Daniel K. InouyeSenatorToday’s hearing on universal service returns the Committee to familiar territory. Indeed, it was just over a decade ago that we created Section 254 of the Communications Act, which provided the Federal Communications Commission with statutory authority to create a system of explicit support to preserve and advance the goals of universal service.While it may be familiar territory, today’s universal service system faces new challenges, brought on by shifts in the way that Americans communicate and by the steady emergence of new communications platforms.Without question, when it comes to universal service reform, we face a difficult task in balancing competing equities to promote the goals of universal service in a manner that will achieve a fair result. These issues are complicated, and radical solutions often promise more than they can deliver.If we are to move forward in fashioning a system that is both flexible enough to adapt to changes in the marketplace and rock-solid in its commitment to promoting reasonably comparable communications services at reasonably comparable rates, then all of us – industry, regulators, and Members of this Committee – will need to roll up our sleeves, and work toward proposals that will result in meaningful progress and a firmer footing for the stability and sufficiency of the universal service fund.I am hopeful that today’s hearing, featuring two distinguished panels, will begin this constructive discussion.
Amy KlobucharSenatorThank you Mr. Chairman and Mr. Vice Chairman. I am pleased to be here to address the challenges facing the Universal Service Fund and to work on ways to reform it.The USF is not new to me – in my years as a telecoms lawyer I dealt frequently with USF issues. And in the past two years, I’ve been all over my home state, Minnesota, talking about the need to serve all of our communities with affordable and up-to-date telecommunications services.But I am a newcomer to the more recent debates about the best methods to sustain, reform, and fairly allocate the costs of the Fund.So I look forward to engaging with all of the stakeholders, with the FCC and the Joint Board, and with my colleagues, and to asking a number of important questions. They include:Should the contribution be assessed on a “per connection” basis or a “per working telephone number” basis?How do ETCs fit into the purposes and operation of the Fund?How do we best allocate high cost support for non-rural carriers?How do we improve our method of distribution from the Fund?Throughout this debate, I think it is vital that we remember the fundamental purpose of Universal Service, as stated in the Communications Act of 1934: It is to ensure that “all the people of the United States,” have access to “a rapid, efficient, Nation-wide, and worldwide wire and radio communication service with adequate facilities at reasonable charges . . .”And that brings me to my top priority in this area: bridging the digital divide and bringing high-speed broadband to every community in Minnesota and every corner of this country.I have talked in previous hearings about the persistent urban-rural digital divide. In May 2006, the GAO reported that broadband takeup rates were 70% higher in suburban and urban homes than in rural homes. A 2006 Pew study found a similar divide.Here is another troubling statistic: more than 1 in 10 of the most rural counties do not even have a single high-speed Internet connection – in the entire county.A community that is left without affordable broadband access is a community that will be left behind. A 2006 MIT study found that towns which had mass-market broadband experienced markedly faster growth in employment and number of businesses.I am convinced that the market alone will not solve this problem. Broadband deployment will lag behind in rural areas because the private sector gets a much higher return in areas of high population density and high income. I am convinced that the federal government must assist underserved areas – especially rural areas – in partnership with states, towns, and the private sector.That much is clear to me. What is a little less clear is the precise form federal government that involvement should take.The FCC and the Joint Board have resisted adding broadband to the list of covered services under the USF. They have consistently decided not to. I want to explore that decision, especially in light of the fact that broadband meets one of the key criteria of the Fund: like plain-old telephone service decades ago, it has become “essential to education, public health, and public safety.”I believe that an updated, reformed Universal Service Fund is very likely the best vehicle for bringing broadband to rural America. But I am willing to listen to those who say that some other vehicle will get us faster and more effectively to our destination.Some have talked about the possibilities of auctions, others about targeted grants and loans, others about tax credits. And, of course, any federal approach must complement existing and emerging digital divide initiatives being undertaken at the state and local level.I intend to look at every possible vehicle, with a strong inclination toward adding broadband to the USF, and I do not intend to rest until we have met this challenge.Thank you.
Bill NelsonSenatorMr. Chairman, thank you for holding this important hearing on the present and future of the Universal Service Fund.Today, the Universal Service Fund fills a critical role by ensuring that all Americans have access to telecommunications services at affordable prices. The E-Rate program, for example, has ensured that almost all American students have access to the Internet. Similarly, the Low-Income program provides affordable telephone service that is truly a “Lifeline” for many families.As we move towards the future, I look forward to exploring possible new uses of Universal Service funds, such as targeted support to bridge the urban-rural divide in broadband service penetration. Consumers in rural areas of Florida should have the same access to broadband services that consumers in urban areas, such as Miami or Tampa, have available.At the same time, however, we must also take steps to preserve the financial stability of the Universal Service Fund. This reform should start with controlling the growth of the Universal Service Fund and, in particular, growth of the High-Cost portion of the Fund.Unrestrained growth of the High-Cost portion of the Fund is causing an increased and substantial burden on consumers that pay into the Fund. Florida, for instance, is currently the largest net payer into the Fund – last year the State paid in more than $311 million more in contributions than it received in distributions.We need to move towards a system that shares both the costs and benefits of Universal Service more equally among all Americans.On the contribution side of the Universal Service equation, I look forward to reform that is sustainable, while still protecting low-volume and low-income consumers from any spike in the amount they currently pay into the Fund.And on the distribution side, I look forward to hearing the details of various reform options – such as reverse auctions – that may limit unsustainable growth of the Fund.Working together, we can create a Universal Service Fund that is technologically flexible, fair to consumers, and sustainable for the future.Thank you.
Ted StevensSenatorI would like to thank the Chairman for scheduling this hearing. Senator Inouye has been a great leader with respect to universal service long before 1996 when we co-authored the universal service title to the communications bill.As communications technologies evolve, the mission of universal service continues. The USF title made sense in 1996 but certain elements like how the program is financed must now be revisited.Last Congress, this Committee worked in a bipartisan fashion to reach consensus on a universal service title to the communications bill that would require all communications carriers to pay into the system – not just interstate operators.S. 101, the USA Act, I introduced with senators Lott, Hutchison, Snowe, Thune, and others is identical to the bill this committee reported out. The bill would result in a more rational approach with a smaller fee on most consumer phone bills.For the elderly, who could have been disproportionately impacted, we created an exception. The bill also ensures that no technology is excluded from being able to receive universal service funds. It also builds on the work of senator smith last year by supporting broadband in rural America.While there seems to be consensus relative to universal service contributions, there are a number of issues before the FCC relative to distributions that do not yet have consensus.We will hear about proposals for reverse auctions and other ways to limit universal service spending today. Rural carriers in Alaska have serious doubts about the impact reverse auctions could have in my state, and I share their skepticism.
Witness Panel 1
Honorable Michael J. CoppsCommissionerFederal Communications CommissionTESTIMONY OF FCC COMMISSIONER MICHAEL J. COPPSU.S. SENATE COMMITTEE ON COMMERCE, SCIENCEAND TRANSPORTATION HEARING ON THE“PRESENT AND FUTURE OF THE UNIVERSAL SERVICE FUND”MARCH 1, 2007Mr. Chairman, Mr. Vice-Chairman, Members of the Committee, I am pleased to visit with you again today to focus on one of the most important challenges confronting this Committee, our Commission and the country. This is the challenge to bring advanced telecommunications to all our citizens and to ensure that our Universal Service System, which has accomplished so much, can make this happen in a sustainable way. Since I went to the FCC nearly six years ago, my overriding objective has been to help bring the best, most accessible and cost-effective communications system in the world to all our people—and I always underline the “all.” Each and every citizen of this great country should have access to the wonders of communications—whether they live in rural areas, on tribal lands, or in our inner cities; whether they have limited incomes or disabilities; whether they are schoolchildren or rural health care providers.If we are going to ensure that no community, no citizen, is left behind by lack of access to basic or advanced telecommunications in this new digital age, we need to think anew, adjust our policies and craft the proper incentives. We must include these new opportunity-creating technologies as part of our Universal Service Program. In plainer English, it is time to bring broadband into the Universal Service System. We must also update and broaden the USF contribution base. We must make sure funds are distributed with maximum equity among consumers, areas and technologies. And we must recognize that the economics of non-rural, rural and truly remote service areas are fundamentally different.Permit me to begin by emphasizing the importance of a USF commitment to broadband because this is, far and away, the most meaningful step we can take to create opportunity for our citizens, to ensure community development in every area of our country and to keep our nation competitive in the global economy. Broadband is the great network and infrastructure challenge of our time. If you double back through the years of this nation’s history, you will find that just about every formative era has had its own major infrastructure challenge. Go back to the very beginning as settlers pushed into the frontier and populated new lands. Their infrastructure challenge was to develop ways to deliver their produce and products to increasingly far-away markets. So they found ways to build roads and turnpikes and canals and ports to meet that challenge. Later, as we industrialized, the need was to lay a railway grid, first across regions and then across the country, climaxed by the great saga of the Transcontinental railroads as we became a continental power following the Civil War. Closer to our own era, in the Eisenhower years as suburbs grew and our demography changed, came the Interstate Highway System binding the country more closely together. We saw it in communications, too, in extending telephone service to rural America with the Rural Electrification amendments under Harry Truman and with the Universal Service Fund that we are gathered here to discuss this morning. In all of these infrastructure build-outs, there was a critical role for government, business and local community organizations to work together toward a great national objective. This is really the American Story. It’s how we built our nation and how we grew. It is, I believe, the only way we will continue to grow it.From where I sit, broadband networks are the canals and railroads and highways of the digital age. Our future will be in significant measure decided by how we master, or fail to master, advanced communications networks and how quickly and how well we build out broadband connectivity.So first we need to look at what part Universal Service should play in meeting this great infrastructure challenge. I recognize that the process of incorporating broadband into Universal Service will involve many complex and difficult choices about what mix of technologies—like wireless, copper-based, and fiber—to support, how to support them, and on what time frame. I certainly don’t have a silver bullet answer here today, and I am not sure that anyone else does either. But I do know that we need to confront these questions in a forthright and honest fashion, and we need to resolve them through a process that involves all the stakeholders in this important issue. That surely includes the state authorities, like those sitting beside me here today, who are a fountain of creative and insightful ideas on this subject. I hope the FCC will play a more proactive role in this effort—not least by gathering the hard data that is absolutely essential to sound policymaking, doing the analysis and teeing up options for Congress to consider. We also need to make sure that decisions about Universal Service are part of a complete national broadband strategy, which might involve additional components such as matching grants and tax incentives. More than anything else, I know that we simply can’t throw up our hands and say that there shouldn’t be any federal Universal Service support for broadband. Yet in too many ways that is exactly what our approach to Universal Service does today.In truth, I believe that Congress already gave the FCC and the states the statutory mandate to advance the cause of bringing access to advanced telecommunications to each and every citizen of our country. I’m not sure, however, that all my colleagues on the Commission agree that we have the authority to be more proactive in encouraging broadband deployment and penetration, and this is why I am hopeful that Congress will choose to make this clear for all of us to understand.Earlier this year I was fortunate enough to meet a small business owner who was able to work out of his home on a rural hilltop on the Big Island of Hawaii after broadband service was installed—rather than trekking each day to the nearest town miles away to get online. And not too long ago I visited an Inuit village in Alaska, totally unreachable by road, where a sick child with an ear infection could be examined by a doctor hundreds of miles away. In another Alaskan village, students had used their broadband connection to speak in real time with the crew of the International Space Station. Like a string wrapped around a finger, stories like these remind us that lives and livelihoods and our very health are hugely influenced by the communications infrastructure available to us.As we work on implementing these lofty concepts, we must also of course deal with nitty-gritty of administering the program we have today. Permit me propose three things that I believe could be done immediately to put Universal Service on a more solid footing so that it can be better deployed to shape our future. First, with boundaries between local and long distance eroding, and the skyrocketing success of any-distance calling plans, assessing Universal Service contributions only on interstate services is anachronistic. While it will require a legislative fix, I believe that assessing both intrastate and interstate revenues is a good idea. Second, it is as clear as clear can be that the costs of investing and maintaining wireless and wireline infrastructure are inherently different. I believe that wireless can and should be a part of Universal Service, but the time has come to put an end to the irrational and costly system of supporting wireless carriers based on the cost of wireline incumbents. The identical support rule is the subject of a five-year old Joint Board referral; I believe it is high time for the Board to make a recommendation to the full Commission so we can take corrective action. Finally, I believe that the Universal Service System cannot thrive without regular review and care. The high-cost fund, like many other good programs, can only benefit from additional oversight and auditing to ensure that a few bad actors do not jeopardize the strength of this great enabling program.The Joint Board and the FCC are in the midst of a serious debate on how to best shore up the Universal Service Fund and how it can meet the changing needs of the country as we head into the 21st century. Board Chairman Tate and our state colleagues here this morning are hard at work developing recommendations for the Commission. Our state colleagues on this panel are among the nation’s leading experts on Universal Service. They have put creative ideas before the Joint Board and Commissioner Tate and I may well be asked to vote on these ideas in the months ahead. Last week, the Joint Board held a valuable en banc hearing addressing some of the issues we will be discussing today. I continue to urge my colleagues that we act quickly and deliberately to address the rising demands on Universal Service. All of us want this system to work. None of us wants our country, or anyone in it, to miss the opportunities of the digital age. None of us wants to see any kind of digital gap anywhere in America. But, truth is, if we don’t get our policies right, we could experience a 21st Century Digital Gap, in spite of the wonder of all these new technologies, greater than the one we experienced with plain old telephone service in the last century. The USF can do great things for America. It can help ensure that often unserved areas of our country are connected to vital education, public health, public safety, employment, and business opportunities. But we don’t have the luxury of time to get this right because the rest of the world isn’t planning on waiting for us.I look forward to our conversation today to see how we maintain a robust, effective, and forward-looking Universal Service System that remains true to its essential mission and true to the mission of our country.Thank you for your attention and for holding this hearing today.
Larry LandisCommissionerIndiana Utility Regulatory CommissionTESTIMONY OF THE HONORABLE LARRY S. LANDISMEMBER, INDIANA UTILITY REGULATORY COMMISSIONGood morning, Mr. Chairman, Co-Chairman Stevens, and members of the Committee. I am Larry Landis, and I am a member of the Indiana Utility Regulatory Commission. I serve on the Telecommunications Committee of the National Association of Utility Regulatory Commissioners, NARUC, and was Vice Chair of NARUC’s Intercarrier Compensation Task Force. I am also a member of the Federal-State Joint Conference on Advanced Telecommunications Services; and most pertinent to today’s hearing, a member of the Federal-State Joint Board on Universal Service.Thank you for the opportunity to address the critical issues relating to Universal Service from the perspective of state regulators. I want to underscore that I do not necessarily represent their views, which like those of this body, sometimes diverge.Given today’s time constraints, I would start by referring you back to the March 2, 2006 testimony of my colleague Tony Clark, Chairman of the NARUC Telecommunications Committee and of the North Dakota Public Service Commission, before this Committee almost exactly a year ago today. Commissioner Clark’s observations then are still relevant today.Commissioner Clark characterized Universal Service as being at a crossroads. Among the questions he posed:· Should broadband infrastructure and services be explicitly funded?· What is the optimal size of the fund and does it need to be capped?· Should it fund competition in high cost markets?· How many networks should be funded in high cost markets?· On what cost basis should carriers be reimbursed?· How many access lines per customer – or household -- should be funded?· Is it intended for networks or for individuals?· Should contributions be pegged to network usage, use of numbers,connections or some other methodology?· Should Universal Service continue to be a shared Federal-Stateresponsibility, or is there some other configuration which makes sense?Today we speak more about the distribution side of Universal Service. However, I do want to acknowledge the bipartisan effort which went into framing a solution to funding of Universal Service which was incorporated into the proposed Communications Act of 2006 last year, and which I understand is incorporated into a free-standing bill again this year. The latitude which you incorporated into that plan from a funding perspective was useful, commendable, and I believe enjoys broad support from state regulators.I will limit my remarks about the important issue of the significant growth in the size of the high cost funds. I share the opinion of my colleagues on the need for a cap on expenditures to give us breathing room to address the issues in a more comprehensive way. It is critically important to the sustainability of the program and to its continued place on the public policy agenda. Chairman Martin has spoken to this issue forcefully and my Federal and state colleagues have addressed and will address that issue here today.In considering reform, we would do well to take a page from the Hippocratic oath and first resolve to do no harm. Given the size, scope and complexity of the current mechanisms, that is a considerable challenge.For example, high cost loop support for rural companies is currently determined based on legacy investments, or put another way, embedded costs. We need only look to Detroit to see the problems which legacy decisions can present for companies which are looking to move into the 21st century and to compete with companies which are not saddled with those decisions. Those decisions seemed appropriate at the time, but now create a significant burden of competitive disadvantage.Increasingly, facilities-based competition is coming to many rural local exchange companies. It is coming not only in the form of mobile wireless, but also VoIP delivered by cable modem, fixed wireless and broadband over power lines. But that competition is taking root primarily in the villages, communities, towns and small cities in those rural service areas. Often it doesn’t reach out to the “truly rural” areas served by rural LECs.We need to encourage incumbents – indeed, all providers -- to look to the future rather than to a legacy past. But if we decide to sever those links to a legacy past for the RLECs, we also have a responsibility to migrate those companies which have based their business plans on a model which we may now consider less relevant. And we need to focus support in those areas where the costs are higher by an order of magnitude, and which in many cases are not contestable.Another example may be found in the challenge presented by the growth in the number of competitive ETCs, primarily wireless companies. Some will assert that this growth is symptomatic of the problems of Universal Service. Others will argue that this is a reflection of the dynamic growth of the wireless sector. Regardless, the wireless sector has been the primary contributor to growth in the high cost funds.Under Section 214 (e) of TA 96, State Commissions are delegated to help administer the Universal Service Fund by designating those companies which are eligible to receive support (Eligible Telecommunications Carriers, or ETCs) in each state. The FCC’s guidelines on ETC designations and certifications, adopted in 2005 in response to a recommendation of this Board, define criteria and urge states to apply a public interest standard.In Indiana, we have taken this charge seriously by fully adopting these guidelines and applying them to each new ETC applicant and each ETC who seeks annual certification for federal universal service funds. Other states have chosen a more permissive approach or – as is the case in North Dakota – were restricted in their ability to review ETC applications by a court decision. Those 2005 FCC guidelines should be made mandatory, and as states we must shoulder our share of responsibility.At the same time, there many rural areas where multiple wireless providers are active. Some companies have entered some rural markets based at least in part on the assumption that they could receive Universal Service support. Other companies have entered rural markets based on a competitive, unsubsidized model. One proposal would hold reverse auctions in those areas where there are multiple wireless ETCs, with wireless ETC funding distributed on a winner-take-all basis. Where there is already competition, we need to make sure we don’t inadvertently advantage one company over its competitors, which entered that market based on their assumption that it was contestable. Put another way, we need to make sure we are not inadvertently making it more difficult to compete, thereby perhaps reducing competition while reforming Universal Service subsidies.Lurking just around the corner is the question of rural broadband buildout. The problem is that there is relatively little granular data which would tell us which of several solutions would be most cost-efficient in addressing the needs of the unserved in any given geographical area. Once we know that, we are in a far better position to determine what form and how much should be devoted to buildout in those high cost and very high cost areas.Where will tax abatements be sufficient incentive to encourage buildout? Where are costs so high that only a straight subsidy will work? In the latter cases, where the market isn’t there, who will choose which technology is selected, and how large should the subsidy be? Commissioner Copps has spoken to the need for better, more robust data, and I share his concern.I believe the states have an important and potentially growing partner role with the FCC as joint stewards in implementing your vision, and in seeing to it that Universal Service funds are appropriately deployed, that legitimate needs are met, but that accountability and performance are audited and demanded.
John BurkeBoard MemberVermont Public Service BoardTestimony Of The Honorable John Downes BurkeMember, Vermont Public Service Board &Member, Federal-State Joint Board On Separations &Member, Federal-State Joint Board On Universal ServiceOn March 1, 2007I. IntroductionI thank the committee for the invitation to speak today. Federal universal service policy is of great importance to the nation, and particularly to states, like Vermont, where it is expensive to provide telephone service.To introduce myself, I have been a member of the Vermont Public Service Board for six years. I have served on the Federal-State Joint Board on Separations since 2003. Last year I was also appointed as a member of the Federal-State Joint Board on Universal Service. With Commissioners Baum of Oregon and Landis of Indiana, I have also served as one of five state NARUC commissioners who oversaw the industry’s development of the current Missoula Plan.II. The Statute.The existing universal service law, Section 254, was passed in 1996. It was a significant step forward in establishing universal availability of telephone services in this country. Section 254 of the Act repeatedly imposes the duty on both the FCC and the Universal Service Joint Board to “preserve and advance” universal service. More specifically, the statute lists six goals, some of which apply primarily to distribution of universal service support, and some of which apply to collection. Notable in this list is subdivision (3), which requires that rural “access to telecommunications and information services,” including “advanced telecommunications and information services” be “reasonably comparable to those services provided in urban areas.” It also requires that the rural rates charged be “reasonably comparable to rates charged for similar services in urban areas.”Reasonably comparable rates is the heart of the high cost support system, and the courts have taken this goal seriously. Twice, the Court of Appeals in Denver has remanded FCC decisions because the FCC had not shown how its programs satisfy that goal. Developing a system in compliance with Section 254 should be an important priority for the Joint Board and the FCC.A. Challenge - Competition and the Growth of CETCsThe most urgent problem for universal service is the rapid growth of funding for competitive telecommunications carriers. There is nothing inherently wrong with providing support to competitors, but our current policy is on a self-destructive path that could jeopardize the entire universal service system, and it is my opinion that subsidizing robust competition was never an underlying goal of this fund.Our current policy was adopted to promote “competitive neutrality,” a seventh principle that the first Joint Board added to the list of goals for universal service. As we have applied it, this principle has led to the “equal payment” rule. Under this rule, carrier “A” who is an Incumbent Eligible Telecommunications Carrier (IETC), and carrier “B,” who is a Competitive Eligible Telecommunications Carrier (CETC), receive equal support per line. This was seen as neutral, even though only carrier A must submit its costs.This equal payment rule was originally conceived as a way to transfer support when a CETC wins a customer from an IETC. Review of the record shows that the Joint Board did not anticipate that households with one carrier and one telephone line would begin to have two or more carriers and multiple cellphone lines in addition to the classical Plain Old Telephone Service (POTS) line. Today, each of these lines may draw a quota of universal service support.The equal payment rule never acknowledged the effects of economies of scale, one of the basic characteristics of networks. When two carriers divide a market that previously was served by one, the total cost of serving that area can go up, not down, particularly if the area served is high-cost and rural. As Chairman Martin has repeatedly pointed out, our current policy has the effect of supporting construction of multiple networks in areas where constructing the first network has been very expensive. This has understandably produced explosive growth in the support provided to Competitive ETCs. As Commissioner Tate’s slides show, this support has been growing at 101 percent per year for the last four years, and is approaching $1 billion. Moreover, the number of new CETC applications suggests the growth will continue into next year and beyond. Even though support to ILECs has held fairly level during this period, rapid CETC growth creates risk for the entire universal service mechanism.I have recommended an immediate CETC cap for all carriers whose support depends on the equal payment rule. I recommended that the cap apply by study area, so that areas without CETC support would remain that way until a new CETC support system is devised. In areas where there is already some CETC support, that amount would be divided among the competitive carriers that obtain designations.Over the longer term, it is imperative that we develop clearer policies about how we expect existing networks to be supported in high-cost areas, how many networks we are willing to support, and how they will be selected.B. Challenge - Uneven SupportOne of the earliest decisions made after the 1996 Act passed was to create separate “tracks” for the universal service provided to rural and so-called “nonrural” carriers. That decision has continued to this day.Today, rural and nonrural carriers have largely distinct support systems. The mechanisms differ in many significant ways, but the overall effect is that support for larger nonrural carriers is significantly less than support for smaller “rural” carriers. Today the average rural carrier receives $13.68 per line per month in high cost support. The average nonrural customer receives 66 cents per line of high-cost support, and most of that goes for interstate cost and not for local rate reductions. In sum, customers of large carriers receive about five cents of high cost support for every dollar paid to benefit the customer of rural companies, not due to differences in need, but rather, to the size of the company that serves them.This would be fine if nonrural carriers had no rural customers. In fact, the match between “rural carrier” and “rural customer” works fairly well in the Midwest where there are hundreds of rural companies. But the equation between “rural carrier” and “rural customer” does not work well in New England or in the Appalachian region, where Bell companies still serve large rural areas. In truth, millions of rural customers are served by larger carriers. Among the so-called “nonrural” companies, more than one customer in five is actually a rural customer.The problem bites most deeply in states, like Maine, Montana, Wyoming and Vermont, where there are no large cities that can subsidize rural areas through retail rate averaging. These states suffer from a double disability: the absence of large cities eliminates the possibility of averaging high and low cost areas to develop lower average rates overall; and the absence of smaller “rural” telephone companies reduces the support available to rural customers.The disparity between rural and nonrural companies has only become worse over time. Rural customers served by large companies today are not only likely to have higher rates, they probably have less access to broadband as well.C. Challenge - BroadbandBroadband is probably the most important current challenge for universal service. Section 254 directs that access to advanced services should be provided in all regions of the nation. Yet many states have large areas where broadband is available only by satellite. It has been widely reported that the United States is falling behind, year by year, in the percentage of our citizens who buy broadband.The Joint Board should give serious consideration to adding Broadband to the official list of supported services. Section 253 gives us detailed guidance for this decision. The statute recognizes that “universal service is an evolving level of telecommunications services.” We must consider whether broadband services “are essential to education, public health, or public safety” and whether “a substantial majority of residential customers” have actually subscribed. As Consumer Advocate Gregg has pointed out to us, a majority of residential customers may soon actually subscribe to broadband.One possible problem is that Section 254 allows us to add only “telecommunications services” to the existing list of supported services. The FCC has declared that several kinds of broadband Internet services are actually “information service,” not “telecommunications service.” So, even though Section 254 tells us explicitly that “access to advanced telecommunications and information services should be provided in all regions of the Nation,” we will need to examine carefully whether these FCC rulings bar use of Section 254 as a vehicle to promote broadband.A second possible problem is that including broadband in the definition of universal service could inadvertently disqualify some existing carriers who provide “POTS” or “Plain Old Telephone Service.” Section 254 does not specifically anticipate allowing funding for services that do not meet the minimum requirements for eligibility. We would need to move carefully to allow existing carriers a reasonable transition period to meet any new requirements.Another concern is that to include broadband in the definition of universal service could greatly expand the size of the high cost fund. This is a serious concern, but we should not assume that broadband services will be supported in the same ways that we now support POTS.The Joint Board has recently sought comment on the use of auctions, and we are examining the potential for newer technologies to better target existing support. I believe that we should also examine matching grants. Many federal agencies, from Transportation to Education, today promote good state policy through the use of such matching grants. If applied to broadband, a system of matching grants could easily be controlled fiscally by implementing an annual funding cap. Also, matching grants would be most likely to be effective. States generally know the most about their own broadband needs, and a mechanism that required a state matching share would be very likely to focus support in areas where a problem really exists.Earlier this winter, Vermont Governor James Douglas outlined to our state legislature an initiative that would authorize state bonding to provide broadband in unserved areas. A federal matching grant for broadband deployment would allow us to stretch our limited state dollars. It would greatly assist Vermont and other states that are still struggling to provide a first broadband connection to many of their citizens.I also agree with Commissioner Copps that data quality is a problem for broadband. Data indicating which zip codes have broadband is misleading. Knowing that broadband is available somewhere within a zip code is little solace to an individual customer who can’t buy it from anyone. The Joint Board should be collecting data on broadband at a much finer scale than it does now, and the technology clearly exists to do this.D. Challenge – Limiting fund sizeI have mentioned the need to equalize support for all rural customers and my desire to expand support to broadband. I also want to emphasize that a rational universal service policy can achieve these goals without unduly increasing the size of the national fund, possibly without increasing it at all.The existing universal service system has not been designed as a single system. Rather, it is a series of eight separate programs that were created incrementally over two decades. A few programs have been modified, but none has ever been replaced. Each new program typically focused on some cost component or company characteristic that seemed relevant at the time. But we have never taken a comprehensive and multi-jurisdictional view of carrier costs, and we have never replaced even one older program.Another problem with the existing system is that it provides the most support to the smallest companies, not necessarily those with the highest costs. The most obvious example today is Local Switching Support, which does not even attempt to limit support to carriers with high costs.If we could design a comprehensive system, we could adopt a single definition of total cost, and we could find new efficiencies by eliminating support to carriers that do not have high overall costs.As I mentioned above, matching grants can be another tool to maintain fiscal discipline. Federal matching programs in other policy areas routinely live within their budgets.For these reasons, I believe that the existing fund size could be reduced, or we could broaden the scope of the fund to cover broadband, without unduly harming ratepayers and without violating any of the principles contained in Section 254(b).E. Challenge - Intercarrier Compensation and SeparationsI mentioned above that I have been privileged to serve on both Joint Boards and the NARUC Intercarrier Compensation project. This has convinced me that universal service is intimately tied both to separations and to intercarrier compensation.Separations has had a particularly close historical relationship to universal service. Before 1996, universal service programs were enacted in the form of separations rules. Although these programs were designed to reduce or avoid an increase in local rates, they acted through separations rules and created inter-jurisdictional cost transfers that ultimately raised interstate access and toll rates. Even more recent programs, like the High Cost Modeling Program that applies to larger carriers, rely on separations factors to avoid the double-recovery of costs that have been separated to the interstate jurisdiction.Universal service also has a close historical relationship to intercarrier compensation. Several universal service programs were created solely as components in intercarrier compensation reforms. For example, the CALLS program, adopted by the FCC in May of 2000, reformed interstate access rates for large “price cap” carriers. The following year, 2001, the Commission adopted the “MAG” order that did essentially the same thing for smaller “rate-of-return” carriers. Each order created a new universal service mechanism. This year those programs – “Interstate Access Support” and “Interstate Common Line Support” – will cost $1.9 billion.The current version of the Missoula Plan, now pending before the Commission, would add another layer. It proposes additional FCC payments of $2.5 billion to finance the reform of new kinds of intercarrier payments, such as intrastate access and reciprocal compensation.The close interaction among these programs shows why two joint boards sometimes find it difficult to identify comprehensive solutions. One can seldom make a recommendation on any of the three topics without affecting the other two. Perhaps Congress should consider a new and more comprehensive mechanism for cooperation between the FCC and the states, particularly in policy areas requiring coordination of rates and cost assignments.F. Improving the Uses of USF DollarsSome carriers have criticized the existing support mechanisms for being insufficiently specific geographically. I agree that more detailed targeting of support for competitive carriers could possibly increase their investment in underserved areas. However, I think the Joint Board and the states have adequate tools now to address this issue. The Joint Board is looking at proposals from industry that would mandate greater disaggregation of existing support, with this result in mind.We should not forget that states already have some tools to encourage carriers to invest in unserved areas. States annually must certify the proper use of universal service support. These certifications offer states a chance to review where federal funds have been spent, and some states have required detailed investment plans as a condition of annual certification.
 See 47 U.S.C. § 254(b), 254(b)(4), 254(b)(5), 254(d), 254(f). Qwest Comm. Int’l Inc. v. FCC, 398 F.3d 1222, 1235 (10th Cir. 2005). The converse problem also exists. A few so-called “rural carriers” actually serve low cost suburbs. Vicki M. Hobbs, and John Blodgett, The Rural Differential: An Analysis of Population Demographics in Areas Served by Rural Telephone Companies, Rural Policy Research Institute, 1999 at 2 (21% of large carrier customers are rural, based upon 1990 census). See 47 U.S.C. § 254(c)(1). The first universal service program was the High Cost Loop program, and was created in 1984. For example, the High Cost Loop program addressed a 1984 change in the jurisdictional separation of loop costs. Today this program exceeds $1 billion, but there is no similar program for the interoffice transport costs of rural companies, costs that for some companies can be even larger than loop costs. Likewise, the Interstate Access Reform and Interstate Common Line Support programs were created in 2000 and 2001 to replace revenues lost through reform of interstate toll access rates. This support mechanism was created in 1987 when the FCC made a change affecting the separation of costs affecting the cost recovery for local “class 5” switches. Originally known as “DEM weighting,” this mechanism allowed ILECs with 50,000 or less access lines to allocate a higher percentage of their local switching costs to the interstate jurisdiction. The greatest benefit went to ILECs that already had the largest interstate usage and to the ILECs that had the fewest lines, according to the following table.Number of Access Lines in Study AreaWeighting for Interstate Dial Equipment Minutes Separations Factor0 to 10,0003.010,001 to 20,0002.520,001 to 50,0002.050,001 or more1.0See 47 C.F.R. § 36.125(f). While the FCC’s rules for this program no longer explicitly differentiate based upon size, the program’s 1996 support parameters were frozen in place by a reformulation that took effect on January 1, 1998, thereby indefinitely perpetuating the size-based distinction. See 47 C.F.R. § 36.125(f). The High Cost Loop (1984) and DEM Weighting (1987) programs were both codified in separations rules. Inter-jurisdictional cost transfers still exist. See, e.g. 47 C.F.R. § 36.603 which describes the High Cost Loop program as a “loop cost expense adjustment.” See 47 C.F.R. § 54.309 (support equals 76% of difference between cost and benchmark). Vermont also has used another tool, the designation process, to promote rural investment. Vermont’s sole CETC has a designation as ETC that expires from time to time. Before the designation is extended, the Public Service Board reviews the carrier’s investment history and the geographic areas to which it has extended service.
The Honorable Deborah Taylor TateCommissioner, Federal Communications CommissionChair, Federal-State Joint Board on Universal Service
Billy Jack GreggDirector, Consumer Advocate Division,Public Service Commission of West Virginia
Witness Panel 2
Mr. Tom TaukeExecutive Vice PresidentVerizonPrepared Testimony of Verizon EVP Tom TaukeU.S. Senate Commerce, Science and Transportation CommitteeThursday, March 1, 2007Chairman Inouye and Members of the Committee:Thank you for inviting Verizon to participate in this hearing on the universal service program for telephony services. Universal service is a longstanding and appropriate goal of telecommunications policy. However, the means of achieving the goal of providing affordable telephone service to high-cost areas – the universal service fund – needs to be reformed.The world of communications – driven by new technologies and competition – has changed dramatically and will continue to change. This dynamic process has created new opportunities for consumers, while challenging all providers in the marketplace to reinvent themselves. For Verizon, this means investing in new networks, offering exciting new services to consumers, becoming more customer-focused, and increasing our efficiency in order to compete.Today the challenges of change are reaching all markets, including those in rural America. Unlike the days of yesteryear, most consumers in rural America now have a choice of carriers. But in two-thirds of areas served by rural telcos that receive universal service support, competitive carriers also receive subsidies. In those same markets, many new providers operate without subsidies.Unfortunately, the federal high-cost funding mechanisms intended to ensure that universal service goals are met have not adapted to the changing marketplace. In fact, these programs are often an impediment to the kind of transformation consumers and the marketplace require. Frankly, the high-cost universal funding system is not working for consumers; it’s not fair, and we need to work together to change it.As competition and technology bring consumers more choices and lower prices, one would expect that the cost of providing universal service would go down. But it’s not. Instead, the burden on the consumer to pay the cost of the universal service program is going up. The percentage rate of the surcharge on phone bills has tripled, with more increases on the horizon, and in the past eight years, high-cost funding has grown from $1.7 billion to $4.1 billion – a 142-percent increase.This increase is driven, in part, by the proliferation of new communications options for consumers. For example, when a family with one wired line buys a wireless family plan with four handsets, the universal-service funding provided for that family increases by a factor of five.Moreover, in many areas we are seeing three, four, even five wireless carriers receiving universal service funding. From a public policy perspective, this doesn’t make sense. If the consumer needs to subsidize service in a given area, how many duplicative infrastructures and carriers should they subsidize? Necessary reforms must include ways to better target support only to those areas that truly require subsidies to ensure affordable access.Another factor that is driving increases in the fund is that the amount of subsidy received by wireless carriers is determined by the cost incurred by wireline carriers to deliver service. To add insult to injury, as wireline telcos lose traditional lines to wireless, their per-line cost increases, thus driving up the subsidy per customer. This increased subsidy is then passed on to all providers.The problem is not just that the fund is getting bigger. Within the fund, the support for each recipient is also becoming unstable. A telco with cost increases that are more than the nationwide average can increase its support, while one that spends less can lose support. This doesn’t provide very good incentives for carriers.Further, in order to keep the telco high-cost funding within its current cap, the FCC raises the threshold for receiving support. Areas with costs close to the threshold can lose funding entirely as a result. Yet carriers with higher costs are given no incentive to change their behavior. This churn threatens the predictability of support.Verizon believes that modernization of the fund should be guided by the following principles:· First, funding should be targeted to geographic areas where consumers will be denied service without universal support.· Second, the fund should ensure affordable service in high-cost areas, while limiting consumer costs to no more than is required to accomplish that goal.· Third, a new policy should recognize the need to maintain a rural wireline infrastructure even as the number of wireline voice customers declines.· Fourth, a new and fairer system is needed to fund high-cost support.Reform should start with the way money is collected for the universal service fund. Verizon supports reform of the pay-in mechanism to the fund by basing payments on phone numbers. Tying payments to telephone numbers ensures that the fund is supported by all voice customers, and it substantially reduces the administrative burden.We also must reform the way money is paid out of the high-cost fund. Earlier this month, Verizon filed with the Joint Board a proposal (attached to my written testimony) that would modernize the high-cost funding mechanisms. This proposal moves us toward achieving the four objectives outlined above.It meets the needs of rural consumers for high-quality services at an affordable price. It stabilizes the fund, encourages a competitive and innovative marketplace, and promotes efficiency so consumers are treated fairly when they pick up the tab for universal service support.Verizon proposes a “reverse auction” for the distribution of universal-service-support funds. To ensure an orderly movement to this new system for determining the payment of universal-service support, we suggest four steps:First, we should stabilize funding in each geographic area, by initially capping the fund in each area at current levels. This will protect consumers who are paying into the fund as we move to a new system. This will also put an end to the instability and churn of the current fund, making support more predictable.Second, the FCC should adopt a framework for competitive bidding through a reverse auction. Competitive bidding is the way government generally procures products and services. It allows an agency through a transparent process to select the most efficient provider and to get the best possible terms. Consumers – as users of rural services and as payers of these services – benefit.Third, this market-based process should begin in areas where there are already at least two wireless ETCs. The wireless carrier that submits the lowest bid would enter into a contract, with a specified term, that spells out its obligations. The ILEC in these areas would continue to receive its existing support, subject to a cap. Once these auctions have been completed, we suggest that auctions among wireline carriers be held in those few areas where there is a competitive wireline carrier receiving support.Fourth, after these initial auctions, the FCC should open a new proceeding to review the auction process, and to determine next steps. The FCC might also use the results of areas where auctions have been held to adjust high-cost support for other areas.We believe this approach puts in place a more market-oriented system that will sustain universal service in this competitive marketplace. While today’s recipients argue over costing methods or administrative details of the fund, our proposal focuses every provider in rural areas on the kinds of transformation that produce benefits for consumers: greater efficiency, creative ways of doing business, and new services.Let me close with three points on broadband. We all know how important the deployment of new, more capable networks and services is to our future. Verizon is a leader in that process.First, we believe that our proposal is the best way to allow the current universal-service system to play a constructive role in the deployment of new services. Each provider in preparing its bid will consider all of the services and revenue sources in its business plan, regardless of whether they are part of the supported service. For that reason, the support provided will help the carrier implement all parts of its business plan. This allows universal service to support basic services and encourage broadband deployment in a market-driven way.Second, recognizing the importance of connecting America to broadband networks, we believe that we need to approach policies for broadband deployment with great care, and with an understanding that while broadband is still developing, we are seeing remarkable growth thanks to private investment. Policies that removed regulatory roadblocks have encouraged Verizon and others to invest heavily in new technology.Third, beyond that, we encourage Congress to review the success of programs to connect Americans in hard-to-serve areas. Specifically, we call to your attention to the very successful Connect Kentucky program.Connect Kentucky pulled the public and private sectors into a partnership which has already made broadband accessible to 94 percent of Kentucky households. Connect Kentucky reports that it will increase that number to close to 100 percent by the end of this year.The Connect Kentucky program began by compiling an inventory of the current and planned investment in broadband networks in the state. It then determined if sufficient demand existed in unserved areas to command private investment. Where private investment was not likely, the program focused on public-private partnerships and securing public funding from various sources to build broadband facilities.This program is working because it’s focused on infrastructure investment. That’s the key reason why we should not look to the current universal service fund to solve the broadband issue. The current fund is designed to provide sustained, ongoing support to maintain affordable rates. But maintaining affordable rates is not the challenge in delivering broadband services to all Americans. Instead, the challenge in broadband delivery is coming up with the one-time capital investment in infrastructure.In most places, the private sector is making that one-time capital investment. Where the market is working, we should let the market continue to meet the needs of consumers. Where we determine that broadband is not available and the private sector is not making the needed investment in network facilities, we should target programs to support infrastructure investment, perhaps through a combination of loans, tax credits, or grants.Verizon believes that the process we have proposed will help create a universal service fund that is sustainable in this new telecommunications marketplace, while meeting the needs of consumers in high-cost areas, and providing carriers with the proper incentives to invest and innovate in the communications marketplace.Verizon looks forward to discussing and working with the committee on this and other ideas that further the worthy goals of universal service, particularly in this time of innovation and opportunity that is being enabled by the communications industry. Thank you.
David CrothersExecutive Vice PresidentNorth Dakota Association of Telecommunications CooperativesDAVID CROTHERSExecutive Vice PresidentNorth Dakota Association of Telephone CooperativesOn behalf of theNational Telecommunications Cooperative AssociationBeforeUnited States SenateCommittee on Commerce, Science, and TransportationSubjectStatus of Universal ServiceMarch 1, 2007
Mr. Chairman, you have convened us here today to consider the status and future of our national universal service policy and its underlying support mechanism. The discussion surrounding this venerable policy is nothing new and indeed has persisted, and evolved, much as the program itself has, and should. While this conversation has at times been exhausting, and at others outright exasperating, the nation’s small and rural community based communications providers welcome and embrace it nonetheless. We do so because such dialogue only serves to strengthen and improve this long-standing national policy – a policy that plays a critical role in maintaining and expanding the communications infrastructure that is so necessary to our national and economic security. So thank you Mr. Chairman for your ongoing efforts to ensure the goal of universal service remains the solid cornerstone of our national communications policy that it has always been.Do we still need this program? The answer to that question is an emphatic yes! More and more Americans rely on communications every day to meet their commerce, security and entertainment needs. The bar for the 21st century communications has been raised. More bandwidth must be deployed in our networks so all American households, urban and rural alike, can benefit from education, healthcare, and economic opportunities that are dependent upon a robust communications platform.Other countries of the world understand the need to make a financial commitment now to ensure adequate bandwidth in their communications networks. This will provide their citizens with opportunities for economic growth and global participation. Rather than working on ways to cap universal service funds, particularly to wireline network providers that have deployed critical backbone infrastructure, the Congress should be looking for ways to expand the fund, thereby encouraging an accelerated deployment of broadband facilities throughout America.Some question the continued need for universal service. To these doubters, I invite you to visit my state of North Dakota and see the incredible accomplishments of this program for yourself. I can, without question, assure this committee that the universal service fund is more necessary today than ever before.It is important when discussing universal service to approach it from the proper perspective. Detractors and supporters alike cannot deny that the universal service system is a shining example of successful national policy. This program is largely responsible for the extremely high communications connectivity our nation enjoys today. It is due to universal service support that virtually any American that wishes to have voice connectivity is able to. Likewise it is largely due to this program that such connectivity is uniform in price and scope regardless of where you live.For more than a decade now our industry has been exposed to an operating environment marked by competition and deregulation. These concepts are in many ways in direct conflict with the policy of universal service. Universal service of course is about developing the appropriate policy environment to ensure all Americans have access to communications services of an equitable price and scope. The very nature of the universal service concept does not allow for the “let the chips fall where they may” theory associated with competition and deregulation.The rural segment of the industry has always understood the reality that the policies of competition and deregulation will be ineffective if simply broad brushed across all spectrums of the marketplace. Yet, when confronted with the policies, we have simultaneously embraced and/or tackled them with vigor. This response is in stark contrast to the array of entities from the private and public sectors alike that continue trying to mold the universal service program into something it was never intended to be – a mechanism for ensuring competitive neutrality. Herein lays the debate about where this program stands today, and where it should go in the future.Unfortunately, while the congressional intent of the Telecommunications Act of 1996 that led to the emergence of these conflicting policies was quite clear the manner in which it has been interpreted is quite another story. Competitors, state regulators, the Federal Communications Commission (FCC), and yes even some of your congressional colleagues have upset the delicate dichotomy that was to have existed between the distinct concepts. The result is a disastrous situation where, under the guise of establishing an environment of competitive neutrality, the program is being accessed by many that have no real commitment to the policy of universal service. Consequently, its growth has been rapid and is currently at a politically unsustainable rate which is the root of why we are here today.Mr. Chairman, so often throughout the course of this debate, people have directed the industry, and particularly small rural carriers, to “think outside the box” in our search for solutions to the fix we find ourselves in today. The comment might be amusing were it not so completely oblivious to our way of thinking and operating each and every day of our existence. If I do nothing else here this morning, it is my overarching desire to ensure that everyone participating and listening to this discussion ultimately leaves with the recognition and understanding that rural carriers do and always will “think outside the box.” Truly, they have no other choice.What segment of the industry was the first to have completely converted to digital switched systems? What segment of the industry was a pioneer in providing wireless options to their hardest to reach customers? From what segment of the industry did the first company to deploy an all fiber system come? What segment of the industry was the first to offer distance learning and tele-health applications? What segment of the industry was an early leader in providing cable-based video, then satellite video, and now IP video to their markets? What segment of the industry quickly moved into Internet Service Provision in the early stages of the Internets public evolution? And what segment of the industry continues to lead in the deployment of high speed broadband capable infrastructure?Mr. Chairman in every instance the answer to those questions is – the small rural segment of the industry. Many might be asking why these carriers care or have this unique perspective and approach to their mission. The answer to that question is relatively simple. Because these systems are owned and operated by the members of the community in the case of cooperatives, or by members from the community in the case of commercial systems. Clearly as a result they are entrepreneurs. Clearly they are continually “thinking outside the box.”But, does thinking outside the box mean we should automatically discount the obvious? Frankly, it is astounding to us at how great the zeal of some is to do just that. Today there are countless plans under development and already on the table directed at how to control the growth of the universal service program. They are Byzantine in their detail and approach to eventually get to the end point desired.Even worse, such plans also completely ignore the most obvious, basic, and easy to implement responses. Expanding the system’s assessment base – strengthening the requirements for receiving eligible telecommunications carrier (ETC) status – eliminating the identical support rule which provides competitors with inflated support – all concepts that could easily be implemented and that we know for certain would produce the desired result.Evidently not in the minds of many as was evidenced just last week at an FCC forum as well as during the course of the NARUC meeting. A great many voices continue to sing the praises of the reverse auction concept. This approach seeks to limit support to the lowest cost and /or most efficient technology. This argument is the antithesis of the goal of universal service which I mentioned is to ensure ALL Americans have access to communications services that are comparable in price and scope.Auctions would presumably lead us down the road of supporting the lowest common denominator. Again, the exact opposite of what universal service was structured to accomplish. Traditionally, rural communications system have been built and constructed to extremely exacting standards. While the law requires that rural Americans receive no less, the universal service system and other cost recovery programs, as well as private financiers demand no less. This Quality of service (QoS) approach to network construction and management is the formula that has allowed our industry to build and maintain the infrastructure that is an integral part of the premiere communications system our nation enjoys today.However, today, many alternative technologies and services to traditional wireline voice service are built and operated according to far less stringent standards. For example, it is a well accepted fact that wireless voice technologies generally do not approach the QoS standards of wireline calls. Another example is voice over Internet protocol (VoIP) oriented service which is even further away from meeting the QoS standards of wireline voice service.There is one more critically important reason for the inferior nature of some of these alternative technologies. They do not consist entirely of their own infrastructure. For example, with regard to wireless service, a great misconception continues to exist among policymakers and the public alike, that wireless hand sets are communicating directly to one another or directly to a wireless tower and directly from that tower to another party. This is simply not the case. Wireless needs wires Mr. Chairman. Whether it’s the wires to complete a wireless to wireline call or a wireless to wireless call, there are wires involved at some point in the call’s path. The great majority of these wires are owned and operated by the incumbent voice providers.Likewise with the VoIP voice services we hear so much about today, these systems rely almost entirely upon the infrastructure of others, and to this point that infrastructure has generally been the last mile connections of wireline carriers and the Internet system. An interesting point to make here is that due to ineffective statutes and regulations, services such as this are allowed to utilize this infrastructure that belongs to others without paying for such use. They are using the facilities of rural providers, and are not paying to do so. Without such compensation, the ability of network owners to continue to invest in their networks is put in jeopardy. Without such investment we will eventually reach the point at which such facilities will not function. Without such facilities being able to effectively operate, many applications such as wireless and VoIP services would be unable to operate.Which bring us back to reverse auctions. Universal service support ensures the continuum of the underlying network upon which all other services rely. Auctions fail to ensure that such support will continue to be provided. Are we willing to risk allowing the almost limitless bandwidth capacities associated with a wireline network to be undermined simply because policymakers choose to make an easy policy decision with wide-ranging long-term implications rather than buckling down and confronting the real underlying issues associated with universal service? There are other questions with the reverse auction concept as well. How will efficiency be determined and measured? Providing support to the system with the lowest upfront costs may appear efficient today but what about over the long term?What happens when a carrier other than the incumbent wins the universal service support? Without this stream of cost recovery, most rural incumbents would be hard pressed to remain operationally functional. What becomes of their underlying infrastructure that is necessary to the operations of alternative technologies? What happens in the future when other providers consistently and repeatedly emerge that are lower cost than the prior? Do we find ourselves stuck in a process of unending churn of providers? Wouldn’t such instability destine such providers to never being able to secure the long-term financing that is so necessary to this capital intensive business?Finally, are policymakers themselves really up to the challenges that reverse auctions present. It’s easy to talk about a lowest cost bidder approach saving money. However, we think parties to such an initiative would quickly realize the fallacies behind this concept were it ever implemented. No American, whether rural or urban based, would be well served by reverse auctions. Indeed, I would like to submit for the record a far more extensive paper on this subject. It was prepared at the request of the National Telecommunications Cooperative Association by Dale Lehman who is the Director of the Executive MBA in Information and Communication Technology at the Alaska Pacific University.No Mr. Chairman, as I alluded earlier, there are far better, more reasonable, more realistic, and more workable options that will best ensure the proper application and future operation of the universal service system. Indeed, many such ideas and concepts were contained in the universal service section of the Communications Act of 2006 that this committee marked up late last year. That legislation was the product of input from many policymakers and many sectors of the industry. Please allow me to just highlight its stronger provisions:
Were there areas that could have been stronger? No question, after all, the entire bill, as in most legislative instances, was a conglomeration of compromise. Yet there was one key area that was initially stronger that was weakened as it moved through the mark-up process. The earliest drafts of the bill directly set the stage for the universal service system to begin formally supporting the deployment of broadband and advanced services capable infrastructure. This is a key issue.Today we are on the cusp of fully moving into a world where data, video, and mobility are the primary objectives of consumers and voice will be secondary, or even an afterthought. Remember my earlier discussion that pointed out how most alternative technologies are reliant upon the underlying wireline voice network. Well the same holds true here. Regardless of whether consumers are focused on voice or some other form of communication, they will still require the underlying infrastructure to ensure their communication gets to its destination. The only difference is that with regard to broadband and advanced services capable infrastructure, the costs and subsequent need for support are even greater than they are for voice only infrastructure.There was one other omission with regard to the legislation that would have gone a long way in controlling the growth of the program and that was the elimination of the identical support rule. For those of you that are unfamiliar with this issue, the FCC’s rules currently allow competitive ETCs to receive universal service support based on the costs of incumbent carriers. So in the case of a carrier with extremely high costs, a competitor can secure a universal service designation for that market and receive the exact same dollars per consumer even if their costs are a fraction of the incumbents. It is a terrible waste of funds and is a rule that should have been changed yesterday.Mr. Chairman, as a concluding thought I would just like to reiterate what many of us already know universal service is not. Universal service support is neither a subsidy nor a tax. Universal service support is an industry funded cost recovery mechanism that offsets the higher cost to build and maintain vital communications networks in rural, sparsely populated, and insular portions of our Nation. No federal monies are appropriated for this purpose.America stands at a crossroads between a narrowband and broadband world. The choice is clear. I can assure you that I and the entire rural segment of the industry that is associated with NTCA and the other rural communications associations are ready to work with you to move forward aggressively with a national plan to bring broadband to all Americans as is envisioned by so many. Thank you.
- Establishing a new definition of “communications service” that alleviates the arbitrage of certain carriers wiggling out from under their universal service responsibilities;
- Expanding the base of contributors to the universal service fund (USF) which will lower the overall USF assessment for all consumers;
- Providing flexibility in how the FCC assesses providers for their contributions, which allows consideration of new technologies and services as well as modern modes of communications;
- Giving states new flexibility for their appropriate management of their state universal service funds;
- Codifying new minimum guidelines for receiving the eligible communications carrier status necessary to receive universal service support;
- Permanently prohibiting the FCC from limiting universal service support to a single primary line, which ensures rural America’s small businesses remain competitive;
- Permanently exempting the program from the Anti-Deficiency Act and permanently removing the private fund from the federal budget process which would preclude the program from experiencing future short falls or spikes in fund assessments;
- Clarifies an entity is not exempt from contributing to the system solely on the basis that it does not receive support from the program;
- Establishing that equivalent services must live up to the geographic toll rate averaging provisions that are in current law;
- Ensuring a smooth conversion resulting from any new regulations or statutes affecting the program by requiring the FCC to adopt transition mechanisms of not less than five years for any changes in the universal service distribution process.
Brian StaihrDirector of Policy/Regulatory EconomistEmbarq Corp.Testimony ofDr. Brian K. StaihrRegulatory Economist – Embarq before theCommittee on Commerce, Science and TransportationUnited States SenateMarch 1, 2007Good Morning Mr. Chairman, Vice-Chairman Stevens, and members of the Committee. My name is Brian Staihr, I work as an economist for Embarq, and I appreciate the opportunity to testify before you today.Embarq is the largest independent wireline telephone company in the country, serving nearly seven million customers across eighteen states [Fig.1]. We serve some of the most rural portions of the country, places like Possum Kingdom, Texas, Pretty Prairie, Kansas and Crater Lake, Oregon. And because we serve rural America, we are well aware that this Committee has put tremendous time and effort into the subject of universal service. Already this year, Senator Stevens has introduced the USA Act which addresses a number of important issues such as exempting the Universal Service Fund (USF) from the Antideficiency Act and stabilizing the contribution base while preserving State universal service programs. We look forward to working with Chairman Inouye, Vice Chairman Stevens and all the members of this Committee going forward as you sort through the complex issues involved in laying a solid foundation for the next generation of universal service. Getting these issues right is a matter of vital importance not just to the stakeholders around this table, but to the economic competitiveness of every rural community – and those in more populated areas who benefit by connecting to rural America.I want to start out today by highlighting two established facts: First, we know that the federal Universal Service Fund has grown dramatically in recent years. As a result of this growth, the FCC is investigating various ways to control the size of the Fund, including the use of reverse auctions, which I will talk more about in a moment.Second, as the graphs before you illustrate [Fig.2], we also know this growth has been driven by the increasing participation of second and third competitive carriers in the Fund, as opposed to the incumbent carriers that shoulder the core carrier-of-last-resort responsibilities.This difference is significant. When a company such as Embarq is a carrier-of-last-resort, that company has an obligation to serve all customers, including the customers in very high-cost areas that no one else wants to serve. Competitive carriers and wireless carriers do not have these same carrier-of-last-resort obligations, even when they receive USF dollars.To illustrate why this difference is significant, I’ve included a picture here of a rural area that Embarq serves called Meadowview, Virginia [Fig.3]. The different colors on the left picture represent different population densities, with red and yellow showing the highest densities and green showing low density. As you can see, the southern portion of Meadowview is actually fairly populous; the northern part is less populous, very rural, and very high-cost to serve. Embarq, as the carrier-of-last-resort, serves the entirety of Meadowview, the yellow parts and the green parts.In contrast, the picture on the right shows the coverage area of the major wireless provider in Meadowview. As you can see, wireless coverage essentially stops where the high-cost areas start. Strange as it may sound, the wireless company has no obligation to serve the high-cost portions of Meadowview, even if it receives USF dollars.These pictures actually illustrate three related concepts that lie at the heart of the challenges that universal service faces today.First, before competition, a company like Embarq could serve an area such as Meadowview and count on the fact that the lower-cost portions would offset the higher-cost portions. It didn’t matter if a company lost money serving the green areas, because the company also served the yellow areas and, on average, the company could cover its costs.Second, this changed with the passage of the 1996 Telecom Act. We have seen competition develop everywhere, but in places like Meadowview the competition is limited to what we see here: the more densely populated areas. Competitors—both wireline and wireless—most often target the low-cost areas, and avoid the high-cost areas. As a result, we can no longer count on those lower-cost areas to offset the highest-cost regions because in many cases we’ve lost half the customers in the low-cost areas to competition.Third, and most importantly, the federal Universal Service Fund has not kept pace with this competitive reality. When the current USF mechanism evaluates an area like Meadowview, the system assumes that Embarq can continue to use low-cost areas to offset the higher-cost ones. In fact, the current system assumes that Embarq can use low-cost areas anywhere in the state of Virginia to offset the cost of serving the high-cost portions of Meadowview.In addition, by allowing competitive carriers to receive support while serving only the parts of a rural study area they choose, the current system creates dysfunctional incentives that lead to an unfortunate chain reaction:o New entrants gravitate to the town center area and receive support at the same per-line rate as the carrier of last resort, creating a windfall opportunity;o Drawn by the windfall, multiple competitive providers apply for support in the same geographic area;o Bereft of its low-cost, offsetting customers, the incumbent carrier’s per-line costs go up – increasing the support to all USF recipients in that area, and increasing the windfall;o The Fund ends up overspending in the town centers and shortchanging the outlying areas where support is most needed.As we look to the future of Universal Service, we need to correct these basic misassumptions to make the fund truly compatible with today’s—and tomorrow’s—competitive environment. The way to do that is straightforward: We have to re-examine the geographic area that we use to determine whether support is needed, and recalculate that support at a much more granular level, so that the town centers and outlying areas are considered separately, and the support migrates to where it is truly needed the most. Not only would such an approach eliminate many of those dysfunctional windfalls, it would be more competitively rational because it would channel support to the truly rural outlying areas that need it the most, eliminating those unsustainable cross-subsidies without necessarily increasing the size of the Fund.The picture in front of you shows the community of Fort Meade, Florida [Fig. 4]. Each green dot on this picture is a customer’s location. There is a very clearly identified downtown area which is actually low-cost to serve; then there are outlying areas where the cost of serving is many times higher. As was the case with Meadowview, when we see competition in a place like Fort Meade we see it in this low-cost downtown area. As a result, the outlying areas are the ones that need explicit support from the Fund.While granular targeting adds a heavy dose of rationality to the USF distribution process, it is not mutually exclusive to other approaches under consideration, such as reverse auctions, support for broadband, modifying the “identical support” rule or eliminating support for multiple providers altogether. Each of these, and many other policy decisions associated with universal service, represent important crossroads that will have impact for decades to come. Granular targeting is, however, a competitively realistic first step for all of those larger decisions that could eliminate some of the worst abuses and realign the market incentives associated with Universal Service to more closely match the program’s original purpose – providing affordable, reliable service where the market would not otherwise deliver it.Eleven years ago when the Act was passed, true competition hadn’t reached any of the town centers in rural America, and we had neither the tools nor the capability to easily calculate and target support separately for these outlying areas. Today we have both the capability and the tools. And we have one more thing: The incentive to do this right, going forward. With that, I will close. Again, thank you very much for the opportunity to speak with you today, and I look forward to any questions you may have.
W. Tom SimmonsVice President of Public PolicyMidcontinent CommunicationsTestimony of Tom SimmonsVice President for Public PolicyMidcontinent Communicationsbefore theSenate Committee on Commerce, Science and Transportationon March 1st“The Present and Future of the Universal Service Fund”Chairman Inouye, Vice-Chairman Stevens and members of the committee thank you for inviting me to testify today. My name is Tom Simmons and I am the Senior Vice President of Public Policy for Midcontinent Communications, a leading provider of cable telecommunications services including analog and digital cable television, broadband Internet and local and long distance telephone services. We serve over 200,000 customers in approximately 200 communities in North and South Dakota, Western Minnesota, and Northern Nebraska generally classified as small or rural. The size of our communities range from densities of 5 to 116 homes per mile of cable plant and populations ranging from less than 30 in Barlow, North Dakota to our largest community, Sioux Falls, South Dakota, which has a population of more than 140,000.Midcontinent launched its broadband Internet service over ten years ago, on April 15, 1996 in Aberdeen, South Dakota, and made a pledge then to bring advanced broadband services to as many customers as possible regardless of the size of community. At the end of 2005, we completed a project to rebuild our cable plant to 750 MHz or better in 50 more Midcontinent communities bringing our total number of upgraded systems to 156, serving over 95% of Midcontinent’s customers. Customers in these communities now enjoy over 150 channels of analog and digital video programming, broadband Internet service, high definition television, and digital video recording capability. Midcontinent Communications is also a certificated local exchange telephone service provider in North Dakota, South Dakota, and Minnesota. Midcontinent first launched facility based circuit-switched telephony in 2000, and in the last year launched its first digital VoIP phone service in Mitchell, South Dakota. Since then, we’ve rolled out digital phone services in a number of additional communities throughout our service area and plan to continue the conversion of analog to digital telephony in many more. Midcontinent is a privately held company that has invested, and continues to invest, substantial amounts of private risk capital to bring advanced services to our customers without the assistance of public funds. We’re proud of our ability to deliver the services our customers demand, which are no less than those demanded and expected in major metropolitan areas.As a provider of telephone service in rural America, Midcontinent strongly supports the goals and purposes of the universal service fund (USF). We believe that quality telecommunications services should be available to all regions of the country at just, affordable and reasonable rates. In that regard, even prior to the Federal Communications Commission’s recent order requiring that all VoIP providers pay into the USF, Midcontinent and all other cable operators offering voice telephone service—either by way of traditional circuit-switched telephony or VoIP—have always contributed to the universal service fund.The entry of cable operators into the telephony marketplace is great news for consumers across America. According to a recent J.D. Power report, cable phone customers are saving over $10 a month on their phone bills. Based on the projected growth of cable phone services, Microeconomic Consulting and Research Associates recently projected that the total anticipated consumer benefit from competition over the next five years will total more than $100 billion. And cable operators, such as Midcontinent, are increasingly bringing the benefits of their competitive telephone services to rural areas.A strong universal service program is an essential component of national telecommunications policy and we share the concerns of policymakers, industry stakeholders and the public that, in its current form, the universal service program is not sustainable. While there is general consensus that all aspects of the system, including contributions, eligibility and level of support are in need of reform, there are a wide range of views as to how the program should be restructured.With respect to distribution related universal service issues, we recognize the value in preserving and promoting this program which provides funding to companies that serve areas where market forces historically might not have resulted in all customers being served. These market forces, however, are not static. Improvements in technology, particularly the transition to IP-based equipment and services, have made it possible for cable operators and other facilities-based competitors to serve areas that previously might not have supported competitive entry. Similarly, incumbent local exchange carriers increasingly are able to provide multiple services (including DSL and video) over infrastructure previously used solely to provide telephone service. This transition to markets in which there is facilities-based competition for voice and non-voice services calls into question the need for continued government funding at historical levels, and may eventually permit the total elimination of high-cost support in at least some markets.The continued growth in the size of the fund, however, is a matter of significant concern to the cable industry for a simple reason – these costs ultimately are borne by consumers. Based on the anticipated growth of cable telephony services, and the corresponding growth in the share of the program that will be funded by cable consumers, our industry supports efforts to reduce the burden of federal support programs by more efficiently distributing support. In particular, we believe that reverse auctions, if structured properly, offer an opportunity not only to reduce the size of the fund, but also to promote competition in high-cost areas by making support available on a more equitable basis. The challenge is to reduce the burden on consumers and promote competition, without sacrificing the level of service provided in these areas today. We believe that an auction program can achieve these goals if it incorporates the following requirements.First, reverse auctions will only be effective and technology neutral if they cover relatively small service areas (such as census block groups) rather than service areas that conform to the boundaries of a particular type of service provider.Second, minimum levels of service to be offered and obligations to be met by all bidders must be established. This should include some sort of carrier-of-last-resort obligation, which will ensure that the fundamental goal of providing service to all consumers is met. Any facilities-based provider that commits to meeting these requirements should be eligible to participate in the auction.Third, bidders should be required to offer services using their own wired or wireless connection to the end user. Such a requirement will provide an important incentive for the construction of competitive networks.Fourth, eligibility to participate in an auction and receive the resulting support should be contingent on accommodating requests for interconnection. Incumbent carriers should not be permitted to collect government funding for their networks, while at the same time blocking competitive entry and foreclosing the introduction of more efficient, innovative technologies that will provide the ultimate cure for high cost networks.Fifth, there should be no guarantee of support such that an incumbent local exchange carrier or any other provider is “made whole” through a government subsidy if they receive less support than they did before the introduction of auctions. Any type of guaranteed support or other guaranteed revenue stream would completely undercut the rationale for moving to an auctions-based system, which is to reduce the overall amount of support provided by the program.Lastly, for each area subject to auction there should be a fresh look on a periodic basis. As technology develops and companies continue to expand their networks, the amount of support needed to serve any particular geographic area should continue to decline to reflect increased efficiencies.We also believe it would be a mistake to make broadband services eligible for USF distributions in areas that already have a broadband provider. Midcontinent shares this Committee’s desire to ensure that all Americans, including those who live in rural communities, have access to high-speed Internet service. As I stated at the outset, Midcontinent has spent hundreds of millions of dollars to upgrade its facilities and deploy broadband services in rural communities. We did this without a government mandate and without a government subsidy. We did it because we want to make certain that our customers have the same access to advanced digital technology as all Americans. We took the risk and invested private capital in order to provide broadband services in the communities we serve. It is unnecessary and profoundly unfair for the government to subsidize a broadband competitor to Midcontinent or any other broadband provider that has already stepped up to the plate and answered the call to help close the digital divide.We recognize that some form of subsidy may be necessary to promote broadband deployment in remote rural areas where no provider is currently offering a broadband service and it is otherwise uneconomic to do so. The cable industry has offered support for legislation that would offer loans or tax incentives to companies that deploy broadband services in clearly defined and carefully targeted unserved areas. But the government should take great care not to subsidize broadband in communities where companies are already offering consumers broadband service. Subsidizing competition is unfair and a waste of scarce resources that should be targeted to areas where a market based solution has not developed.However, despite our support for government programs that target funding to unserved areas, we would like to point out that any program that subsidizes private entities to deploy broadband service is fraught with the potential for abuse. An example of such a program, though well intentioned, is the current Rural Utilities Service broadband loan program. Loan money from this program is being used to subsidize cable and phone competitors in markets where there are already two or more broadband providers. This type of subsidized competition penalizes private entities serving those markets and discourages private investment in rural America. In its September 30, 2005 report, the Office of Inspector General of the U.S. Department of Agriculture found that the RUS had not maintained its focus on rural communities without preexisting service, questioned whether the Government should be providing loans to competing rural providers when many small communities might be hard pressed to support even a single company, and observed that the RUS, by granting such loans, may be “creating an uneven playing field for preexisting providers operating without Government subsidies.”While government subsidies may be necessary to promote broadband deployment in unserved areas, the cable industry does not believe that universal service funds are necessary to spur further broadband deployment. Broadband deployment in this country continues to grow at a robust rate, with the number of consumers that have signed up for high-speed Internet service in the U.S. far exceeding any other country in the world. The cable industry, for example, has invested over $110 billion since 1996 in order to provide high-speed Internet access and other advanced services throughout the country.As of June 30, 2006, the Federal Communications Commission reported that based on company data, cable modem service was available to 93 percent of households that could access cable TV service and the phone companies’ Digital Subscriber Line (DSL) service was available to 79 percent of households who could access ILEC telephone service. Kagan Research reported even higher numbers, stating that cable broadband service is available to more than 94 percent of all U.S. homes.With private industry investing in broadband deployment like never before, and the successful roll out of broadband and other advanced services across the country, it does not make sense to undermine the universal service program’s principle purpose of promoting the availability of affordable telecommunications services to all regions of the country.Turning to the current USF contribution mechanism, cable recognizes that reliance on the assessment of interstate telecommunications revenues virtually guarantees that the funding base will continue to shrink. An increasing number of companies offer consumers voice telephone service for a fixed monthly rate that does not differentiate between local or long distance calls. Companies also offer bundled packages of digital services that include voice telephony. Most consumer VoIP services are offered without regard to intrastate or interstate distinctions. The fact is that interstate telecommunications revenues have been declining and are predicted to continue declining for the foreseeable future. As the line between what is a local and long distance call continues to blur, the existing USF contribution mechanism will become increasingly obsolete which threatens the viability of the program itself.The cable industry has long advocated the adoption of a telephone numbers-based contribution mechanism, a simple yet effective reform that will sustain the long-term health of this fund while adapting to the evolving technology and economics of voice telephony. Using telephone numbers would be a relatively simple means of determining who should contribute as well as when contributions were owed and in what amount. There would be no need to apportion provider revenues into interstate versus intrastate or to determine which portion of a bundled offering represents interstate telecommunications. It would also make no difference whether a service was defined as a telecommunications service or as an information service. Under a telephone number-based system, all that matters is whether or not the service uses a phone number. As such, a numbers-based system promotes competitive neutrality among providers and technologies and ensures that no provider of a voice telephone service is placed at a competitive disadvantage due to disparate treatment with respect to universal service fund contributions.While a numbers-based approach would capture any service designed as a replacement for plain old telephone service (POTS), it would avoid assessments on a service that might include a voice component. Few would argue, for example, that applications, or devices, where voice functionality is ancillary to the actual purpose of the service or device—such as voice enabled gaming—should be assessed for USF purposes.Some have expressed concern that a numbers-based system would collapse as proposals to map telephone numbers to Internet addresses, such as ENUM, become a reality. However, ENUM requires that a subscriber have an active telephone line. If someday in the distant future a non-number based system were developed and widely implemented, the telephone number- based contribution mechanism could easily be adapted, as some form of unique identifier or address will always be necessary to route various types of voice communications.Mr. Chairman, the reality is that interstate telecommunications revenues are declining and will continue to decline. Conversely, an FCC staff analysis shows that the number of active telephone numbers is expected to grow for the foreseeable future, from 554 million numbers in use in 2004 to nearly 600 million numbers in use in 2007. Moving to a numbers-based USF contribution mechanism embraces this reality and will ensure the universal service fund remains solvent well into the future. Furthermore, it would create a more predictable and equitable split between assessments collected by providers of local and long distance telephone services, and between residential and business subscribers. Residential telephone subscribers would generally pay less under a numbers-based plan. Assuming an appropriate assessment amount, even most one-line households with low long distance usage would pay less under a numbers-based system than they do under the existing interstate revenue model.As stated above, Midcontinent and the cable industry strongly support the goals and purposes of the universal service program and recognize that changes are necessary to ensure its continued viability. We appreciate that the legislation introduced by Vice-Chairman Stevens (S. 101) would give the FCC the option of establishing a numbers-based assessment scheme and we would like to work with this Committee to give priority to the numbers-based option and ensure that future assessments are not extended to broadband and Internet services. The imposition of new fees on broadband service at the same time policymakers seek to encourage more widespread deployment and service penetration would be counter-productive and would raise the price of high-speed Internet services for current and potential broadband customers. It would also penalize those who have worked diligently to deploy broadband to nearly the entire nation.Contrary to assertions that broadband is negatively impacting universal service, the impact has been minimal at best. Most VoIP services, for example, already pay into the universal service fund and a number-based plan would, in any case, capture these services into the future. The assessment of broadband service is unnecessary to the goal of a stable, sufficient and predictable fund. Instead, a number-based contribution mechanism addresses the current problems with declining interstate revenues and bundling of services, and captures new technologies and protocols such as VoIP.Mr. Chairman, Midcontinent supports the goal of the federal government to assure that all Americans have access to telephony and broadband services. We have invested hundreds of millions to help that goal become a reality. We recognize that government subsidies may be the only answer in some high cost rural areas. However, any government program designed to promote broadband deployment must be technology and provider neutral and carefully defined and targeted to only those areas that lack broadband service. Furthermore, any such program must be subject to the most stringent government oversight to ensure that government funds are allocated only to areas that are defined as unserved and are not used to subsidize competition.Thank you for inviting me to testify today. I would be happy to answer any questions you or the members of the committee may have.
Richard MasseyExecutive Vice President, Corporate Secretary, General CounselAlltel Corp.