject June 21, 2002, and state members did submit two sets of
comments to the FCC, most recently on May 20, 2003.
a. Per connection assessment;
b. Capacity based assessments;
c. Per-telephone number and number equivalent assessments; and
d. Modifications to the revenue-based approach either by:
i. broadening the base to include more services (such as broadband
services in addition to DSL), or by eliminating the
wireless ``safe harbor,'' or
ii. Deepening the base to allow assessment for the federal fund to
be based on intrastate as well as interstate revenue (with
a similar modification for state funds).
Most of these proposals have been subjected to criticisms based on
possible illegality under Section 254 as interpreted by the courts
<SUP>10</SUP>; administrative workability, fairness, or other grounds.
Most current attention is focusing either on the number and number-
equivalent approaches (developed most thoughtfully by FCC Commissioner
Martin), or on expanding the revenue base to include more telecoms
revenue. Notably, the federal and state members of the Joint Board
submitted a letter to Senator Burns stating that deepening the base to
include intrastate revenue was a workable option.<SUP>11</SUP>
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\10\ See, Texas Office of Public Utility Counsel v. FCC, 183 F. ed
393 (5th Cir. 1999), prohibiting assessment of intrastate revenues to
support the Schools and Libraries program. Others have suggested that a
per-connection or per-telephone number approach would not comply with
the statute that requires all interstate carriers to contribute, or
would not be equitable and non-discriminatory. See 47 U.S.C. Section
254(d).
\11\ Letter dated May 19, 2003, Attachment 1. While the state
members of the Joint Board endorsed this approach, it is likely to be
strongly opposed by a number of state commissions.
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It has also been suggested that Congress clarify that any of the
approaches are acceptable, based on a determination by the FCC, thereby
eliminating any possible legal barrier to an approach determined most
workable by the Commission.
2. Eligibility.<SUP>12</SUP> The Joint Board is currently examining
numerous questions regarding carrier eligibility for universal service
support. What standards should ``competitive eligible
telecommunications carriers'' (CETCs) have to meet in order to be
certified by a state commission or the FCC under Section 214,
especially in areas served by rural carriers? Should the FCC adopt a
set of standards applicable to currently-certified ETCs and CETCs
alike? Should this issue continue to be left to the state commissions?
Should the FCC set a floor, with state commissions able to build on
this floor? Could a set of wireless-appropriate standards be developed?
Could a ``best practices'' or model standards for state commission
consideration be developed? Are there relevant differences between
wireline CETC applicants (often rural overbuilders) and wireless CETC
applicants? Is there a risk of diminished quality if one set of
carriers faces a lower standard than does another? How should state
commissions evaluate the ``public interest'' component of the current
statutory standard, and should they consider the effect on the federal
fund of multiple ETC designations?
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\12\ Eligibility-related and cost and payment issues were included
in the ``portability'' referral from the FCC to the Joint Board. The
Joint Board held a very productive en banc hearing in Denver on July
31, 2003, and is currently considering comments. This proceeding also
concerns specific issues such as whether support should be limited to a
``primary line,'' and how primary line would be defined.
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3. Cost basis for payment. Currently, all ``nonrural'' companies,
including all the Bell Companies, receive support based on forward
looking costs, determined through the FCC's Hybrid Cost Proxy Model
(HCPM). Small companies receive support based on embedded (historical)
costs. CETCs receive support based on (and on a per-line basis
identical to) the support of the incumbent for whose area the
competitive carrier is granted ETC status. The Joint Board is currently
considering a number of issues here as well. For example, should the
CETC receive payment based on the incumbent's costs, or on its own
costs, and should those be forward looking or embedded? Given concerns
about the HCPM, should it ever be used for rural carriers, and should
it continue to be used even for large carriers?
4. Large Company Issues. The 10th Circuit Court of Appeals remanded
to the FCC its ``large company'' Ninth Report and Order.<SUP>13</SUP>
In turn, the FCC referred this issue to the Joint Board, which issued a
recommendation on October 16, 2002. The Joint Board suggested several
modifications, which the FCC is now considering. The FCC's order is
expected soon. In my opinion, the combination of an imperfect cost
model <SUP>14</SUP> with the formula used to award support does result
in significant under-funding to areas served by the largest companies.
This includes many states in the west, but also New England states such
as Maine and Vermont (a rural state in which 85 percent of lines are
served by Verizon).<SUP>15</SUP> In my dissent to the Joint Board
recommendation, I argued that Section 254 requires that rates and
services in rural and insular areas be ``reasonably comparable'' with
rates and services in urban areas. Comparing rural rates <SUP>16</SUP>
with a national average and then providing support only for costs
exceeding 135 percent of the national average falls far short of this
clear directive. A rural or insular area might be required to have
rates or costs as high as 165 percent of the urban average cost before
it would be eligible for support under the current system.
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\13\ Qwest Corp. v. FCC, 258 F.3d 1191 (2001). The FCC's order was
challenged by Maine, Vermont, and Montana, as well as by Qwest. The
court held, inter alia, that the FCC did not provide an adequate
explanation for its decision that the non-rural mechanism in the Ninth
Report and Order achieved the statutory principles in Section 254; that
the FCC failed to define the key statutory terms ``reasonably
comparable'' and ``sufficient''; that it did not adequately explain the
135 percent of national average funding benchmark.
\14\ Montana, Maine, and Vermont have repeatedly urged the FCC to
address problems with inputs, formulas and maintenance of the model,
but have generally been frustrated in their attempts to obtain critical
information about the model. See, letter to the FCC from counsel for
the Vermont Public Service Board, September 12, 2003 (Attachment 2).
Possible problems include but are not limited to assuming that cabling
runs on straight compass lines, underweighting the cost of traveling
over mountains or rivers; apparently ignoring physical barriers such as
highways or railroads; apparently not accounting sufficiently for
physical barriers such as shallow bedrock or rocky soil; not accounting
for increased maintenance cost in snowy regions; inconsistently
treating broadband facilities.
In the 10th Circuit litigation, Qwest mounted an unsuccessful
general challenge to the use of forward looking cost models for
universal service purposes. Based on several years of experience, one
wonders how a court would view under Section 254 the model as
implemented and maintained. The Congress could instruct the FCC, if it
continues to use cost models, to adequately staff and maintain the
model, and to document and publicly disclose all modifications to it.
\15\ Only eight states receive high cost fund support under the
large company program. Qwest serves fourteen states, including twelve
of the fifteen least densely populated states, but receives high cost
fund support for only two states: $10.307 million per year for Montana
and $7.243 million per year for Wyoming. (It must be noted that many of
the highest cost areas within those states are served by rural
carriers.) Verizon will receive $9.259 million per year in high cost
model support in Vermont and $5.529 million per year in Maine [based on
4th quarter 2003 projections by USAC].
\16\ Or costs, as there are many variables in rate comparability,
including but not limited to the size of the local calling area, how
costs are assigned to different rate elements, the depreciation rates
assumed, and so on.
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5. Covered services. The Joint Board is required periodically to
review the list of services eligible for support, and recommend
changes. ``On July 10, 2002, the Joint Board recommended that the list
remain unchanged on July 10, 2002 [Recommended Decision, Release Date
(FCC 02J-1)]. The FCC issued an order adopting that recommendation on
July 14, 2003. In that proceeding, I dissented in part, suggesting that
a focus on support for the network over which most services are
provided would be a more reasonable approach than attempting to
evaluate specific services. For example, the primary requirement for
DSL service (or similarly, high speed wireless service) is a robust
network, with clean loops. This is consistent with the ``no barriers''
approach advocated by the Rural Task Force.<SUP>17</SUP>
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\17\ The Rural Task force recommended to the Joint Board and the
FCC a ``no barriers to advanced services'' policy, including universal
service support for plant that can (as built or with the addition of
elements) provide access to advanced services; encouraging carriers to
remove infrastructure barriers to such access; and, sizing the federal
universal service fund so that it does not present barriers to
investment in plant needed to provide access to advanced services. See,
Joint Board's Recommended Decision concerning covered services,
Separate Statement of Commissioner Rowe, Sections IV and V (July 10,
2002), pp. 47-52.
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6. Further modification of inter-carrier compensation systems. Many
carriers, including but not limited to the largest ILECS and the IXCs,
argue that further modification of inter-carrier compensation is
required because of a variety of threats to the current system. The
full scope of the problem is being identified only now, including
through specific data requests by the FCC. It is abundantly clear,
however, that rural carriers are much more dependent on access payments
than the larger carriers. ``Bill-and-keep'' approaches are especially
problematic for small carriers because they lack the ability to average
costs over a larger area and the current pooling mechanisms function
like high-cost support but are vulnerable if bill-and-keep is adopted.
Also, intrastate access may eventually be as significant a concern as
interstate access. If universal service support is further substituted
for access payments, the upward pressure on the fund could be
tremendous.
a. narrow versus broad approaches to issue resolution.
Generally, one group of stakeholders prefers focusing on a
particular issue, principally stabilizing the revenue base. Another
group argues that a comprehensive approach is required, one that
addresses all issues as part of the same package. The narrow approach
is advocated based on feasibility, and the urgency of the contributions
issue. The broader approach is advocated based on the desirability of
addressing all related issues, especially including intercarrier
payments, in a consistent manner, and that does not risk making
decisions on narrower issues that may limit the ability to address the
larger issues. Some have said that it is unwise to resolve
contributions issues without also addressing eligibility issues at the
same time.
A reasonable middle approach might be: 1. to move forward with a
focused approach to the contributions issue, including legislation; 2.
to address the portability issues through the ongoing Joint Board
process, with Congressional oversight; and 3. to address intercarrier
payments through a rigorous, structured approach. For consideration, I
suggest exploring a structured, analysis-based approach to resolving
intercarrier payments concerns. We can learn some positive and negative
lessons from ``alternative dispute resolution'' efforts such as CALLS,
MAG, Rural Task Force, and the Qwest Multi-state Section 271
collaboratives. Such a process would require effective participation by
all affected, especially the small carriers who are especially
vulnerable to changes in access revenue. It would likely benefit from a
high degree of transparency and independent facilitation; it should
have access to sound and extensive analysis. Its decision rules and
eventual deliverable product (e.g., a recommendation to the FCC, along
with any dissents) should be clear. It would be difficult to achieve a
rigorous outcome based purely on consensus. Therefore, it might be
desirable for the facilitator to be charged as an arbitrator or
decision-maker. As noted before, revision of intercarrier compensation
has strong implications for universal service, and also potentially
implicates the process of jurisdictional separations.<SUP>18</SUP>
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\18\ The separations process identifies and assigns costs to the
interstate and intrastate jurisdictions, and matches those costs with
cost recovery. A separations process of some sort is required when a
provider of telecommunications service is regulated by two
jurisdictions at once. Smith v. Illinois, 282 U.S. 133 (1930).
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b. the crucial role of congress.
Throughout implementation of the Telecommunications Act,
Congressional oversight has been valuable, and has been appreciated by
all of us concerned with day-to-day implementation. It's easy for us to
get lost in the forest, and Congress regularly provides a good beacon
guiding us back to the main path.
I particularly commend to you the unique efforts of your Senate
colleagues. As you know, Senators Burns and Dorgan, with strong support
from Senators Stevens, Rockefeller, and others have convened two
Summits. I was privileged to help moderate these two sessions. They
were unique: The Senators sat at the table with a very broad spectrum
of stakeholders, participating in a very lively give-and-take,
furthering everyone's understanding,
and significantly clarifying the issues and options. No stakeholder
perspective that asked to participate was excluded. (Reporters and
investment analysts were not invited in until the end of the meeting,
but were then free to talk to participants.) The Senators, of course,
will decide what they do with this input. I commend this process to
you, and urge you to discuss the results with your colleagues in the
Senate. Specific options include formal oversight proceedings, a Sense
of the Congress resolution on several key topics, and specific
legislation, focused on issues including the contribution base.
c. conclusion.
When I drive across Montana or other rural areas, when I see a
rural telemedicine facility, when I'm in a school where students are
learning on-line, I recognize universal service as a rip-roaring
success. The programs included in universal service do face significant
challenges. Some of those challenges are especially time-critical. All
stakeholders desire a greater degree of certainty as they plan how to
meet their customers' demands. Modifications should be designed to
preserve what works, and to achieve Congress's vision in the remarkable
language of Section 254.
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Mr. Upton. Thank you, Mr. Rowe.
Mr. Gregg?
STATEMENT OF BILLY JACK GREGG
Mr. Gregg. Thank you, Mr. Chairman. May it please the
committee, I am Billy Jack Gregg. I am Director of the Consumer
Advocate Division of the West Virginia Public Service
Commission.
Prior to addressing issues related to the long-term
sustainability of the universal service fund, I think it is
important that we review where we are today with the universal
service fund. Since 1996, when section 254 of the act was
passed, the fund has grown from $1.8 billion to $6.2 billion
for this year, 2003.
$6.2 billion sounds like a lot of money, and it is. But we
have to put it in perspective. Last year the telecommunications
industry had total revenues of over $230 billion. That means
that by collecting and redistributing less than 3 percent of
the total telecom revenues in this Nation, we have been able to
keep phone service affordable in all areas of our Nation. We
have allowed phone service to be affordable to low-income
individuals. We have assisted rural health care providers. And
we have wired all of our schools and classrooms to the
internet. That is quite an accomplishment and something that
all of us involved in universal service should be quite proud.
Moreover, every State and every territory of this Nation
benefits from universal service. I have attached to my
testimony as attachments 1 and 2 printouts from USAC's annual
report for 2002, which shows payments under each support
mechanism to each State on both a total basis and ranked by
total receipts and on a per-line basis and ranked on a per-line
basis.
In response to the statements from some of the members
today, I think it is important to see that when you look at the
high-cost fund, every State and every territory has received
benefits from the high-cost fund alone except the District of
Columbia because it does not have any high-cost areas.
Otherwise, every State from the Northern Mariana Islands to
Delaware to Montana to Wyoming to West Virginia all receive
high-cost support.
The universal service fund has been one of the great public
policy successes of this country for the last 100 years. The
issues we are talking about today is, how do we sustain that
success into the future? And, as has been mentioned by the
members and the first two speakers, we have to look at both
sides of the equation: the income for the fund and the outgo
from the fund.
In terms of the contribution base, I would just ratify what
my fellow members on the joint board, Ms. Abernathy and Mr.
Rowe, said, we have to expand the base for universal service.
The joint board has previously sent a letter, as Mr. Rowe said,
to Senator Burns suggesting very targeted, very focused
legislation that would give the FCC the authority to assess on
all revenues and all services. Since all benefit from universal
service, all should contribute. It's a very simple proposition.
On the outgo side, the most important thing we can do is
target the high-cost support to fulfill the principles that are
laid out in section 254. And I believe that there are three
very basic measures that can be accomplished by the FCC to
focus the support of the high-cost fund.
No. 1, we need to limit support to a single line per
household. Right now under current rules, all lines supplied by
all eligible telecommunications carriers are eligible for
support. A household that has two land lines and three cell
phone lines would receive support for each of those lines. I
believe that that is excessive. If you limit it to a single
line, we would get back to the original purpose, which was to
provide comparable services at comparable rates.
Second, we need to reform the basis of per-line support to
be based on each carrier's own cost. Right now they are based
on the cost of the incumbent carrier. We believe that if you
adopt this procedure, it should be capped at the incumbent's
level of support to prevent any windfall to any competitor.
And, finally, we believe that the FCC should adopt
guidelines for the States in making public interest
determinations for eligible telecommunications carriers. I
believe that those guidelines should be based on very simple
support guidelines. Those areas that are truly costly to serve,
where it makes no sense to have more than one subsidized
carrier, are the ones that would be targeted.
I propose $20 and $30 guidelines. Above $20 per line per
month, those study areas should be allowed one additional
eligible telecommunications carrier, those eligible to receive
universal service funding. Above $30 per line per month, only
one eligible telecommunications carrier would be allowed.
About half of the rural study areas would be encompassed by
those guidelines, but they only serve 1.7 percent of the access
lines in this Nation. Yet, they receive 45 percent of total
high-cost support. They are the truly small high-cost areas.
And there should be some limitation on subsidization of
competition in those areas.
I want to thank you again for the opportunity to appear
here. And I look forward to the other statements.
[The prepared statement of Billy Jack Gregg follows:]
Prepared Statement of Billy Jack Gregg, Director, Consumer Advocate
Division, Public Service Commission of West Virginia
My name is Billy Jack Gregg and I am the Director of the West
Virginia Consumer Advocate Division. My office is charged with the
responsibility of representing West Virginia utility ratepayers in
state and federal proceedings which may affect rates for electricity,
gas, telephone and water service. My office is also a member of the
National Association of State Utility Consumer Advocates (NASUCA), an
organization of 43 state utility consumer advocate offices from 41
states and the District of Columbia, charged by their respective state
statutes with representing utility consumers before state and federal
utility commissions and before state and federal courts.<SUP>1</SUP> I
am a former member of the Board of Directors of the Universal Service
Administrative Company (USAC) and currently serve on the Federal-State
Joint Board on Universal Service. I greatly appreciate the opportunity
to testify at this legislative hearing on the sustainability of the
Federal Universal Service Fund (USF).
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\1\ In most respects, my testimony reflects the positions taken by
NASUCA, although there are some areas where NASUCA has not yet reached
a consensus position.
---------------------------------------------------------------------------
i. background
The most important issue facing the Federal Universal Service Fund
is its long-term sustainability. We must ensure that the USF is
sufficient, predictable and affordable for all parties involved: fund
recipients, telecommunications providers and consumers. Before I
address the current problems facing the USF, I believe it is
appropriate to review the achievements of the USF since the passage of
the Telecommunications Act of 1996 (the Act).
Section 254 of the Act enshrined and expanded universal service
principles which had been followed by the Federal Communications
Commission for decades. Based upon the requirements of Section 254, the
FCC, after consultation with the Federal-State Joint Board on Universal
Service, created a new Universal Service Fund in 1997 containing
several distinct support mechanisms. As a result, total USF funding has
grown from $1.8 billion in 1997 to $6.2 billion during 2003. While
these support amounts are large, they must be kept in perspective.
Total telecommunications revenues in the United States last year were
in excess of $230 billion. By annually collecting and redistributing
less than 3% of these total revenues, we are able to make phone service
affordable in all high-cost areas of the nation; support low-income
customers; assist rural health care providers; and connect all
classrooms to the internet. Moreover, all states and territories
benefit from the USF as shown on Attachments 1 and 2.<SUP>2</SUP>
That's quite an accomplishment, and one that everyone involved in the
USF should be proud of as we move forward to ensure the long-term
sustainability of the fund.
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\2\ Attachments 1 and 2 show actual disbursements to states during
2002 under each of the federal USF support mechanisms. Attachment 1
ranks the states based on total support received. Attachment 2
considers the number of access lines in each state, and ranks the
states based on monthly support received per line.
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ii. the funding base
As I mentioned earlier, total funding for the USF has grown from
$1.8 billion to $6.2 billion. Unfortunately, the funding base for the
USF has not kept pace with the growth in the fund, resulting in higher
and higher USF assessments on carriers and their customers.
The contribution base problem stems in large part from the wording
of the Act itself. Section 254(b)(4) states that: ``All providers of
telecommunications services should make an equitable and
nondiscriminatory contribution to the preservation and advancement of
universal service.'' However, Section 254(d) states: ``Every
telecommunications carrier that provides interstate telecommunications
services shall contribute on an equitable and non-discriminatory basis,
to the specific, predictable, and sufficient mechanisms established by
the Commission to preserve and advance universal service.'' In other
words, even though the principle set forth in the Act is that all
telecommunications providers should contribute to the fund, and even
though the fund benefits all areas of the country, Section 254(d)
limits the obligation to support the fund to a subset of
telecommunications carriers--providers of interstate telecommunications
services.<SUP>3</SUP>
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\3\ As a practical matter, virtually all telecommunications
carriers provide some sort of interstate service.
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In 1997 the FCC decided to base the funding for the high-cost and
low-income support mechanisms on each carrier's interstate and
international revenue, while the funding for schools and libraries and
rural health support mechanisms were supported by assessments on all
revenues, interstate and intrastate. The use of intrastate revenues for
USF assessment purposes was struck down by the Fifth Circuit Court of
Appeals in 1999.<SUP>4</SUP> Since that time the contribution base for
the USF has been limited to only interstate and international revenues.
As the USF has grown in order to meet the Act's direction that support
be sufficient and explicit, and as the interstate revenue base has
leveled off, the assessment rate has increased rapidly.
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\4\ Texas Office of Public Utility Counsel v. FCC, 183 F.3d 393
(5th Cir. 1999) at 448.
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Attachment 3 shows the change in USF funding since 1997, along with
changes in the interstate revenue contribution base for the
USF.<SUP>5</SUP> As you can see, the introduction of the schools and
libraries fund and increases in the high-cost fund have driven the
overall size of the fund. As a result, the fund has tripled, rising
from approximately $1.8 billion in 1997 to approximately $6.2 billion
this year. So long as interstate revenues grew at a reasonable rate,
the ultimate impact of fund growth on the USF assessment rate and
customers' bills was fairly moderate. However, beginning in 2000
interstate revenue growth began to flatten out, and during 2002 started
to decline. The result has been a steep escalation in the assessment
rate, from 5.7% in the fourth quarter of 2000 to 9.5% in the third
quarter of 2003.<SUP>6</SUP> A universal service fund which cannot
depend on the stability of its funding base is not predictable, is not
sufficient, and is clearly not sustainable.
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\5\ Through 2002 the interstate revenue base for a particular year
represents revenues reported from the previous year. The USF assessment
rate shown on Attachment 3 is not the actual rate used in any quarter,
but is derived by dividing annual funding by the annual interstate
revenue base. The interstate revenue base for years 1998-2003 comes
from USAC reports. The interstate revenue base for 1997 is estimated.
Beginning in the second quarter of 2003, assessments are based on
projected collected revenues.
\6\ These increases have been flowed through to most customers by
means of line items. Beginning in the second quarter of 2003, carriers
can no longer mark up these assessments, but can only flow through the
assessment rate approved by the Commission.
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iii. alternatives for the contribution base
There are several alternatives available in order to stabilize the
USF contribution base. One alternative would be to retain the current
system, but remove restrictions in current rules which artificially
depress the existing interstate revenue contribution base. One such
restriction is the so-called ``safe harbors'' which limit the
contribution responsibility of certain classes of carriers. Beginning
in the second quarter of 2003, the FCC raised the safe harbor for
wireless carriers from 15% to 28.5%.<SUP>7</SUP> However, in spite of
these changes the interstate revenue base continues to decline.
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\7\ Under the ``safe harbor'' provisions, a wireless carrier can
claim that 28.5% of its total revenues are interstate without further
documentation. A wireless carrier claiming a smaller percentage of
interstate revenues must have adequate documentation to back up such a
claim.
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Another restriction limits the contributions from broadband
providers, one of the fastest growing areas of telecommunications.
Under current rules, providers of broadband by means of digital
subscriber line (DSL) service must contribute to the fund, while cable
modem service providers are exempt. It is obvious that such an
inequitable and artificial system of assessment on similar services
cannot be maintained. However, proposals to eliminate the inequity by
eliminating contributions from DSL providers would only further shrink
the interstate contribution base.
A second alternative would be to grant the FCC the authority to
base contributions to the fund on total telecommunications revenues.
While growth in the interstate revenue base has flattened out and begun
to decline, total telecommunications revenues from end-users have
continued to grow at a healthy pace. Shown on Attachment 4 is a
comparison of changes in the universal service fund, the interstate
revenue base, and total telecommunications revenues from 1997 to
2003.<SUP>8</SUP> As you can see, total telecommunications revenues
would provide an adequate funding base for the USF. In fact, if total
telecommunications revenues had been used as the funding base from the
start, we would not be discussing this issue today. The growth in the
fund could have been accommodated while keeping the assessment rate
below 3%.
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\8\ On Attachment 4 USF Funding and the Interstate Revenue Base are
taken from USAC reports. The Total Revenue Base is taken from the FCC's
Telecommunications Industry Revenues reports. The funding base for 1997
is estimated. Beginning in the second quarter of 2003, the USF funding
base has been based on carriers' projected revenue collections.
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Use of total revenues would also eliminate disputes about whether
revenues are intrastate or interstate, and would equitably spread the
obligation to support universal service to all providers and to all
customers based on their use of the network. However, basing federal
universal service on total revenues would require a statutory change to
clarify that the FCC has the authority to base contributions on all
revenues, intrastate as well as interstate.<SUP>9</SUP> In addition, a
total revenues base could be susceptible to erosion in the future as
more and more traffic, including voice traffic, migrates to the
internet and is classified as ``information services,'' currently
exempt from USF assessment.<SUP>10</SUP> Finally, the impact of the use
of total revenues on state universal service programs is unclear.
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\9\ On May 19, 2003, the members of the Federal-State Joint Board
on Universal Service sent a letter to Senator Conrad Burns of Montana
suggesting legislative changes to enable the FCC to use a total revenue
base for universal service contributions.
\10\ It should be noted that the FCC already has the discretionary
power under 254(d) to require contributions from any other provider of
interstate telecommunications ``if the public interest so requires.''
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A third alternative would be to base assessments on connections to
the public switched telephone network, or on assigned telephone
numbers. The FCC is currently considering several such proposals. While
these connection-based or numbers-based proposals do enlarge the base
of the USF, and minimize problems with classification of services or
revenues as information services, they do have several flaws: (1) each
proposal radically shifts the funding of the USF among industry groups;
(2) each proposal appears to exempt pure providers of interstate long
distance from making any contribution to the fund in contravention of
the plain wording of Section 254(d); (3) each proposal requires
capacity-based connection equivalents for high-capacity customers; and
(4) each proposal shifts responsibility for payment of USF charges from
high-use to low-use customers.
A final alternative, which my office has proposed to the FCC, would
be a hybrid of the proposals described above. For example, the
Commission could continue to base 50% of the universal service
assessment on interstate revenues, and assess the remaining 50% on end-
user connections to the public switched network. Such a hybrid would
not require a statutory change and would ensure that all providers of
interstate services, even those that did not provide end-use
connections, would continue to contribute to support universal service.
In addition, this 50/50 hybrid approach would mitigate impacts on low-
usage customers, and result in contributions from various industry
sectors that are very close to those produced by use of total
telecommunications revenues.
In finding a solution to the contribution base problem, I agree
with Senator Stevens of Alaska who said last spring: ``All companies
that use the network, in my judgment, should contribute to universal
service, regardless of the type of service they provide.''
<SUP>11</SUP> I believe we must expand contribution responsibility to
encompass all revenues and all services that connect to the
telecommunications network. Since all benefit, all should contribute.
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\11\ TR Daily, March 26, 2003.
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iv. issues related to particular support mechanisms
In looking at the long-term sustainability of the fund, we need to
focus not only on broadening the contribution base, but also on
controlling and focusing the funds paid out for the individual support
mechanisms which make up the overall USF. Each of these support
mechanisms presents unique issues which will have to be resolved. Even
though many have argued that we must stabilize the fund--which implies
that we should limit funding--we must be mindful that the Act requires
the fund to be sufficient to carry out each of the universal service
principles. For some mechanisms this may require a limitation in
funding, while for others an expansion will be needed.
a. high-cost support
The high-cost support mechanism is the oldest portion of the fund,
and is still the biggest, amounting to $3.3 billion this year. Of this
amount, approximately $800 million goes to non-rural companies, while
$2.5 billion goes to rural carriers.<SUP>12</SUP>
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\12\ The term ``rural carrier'' is defined at 47 U.S.C. 153(47).
Generally, rural carriers are small carriers serving rural and high-
cost areas, while non-rural carriers tend to be larger carriers, such
as the regional Bell operating companies. There are approximately 80
non-rural carriers which serve 90% of the access lines in the nation,
while the 1400 rural carriers serve the remaining 10%.
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As shown on Attachment 3, total high-cost support has grown by over
$1 billion since 2000. Most of this increase is the result of three new
mechanisms which have been added to the fund: high-cost model support,
interstate access support, and interstate common line support. These
new funds have helped adapt the USF to the introduction of competition
by making support explicit and portable. However, the continued growth
in the high-cost fund has added to the unrelenting pressure on the
assessment rate which must be paid by all consumers.
Earlier this year, the FCC referred to the Joint Board a number of
issues related to the growth of the high-cost fund. These issues
include determination of how many lines to support, the cost basis of
per line support, and whether guidelines should be adopted for state
eligible telecommunications carrier (ETC) determinations.
1. Limitation of Support to a Single Line Per Household
There is one issue common to all parts of the high-cost fund which
threatens to enlarge the fund to an unsupportable size. Under current
rules, all lines provided by ETCs in high-cost areas receive support.
The support in any particular wire center is the same for all carriers,
and is based on the costs of the incumbent carrier. However, rather
than competing for universal service support, all ETCs that provide
service receive support in equal per line amounts for all lines that
they provide to a home or small business. For example, a single family
in a high-cost wire center could be provided two landlines by an
incumbent ETC and three cellular lines by a wireless ETC. Each of these
carriers would receive equal support for each of the lines
provided.<SUP>13</SUP> As a result, the potential exists for a large
increase in the high-cost fund as more and more carriers--especially
wireless carriers--attain ETC status.
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\13\ Under the example provided above, if the per line support in
the wire center was $10 per line per month, the incumbent ETC would
receive $20 (2 X $10) per month in support. Once the wireless ETC began
providing the three wireless ``lines,'' the wireless carrier would
receive $30 (3 X $10) per month for providing service to the same
household. However, the incumbent's support would not be reduced. Thus,
the USF would be obligated to pay out $50 per month in total support
for this household, even though per line support for the wire center is
only $10 per month.
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It is estimated that during 2002, support for secondary lines
amounted to $336 million, or 11.5% of the entire high-cost fund.
Moreover, support paid to wireless carriers represents the fastest
growing component of secondary line support. As shown on Attachment 5,
high-cost support for wireless carriers has grown from $500,000 in 1999
to approximately $120 million in 2003.
If the high-cost fund is going to continue to provide affordable
access in all parts of the country, then it cannot continue to
subsidize the unlimited desires of each individual. I believe that
federal USF support should be limited to a single line for each
household,<SUP>14</SUP> and that the choice of which carrier receives
USF support should be left to each customer. This would mean that
carriers would have to compete for the USF subsidy. This will increase
customer benefits and stabilize the federal high-cost fund. Individual
states should be free to subsidize additional lines if they so choose.
---------------------------------------------------------------------------
\14\ In order to mitigate the impact of this change on rural
carriers, per line support should be redetermined based only on single
lines. However, once an additional ETC enters the rural incumbent's
service territory, per line support should be frozen. This will prevent
an unwarranted spiraling of per line support which is possible under
current rules.
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2. Determination of the Cost Basis of Per Line Support
As I previously mentioned, the current high-cost system bases per
line support on the costs of the incumbent carrier, and offers this
support to all ETCs serving the same area. This is true even when
competitive carriers--such as wireless carriers--may have costs that
are substantially less than the wireline incumbent. Another means of
limiting the growth of the high-cost fund would be to use each
carrier's own costs as the basis for per line support. In order to
ensure that no carrier receives an unwarranted windfall from USF
support, support to competitors should be capped at the per line
support received by the incumbent.
3. Guidelines for ETC Public Interest Determinations
Under Section 214(e) of the Act, two different standards were
adopted for designation of ETCs, depending on whether an area is served
by a rural or non-rural incumbent carrier. For areas served by non-
rural carriers, the Act mandates that states must designate additional
carriers as ETCs if they can provide all of the supported services
<SUP>15</SUP> and advertise the availability of those services
throughout the service area. However, for areas served by rural
carriers, states may designate additional ETCs, and must first find
that it is in the public interest to do so.<SUP>16</SUP>
---------------------------------------------------------------------------
\15\ The complete list of supported services is found at 47 C.F.R.
54.101(a).
\16\ Section 214(e)(5) of the Act also requires any additional ETCs
in a study served by a rural carrier serve the rural carrier's entire
study area, unless the state and FCC concur that an area less than the
entire study area is appropriate.
---------------------------------------------------------------------------
Unfortunately, there are currently no standards to guide states'
determination of the ``public interest'' under Section 214(e) of the
Act. As a result, state ETC determinations in rural study areas have
varied widely in terms of conditions which must be met by carriers
prior to and after ETC designation. In many states the obligations on
competitive ETCs are less than those imposed on incumbent ETCs.
Almost every party agrees that one of the purposes behind Section
214(e) was to allow states to identify those areas where it was so
costly to serve, that it made no sense to have more than one subsidized
carrier. However, since states have no responsibility for funding the
federal USF, and under current rules additional ETCs mean more federal
USF money coming into the state, it is very difficult for states to
find that it is not in the public interest to designate additional ETCs
in rural areas. This is true regardless of the cost to serve any
particular area.
I believe the FCC should establish guidelines for the public
interest determination. The guidelines should allow states to level the
playing field among ETCs by requiring all ETCs to offer an unlimited
local calling plan, equal access to long distance carriers, and a
comparable monthly price for local service. ETCs should also be
required to follow the same consumer protection rules, including
billing and collection rules, that apply to incumbents.
In order to provide guidance to the states in identifying those
areas where there should be a limit on the number of subsidized
carriers, I believe the FCC should also establish ETC guidelines based
on the amount of per line support received by each study area. Under
this approach, in rural study areas receiving an average of $30 or more
per line in monthly support the guideline would state that it is
presumed that it is not in the public interest to designate more than
one subsidized carrier, i.e., more than one ETC. In areas receiving
more than $20 per line in monthly support, but less than $30 per line,
it would be presumed that no more than one additional subsidized
carrier should be designated. There would be no limitation on the
number of ETCs in study areas receiving less than $20 per line in
support. States would be able to overcome these presumptions by
specific evidence about particular carriers or particular areas.
Establishing such presumptive benchmarks based on the amount of
monthly per line support for each study area would be easy to
administer, and would encompass the truly small study areas where it is
especially costly to serve. Of the 1400 rural study areas, those study
areas receiving over $20 per line in monthly high-cost support serve
only 1.7% of the total access lines in the United States, but receive
almost 45% of total high-cost support. In other words, these study
areas represent the small, high-cost areas where presumably it makes no
sense to have more than a limited number of subsidized carriers.
Placing limitations on the number of ETCs in these truly high-cost
areas will help ensure the long-term sustainability of the fund, and
will help ensure that consumers in those areas continue to have high-
quality access at affordable rates.
b. low-income support
The FCC greatly expanded the eligibility criteria and the size of
the low-income support mechanism in 1997. Nevertheless, participation
in the Lifeline and Link-Up programs varies widely among the states. As
shown on Attachment 1, of the $673 million paid out for low-income
support in 2002, almost half went to one state, California. This is not
to disparage California's low-income program, but to point out that
low-income support funds are distributed very unevenly throughout the
nation. There are also overall fund size implications from this skewed
distribution. If every state's program was as successful as
California's, the size of the low-income support fund would more than
double to $1.5 billion. The FCC currently has a proceeding open to
review the operation of the low-income support mechanism. A Recommended
Decision from the Joint Board was issued in April 2003 which endorsed
expanding Lifeline and Link-Up eligibility to include customers with
incomes at or below 135% of the federal poverty guidelines. NASUCA has
supported the use of a benchmark based on 150% of the federal poverty
guidelines, and has encouraged the use of automatic enrollment and
self-certification to ensure that as many eligible customers as
possible receive Lifeline benefits.
c. schools and libraries support
The schools and libraries fund has been capped since its inception
at $2.25 billion. Demand for schools and libraries funds have always
far exceeded the cap. As noted by the FCC in its Order of June 13,
2002, annual demand for e-rate funding is almost double the funds
available. As more and more schools have become connected to the
internet through the e-rate, the demand for recurring or priority one
funds has increased. The result has been that the money available for
internal connections in the schools yet to be wired has been declining.
The FCC's decision to allow unused schools and libraries funds to be
rolled forward to increase future funding may help resolve this
problem, but pressure on the cap is likely to continue. The FCC is also
currently considering comments on reforms to the schools and libraries
fund to address allegations of fraud and abuse, and inefficiency in the
administration of the program.
d. rural health care support
Unlike the other support mechanisms, the rural health fund has had
difficulty generating sufficient demand. The FCC originally anticipated
a rural health fund sized at $400 million per year. However, in spite
of repeated attempts to remake the fund, disbursements have remained
low, only $16.4 million in 2002. Like the low-income program, benefits
under the rural health care program are distributed unevenly. During
2002 Alaska received 72% of total USF rural health care funding.
Although the FCC is currently examining the operation of the rural
health fund, it is clear that the root cause of the problems with the
fund lie in the wording of Section 254. Unlike the schools and
libraries support mechanism which provides discounts from regular
prices on all telecommunications services, and pays for internal
connections, Section 254(h) limits the rural health fund to the
difference between rates available to health care providers in rural
and urban areas of a state. Since many states have rural rates which
are lower than urban rates, or have ``postage stamp'' rates for data
services, the rural support mechanism has been of limited utility in
meeting the needs of rural health providers. A statutory change should
be considered which would make the rural health section of the Act
parallel with the schools and libraries by providing services ``at
rates less than the amounts charged for similar services to other
parties.''
v. conclusion
In order to be stable and sustainable in the long-term, the USF
must be configured like a pyramid: it must have a broad and stable base
of contributions at the bottom, and a narrow but sufficient focus of
support at the top. The current universal service fund requires work on
both ends of this structure. Issues related to the contribution base
must be resolved. Since all benefit, all should contribute. In
addition, the limited resources of the fund must be properly targeted
to carry out the purposes of the Act. In order to continue the public
policy success of the universal service fund, we must support access,
not excess.
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Mr. Upton. Thank you very much.
Those buzzers, you might have guessed, were not a fire
drill. But we have got a couple of votes on the House floor.
And we will temporarily adjourn at this point for about 20
minutes. We will resume with Mrs. Greene's testimony after
these two votes.
[Brief recess.]
Mr. Upton. I think we are okay for votes for a little
while. Our next votes will be many more. So it will put a real
crimp to where we are at. So we will try to get finished.
Ms. Greene, you are next. Welcome to the committee.
STATEMENT OF MARGARET H. GREENE
Mrs. Greene. Thank you, Mr. Chairman. It is my honor to
join this panel today in discussing universal service, one of
the most important issues facing the future of the
telecommunications industry, and its contributions to the
country.
Connecting virtually all Americans is a key goal in a
fundamentally altered communications world. Far beyond these
halls, of course, we see broad evidence of this new world. Your
son goes off to college and calls home via the computer. You
walk down the street. And it seems the whole world has sprouted
a cell phone from their ear. You sign up for cable television.
And you get not just TV but internet and phone service as well.
It's an exciting time for consumers. It's a challenging
time for our companies. And it is also a challenging time for
this body. The old rules, written for the old world, have less
and less application today. These rules have to be adapted as
quickly as possible to a new marketplace that is being defined
today by rapid technological change and mounting competition.
This is the challenge for U.S. telecom policy. The
universal service is no exception. The fund is in significant
jeopardy today. As communications migrate to broadband, the old
world base of universal service funds, local and long distance
wire line, is shrinking.
At the same time, demand for the fund's resources is
exploding. The 1996 act dramatically expanded the size of the
fund by declaring that universal service was no longer merely
about ensuring folks in remote areas had service. Instead, it
became about financing a choice of providers, a profoundly more
expensive proposition in areas where the market alone struggles
to support even one company at reasonable rates. This change
opened the floodgates and could cost ratepayers an extra $2
billion annually in less than 4 years' time.
Some suggest we should cap the fund. Such an approach
ignores a history of distorted economics around achieving
universal service and allows the excesses that do exist to
continue unabated. The more constructive approach, restore
discipline in terms of who and how many companies have access
and get all participants in the Twenty-First Century
communications marketplace to contribute to a Twenty-First
Century universal service fund.
In a marketplace being defined by the fact that cable
satellite, wireless, wire line, and internet offerings all
compete directly, it is imperative that outdated rules not be
permitted to distort what should be consumer-driven
competition. For universal service, that means ensuring
neutrality on both sides of the equation, who pays in and who
takes out?
For contributions, a reasonable fee assessed across today's
far broader pool of market participants would help ensure the
fund's viability without overburdening any set of companies or
unfairly throwing a price advantage to newer platforms.
On the distribution side, United States Telecom
Association, of which I served as chair this year, believes
that the Federal fund should be asked to support only one ETC
in each high-cost area. States that wish to subsidize companies
by designating additional providers should be permitted to do
so provided that they pay the additional cost so the fund is
not destabilized for the entire Nation.
USTA also believes that there should be one high standard
for eligibility across all platforms. Either you deliver true
universal service or you don't. Of course, these public
resources should serve their original purpose: helping offset
the high cost of actual infrastructure. Given the candle-lit
weekend so many East Coast residents have had in recent weeks,
we as a Nation have a newfound appreciation of the need for
policies that ensure essential infrastructure remains robust
and reliable.
In terms of telecommunications, we can do that through a
focused, adequately funded universal service fund, through
policy that encourages companies to invest on their own, and by
being less prescriptive in how networks are built.
Today universal service requirements go down to the service
and the line. Why not demand one result? You've got to serve
everyone. You've got to do it reliably. And you have to deliver
service comparable in scope with what is available elsewhere in
terms of public safety obligations like 911. And then let the
companies figure out how best to get there.
Command and control regulations by nature are based on the
past. Network architecture at such a pivotal moment in the
information revolution must be free to look to the future. U.S.
policy should encourage vigorous investment that keeps our
infrastructure sophisticated and strong.
Grafting the old ways onto a new world doesn't get us
there. That is primarily our concern with H.R. 1582. While we
certainly appreciate Congressman Terry's leadership, we think
this bill does not go nearly far enough to safeguard universal
service. It does not address at all the contribution side of
the equation. And it imposes no new discipline in either how
many companies have access or what standard of service they
provide. And the bill addresses only the non-rural side of
universal service, leaving out the lion's share of the
communities that the fund serves.
Mr. Chairman, we need to be bold in preserving the future
of universal service in a new communications era. And time is
of the essence. By asking everyone to pay in and everyone to
meet the same high standard for eligibility, we can deliver a
true, fair, and constructive universal service policy for the
Twenty-First Century.
I thank you for holding this hearing today. It is an
important issue. I thank you for your leadership and timely
consideration.
[The prepared statement of Margaret H. Greene follows:]
Prepared Statement of Margaret H. Greene, Chair, United States Telecom
Association
Universal service is one of the most important issues facing the
future of the telecommunications industry and its contributions to the
country. Connecting virtually all Americans to the opportunity and
security of the dial tone was one of the most important achievements of
the last century. In today's Information Age, universal service
continues to embody the nation's commitment to keeping the American
dream alive in every community--urban and rural.
The United States Telecom Association represents the entire local
telecommunications industry--from my company, BellSouth, to small rural
companies to a host of innovative companies in between. We have worked
extensively to forge an industry-wide position to ensure a strong
future for this vital national priority in a fundamentally altered
communications world. The old rules, written for the old world, have
less and less practical, constructive application today. These rules
have to be adapted--as quickly as possible--to a new marketplace that
is being defined today by rapid technological change and mounting
competition. In a marketplace being defined by the fact that cable,
satellite, wireless, wireline and Internet offerings all compete
directly, it is imperative that outdated rules and antiquated
regulatory classifications not be permitted to continue to distort what
should be consumer-driven competition.
This is the challenge for U.S. telecom policy. Universal service is
no exception. The Fund is in significant jeopardy today, caught in a
perilous limbo between our regulatory past and a future that's already
here. The revenues that serve as the base for contribution to the
universal service fund are shrinking, putting pressure on the revenue
side of the Fund that is unsustainable. At the same time, demand for
the Fund's resources is exploding in an undisciplined and arguably
unproductive way. The issue of universal service must be dealt with in
a comprehensive way. Both the assessment mechanism and the distribution
formula must be addressed, and quickly, if we are to sustain this long
held goal of affordable and robust communications for all Americans.
The funding side of universal service is in trouble. It focuses on
historical distinctions in geography and technology that no longer
serve as viable definitions in today's telecommunications world.
Universal service funding is derived from an assessment on wireline
companies, local and long distance, and wireless companies, based on a
factor applied to interstate revenues. In a world of bundled minutes
delivered over at least four different technologies, this becomes
increasingly meaningless.
As communications migrate to broadband, the old world base of
universal service funds--local and long distance wireline--is
shrinking. And increasingly, alternate technologies, like cable modem
and VOIP, offer directly competitive services while being exempt from
the social responsibilities attendant to universal service. Like so
many other aspects of our current regulatory scheme for
telecommunications, this puts the historic providers of universal
service, those living with the legacy of using wireline revenue flows
to subsidize social goals, at a competitive disadvantage in a robustly
competitive marketplace. This situation cannot exist without serious
detriment to the regulated carriers and it must be fixed.
Fixing this competitive/social policy mismatch means, for the issue
of universal service, ensuring neutrality on both sides of the
equation. Parity of obligation must exist between those who offer
functionally equivalent telecommunications services. If broadband
connections are to be assessed, as DSL is today, then functional
equivalents, like cable modem service, must pay.
Furthermore, users of intrastate as well as interstate services
should contribute to universal service. The distinction between
intrastate and interstate services is artificial and unsustainable in
today's world. It creates perverse incentives to mischaracterize
traffic and again places the burden of supporting universal service on
less than the full universe of subscribers benefiting from universal
service. It further puts a cost on the consumer of having to Fund the
arcane regulatory exercise of allocating revenues to a particular
geography or jurisdiction even though those revenues are derived from
services, like bundled wireless or local and long distance minutes,
designed to free the consumer from the constraints of geography.
Besides these serious issues that constrain the funding area,
demand for the fund's resources is exploding. This is due to the 1996
Act, which dramatically expanded the size of the Fund by declaring that
universal service was no longer merely about ensuring folks in remote
areas had service. Instead, it became about financing a choice of
providers--a profoundly more expensive proposition in areas where the
market economics make it difficult to support even one company at
reasonable rates. This change opened the floodgates. Left unabated, it
is expected to cost ratepayers an extra $2 billion [annually] in less
than four years' time.
On the distribution side, USTA believes this rise in demand on the
Fund is unwise, unnecessary and unsustainable. Discipline must be
brought to bear around distribution of the Fund. This can be
accomplished by implementing some specific principles governing
eligibility to draw from the Fund. Specifically, USTA asserts that the
federal Fund should be asked to support only one ETC in each high-cost
area. That ensures universal service. States that wish to subsidize
competitors by designating additional providers should be permitted to
do so, provided they pay the additional cost, so the Fund is not
destabilized for the entire nation. Again, basic connectivity is the
goal of universal service.
To ensure connectivity, rates in high cost study areas should be
comparable to rates in other parts of the country and, thus, widely
affordable. To that end, universal service support should be used to
encourage continued investment in and rehabilitation of high cost study
area infrastructure and help recover the actual or embedded cost of
such networks (not lines or services) consistent with the recognition
of appropriate distinctions based on the size of the study area.
Telecommunications is a capital intensive business and steady
investment is required for consumers to be well served. Choosing only
certain lines or services to support ignores the essential nature of
telecommunications as a network industry. Each part of the network can
support multiple lines or services. It is administratively burdensome
as well as nonsensical to attempt to allocate support to only certain
lines or services provided by a network that operates as an integrated
organism.
USTA also believes there should be one high standard for
eligibility across all platforms. Either you deliver true universal
service or you don't. Of course, it should go without saying that these
public resources should serve their original purpose: helping offset
the high costs of actual infrastructure. Given the candle-lit weekend
so many East Coast residents have had in recent weeks, we as a nation
have a newfound appreciation of the need for policies that ensure
essential infrastructure remains robust and reliable. In terms of
telecommunications, we can do that through a focused, adequately funded
Universal Service Fund; through policy that encourages companies to
invest on their own; and, by being less prescriptive in how networks
are built.
Today, universal service requirements go down to the service and
the line. Why not demand one result? You've got to be willing to serve
everyone; you've got to do it reliably; and you have to deliver service
comparable in scope with what is provided elsewhere, including meeting
all public safety obligations. This is precisely the constructive role
that government should play today. Yes, consumers should define the
market--prices, services, technology. But government can ensure
essential services--from 911 to ready, affordable access to a dial
tone--reach all Americans. And, U.S. policy should encourage vigorous
investment that keeps our infrastructure sophisticated and strong.
Grafting the old ways onto a new world doesn't get us there. That
primarily is our concern with HR 1582. We certainly appreciate
Congressman Terry's leadership, but we think this bill does not go
nearly far enough to safeguard universal service.
There are three large categories of support in the federal
Universal Service Fund; the e-rate for schools, libraries and rural
health care, the low income program, and high cost support for high
cost areas. The Terry bill focuses in on one of about twelve categories
of funding in the high cost support program and essentially
redistributes funds from high cost rural communities in Mississippi,
Alabama and West Virginia. Its companion measure in the Senate (S.
1380) spares West Virginia from harm and slashes funding from the
Commonwealth of Puerto Rico by redistributing two categories of
funding.
In part to control the size of the Universal Service Fund and to
ensure that support went to carriers providing a substantial amount of
service to the highest cost, most rural areas, the FCC determined that
levels of support for non-rural carriers should be averaged on a state-
wide area. For large carriers, this is relatively consistent with the
practice of averaging support on a ``study area'' basis, which for
these carriers was generally an entire state.
Those non-rural carriers with large numbers of lines concentrated
in urban areas relative to their rural lines did not generally receive
support from this category of funding. Funding went to those carriers
in states serving large numbers of rural lines relative to total lines.
The Terry bill seeks to change the granularity of calculation of
the burden of high cost, largely rural lines from a state-wide average
to a much smaller wire-center average and then impose an artificial
``state-wide'' cap of 5% in the House bill and 10% in the Senate bill
on the distribution in the large company category of funding. The
apparent purpose of those caps is to simply redistribute funding among
large carriers without regard to the needs of affected consumers or
actual investment. It in fact rewards carriers that have sold off rural
exchanges and punishes those carriers that have consistently served
rural communities.
The Terry Bill does not truly impose new discipline, either in how
many companies have access to the fund or what standard of service they
provide. It robs from Peter (Puerto Rico) to pay Paul (Qwest) and even
then addresses only the non-rural side of universal service, leaving
out the lion's share of communities the Fund serves.
Similarly, universal service cannot be looked at in isolation--the
entire regulatory regime under which carriers operate today impacts
their ability to provide universal service. Government managed
competition is far inferior to the free market in its ability to
efficiently allocate resources to provide quality ubiquitous services
to consumers. Market based competition in telecommunications will lead
to increased capital investment, new jobs, economic growth, and a
positive impact on the ability of network operators to provide
universal service with, in some cases, a lesser dependence on universal
service funding.
We need to be bold in preserving the future of universal service in
a new communications era. And, time is of the essence. Without
significant change, four years from now, ratepayers will have a tab
that's $2 billion higher--Federal policy will continue to discourage
investment in vital national infrastructure--and outdated government
rules will continue to pre-empt the consumers' judgment in defining the
shape of American innovation.
By asking everyone to pay in and everyone to meet the same high
standard for eligibility, we can deliver a true, fair and constructive
universal service policy for the 21st century, one that keeps the
nation's commitment to ensuring real opportunity in every American
community.
Mr. Upton. Thank you very much.
Mr. Lubin, welcome.
STATEMENT OF JOEL LUBIN
Mr. Lubin. Thank you, Mr. Chairman and members of the
subcommittee. Thank you for inviting me here today to testify
on behalf of AT&T on the subject of universal service.
AT&T is the Nation's oldest and most far-reaching
telecommunications carrier. And we are proud to serve customers
in every corner of the country. More than any other carrier, we
tie the Nation together. And we are proud to be the carrier
that brought the term ``universal service'' to the
telecommunications lexicon.
In 1996, Congress directed the FCC to ensure that universal
service was reformed in a manner that would make subsidies
specific, predictable, and explicit. Seven years later, this
directive has not been met fully. The universal service system
is struggling to keep up with the dynamic marketplace,
technologically driven marketplace. And without change, the
system will come under increasing pressure and ultimately
become unsustainable.
Fortunately, there are changes that could be implemented by
the FCC within the existing structure of the act that can both
alleviate the pressures and provide a universal service system
that will be compatible with technological change and
competition. Today I wish to highlight two of these issues that
we believe are essential.
First, the change necessary because of the demands on the
system are ever-increasing while the base on the service,
universal service, funds are collected is shrinking. The
situation is both competitively biased and economically
unsustainable. Left unchanged, it will put the USF in a death
spiral while raising the assessment rates, will erode public
support for the universal service concept. This would be a
problem, not just for rural America but for all of America.
I estimate that the universal service assessment in the
year 2004 will exceed 10 percent. AT&T's solution to the
problem is to move away from a revenue base system to a
contribution base system on telephone numbers for those
services that have telephone numbers and on a connections to
the public network for special access and private line services
that do not utilize telephone numbers.
A numbers-based solution has several advantages over the
current system. First, it would be competitively neutral.
Second, it would be predictable and simple, two things that
customers tell us they appreciate. Let's remember it is the
customer who pays the bill. We all act as collection agents to
collect the money and hand it off to USAC.
Third, a numbers-based solution will ensure that the system
is not left to crumble as telephone traffic migrates to new
technologies and protocols, such as voice over the internet. We
believe that a numbers-based solution to the question of how
carriers contribute to universal service could be achieved
under the existing law. And we believe that a numbers-based
solution would provide adequately for both current and future
demands on the universal service system. What is needed is the
will to reform the universal service assessment mechanism.
The second change that I would like to highlight today is
the issue of eliminating the remaining disparities associated
with interstate access rates. As I said at the start, AT&T is
proud of its heritage as the carrier that truly ties America
together, but today the challenge of tieing America together is
being borne significantly by AT&T. AT&T is carrying the burden
even as it must increasingly compete in the long distance
market with regional Bell operating companies that provide
service only in their largely urban lower-cost service areas.
As part of the 1996 act, Congress ensured that all
Americans could be tied together affordably by mandating rate
averaging and rate integration for long distance services. But
interstate access charges, a significant component of the cost
of long distance services, are not the same in all parts of the
country. So that when AT&T averages toll rates Nationwide, it
has to charge its customers in the RBOC territory more than it
otherwise would in order to charge customers in small rural
telco areas the same rate. This puts carriers that serve rural
America at a competitive disadvantage vis-a-vis carriers that
serve primarily urban and suburban customers. We do not believe
this is something that good public policy should encourage.
Two years ago AT&T presented a proposal to reform rural
access rates to the FCC. Since then, the economic challenges
that led to our plan have gotten worse. We need relief. Without
relief, the marketplace will drive AT&T and other National
carriers to find other less optimal solutions to the problem.
Options are not attractive, and rural America should not be
forced to bear their costs.
I look forward to answering your questions. Thank you again
for the opportunity to appear this afternoon.
[The prepared statement of Joel Lubin follows:]
Prepared Statement of Joel Lubin, Vice President, AT&T Corp.
Mr. Chairman, and members of the Subcommittee, thank you for
inviting me to testify on behalf of AT&T as you address the important
topic of universal service reform.
It was AT&T that brought the term ``universal service'' to the
telecommunications lexicon. We are proud of our more than 125-year
history as the nation's oldest and most far-reaching long-distance
carrier; more than any other carrier, we tie together all parts of
America. On the basis of this experience, we understand the importance
of maintaining a vibrant and sustainable universal service system.
In 1996, the Congress directed the Federal Communications
Commission, with the assistance of a Federal-State Joint Board, to
charter a new universal service mechanism--one that would work with,
not against, competition in all markets. This new universal service
mechanism was to be specific, predictable, and sustainable as
competition grew, and it was to be competitively neutral, both in the
way that contributions were collected and support distributed.
Unfortunately, seven years and many Commission proceedings later,
these goals have yet to be achieved. Some progress has been made, most
notably through adoption of the CALLS plan in May 2000 and later with
adoption of the MAG plan in October 2001, but we cannot yet say that we
have a universal service system that meets all of the goals set forth
by Congress in 1996. Instead, we have an ever-increasing fund that is
being raised from an ever-shrinking funding base--interstate and
international end-user telecommunications revenues--and a collection
mechanism that is discriminatory and self-defeating. Something has to
give.
It is beyond question that the fund is increasing. The fund today
stands at more than $6 billion per year. Both the Office of Management
and Budget and FCC staff project additional increases in the size of
the universal service fund, even if the Commission makes no further
policy changes that add to the obligations supported through the USF.
OMB projects total growth at just under 2% per year for FY2004-2007.
Only two parts of the fund won't grow--the schools and libraries fund
and the $650 million interstate access support for areas served by
price-cap carriers. All other parts of the USF can and are likely to
increase.
At the same time the system faces increasing demands for support,
the universal service funding base--interstate and international end
user telecommunications revenues--continues to shrink. In 2001 and
2002, the universal service funding base shrank by an average of 8% per
year. If that rate of decline continues in combination with the
projected growth in the demand for universal service support, in three
years, the USF contribution factor--the rate carriers are assessed and
that they pass on to consumers at the bottom of the bill--would rise
from 9.5% today to 12.8% in 2006. I believe that such a result is
likely to be both economically and politically unsustainable.
The competitive inequities built into the current system for
raising universal service funding will only speed the shrinkage of the
universal service funding base. These competitive inequities take
several forms. For example:
if a consumer is a high-volume user of interstate long-distance
service--the customer who traditionally has contributed the
most to the support of universal service--that consumer can pay
substantially less into the fund by migrating his or her long-
distance calling to a wireless phone.
if a consumer purchases interstate long-distance service bundled with
local service or information services, he or she can contribute
less to the universal service fund if the carrier providing the
bundle allocates more revenue to the parts of the bundle that
do not contribute to the support of universal service than to
the interstate long-distance portion of the bill, which does
contribute to universal service.
if a consumer uses service provided by international carriers that
carry little or no interstate traffic, he or she can avoid
universal service charges altogether on that international
calling.
if a consumer uses some Voice over Internet Protocol services, e-
mail, or instant messaging, it is likely that he or she would
not contribute anything to support universal service.
Each of these outcomes encourages carriers to seek ways to avoid
contributing to the universal service fund and, increasingly, price
sensitive consumers are moving to services that allow them to avoid
charges related to the support of universal service. When this happens,
the universal service fund's contribution base shrinks, which causes
the assessment rate to rise, which drives more consumers to find ways
to minimize their contribution. Perpetuation of this scenario will
drive the fund into a ``death spiral,'' something that is completely at
odds with what the Congress directed when it added Section 254 to the
Communications Act.
Because AT&T is deeply concerned about this problem, we have
proposed a solution to the FCC--a universal service contribution system
based on telephone numbers for those services that use telephone
numbers, and on connections associated with special access and private
line services that do not use telephone numbers. If numbers and number-
equivalent connections grow 2% per year, a 2% annual increase in the
fund would not change the projected $0.98 per number universal service
assessment.
Moreover, a numbers-based solution offers the advantage of being
``future-proof.'' Voice-over-Internet-Protocol (VoIP) providers give
their customers a telephone number so that those customers can receive
calls from the public switched network. This assignment of numbers will
trigger an obligation to support universal service, with the effect of
keeping VoIP in the universal service contribution base. Preventing
``leakage'' from the universal service system is key to maintaining the
stability of the fund, and by focusing on numbers rather than
technologies, we can avoid the need to impose ``one-size fits all''
regulation on emerging services such as VoIP.
A numbers-based solution could be implemented today by the
Commission, under its existing statutory authority. This is not true
with respect to the call to ``expand the base'' by assessing intra-
state revenues. Statutory change clearly would be necessary to achieve
that goal, and even with such a change, it is not clear that just
adding intra-state revenues to the mix would be sufficient to sustain
the fund over the long haul. Revenues are unpredictable and it is not
clear that revenues will continue to climb; if revenues plateau or
drop, the assessment factor will have to rise--exactly as it has today
as interstate revenues have stagnated.
The connections-based solution proposed by BellSouth and SBC
suffers from the fact that it would not necessarily eliminate the
problem of having customers face multiple USF charges. In my view, this
is a major failing both because it contributes to consumer confusion
and because it imposes additional cost on the industry.
Whether or not the Congress contemplates amendments to Section 254,
what is needed is the will for reform.
If, however, Congress decides that additional statutory authority
is a necessary precursor to reform of the universal service system,
such legislation should be narrowly tailored and exclusively focused on
enabling the Commission to consider a wider array of inputs for funding
universal service programs. An ``enabling approach'' to universal
service legislation should permit the Commission to consider a funding
mechanism based on inter- and intra-state revenues, assigned, working
telephone numbers, connections to the public switched network, or any
combination of these elements, so long as such funding mechanism is
competitively neutral among all providers and technologies. Reform
along these lines could help to ensure the near- and long-term
sustainability of the fund, maximize the support of universal service
among the broadest array of providers of telecommunications services,
reduce the need for regular revisions in the assessment mechanism
(which would minimize carrier costs and consumer confusion associated
with such changes), and reduce the likelihood that any reforms adopted
by the Commission would be subject to challenge in the courts.
As I said at the outset, AT&T is proud of its heritage as the
carrier that truly ties America together. But today, the burden of
tying America together--of providing long distance service in all
corners of the country--is being borne substantially by AT&T. AT&T is
carrying this burden, even as it must increasingly compete in long
distance with RBOCs that provide long distance service only in their
largely urban, lower-cost service areas.
As part of the 1996 Act's universal service provisions, Congress
ensured that all Americans could be tied together affordably by
mandating rate averaging and rate integration for long distance
services.
But interstate access charges--a significant component of the cost
of long distance service--are not the same in all parts of the country.
The geographic toll rate averaging provisions of Section 254(g) make it
imperative that the remaining traffic sensitive cost disparities be
removed from interstate access rates and this support be provided
instead through the universal service fund.
In most areas served by the RBOCs, this reform was implemented
through the CALLS plan, and interstate access charges are now
approximately .6 cents per access minute. In the areas served by small,
rural carriers not covered by the CALLS plan, the average interstate
access charges AT&T faces are much higher. For example, the average
NECA minute of access averages 2.6 cents per minute. When AT&T averages
its toll rates nationwide, it has to charge its customers in the RBOC
territory more than it otherwise would, in order to charge the customer
in the small, rural carrier's service area the average rate.
This burden was barely bearable before Bell entry into the long
distance market, when AT&T had to compete with MCI, Sprint, and other
carriers that could choose not to serve certain geographies or service
areas. Now, with the Bells having secured approval to enter the long
distance market in most of the country, this burden has become
intolerable. Verizon, which is already the nation's third largest long
distance carrier, gets an unfair competitive advantage from the Act's
toll averaging requirements because it doesn't serve all of America. In
addition to incenting certain carriers not to serve rural America,
these high access changes--and the desire to avoid paying them--
provided the economic incentive for the ``Canadian Gateway'' access
fraud committed against AT&T.
Fortunately, the 1996 Act allows for a solution that preserves toll
averaging while restoring a level playing field to long distance
competition. The local network costs--primarily high switching and
transport costs--that lead to these high rural company access charges--
which can be as high as 10 cents per minute of use--could be supported
through explicit universal service funding.
More than two years ago, AT&T and several other carriers presented
just such a proposal to the FCC. Unfortunately, the Commission has not
implemented our proposal, and since that time, the economic challenges
that led us to file our plan have gotten worse. The need for relief is
now acute.
In order to alleviate these competitive problems and eliminate any
incentive for parties to ``game the system,'' the Commission should
move expeditiously to reform the inter-carrier compensation regime.
Unless the Commission acts aggressively, the marketplace will force
AT&T and other national carriers to find other, less optimal solutions.
Those options are not attractive to us, nor should they be attractive
to policymakers, and rural America should not be forced to bear their
cost.
Thank you again for the opportunity to testify here today. At AT&T,
we believe firmly that a vibrant, sustainable universal service system
is important to the well-being of both the telecommunications industry
and the American economy. But decisions must be made, and some bold
actions taken to secure universal service for the future. On behalf of
my company, I hope you agree, and look forward to working with you and
the members of this Subcommittee as you continue your important work in
this area.
Mr. Upton. Thank you.
Mr. Post?
STATEMENT OF GLEN POST
Mr. Post. Thank you, Mr. Chairman. My name is Glen Post. I
am Chief Executive Officer and Chairman of the Board for
CenturyTel. I appreciate the opportunity to speak before you
today. I am representing CenturyTel and the Independent
Telephone and Telecommunications Alliance, ITTA. ITTA is an
association of 13 mid-sized telecommunications companies who
together serve more than 10 million lines in 40 States.
CenturyTel is a leading provider of telecommunications
services to 2.4 million customers, mostly in rural areas, the
smaller cities across the country, in 22 States that include
many of the States represented by the members of this
subcommittee.
Many regulatory and technology changes have taken place
since the act was passed in 1996. We want you to know that ITTA
companies share common goals with the larger Bell operating
companies and the smaller telephone companies to maintain the
incentive to invest in our markets and to see meaningful
deregulation of our businesses. However, this hearing should
not be about companies. It should be about consumers and the
continuity of the network that keeps us all connected.
The Nation's telecommunications future is at a crossroads.
Evolving technology, competition, and converging network
platforms are rapidly outpacing our ability to keep rates
comparable and affordable for all consumers, regardless of
where they live. In our view, affordable modern
telecommunications infrastructure and advanced services can
make the difference between success or failure in economic
development, creation of jobs in rural markets.
Universal service support as envisioned by the act is still
the telecommunications linchpin for millions of Americans and
thousands of communities. It would be fair to say that perhaps
no other industry has the potential to more directly impact and
improve the lives and livelihoods of your constituents than the
telecommunications industry. However, for that potential to be
fully realized, some bold changes must take place to provide
much-needed stability for this industry.
Today there is an undeniable need to address the full array
of issues associated with telecommunications reform. We support
those initiatives. However, the first and highest priority of
the Congress should be to stabilize and strengthen the
Telecommunication Act's universal service mandates, which
include predictability, sustainability, and sufficiency.
If meaningful universal service reform is not accomplished
first, other needed reforms, such as deregulation, inter-
carrier compensation, and the future of broadband deployment,
are likely to be grounded on an unsure foundation and are
likely to fail to deliver their full-intended benefits for the
American consumer.
Addressing the rapidly eroding USF contribution base is the
first critical step in the process of shoring up the universal
service system. Contributions to universal service funding
should be based on revenues. A revenue-based assessment
methodology is both competitively and technologically neutral.
Assessing revenues, instead of connections or numbers, avoids
imposing a regressive flat fee on low-volume consumers. A
revenues-based system eliminates potential gaming that may be
associated with connections or numbers-based approaches and
also anticipates future changes in technology that may make
connections-based approaches meaningless.
Also, the FCC should be permitted to assess the broadest
base of revenues possible, including intrastate revenues.
However, this is only part of the solution.
If Congress is going to effectively deal with the crisis
looming over universal service, it must consider expanding the
contribution base to all providers that currently rely on the
telecommunications network. Congress and the FCC must make sure
that any new contribution mechanism is capable of keeping pace
with technology by assessing the broadest base of providers
possible.
Also, current caps on universal service funds have a direct
and negative correlation to advancing the universal service and
advanced services deployment goals of the act. The growth and
size of the fund are controlled today by arbitrarily capping
the funds without regard to the impact on consumers. This is
not the answer. In rural areas, significant investment is still
needed.
Also, the rapid increase in the number of competitive
eligible telecommunications carriers raises critical issues for
the consumers in rural America. Present rules for ETC
designation are being interpreted in widely different fashions
by stakeholder service commissions and are often not consistent
with the intent of the act.
We're concerned that present rules allow carriers to offer
varying levels of service commitments to customers based on
investments and cost of the ILEC. This raises obvious questions
regarding the reasonableness of this method of distribution of
universal service funds.
The following are recommendations of actions related to
universal service that need to occur to protect consumers.
First of all, telecommunications providers, regardless of their
network platforms, should be required to pay in the universal
service fund. This includes cable broadband providers, internet
service providers, all wireless services, long distance, and
local exchange companies.
Second, States that approve additional ETCs should be
required to help with additional funding needs.
Third, CETC portability rules need to be changed to reflect
reality and reasonableness. Regulatory oversight should ensure
that funds are truly being used to serve consumers in high-cost
areas and that the amount of support reflects the service
commitment.
Finally, consumers must not be overlooked in the process of
achieving telecommunications reform. Congress should make sure
that rural consumers do not bear a disproportionate rate burden
that would place advanced services out of the financial reach
of most Americans.
This committee and the Congress have a great opportunity
before them to initiate legislative changes and provide
meaningful direction to the FCC that will offer much-needed
positive signals to the telecom sector of our economy. Our
Nation's telecommunications system did not happen by accident.
There has been and should always be a strong commitment to
building and maintaining evolving networks that connect all of
our citizens in rural and urban areas to each other and the
rest of the world.
Thank you for the opportunity of speaking with you today.
[The prepared statement of Glen Post follows:]
Prepared Statement of Glen Post, CEO and Chairman of the Board for
CenturyTel on Behalf of the Independent Telephone and
Telecommunications Alliance (ITTA)
Good afternoon. My name is Glen Post, and I am Chief Executive
Officer and Chairman of the Board for CenturyTel. I appreciate the
opportunity to appear before you today representing CenturyTel and the
Independent Telephone and Telecommunications Alliance (ITTA). ITTA is
an association of 13 mid-sized telecommunications companies who
together serve more than 10 million lines in 40 states.
CenturyTel is a national telecommunications company with
headquarters in Monroe, Louisiana. We are a leading provider of
telecommunications services in 22 states that include many of the
states represented by members of this Subcommittee including Michigan,
Louisiana, Texas, Ohio, Wyoming, New Mexico, Mississippi, Oregon,
Missouri, and Tennessee. We specialize in providing high quality
telephone, long distance, Internet, broadband and advanced services in
rural and small urban markets. Today, CenturyTel is the eighth largest
telephone company in the United States with 2.4 million access lines.
Much of CenturyTel's recent growth has come from the acquisition of
telephone lines from the larger Bell Operating Companies in multiple
states. The majority of our 3 million customers and 7,000 employees
live and work in the very areas that have the most critical stake in
the issue we will discuss today.
Many regulatory and technology changes have taken place since the
Telecommuni-cations Act was passed in 1996. We want you to know that
ITTA companies share common goals with the larger Bell Operating
Companies as well as the smaller telephone companies to both maintain
the incentive to continue investing in our markets and to see
meaningful deregulation of our businesses. However, this hearing should
not be about companies. It should be about consumers and the continuity
of the network that keeps us all connected. It should be about the
future and not the present. We empathize with the other providers that
serve high cost markets and appreciate the challenges and concerns
those markets pose from a service and investment standpoint.
The nation's telecommunications future is at a crossroads. Evolving
technology, competition, and converging network platforms are rapidly
outpacing the existing regulatory mechanisms' ability to keep rates
comparable and affordable for all consumers regardless of where they
live. There are a number of proposed changes in telecommunications that
could put the stability of rural telecommunications at risk. We commend
Chairman Tauzin and Chairman Upton and the members of this Subcommittee
for addressing these issues that are crucial to consumers in so many
regions of our nation.
I have been asked to provide you with a mid-size company
perspective about our view of telecommunications and universal service
as it relates to our customers and the markets we serve. Mid size
companies understand that our business success depends on the long-term
economic viability of our communities. In our view, affordable, modern
telecommunications infrastructure and advanced services can make the
difference between the site for a proposed industrial park remaining a
field of weeds, or actually being considered as a promising location by
a global manufacturing company. Businesses today look for areas where
the telecommunications infrastructure has kept pace with technology and
which provide the ability to communicate anywhere in the world.
Universal service support plays a big role in this picture.
As members of this Subcommittee know, agriculture has long been the
leading economic driver for much of rural America. However, I would ask
that you also consider telecommunications as a force that will create
jobs, spur investment and allow all citizens to effectively connect
with the rest of the Nation and the world. It would be fair to say that
perhaps no other industry has the potential to more directly impact and
improve the lives and livelihoods of your constituents than the
telecommunications industry. However, for that potential to be fully
realized, some bold changes must take place to provide much-needed
stability.
The one thing that has not changed since the passage of the
Telecommunications Act is that rural and small urban markets remain
unique in their demographics, service needs and cost-of-service
characteristics. Universal service support, as envisioned by the Act,
is still the telecommunications lynchpin for millions of consumers.
These consumers have become increasingly sophisticated in the types and
quality of services they need and expect. Thanks to the Universal
Service system, our companies like CenturyTel have been able to ensure
that rural America has not been left behind by the digital revolution.
We believe that in a global economy, rural and small urban consumers
not only deserve, but also truly need, reliable and affordable advanced
telecommunications services to talk with loved ones, conduct business,
be entertained and connect with the rest of the world.
One of the challenges these customers and their phone providers
face is the ability to keep basic and advanced services affordable and
to overcome the challenges of distance associated with high cost
markets. However, this premise and the system that supports it are
under attack from a variety of fronts. The reason we are here today is
to attempt to find reasonable solutions that will help to keep
America's telecommunications system the model for the rest of the
world.
A vast and complex task awaits, but there is a need for sequencing
and prioritization of the issues we face. To attempt to resolve all
pending issues simultaneously prior to stabilizing universal service is
to run the risk of failing from the outset. There is an undeniable need
to address the full array of issues associated with telecommunications
reform, and we support those initiatives and the need to move ahead as
an industry. Our industry is in serious need of economic stabilization
that can be brought about through deregulation and free market
competition. However, the first and highest priority of the Congress
must be to stabilize and strengthen the Telecommunication Act's
universal service mandates which include: predictability,
sustainability and sufficiency.
Few issues more directly affect consumers, the economy, job
creation or investment in the country's national security
infrastructure than universal service. Whether we are talking about
affordable services for everyone, national security, bridging the
Digital Divide or successfully placing an emergency 911 call, universal
service is the key component that affects our industry and customers.
Stabilization of universal service must be viewed as the ``base'' upon
which all other reforms are built. If meaningful universal service
reform is not accomplished first, other needed reforms such as
deregulation, intercarrier compensation and the future of broadband
deployment are likely to be grounded on an unsure foundation and are
likely to fail to deliver their full-intended benefits to the American
consumer.
contribution mechanisms
Addressing the rapidly eroding USF contribution base is the
critical first step in the process of shoring up the universal service
system. Without ensuring a predictable, sustainable, and sufficient
funding base, other reforms could end up being academic. Contributions
to universal service funding should be based on revenues. A revenues-
based assessment methodology is both competitively and technologically
neutral. Assessing revenues instead of connections or numbers avoids
imposing a regressive flat fee on low-volume consumers. A revenues-
based system eliminates potential ``gaming'' that may be associated
with connections or numbers-based approaches and also anticipates
future changes in technology that may make connections-based approaches
meaningless. All providers have revenues that may be fairly assessed on
a non-discriminatory basis, which makes such an assessment
competitively neutral among consumers. The FCC should be permitted to
assess the broadest base of revenues possible, including intrastate
revenues.
However, this is only part of the solution.
To provide true long-term sustainability, the base of contributors
must be expanded beyond what may be considered the traditional or
legacy providers of today. Consumers are rapidly adapting to a world in
which they receive their telecommunications services, including voice
service, from their Internet Service Provider such as AOL or their
cable modem provider, neither of which are currently subject to
assessment. If Congress is going to effectively deal with the crisis
looming over universal service and not simply postpone the day of
reckoning, it must consider expanding the contribution base to all
providers that currently rely on the telecommunications network.
Anything less perpetuates rather than resolves the underlying problem.
Ultimately, the expansion of universal service contribution mechanisms
must be a progressive process with the goal of achieving long-term
sustainability that is immune to technological change.
The FCC is considering basing its assessment on other metrics
beside revenues. Some carriers who would advocate the use of telephone
numbers as an assessment mechanism are, ironically, companies that do
not have a telephone number link with customers, and would consequently
be mostly immune from such an approach. Additionally, telephone numbers
are not able to capture new technologies that provide voice service
such as Voice Over Internet Protocol (VOIP) or even Instant Messaging
services that are so prevalent today. Furthermore, the VOIP industry
currently works with traditional telephone numbers and without them. A
telephone number-based approach would skew the VOIP industry toward a
non-numbers based approach. Congress and the FCC must make sure that
any new contribution mechanism is capable of keeping pace with
technology by assessing the broadest base of providers possible.
disbursement of universal service funding
The rapid escalation in the number of Competitive Eligible
Telecommunications Carriers (CETC's) raises critical issues for the
customers of ITTA members. Present rules for ETC designation are being
interpreted in widely different fashions by state public service
commissions and are often not consistent with the intent of the Act. We
are concerned that present rules allow carriers to offer different
levels of service commitment to customers even though they are
receiving the same level of support. This anomaly in universal service
portability requirements places an ever-increasing pressure on
universal service funding that directly or indirectly affects all
American phone users.
Appropriate standards for the ETC designation process must be
instituted and enforced. Unchecked distribution of universal service
support threatens consumers and carriers alike. Currently, designations
are often based on inconsistent or non-existent criteria. Minimum
uniform, technologically neutral national criteria for state review of
applications would do much to rationalize a chaotic, unpredictable
process that ultimately does not serve the consumer's interest. Any
such standards would also require some provision for enforcement, both
at the federal and state levels, if they are not to be rendered
meaningless from the outset.
caps on universal service funding
Reform of the contribution mechanism and disbursement procedures,
while necessary first steps, are nonetheless insufficient by themselves
to cure the ailing universal service system. Current caps on universal
service funds have a direct and negative correlation to advancing the
universal service and advanced services deployment goals of the Act.
Existing caps are fundamentally in conflict with the broad universal
service mandates laid down in the 1996 Act. They are also a disservice
to rural consumers and an impediment to the delivery of advanced
services to all consumers. Carriers, competitors and consumers alike
will benefit from removing existing fund caps.
The growth of the fund is controlled today by arbitrarily capping
the funds without regard to the impact on consumers. This is not the
answer. In rural areas, significant investment is still needed.
intercarrier compensation reform could threaten universal service
Carriers that use our networks should continue to pay fair
compensation to use those networks. Access charges that long distance
companies pay to compensate local phone companies have been reduced and
the balance of that money has been shifted into universal service
funding. Further access charge reductions will only put more pressure
on the funds. Increasing downward pressure on access rates becomes a
problem, particularly for the customers of companies operating in high
cost rural areas. Zeroing out carrier access charges will mean that the
customer ultimately pays an increased price to subsidize the
stockholders of long distance companies.
recommendations to address universal service issues
There are no easy answers to solving all of the issues associated
with universal service or telecommunications reform. However, there are
a combination of actions that need to occur to protect consumers.
First, all telecommunications service providers, regardless of their
network platform, should be required to pay into the universal service
fund. This includes cable, all broadband providers of any kind,
Internet Service Providers (ISPs), all wireless devices, long distance
and local exchange companies. Second, states that approve additional
ETC's should be required to help with the funding. Third, CETC
portability rules need to be changed to reflect reality. Today, CETC's
are drawing the same support as the incumbent phone provider based on
the ILEC's cost. This is putting increased pressure on the fund. They
should have more stringent certification standards than they have
today. The FCC should establish minimum criteria that individual state
commissions can use in assessing eligibility. CETC's should be required
to serve an entire rural study area--something they are not being held
accountable for today. Regulatory oversight should ensure that funds
are being used to serve consumers in high cost areas for all recipients
of support.
Finally, CenturyTel believes portability requirements should be
modified to recognize that many of today's USF dollars are actually
access charges formerly paid by long distance companies--these dollars
should not be portable to competitors.
conclusion
Ultimately, consumers must not be overlooked in the process of
achieving telecommunications reform. Consumers have seen a steady
increase in their local phone bills due to a variety of end-user
charges that have been systematically applied since the passage of the
Act. Consumers also face shouldering the burden of pending proposals
that would eliminate carrier-to-carrier revenues, such as access
charges, and replace them with higher customer charges such as local
rates and subscriber line charges. Congress should make sure that rural
consumers do not bear a disproportionate rate burden that would place
advanced services out of the financial reach of most Americans or add
additional pressure to universal service funds.
This Committee and the Congress have a great opportunity before
them to initiate legislative changes and provide meaningful direction
to the FCC that will offer much-needed positive signals to the telecom
sector of our economy. Telecommunications has the potential to create
jobs, spur investment and provide economic stability to literally every
state and to every section of the country. We must remember that our
nation's telecommunications system did not happen by accident. There
has been, and should always be, a strong commitment to building and
maintaining evolving networks that connect all of our citizens in rural
and urban areas to each other and the rest of the world.
Mr. Upton. Thank you very much.
Mrs. Shank?
STATEMENT OF SIDNEY SHANK
Ms. Shank. Good afternoon. I am the manager of Bloomingdale
Telephone Company, which is an independently owned
telecommunications corporation headquartered in Bloomingdale,
Michigan. We've been engaged in the provision of local exchange
service for nearly 100 years. Today we serve approximately
2,000 customers in our Bloomingdale exchange itself. However,
we serve about 8,500 customers in Allegen, Kalamazoo, and Van
Buren Counties with other telecommunications needs.
We are involved in the provision of telecommunications
business systems, networking, internet, broadband services,
long distance, cellular, competitive local exchange services,
and DBS services.
We are proud of the record of service, which is
representative of the Nation's small rural incumbent local
exchange carriers. That's why I'm so pleased to be appearing on
behalf of the hundreds that are represented by NTCA and
OPASTCO.
The success of Bloomingdale and its small rural ILEC
colleagues is tied directly to a dedication to community and
the Nation's commitment to universal service. Yet, in the
uncertain competitive deregulatory environment that we operate
in today, these constants may be in jeopardy. Left hanging in
the balance could be quality, affordable service for rural
areas and telecommunications.
It's no secret that the ability to fully recover costs is
the very lifeblood of our small rural ILECs. Thus, of
particular concern to all of us today are the many regulatory
and judicial proceedings that will either sustain or destroy
this ability and subsequently the continued investment in rural
telecommunications infrastructure will be in jeopardy.
Any adjustment to one of the three components of our cost
recovery, the local end-user rates; inter-carrier compensation,
such as access charges; and universal service, requires the
inverse adjustment of the others. Not surprisingly, the local
end-user rate component is the least able to tolerate increased
pressure. Conversely, the inter-carrier component is the one
most susceptible to regulatory and competitive-oriented
pressures. This leaves universal service as the most likely to
contend with cost recovery fluctuations.
In past access charge reduction proceedings, the universal
service fund has been charged with such residual cost recovery
responsibilities. And the current debate over additional inter-
carrier compensation adjustments has suggested this could
happen again. Yet, with other regulatory dilemmas currently
facing the USF, we fear it is ill-prepared to take on another
such obligation.
Perhaps the most notable of these is how easily many States
and the FCC are granting USF ETC status to competitors. Adding
insult to injury is the fact that under the FCC's current
rules, competitor support is based on the incumbent's costs,
this despite the fact that the law requires carriers to certify
support is for actual universal service-allowed costs. This has
led to a ballooning USF, which could eventually erode public
support for the underlying National policy. Also problematic is
change in economic and regulatory environment that is eroding
the USF funding.
We believe that all policymakers must take the
responsibility of granting ETC designations much more
seriously. NTCA and OPASTCO have both put forth sets of
standards on which such decisions could be based. These focus
on encouraging policymakers to impose the same service,
billing, quality, capability, and recording standards on
competitors that incumbents already face.
We also strongly believe that Congress should direct the
FCC to follow the law when asked for the contributions to the
universal service fund. The FCC is entertaining the idea of
adopting certain contribution proposals we contend would not
adhere to the law. Some of these proposals, connections and
numbers-based, would allow today's larger contributors, the
long distance mammoths, to escape their statutory universal
service responsibilities.
Considering the current dilemma that faces the USF, we
should expand the base of contributors and revenues that are
accessed, rather than relieving entities of a statutory
responsibility. We have registered our views, both in the State
and Federal regulatory arenas. In many cases, we have done so
with the judicial as well. Yet, we now believe it is time for
Congress to weigh in on these matters.
We are hopeful that with your direction, policymakers and
judicial, the public, and competitors alike, will be guided by
the principle that USF is a scarce National resource. Congress
has the ultimate authority and responsibility to ensure that
the USF is carefully managed in order to best serve the public
interest. Universal service is not a tool to be used to incite
artificial competition. It is a tool to help ensure the
existence of a Nationwide ubiquitous telecommunications
network, a network that has been proven again and again to be
so critical to our National and economic security.
Congress must continue to ensure that the underlying
principles of this long-lasting National policy are safely
adhered to now and in the future. And I thank you so much for
your time and for allowing me to be here today. Thank you.
[The prepared statement of Sidney Shank follows:]
Prepared Statement of Sidney Shank, Manager, Bloomingdale Telephone
Company on Behalf of the National Telecommunications Cooperative
Associationand the Organization for the Promotion and Advancement of
Small Telecommunications Companies
Chairman Upton, members of the subcommittee, my name is Sidney
Shank, and I am the manager of Bloomingdale Telephone Company, which is
an independently owned telecommunications corporation headquartered in
Bloomingdale, Michigan. We've been engaged in the provision of local
exchange service for nearly 100 years. Today we serve approximately
2000 customers with an investment of over 250 miles of cable. But
that's not all we provide to our community and the surrounding area. In
addition, we are involved in the provision of Internet, broadband
services, long distance, cellular, competitive local exchange services,
and Direct Broadcast Satellite (DBS) services.
We are proud of this record of service, which is representative of
the nation's small rural ILECs. That's why I'm also pleased to be
appearing on behalf of the hundreds that are represented by the
National Telecommunications Cooperative Association (NTCA) and the
Organization for the Promotion and Advancement of Small
Telecommunications Companies (OPASTCO).
the importance of universal service
Today, the Subcommittee will hear from a variety of witnesses that
are deeply interested in the future of universal service--each for very
different reasons. Let me state at the outset that our concern is
centered exclusively on ensuring that the strong mandates of the
nation's long-standing policy of universal telecommunications service
are carried out in a manner that best serves consumers. That is how we
have always conducted our businesses.
The success of Bloomingdale, and its small rural ILEC colleagues,
is tied directly to a dedication to community, and the nation's
commitment to universal service. Yet, in the uncertain competitive
deregulatory environment that we operate in today, these constants may
be in jeopardy. Left hanging in the balance could be quality,
affordable, universally available rural telecommunications service.
It's no secret that the ability to fully recover costs is the very
lifeblood of small rural ILECs. Thus, of particular concern to us today
are the many regulatory and judicial proceedings that will either
sustain or destroy this ability--and subsequently the continued
investment in rural telecommunications infrastructure.
Any adjustment to one of the three components of our cost
recovery--the local end-user rates, intercarrier compensation such as
access charges, and universal service--requires the inverse adjustment
of the others. Not surprisingly, the local end-user rate component is
the least able to tolerate increased pressure. Conversely, the
intercarrier component is the one most susceptible to regulatory and
competitive oriented pressures. This leaves universal service as the
most likely to contend with cost recovery fluctuations.
In past proceedings on access charge reductions, the USF has been
charged with such residual cost recovery responsibilities. And the
current debate over additional intercarrier compensation adjustments
has suggested this could happen again. Yet with other regulatory
dilemmas currently facing the USF, we fear it is ill prepared to take
on another such obligation.
greater oversight and reform of the etc designation process is needed
Perhaps most notable of these regulatory dilemmas is how easily
many states and the FCC are granting USF ETC status to competitors
today. These carriers are receiving this valuable designation without
having to comply with the same stringent service, billing, quality,
capability, coverage, and reporting requirements that ILECs must, and
have been happy to, adhere to each and every day. Is it too much to ask
carriers to meet such obligations as a condition of receiving scarce
USF support? We think not. Adding insult to injury is the fact that
under the FCC's current rules, competitor support is based on incumbent
costs. This despite the fact that the law requires carriers to certify
support is for actual universal service allowed costs.
This problem is particularly pronounced with regard to wireless
competitive ETCs. For example, since 1999, universal service support
allocated to wireless CETCs has increased dramatically from $500,000 in
1999 to a projection of approximately $240 million in 2003. This
astonishing growth in support to wireless CETCs is particularly
troubling since these carriers are not held to the same regulatory
obligations and service standards faced by other carriers.
We ask that Congress reaffirm its strong admonition about
financially supporting competition when it crafted section 214(e) of
the Act. In enacting this section of the law governing the designation
of multiple ETCs, Congress clearly recognized that supported
competition would not always be in the ``public interest'' of areas
served by rural telephone companies. Sadly, some state commissions and
the FCC have ignored the intent of Congress and have designated
additional ETCs without thoughtfully considering the factors that
determine the public interest. Regulators have placed far too much
emphasis upon the Act's general goal of competition at the expense of
rural markets and consumers. The result of state government-sponsored
artificial competition in rural service areas has been a swollen USF
that has put the entire universal service program at great risk.
possible solutions to the cetc designation process
Mr. Chairman, many witnesses come before your committee without
solutions. However, I am very pleased that both NTCA and OPASTCO have
each developed their own principles to strengthen the public interest
standard governing the CETC designation process.
This past July, during a forum of the Federal-State Joint Board on
Universal Service, NTCA put forth, and urged the adoption of a seven-
point public interest test for evaluation of ETC designations in rural
telco service areas. The points are as follows:
1. Is the additional ETC designation of the requesting carrier required
to ensure that consumers living in the rural ILEC service
territory have access to the nine support services listed in
the definition of universal service at rates that are
comparable to similar services and rates received by consumers
living in urban areas?
2. Would the requesting ETC designation be able to provide service to
the entire rural ILEC service territory, as required by FCC
rules?
3. Do the potential benefits to the rural service area of granting the
ETC designation outweigh the ultimate burdens on consumers that
will occur through the added growth in state/federal universal
service funds?
4. Is the carrier requesting designation willing to demonstrate its
cost to provide universal service to consumers living in the
rural ILEC service territory?
5. Would the ETC designation result in excessive support to the
requesting carrier based on the amount of support distributed
under the identical support rule?
6. If the carrier seeking ETC designation is offering rural consumers
universal service at a rate that is at, below or slightly above
the comparable rate for supported services, why is the
requesting carrier seeking universal service support?
7. Is the carrier requesting ETC designation willing to adhere to
quality-of-service guidelines or other state-specific
requirements?
Earlier, OPASTCO had developed an industry white paper, titled,
``Universal Service: A Congressional Mandate At Risk.'' This paper
elaborates upon how misinterpretations of the public interest standard
by state and federal regulators when designating multiple ETCs has
placed the universal service fund in serious jeopardy. The
recommendations of the OPASTCO paper have also been presented to the
Joint Board for its consideration. It lays out the following
principles, guidelines and requirements that State commissions and the
FCC should utilize in their consideration of ETC applications for rural
telephone company service areas:
1. Rural consumers should receive access to affordable, high-quality
telecommunications and information services, including advanced
services that are reasonably comparable to those services
provided in urban areas and at reasonably comparable rates.
2. The high-cost support mechanisms should not be used as an incentive
to attract uneconomic competition in the areas served by rural
telephone companies.
3. The USF is a scarce national resource that must be carefully managed
to serve the public interest.
4. Rural universal service support reflects the difference between the
cost of serving high-cost rural areas and the rate levels
mandated by policymakers.
5. The public interest is served only when the benefits from supporting
multiple carriers exceed the costs of supporting multiple
networks.
6. In areas where the costs of supporting multiple networks exceed the
public benefits from supporting multiple carriers, the public
interest dictates providing support to a single carrier that
provides critical telecommunications infrastructure.
7. The cost of market failure in high-cost rural America could be
severe.
Along with the adoption of public interest principles, the OPASTCO
white paper further recommends that in order to be considered for ETC
status in a rural telephone company service area, a carrier should be
required to demonstrate to the state commission or FCC that it meets,
and will abide by, all of the following qualifications and
requirements:
1. A carrier must demonstrate its ability and willingness to provide
all of the services supported by the federal High-Cost program
throughout the service area.
2. In fulfilling the requirement to advertise its services and rates,
an ETC must emphasize its universal service obligation to offer
service to all consumers in the service area.
3. A carrier must have formal arrangements in place to serve customers
where facilities have yet to be built out.
4. A carrier must have a plan for building out its network once it
receives ETC designation and must make demonstrative progress
toward achieving its build-out plan in order to retain ETC
designation.
5. A carrier must demonstrate that it is financially stable.
Lastly, OPASTCO suggests State commissions and the FCC should also
adopt the following policies regarding ETC designations in rural
telephone company service areas:
1. ETC designations in rural telephone company service areas should be
made at the study area level (an ILEC's entire service
territory within one state).
2. State commissions and the FCC should ensure that competitive ETCs
will be capable of providing high-quality service to all of the
customers in the service area should the rural ILEC find it
necessary to relinquish its own ETC designation.
3. Any service quality standards, reporting requirements and customer
billing requirements established by the state commission should
be applied equally to all ETCs in the state.
4. State commissions have the authority to decertify any ETC that is
not meeting any of the qualifications or requirements
enumerated above.
We strongly believe that the long-term sustainability of the
federal USF has been greatly threatened by federal and state regulator
decisions about whether to designate multiple ETCs in an area served by
a rural telephone company. The number of competing carriers seeking
designation as eligible to receive universal service support is growing
at an everincreasing pace. If the size of the USF reaches a point where
further growth is prohibited, yet the number of carriers receiving
support continues to grow, then no carrier will have the funding
necessary to provide affordable, high-quality telecommunications
services and rural consumers will be denied the benefits promised by
the Act. This is an area that Congress simply can no longer ignore.
contribution methodologies must adhere to statutory mandates
Unfortunately, there are other major regulatory proceedings that
are still underway that have the potential to undermine the USF and its
underlying national policy. It is very possible that the FCC could
still adopt a ``connections-based'' or ``numbers-based'' proposal for
revising the universal service contribution methodology, which without
a legislative change, may not comply with the Telecommunications Act of
1996's requirement that every interstate telecommunications provider
contribute to the Fund on an ``equitable and nondiscriminatory basis.''
We urge the Congress to direct the FCC to follow the law and ensure
that interstate carriers continue to contribute their fair share to the
Fund. We also believe the FCC should be strongly encouraged to take
action that would broaden the base of contributors to universal
service. NTCA and OPASTCO have both advocated a narrow legislative
approach as one part of this solution, which would effectively overcome
a judicial decision that limits USF assessments to interstate and
international revenues.
The FCC has recently given consideration to three different
``connections-based'' proposals for revising the universal service
contribution methodology. The first proposal would impose a flat
monthly fee for each end-user connection and assess a ``minimum''
contribution from each interstate telecommunications provider
regardless of whether the carrier provides connections. The second
proposal would split ``connections-based'' based contributions between
switched access and interstate transport providers. The final proposal
would assess contributions on the basis of telephone numbers assigned
to end-users. We are very concerned that through these proposals the
Commission is considering possibly adopting a new contribution
methodology that would violate the requirement set forth in the 1996
Act that calls for ``equitable and nondiscriminatory'' contributions
from every interstate telecommunications carrier.
In addition, we also all strongly believe that any reform of the
universal service contribution methodology should expand the base of
contributions to the Fund. As you know, the universal service system
has been funded by a broad-based national system of industry
contributions. The traditional contribution base--the long distance
market--has steadily declined, eroding the funding base for universal
service. Alternatives to long distance--wireless, e-mail, Internet
Protocol (IP) telephony, and most broadband platforms--have not been
asked to contribute their fair share to alleviate the shortfall. We are
very concerned that the proposals currently pending before the FCC
would fail to broaden the contribution base sufficiently, and fail to
ensure the stability and sufficiency of the USF for the long-term.
The manner in which contributions are assessed for the USF is a
very complex and controversial issue. Furthermore, I can assure you in
the strongest possible terms that we are unified in our view that any
further modifications by the FCC to the contribution methodology must
be consistent with the statute's clear requirement that all interstate
telecommunications services contribute to the USF on an equitable and
nondiscriminatory basis. Regardless of how the FCC ultimately
approaches this issue, interstate interexchange carriers have to remain
principal contributors as mandated by the law.
We all agree that universal service support needs to be sufficient
and sustainable and should be fair to all providers and users of all
kinds of networks. We are aware of growth in the USF and concerned
about shifts in the types of interstate services consumers are
utilizing. These developments have created a serious issue about how to
prevent erosion and evasion of support mechanisms. Thus, we firmly
believe that the FCC needs to assess the broadest possible list of
contributors to keep each carrier's contribution and the amount it
needs to recover from its customers as small as possible.
We need to emphasize that the gradual but ever-growing use of
broadband platforms and Internet Protocol (IP) networks plays a growing
role in the instability of the contribution base. Consumers use IP
networks in a variety of ways (access to the World Wide Web, e-mail,
instant messaging, Internet telephony) and via various platforms
(cable, wireless, satellite) to substitute for interstate calls on the
public switched network. As this ``Internet substitution'' grows,
traditional interstate revenues providing the funding base for
universal service will diminish. And there will be little offsetting
gain, since presently only wireline telecommunications carriers are
required to contribute on the basis of revenues earned from Internet
access service. All other Internet access providers using other
platforms remain exempt from the obligation.
Federal law allows the FCC to assess all providers of interstate
``telecommunications'' if the public interest so requires, even if they
are not common carriers. We believe that all providers that compete
with each other and provide the same functions should have the same
contribution responsibilities. This means that cable modem providers
and other information service providers that provide their own
transmission should contribute, just as ILECs presently contribute for
their transmission role in providing Internet access. This also means
that wireless carriers need to be assessed on a fairer basis than even
the ``modified safe harbor'' adopted by the Commission last year.
More specifically, in reassessing who must contribute to the Fund,
Congress should insist that interexchange carriers, Internet access
providers, wireless carriers, bundled service providers, payphone
providers, dial-around services, and IP telephony providers, as well as
local exchange carriers all contribute to the USF. Broadband service
providers, whether considered information service providers or
telecommunications service providers, also should be included as
supporters of universal service. Finding an equitable way of assessing
contributions to universal service support on carriers, and--as I just
discussed--broadening the base of contributors to universal service are
significant issues the FCC needs to resolve to make universal service
support funding sustainable.
universal service is good public policy for america
The high-cost component of the universal service program handles
approximately $3.3 billion in annual carrier-to-carrier support
transactions, which represents slightly more than half the amount that
is channeled through the overall fund each year. The high-cost
component is a ``safetynet'' of sorts for rural carriers and their
subscribers, but it is also a tool to ensure that all Americans enjoy
the benefits and security of a nationwide integrated network. Congress
and successive administrations have wisely recognized the value of this
component of the program and now, above all else, need to take steps to
ensure its ongoing ability to function according to statutory intent.
The high-cost element of the Fund is used to build
telecommunications ``platform'' infrastructure. Without a
telecommunications platform, our schools and libraries, rural health
care, and lifeline and linkup programs, and millions of rural
Americans, have nothing. Modern telecommunications infrastructure in
rural America enables diversity of education, health, and other social
services comparable to those in urban areas.
Our nation's first priority for rural areas should be to provide a
stable environment for continued telecommunications investment. One of
the most important ways rural Americans have benefited from universal
service is that it has sustained a telecommunications commitment to
rural communities for decades. ``Rural telephone companies,'' as
defined in the 1996 Act, have become an integral part of rural
communities throughout America and have remained economically viable in
these high-cost areas due, in large part, to strong universal service
policy.
In sum, a strong universal service policy is still needed today to
ensure a stable environment that encourages continued
telecommunications investment in rural America. Incumbent rural
telephone companies have met the challenge of deploying
telecommunications infrastructure in high-cost rural areas. With a
strong universal service policy, they can continue to help rural
communities and rural Americans realize diversity of education,
improved health and other social services, and economic development
through modern telecommunications.
Mr. Upton. Thank you very much.
Mr. Stanton?
STATEMENT OF JOHN STANTON
Mr. Stanton. Thank you, Mr. Chairman. The burden and luxury
of being the final speaker of a large panel is that I have the
opportunity to make some of my comments responsive and the
burden and responsibility to attempt to be brief.
The wireless industry celebrates its 20th birthday, the
anniversary of the first customer becoming a wireless customer
in Chicago, Illinois in October. So in October 1983, our
industry was born. In that time, the industry has grown to the
point that roughly 55 percent of Americans now have a wireless
phone. The industry's revenues in total now exceed as of 2003
the total revenues of the local exchange business in the United
States. So the wireless business on that basis has become the
largest part of the telecom industry.
Wireless is fundamentally the best way to provide services
in rural areas from an economic point of view. In areas with
population densities below ten people per square mile, in most
exchanges, wireless can provide service more efficiently and
more economically over the long term.
Western Wireless, the company that I founded in 1994,
provides services to approximately 800,000 square miles of
territories. We built the 1,500 sites that we offer in the 9
years that the company has been in existence in addition to
some sites that were built by predecessor companies that we
operated.
We have managed during that time to also build systems that
are relied upon by our 1.25 million customers as their
primarily telecommunications device. Our company has been a
leader in terms of building systems that we believe can be
responsive to consumer needs.
About 5 years ago, in the Antelope Valley of Nevada, no
telephone service, wired or wireless, was available. We in an
agreement with PacBell and with the Nevada Public Service
Commission agreed to build a wireless system that literally
represented the first form of any telecommunications services
that was available in that community.
Two years later, in Regent, North Dakota, we introduced the
first competitive wireless service, providing services directly
competitive with the local exchange carrier. Two weeks later,
the local exchange carrier that we connected with cutoff our
access to the public switch network by cutting off our switch,
which was restored only a few weeks later. The challenge for us
has been we operate in an intensely competitive environment,
but we have also done I think the right thing.
In the Pine Ridge Indian Reservation in South Dakota, we
have introduced services about 3 years ago on Election Day
2000. And in doing so, we now have majority market share in
that market because we have been willing to commit substantial
investment and we have been able to grow that business.
Earlier this month, we introduced a wireless data service.
And while not directly a result of universal service monies,
our ability to build a voice-grade system enabled us, then, to
layer on top of that data services. The two little girls in
this picture had their first opportunity to interact with the
internet via a wireless connection and their only opportunity
to interact with the internet via that wireless connection.
New services are possible because of universal service. Our
company began attempting to get certified as an eligible
telecommunications carrier roughly 5 years ago. And I can
guarantee you that commissioners such as Chairman Rowe and
Commissioner Gregg as well as the other commissioners across
the country have been rigorous in examining the applications of
wireless carriers. It has taken us a total of 5 years to get
certified in 13 of the 14 States in which we have applied.
We have as a result of that and in reliance on the
understanding that we were going to be able to access the
universal service monies invested approximately $500 million,
extending our coverage and expanding our services into rural
areas. That commitment, doubling the total property, plant, and
equipment that the company operated, was a direct result and in
reliance on our understanding of the new rules promulgated by
the 1996 act.
The 1996 act effectively allowed new players to enter the
market. It also allowed new players or players that were in the
market to contribute effectively to the fund. Commissioner
Gregg cited the increase in the fund from $1.8 billion to $6.1
billion. Nearly 40 percent of those monies come from the
wireless industry.
In fact, between 2002 and 2003, the amounts of monies that
the wireless carriers will pay into the fund increased from
$900 million to $1.8 billion. And, in total, wireless carriers
now contribute approximately 30 percent of the money going into
the funds. And, yet, even with an increase recently in amounts
coming out, our payments coming out of the fund represent less
than 2 percent of the fund's total. So we pay in 30 percent,
and we take out 2 percent, despite the fact that companies like
my own make substantial commitments to rural areas.
The core issue is, do you support competition in rural
areas? Competition benefits rural customers. It disciplines all
of the operators within the market. And it guarantees the
ability of customers to get better services in rural areas than
they would otherwise.
Thank you, Mr. Chairman.
[The prepared statement of John Stanton follows:]
Prepared Statement of John Stanton, Chairman, Director & Chief
Executive Officer, Western Wireless Corporation
Mr. Chairman and members of the Committee, I commend you and your
colleagues for conducting this hearing to examine the critically
important issue of the future of universal service. I especially
appreciate this opportunity given to Western Wireless to address a
subject--universal service--that is not only of great interest to this
committee, but also is a subject that runs to the core of the company I
founded in 1994.
Western Wireless provides wireless telecommunications services in
19 western states with a focus on serving the telecommunications needs
of rural consumers. Over the years, wireless service has become
essential to a growing number of Americans who are increasingly using
wireless service for their basic and advanced telecommunications needs.
In urban areas, wireless and wireline carriers compete with one another
based upon their costs of providing service, which has resulted in
intermodal competition to the benefit of consumers. In rural areas,
however, wireline carriers have historically received an exclusive
subsidy, called universal service, that has provided the incumbent
local exchange carriers a decisive advantage over their only potential
competitors--wireless carriers.
In 1996, Congress adopted sweeping changes to the
telecommunications landscape by introducing competition into the local
market, including the universal service market. Now, for the first
time, many rural consumers are realizing the benefits of competition
brought about by the Telecommunications Act of 1996 and the pro-
competitive policies of the Federal Communications Commission.
Coincidently, with competitive carriers' entry into the universal
service market, incumbent local exchange carriers have cried foul,
attempting to reverse the 1996 Act's pro-competitive promises for rural
consumers and restore their monopoly power over the local market.
Congress' vision for universal service, which I share, is that it
is an evolving set of services based upon consumer preferences. In
rural and urban areas alike, consumers increasingly prefer wireless
service over wireline service for their communications needs. The FCC
and state commissions have recognized this trend and have concluded
that the public interest is served by designating wireless carriers as
eligible for universal service support. So, instead of talking about
competition brought about by the competitive local exchange carriers
(``CLECs''), we find ourselves here today talking about one of the
bigger successes of the 1996 Act and that is universal service and the
fact that rural consumers are, for the first time, beginning to
experience the benefits of a competitive local telecommunications
market.
In this testimony, I explain that: (i) wireless communications
serves the needs of rural consumers; (ii) a competitive universal
service system allows rural consumers to realize the benefits of a
competitive market; and (iii) Congress should continue its oversight of
the emerging competitive universal service market to ensure that rural
consumers remain the primary beneficiary of efforts to reform the
system.
wireless serves the needs of rural consumers
Western Wireless provides cellular telephone service in 19 western
states, including on more than 85 Indian reservations and American
Indian communities. The Company is the second largest wireless carrier
in the country based upon geography served, covering approximately 25
percent of the continental U.S. with an average population density of
approximately eleven people per square mile. Western Wireless serves
many areas that do not have access to basic telephone service, much
less advanced telecommunications services.
Western Wireless has a long history of providing service to
unserved and underserved consumers. In 1994, through a unique
arrangement with the Nevada Public Utilities Commission and the
incumbent local exchange carrier, Western Wireless began providing
wireless local loop service to small businesses and residential
consumers in a remote area of Nevada that did not have access to
wireline local telephone service. In 1999, Western Wireless began
offering wireless local loop service in Senator Dorgan's hometown of
Regent, a community of less than 300 people, which was one of the first
competitive local telephone service offerings in rural America,
resulting in the availability of new and innovative services to
consumers for the first time. In August 2000, Western Wireless took
another step towards serving the telecommunications needs of consumers
living in some of the more rural areas of the U.S. by entering into a
historic agreement called Tate Woglaka (Talking Wind) with the Oglala
Lakota Tribe on the Pine Ridge reservation, resulting in many tribal
members having access to basic telephone service, including emergency
9-1-1 service, for the first time. And more recently, Western Wireless
embarked upon an effort to more broadly bring the benefits of
competition to the local telephone market in rural America. The
centerpiece of this effort was the Company's petitions seeking
designation as an Eligible Telecommunications Carrier (ETC) for
purposes of universal service support. Today, Western Wireless is an
ETC for purposes of universal service support in 14 states, plus the
Pine Ridge Indian reservation in South Dakota, and has emerged as the
preeminent competitive universal service provider in the United States.
a competitive universal service system
It has been a national policy since 1934 to make available to all
Americans, regardless of the location of their residence, affordable
telecommunications services. In too many cases, rural areas have been
effectively excluded from the benefits of a competitive
telecommunications market because incumbent local telephone companies
have historically monopolized access to universal service support
necessary to provide affordable telecommunications services in these
rural, high-cost areas. The 1996 Act changed all of that and now,
through a competitive universal service system, rural consumers are
beginning to realize the benefits of competition.
Many consumers are using mobile wireless service in lieu of
wireline as their primary mode of communications. Wireless service has
emerged as a fully robust competitor to traditional wireline telephone
service. Survey results and other data reveal a strong willingness by a
substantial number of consumers to substitute wireless service for
wireline telephony. For example, a recent study by Ernst & Young and
PriMetrica Research Survey confirms the growing displacement of primary
lines by wireless service. The study surveyed 700 households and found
that:
Close to one-half of households would drop their wireline service for
a family share wireless plan with 600 shared base minutes
offered at $50 per month.
Roughly one-third of US households would drop their wireline service
for a family share wireless plan with 2000 shared base minutes
offered at $130 per month.
Not surprisingly, households that currently have wireless service
expressed a greater willingness to drop their wireline service
than households that do not have any wireless service.
Survey data focusing on consumers in rural areas shows similar
results. Western Wats, an independent consultant, completed a survey in
February 2003 that provides what may be the best, most current insight
into the needs and preferences of rural consumers. The survey asked
1,000 rural residents within Western Wireless' territory about their
use of wireless phones. The survey found that of the rural consumers
who had wireless service:
50% stated that their wireless phone has become more important to
them, while their landline phone has become less important;
51% said that wireless service has replaced some or a large
percentage of their home landline service;
48% reported that wireless service has replaced 90% or more of their
landline long distance;
Nearly 25% reported that they consider their wireless phone to be
their primary phone; and
Approximately 65% reported that they have friends or family members
whom they contact primarily on their wireless phone.
These surveys confirm that wireless service is essential to a
growing number of Americans, many of whom are substituting wireless for
wireline service. This fundamental change, which is occurring in rural
areas, as well as in urban areas, reflects the ``will'' of consumers,
which must be recognized by government policies that are competitively
and technologically neutral. The universal service system as
implemented by the FCC is a good example of a competitively and
technologically neutral policy that has enabled rural consumers to
realize the benefits of competition envisioned by the 1996 Act.
Consumers will likely increasingly ``cut the cord'' implement
services, like local number portability and enhanced 9-1-1 services,
that further blur the lines between wireline and wireless service. To
this end, Western Wireless is in the process of sending bona fide
requests for number portability to many of the wireline and wireless
carriers within its markets.
Competition is the means by which rural consumers can obtain
service reasonably comparable to those services provided in urban
areas. Over the last few years, as competition has developed in the
universal service market, it has become clear that competition
preserves and advances universal service by:
(1) Making service available in areas previously unserved by incumbent
carriers. As many state commissions know, there are numerous
areas within rural states where consumers do not have access to
affordable landline service. On the Pine Ridge Indian
reservation, Western Wireless' competitive universal service
offering has made telephone service available to many tribal
members for the first time, resulting in dramatic increases in
telephone penetration rates. In Reese River Valley, Nevada,
Western Wireless has provided telephone service for the last 10
years to residents not served by the landline carrier. In
Montana, Western Wireless serves many rural consumers that do
not have access to landline telephone service. All of these
examples demonstrate how universal service is advanced by
competition.
(2) Providing new and innovative services that are reasonably
comparable to those services provided in urban areas. Western
Wireless' entry into the local telephone market has not only
resulted in new and innovative services being available to
rural consumers, but has also forced the incumbent carrier to
offer better service. For example, in Regent, North Dakota,
after Western Wireless entered the market and began offering
new services previously unavailable, the incumbent carrier
responded by offering an expanded local calling area, lower
rates, and data services.
(3) Facilitating access to advanced services. Many rural areas do not
have access to advanced services and are unlikely to be served
in the future by landline carriers due to wireline limitations.
Competition provides the only hope to bridge this ``digital
divide.'' Recently, Western Wireless demonstrated the
capabilities of wireless service to bridge the digital divide
in the small rural town of Terry, Montana, where the Company
deployed advanced high-speed digital technology with the
capability to offer data speeds of up to 140 Kbps.
a. The establishment of a competitive universal service market, and
specifically Western Wireless' provision of universal
service on the Pine Ridge Indian reservation, is also
bridging the ``digital divide'' in rural America. In
September 2003, Western Wireless introduced high-speed data
services on the Pine Ridge Indian reservation through the
implementation of next generation digital technology and
the donation of 22 laptop computers capable of internet
access at speeds up to 140 Kbps. Western Wireless' ability
to provide advanced telecommunications services on the Pine
Ridge Indian reservation and other rural areas are
dependent upon high-quality network facilities in rural
areas, which, in turn, is largely dependent upon the
availability of universal service support.
State Commissions and the FCC agree that a competitive universal
service system benefits rural consumers. There is near unanimous
agreement among policymakers that the public interest is served by a
competitive universal service system. Specifically:
The Minnesota commission acknowledged that Congress and the Minnesota
Legislature were ``deeply committed to opening local markets to
competition,'' but that it was responsible under Section
214(e)(2) to determine on a case-by-case basis whether some
rural telephone company areas could not sustain or benefit from
competition. The state commission first looked to whether
Western Wireless' designation would benefit consumers in rural
Minnesota, and determined that Western Wireless would bring
reliability, high service quality, affordability, customer
choice and new and innovative services.
The Kansas Commission stated that the clear and unmistakable public
policy imperative from both the federal and state legislatures
is that competition is a goal, even in rural areas. Arguments
were made that competition is not in the public interest in any
rural telephone company service area because it may jeopardize
universal service. However, the commission concluded that no
articulable facts had been presented to reach the broad
conclusion that competition and universal service are never
able to exist together in rural areas. The Commission did not
accept the assertion that designating additional ETCs in rural
areas will necessarily threaten universal service. The
commission found that the benefits of competition and customer
choice should be available to Kansans living in non-rural areas
and that general concerns and speculation are not sufficient
justification for adopting a policy that would result in
benefits and services that are available to other Kansans not
also being available to rural telephone customers. The
Commission concluded that the rural telephone companies did not
demonstrate any adverse impacts and that competition should not
be withheld from customers in rural areas.
The Nebraska Commission concluded ``the public interest requirement
for designation of an ETC in rural areas is not meant as a
protective barrier for rural telephone companies but rather as
a method for ensuring that rural areas receive the same
benefits from competition as their urban neighbors.''
The South Dakota Commission found that Western Wireless' provision of
``universal service throughout the study areas will be
beneficial to the public.''
The North Dakota Commission summed things up this way: ``The
Commission finds that designating Western as an additional ETC
in the study area of each rural telephone company will advance
universal service by bringing new telecommunications services
to North Dakota consumers, by bringing competitive choice for
universal services to residential customers, by offering a
highly reliable and top quality universal service offering, and
by providing cost effective means for customers in remote areas
to acquire universal services.''
The Texas Public Utilities Commission said in 2000, when designating
Western Wireless as an ETC: ``[T]he Commission is unwavering in
its support of a simple proposition: Rural Texans are not
second class citizens and should not be deprived of competitive
alternatives or access to new technologies.''
congress should continue its oversight of the emerging competitive
universal service market.
Congress and this Subcommittee in particular should continue its
oversight over the development of a competitive universal service
market to ensure that rural consumers continue to be the primary
beneficiary of universal service policies. To this end, I suggest the
following:
1. Create A Stable, Sustainable Universal Service Funding Mechanism
By Ensuring Adequate Funds Are Available To Preserve And Advance
Universal Service. Until universal service evolves to a market-based
solution for providing telephone service to rural America, any support
provided to rural areas must be distributed on an equitable, non-
discriminatory basis to both incumbents and competitive carriers.
Federal legislation may be necessary to provide the FCC with the
authority to base universal service contributions upon a broad range of
revenue sources to ensure a stable, sustainable universal service
funding mechanism. At the same time, universal service support to
carriers must be based upon the most efficient technology for providing
service.
2. As Consumers' Telecommunications Needs Evolve, The Universal
Service Policy of the U.S. Needs To Reflect Consumers' Increasing
Reliance On Wireless Services. The focus of any universal service
policy should be the consumer. Wireless service has emerged as a fully
robust competitor to wireline telephony, resulting in many rural
customers ``cutting the cord'' and other consumers using wireless as a
substitute for wireline usage or additional lines. Competitive Eligible
Telecommunications Carriers (``CETCs''), including wireless CETCs, use
high cost support to serve unserved and underserved areas, thereby
``advancing'' universal service.
3. Universal service policies must be competitively-neutral. It has
been a national policy since 1934 to make available to all Americans,
regardless of the location of their residence, affordable
telecommunications services. All too often, however, rural areas have
been effectively excluded from the benefits of a competitive
telecommunications market because incumbent local telephone companies
have historically monopolized access to universal service support
necessary to provide affordable telecommunications services in these
rural, high-cost areas. Clearly, a competitive carrier that does not
have access to universal service funds would not choose to enter the
local market and compete with incumbent carriers who do have access to
universal service support. I89CONCLUSION
The competitive universal service system is working: rural
consumers are gaining access to services previously reserved to their
urban counterparts. Rural consumers today have begun to realize the
vision of the 1996 Act's pro-competitive mandates, including those that
apply to the universal service market. Wireless service provides the
only real option for rural consumers to bridge the ``geographic
divide'' and fully participate in our global economy. A competitive
universal service market is a success because of the progressive
thinking of Congress and pro-competitive policies of the FCC and state
commissions. Congress should continue to oversee the development of
universal service in the United States and take action, as necessary,
to further develop the emerging competitive universal service market.
Mr. Upton. Thank you all very much.
Again, I apologize that the votes interrupted it in the
middle. At this point, we are going to alternate between the
Republican and Democrat side asking questions of 5 minutes
each. And we'll move in the order that members appeared and
their seniority, knowing full well that a couple of members
have an extra 3 minutes for those that deferred their opening
statements.
I would like to focus my time on the eligible
telecommunications carrier, ETC, issue. Ms. Shank, in your
testimony, you suggested that there was a ``Lax state in
Federal Communications Commission consideration of what
constitutes the public interest when granting ETC status to
competitors.'' I would like to have a little better picture of
what that means and the implication of such lax considerations.
What are they for rural ILECs and universal service funding in
general?
Ms. Shank. In public interest, I feel that small telephone
companies are regulated. We have demands to meet. We have
quality of service. And I think the public interest people want
those things. It doesn't matter where somebody builds a new
house or what. We're there to provide service to them.
What is happening is our wireless is coming into our area
and not that that is all bad, but the problem is you get two
and three of them coming in a small area like Bloomingdale
Telephone Company if they're all pulling on it. It does affect
it very much.
Our public interest people, I think that they so need the
network that we set up years ago. And they have an interest in
being able to always know they can rely on telephone service.
And if you look back when we have bad things happen, like in
New York and everything, where those systems of wireless and
everything didn't work, you saw lines of people at pay
stations. So I think public interest still has a desire to
continue with a good strong network in the United States.
Mr. Upton. Commissioner Abernathy, how would you respond to
the suggestion that there is a lax state in FCC consideration
of what constitutes the public interest?
Ms. Abernathy. I guess I would respond by saying one of the
reasons that the FCC referred the ETC issue over to the joint
board was a recognition that we need to make this process
better. And there are some improvements that can be made.
Most of the parties who responded in response to the whole
joint board process on either side of this issue have said that
it would be very beneficial to have more concrete guidance from
the FCC about what it takes to be designated and guidelines for
being designated as an ETC because at the end of the day, there
has to be a public interest analysis associated with it.
Some of the concerns have been that because funds continue
to run to both the wire line provider as well as the new ETC,
that there may be no incentive to really do a public interest
analysis because no harm, no foul. You're not going to lose any
support.
So I think at the end of the day, this is one of the major
areas that we're looking at as the joint board. And we can do
better.
Mr. Upton. What do you think with regard to Mr. Stanton's
comment that the wireless industry contributes 30 percent and,
yet, receives only about 2 percent of the fund?
Ms. Abernathy. I think that that really goes to the
question of when you're contributing to the fund, is there any
obligation to then receive support from the fund? And the
answer pretty much is no because the way it works is all
telecom carriers contribute and not all qualify for funding.
Now, again, at the end of the day, as we all know, it's
passed through to consumers. And so what we're really looking
at is our consumers contributing fairly and equitably. And are
we distributing it in a way that there is no arbitrage between
the various industries?
I do agree with Mr. Stanton that wireless has been of
tremendous benefit to rural America, no question in my mind. So
what we are deliberating about is at what point does a company
that is lightly regulated and has done a fabulous job in rural
America, when they then come to the government and say, ``And
now I would like to be able to receive some subsidy support,''
what are the bells and whistles? What are the obligations that
go along with receiving that subsidy?
As long as they're out there providing service
competitively with their own capital investment, we pretty much
do leave them alone, but I think there are some obligations
that necessarily go along with being qualified to receive
government subsidies.
Mr. Upton. Ms. Shank, what are some of your obligations as
the carrier of last resort? How do those requirements compare
to the obligations of carriers serving the same areas? And how
should the fact that a rural ILEC is the carrier of a last
resort factor into whether a competitive carrier should be
designated as an ETC in the same area?
Ms. Shank. No. 1, we're regulated. We have to provide
service to whoever comes in there. We are regulated by billing
standards. We are regulated by the rates we charge and all of
those things. And, as a last resort provider, there is never a
question. When somebody applies in our service, they are
provided with service.
You have some of the other competitors coming in. In all
areas, it doesn't always work either in our exchange. So people
cannot depend on that. As a last resort, they depend on us to
provide that service. And we're there under regulations to
provide it and will provide service to each and every customer
living in our exchange.
Mr. Upton. I see my time has expired. Mr. Gordon?
Mr. Gordon. Thank you.
Mrs. Greene, in Tennessee, you're not only regulated by the
FCC but also by what we call the Tennessee Public Service
Commission. And so with that, there are implicit and explicit
additional charges for universal service. What are some of the
issues we are concerned with as we look at this about the
relationship between the FCC and various State universal
service regulations?
Mrs. Greene. You are correct that we are regulated by the
Tennessee regulatory authority. And what we have right now is
really a situation where we have conflicting theoretical
schemes that have been layered on top of each other that have
the potential to do a lot of damage to the incumbent local
exchange industry.
We have a social pricing program that is imposed by States,
all the States, like the Tennessee commission. And in that
social pricing program, we have a history of pricing
regulations that have business subsidizing residential and
urban subsidizing rural.
When you take that and you overlay it with a pro-
competitive plan that is enforced by the FCC that not only
creates our wholesale business but makes us price that
wholesale business at a deeply discounted rate you then have a
series of interlocking implicit subsidies that really don't
work anymore. If those implicit subsidies were made explicit,
the size of the universal service fund would just really
explode.
Mr. Gordon. So what do we need to do about that?
Mrs. Greene. Well, first of all, I think we need to breathe
life into a couple of things that were required by the 1996 act
that have not yet been implemented.
The 1996 act had three basic goals. One was to create
competition. And it has been very successful at that. In our
service territory alone, in our nine States, we have on any
given day between 350 and 385 competitors just in the wire line
space. So it's been very successful in creating competition.
The other two premises of the act were, first of all, to
make implicit subsidies explicit. The State public service
commissions have not stepped up to the plate either by creating
State universal service funds or by allowing rates to rise to
their natural level with some sort of protections about
comparably affordable services between urban and rural areas.
But, in addition to that, a final goal of the
Telecommunications Act was to encourage deregulation and to
allow marketplace competition to supplant command and control
regulation. That has not happened at all. And, in fact, today
what you have is both at the State and Federal level more
regulation than we have had at any time in our history.
Mr. Gordon. Ms. Abernathy, as we look at this, what are
your concerns in terms of the State issues versus the FCC and
that interrelation?
Ms. Abernathy. Actually, it's something that we addressed
as a joint board when we were dealing with this whole non-rural
support mechanism. And one of the major issues that came up
there was given that we generally look at Statewide average
costs per line for non-rural carriers and then we compare that
to a Nationwide benchmark, how do you, nevertheless, ensure
that support is sufficient and that the rates are reasonably
comparable?
What we have done historically is that we presume that if
they're within 135 percent of the Nationwide average, that the
States are in a position to make sure that urban and rural
rates are reasonably comparable because you spread the rates
across your low-cost customers and your high-cost customers.
That's been the interaction with the States.
What we did as a joint board is we then said, ``Okay. In
addition, as another safety mechanism, to the extent that you
still may not have reasonably comparable rates for various
reasons within a State, then''--this is the recommendation
again from the joint board--``you can come back either to the
FCC, to the Nationwide USF, or to a State USF and ask for
additional funding dollars providing the documentation about
why you're unable to keep your rates at comparable levels for
between urban and rural customers.''
The reason this approach has been historically taken was
the belief that while rural carriers aren't able to absorb any
of these high costs themselves and so, therefore, they qualify
based on their own costs, that with the larger carriers, such
as the incumbent BOCs, that they are able to engage in this
shifting of burdens between high and low-cost customers.
Mr. Gordon. And then where that does leave us with a so-
called level playing field?
Ms. Abernathy. Well, where that leaves us is at the end of
the day, customers are fine under the current approach. The
real question is, is it unfair to the carriers, the larger
carriers, who now face competition for their lower-cost
customers that traditionally have been absorbing some of the
costs of the higher-cost customers?
So now you're really engaged in a debate about, is this the
best way to manage the USF? Is it fair to the carriers who are
now facing competition? Can they continue to be able to balance
off these costs between high and low-cost customers?
Necessarily, if we change this method, you will drive up
the size of the fund explicitly because you won't have large
companies any more that are doing this for you within their own
customer base.
Mr. Gordon. Thank you, Mr. Chairman.
Mr. Whitfield. Mr. Terry is recognized for 5 minutes.
Mr. Terry. Thank you. I appreciate that. I had a statement,
but I appreciate the effort.
With that, let me just start off by saying that this has
been a fairly decent hearing and I have appreciated listening.
I think we could have had more diverse opinions up here, but I
will get into that later. Certainly I think one of the issues
that anyone listening to the testimony here would take is just
how complicated universal service is and will become when we
factor in new technologies.
And just down on the far end at my left, it was an
interesting discussion between Western Wireless and
Bloomingdale Telephone Company. And one that is raging within
my own State back home is the role of wireless in universal
service fund in rural areas. And it really begs the question,
and I think it forces us to have to go back and say, ``Hey,
what is universal fund? What is the purpose of it? How are we
going to define it because times have changed? Do we need to
modernize it or is it simply going to be that every residence
for safety purposes should have one line into their house?''
It's going to take a Herculean effort to modernize universal
service fund. And I'm certainly willing to participate in that.
In fact, I have mentioned to Chairman Upton on a couple of
times that I think we should put together a very diverse but
controlled, not controlled in the sense that we control the
outcomes but certainly if you have a 40-member panel versus a
10-member panel, you could probably get more accomplished with
the smaller, but I think we should put together a panel of
diverse views and have discussions amongst those and really
figure out new and unique ways to do it.
It's just been my year now that I dove into the universal
service fund. I see that there are a variety of different ways
to fix this. And I just think we need a total fix. I am just
not very confident that will ever come about.
I mean, even if we could put together an effort, I am just
not sure that with all the interests that have just been
displayed here today, that we are ever going to get there. So
let me lay down the second premise here.
We are all in it for our own. Okay? I am representing a
State that I feel is getting screwed right now, to put it
bluntly. And that is why I have been so emphatic regarding the
high-cost non-rural fund and its distribution.
It just baffles me when we have six counties in the State
of Nebraska that rank as the poorest in the Nation, when we
have counties like Cherry County that are larger than two
States and have 800 people in it, in that county, that we can't
qualify for that fund. And I see States that are listed here
that are just as rural, the Dakotas, for example, that don't
share in this high-cost fund. And so there seems to be
something inherently wrong.
And since the FCC adopted this, Ms. Abernathy, you are
going to get some of my questions here. Now, just as a member
of the commissioners, are you aware of this discrepancy in
distribution in the high-cost non-rural fund?
For example, my State that pays into this, that's a rural
State but doesn't receive anything out of it. Is this something
that the FCC is aware of or you are aware of personally?
Ms. Abernathy. I'm personally well-aware of it, thanks to
having spent some time with you and your staff. And I do
appreciate the discussions we have had because this is very
complex.
What I had always focused on before this point was the USF
funds that flow to Nebraska and South Dakota and North Dakota,
Wyoming, Utah. And they're net receiver States. So I had always
looked at, as a rural State, are you receiving the U.S.
dollars? Are you paying in but getting more than you pay in?
And the answer is yes, to the tune of around $8 million,
sometimes $20 million.
What I had never stepped back and said, ``But what about
the non-rural carrier within that State? Are they able to
continue to balance rates between rural and urban without any
USF support?'' Again, historically what has been done is to
say, ``Larger carriers, you do that balancing within the State.
And then at the back end, if you need more support, we give it
to you.''
But it has been an obligation placed on the larger
carriers. So all the rural carriers within your State, you
know, they're receiving the payments. The non-rural, the large
carrier, which would bequest, yes, they are expected to absorb
some of this. And is that methodology sustainable given
competition?
Mr. Terry. Let me ask the follow-up in there. Do you feel
that that methodology, the current methodology, is----
Mr. Whitfield. Mr. Terry, your time has expired, but----
Mr. Terry. Will you yield me your time?
Mr. Whitfield. I'm sure when the chairman gets back, he may
do another round.
Mr. Terry. I will do the second.
Mr. Whitfield. Mr. Markey is recognized for 5 minutes.
Mr. Markey. Thank you, Mr. Chairman.
Looking ahead, it is now clear to almost everyone that the
current universal service policy's days are numbered. The
clamor for additional funds keeps growing. Meanwhile, the
traditional interstate revenue base for providing such funds
continues to hemorrhage. That's because so-called long distance
service is increasingly becoming conjoined with flat rate local
and long distance packages for both wireless and wire line
service. In addition, there will be an inevitable and in my
view rapidly accelerating migration from circuit switch
telecommunications services to nontraditional internet
protocol-based telecommunications services.
So, Ms. Greene, you are from BellSouth. Are you any
relation to Judge Harold Greene, who broke up the Bell system?
Mrs. Greene. Actually, I got hired right after the breakup
of the Bell system, and I had a lot of people at BellSouth ask
me that. They really weren't very nice to me until I answered
it. But no, sir, I am not.
Mr. Markey. You claim no relationship? I didn't think so.
Do you believe, Ms. Greene, given the sweeping nature of
the change in the marketplace that the FCC and the States
should nickel and dime some minor adjustments to current
formulas for collecting universal service and continue to
monitor IP telephony and other issues or do we need a more
comprehensive revamping of how such fees are collected and
distributed?
Mrs. Greene. Yes, sir. I think we need a comprehensive
overview of the fund. We need a comprehensive view of who
contributes. And we also need to look at the distribution of
the fund. So no, I don't believe nickel and diming is correct.
We do need a comprehensive overview.
Mr. Markey. Mr. Lubin, could you give me your quick view on
that?
Mr. Lubin. Yes. I have a tremendous sense of urgency. I
think the universal service mechanism is broken. I think the
assessment rate today of 9.5 next year will exceed 10 percent.
I think it's only going to get worse. And I urge----
Mr. Markey. Comprehensive?
Mr. Lubin. Comprehensive.
Mr. Markey. A re-looking of the whole system?
Mr. Lubin. Correct.
Mr. Markey. Okay. Thank you. Thank you both for your
questions.
Let me yield the balance of my time to the gentleman from
Michigan, Mr. Stupak, which he can use in addition to his own
time.
Mr. Stupak. I appreciate the gentleman yielding.
Commissioner Abernathy, I understand that the commission is
completing its review of the support mechanism for non-rural
carriers. As you know, representative Terry and I have H.R.
1582. Will the commission in its review of this fund be
providing comment on our legislation as well?
Ms. Abernathy. At this point, I haven't seen a draft item
from the bureau. As far as I know, there was nothing in the
record comparing the legislation. So to the best of my
knowledge, we will not, but I will certainly give you better
information as we get more information from the bureau.
Mr. Stupak. Okay. In your testimony, you were talking a
little bit about intrastate. What is the reason that intrastate
revenues were not included in the contribution methodology? And
it would seem to me that there is not a strong objection among
the stakeholders regarding including intrastate revenues. Won't
that at least provide some measure of relief?
Ms. Abernathy. Is the question, would it help us if we are
able to effect both interstate and intrastate?
Mr. Stupak. Yes.
Ms. Abernathy. Absolutely. It makes a huge difference for a
couple of reasons.
Mr. Stupak. Why wasn't it included initially, then?
Ms. Abernathy. By Congress?
Mr. Stupak. By Congress.
Ms. Abernathy. Well, I don't know, but I think there was
some belief----
Mr. Stupak. There was----
Ms. Abernathy. [continuing] originally that we could.
Mr. Stupak. Yes.
Ms. Abernathy. And then the case went up on appeal and the
court said we couldn't. So it may very well be that Congress
thought that we were able to assess.
Mr. Stupak. Okay. Mr. Lubin, yesterday several
organizations put out an ad in the Washington Post--I think
they were AARP, Rainbow Push, National Grange--urging the FCC
to maintain a revenue based universal service funding system.
They also sharply criticized a connections-based system, such
as the one that you have proposed, claiming that it will
unfairly burden low-income customers. Could you respond to that
comment or criticism?
Mr. Lubin. Yes. From our point of view, first of all, we
supported the telephone number approach, which is similar to a
connection-based approach. Our belief is that absolutely does
not harm low-income individuals. In fact, what we suggest the
commission might consider is to exempt people who are on
lifeline programs. So people who are on life line programs
would not pay the dollar.
But I would like to go even one step further. Every time we
have looked at the data, people who are considered low-volume,
which was the other point that they raised in that article,
that low-volume, there really is no correlation usage and
people with ethnicity or age or income. In fact, what you find
are people who have low usage follow the whole demographic
spectrum. Conversely, people who are low-income at various
points in time could be high-usage toll users.
So we think, actually, a connections-based or a numbers-
based, which we put forward, creates simplicity, stability. The
customer knows exactly what they are going to be paying every
month.
Mr. Stupak. I guess my time is up, Mr. Chairman. I will
look for my opportunity to ask questions later.
Mr. Upton. Thank you.
Mr. Walden? And you get the extra bonus of 3 minutes.
Mr. Walden. The bonus points. Thank you, Mr. Chairman.
Let me go to Commissioner Abernathy. I am trying to get a
better understanding of this high-cost rural area fund. The
``high-cost non-rural fund'' I guess is the term.
I have seen this printout that shows contributions to USF
by State--I am sure you have seen it, too--and then payments
from the USF. I am just trying to figure out why this occurs
the way it does in this particular fund and then how this fund
is related to other funds that make other payments that you
have alluded to.
For example, with all due respect to my friend from
Mississippi, Mississippi gets $104 million and Alabama gets $43
million and West Virginia gets $26 million. And then it's a
couple of million and a bunch of zeros from there on.
Can you explain how we arrive at that and then, anybody on
the panel, too, if that is a fair distribution of funds because
it seems kind of odd----
Ms. Abernathy. Right.
Mr. Walden. [continuing] unless you're from Mississippi or
Alabama?
Ms. Abernathy. Which I am not. I will explain, and then I
may yield to my colleagues to help with this.
The way it is supposed to work is you look per State at the
number of rural high-cost customers that are entitled to USF.
You then look at the amount of money you're collecting from all
of the customers within the State to support all USF programs.
You then back out all of the revenues that they receive and see
what the total amount is.
So, in theory, the way it should work is that the States
that are receiving the most funds are those that have the
largest number of high-cost rural carriers as----
Mr. Walden. And how is that defined? What is a high-cost
rural carrier?
Ms. Abernathy. High-cost rural carrier. It's based on an
average. You look at Nationwide averages. You calculate whose
costs are above and whose costs are below that benchmark. And
that's how you define who are the high-cost companies. And
then----
Mr. Walden. Is that on a company-wide basis?
Ms. Abernathy. For the rural carriers, it is based on their
cost models that are used to identify their costs. For the non-
rural carriers, the non-rural carriers then end up receiving
support depending upon the volume of high-cost customers they
have versus the volume of low-cost customers they have. And
even if they have numbers of high-cost customers, if the low-
cost customers ultimately drive their overall costs down to
within a Nationwide average, then they won't get that much
support.
But I think I may allow Billy Jack to step in or Bob Rowe.
Mr. Gregg. There are about 185 million land lines in the
United States. And we have rural carriers, which tend to be the
smaller, more rural carriers; and non-rural carriers, which are
the larger carriers, like the regional Bell holding companies.
Mr. Walden. But they may cover a rural area.
Mr. Gregg. Right, but the----
Mr. Walden. As well as an urban area?
Mr. Gregg. Right. And there are only 80 non-rural carriers
in the entire United States, but they serve 90 percent of all
the access lines. There are 1,358 rural study areas that serve
only 10 percent of the access lines.
The non-rural high-cost fund that you have been speaking of
amounts to $240 million a year. That's only 7.2 percent of the
entire high-cost fund. The lion's share of the high-cost fund
goes to these 1,358 rural carriers, $2.5 billion each year.
Eight hundred million total goes to these 80 non-rural
carriers. Two hundred forty is the high-cost model. And that is
the----
Mr. Walden. That's the chart we're looking at?
Mr. Gregg. Right. And it's the distribution of that
support. That $240 million is as she stated. First, you
calculate a National average cost of all of the non-rural
carriers. And that's about $22 per line per month. Then you
apply a benchmark. The benchmark that has been used,
heretofore, is 135 percent. That results in about a $30 per
line per month benchmark.
Any States, any non-rural States, that have costs over that
benchmark, the Federal fund will support 76 percent of that
difference. So you have 8 States that have per line costs per
month above $30. The others are below. There are two that are
very close, Nebraska and South Dakota, to the benchmark.
Depending on what the FCC does with the Tenth Circuit
remand decision, which is due out next month, there may be more
States getting high-cost distribution or less. It just depends
on what they finally come up with.
Mr. Rowe. Mr. Chairman, representative, if I could weigh
in, too? Both your State and my State do receive significant
support in the fund targeted at the small programs. And your
concern, again, is to the large company program.
The FCC's initial decision was appealed to the Tenth
Circuit, was remanded to the FCC. The court said, among other
things, that the commission failed to adequately define terms
``reasonably comparable'' and ``sufficient'' and failed to
explain how the particular mechanism was consistent with the
statutory requirement that urban, underline ``urban,'' and
rural rates and services be reasonably comparable.
That decision was then referred by the FCC to the joint
board. Everyone worked on that in good faith and very
diligently. I was one of the dissenting commissioners and wrote
at length that, in my view, comparing rural and insular costs
to National average costs was not compliant with the statute.
Quoting the former economist for this committee, who went
on to serve on the FCC, we have to, as a first matter, follow
the law. That's, of course, an unusual sentiment coming from an
economist. But in my view, despite good effort and some
progress coming out of the joint board recommendation, we have
not yet followed the law in that very basic way.
Depending on how you determine the urban average cost--and
there are a number of ways that were included in the record
before the joint board--it might be necessary for one of the
large carriers to have average costs of 164 percent of an urban
average up to, using a rural utility service study from several
years ago, 233 percent of the urban average before they would
be eligible for support under the large company program.
As Mr. Gregg pointed out, the large company program
represents a very small portion of the overall universal
service fund, also represents a very small portion even of the
high-cost fund. So this is a critical problem.
If I could, I would add that this has been perceived as a
quest issue. I don't consider it a quest issue, Rather, I would
say, first of all, it's a question about providing sufficient
support for networks that serve all customers.
Second, I think it's of potential concern to competitive
providers, who follow the advice of another good economist,
Willie Sutton, and go where the money is.
Mr. Walden. I have got 4 seconds left. Let me just try and
find out an answer. Do you think, then, that this is a fair
distribution of this $200 million or is it inequitable that the
basis of the $200 million goes to just a handful of States,
including Montana?
Mr. Rowe. Mr. Chairman, representative, in my view, no for
the reasons that I stated in my dissent.
Mr. Walden. All right. Ms. Abernathy?
Ms. Abernathy. In my view, again, so long as rates are
affordable and reasonably comparable across States, then I
think it is fair. And we have managed to make sure that happens
through the support mechanism safeguards we have in place.
Mr. Walden. All right. Thank you very much.
Mr. Upton. Thank you.
Next we will go to the chairman of the full committee, the
chairman from Louisiana, Mr. Tauzin.
Chairman Tauzin. Thank you, Mr. Chairman. And thanks for
conducting this hearing.
To start with, I wasn't here for the opening statements.
And I missed a lot of the questions. I apologize, but we were
working on a Medicare conference. So excuse me.
I would like to take us back a bit. I mean, universal
service fund was based upon a rather simple notion, was it not?
Was it not based upon the notion that we wanted everybody in
the country to be connected so that by homogenizing rates
somewhat in the country, we could make it affordable for
sparsely populated parts of America that should also be part of
the telephone networks? So my phone became more valuable
because more Americans were connected to it. So we all
benefited in a sense.
I mean, that was a simple notion, was it not? It wasn't an
attempt by government to, if you will, socialize telephones as
an economic entity. It was a design to make sure everybody had
a phone. Therefore, all of our phones were valuable to us and
the whole economic network by which our country communicated
would be more valuable as a result. Wasn't that basically it,
anyone? I see no disagreement.
Mr. Gregg. Absolutely. The problem now is, how do we
transition that system that was borne in a monopoly environment
into a newly competitive----
Chairman Tauzin. It's more complex than that. I mean, it
has really become a Rube Goldberg kind of structure where all
of you have been discussing for some time now--I have read a
lot of statements on the background of this. All of you have
been discussing who is paying and who is paying into the system
and who gets money out of it, who should be paying it, and who
should be receiving money, and how they get in one State region
or another, and where the long lines ought to pay more than the
ILECs.
I mean, it has really gotten to be something that the
average American would find extraordinarily difficult to
follow. From the simple notion that we started out with that we
were homogenizing rates in America so that everybody could
afford a phone, we have gone way, way beyond that simple notion
now. And it has gotten to such a complex, difficult
bureaucratic mess that we are literally I think at some point
going to have to re-simplify the system.
Is that basically correct or do you want to make it more
complex? If we are re-simplifying the system and we are facing
the fact that American communication, world communication is
changing, people are going to be making telephone calls on
different systems other than the telephone. They're going to be
making telephone calls on the internet, making telephone calls
on wireless systems and satellite systems that were never
designed as telephone systems. They were data systems or they
were video systems. They've suddenly become all amalgamated in
broadband distributions, what have you. But they are outside of
this system of support, aren't they, today?
So you have got cable companies and other companies that
are going to be distributing video signals. They could be your
utility company, could be your wonderful utility company that
you depend upon for electricity and sometimes leaves you in the
dark. They will be supplying you now with telephone service and
even video signals with it so you can see who you're talking
to. And that's going to be both wonderful and frightening
simultaneously.
So all of that is going to change, but they are outside the
support system today, are they not? And so we face a situation
where the simple notion of homogenizing rates so everybody can
have a phone has now become a system where more and more of the
folks who put into that system are going to be delivering
telephone service without being part of it; and, second, where
the amount of money available to make sure everybody has a
phone is diminishing while demand grows for money under the
system.
So it's sort of like Social Security. I mean, when we
started out with Social Security, there were 15 people working
for every person collecting Social Security. We're down to--
what is it, folks? Aren't we down to about two, two and a half
people, I think, less than three now? We're working to support
every person retired. And it's becoming a stressed system. And
this system is becoming stressed for that reason. Is that about
right? Everybody is shaking their heads.
So the question is, is it time for us to reform this system
so it's simple again, No. 1? And does that mean that we have to
make it a simple proposition, anybody who is providing voice
service by any means has to be part of that system, so that
everybody can benefit from that system mutually the same way
the universal service fund was originally designed, or do we
just scrap the system? Is it outdated? Is it outmoded? Has it
served its usefulness? What is correct here? Which way do we
go?
Mr. Gregg. I believe, Mr. Chairman, since all benefit, all
should contribute. It's a very simple proposition.
Chairman Tauzin. Anyone else?
Mr. Rowe. I believe, Mr. Chairman, on the contribution
side, in particular, both of the leading proposals, either a
number-equivalent assessment or broadening and depending the
revenue base, are very much in the spirit of your suggestion
that we simplify the collection mechanism and, in simplifying
it, reconcile how we collect support much better with how the
market is working, how services are being packaged, and how the
network is evolving.
Chairman Tauzin. Let me give you a warning. I appreciate
anyone who wants to jump in at any time. Come on in. We had
something called a property tax relief system in Louisiana. We
had property tax exemptions for people up to a certain limit.
And then the State paid the counties or the parishes for the
amount of money they lost to support that system.
And parishes started working out gimmicks to cheat on it.
The court finally threw it all out. It got too complex. It got
unfair. People were benefiting unequally under it. And our
Constitution generally says, particularly when it comes to
taxes and government, that we sort of have got to treat people
equally and fairly. And when some people start benefiting and
other people skip out, free from their obligation, sooner or
later, a court is going to step in and throw it all out.
Are we in danger of that with the universal service fund at
some point?
Ms. Abernathy. I think we have a real opportunity to
simplify the collection mechanism here and figure out a better
way to collect the revenues. The biggest challenge, the one you
recognized, is, how do we distribute it and to whom do we
distributed it and who is entitled to it?
Chairman Tauzin. Well, there is one other thing you have
got to think about that we have to think about because it has
been raised by this committee. Mr. Chairman, I know my time has
expired, and I will just lay it on the table for everybody to
think about.
The old notion was everybody should have a telephone. Is
the new notion that everybody should have more than just a
telephone? Is the new notion that we want to make sure that
everybody in rural America has the same advantage in the new
communication structures we're building in this country as
anyone who lives in an urban area? Are we going to have
``haves'' and ``have nots'' in the new broadband world, in
effect? Do we use the universal service fund to make sure that
doesn't happen?
I will yield back, but, Mr. Chairman, maybe somebody wants
to comment.
Mr. Gregg. The act mandates that all customers in all parts
of the Nation, including high-cost areas, have comparable
services, including advance services, at comparable prices. But
our whole task is to make sure that we promote access and not
excess, that we don't go out and support four or five lines per
home when, really, what we are trying to do is have one line to
each home and an affordable line here.
The rest of it should be up to the individual or individual
State if they want to go beyond that. But the Federal universal
service fund should establish a baseline for everybody.
Mr. Post. Two observations. First, I agree with a lot of
the thought process that you articulated in terms of learning
from the last 6 years. And I would hope that we would learn
such that we would define a mechanism that does not distort the
marketplace, that minimizes leakage in the future so that we
don't come back in two or 3 years and find we picked a method
that, in fact, allows leakage.
I would also hope we would find a solution that is
predictable for customers, customer-friendly. And once we
identify what that solution is, we then ask your second
question. And your second question is, what should be funded?
For example, do I want to have wireless infrastructure in rural
America comparable to what I have in urban America? That is a
question which, unfortunately, gets confused today by granting
ETC status, which is supposed to be head-to-head competition.
But it's really not head-to-head competition.
If it is, you look at that question versus if what they're
going to do is upgrade the infrastructure and give two and
three and four connections to a customer's household, I'm not
making a decision whether that is good or bad. What I am
saying, pick a rational mechanism and then ask the question,
what do I want it to fund?
And then the next question you should be asking is, how
much is it going to cost? And is that what I want to see this
new line item to be on everyone's bill? And, all of a sudden,
you would have a very rational, coherent way of looking at the
problem.
Mr. Stanton. Mr. Chairman, I would like to just add. I
think that you are absolutely right. The system needs to be
simplified. What I would, respectfully, disagree with is that
the system is universal service.
Our industry, the wireless industry, is about 20 years old,
almost 20 years old. And we generate as an industry now more
revenues than the local exchange business does. Our industry
now contributes about 30 percent of the monies to the fund and
only takes about 2 percent out. But the bigger issue is not
universal service. It is the continuation of rate of return
regulation of carriers, including the local exchange carriers
when they have competition.
Between Judge Green and the Telecom Act, if we
fundamentally change the system so that competition can replace
regulation where competition exists, universal service is a
small subset of the total. Monies are paid in access charges
that are a part of the total. Rate of return regulation is a
part of the total. Using the most economic technology with
which to provide service to people who can't otherwise get
telephone service, which I believe wireless is, is a part of
the solution.
But you can't just take universal service in isolation. I
think we have suggested to the joint board and the FCC and
would suggest to the Congress that there is a bigger picture
that needs to get simplified. And in the end, competition
replaces the need for regulation.
Mr. Upton. Thank you. The gentleman's time has expired. I
would recognize the gentleman from Michigan, Mr. Stupak, for 5
minutes.
Mr. Stupak. Thank you, Mr. Chairman.
Let me follow up on what the chairman was asking, but let
me ask it this way. Ms. Greene, you don't seem to be a fan of
Representative Terry's and my bill in looking at your testimony
and some of your statements here today. Let me ask you this
question, though. Since places like--what was it?--Mississippi
and West Virginia and some of these others are getting so much
money out of that universal service fund, what service are they
being provided, the simple telephone or with the money that is
coming out of the universal service fund for Mississippi, $103
million last year, do they have all kinds of other services
being added to the rural customers in Mississippi?
Mrs. Greene. Well, the non-rural fund--this kind of goes
back to the conversation that we were having earlier. The non-
rural fund is a very small part of the universal service
overall compensation flow.
Mr. Stupak. Granted, but they did still get $103 million
out of it last year.
Mrs. Greene. Right.
Mr. Stupak. So are they getting just a simple telephone, as
the chairman asked, or are they getting voice, data, and all
the other services with it that are being funded by the rest of
the Nation?
Mrs. Greene. What they are getting is a stipend that
offsets the high cost of providing service in Mississippi.
Mr. Stupak. Understood.
Mrs. Greene. And that is not a function of specific service
that is provided. We do provide advance services to good parts
of Mississippi.
Mr. Stupak. But the services, you're getting this $103
million out of the fund. And with that, you are able to provide
more than just a simple telephone but other services, too,
where Nebraska doesn't get it because they won't get any money
out of the fund or northern Michigan won't receive those added
services because they don't have any money out of the fund?
Mrs. Greene. Well, Nebraska does get about $33 million out
of high-cost universal service funds. They don't get money out
of the non-rural fund.
Mr. Stupak. They don't get any money out of the high-cost
non-rural fund.
Mrs. Greene. Right. And in large part of why Mississippi
and Alabama get the amounts of money that they do----
Mr. Stupak. I understand all of that. I understand all of
that. What I am trying to ask you----
Mrs. Greene. I thought your question indicated that maybe
you didn't understand, that it was a function that we serve 90
percent of the States,----
Mr. Stupak. I understand it.
Mrs. Greene. [continuing] like Qwest, which serves only a
small portion of this.
Mr. Stupak. This fund has only been around since we did the
Telecommunications Act of 1996. Therefore, I would think if you
are going to spend $103 million last year and I'm sure other
years close to that more money just in Mississippi, not only
would you be putting in telephone lines, but it would think you
would also be putting in the services that a lot of us don't
have in rural areas, like the broadband, like the data, like
the voice, ``Yes'' or ``No''?
Mrs. Greene. Yes, we are, but you're really kind of
confusing the way that the fund works and what eligibility for
the fund is attributable to.
Mr. Stupak. Here's the part I'm not confused on. The part
I'm not confused on, if I am getting $103 million out of a fund
that all the Nation kicks into but only about 7 or 8 States are
allowed underneath the formula to take advantage of, not only
are they being provided the service that we all want them to
have underneath telecommunications, but they also have that
distinct advantage of receiving other services the rest of us,
who are just as rural, but because we may have a big city like
Detroit, therefore, we are offset, we do not receive money
underneath the high-cost non-rural fund only.
Now, I agree there are other areas that they can apply for,
but the kicker for us and for some of us who feel that this is
just simply wrong is not only do you take 2 States getting
about 70 percent of the money, but they are also, and rightly
so, getting added services and benefits the rest of us do not
have an opportunity to have or the carriers working our areas
don't have access to the money to put in the extra services. So
we see two advantages: lack of money and lack of upgrade of
services that would benefit our areas because of the money that
is coming out for just a few States.
I am sure Mr. Gregg wants to say something.
Mr. Gregg. Yes. Just in terms of how that money is used, I
can give you the personal example of what we do in West
Virginia. We receive about $31 million from the non-rural high-
cost fund. We conduct an annual rigorous review of that money
before it is received.
We use approximately $26 million of it to reduce rates for
customers. We have some of the highest rates in the Nation.
It's an average credit on each person's bill in the State
that's served by Verizon of $3 per month.
The FCC's latest rate survey that just came out show that
we still have the second highest rates in the Nation, even
after the credit.
Mr. Stupak. I don't disagree with that, but the part that I
have a problem with is not only the money part, but, look,
there are non-rural carriers who serve rural customers in over
40 other States. So those rural customers that are being served
by a non-rural carrier, why shouldn't they get a discount on
their bill also from money out of this fund?
I just think it's a simple fairness issue and not only is
it a fairness issue on reduction of rates, but now I understand
it is also fairness on the services that are being provided.
Chairman Tauzin. Would my friend yield?
Mr. Stupak. Sure. Go ahead.
Chairman Tauzin. What is so crazy about this system is you
have got grandmas and grandpas on Social Security subsidizing
their children who are earning good money on their phone bills
today. Isn't that correct?
I mean, it's true. It depends where you live. You could be
living on a Social Security income, aged, and barely struggling
to pay your food and your drug bills. And, yet, the system
requires you to be subsidizing your children who are making a
good living but living a different place in America. It's a
little nutty. There are inequities all over it like that as you
begin to study it.
And that's why, again, my friend is right. It's full of
those kind of inequities. The more you look at it, the more you
see them. And the more you come to the conclusion we need to
simplify this thing.
Thank you, sir.
Mr. Upton. The gentleman's time has expired.
The gentleman from Kentucky, Mr. Whitfield.
Mr. Whitfield. Thank you, Mr. Chairman. I want to thank the
panel for joining us today and for their patience. I know it
has been a long afternoon.
I want to congratulate Mrs. Greene for her--I guess you are
coming to the end of your years as chairman of the USTA. And
I'm sure it's been an exciting year for you.
I think the testimonies showed quite clearly today that
there are a lot of inequities in this system and that at least
the appearance is that most people think there need to be
comprehensive reform.
I noticed, Ms. Greene, in your testimony, you indicated
that USTA believes that Federal funds should be used to support
only one eligible telecommunication carrier in each high-cost
area. Is that correct?
Mrs. Greene. That's right.
Mr. Whitfield. And other members of the panel, do you all
have any response to that or any views on that recommendation?
Mr. Gregg. I have made a variation on that proposal, which
is that on the truly high-cost areas, those above $20 per line
per month in terms of support, there would be a limitation
between $20 and $30 per line per month. Only one additional
eligible carrier would be allowed and above $30 only one
carrier at all.
This would encompass half of the study areas in the United
States served by rural carriers but only 1.7 percent of all the
access lines. It's the truly small high-cost areas. That's
where we need to restrict the amount of subsidy going. It
doesn't make any sense to have multiple subsidized carriers
there. Below $20 per line, I would part ways with USTA.
The section 214E of the act mandates that we have multiple
ETCs in areas served by non-rural carriers. Non-rural carriers
receive high-cost support, too. The highest is Puerto Rico
Telephone Company that receives about $8 per line per month. So
obviously there is unlimited subsidy there.
And I believe that allowing areas that receive less than
$20 per line per month, whether they be rural or non-rural, to
have multiple ETCs would be reasonable and would not
excessively increase the fund like allowing multiple ETCs in
these really high-cost areas.
Mr. Stanton. I would respectfully disagree with the notion
of having a single carrier be designated. There is an
underlying presumption that if you only designate one ETC, that
you designate the wire telephone company in that geography. In
many cases, that is, particularly as I said in my oral
testimony, in areas below ten people per square mile, which is
the vast majority of the territory that my company serves. You
are excluding the more efficient provider of service, that
wireless can provide service at a lower cost in those areas.
And, therefore, not only are you excluding them in, for
example, Commissioner Gregg's proposal, but you are actually
punishing all of the system by requiring that you subsidize the
less efficient provider.
And I would argue that if you create arbitrary milestones
that say you only allow one if the cost per company is above a
certain level, that you create incentives for the telephone
company to actually increase their costs to be above that level
to preclude having competition.
You, in effect, reward inefficiency associated with high
cost. And I'm an admitted capitalist. In my view, there is only
one mechanism by which you can truly create the most efficient
system. And that is the introduction of competition. And having
multiple carriers able to provide service on a level playing
field in a market is the way to create competition.
Mr. Whitfield. Mr. Lubin, were you going to make a comment?
Mr. Lubin. Yes. The thing I want to highlight is I think we
have two issues that get mixed up. And I appreciate the
question because I am going to try to use it to highlight the
point.
One issue is, do I want to create head-to-head competition?
And that is a public policy question. You have to come to grips
with an answer. In those areas of the country where you want
head-to-head competition and you want wireless to compete with
the incumbent wired, make a decision if you want that. If you
do, so be it.
The second question is, in those areas where you don't want
competition, Billy Jack comes up with a mechanism to do that.
That's fine. Make a public policy decision that says, ``In some
geographic areas, I don't want to see competition.'' But there
is one more issue. And that issue is, with wireless, let's say
you want head-to-head competition. So you mark that box, ``I
want head-to-head competition.'' But now the wireless company
comes in and says, ``I am going to offer you four connections
in a household''; whereas, maybe the wired house only has one.
If you had head-to-head competition, do you want to fund
four connections? Let's hypothetically say the subsidy per line
is $10. Now you're putting pressure on the fund. All I am
highlighting to you is that is an explicit issue for public
policy considerations because without considering it, you are
going to expand the fund.
Mrs. Greene. But let's go back 1 second to the original
purpose of universal service. The original purpose of the
universal service was to provide a mechanism to encourage
companies to invest in a marketplace where market economics
alone would not make it worthwhile to invest.
And we had a concept called carrier of last resort that was
born out of that. And it goes along with the whole concept of
universal service. To have multiple carriers of last resort in
a marketplace where the economics of that marketplace don't
even support a single carrier is sort of a questionable
activity. And that's what the USTA position is designed to
reflect.
Mr. Whitfield. Mr. Chairman, if I may interrupt, I waived
my opening statement. And I thought----
Mr. Upton. Oh, I'm sorry. You get an extra 3 minutes. So
you've still got----
Mr. Gregg. I just wanted to amend one thing that Mr. Lubin
said. The question is not whether we will have areas where
there is no competition. That is a policy decision that has
already been made by Congress. The whole issue is, are there
areas where we don't want to have subsidized competition?
And as far as the issue raised by Mr. Stanton of there
could be an inefficient carrier in an area where you have
limited ETCs, that is up to each State. And States have the
power to decertify ETCs and to place some other carrier in
there that they believe can do a better job of providing
universal service. It's the State's call.
Mr. Whitfield. Now, in the 1996 act, of course, as you all
have said, we expanded from ensuring rural services to also
financing choice of providers. And wireless is one of those
providers now and is doing a good job.
The question I would have is, do each of these providers
have the same public service obligation or is there a
difference in that? And if there is, should that have any input
into who receives the benefit?
Mr. Rowe. Mr. Chairman, there are substantial differences.
Those differences are complex. This and the primary line
discussion are areas where I am actually fairly confident that
the joint board is going to make some progress.
As to the service obligations, the question that we are
currently looking at is, should the competitive carriers be
subjected to effectively the same obligations, either by the
FCC or by the State commission, as are the incumbent carriers?
Should the FCC set a floor, allowing State commissions to
exceed that floor? Is it possible to develop an appropriate set
of service quality expectations for wireless carriers
specifically? I think all of those things are on the table.
Generally State commissions do not regulate wireless
carriers but are allowed to regulate essentially service
quality issues. Also, as part of certifying competitive
carriers, States may impose appropriate restrictions.
There is a lot more thought going into this than there was
even three or 4 years ago, when the first round of applications
came in. And we are all paying more attention to it.
Mr. Whitfield. Ms. Greene?
Mrs. Greene. One of the fundamental differences, of course,
being that wireless doesn't serve the same serving territory
that a wire line does. It's not as comprehensive a serving
territory.
Mr. Whitfield. Ms. Abernathy?
Ms. Abernathy. I think the only thing I would add is that
part of what we are trying to do with this ETC proceeding in
front of the joint board is come to grips with the fact that
the new competitors build out differently and provide service
differently than the incumbents.
But to the extent we want to encourage competition in rural
areas, somehow we have to reconcile how much subsidy support do
we give to a new provider without jeopardizing or risking basic
support for the incumbent for the customers?
Mr. Post. Just a couple of comments. The sole purpose of
the USF has been not to provide competition or defaults to
competition but to provide affordable local service rates to
customers in rural America or in high-cost areas. I think we
have, I know the States have, lost sight of that in the areas
we operate. That seems to be the only criterion for a carrier
entering a market that it provides additional competition. The
real issue or the real focus or purpose of the universal
service fund is really forgotten in many cases.
Second, there has to be some kind of control here or
obviously universal service funding is going to collapse under
its own weight. There has to be some type of criteria developed
that says this is what is required for a company to qualify for
universal service funding because in some of our markets in
rural America, we have four and five wireless carriers in these
markets.
If every one of them has funded it $20 or $30 a line, those
markets, or more in some cases, you can see what happens. Where
is the funding coming from? How is the money going to be used?
Obviously it is not in the public interest when that happens.
Mr. Stanton. If I may add from the one wireless perspective
on the panel, the taking on the responsibility of being a
carrier of last resort is a decision that a wired company made
at some point in time in its history, probably before any
wireless companies existed in many cases.
The presumption that they should continue to be that
carrier of last resort I take issue with. Our company, for
example, is the carrier of last resort in the Antelope Valley
in Nevada, which I spoke of before. The alternative was that
the local residents could pay $100,000 to bring wires in. And
that was how the telephone company, the wire telephone company,
was going to make service available to them.
The residents couldn't afford that. We were willing to
build service out into that community and take on, in effect,
the carrier of last resort responsibilities. And we are willing
to take that on in a number of cases.
I don't represent all wireless companies. I can't tell you
all of them would be willing to do that or how they would be
willing to do it. But we are willing as a company to
participate in the process fully, and we have taken on some
responsibilities and are more than happy to continue to do
that. But I think what we ask is to be treated fairly, not like
the new kid coming to the party gets all of the burdens and
none of the benefits.
Mr. Whitfield. Thank you, Mr. Chairman.
Mr. Upton. The gentleman from Florida, Mr. Deutsch.
Mr. Deutsch. Thank you, Mr. Chairman.
Ms. Greene, could you take a moment to explain the concept
of negative dollar flow from the universal service fund and why
BellSouth cannot access the universal funds in Florida?
Mrs. Greene. This goes back to the discussion that we had
about the non-rural carrier fund. We access only as a non-rural
or large company carrier.
One of the fundamental structures that governs non-rural is
that need is calculated as Statewide level. And so in Florida,
we have enough urban areas to offset the rural areas. And as a
result of that, we don't qualify for taking funds in that area.
Mr. Deutsch. So even though there obviously are areas that
are both by definitional status rural and by logical status
rural throughout the State, I mean, you know Florida very well,
as I do----
Mrs. Greene. Yes, sir.
Mr. Deutsch. [continuing] that none of those areas qualify
for any of the funding?
Mrs. Greene. And that is a good point. BellSouth serves
more rural access lines than all of the independent companies
in our service territory put together. We take money from this
very small segment of the universal fund, the non-rural fund,
only in two States, even though we do serve rural access lines
in our other seven States.
Mr. Deutsch. Again, it just seems a little bit illogical. I
mean, is there any proposal that you could see the FCC changing
to provide relief in this situation?
Mrs. Greene. Well, I think that any time that we have a
discussion--I am sitting here next to Mr. Gregg's charts. Any
time that we have a discussion about rural universal service
fund, I think we need to have a comprehensive discussion about
all the different subsidy flows that go to offset the cost of
rural universal service.
I do think that we need to have a comprehensive look at how
to redo this system.
Mr. Deutsch. In any specifics that you would suggest or we
just really need to go through the process of really looking at
it in terms of this anomaly that you are describing?
Mrs. Greene. Yes. I think we need to go through the process
of looking at it. I think we need to simplify the multiple
funds. I think we need to, most importantly, broaden the base
of payers.
Mr. Deutsch. Yes. Go ahead, Mr. Rowe.
Mr. Rowe. Mr. Chairman, as I have suggested earlier, the
discussion about the large company fund is not necessarily a
debate between BellSouth, on one hand, and other carriers, on
the other. In my view, if you were to go back to what the law
says, reasonable comparability of rural and urban rates and
services, and if you were to deal seriously, very seriously,
with the problems in the hybrid cost proxy model, upon which
support is based, certainly carriers that currently receive
money would receive a different amount of money.
But it would not necessarily be disadvantageous to
BellSouth overall. It would simply be better met with what we
do than what the law now requires.
Mr. Deutsch. Thank you.
Mr. Gregg?
Mr. Gregg. Yes. Just to follow up on what Ms. Greene said,
the rural carriers in Florida receive about $79 million from
the high-cost fund. BellSouth, even though it serves rural
areas, does not because, as she said, their overall average
cost is low because they also serve urban areas.
Mr. Deutsch. Right.
Mr. Gregg. One of the things that we have to keep in mind
when we look at reforming any of this, the distribution or the
size of the fund, is to be mindful of what the chairman said.
Everybody in the United States has to pay for this. And if we
end up doing things that end up growing the fund exorbitantly,
that is going to have to be paid for. And we are already under
pretty unrelenting pressure.
I think that the joint board when they recommended what
they did in the Tenth Circuit remand was mindful of trying to
keep the fund under control but to provide relief in those
areas where it was truly needed. That was the supplemental rate
request that Commissioner Abernathy spoke of.
If, even with all Federal support and all State support,
you still didn't have comparable rates,--that is the real
litmus test--they can come back for additional support under
that recommendation. And we will see what the FCC does in
October on that.
Mr. Deutsch. Right. I mean, I understand what you're
saying. It just seems a little bit from the policy side if
you're treating customers--and most of my constituents or, in
fact, maybe all of my constituents are BellSouth customers or a
very extraordinary high percentage are BellSouth customers.
They have this distinct in terms of their own rates
disadvantage.
I mean, I can articulate a policy reason why the other
carriers kept that advantage and BellSouth obviously has other
advantages over them, but it clearly makes my constituents pay
more on average.
Do you want to give me the extra time or not the extra
time? Last question. And hopefully just Commissioner Abernathy
can give a short answer. The future of universal service is
something that we all need to focus on.
I am glad to be here today for that important discussion,
but ultimately I feel that we need a decision out of the FCC
soon, as we all know that the current path is unsustainable,
technology is changing every day.
Could you speak to the FCC's efforts to address the
internal conflict between the telecommunications service and
the information services in terms of contribution methodology?
Ms. Abernathy. Yes. Thank you. We put out for comment the
question about, how do we handle this by statute? We can
legally decide that, even if a service is an information
service, not a telecommunications service, that that entity
could be obliged to contribute to the universal service fund.
So the real question, then, is, what do we do once we define
what broadband services are? And all of those entities, if they
are treated alike, will they be contributing to USF or will
they not be contributing?
It's an open question in front of the FCC. I can't tell you
how all of us are going to vote. I have said publicly that it
seems to me that a fund of this size and this obligation, that
you spread it across as broad a base as possible so you have as
small a hit as possible on multiple providers.
But this additional issue goes to a proceeding that is
ongoing about what category of service will broadband fit into.
And then you ask, following that answer, what are the USF or
other kinds of obligations that may go along with it?
Mr. Upton. Thank you.
Mr. Bass gets the advantage of the deferral, 8 minutes.
Mr. Bass. Thank you very much, Mr. Chairman. It's an
interesting hearing, very complex.
Telecommunication in a State like New Hampshire is really a
form of transportation. There are many different reasons why
New Hampshire is way down. In fact, it didn't even make the top
50 States. We are 51 in terms of support of this universal
fund. And there are lots of reasons for that, some of which
have been dealt with in this discussion.
The New Hampshire Public Utilities Commission from the very
beginning has had a philosophy that telephone service must be
very low-cost. And today you can still get a telephone for less
than $10 a month. Now, the telephone providers have to juggle
things around a little bit, but ultimately they are required to
do that.
Unfortunately, that may be part of the reason why New
Hampshire is so low on that list because it may look in this
formula like it's very urban because the utility PUC requires
that the rates be very low.
The other problem is that New Hampshire is not really a
State--and there are a lot of other States like this--where
income and wealth are fairly even across the States. We are a
relatively wealthy State, but there is significant disparity.
So in some parts of the State, you may have all kinds of
services. In other parts of the State, you have nothing but no
subsidy on top of all of that.
I guess my question is, should there be a different
mechanism for determining the allocation of high-cost support
that is not based on States' boundaries but, rather, on even a
single line or a single service or a town or a community or a
county because there are counties in New Hampshire that are
very poor and there are counties in New Hampshire that are
amongst the richest in the Nation? Does anybody in this panel
have any thoughts about that concept?
Mr. Gregg. Yes. Section 152B of the act preserves the
traditional State roles and on top of the Federal roles. In
fact, that was the limiting factor that caused the Fifth
Circuit to limit the ability of the FCC to assess on all
revenues, was that traditional province of State rate-making
and control over their intrastate revenues.
And that's why I believe we should continue to look at
equalizing costs and trying to keep rates comparable among
States from the Federal viewpoint and then leaving it to the
States to try to keep rates comparable within their borders.
It's a partnership, a Federal approach to comparable and
affordable rates.
Now, in terms of New Hampshire's $10 rate, the support
formula is based not on rates, but on cost. And it looks at the
cost in New Hampshire compared to a Nationwide average cost.
Now, that is one of the issues.
If New Hampshire is not requiring their end users to
contribute close to what the cost of that service is, is it
fair to ask other consumers in, say, inner-city Baltimore or in
Denver or in Arizona to contribute to their rates or their
upkeep of their network through having support there when their
rates are so low?
That's why we put in the supplementary rate review, so if
there are truly areas where in spite of Federal support, in
spite of State support, you still have exorbitantly high State
rates, they can ask for supplemental support. But if your rates
are still down around $10, it seems like there needs to be some
additional contribution from end users as well as, say, the
State universal service fund before you ask other people in
other States to contribute to helping.
Mr. Bass. Any other comments from anybody else?
Mr. Rowe. I think Mr. Gregg made the correct point in
describing the difficulty doing a rate-to-rate comparison. When
we have looked at how retail rates are set, there are many
important variables. The one I focus on, in particular, is the
size of the local calling area.
My guess is the local calling area in your State is
relatively small. Even if it may be large geographically, you
probably can't reach that many customers for your local rate,
depreciation rates, assignment of costs to the long distance
services or local service, a lot of variables in the rate
component. So generally I think a cost-to-cost comparison makes
more sense.
The two alternatives that have been focused on primarily
are: one, going right down to the smallest possible unit of
making a comparison, a central office typically, less of a
concern for the rural, the small, carriers because they
typically don't have as many offices, less territory to average
over. That can be an important factor for the Bell companies,
in particular.
The other alternative, though, if you are going to stay
with what we are calling a State-to-State comparison--it's
really a telephone company study area to study area
comparison--is to be very serious, very rigorous about the
statutory requirement of reasonable comparability of rural and
urban rates and services. And, again, I think for the large
companies, if we do a better job with that, the results will
also be better for everyone.
Mr. Bass. Mr. Terry's bill provides for a 5 percent cap on
high-cost lines, high-cost funds. What about the concept of
having a 5 percent cap for the entire universal service fund
per State?
Mr. Gregg. There currently are caps on several of the
mechanisms in the universal service fund. The biggest caps is
the schools and libraries. It's capped at $2.25 billion each
year and always has been. That's a hard cap. The high-cost loop
portion of the high-cost fund that goes to rural carriers has a
cap on it. It grows each year by a certain factor, but it is
capped.
The concept of caps can work. However, I think that it is
better to if you are going to have a cap at least let it grow
so that it can move around as conditions change.
As you heard in here today, there are conflicting demands
on the fund. On the one hand, people want the fund to be
affordable. They want the assessment rate to be low. That means
it shouldn't grow. On the other hand, people want the fund to
go out and support all of the new whiz bang services that
everybody wants. And that is going to require more money.
Mr. Bass. The caps you talked about were not per State.
They were per fund.
Mr. Gregg. They were per fund, right.
Mr. Bass. I am talking about a 5 percent cap for State for
the universal.
Mr. Gregg. I think it might be arbitrary because what you
would do is States that have a very large need; for example,
Wyoming or Mississippi, that has very large per-line needs,
might not get enough support to have comparable services.
Mr. Bass. Fair enough. Fair enough.
Yes, commissioner?
Ms. Abernathy. I think it would be very difficult to just
in a sense say, ``You're not entitled to any more money,
regardless of how high-cost your loop costs are, to build out
to these rural areas.''
But I think one other factor we have to continually bring
ourselves back to is it's not simply that urban and rural rates
have to be reasonably comparable. Rates have to be affordable,
too.
What is affordable gets mixed into this debate at the same
time because what we ultimately decided at the joint board is
while it might be nice to have a $10, a $15, or even a $20
rate, that it is okay for rates to go as high as around $30, I
think we said. And we viewed that as affordable because
otherwise what you are really doing is saying there is no limit
on how much you would support. It would be decided by the State
about how low they wanted to drive their rates.
Mr. Bass. Interesting point.
Thank you, Mr. Chairman.
Mr. Upton. The gentleman from Maryland, Mr. Wynn, is
recognized for 5 minutes.
Mr. Wynn. Thank you, Mr. Chairman. I apologize for not
being here earlier. I just have a couple of questions.
First, for Ms. Greene of BellSouth, I understand that you
do represent rural and lower-income areas. And the question I
have is whether the FCC's list of universal service providers
should be expanded to include broadband services. I don't know
if this has been covered earlier. And should we move away from
a service-based approach and support networks?
Mrs. Greene. Yes, I do agree that we should move away from
a service-based approach and support networks. Basically, the
way that this system is administered today, it's on a service
or a line basis. And that has the effect basically of
constraining the investment and making government decide,
instead of consumers, what investments in forward-looking
technology should be. So I think that it should go to a network
basis.
Mr. Wynn. Now, what about the expansion regarding universal
service? Should it include broadband?
Mrs. Greene. Again, I think that it should be a function of
doing the calculations on what is the cost of universal
service. And then that money should be provided to the carrier.
And the carrier should make the decisions on network
infrastructure, instead of listing each specific service that
should be required in universal service.
Mr. Wynn. Thank you.
Mr. Rowe. Mr. Chairman, representative, could I follow up?
Mr. Wynn. Sure.
Mr. Rowe. When the joint board looked at this issue, we
were required to evaluate services under the act. I think your
point is right on target. I said earlier that all services
basically ride over the same network. And the best thing we can
do is to support the development of a robust network that is
forwardly upgradable.
The cost, the incremental cost, of providing, for example,
DSL service over the wire line network is now negligible
provided that wire line network is built in a sufficiently
robust fashion. It's been referred to as the no-barriers
approach. It's equally applicable to wireless networks. So,
again, I think a network focus, rather than a service focus, is
in many ways very helpful.
Mr. Wynn. Okay. Thank you.
Mr. Lubin, how would broadband services, such as those in
large companies with private networks, be assessed under your
model for universal service?
Mr. Lubin. AT&T took no position in terms of the assessment
of DSL or cable modem services. And so the reason, quite
candidly, we went to a numbers-based mechanism is we thought it
was an effective way to broaden the base, actually under the
existing statutory authority that the FCC has to go to numbers,
which would be a way to not focus on a revenue basis but,
rather, start assessing connections for special access pipes,
private line pipes. The fatter the pipe, the more you pay. And
where you have a telephone number, you assess the number. And
you don't worry about what services are being carried over the
connection or the number.
Mr. Wynn. But what would you anticipate would be the
possible costs on a per-line basis?
Mr. Lubin. The number that we put in the record was 98
cents per telephone number and per connection. The fatter the
pipe, you would pay more. We also in the record at the FCC
suggested that you might want to exempt people who are lifeline
consumers, who have a lifeline assistance program, such that
they would not pay the 98-cent fee. If you did that, then the
fee would be approximately 99 cents or $1.
Mr. Wynn. Okay. Thank you.
Ms. Abernathy, one question. I get a sense--and maybe this
was covered earlier and, again, my apologies--that we are
looking at redefining the definition of universal service, as
opposed to how the traditional telephone access for everyone to
call police and fire and people like that, to covering a
broader range of service, internet access and things like that.
Is that where you're headed? Is that what we're talking about?
Are we still back at the kind of traditional notion that we
need to at least make sure everyone has access to basic
telephony?
Ms. Abernathy. That is not where the FCC's proceedings are
currently headed. And, in fact, previously the joint board
looked at this issue of, should we broaden the definition of
support in services?
The joint board made a recommendation to the commission
that no, we should support the existing services that have
traditionally been supported. The FCC looked at that order and
implemented that recommendation in July of 2003.
So we're not at this point exploring whether or not we
should expand the list of supported services. Rather, we are
looking at, at least in the broadband context in one of the
FCC's proceedings, should broadband providers be obligated to
contribute to the USF fund, like other providers, such as wire
line and wireless and long distance?
Mr. Wynn. Did you take a position on that?
Ms. Abernathy. On the joint board?
Mr. Wynn. No. On the question of whether broadband
providers ought to be included?
Ms. Abernathy. Not yet. It's still pending in front of the
FCC.
Mr. Wynn. You don't want to give us a hint, do you?
Ms. Abernathy. I already gave a hint a little earlier,
unfortunately, although----
Mr. Wynn. I'll talk to you about it. I relinquish the
balance of my time. Thank you.
Mr. Upton. Thank you.
The gentleman from Mississippi, Mr. Pickering, is
recognized for 8 minutes as he deferred earlier.
Mr. Pickering. I thank you, Mr. Chairman. I want to commend
you for having this hearing.
I don't think there is anything in telecommunications more
important or significant than the debate that we are beginning
now in the hearings. The universal service fund and the
possibility of reform is probably the most important policy
question that we have in telecommunications, either as we try
to move in this Congress or hopefully in the very near future.
It is something that started in the 1996 act and that you all
have all captured very well with the current state of both
emerging technologies, emerging competition, and the changes
that those have brought to the universal service fund.
Mr. Gregg, you did a great job in saying where we have been
and where we are at present. The question for us is, where will
we be 5 years from today? Where will we be 10 years from today?
And basically where will we be for the next generation? The
decisions that we make in a universal service fund reform could
shape. And the 1996 act has shaped dramatically, as you
described, the services we have in rural areas, the deployment
that we have, the advanced services, education, health care.
What I would like to ask, has anybody done any of the
projections on where we are going to be in 5 years? In 1996,
the universal service fund was $1.6, $1.8 billion. And today
it's approximately $6 billion. What is that fund going to be in
5 years? Mr. Gregg?
Mr. Gregg. Most of the projections have gone out to about
2007. They were usually in conjunction with the FCC's
contribution base proposals. They were looking at, what would
the contribution base be under different alternatives? What
would the assessment rate then be based on the expected fund
size for that period?
Mr. Pickering. What if we did nothing?
Mr. Gregg. The problem is that the projections that we had
in that case I think were before we started having a big up
swing in the number of eligible carriers for the high-cost
fund. They projected a total fund of in excess of $7 billion,
around $7.3 to $7.5 billion. However, if we continue to have a
doubling of new ETCs drawing on the high-cost fund each year,
those may be low.
For example, new wireless ETCs received only $500,000 in
the fund in 1999. And I'm glad, actually, Mr. Stanton, that
wireless carriers in all technologies are accepting the
obligations of being eligible telecommunications carriers.
However, we have to be mindful of their overall impact on the
fund.
It's gone from $500,000 to $20 million to $40 million, this
year to $120 million. Next year we expect it to more than
double because of all the ETC applications that are in the
pipeline. So we may be looking at a total fund probably closer
to $8 or $9 billion if there is no limitation such that I have
described earlier, the limitation on single-line support, the
limitation on the number of ETCs in high-cost areas.
Mr. Pickering. And would $7, $8, $9 billion be sufficient
to sustain what we are currently doing with the universal
service fund?
I guess the question is, if we have a consensus that the
current system is either inequitable, that's one area of
debate. I think that's very fair to Mississippi and Alabama and
to our region. And we want to protect that. But it's a broader
question. Not only is it fair, but is it outdated? Is it
inequitable? Does it actually hinder deployment? Does it hinder
and burden the companies that are trying to provide these
services? Does it hinder competition? And those are larger
public policy questions. And so is the current system
sustainable?
My sense is that everybody in the panel would say no. Just
trying to get the points of consensus. Would everybody agree
with the one line limitation? Would there be a disagreement on
the one line? The principle of all who play pay, everybody pays
in? Should there be a principle of competitive neutrality, that
we try to find ways to be competitively neutral and technology-
neutral as we try to reform the system?
This is an area that I think we're coming to a place, one
of those rare political moments, where everyone agrees that the
current system is not sustainable, that it serves no one as
well as it should, which gives us an opportunity possibly to
get local, long, although distances, now we have really reached
a point where there is not a distinction in distance in the
service.
And we're also having the bundling of services. So you
don't have this distinction of you have no longer the
segregated markets, but now you have the commingled, bundled
offerings of service. So you no longer can really calculate
based on the particular offering and so as we try to find some
new system of collection based on what service. All of those
things as we try to follow a principle of simplification, just
like the tax reform, if you could simplify and broaden and
increase participation, you can actually lower the cost to each
so it benefits everyone would actually increase and sustain the
fund over a period of time. I think that is what we want to
achieve.
And I think that we are at that time where we could get
rural, non-rural, long, local, CLECs, wireless to a table to
possibly see if we could come up with a comprehensive approach
to modernize universal service so that it achieves the
objectives.
And, Mr. Chairman, I look forward to working with the
committee and the staff and with all the industry participants
to start that. And I think the sooner that we do that, the
better. And I do think we have some emerging principles that we
could all at least establish a framework of discussions and
reform on.
I know the joint board is soon to make some decisions. That
would give us some clarification in major decisions. But
Congress really needs to act in this area to get the full
benefit of what we need to do.
I know that I am talking more than I am asking, but I have
listened for a long time. I do appreciate all of your
participation. Mr. Chairman, again, this is a very important
issue. And for my own State of Mississippi and rural States
like Mississippi, this is critical to the new deployment and
making sure that we maintain the services.
BellSouth has done a tremendous job in a State like mine
and across the Southeast. We have wireless companies that are
doing a great job of going in to rural areas. And competition
is beginning to development. So how do we get all of those at
the table so we can make something work? And that's what we
want to see happen?
To my friend from Nebraska, if Southern Mississippi meets
Nebraska--you have to give me at least a 10-point spread--we
will set aside universal service fund debates in the next
Congress and find a fair and equitable solution for the
Cornhuskers.
Mr. Terry. I kind of like the catfish and steaks one that
we discussed earlier.
Mr. Upton. Have you talked to Coach Osborne?
Mr. Pickering. He is going to give me 14 points. Mr. Terry
I am having a hard time getting ten points.
I would say, in all seriousness, I don't know if regional
approaches are going to work. So I would like to sit down with
Nebraska and Michigan, not in a way to look at which regions
get more. We would argue that Michigan and Nebraska give more
than Mississippi in energy assistance. I think it would be
counterproductive and wouldn't be what will eventually pass,
but if we look in a broad, comprehensive way, I do think that
we can modernize it, simplify it, and increase participation
and sustain the fund for the long term.
With that, I yield back. Thank you, Mr. Chairman.
Mr. Upton. I would just remind the gentleman from
Mississippi that I think Southern Mississippi played the
Wolverines in a ball game a couple of years ago. And I could
give you 40 points and still win.
Mr. Pickering. I think it was 35 points.
Mr. Upton. The gentleman from Nebraska.
Mr. Terry. Yes. Times have changed over the last few years,
especially for us Huskers.
In listening to Chip's discussion here, frankly, we were on
the same page until he said that Mississippi should be able to
keep all of that money. That's the only part that I disagreed
with.
Mr. Chairman, maybe I should be so bold to suggest that
Chip and I even start a task force on your behalf with your
guidance as chairman to start looking into this.
I appreciate all the senators that have gone on the Stupak-
Terry or Terry-Stupak bill, but I would really like to see the
House drive the discussions on universal service reform.
Again, I want to come back to the point that I still have--
--
Mr. Upton. If the gentleman would yield just for 1 second?
Mr. Terry. Yes.
Mr. Upton. I would note that today, despite a lot of things
going on, a health conference on prescription drugs and a host
of other things, we have had 22 members of this subcommittee
come at some point----
Mr. Terry. It shows the importance.
Mr. Upton. [continuing] to discuss. And they have been very
engaged and involved and concerned about where we are going.
Clearly, it is, as I said in my opening statement, the engine
is broken, sort of like the Fram oil filter commercial, the
bottom line being if not now, when are you going to pay,
something like that, right, pay me now, pay me later, pay me
now or pay me later.
So we are going to continue this good dialog listening. I
look forward to your input. We have had a good amount of your
interest for sure. And it's one of the reasons why we're having
the hearing today.
Mr. Terry. And I greatly appreciate that you are having
this hearing today.
In that respect, I would like to take it from listening to
action at some point in time. But I worry, as we have seen here
just in the series of questions that Chip asked the panel, out
of the nine people up there to each panel, we saw people
nodding their heads ``Yes'' and ``No'' to the same questions.
And I think that shows the difficulty that it's going to be
to simplify the system in the long run. That certainly would be
my goal as long as rural areas are treated uniformly and
fairly, which brings me back to the question that I couldn't
get to, Chairman Abernathy. And that's you recognize that there
are these types of discrepancies up here, just the States that
I think are inherently rural, although may have some
metropolitan area, that receive nothing from the fund, Arizona,
Arkansas. No one of us would think of Arkansas as just highly
cosmopolitan and metropolitan. They've got a significant rural
population but receive nothing. Georgia, Iowa, Kansas,
Kentucky, Minnesota. I've been to northern Minnesota, not
northern Michigan, but there is nothing but rural population up
there.
So my question is just, in a personal sense, do you think
that's fair that eight States under this fund share the entire
pool where States that do have significant rural populations
that are serviced by the Bell receive nothing?
Ms. Abernathy. I guess, again, I would go back to say, are
these States receiving universal service support? They are.
Now, the non-rural companies are not. You're absolutely right.
The non-rural companies are not. So I just want to distinguish
between----
Mr. Terry. Sure.
Ms. Abernathy. [continuing] do the States go, do they not?
Again, I can only tell you historically why this has
existed and is it fair. I guess when I look at the USF system,
there is very little about it that I think any one person would
say, ``Oh, well, this seems eminently fair.''
Most of it seems unusual or somewhat convoluted. I know why
we are where we are with the non-rural. Again, the idea was,
let's funnel most of the money to the rural carriers. And these
big companies that were the spinoffs from AT&T, they can move
the money around as long as they have enough low-cost
customers.
This premise was based on a pre-competitive environment.
And so now the question is, can that model survive in a world
where everyone is facing competition? And is this fair to the
customer base that they serve? I think it is a question we are
going to have to answer.
I look, for example, at the District of Columbia. You know,
this is not a needs-based system. So there is no money flowing
into the District of Columbia. Are there people who live in the
District who are supporting universal service who don't make a
lot of money? Yes, there are. So, you know, we have a lot of
challenges in front of them.
And I don't dispute that the inherent equities of the
system are questionable in some respects. What we are trying to
do through the joint board efforts and through meeting with all
of you is to slowly peel back at these issues and try and
rationalize them in as best a way we can given the technology
of the day and the competitive market of today.
Mr. Terry. Thank you.
My time is up unless you want to yield me some more.
Mr. Upton. You can ask another question if you'd like.
Mr. Terry. No. Go ahead.
Mr. Upton. Well, this concludes the hearing for today. I
appreciate your time. I know Mr. Rowe had to leave early to
catch a plane. Actually, he had to leave on time to catch a
plane. But we appreciate your testimony and the members'
participation. We look forward to seeing you in the days ahead.
Thank you.
[Whereupon, at 5 p.m., the hearing was adjourned.]
[Additional material submitted for the record follows:]
Prepared Statement of F.J. Pollak, President and CEO, TracFone
Wireless, Inc.
I am F.J. Pollak. I am President and CEO of TracFone Wireless, Inc.
TracFone is a wireless telecommunications company headquartered at
Miami, Florida. It differs from other wireless providers in that it
offers primarily prepaid services. Consumers purchase wireless phones
(which we subsidize) from retail outlets (including, for example,
WalMart, K-Mart and others) and usage cards which provide quantities of
wireless service usage that vary depending on the price of the card
selected. Unlike traditional wireless providers, TracFone customers
purchase service on a ``pay-as-you-go'' basis. There are no credit
checks; no minimum volume or term commitments; no early termination
fees. Many of TracFone's customers are lower volume, often lower
income, users for whom wireless service would otherwise be either
unavailable or at least impractical. TracFone service also is popular
with families who want wireless phones for their own or their
children's safety but who do not need and possibly cannot afford a
traditional service plan. Currently, TracFone has more than 2.6 million
customers and its business continues to grow. TracFone service is
available throughout the United States, including offshore locations.
TracFone is profoundly concerned about certain proposals before the
Federal Communications Commission (FCC) to change the manner in which
telecommunications service providers contribute to the Universal
Service Fund. TracFone believes that the fairest, most competitively
neutral and most appropriate way to assess universal service
contributions is based on each service provider's revenues. TracFone
believes that cries by certain providers that interstate revenues are
decreasing are unsupported and are factually inaccurate. While it may
be true that certain carriers' revenues are decreasing, total
interstate revenues are increasing as consumers migrate their services
to those of wireless providers, Voice over the Internet Protocol (VoIP)
providers and others.
In December 2002, the FCC took several significant steps to address
shortcomings in the universal service contribution methodology. First,
it raised the wireless safe harbor from 15% to 28.5%. This was a step
in the right direction, but the FCC should not stop there. We believe
that several of the major wireless providers' interstate usage levels
are well above 28.5% and there is no reason why wireless carriers--like
other telecommunications carriers--should not be assessed on their
actual interstate usage revenues. Their interstate usage is measurable.
Second, the FCC wisely has prohibited service providers from ``marking
up'' their pass through of universal service contribution charges. By
eliminating the opportunity for certain providers to turn their
universal service contribution obligations into ``profit centers,'' the
FCC has reduced the impact of those consumers who pay to support
universal service without reducing the amount of support for the
Universal Service Fund.
Neither the connection-based nor the telephone number-based plans
which have been proposed by the FCC and supported by a few carriers
should be adopted. Those plans would violate the statutory requirement
that ``every'' telecommunications carrier that provides interstate
service must contribute on an equitable and nondiscriminatory basis to
support universal service. Moreover, those plans would result in lower
volume users (who are often lower income consumers) paying a
disproportionate share of the universal service burden. Simply put, it
is neither equitable nor nondiscriminatory for a consumer who makes
$1.00 of interstate calls per month to now be charged $2.00 per month
while a large volume user who makes $1,000 of interstate calls per
month would be charged $1,001.
TracFone recommends that a revenue-based contribution methodology
be maintained, but that the methodology should include all revenues
derived from telecommunications. Specifically:
The wireless safe harbor should be eliminated as no longer being
necessary and each wireless provider should contribute based on
its actual interstate revenues;
The FCC should use its existing statutory authority to assess all
providers of telecommunications. This would include cable modem
services, other broadband services, and Voice Over the Internet
Protocol (VoIP) telephone services.
Congress should grant the FCC the authority to assess intrastate
revenues, but only to the extent needed to generate sufficient
funding to meet requirements of the Universal Service Fund.
Thank you for affording TracFone the opportunity to present its
views on universal service to the Subcommittee.
______
AARP
April 28, 2003
The Honorable Michael K. Powell
Chairman
Federal Communications Commission
445 12th Street, S.W.
Suite 8B201
Washington, DC 20554
Re: Reply Comments to Federal-State Joint Board on Universal Service,
CC Docket 96-45; and CC Dockets 98-171, 90-571, 92-237, 99-200,
95-116, 98-170
Dear Chairman Powell: As the FCC prepares to issue a final ruling
on proposed changes to the way in which the Universal Service Fund
(USF) is collected, AARP would like to reiterate and reemphasize views
submitted to the Commission in August of last year. AARP has been a
strong supporter of the universal service fund, recognizing its
importance in providing essential telecommunications services to
traditionally underserved communities. We are firmly on record
supporting the elimination of surcharges and line items as a means to
collect universal service funds. Absent elimination of such charges,
however, the existing system of collecting contributions is preferable
to the contemplated move to a per-line charge.
AARP has lent its support to the implementation of the Universal
Service Fund, particularly the assistance it provides to low-income
consumers, since its inception. We have actively promoted the Lifeline/
Link-Up programs within the community. In fact, the Commission
participated in an event AARP sponsored with the Florida Public Service
Commission in Tallahassee last year to educate consumers about the two
telephone savings programs. Therefore, we have a clear understanding of
the need to adequately fund the program. We believe that a mechanism
that levies contributions from every consumer equitably, based on a
percentage of the charges assessed for long distance calls, would
provide the monies needed to implement the USF without having to make
any changes to the existing formula. By ``equitably'', we mean that
special exemptions or preferential rates should not be afforded certain
classes of consumers, as is currently the case. The carriers who employ
this practice continue to unfairly discriminate against residential
consumers, and AARP believes that now is the time to discontinue the
practice.
We are concerned that the move to a per-line charge would further
institutionalize the universal service line-item charge. Such a change
in regulation now would diminish chances of eliminating the per-line
charge from consumer's monthly bills, as we have contended it should be
in previous filings with the Commission. However, the existing funding
mechanism at least does not penalize consumers who make few or no long
distance telephone calls. Under the proposed funding mechanism, these
low-volume long distance service callers would be required to pay the
bulk of the funding for Universal Service. Based on comments filed with
the Commission during its review of low-volume long-distance users in
1999, some 44% of consumers fall into this category. While the goal of
the Universal Service Fund is to maintain affordable rates for all
consumers, this proposal appears to ask those who most need help to
provide a disproportionate amount of the funding.
Ideally, all consumers should see their monthly USF charges decline
to $.00 through a system that would allow carriers to recover their
cost in rates as a legitimate cost of business. AARP believes that the
elimination of line-item charges would advance universal service and
ultimately benefit more residential consumers. Absent that fundamental
shift, however, we support maintaining the existing system of funding
the Universal Service Fund based on a percentage of the cost of long
distance phone calls a consumer makes. We commend the Commission for
increasing the ``safe harbor'' percentage for wireless carriers in your
interim ruling as a means to better capture the true percentage of
long-distance calls. We hope that you maintain this system so that
carriers can assign the percentage recovery equitably preventing
residential consumers from being further disadvantaged.
In summary, adequate funding of the universal service program is of
critical importance. AARP commends the Commission for seeking the
appropriate means with which to implement the program. However, we
believe that the move to a per-line charge would be harmful to the very
population the fund seeks to help. Therefore, we reiterate our request
that the Commission not adopt a per-line cost recovery mechanism and
offer our assistance in continuing to seek more suitable alternatives.
If you have any further questions, feel free to call me, or have
your staff contact Jeff Kramer of our Federal Affairs staff at 434-
3800.
Sincerely,
David Certner
Director, Federal Affairs
______
American Council of the Blind
June 27, 2003
Marlene H. Dortch
Office of the Secretary
Federal Communications Commission
445 12th Street, SW
Washington. DC 20554
Re: Federal-State Joint Board on Universal Service, CC Docket 96-45;
and CC Dockets 98-171, 90-571,92-237,99-200, 95-1 16,98-170
Dear Ms. Dortch: As the FCC prepares to issue a final ruling on
proposed changes to fund the Universal Service Fund (USF), the American
Council of the Blind (ACB) would like to share with you our thoughts.
As the nation's leading membership organization of blind and visually
impaired people, ACB is concerned about how proposed changes in the USF
funding mechanism could disproportionately harm low and fixed income
consumers, many of whom are blind and visually impaired.
Universal service is very important to people with disabilities. It
helps ensure the delivery of affordable and accessible
telecommunications services to all Americans, including those who live
in high-cost areas and/or on limited incomes, as well as to schools,
libraries and rural health providers. As many Americans with
disabilities live on fixed or limited incomes and are more likely to be
unemployed than Americans without disabilities, ensuring the
maintenance of the USF is very important to our organization.
We are very concerned that the current proposal to switch from a
revenue-based universal service funding mechanism to a connection-based
one would be harmful to the very population the fund seeks to help.
Under a connection-based methodology, customers would be charged the
same amount for universal service whether they make one interstate
phone call or 100, e.g., a low volume residential customer would
contribute the same amount as a high-volume business customer. So
rather than helping provide affordable service to those that need it
most, this proposal appears to ask them to contribute a
disproportionate amount of the funding.
We are also concerned about the impact of this connection-based
funding mechanism on users of pre-paid wireless services. For the blind
and visually impaired, wireless phones provide significant benefits
including safety, security and convenience. Pre-paid wireless services,
in particular, are an important product to many people with
disabilities. Pre-paid wireless gives people who cannot afford or
cannot qualify for regular cell phone service the opportunity to enjoy
its benefits. We are troubled that changing the USF mechanism to
connection-based would significantly increase the cost of pre-paid
wireless companies' USF contributions which would force companies to
increase the usage charges for such services. We urge you to ensure
that any changes to the USF mechanism do not inadvertently raise the
cost of pre-paid wireless service to the detriment of consumers who
need it most.
We appreciate the opportunity to share with you our concerns and
urge you to ensure that any changes to the universal service funding
mechanism do not unintentionally hurt the very people universal service
was created to help.
Sincerely.
Charles Crawford
Executive Director, American Council of the Blind
______
Reply Comments of Community Action Partnership, American Association of
People with Disabilities, Consumer Action and Rainbow-Push Coalition
april 18, 2003
Re: Reply Comments to Federal-State Joint Board on Universal Service,
CC Docket 96-45; and CC Dockets 98-171, 90-571, 92-237, 99-200,
95-116, 98-170
The following organizations jointly provide these reply comments
addressing a proposal under consideration by the Federal Communications
Commission (Commission) that focuses on how universal services are
funded:
i. statement of interests
Community Action Partnership (CAP) is the national association
representing the interests of the 1,000 Community Action Agencies
(CAAs) organized to change people's lives, embody the spirit of hope,
improve communities, and make America a better place to live. CAP
serves as a national forum for policy on poverty and to strengthen,
promote, represent and serve its network of member agencies to assure
that the issues of the poor are effectively heard and addressed. CAP
works to advance the economic condition, educational attainment,
political influence, health and civil rights of low-income Americans.
CAP works hard to ensure that low-income Americans are not left behind.
American Association of People with Disabilities (AAPD) is the
largest national nonprofit cross-disability member organization in the
United States, dedicated to ensuring economic self-sufficiency and
political empowerment for the more than 56 million Americans with
disabilities. AAPD works in coalition with other disability
organizations for the full implementation and enforcement of disability
nondiscrimination laws, particularly the Americans with Disabilities
Act (ADA) of 1990 and the Rehabilitation Act of 1973.
Consumer Action is a San Francisco-based education and advocacy
organization that has worked on telephone, banking and privacy issues
for more than 30 years. Consumer Action works through a national
network of more than 6,500 community-based organizations that serve low
and moderate-income consumers, recent immigrants and people of color.
Rainbow/PUSH Coalition is a progressive organization that advocates
for social change. With a membership of nearly 300,000, Rainbow/PUSH is
a national coalition of under-served employees, consumers, and
entrepreneurs committed to securing equal protection, opportunity, and
access under the law. Consistent with this mission, Rainbow/PUSH seeks
to ensure equal access to services, employment and ownership
opportunities in the telecommunications industry. The connection-based
methodology proposal (CBM) being reviewed at the Commission will pose a
disproportionate financial burden on low-income and low-volume
consumers. Rainbow/PUSH has a substantial interest in this proceeding,
because of the adverse impact that the CBM will have on many of our
constituents.
ii. comments
Under the current system, telecommunications firms are required to
use a percentage of their interstate revenue to support the Universal
Service Fund (USF). Under the proposed system, contributions would be
based on a flat monthly connection-based fee. Considering that many of
the Commenters' members/affiliates are eligible for the universal
service programs, we are strong supporters for the Universal Service
Fund, and the need to provide a reliable source of funding for
universal service programs. We also endorse the Commission's recent
changes to the universal service contribution methodology. However, we
are wary about radical changes to this revised contribution methodology
that may negatively affect the populations we ultimately serve.
We believe that a connection-based mechanism unfairly and adversely
impacts lower income and lower volume users of interstate services, and
on carriers who provide services to such consumers. The Commenters
point out that a connection-based mechanism is neither equitable nor
nondiscriminatory to carriers who provide services to our members/
affiliates, which violates Section 254(d) of the Communications Act
which states that ``[e]very telecommunications carrier that provides
interstate telecommunications services shall contribute, on an
equitable and nondiscriminatory basis, to be specific, predictable and
sufficient mechanisms established by the Commission to preserve and
advance universal service.'' <SUP>1</SUP> The implementation of a
connection-based mechanism would present a significant, unnecessary
change in the way in which USF contributions are collected.
---------------------------------------------------------------------------
\1\ 47 U.S.C. Paragraph 254(d)
---------------------------------------------------------------------------
We recommend that the Commission consider alternative modifications
to the contribution methodology. The Commenters bring to the
Commission's attention some example modifications noted by TracFone
Wireless, Inc.'s recent comments in which they
``. . . urges the Commission to consider additional changes to
the revenue-based contribution methodology, such as eliminating
the wireless safe harbor and ensuring that broadband Internet
access services, particularly Internet based telephony
services, contribute to the Universal Service Fund.''
<SUP>2</SUP>
---------------------------------------------------------------------------
\2\ Comment Letter of TracFone, Inc. CC Docket Nos. 96-45, 98-171,
90-571, 92-237, 99-200, 95-116, and 98-170, February 28, 2003
---------------------------------------------------------------------------
We concur that such changes could provide significant additional
resources for universal service programs. Additionally, these suggested
changes would most likely not have a negative effect on lower income
and lower volume users of interstate services.
conclusion
In summary, the Commenters believe that radical changes to the
revised contribution methodology may have unintended negative
consequences on consumers. We believe that the best available
alternative to ensure the continued viability of the universal service
programs is to consider alternative modifications to the contribution
methodology, such as eliminating the wireless safe harbor and ensuring
that Internet based telephony services contribute to the Universal
Service Fund. Hence, we respectfully request that the Commission more
carefully review proposed changes to the universal service funding and
request that the Commission discard the proposal for a connection-based
funding system.
Sincerely,
Derrick Span, National President
Community Action Partnership
Ken McEldowney, Executive Director
Consumer Action
Andrew J. Imparato, President and CEO
American Association of People with Disabilities
Cleo Fields, General Counsel
Rainbow/PUSH Coalition
______
League of United Latin American Citizens
April 18, 2003
Marlene H. Dortch
Office of the Secretary
Federal Communications Commission
445 12th Street, SW
Washington, DC 20554
Re: Federal-State Joint Board on Universal Service, CC Docket 96-45;
and CC Dockets 98-171, 90-571, 92-237, 99-200, 95-116, 98-170
Dear Ms. Dortch: The League of United Latin American Citizens
(LULAC) appreciates this opportunity to provide additional comments in
the aforementioned proceedings. In particular, we would like to
reemphasize our view that adoption of a connection based proposal will
have negative consequences for Hispanic consumers who are low volume
long distance customers and those that utilize prepaid wireless
services. We believe that a radical shift in the universal service
contribution methodology from one based on interstate revenues to one
based on connections or telephone numbers is not only ill-conceived, it
is unwarranted.
The assertion that interstate revenues are on decline does not
entirely ring true when one considers that interstate communication is
simply shifting from wireline to wireless, instant messaging, e-mail
and voice-over Internet. Indeed, even the FCC acknowledged this shift
in the December 13, 2002 Interim Rule when they lifted the wireless
safe harbor from 15 percent to 28.5 percent. LULAC supports this
revenue-based refinement and looks forward to assessing the outcome of
this change on universal service contributions when data becomes
available. We encourage the FCC to continue along this path and to
explore other refinements to the current methodology.
As we mentioned in our earlier filing, LULAC takes a special
interest in this proceeding because we want to ensure all Hispanic
Americans have access to affordable wireless telephone service. While,
almost half of U.S. Hispanics, or approximately 16 million Latinos,
have mobile phones, according to Cheskin Research; we also know that
there is a unique population of the Hispanic market that relies on
prepaid wireless service as their only wireless option. These types of
individuals include:
young people who cannot meet credit or security deposit requirements;
migrant and seasonal workers without a permanent address or other
institutional prerequisites;
people who are unwilling to enter into a long-term contractual
commitment;
senior citizens or public assistance recipients who are on fixed
incomes;
individuals who want to control their telephone costs; and
women and others who use them primarily for emergency or security
purposes.
Since this population tends to be low-volume, low cost customers,
they are often overlooked by wireless carriers who prefer high volume,
high cost customers. Yet, we understand, there are nearly 10 million
pre-paid wireless customers nationwide that are being served by
companies such as TracFone and Verizon Wireless thereby documenting the
critical role pre-paid service plays in meeting the needs of consumers.
LULAC urges the FCC to pay particular attention to how the connection-
based proposals will adversely affect pre-paid telephone providers who
serve this unique audience. The goal of universal service must include
fostering a marketplace that encourages providers to serve all
customers; and the FCC must prevent obstacles from being erected. In
addition, changes to the universal service funding mechanism must not
impose a regressive charge for universal service on low-volume
customers such as those mentioned above.
LULAC notes that a number of other public interest groups that
represent large constituencies of low-income consumers, such as the
Community Action Partnership, Rainbow-PUSH and the NAACP, share our
concern about negative consequences of abandoning the revenue-based
methodology. We also note industry groups, including mobile wireless
carriers, small local exchange carriers, and state public utility
commissions find fault with the various connection-based proposals on
different grounds. Consequently, we urge the FCC to conclude that
retention of the revenue based system, with the interim changes of
December 13, 2002, is the correct path to follow.
Thank you for taking our views into consideration and please do not
hesitate to call upon us if we can be of further assistance.
Sincerely,
Hector M. Flora,
LULAC National President
______
NAACP
April 18, 2003
Marlene H. Dortch
Office of the Secretary
Federal Communications Commission
445 12th Street, SW
Washington, DC 20554
Re: Reply Comments to Federal-State Joint Board on Universal Service,
CCDocket 96-45; and CC Dockets 98-171, 90-571, 92-237, 99-200,
95-116, 98-170
Dear Ms. Dortch: I am writing this letter to reiterate my concern
regarding proposed reforms to the contribution methodology for the
Universal Service Fund (USF). As I mentioned in my February 27, 2003
letter, the NAACP's principal objective is to ensure the political,
educational, social and economic equality for racial and ethnic
minority groups of United States and to eliminate race prejudice. The
USF has been instrumental in ensuring that all Americans have access to
affordable, comprehensive telecommunications services, particularly
consumers in high-cost service areas, low-income consumers, schools,
libraries and rural health providers.
Presently, telecommunications firms are required to use a
percentage of their interstate revenue to support the Universal Service
Fund. The fund is used to help compensate telephone companies for
providing access to services at reasonable and affordable rates
throughout the country, including rural, insular and high cost areas,
and to public institutions. Many of the consumers who benefit from the
USF are our constituents.
We strongly support the Federal Communications Commission's (FCC)
laudable goal of maintaining the viability of the USF. However, the new
proposal to shift from a revenue-based system to one based on
connections--meaning USF contributions would be based on a flat monthly
connection fee--raises concerns. Under this proposal, consumers who
make few or no interstate calls would be assessed the same as
consumers, especially businesses, who make more interstate calls. Low-
volume and primarily residential customers could unfairly bear the
burden of contributing to the universal service fund. Additionally,
studies have concluded that telephone providers who service the low-
volume population will be at a competitive disadvantage under a
connection-based methodology.
Consumers who utilize products such as pre-paid wireless services
could be adversely affected by the connection-based proposals. As the
FCC is aware, pre-paid wireless provides service to portions of the
African American community, including: low-income users or young people
who cannot meet credit or security deposit requirements; migrant and
seasonal workers without a permanent address; people who are unwilling
to enter into a long-term contractual commitment; senior citizens or
public assistance recipients who are on a fixed incomes; individuals
who want to control their telephone costs; and women and others who use
them primarily for emergency or security purposes among others. The
connection-based methodology would significantly raise the cost of this
particular type of telephone service at the expense of consumers such
as those mentioned above.
I urge the FCC to carefully weigh the impact of any intended
reforms to the universal service funding methodology to our nation's
most vulnerable as we work together to find better ways to increase
funding to such a valuable program.
If there is anything I can do to help advance this process, I can
be reached by telephone at (202) 638-2269.
Sincerely,
Hilary O. Shelton
Director
______
Before the Federal Communications Commission, Washington, DC 20554
April 16, 2003
Marlene H. Dortch
Office of the Secretary
Federal Communications Commission
445 12th Street, SW
Washington, DC 20554
Re: Reply Comments on Federal-State Joint Board on Universal Service CC
Docket 96-45 CC Dockets 98-171, 90-571, 92-237, 99-200, 95-116,
98-170
To: The Commission
reply comments of the national grange of the order of patrons of
husbandry
The National Grange of the Order of Patrons of Husbandry (the
``Grange'') hereby submit these reply comments to encourage the
Commission to adopt equitable and non-discriminatory regulations
related to assessments for the Universal Service Fund.
The Grange is the oldest general farm and rural public interest
organization in the United States. Founded in 1867, today the Grange
represents nearly 300,000 individual members affiliated with 3,000
local, county and state Grange chapters across rural America. More than
70% of all local Grange chapters are located in communities of 2,500
persons or less.
The Grange recognizes the importance of the Universal Service Fund
(USF) to the public welfare, especially in rural communities. In rural
America, there is an admitted lack of overall communications services.
Rural areas with many small towns and villages are considered to be on
the wrong side of the ``last mile'' of telecommunications services. A
major purpose of the USF is to help rural areas achieve parity in
telecommunication standards that is comparable to the more densely
populated metropolitan areas of the United States. The National Grange
also believes that full and fair competition is the only way to provide
state-of-the-art telecommunications services to rural populations,
especially those contained within the ``last mile.''
Section 254(d) of the Communications Act requires that ``[every
telecommunications carrier that provides interstate telecommunications
services shall contribute, on an equitable and nondiscriminatory basis,
to the specific predictable and sufficient mechanisms established by
the commission to preserve and advance universal service.]''
Today, all telephone companies that provide telephone service
between states or internationally contribute to the USF. The exact
amount is adjusted every quarter, based on the projected universal
service needs and the projected revenues generated by interstate and
international calls. Currently, each company makes a business decision
regarding whether and how to assess customers, in order to recover
their USF costs. Wireless service providers have a special provision
that is based on a flat rate calculation of estimated total revenues
rather than actual revenues generated by interstate telephone calls.
The Study estimates that wireless connections will grow by more than 50
million between 2002 and 2007 while land line connections are expected
to grow by fewer than six million over the same time period.
Current, proposals that have been submitted to the FCC suggest that
major changes are necessary in the collection of universal service
funds. One comment period for that topic has already passed. Following
that, the FCC issued a public notice seeking reply comments on a staff
study (the study) regarding alternative contribution methodologies. The
study undertakes to project the effects that alternative collection
based methodologies would have on the universal service fund.
The Grange strongly disagrees with the assumptions that major
changes are necessary in the revenue-based methodologies used to
currently collect funds for the USF. The following observations and
comments are submitted by the Grange in response to the study and in
support of our position.
Various methodologies used by the Commission staff project
significant shifts in the burden of payment among long distance
carriers, local exchange carriers and wireless carriers. Under the
baseline projection for revenue based methodology the share of
contributions by industry segment would shift from 59% for long
distance carriers, 26% for local carriers and 15% for wireless carriers
in 2002 to 41%, 32% and 27%, respectively, by 2007. However, all
baseline projections for connection or telephone number based
methodologies shift a disproportionate share of the USF funding
responsibility away from long distance carriers to local carriers and
wireless carriers. In 2002 the long distance carriers were responsible
for 59% of USF revenues. Under Proposals 1, 2, and 3, respectively,
that responsibility would fall to 22%, 29% or 13%. The financial
responsibility for maintaining the USF would shift dramatically to
local carriers and wireless carriers under any of the connection based
methodologies examined in the study. With this shift would come
significant shifts in the financial burden on individual consumers,
especially in rural areas, with no apparent benefit to consumer
populations that are dependent on USF funding to maintain telephone
service.
In contrast, The National Grange believes a modified revenue based
methodology is the most reasonable alternative for funding the USF
because it will result in the fewest disruptions in the long-standing
relationships among various companies and their consumers.
We do not see how any of the connection or phone number based
methodologies fit the intention of the Telecommunications Act of 1996
Act or Section 254(d). Connection based methodologies would fail to
meet the requirement that every telecommunications carrier contribute
to the USF. Connection based methodologies will disproportionately
affect low volume long distance callers, residential customers, and
customers on fixed incomes. All of these customer groups are
disproportionately represented in rural communities. Since one of the
major purposes of the USF is to provide or enhance telephone services
in high cost rural residential areas the Grange do not see the logic in
any methodology that would effectively increase USF contributions from
consumers who already reside in high cost rural areas.
Connection based methodologies would also significantly reduce the
responsibility of high volume, business users of long distance
telephone services to financially support the USF by effectively
imposing additional USF charges on intrastate telephone calls.
Connection based methodologies would remove the current
responsibility that each company has to decide whether and how to
assess customers to recover USF costs. Instead it would replace those
business decisions with de facto USF surcharges on every telephone
connection. In the best interest of fairness in competition, the
consumer-driven marketplace should dictate the success or failure of a
business plan, not the manner in which the government structures its
fees. To shift the burden of payment from one type of business model to
another in a seemingly arbitrary manner would be inequitable and unfair
treatment of private business entities.
On December 12, 2002, the Commission issued an interim rule
regarding modest changes to the current revenue based methodology. The
interim rule modified the current revenue base to increase the minimum
assessment that wireless carriers pay USF charges on from 15% to 28.5%
of revenues. This change better captures the industry wide proportion
of wireless calls that involve long distance service, but is still an
imperfect measure of the contribution that the individual wireless
carriers make to overall interstate service. The interim rule also
changed the assessment base from ``revenues accrued'' to ``projected
revenues'' to address concerns by some long distance carriers related
to the declining customer base that some carriers are experiencing.
Finally, the interim rule prohibits telecommunications carriers from
charging customers any ``mark-up'' above their relevant contribution
factor for their USF assessments. The National Grange believes that
these changes are sufficient to maintain the solvency of the USF for
several years on a basis that is equitable and nondiscriminatory to the
various segments of the telephone industry.
As a group whose membership is overwhelmingly from rural America,
the National Grange views the universal service fund as a necessity in
the achievement of parity of services to all segments of the United
States. Therefore, we support the current revenue-based methodology as
the most fair and least market intrusive manner in which funds are
collected.
The National Grange encourages the Commission to continue to study
the issues surrounding this proceeding and to make small changes to
correct minor inefficiencies or inequities, as done in the recent past.
For example, the Commission should move away from ``safe harbor
assessments'' for the wireless carrier industry and replace them with
methodologies that accurately reflect each wireless company's
proportion of the long distance market. In addition, we respectfully
urge the Commissioners to allow an adequate passage of time between
implemented changes, to allow valid observations of the results.
For the reasons explained in these comments, the Grange urges the
Commissioners to reject the connection-based methodologies to fund the
USF. We oppose any drastic changes to the method of collection of
universal service funds. Instead the Grange urges the Commission to
retain the basic structure of the current revenue based methodology for
assessing USF contributions. In addition, the interim changes put in
place in December of 2002 should be given a chance to work. Additional
modifications to fine-tune the existing revenue based methodology
should be explored to assure both sufficient USF revenues and an
equitable distribution of USF fees across various segments of the
telephone industry as well as across the various segments of the
consumer population, including rural consumers.
Respectfully submitted,
Leroy Watson, Director of Legislative Affairs
The National Grange
______
National Indian Education Association
April 18, 2003
Marlene H. Dortch
Office of the Secretary
Federal Communications Commission
445 12th Street, SW
Washington, DC 20554
Re: Federal-State Joint Board on Universal Service, CC Docket 96-45;
and CC Dockets 98-171, 90-571, 92-237, 99-200, 95-116, 98-170
Dear Ms. Dortch: The National Indian Education Association submits
this letter as a reply comment to express our trepidation about the
Federal Communications Commission's (FCC) consideration of an
alternative funding mechanism for universal service. Under the proposed
mechanism, contributions would be based on a flat monthly connection
fee as opposed to the current system based on a percentage of
interstate revenue.
The National Indian Education Association (NIEA) supports
traditional Native cultures and values, to enable Native learners to
become contributing members of their communities, to promote Native
control of educational institutions, and to improve educational
opportunities and resources for American Indians, Alaska Natives, and
Native Hawaiians throughout the United States. NIEA has promoted the
interests of Native Americans in telecommunications to Congress, before
the FCC and in the courts.
Because the majority of Native Americans live, work, and learn in
rural areas, many participate in the Lifeline and Link-up programs.
Additionally, many Native American libraries, schools, and universities
are beneficiaries of the E-rate program. E-rate is a vital program
providing numerous Native American K-12 public schools and libraries
with significant discounts on telecommunications services, Internet
access, and internal connections costs; thereby ensuring our teachers,
students and families have access to the richness of the world wide
web. Hence, NIEA is an avid supporter the Universal Service Fund, and
the need to generate reliable sources of funding for universal service
programs.
NIEA is instrumental in working with Native American schools and
libraries to apply for E-rate discounts, and we support the FCC's goal
of ensuring the USF is positioned to meet future demands. We advocate
not only for the continuance of the USF but also for the expansion of
base contributors as well. An expanded base of contributors will assure
the availability of affordable, accessible telecommunications services.
However, in the case of the connection-based proposal, NIEA is
concerned that prepaid wireless carriers that service rural localities,
such as TracFone, Inc., would be disproportionately impacted, resulting
in a higher fee assessment for Native American consumers of such
services. Prepaid wireless service offers Native Americans an
affordable accessible communication option. Prepaid wireless service is
an off-the-shelf, pay-as-you-go, service that offers consumers wireless
service with no contracts, no credit checks, no monthly fees, no
activation fees, no security deposits and no age limits. Such features
provide Native Americans with true costs for services. Because of
living in rural localities, many calling plans hit Native Americans
with hidden roaming fees and various other charges that are financially
burdensome. With prepaid wireless services, there are no surprises.
Native Americans pay for minutes that are expended.
As iterated in our previous comments on this matter, under this new
connection-based proposal, carriers whose services are designed for
customers that make fewer calls would carry a greater payment burden.
Such a burden would also be levied on the prepaid wireless customers.
In short, customers who make few interstate calls would be assessed the
same cost as customers who make many interstate calls. This would be a
major financial cost to Native Americans, who generally are low-volume
interstate callers. The result would be low-volume, residential
customers disproportionately contributing to the universal service
fund. The connection-based proposal does not live up to a primary
statutory principle that guides universal service fund policy: quality
services should be available at just, reasonable, and affordable rates.
NIEA urges the FCC to consider alternative modifications to the
contribution methodology. We would like to point out that other
commenters have identified additional contribution methodologies--such
as, eliminating the wireless safe harbor and ensuring that broadband
Internet access services contribute to the Universal Service Fund--as
viable alternatives. We agree that such changes could possibly provide
significant additional resources for universal service programs.
Additionally, these suggested changes would most likely not have a
negative effect on Native Americans.
NIEA asks that the FCC take a closer look at the connection-based
proposal. We are confident that you will find that it is not in the
interest of consumers, especially Native American prepaid wireless
consumers. Nor do we believe that adoption of this methodology is
necessary to ensure a robust USF. We, instead, encourage the FCC to
retain the current revenue-based mechanism and to carefully explore
fair and equitable ways to expand the base of contributors as a means
for generating additional revenues.
John Cheek, Executive Director
National Indian Education Association
______
Organization Concerned about Rural Education
July 17, 2003
Marlene H. Dortch
Office of the Secretary
Federal Communications Commission
445 12th Street, SW
Washington, DC 20554
Re: Ex Parte Comments to FCC Staff on Study of Universal Service Fund
CC Docket Nos. 96-45, 98-171, 90-571, 92-237, 99-200, 95-116,
98-170, NSD File No L-00-72
Dear Ms. Dortch: The achievement of parity in telecommunications
standards in rural America is a major purpose of the universal service
fund (USF). Rural schools, libraries and homes deserve to have equal
access to telephones and other telecommunications services when
compared to those located in more densely populated areas of the United
States. In rural America, some great strides have been made in the
delivery of telecommunications services. For example, it is estimated
that 89% of rural homes have wireline telephone service and the e-rate
program, paid for by the Universal Service Fund, has made some progress
in bringing services to our rural schools and libraries.
The very formation of the Organization Concerned about Rural
Education (OCRE) was predicated on the belief of equality in
educational standards with respect to the condition of physical
structures, quality teachers and the access to technology. As a result,
OCRE has long been a staunch advocate for the sustainability of the
universal service fund. Yet, recently, some concerns have been
expressed that the future holds a decline in funds available to sustain
the universal service fund. Among the reasons cited for this trend are
a decline in interstate revenues, the bundling of local and long
distance calling packages and customer demand for universal service
programs.
Consequently, there are those who believe that the current
collection system simply needs minor modifications while others believe
a major change in the collection methodology is necessitated. To that
end, and much to the credit of the FCC, a Staff Study was done that
attempted to project the effects various proposals would have on the
universal service fund. The FCC seeks to ensure the full funding of the
USF by changing collection methodology. Three of the four proposals
would drastically change the method of collection from a revenue-based
system to a connection-based system.
In all of the connection-based proposals presented in the study,
there seems to be a significant shift in the burden or payment from
interstate and international business community calls to the
residential customer base. Can such a radical change in the formula for
collection methodology be justified if the people, including families
with school-aged children, who are to benefit from the universal
service fund are those who must shoulder the greatest burden of
payment? In addition, the ever-protected reserve fund, considered to be
an absolute necessity by industry and consumer groups, although briefly
mentioned, is conspicuously absent from the staff study. This leads to
questions revolving around the reserve fund, and its subsequent
condition if this radical change in collection is made.
As an organization whose focus is on the success of rural
education, OCRE views the universal service fund as a necessity in the
achievement of parity of services to all segments of the United States.
Therefore, we support the current revenue-based methodology as the most
fair and least market intrusive manner in which funds are collected. In
that way, the FCC avoids taking the inevitable blame for capriciously
changing collection methodologies that disproportionately affect
customers who make few or no long distance calls. With that in mind,
OCRE suggests that the FCC seriously considers an expansion in the base
of contributors to the USF. This would be more inclusive of all types
of telecommunications providers, would solve the existing concern of
decline in interstate revenues, as well as thwart the potentially
inequitable result that a connection-based methodology will cause.
Furthermore, it certainly would conform with market trends.
In another decision, the FCC increased the safe-harbor rate used as
the basis for wireless providers to contribute to the USF from 15% to
28.5%. OCRE commends the Commission for its ability to timely recognize
shifting market trends and act accordingly. As time progresses, this
will likely prove to be a wise decision on the part of the FCC that
will help the USF to remain sustainable and predictable.
OCRE views the proposed connection based changes as unnecessarily
extreme, and opposes any drastic changes to the method of collection of
universal service funds. We encourage the Commission to make small
changes to correct minor inefficiencies or inequities, as done in the
recent past. In addition, we respectfully urge the Commissioners to
allow an adequate passage of time between implemented changes, to allow
the results to be observed fully.
We urge the Commissioners to retain the current revenue based
mechanism for assessing universal service fund contributions.
Sincerely,
Dale Lestina
President
______
Telecommunications Research & Action Center
April 18, 2003
Marlene H. Dortch
Office of the Secretary
Federal Communications Commission
445 12th Street, SW
Washington, DC 20554
Re: Reply Comments to Federal-State Joint Board on Universal Service,
CC Docket 96-45; and CC Dockets 98-171, 90-571, 92-237, 99-200,
95-116, 98-170
Dear Ms. Dortch: The Telecommunications Research & Action Center
(TRAC) submits these reply comments to the Federal Communications
Commission (Commission) to express once again its concern regarding the
above-captioned proceedings. As noted in our February 27, 2003, letter
to the Commission, TRAC is a non-profit membership organization based
in Washington, DC, that, since its inception in 1983, has promoted the
interests of residential telecommunications customers. TRAC staff
researches telecommunications issues and publishes rate comparisons to
help consumers make informed decisions regarding their long distance
and local phone service options. TRAC can be found on the web at http:/
/www.trac.org.
TRAC strongly urges the Commission to carefully measure the adverse
impact on residential consumers before the Commission drastically
alters how it assesses contributions to the universal service fund
(USF). TRAC notes that other Commenters and even Commission's staff
have found that should the Commission change from the current revenue-
based methodology (RBM) to a connection-based methodology (CBM), ``such
a change would shift much of the responsibility for USF funding from
business users to residential users, and would increase USF rates for
many average-use and low-use residential customers.'' <SUP>1</SUP>
---------------------------------------------------------------------------
\1\ See Comments of Consumers Union, Texas Office of Public Utility
Counsel, Consumer Federation of America, Appalachian People's Action
Coalition, Center for Digital Democracy, Edgemont Neighborhood
Coalition and Migrant Legal Action Program at page I (April 22, 2002).
See also Projected Assessments under Proposal 2 of Connection-Based
Methodology published in Federal Communications Commission Public
Notice FCC 03-31, Commission Seeks Comment On Staff Study Regarding
Alternative Contribution Methodologies, February 26, 2003.
---------------------------------------------------------------------------
TRAC highly recommends that the Commission consider how the
proposed CBM runs afoul of the clear mandate of the Telecommunications
Act of 1996 (1996 Act) to assess every telecommunication carrier for
USF contributions. Under the CBM, the assessment would shift from the
carriers to the end-users. As TRAC previously remarked, the Commission
is tasked with assessing contributions in an equitable and non-
discriminatory manner. Under the proposed CBM, high-volume and low-
volume consumers would be charged the same flat fee. This is hardly
equitable or nondiscriminatory, given that business consumers, who
typically make many interstate calls would be assessed the same as
residential consumers, many of whom are low-income and low-volume
callers. Low-volume residential consumers would have to contribute the
same to the USF as high-volume residential or business consumers.
Finally, TRAC stresses the twin hardship faced by low-income and
low-volume users who use pre-paid wireless services should the
Commission adopt the CBM. Low-income users of pre-paid wireless
services are ineligible to receive the FCC's ``Lifeline'' exemption
from USF contributions. Sadly, low-income and low-volume consumers will
be charged a flat connection fee regardless of the number of calls they
make as well as being ineligible for the Lifeline exemption.
The connection-based methodology disparately impacts low-income and
low-volume residential consumers. In addition, the CBM is contrary to
aims of the 1996 Act. Accordingly, TRAC highly recommends that the
Commission abandon any further consideration of the proposed
connection-based methodology.
Sincerely,
Dirck A. Hargraves, Esq., Counsel
Telecommunications Research & Action Center
[GRAPHIC] [TIFF OMITTED] 99965.016
[GRAPHIC] [TIFF OMITTED] 99965.017
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