Testimony

• Honorable Kathleen Q. Abernathy
  Read statement

  Testimony

  Honorable Kathleen Q. Abernathy

  STATEMENT OF COMMISSIONER KATHLEEN Q. ABERNATHY Good morning, Chairman Burns, Senator Hollings, and distinguished members of the Subcommittee. I appreciate the opportunity to appear before you to discuss the FCC¡¯s efforts to preserve and advance universal service. The goal of providing high-quality telecommunications services to all Americans at affordable rates is a cherished principle in U.S. telecommunications policy and one of the cornerstones of the Telecommunications Act of 1996. I know that every member of this Subcommittee understands the importance of universal service, and, as Chair of the Federal-State Board on Universal Service, I make it a top priority to ensure that the federal support mechanisms fulfill their objectives. The 1996 Act directed the FCC to promote two key goals that at times appear to be in tension with one another: opening local markets to competition and preserving universal service. The prior monopoly environment enabled regulators to promote universal service by building implicit subsidies into local and long distance rate structures. The introduction of competition, however, erodes these subsidies as new entrants undercut rates that were set well above cost, such as business rates in urban areas. Congress accordingly directed the FCC to adopt explicit support mechanisms that would be sufficient to ensure that rates remain affordable and reasonably comparable throughout the nation. In response, the FCC developed several explicit support mechanisms for carriers that provide service in high-cost areas. High-cost support will total over $3.2 billion in 2003. Congress also expanded the scope of universal service by directing the Commission to establish support mechanisms for schools and libraries and for rural health care facilities. The schools and libraries program (often called the e-rate program) provides up to $2.25 billion in annual support and has enabled millions of school children and library patrons to gain access to advanced telecommunications and Internet services. While the rural health program generally has been underutilized, the FCC is considering a variety of measures to strengthen it, as discussed below. In addition to the high-cost support mechanisms and the programs supporting schools, libraries, and rural health clinics, the FCC¡¯s Lifeline and LinkUp programs provide discounts off monthly service charges and connection fees to ensure that low-income consumers have access to basic telephone service. Last year, these programs provided approximately $647 million in support. All of these programs promote the universal service goals set forth in section 254(b) of the Act, including the availability of quality services at affordable rates; access to advanced services in all regions of the Nation; comparable access to telecommunications services for all consumers, including low-income consumers and those living in rural, insular, and other high-cost areas; and access to advanced services for schools, libraries, and rural health care facilities. Shortly after Congress¡¯s enactment of the 1996 Act, the FCC adopted rules regarding the collection and distribution of universal service support. Now, with several years of experience under our belts, we are engaged in a reexamination of many aspects of the program to ensure that each component is administered as efficiently and effectively as possible. A host of marketplace and technological developments have already prompted some course corrections, and may ultimately cause us to reassess certain fundamental policy choices made in the initial implementation period. As we engage in this review, our commitment to preserving and advancing universal service remains unwavering. I describe below some of the challenges confronting universal service and the efforts the FCC has underway to ensure that each component of the universal service program remains faithful to the principles set forth in section 254 of the Act. These proceedings aim to improve and strengthen all of our support mechanisms, and therefore will benefit consumers in high-cost areas, families with low income, and patrons of schools, libraries, and rural health care facilities. High-Cost Support The Commission and the Joint Board have three pending proceedings that focus on the distribution of support to high-cost areas. First, with respect to the support mechanism for non-rural carriers (the Bell operating companies and other large independent LECs), the FCC is considering a Recommended Decision from the Federal-State Joint Board in response to a remand by the Tenth Circuit Court of Appeals. The court ruled that the Commission did not adequately explain how the non-rural support mechanism is sufficient to enable states to set affordable rates that are reasonably comparable in both rural and urban areas. In particular, the court directed the Commission to consider how to induce states to develop their own support mechanisms to fund high-cost areas within their borders, since the federal mechanism aims primarily to mitigate cost differentials among the states. The Joint Board issued its recommendations last October, and the Commission will complete its consideration of the issues later this year. A second FCC proceeding relating to high-cost support focuses on the definition of services that are eligible for universal service support. Supported services include voice-grade local service, access to 911, access to interexchange services, and other basic local services. In a Recommended Decision issued last July, the Joint Board recommended maintaining the existing list of supported services. One issue that is likely to be of interest to the Subcommittee was the Joint Board¡¯s discussion of providing direct support for broadband services, in addition to the support for underlying loop facilities that carriers receive today. The Joint Board recognized the increasing importance of broadband services in the lives of American consumers, but concluded that broadband fails to satisfy most of the eligibility criteria set forth in section 254(c)(1) of the Act. Specifically, the Joint Board stated that broadband services are not yet essential to education, public health, or public safety, because such resources are readily accessible through alternative means, such as voice service or dial-up Internet service. In addition, broadband services have not been subscribed to by a substantial majority of residential customers. The Joint Board further opined that providing direct support for broadband services ¡ª in addition to already providing support for underlying loop facilities ¡ª would not serve the public interest, because it would place enormous financial burdens on American consumers and threaten the sustainability of the universal service fund. Moreover, because ETCs must provide all supported services to be eligible for funding, adding broadband to the list would threaten to withdraw support from those carriers that have not yet upgraded their networks to enable the provision of broadband services. The Commission is currently considering this Recommended Decision and will issue a final order later this year. The third proceeding regarding high-cost support will focus on the intersection of competition and universal service in rural areas. The Commission referred this proceeding to the Joint Board in November 2002, and the Joint Board issued a public notice seeking comment in February. The issues for comment include the impact of providing support to competitive eligible telecommunications carriers (ETCs) on the growth of the universal service fund, the manner in which competitive ETCs receive support (often called ¡°portability¡±), and the consequences of supporting multiple lines per household. The public notice also sought comment on the process for designating ETCs and whether the FCC should establish guidelines for consideration by the state commissions that make these determinations under section 214(e)(2). Following the close of the comment period, the Joint Board intends to organize a public forum involving rural LECs, wireless carriers, consumer groups, and other interested parties to gather additional information. While this rulemaking is only in its preliminary stages, its importance is undeniable and it will accordingly be the Joint Board¡¯s primary focal point in 2003. Of the 1,400-plus ETCs that received high-cost support in the fourth quarter of 2002, 63 were competitive ETCs (including a number of mobile wireless carriers). Competitive ETCs received approximately $14 million that quarter, compared to more than $800 million for incumbent LECs. Yet this support flowing to competitive ETCs was seven times higher than in the first quarter of 2001. So while the share of high-cost support distributed to competitive carriers remains small (less than 2% of the total), it is growing quite rapidly. This trend underscores the timeliness of the Commission¡¯s review of its rules for providing support to competitive ETCs. Schools and Libraries and Rural Health Care Facilities Now that the Commission has had significant experience overseeing the support mechanisms for schools and libraries and rural health care facilities, we are seeking in two pending rulemakings to capitalize on this experience by making these programs more effective and efficient. The schools and libraries proceeding aims to streamline the application and appeals processes by eliminating red tape and any other needlessly burdensome requirements. At the same time, this rulemaking focuses on potential rule changes to address issues that have been identified in the course of the Commission¡¯s ongoing oversight of the e-rate program. The Commission is fully committed to taking actions where necessary to address waste, fraud, and abuse and will consider initial rule changes based on the record in the very near future. I have also announced that, in cooperation with Chairman Powell and my other colleagues, I am organizing a public forum on May 8 focusing on several of the oversight issues raised in the rulemaking. To the extent that issues remain outstanding following the Commission¡¯s upcoming Report and Order, I hope that the public forum will enable us to quickly develop a consensus on additional means of protecting against gaming of the system. Our efforts to improve the Commission¡¯s oversight will help ensure that funds are disbursed in an efficient and evenhanded manner so that deserving school children and library patrons continue to have access to critical services. The Commission¡¯s rulemaking on the support mechanism for rural health care facilities likewise seeks to strengthen the program. Whereas the schools and libraries program cannot fully fund applicants¡¯ requests, the rural health program has been underutilized. The notice of proposed rulemaking sought comment on ways to modify eligibility requirements to eliminate obstacles to rural health clinics¡¯ receiving support while remaining faithful to the statutory purposes. The Commission recognizes that facilitating telemedicine by connecting rural health clinics to regional hospitals and universities takes on added importance in light of the increased threat of terrorism. We accordingly hope to complete this proceeding expeditiously. Low-Income Support The third component of the federal universal service regime is the low-income support mechanism, Lifeline/LinkUp. The Joint Board will soon release a Recommended Decision on proposals to bolster the effectiveness of this mechanism. This Recommended Decision suggests new ways for low-income consumers to qualify for support and also addresses questions regarding states¡¯ efforts to engage in outreach and to verify program eligibility. As with the e-rate and rural health care programs, the goal of the rulemaking is to remove impediments to beneficiaries¡¯ receiving support while simultaneously preserving the integrity and enhancing the efficiency of the program. Contribution Methodology Each of the programs described above draws support from a pool of carrier contributions made pursuant to section 254(d). In a series of related proceedings, the Commission has been actively exploring changes to the methodology for assessing contributions on carriers. Since 1997, contributions to the explicit support mechanisms have been assessed on carriers as a percentage of their revenues from end-user interstate telecommunications services. Several trends have combined to put upward pressure on the contribution factor (which is currently 9.1%), which in turn has increased the funding burden on consumers. While long distance revenues grew between 1984 and 1997, they have since been flat or in decline as a result of price competition and substitution of wireless services and e-mail. Because federal universal service contributions by law may be assessed only on interstate revenues, this shrinking of the revenue base has caused the contribution factor to rise steadily. Another important trend has been the increasing prevalence of bundled service plans. For years, wireless carriers have offered buckets of any-distance minutes at flat rates, and now wireline carriers such as MCI and Verizon are offering packages including local and long distance for a single price. In addition, many carriers offer business customers bundles that include local and long distance voice services, Internet access, and customer premises equipment. Such bundling has been a boon for consumers but has made it difficult to isolate revenues from interstate telecommunications services. And the problem is likely to get worse as bundling becomes more and more popular. In December 2002, the Commission adopted a number of measures to stabilize the universal service contribution factor in an effort to mitigate the growing funding burden on consumers. For example, the Commission increased from 15% to 28.5% the safe harbor that wireless carriers may use to determine the interstate percentage of their revenues. The Commission also eliminated the lag between the reporting of revenues and the recovery of contribution costs, which lessened the competitive disadvantages facing long distance carriers with sharply declining revenues. And the Commission prohibited mark-ups of contribution costs on customers¡¯ bills to ensure that carriers cannot profit from inflated line charges. While these were important steps, more fundamental reform may be necessary to ensure the sustainability of universal service funding in the long term. Bundling together interstate and intrastate services ¨ú and telecommunications and information services ¨ú gives carriers the opportunity and incentive to understate the portion of their revenues that are subject to assessment and increases the difficulty of identifying interstate revenues. Contribution factors therefore are likely to continue their ascent under a pure revenue-based contribution methodology. For this reason, the Commission is continuing to consider whether a contribution methodology incorporating a component based on end-user connections, in addition to or in lieu of our revenue-based methodology, may create a more sustainable model for funding universal service in the future. The number of end-user connections has been more stable than the pool of interstate revenues, and connection-based charges can be adjusted based on the capacity of each connection to ensure an equitable distribution of the funding burden among business and residential customers. The Commission has sought comment on several proposals and will consider additional changes to the contribution methodology based on the record now being developed. The Commission also has sought comment, in the Wireline Broadband NPRM, regarding the possibility of assessing contribution obligations on facilities-based providers of broadband Internet access services. We will seek to ensure that any modifications to the contribution methodology that are designed to promote sustainability will also remain faithful to the statutory requirement that contributions be assessed in an equitable and nondiscriminatory manner. * * * Taken together, the reforms being considered by the Commission should ensure the continued vitality of the federal universal service support mechanisms. The Commission has no higher priority than delivering on the promise of ubiquitous, high-quality, and affordable services. I would like to thank you, Mr. Chairman, for calling this hearing, and I look forward to working with you and other members of the Subcommittee on these challenging and critical issues. SUMMARY OF STATEMENT OF KATHLEEN Q. ABERNATHY The goal of providing high-quality telecommunications services to all Americans at affordable rates is a cherished principle in U.S. telecommunications policy and one of the cornerstones of the Telecommunications Act of 1996. Shortly after Congress¡¯s enactment of the 1996 Act, the FCC adopted rules implementing section 254 to provide for the collection of explicit universal service support and its distribution through the high-cost funds and the mechanisms supporting schools, libraries, rural health clinics, and low-income consumers. Now, with several years of experience under its belt, the FCC is engaged in a reexamination of many aspects of the program to ensure that each component is administered as efficiently and effectively as possible. High-Cost Support. The Commission and the Federal-State Joint Board have three pending proceedings that focus on the distribution of support to high-cost areas. First, with respect to the non-rural high-cost support mechanism, the FCC is reviewing a Recommended Decision from the Joint Board that seeks to ensure that support is sufficient to keep rates affordable and reasonably comparable in rural and urban areas. This proceeding also examines ways to induce states to contribute to the preservation and advancement of universal service. Second, the FCC is considering a Joint Board recommendation relating to the services that are eligible for universal service support. The Joint Board recommended maintaining the existing list of supported services, which includes voice-grade local service, access to 911, access to interexchange services, and other basic local services. Third, the Joint Board has sought comment on a host of issues focusing on the intersection of competition and universal service in rural areas. The issues under review include the impact of providing support to competitive eligible telecommunications carriers (ETCs) on the growth of the universal service fund, the manner in which competitive ETCs receive support, the consequences of supporting multiple lines per household, and whether the FCC should establish guidelines for state review of ETC applications by competitive carriers. Schools and Libraries and Rural Health Care Facilities. Two pending rulemakings seek to ensure that the mechanisms supporting schools and libraries and rural health care facilities operate as effectively and efficiently as possible. The schools and libraries proceeding aims to streamline the application and appeals processes and to complement existing oversight efforts designed to deter and detect waste, fraud, and abuse. The Commission¡¯s rulemaking on the rural health mechanism is examining ways to modify eligibility requirements to eliminate obstacles to rural health clinics¡¯ receiving support while remaining faithful to the statutory purposes. Low-Income Support. The Joint Board will soon release a Recommended Decision on proposals to bolster the effectiveness of the Lifeline and LinkUp programs for low-income consumers. This Recommended Decision suggests new ways for low-income consumers to qualify for support and addresses questions regarding states¡¯ efforts to engage in outreach and to verify program eligibility. Contribution Methodology. Finally, the FCC is considering changes to the methodology under which carriers contribute to the support mechanisms described above. In December 2002, the Commission adopted a number of measures to stabilize the universal service contribution factor in an effort to mitigate the growing funding burden on consumers. More fundamental reform may be necessary to ensure the sustainability of universal service funding in the long term, because of the declining trend in interstate revenues and the impact of bundled service offerings, which increase the difficulty of identifying interstate revenues and also give carriers the opportunity and incentive to understate the portion of their revenues that are subject to assessment. The Commission is accordingly considering three proposals that would incorporate alternatives to the existing revenue-based assessment methodology. Taken together, the reforms being considered by the Commission should ensure the continued vitality of the federal universal service support mechanisms. The Commission has no higher priority than delivering on the promise of ubiquitous, high-quality, and affordable services.

Witness Panel 2

• Mr. Joel E. Lubin

  Vice President-Regulatory Planning and Policy

  AT&T
  Read statement

  Witness Panel 2

  Mr. Joel E. Lubin

  TESTIMONY OF JOEL LUBIN Vice President, AT&T Corp. Before the Senate Subcommittee on Communications April 2, 2003 Mr. Chairman, Senator Hollings, and members of the Subcommittee, good morning. I thank you for inviting me to testify today to share AT&T’s views as you address the important topic of universal service. AT&T strongly supports the 1996 Act’s twin objectives of opening markets to competition and preserving and enhancing universal service. We are proud of our history as the nation’s oldest and most far-reaching long distance carrier. We are proud to connect rural and distant parts of America – including states like Montana, Alaska, South Carolina, Hawaii, North Dakota and West Virginia that are represented on this Subcommittee – with the rest of the country. More than any other carrier, we tie together all parts of America. On the basis of this experience, we understand the importance of universal service. * * * * * The Current Assessment System Is Unsustainable and Should Be Replaced In 1996, the Congress directed the FCC, with the assistance of a Federal-State Joint Board, to charter a new universal service mechanism – one that would work with, not against, competition in all markets. One that would be specific, predictable, and sustainable as competition grew. One that would not distort competition, either in the way contributions are collected or support is distributed. The FCC has made significant progress in moving implicit subsidies into an explicit USF, most notably through adoption of the CALLS plan in May 2000 and adoption of the MAG plan in October 2001. Nonetheless, seven years after the 1996 Act, we cannot say we have a universal service system that meets all of the goals set forth by Congress in 1996. Instead, we have an ever-increasing universal service fund that is being raised from an ever-shrinking funding base – interstate and international end user telecommunications revenues. And the mechanisms the FCC has in place for collecting universal service support are discriminatory and self-defeating. Something has to give. It is beyond question that the fund is increasing. The fund today stands at more than $6 billion per year. Both the Office of Management and Budget and FCC staff project additional increases in the size of the universal service fund, even if the FCC makes no further policy changes that add to the obligations supported through the USF. OMB projects total growth at just under 2% per year for FY2004-2007. Only two parts of the fund won’t grow – the schools and libraries fund and the $650 million interstate access support for areas served by price-cap carriers. All other parts of the USF can and are likely to increase. At the same time that the system faces increasing demands for support, the universal service funding base --interstate and international end user telecommunications revenues -- continues to shrink. In 2001 and 2002, the universal service funding base shrank by an average of 8% per year. Chart A, which is appended at the end of my testimony, shows the results of the 2% fund growth predicted by OMB and an 8% annual decline in the funding base. In three years, the USF contribution factor – the rate carriers are assessed and that they pass on to consumers at the bottom of the bill – would rise from 9.1% today to 12.8% in 2006. Such a result is likely to be both economically and politically unsustainable. The competitive inequities built into the current system for raising USF support will only speed the shrinkage of the USF funding base. These competitive inequities take several forms. For example: · if a consumer is a high-volume user of long distance service – the customer who traditionally has contributed the most to support universal service – that consumer can pay less into the fund by migrating his or her long distance calling to a wireless phone. · if a consumer purchases interstate long distance bundled with local service or information services, he or she can contribute less in universal service if the carrier providing the bundle allocates more revenue to the parts of the bundle that do not contribute to universal service support than to the interstate long distance bill, which supports universal service. · if a consumer uses service provided by international carriers that carry little or no interstate traffic, he or she can avoid universal service charges altogether on that international calling. · if a consumer uses Voice over Internet Protocol services, e-mail, or instant messaging, it is likely that consumer would not contribute anything to support universal service. Each of these outcomes encourages carriers and consumers to seek ways to avoid contributing to the fund, and increasingly, price sensitive consumers are moving to services that allow them to avoid paying universal service support. As a result, the USF support mechanism appears headed for a “death spiral.” Put another way, as the USF contribution base shrinks, the assessment rate goes higher, which causes more customers to figure out ways to minimize their universal service charges, which in turn causes the USF contribution base to shrink further. As Senator Stevens recently noted, something must be done or the system will become unsustainable. Such an outcome would be completely at odds with what the Congress directed in Section 254. Because AT&T is deeply concerned about this problem, we have proposed a solution to the FCC – a universal service contribution system based on telephone numbers for those services that use telephone numbers, and on connections to the public network for special access and private line services that do not use telephone numbers. Chart B, also at the back of my testimony, shows what would happen under this plan as the fund grows, and numbers-based and special access connections increase. If numbers/special access connections grow 2% per year, a 2% annual increase in the fund will not change at all the $0.93 per number universal service assessment. Moreover, a numbers-based solution offers the advantage of being “future-proof.” Voice-over-Internet-Protocol (VoIP) providers give their customers a telephone number so that those customers can receive calls from the public switched network. This assignment of numbers will trigger an obligation to support universal service, with the effect of keeping VoIP in the universal service contribution base. We believe that a numbers-based solution could be implemented today by the FCC, under its existing statutory authority. What is needed is the will for reform. Geographic Toll Rate Averaging: Access Reform Is Necessary to Preserve Competition As I said at the start, AT&T is proud of its heritage as the carrier that truly ties America together. But today, the burden of tying America together – of providing long distance service in all corners of the country – is being borne substantially by AT&T. AT&T is carrying this burden, even as it must increasingly compete in long distance with RBOCs that provide long distance service only in their largely urban, lower-cost service areas. As part of the 1996 Act’s universal service provisions, Congress – and really the members of this Committee -- ensured that all Americans could be tied together affordably by mandating rate averaging and rate integration for long distance services. But interstate access charges – a significant component of the cost of long distance service – are not the same in all parts of the country. The geographic toll rate averaging provisions of Section 254(g) make it imperative that the remaining traffic sensitive cost disparities be removed from interstate access rates and made explicit through the USF. In most areas served by the RBOCs, this reform was implemented through the CALLS plan, and interstate access charges are now approximately .6 cents per access minute. In the areas served by small, rural carriers not covered by the CALLS plan, the average interstate access charges we face are much higher. For example, the average NECA minute of access averages 2.6 cents per minute. When AT&T averages its toll rates nationwide, it has to charge its customers in the RBOC territory more than it otherwise would, in order to charge the customer in the small, rural carrier’s service area the average rate. This burden was barely bearable before Bell entry into the long distance market, when AT&T had to compete with MCI, Sprint, and other carriers that could choose not to serve certain geographies or service areas. Now, with the Bells having secured 271 approval to enter the long distance market in most of the country, this burden has become intolerable. Verizon, which is already the third largest long distance carrier in the country gets an unfair competitive advantage from the Act’s toll averaging requirements because it doesn’t serve all of America. At the back of my testimony, Chart C1 demonstrates this problem. Fortunately, the 1996 Act allows for a solution that preserves toll averaging while restoring a level playing field to long distance competition. The local network costs – primarily high switching and transport costs – that lead to these high rural company access charges – which can be as high as 10 cents per minute of use -- could be supported through explicit universal service support in much the same way as in the CALLS plan adopted by the FCC. Chart C2 illustrates the outcome if this problem is solved in a manner similar to that employed in the CALLS plan. Two years ago, AT&T and several other carriers presented just such a proposal to the FCC. Unfortunately, the FCC did not implement our proposal, and in the two years since that time, the economic challenges that led us to file our plan have gotten worse. We need relief. Unless the FCC acts aggressively, the marketplace will force AT&T and other national carriers to find other, less optimal solutions. Those options are not attractive to us, nor should they be attractive to policymakers, and rural America should not be forced to bear their cost. Wireless Service and Multiple Connections: How Much Support Is Enough? Providing for a sustainable funding mechanism is just part of the challenge we face. Decisions also must be made regarding just how many network connections universal service will support for each household. The miracle of wireless phones is that they make connections truly personal. But are we really going to pay universal service support for four or five connections for a family of four? Are we ready to foot that bill? If policymakers decide that this type of support is acceptable, they must be prepared for a significant increase in the demands placed on the USF. By making this point, I am not suggesting that the FCC’s implementation of Section 254 should bar wireless carriers from receiving USF support. Any decision about how many lines to support to a household must be competitively neutral in its application. LEC-provided multiple lines to a household are no more sacrosanct than wireless-provided multiple lines. But how many lines to a household constitute universal service? It is important to decide what it is really necessary to subsidize because no universal service funding mechanism can raise an unlimited amount of USF support. This issue needs additional attention from the FCC and the Federal-State Joint Board. In addition, attention must be paid to the discriminatory advantage wireless-based long distance services have with respect to universal service contributions. With the wireless “safe harbor” set at 28.5 percent, any wireless carrier whose actual percentage of interstate traffic exceeds 28.5 percent will simply elect the “safe harbor.” As such, it operates as an absolute cap on wireless contributions that is not available to wireline long distance carriers. This is highly discriminatory and provides an incentive to shift interstate traffic from wireline service to wireless service. Assume, for example, that a customer has 200 minutes of interstate long distance usage at 5 cents per minute. If that customer can shift those 200 minutes of usage to a wireless plan, and pay $10 in additional wireless charges, he or she will rationally do so. Why? Because the effect of the “safe harbor” is to substantially reduce this customer’s obligation to pay universal service support. The impact of this incentive is dramatic, and we believe it is flatly at odds with Section 254’s direction that universal service contributions be “equitable and non-discriminatory.” This inequity should be fixed. * * * * * Mr. Chairman, thank you again for the opportunity to testify here today. At AT&T, we believe firmly that competition and universal service can go hand-in-hand. But decisions must be made, and some bold actions taken to secure universal service for the future. On behalf of my company, I hope you agree, and look forward to working with you and the members of this Subcommittee as you continue your important work in this area.

• Mr. Robert W. Orent
  Read statement

  Witness Panel 2

  Mr. Robert W. Orent

  In the Matter of "The Future of Universal Service" April 2, 2003 Executive Summary The Senate Commerce Committee Subcommittee on Communications should be commended for convening an oversight hearing to consider the current universal service proceedings pending before the Federal Communications Commission (FCC). There is clearly much at stake for both rural telephone companies and rural consumers within the FCC's proceeding pertaining to the universal service contribution methodology and universal service portability. Today, the Subcommittee will hear from a variety of witnesses that are deeply interested in the future of universal service and the outcome of both of these proceedings. Witnesses will identify a variety of concerns about the current universal service program and offer their recommendations on how the FCC should address these important proceedings. We believe there are serious threats to the long-term sustainability of the federal Universal Service Fund (USF). If these issues before the FCC are not dealt with in a manner consistent with the will of Congress when it passed the Telecommunications Act of 1996, consumers will bear the costs of a broken universal service system. I. Greater Oversight and Reform of the ETC Designation Process is Needed The sustainability of the USF is severely threatened by the ease in which some state commissions have approved universal service support for wireless Competitive Eligible Telecommunications Carriers (CETCs). In fact, since 1999, universal service support allocated to wireless CETCs has increased dramatically from $500,000 in 1999 to a projection of approximately $140 million in 2003. This astonishing growth in support to wireless CETCs is particularly troubling since these carriers are not held to the same regulatory obligations and serve standards faced by other carriers. We ask that Congress reaffirm its strong admonition about financially supporting competition when it crafted section 214(e) of the Act. In enacting this section of the law governing the designation of multiple ETCs, Congress clearly recognized that supported competition would not always be in the "public interest" of areas served by rural telephone companies. Sadly, some state commissions and the FCC have ignored the intent of Congress and have designated additional ETCs without thoughtfully considering the factors that determine the public interest. Regulators have placed far too much emphasis upon the Act's general goal of competition at the expense of rural markets and consumers. The result of state government-sponsored artificial competition in rural service areas has been a swollen USF that has put the entire universal service program at great risk. II. The Senate Should Direct the FCC to Follow the Law when Assessing Contributions to the Universal Service Fund It is very possible that the FCC will adopt a "connections-based" proposal for revising the universal service contribution methodology that does not comply with the Telecommunications Act of 1996's requirement that every interstate telecommunications provider contribute to the Fund on an "equitable and nondiscriminatory basis." We urge the committee to direct the FCC to follow the law and ensure that interstate carriers continue to contribute their fair share to the Fund. We also believe the FCC should be strongly encouraged to take action that would broaden the base of contributors to universal service. The Senate has the opportunity to prevent further erosion of the contribution base. Your vigilant oversight of the FCC in this area would help to ensure a sustainable funding mechanism that provides stable and sufficient universal service support throughout rural America. There can be no denying the critical role that universal service plays in ensuring the future of our integrated network - a network that has been proven to be critical to our national and economic security. Congress must continue to ensure that federal and state regulators understand our nation's long-standing commitment to a strong universal service policy and reaffirm its support for regulatory decisions that recognize the USF as a scarce national resource. We hope that this morning's hearing is the first in a series of actions by the Senate Commerce Committee to exert better oversight of these complex issues that directly impact the receipt of high-quality and affordable telecommunications services by millions of consumers nationwide. Introduction Mr. Chairman, members of the subcommittee, my name is Bob Orent, and I am the President and CEO of Hiawatha Communications, which is an independently-owned telecommunications corporation headquartered in Munising, Michigan. Hiawatha Communications is the parent company of four local exchange telephone companies, namely Hiawatha Telephone Company, Midway Telephone Company, Ontonagon County Telephone Company, and Chippewa County Telephone Company, along with other subsidiaries, providing telecommunications services in the central and western Upper Peninsula region. Hiawatha Communications also owns and operates Jamadots.com, a new competitive high-quality Internet service that provide broadband services such as Digital Subscriber Line (DSL) service. Collectively, the operating companies serve more than 5,000 square miles of territory and approximately 15,000 customers. I am very proud of Hiawatha Communication's commitment to universal service by providing top quality telecommunications services at affordable prices, contributing to economic development, improving the quality of life, and otherwise serving the communities and citizens of Michigan's Upper Peninsula. However, Hiawatha's commitment to providing universal service is not unique. There are hundreds of independent incumbent local exchange carriers (ILECs) nationwide that are as just as committed toward fulfilling their universal service obligations on a daily basis. This morning, I am particularly pleased to appear before you on behalf of those hundreds of other ILECs that are represented by the Independent Telephone and Telecommunications Alliance, the National Rural Telecom Association, the National Telecommunications Cooperative Association, the Organization for the Promotion and Advancement of Small Telecommunications Companies, and the Western Alliance. Mr. Chairman, we strongly support the goal of our nation's universal service policy: to ensure that every American, regardless of location, has affordable, high-quality access to the public switched network and thereby benefits from a variety of telecommunications services. Rural ILECs are the embodiment of the universal service concept, having built the infrastructure that provides ubiquitous, high-quality local telecommunications service to some of the country's most remote and difficult to serve areas. The provision of a robust infrastructure in these areas would never have been possible were it not for the nation's long-established policy of universal service and the USF. However, we are very concerned that state and federal policy decisions are threatening the availability of such high-quality, modern service to rural consumers. Such ill-advised decisions and several controversial court decisions have put the system of universal service support at risk. Nine months ago, rural providers brought a warning to this subcommittee about a rural cost recovery system that was facing increasingly serious risks on several fronts. I regret to say that in the intervening nine months little has been done to effectively respond to these threats. Not surprisingly, these threats have not gone away. They have grown to the point that we may now be facing a true watershed for rural telecommunications. A series of critical decisions are pending at the FCC that will either make or break the cost recovery mechanisms that make rural telecommunications possible. Given early indications, we are not at all confident that the FCC will get these decisions right without active oversight from Congress. For example, in their zeal to meet the Act's goal of promoting competition, some state commissions and the FCC have not hesitated to allocate federal universal service support to competing carriers in rural areas that clearly cannot naturally sustain more than one carrier. Some have even assumed that artificially supporting competition in rural areas, in and of itself, meets the Act's "public interest" requirement. Ignoring the law this way takes advantage of consumers nationwide that end up footing the bill when regulators abuse their authority. Mr. Chairman, the dire consequences of such regulatory decisions have become more apparent in recent years. These decisions have rapidly swollen the USF to a level that may soon be unsustainable. For example, in 1996, the year the Act was passed, total funding for the support programs was $1.7 billion. By the end of this year, funding for all programs projected to be approximately $6.3 billion. Contributing to this dramatic growth in the USF is the fact that universal service support going to wireless Competitive Eligible Telecommunications Carriers (CETCs) has grown from less than $500,000 in 1999 to a projection of more than $147 million in 2003. It is estimated, that if all wireless providers nationwide were granted ETC status as part of this artificial "competitive" model that the annual level of the USF would grow by approximately $2 billion. Thus, amazingly, over seven years, the Fund would have nearly quadrupled in size! Our message this morning is very clear. If the size of the USF reaches a point where further growth is unsustainable, yet the number of carriers receiving support continues to grow, then no carrier will have the funding necessary to provide affordable, high-quality telecommunications services. Who will suffer if the FCC and state commissions get it wrong? Just about everyone. Rural consumers will be denied the benefits of reliable, affordable communications service promised by the Act. Rural communities will also be disadvantaged. Investment in rural communities - both to maintain existing facilities and to deploy advanced services - will dry up. The more highly skilled jobs in rural communities will disappear. Finally, rural consumers will incur ever-growing costs for ever-dwindling benefits. We are headed on a course for a serious train wreck and precious little is being done to avert it. Congress must exercise greater oversight of federal and state regulatory decisions to protect our nation's universal service program from these mounting risks. Without Congress' active oversight, the fundamental principles underpinning universal service - that all Americans deserve reliable, state-of-the art telecommunications and that all Americans benefit when rural customers are connected to the network - are likely to be lost in a series of piecemeal FCC decisions designed to advance other, unrelated policy objectives. The Economics of Rural Telecommunications Mr. Chairman, for more than 100 years, independent local exchange carriers have provided local telecommunications service throughout rural America. For rural ILECs, universal service support has always been, and continues to be, a critical means of cost recovery that has made the provision of modern, affordable service possible in high-cost areas. Thus, if rural ILECs lose the ability or incentive to continue investing in their networks - or worse yet, if their existence is placed at risk - then some rural areas may be deprived of basic universal service where high-quality, reliable telecommunications services are available and affordable for all. Such an outcome would be completely at odds with the universal service principles that Congress enacted in the 1996 Act. The universal service provisions of the 1996 Act indicate that universal service support should be used for infrastructure investment in areas where it would not otherwise be economically feasible to provide service at rates that are affordable and reasonably comparable to urban areas of the country. High-cost support should never be confused with a program simply to reduce the rates for telecommunications service charged to an individual end user. Major Threats to Affordable Rural Telecommunications Mr. Chairman, as I indicated earlier, universal service programs have successfully connected rural American households and businesses, schools and libraries, low income families, and others to the public switched network. A strong universal service policy also provides other economic and social benefits for rural communities served by Hiawatha Communications and the hundreds of rural telephone companies nationwide. In communities in Michigan's Upper Peninsula and across the country, rural Americans have witnessed their communities thrive and prosper through rural economic development that depends on modern telecommunications. I am absolutely convinced that our nation has already achieved many benefits from pursuing universal service as a national public policy goal. But again, it is critical that Congress exercises its oversight responsibilities to ensure a sustainable funding mechanism that provides stable and sufficient universal service support. More than 7 years ago, we greatly appreciated the efforts of the "Senate Farm Team" led by Senators Burns, Dorgan, Stevens and others to ensure that key universal service provisions were ultimately enacted into law. However, from the moment when the Act was crafted until now, we have remained very wary of several elements of the provisions. Today, we believe that there are major threats facing the sustainability of the high-cost program. States Must Take ETC Responsibilities More Seriously First, we believe the sustainability of the universal service program is threatened by the ease in which some state commissions and the FCC have begun to create potentially vast new liabilities for the Fund and the nation's consumers by approving universal service support for wireless CETCs - in spite of the fact that they do not face many of the regulatory obligations other carriers face. For example: • They are not required to serve all customers in the service territory. • They are not held to the same quality of service and reliability standards. • They do not have equal access obligations. • They do not receive support on the basis of their own costs. Mr. Chairman, as you know, under the 1996 Act, in order to be eligible to receive high-cost universal service support, a carrier must first be designated as an Eligible Telecommunications Carrier (ETC) by a state commission or, in limited circumstances, by the FCC. In areas served by a non-rural ILEC, the Act requires state commissions and the FCC to designate additional ETCs, so long as the applying carrier meets certain prerequisites. However, in areas served by a rural telephone company, the Act provides state commissions and the FCC with the discretion to determine whether or not providing more than one carrier with universal service support would be in the best interest of those communities. More specifically, it requires state commissions and the FCC to find that the designation of an additional ETC in a rural service area is in the public interest before such a designation is made. This additional requirement demonstrates Congress’s recognition that supported competition would not always serve the public interest in the areas served by rural telephone companies. Unfortunately, in many instances, state commissions and the FCC have not been following the intent of Congress and have been quick to designate additional ETCs in rural telephone company service areas without thoughtfully and thoroughly considering all of the factors that determine the public interest. Our concerns are reflected in separate comments made recently by Commissioners Kevin Martin and Jonathan Adelstein. Commissioner Martin explained how supporting competition in rural areas may not always be in the public interest when he stated: I have some concerns with the Commission's policy….of using universal service support as a means of creating "competition" in high cost areas. I am hesitant to subsidize multiple competitors to serve areas in which costs are prohibitively expensive for even one carrier. This policy may make it difficult for any one carrier to achieve the economies of scale necessary to serve all of the customers in a rural area, leading to inefficient and/or stranded investment and a ballooning universal service fund. Commissioner Martin's concerns underscore a key concern for rural telephone companies - the perfunctory grants of ETC designations by various state commissions and the FCC that do not take into consideration the potential costs of such decisions to rural consumers and to consumers nationwide who are the ultimate contributors to the USF. Fortunately, the Federal-State Joint Board on Universal Service has recently issued a Public Notice that will examine the process for designating ETCs and the Commission's rules relating to high-cost universal service support in study areas in which a competitive ETC is providing services. In case after case state authorities and the FCC have granted ETC status to competitive carriers based on extremely loose public interest tests or tests that are inconsistent with the language and intent of the law. Notably, however, just last year, the Utah Supreme Court upheld a decision of the Utah Public Service Commission that denied ETC status for Western Wireless Corp. In upholding the PSC decision, the Court found that: …the [Utah Commission] is not against competition per se, but rather, merely recognizes that in some instances competition in rural areas by multiple ETCs receiving state universal service support may not be in the public interest. That is precisely what Congress's "public interest" requirement in rural carrier's areas says and means. Far too often, artificially inducing competition - or simply providing windfall payments to carriers for services for services that they are already successfully providing without support - has been assumed to be in the public interest. This flatly wrong interpretation has no place in the regulatory arena implementing the 1996 Act for rural markets. In the case of the rural markets served by my companies and those of my rural company colleagues, these entire communities are typically already receiving high quality, affordable communications services and the existing provider is doing all it can to provide advanced capabilities. Owing to the FCC's and the state's misguided interpretations and implementation of the 1996 Act, today we are at the point where pressures on the high-cost program have grown to the degree that we are now very concerned about its long-term viability. Clearly, for the public interest to be served, it will be necessary to demonstrate that the benefits of supporting multiple carriers will exceed the costs created by supporting multiple networks. These concerns are also apparently shared by FCC Commissioner Jonathan Adelstein, who recently stated: The public interest also demands that regulators seriously consider whether a market can support more than one carrier with universal service. If not, then new designations shouldn't be given as a matter of course just because they meet other qualifications. Commissioner Adelstein too is simply reading what the 1996 Act says and requires. Mr. Chairman, although we have never agreed with the concept of allowing multiple carriers in a market served by a rural telephone company to receive universal service support, we had hoped that the safeguards in the law would prevent the duplicative support provisions from doing unintended harm. In fact, we have always noted that the great majority of rural markets that are served by our members are not, and may never be, in a position to sustain more than one carrier. Artificial competition that is competition that is based upon a business plan relying on duplicative universal service support is not market driven competition at all and should be discouraged, not encouraged. Technically, the statute contemplates multiple carrier support in non rural telephone company areas and even requires it in the large urban centered markets. In our view, however, the provision allowing an existing support recipient to relinquish its ETC designation voluntarily when a new recipient becomes designated indicates that the congressional intent behind the provision was that new entrants into a market would be making a genuine, carrier-of last resort-commitment to the market in order to receive universal service support. The legislative history leading to the creation of the section of the statute that provides the states with the responsibility of making ETC determinations shows that the Congress believed state authorities would be in a better position to make ETC determinations than the FCC. State policymakers, after all, would have the best information with regard to the needs of their respective rural markets and would have a vested interest in ensuring such markets were efficiently and well served. Unfortunately, to a large extent state policymakers have simply followed the direction and directives of the FCC, without a great deal of thought being given to their individual, unique circumstances. The FCC first tried to prevent states from adopting any additional requirements for carriers seeking to qualify for support. The 5th Circuit decided that the law did not permit this prohibition. The FCC has, since then, issued an unnecessary declaratory ruling threatening to preempt state requirements the FCC perceives as obstacles to the publicly supported "competition" it wants to foster. Mr. Chairman, we urge Congress to work with us and the Federal-State Joint Board on Universal Service to make it clear that ETC designations are to be taken seriously and that the responsibilities associated with receipt of this designation must be equal to the carrier of last resort level of commitment demanded of incumbent carriers. Providing support to a carrier that is unwilling to provide true, ubiquitous universal service is wasteful and serves no one well. The fact of the matter is that we incumbents have always provided real value to our customers and to the nationwide end-user contributors in return for our ETC designations, and we would not have it any other way. Nevertheless, Congress should no longer sit still and watch others take advantage of this critical program. Providing Support for Multiple Carriers at the Incumbent Carrier's Cost Mr. Chairman, I have spoken about my disappointment over state commission misinterpretation of the "public interest" when designating more than one ETC in an area served by a rural telephone company. However, the states are not the only ones running up the costs for the universal service program without increasing the benefits. The FCC is also responsible. One of the most controversial and costly FCC actions "implementing" Congress's universal service requirements is its revision of a pro-consumer policy into a consumer-funded windfall for competing carriers in rural areas. This unjustified consumer burden came about because the FCC uses the incumbent local telephone company's actual costs for providing a line to its customers to calculate the universal service support for competing carriers. The FCC originally said that it would use its proxy model, based on an imaginary state-of-the-art lowest-cost network for rural carriers’ support. However, its Rural Task Force, made up of representatives of consumers and all sorts of carriers, determined that the proxy model simply would not work for the extremely varied rural telephone companies and the differing conditions in their service areas. And we agree. Nevertheless, the FCC still wants to force rural companies into its misshapen proxy mold. Fortunately, for now it is still using actual costs, which accurately measure the need for support for incumbents under the current formulas. Mr. Chairman, fixated on the principle of "competitive neutrality" it had added to the list of principles Congress adopted, the FCC decided to make support "portable." By this, the FCC meant that universal service support for high cost, rural, and insular areas would be shifted to a competitive ETC that "wins" or "captures" a customer from an ILEC. It later spoke of support for "new" customers, too. The idea is that the new eligible carrier receives the same level of universal service support for a customer as the ILEC would have been eligible to receive for serving that customer. The FCC's rationale was that "paying the support to a competitive eligible telecommunications carrier that wins the customer or adds a new subscriber would aid the entry of competition in rural study areas." The FCC simply brushed aside the statutory language, ignoring that section 254's requirements for "sufficient," "predictable" and, above all, "specific" support are totally at odds with basing support on another carrier’s cost-specific support. Basing support on the incumbent’s actual costs means that the competing carrier's subsidy per line has no link whatever to its own costs or rates. Thus, the support is not "specific" and is almost certain to be more than "sufficient," since unlike ILECs, competitors can choose where to serve and where to seek support. As a result, wireless carriers get support based on the high costs of providing a copper or fiber line to a remote ranch in Montana. However, the economics of how wireless carriers incur costs are entirely different, and they do not need to install lines to the customer's premises. They also get support based on the greater costs per line for necessarily small switches provided by small incumbent carriers in areas with few subscribers, regardless of the size, location, or efficiency of their switches or the scope of their service areas. The mismatch between support and costs has become even greater now that the FCC has adopted Interstate Common Line Support (ICLS) to replace cost recovery that ILECs used to get via their access charges to long distance carriers. However, while the incumbents lowered their access charges to qualify for support, the competing subsidized carriers claim that they must get the additional support per line without changing their rates or services at all. Mr. Chairman, the claim that support is necessary to bring competitors into rural areas is not supported by the facts. What has generally been the case, for example, is that the additional support is claimed by a rural cellular carrier that is already serving the area where it draws support. Under current FCC policies, it immediately obtains support at nationwide consumers' expense for the service it is already successfully providing to paying customers. The lure of support for nothing in return is quickly inducing wireless carriers to cash in on the consumer-financed bonanza. Recent reports by investment analysts of the "high margin" subsidies that wireless carriers may obtain for their lines in rural areas will further pressure more prudent wireless providers to seek this windfall as well. Incumbent local phone companies serve as the so-called carrier of last resort in their service areas. This means that they must provide service in response to any reasonable demand, including, for example, when competitors cease to provide service, and cannot discontinue service without regulatory permission. These obligations are key safeguards against any community or consumer losing the ability to connect into the public switched network at just and reasonable rates. In contrast, the wireless carriers that are beginning to line up for the right to draw support are also the strongest opponents of any requirements that competing subsidized carriers provide proven value to consumers in return for the support they receive. These carriers claim that section 332(c) of the Act, which exempts them from state rate and entry regulation, also bars any state from requiring them to meet rate level requirements to justify their subsidies under universal service support programs. They expect the general public to cover some of their costs of providing service under the national policy of providing universal service in high-cost markets. But they refuse to recognize the difference between state regulation - setting rates or placing obstacles that prevent them from providing competing service at all - and requiring them to provide value to the nation's ratepayers to justify the support they receive. These carriers even complain that it is against government policy to ask competing carriers to calculate their costs of service to qualify for support from nationwide users of the network. It is as if applicants for hurricane disaster assistance took the position that they could not be asked to demonstrate that they had been affected by hurricane damage because financial information and information about the condition of their property is private. Under section 253 of the Act, carriers are free to enter and provide competing service in markets throughout the nation without regulatory obstacles. However, it is not forbidden "regulation" to ask that they justify the need for support, and how they use such support, under the consumer centered purposes for which universal service support has been established. Nor should the section 332 prohibition on requiring wireless carriers to provide equal access to competing providers of long-distance service mean that they are shielded from meeting that requirement if they voluntarily seek high cost subsidies. It is absurd to equate regulatory requirements that apply as a condition for providing service as a carrier with conditions that attach only to carriers that choose of their own volition to seek universal service support. Mr. Chairman, section 254(e) of the Act requires that carriers that obtain federal universal service support use it only for the legitimate universal service purposes for which it is intended. Since the support for incumbents is based almost entirely on their own past actual investment and expense payments or reductions in other rates, it is clear that the support has been used for purposes covered by the cost-based support formulas. The use to which competitors will put support based on the incumbents' actual spending record, cannot be discerned from the formulas or records. Their unsupported self-certification that they use the support for appropriate purposes is suspect, at best, when they need not capture customers, add new customers, change their rates, increase their investments, improve their services or make any other legitimate use of the windfall payments they receive. Congress owes it to the nation's telecommunications customers that fund the federal universal service programs (a) to base each ETC's support payments on its own cost of providing service and (b) to verify that non-cost-based payments are actually put to use for the statutory purposes. Finally, the argument of wireless carriers that the definition of universal service must not be upgraded unless they can meet the new standard is a perversion of the pro-consumer foundation on which the national universal service policy rests. While competitive local exchange carriers (CLECs) have tried to provide broadband in their markets, wireless carriers that are entering markets on the basis of what universal service subsidy is available put their own interests ahead of the consumers Congress sought to benefit. To make the level of support available to particular carriers a test for whether and when consumers should be able to count on the evolving definition of universal service the law requires is an affront to the statutory principles of reasonably comparable urban and rural rates and services, including advanced telecommunications and information services and to the section 706 objective of universally available access to broadband services. Although it is too early to change the definition at this point in the development of the broadband marketplace, who can qualify for support will never be a reasonable standard for evolving the supported universal services within the definition. The FCC Should Follow the Law when Assessing Contributions to the Universal Service Fund Mr. Chairman, the FCC is currently considering three different "connections-based" proposals for revising the universal service contribution methodology. The first proposal would impose a flat monthly fee for each end-user connection and assess a "minimum" contribution from each interstate telecommunications provider regardless of whether the carrier provides connections. The second proposal would split "connections-based" based contributions between switched access and interstate transport providers. The final proposal would assess contributions on the basis of telephone numbers assigned to end users. We are very concerned that through these proposals the Commission is considering possibly adopting a new contribution methodology that would violate the requirement set forth in the 1996 Act that calls for “equitable and nondiscriminatory” contributions from every interstate telecommunications carrier. In addition, we also all strongly believe that any reform of the universal service contribution methodology should expand the base of contributions to the Fund. As you know, the universal service system has been funded by a broad-based national system of industry contributions. The traditional contribution base - the long distance market - has steadily declined, eroding the funding base for universal service. Alternatives to long distance - wireless, e-mail, Internet Protocal (IP) telephony and their customers have not been asked to contribute their fair share to alleviate the shortfall. We are very concerned that the proposals currently pending before the FCC would fail to broaden the contribution base sufficiently, and fail to ensure the stability and sufficiency of the USF for the long-term. Mr. Chairman, the manner in which contributions are assessed for the USF is a very complex and controversial issue. In fact, the associations that I represent this morning differ on how to solve the current universal service contribution dilemma. One view is that only the "connections-based" proposal which would split contributions between switched access and interstate transport providers could be made to comply with the Act's requirement of "equitable and nondiscriminatory" contributions from all interstate telecommunications carriers. Since all interstate telephone calls require both a connection to a local distribution network and a carrier equipped to transport these calls across state lines, splitting contributions between both of these carriers would be equitable and nondiscriminatory. Other telecommunications advocates are not convinced that the Commission should give further consideration to any of the "connections-based" USF assessment proposals. Their alternative position recommends that the FCC allow sufficient time to determine whether the modified revenues-based USF contribution mechanism it adopted last year could be sustainable for the future. Some industry stakeholders with this view also maintain in part that the FCC should refrain from further changes to the USF contribution mechanism until it has implemented final rules in its wireline broadband classification and universal service portability proceedings. Although there is more than one view among the associations about whether and how to address the USF contribution issue, I can assure you in the strongest possible terms that we are unified in our view that any further modifications by the Commission to the contribution methodology must be consistent with the statute's clear requirement that all interstate telecommunications services contribute to the USF on an equitable and nondiscriminatory basis. Regardless of whether the FCC adopts the proposal for splitting contributions between switched access and interstate transport providers or extends the operation of its interim modified revenues based plan, the associations all agree that interstate interexchange carriers have to remain principal contributors. Mr. Chairman, we all agree that universal service support needs to be sufficient and sustainable and should be fair to all providers and users of all kinds of networks. We are aware of growth in the Fund and concerned about shifts in the types of interstate services consumers are utilizing. These developments have created a serious issue about how to prevent erosion and evasion of support mechanisms. Thus, we firmly believe that the FCC needs to assess the broadest possible list of contributors to keep each carrier's contribution and the amount it needs to recover from its customers as small as possible. We need to emphasize that the gradual but ever-growing use of broadband platforms and Internet Protocol (IP) networks plays a growing role in the instability of the contribution base. Consumers use IP networks in a variety of ways (access to the World Wide Web, e-mail, instant messaging, Internet telephony) and via various platforms (cable, wireless, satellite) to substitute for interstate calls on the public switched network. As this "Internet substitution" grows, traditional interstate revenues providing the funding base for universal service will diminish. And there will be little offsetting gain, since presently only wireline telecommunications carriers are required to contribute on the basis of revenues earned from Internet access service. All other Internet access providers using other platforms remain exempt from the obligation. Mr. Chairman, federal law allows the FCC to assess all providers of interstate "telecommunications" if the public interest so requires, even if they are not common carriers. We all agree that all providers that compete with each other and provide the same functions should have the same contribution responsibilities. This means that cable modem providers and other information service providers that provide their own transmission should contribute, just as ILECs presently contribute for their transmission role in providing Internet access. This also means that wireless carriers need to be assessed on a fairer basis than the even the "modified safe harbor" adopted by the Commission last year. More specifically, in reassessing who must contribute to the Fund, Congress should insist that interexchange carriers, Internet access providers, wireless carriers, bundled service providers, payphone providers, dial-around services, and IP telephony providers, as well as local exchange carriers all contribute to the USF. Broadband service providers, whether considered information service providers or telecommunications service providers, also should be included as supporters of universal service. Finding an equitable way of assessing contributions to universal service support on carriers, and - as I just discussed - broadening the base of contributors to universal service are significant problems the FCC needs to resolve to make universal service support funding sustainable. Universal Service Is Good Public Policy For America Mr. Chairman, the high-cost component of the universal service program handles approximately $3.3 billion in annual carrier-to-carrier support transactions, which represents slightly more than half the amount that is channeled through the overall fund each year. The high-cost component is a "safety net" of sorts for rural carriers and their subscribers, but it is also a tool to ensure that all Americans enjoy the benefits and security of a nationwide integrated network. Congress and successive administrations have wisely recognized the value of this component of the program and now, above all else, need to take steps to ensure its ongoing ability to function according to statutory intent. The high-cost element of the Fund is used to build telecommunications "platform" infrastructure. Without a telecommunications platform, our schools and libraries, rural health care, and lifeline and link up programs, and millions of rural Americans, have nothing. Modern telecommunications infrastructure in rural America enables diversity of education, health, and other social services comparable to those in urban areas. Mr. Chairman, our nation's first priority for rural areas should be to provide a stable environment for continued telecommunications investment. Technologies and businesses come and go. But one of the most important ways rural Americans have benefited from universal service is that it has sustained a telecommunications commitment to rural communities for decades. "Rural telephone companies," as defined in the 1996 Act, have become an integral part of rural communities throughout America and have remained economically viable in these high-cost areas due, in large part, to strong universal service policy. In sum, a strong universal service policy is still needed today to ensure a stable environment that encourages continued telecommunications investment in rural America. Incumbent rural telephone companies have met the challenge of deploying telecommunications infrastructure in high-cost rural areas. With a strong universal service policy, they can continue to help rural communities and rural Americans realize diversity of education, improved health and other social services, and economic development through modern telecommunications.

• Mr. Carson Hughes
  Read statement

  Witness Panel 2

  Mr. Carson Hughes

  Statement of Carson Hughes Cellular South Licenses, Inc. Before the Subcommittee on Communications Committee on Commerce, Science and Transportation April 2, 2003 Mr. Chairman and Members of the Subcommittee: Thank you for this opportunity to testify on behalf of a coalition of independent wireless carriers called the Wireless Independent Group (“WIG”). Members of the coalition include Cellular South Licenses, Inc., Hargray Wireless, L.L.C., Midwest Wireless Communications L.L.C., and Rural Cellular Corporation. I am the Chief Executive Officer of Telapex, Inc., Cellular South's parent company. WIG member companies serve people in communities in 19 states, including Alabama, Arkansas, Iowa, Georgia, Florida, Kansas, Maine, Massachusetts, Minnesota, Mississippi, New Hampshire, New York, Oregon, South Carolina, South Dakota, Tennessee, Vermont, Washington and Wisconsin. In each of these states, the vast majority of area served by WIG member companies is rural. If you examine the operations, the composition and demographics of WIG members' service area, the challenges we face in rural areas, and our goals, you will likely conclude that we have a great deal in common with incumbent local exchange carriers ("ILECs") serving rural areas throughout the country. For example, Cellular South's current ETC service area, which is also served by Bell South, roughly 38,000 square miles, larger than the state of Indiana. Most of it can fairly be described as sparsely populated and remote, with small towns scattered throughout. We are locally owned and operated. We live, work and play in the communities we serve and believe that investment in these communities is one of the best ways to differentiate ourselves from large national wireless carriers that we compete with. Like all of you, WIG members are committed to the long-term sustainability of the universal service support system and have seen first hand how it helps the lives of those living in rural and underserved communities. As one of the few wireless companies that have actually received universal service funds, we hope to provide you with our perspective on how high-cost funds are improving rural communities we serve. For ease of reference, my testimony is divided into three sections. Section I describes our company and our experience in Mississippi as a competitive ETC ("CETC"). Section II outlines specific policy positions that Cellular South supports. Section III provides responses to some of the more popular arguments advanced by ILECs in presentations made to the FCC and members of this Committee. I. A DESCRIPTION OF CELLULAR SOUTH AND OUR EXPERIENCE AS A COMPETITIVE ETC. A. Our Company Cellular South (or its predecessor) has been licensed to provide mobile wireless service in rural Mississippi since 1988. Our company philosophy is to provide our customers with the highest quality voice service and to differentiate our product from other wireless carriers by providing superior network quality and customer service. We believe we provide the highest quality service of any wireless company in our state and that our CDMA 1X network in rural areas is superior to our wireless competition. Our customer quality surveys, our churn rate, and our interaction with customers tell us that we have developed a first rate wireless system serving many rural areas in Mississippi. Since our inception, we have not been able to compete as effectively as we would like with Bell South for local exchange customers simply because our network is not robust enough to deliver in all rural areas the service quality that persons living in urban areas such as our state capital, Jackson, have come to enjoy. Because Bell South was the only carrier receiving high-cost support in much of rural Mississippi, it was very difficult for any carrier using any technology to achieve network and service quality at price points low enough to be competitive. In the 1996 Telecom Act, Congress directed the FCC to designate additional ETCs throughout the country. Since 1997, the FCC has released a series of rulemaking orders implementing the 1996 Act and designating CETCs. In 2001, Cellular South applied for and received a grant of ETC status from the Mississippi Public Utility Commission for the area served by Bell South, which comprises over three quarters of the state and includes some of the most rural portions of Mississippi. In early 2002, we began receiving high cost support from the federal fund. Today, we receive an average of approximately $6.70 per month per line in high-cost support. B. Our Experience Federal law requires eligible carriers to use high-cost support solely to construct, improve, and maintain facilities and services in designated ETC areas. We have done just that and the results have been remarkable for Mississippi's rural residents. 1. Network Improvements Have Provided Important Health and Safety Benefits High-cost support has enabled Cellular South to significantly accelerate its planned upgrade to CDMA 1X digital technology in at least 169 cell sites and at our switching center which, (1) provides consumers with the highest quality voice service available, (2) contains significant additional features that customers want that are not available on our old analog or TDMA networks, (3) greatly increases the capacity of our system, enabling us to improve the quantity of service we can provide to customers, and (4) enables us to meet the FCC's E-911 mandates more efficiently. We have also initiated service at 34 new cell sites in high-cost areas in 2002, and plan to turn on at least 48 more in 2003. CDMA 1X is one of the most advanced digital standard and will enable us to deliver high-speed data services to our customers as demand for such services increases. Most important, each new cell site provides to rural consumers the benefit of 911 service. Citizens in rural areas depend on mobile phones more and more to provide critical communications needs. Those in need may be on farms, on remote roads, in bad weather, or as we witnessed only a year ago in Arizona, in firestorms, far from where assistance can be summoned by more traditional means, or separated from family or home for long periods. E-911, which permits a caller to be located and tracked, will be useless in areas where signal is weak or non-existent. It is self-evident that every time Cellular South adds a cell site or increases channel capacity, the number of completed 911 calls will increase. 911 and E-911 services are supported by universal service funds. We can think of no more important benefit that can be conferred on rural consumers than providing reliable wireless infrastructure on a par with that enjoyed in urban areas. 2. High Cost Support Has Improved Consumer Choices While generally speaking, the wireless service coverage gap between rural areas and urban areas continues to grow, high-cost funding in our rural areas is narrowing that gap. The business case for constructing quality wireless networks in rural areas is almost as difficult to make as the one for constructing a competing wireline network. Attempting to compete with long established incumbent wireline carriers in the local exchange market is extremely difficult, if not out of the question. With high-cost support, a competitor such as Cellular South has an opportunity to deploy network facilities that enable service quality improvements that enable customers to see wireless as a viable alternative to local exchange telephony, while at the same time extending the benefits of universal service. Although it is too early to measure our progress with any precision, we believe that our CDMA 1X overlay and deployment of new cell sites in 2002 is having a significant impact on the competitive landscape in Mississippi, to the benefit of the citizens of our state. In addition, we believe that the deployment of approximately 48 new sites in 2003 will accelerate our ability to compete in rural areas. For example, our upgraded CDMA 1X network permits us to offer customers a larger local calling area (all of Mississippi and Memphis) and a lower price. Larger local calling areas are a critical competitive factor – because most basic calling plans offered by wireline carriers offer very small local calling areas that provide toll free calling to only a few thousand, or sometimes only a few hundred, numbers. All other calls incur toll charges. Customers in many rural areas across the country pay much higher rates for in-state toll calls and most interexchange carriers do not offer their discounted interexchange toll service rate plans in many rural areas. In contrast, we are able to offer customers the ability to make unlimited calls throughout the state, and include Memphis, for $49.99 per month. For Cellular South to be competitive in rural areas, we need to deliver a robust and high quality network with both coverage and capacity. It is the provision of high-cost support that is enabling us to deliver competitive choices to rural consumers. ETC status has also enabled us to commence offering federal Lifeline and Link-Up benefits to eligible consumers. Lifeline and Link Up provide discounts on service and connection charges to consumers who participate in federal low-income programs. We have advertised the availability of Lifeline and engaged in specific outreach efforts at local health, welfare, and employment offices, to inform consumers of the availability of these benefits. We have freestanding signs in our stores to promote Lifeline and Link-Up and have instituted specific training for all of our new sales representatives so prospective customers can be made aware of the benefits. Even low income consumers in rural areas now have a choice of service provider. Eligible customers can obtain telephone service from us for as little as $7.00 per month. This essential benefit for those most in need advances universal service and competitive choices to those most in need. II. POLICY POSITIONS A. High-Cost Support Advances Universal Service and Drives Critical Infrastructure Development in Rural Areas. In urban areas, it is taken for granted that in most areas you can complete a wireless call in an emergency. In a very short time, consumer expectations for wireless have risen enormously, to the point where the failure to complete an important health or safety call is newsworthy. In many rural areas served by WIG members, expectations are often very different. Consumers understand that wireless phones work in larger towns and on major roads, and not much beyond that. Unlike urban dwellers, many rural Mississippians have traditionally seen mobile phones more as ancillary communications tools, rather than one that can be counted on to provide primary telephone service. While the national press has recently focused on the benefits of E-911 service and the need to accelerate its deployment, WIG members believe the best thing Congress and the FCC can do for rural America is to ensure that critical infrastructure is developed to permit callers to complete 911 calls. Without a cell site, there is no 911 service. E-911 system upgrades a carrier can invest in to locate a 911 caller will not help someone who cannot complete the call. The FCC's rules require all support to be used for the construction, provision and maintenance of facilities and services within the designated ETC support area. For us, there is no more important goal than to improve coverage within our existing service area. High-cost support has provided us with an opportunity to achieve that goal. Since obtaining ETC status, we have committed to an infrastructure development plan that significantly exceeds the amount we are receiving from the fund. With respect to universal service, we can think of few achievable goals more important than driving investment into rural areas that will improve critical infrastructure. At Cellular South, our new cell site construction is rapidly filling in service gaps and extending our reach in rural areas that we would not have reached for many years, if ever. In addition, it is self-evident that the number of important health and safety calls, such as those made by doctors, volunteer firemen, police, and first responders, is increasing with every new cell site that we construct in rural areas. For all of these reasons, we urge Congress to ensure that high-cost funds continue to be available to wireless carriers. B. High-Cost Support Will Bring Economic Development to Rural Areas. As a rule, our nation's rural areas have long trailed cities in terms of economic development. Use of high-cost support to improve infrastructure has significant economic impact on small communities and is a key to closing that gap. Today, many companies and people consider rural areas as more attractive places to locate and to live. One of the major factors involved in selecting a community is the quality of its telecommunications infrastructure. Wireless service is a very important factor in the equation. In our experience, more and more companies and people today rely on wireless phones to improve efficiencies and manage their businesses, especially in rural areas where the distances between job sites can be large, and in the case of farms and ranches, the job site itself can be quite large. At Cellular South, we believe that a number of small communities where we have constructed new cell sites are now better positioned to attract and keep business. We urge the Congress and the FCC to recognize the substantial economic benefits that can accrue to rural America as a result of the provision of high-cost support to wireless carriers. C. Wireless Carriers Pay Into the Fund And Are Entitled To Draw From It. For years now, wireless subscribers have been required to contribute to the universal service fund, to support wireline service. Yet ILECs have generally and vigorously opposed wireless companies' efforts to gain ETC status in rural areas, even though under the current system they are not harmed as a result of a competitor's designation. Just this year, the FCC nearly doubled the amount that wireless subscribers must pay into the universal service fund. It is completely unfair for wireless subscribers to contribute to a fund without having a fair opportunity to receive the benefits that both the Congress and the FCC have long ago determined are to be made available to competitors. Over the past seven years, the FCC has implemented a comprehensive plan to carry out Congress' mandate to provide high-cost support to competitors in rural areas. Virtually every state has followed suit, adopting rules and deciding cases to designate new competitors. Still, long after being discredited at the FCC and in the courts, many ILECs still view the high-cost fund as theirs alone. They see landline telephone service as the only "true" universal service, which in areas where wireless service is available, is no longer the case. We, like other WIG members, have played by the rules to apply for and obtain support, often enduring a process that is far more protracted and expensive than is necessary, opposed by well financed incumbents backed by national organizations. Wireless carriers are capable of advancing Congress' twin goals of promoting universal service and competition in rural areas, if given the opportunity. In all fairness, if wireless subscribers are required to pay into the fund and support wireline networks, they must be permitted to obtain the benefits that the universal service system was designed to provide. D. Congress Should Ensure That The FCC Continues To Enforce The 1996 Act And Administer All Federal ETC Rules In A Competitively Neutral Manner. Following Congressional direction contained in Section 254(h)(2) of the Act, the FCC adopted competitive neutrality as a core principle for its universal service program, stating, "competitive neutrality means that universal service support mechanisms and rules neither unfairly advantage nor disadvantage one provider over another, and neither unfairly favor nor disfavor one technology over another." Federal-State Joint Board On Universal Service (Report and Order), 12 FCC Rcd 8776 (1997) at paras. 47-49. In spite of this principle, ILECs have steadfastly urged states to adopt eligibility criteria and rules for CETCs that are not competitively neutral. In many cases, they have succeeded in turning the ETC designation process into an extended litigation that is far more arduous than even obtaining a certificate to become an ILEC. Seven years after the 1996 Act, only a trickle of CETC designations have been made. ILEC opposition at the state level has greatly contributed to this long delay. The standard set forth by Congress and the FCC is relatively simple. In rural areas, a state is required to examine whether a petitioner will advertise and provide the nine supported services and that a grant will serve the public interest. Some ILECs now urge that the public interest bar be raised, suggesting a long list of eligibility requirements that were never imposed on ILECs. We believe that Congress gave clear direction here and if it wanted a lengthy list of eligibility criteria, it would have specified them in the Act or directed the FCC to do so. It is not competitively neutral to make ETC designations easy for ILECs and difficult for others. With respect to ongoing regulation of CETCs, Congress preserved the state preemption of rates and entry for CMRS carriers, even when a CMRS carrier seeks ETC designation. States are free to regulate “other terms and conditions” of service. Most states have properly understood this, however a few have attempted to impose tariffs and otherwise regulate rates that violate the preemption. Some CETCs have assented to such regulation as a condition of obtaining ETC status simply because it is expensive to litigate and delays in receiving funding mean delays in bringing competition to the marketplace. Some ILECs have taken the position that it is competitively neutral to cause CETCs to be subject to the same regulatory structures as ILECs. Not true. Such ILECs ignore the fact that the purpose of ILEC regulatory structures is to protect consumers from monopoly abuse, which is simply not possible in a competitive market. Asymmetrical regulation of a monopoly and its competitors is not only appropriate in the current case, it has been implemented before with success. For example, when AT&T was broken up in 1984, monopoly regulation continued to be applied to AT&T until such time as its monopoly grip was broken, after which such regulations were dismantled. Cellular South is a prime example of why such regulations are unnecessary. We believe that we are already in substantial compliance with the state service quality regulations applicable to Bell South – and that has been accomplished without any special regulatory requirements being imposed on us. Like all carriers in a competitive market, Cellular South cannot afford to act like a monopoly because its customers have a choice of service provider. If a customer does not like our service, they may choose another wireless carrier, or the ILEC's service. Most ILEC customers in rural America do not have the same choice and therefore regulation must take the place of a competitor. E. Portability of Support is Essential to Promoting Competition and Universal Service When a CETC gets a customer, it receives the same amount of "per line" support as the ILEC receives for serving that customer. This is called portability of support. Portability is the lynchpin that levels the playing field among competitors. It is the ability to compete for customers on a level playing field that drives infrastructure investment and improves services for consumers in areas where monopoly service would otherwise be the norm for the foreseeable future. Portability was a cornerstone of the FCC's policy for providing high-cost support to CETCs and the concept was specifically affirmed by the 5th Circuit in the Alenco case: The purpose of universal service is to benefit the customer, not the carrier. "Sufficient" funding of the customer's right to adequate telephone service can be achieved regardless of which carrier ultimately receives the subsidy....What petitioners seek is not merely predictable funding mechanisms, but predictable market outcomes. Indeed, what they wish is protection from competition, the very antithesis of the Act. The court also stated: The Act does not guarantee all local telephone service providers a sufficient return on investment; quite the contrary, it is intended to introduce competition into the market. Competition necessarily brings the risk that some telephone service providers will be unable to compete. The Act only promises universal service, and that is a goal that requires sufficient funding of customers, not providers. So long as there is sufficient and competitively neutral funding to enable all customers to receive basic telecommunications services, the FCC has satisfied the Act and is not further required to ensure sufficient funding of every local telephone provider as well. Alenco v. FCC, 201 F.3d 608 (5th Cir. 2000). Put simply, portability of support is a core element of the FCC’s universal service high-cost support mechanism. Without portability of support, there is no hope of advancing universal service and bringing the benefits of competition to high-cost areas. F. The High-Cost Fund is Not "Exploding" As a Result of CETC Designations. For months ILEC lobbyists have proclaimed that the size of the high-cost fund is exploding as a result of ETC designations to competitive carriers. This is untrue. According to the Cellular Telecommunications and Internet Association ("CTIA"), over the past three years, high-cost support to CETCs increased by approximately $175 million. During that same period, high-cost support to rural ILECs increased by approximately $2.1 billion. It is my understanding that, in 2001, rural ILECs successfully lobbied the FCC to provide them with a major increase in high-cost funding through 2006. Prior to that, they sued the FCC in federal court to remove caps on their funding and have consistently argued that the size of the fund must not be considered when determining whether funding (to them) is sufficient. In short, rural ILEC lobbyists now for the first time argue that a $100 million increase in the size of the fund to competitors threatens the fund's viability. There can be no doubt but that the increase in high-cost funds paid to carriers has increased almost exclusively as a result of increases to rural ILECs. The fund is also increasing because the FCC has properly implemented its Congressional mandate to make all universal service support explicit – that is – to remove support from ILEC rates so that rates are cost-based and support is in plain view. As the FCC has removed support from rates and placed it in new high-cost programs, such as for example, Interstate Access Support, customers see on their bills exactly what they pay for service and what they pay for universal service support. To be clear, as more support is moved out of ILEC rates and into explicit funding mechanisms, the fund will continue to grow and rates will decline. This has been expected and is a good thing. It permits all participants to compete for customers and support on a more level playing field. Finally, we note that most of the growth in the high-cost fund generally is within that the Schools and Libraries Program, which is a subset of the high-cost support program. We agree with suggestions that the Schools and Libraries Program should be severed from the high-cost fund, at least for the practical purpose of grouping together only those programs that have similar purposes. But make no mistake – in response to claims that the viability of the fund is threatened, CETCs are not the responsible party. G. Fund Growth Must be Managed in a Competitively Neutral Fashion It is self-evident that, as more CETCs are designated, the high-cost fund is going to grow. WIG supports careful management of the high-cost fund, provided that it is done in a competitively neutral fashion. An increase is only appropriate if consumers receive appropriate levels of support and if carriers are using support for the intended purposes. The high-cost fund is not a set aside program for incumbents, nor is it the duty of regulators to ensure a market outcome in favor of ILECs. Quite to the contrary, if the fund is to be preserved and universal service advanced, then state and federal governments should support efficient technologies and promote competition for support so that private industry has an incentive to drive infrastructure investment out to rural areas. Competition for customers and support will drive costs down, and likewise, reduce the overall level of support required nationwide. In the meantime, an increase in the size of the fund is not necessarily a negative if the increase is used to improve critical wireless infrastructure in rural areas that currently have substandard networks and lack reliable 911 service. Managing growth of the fund is a complicated task that is not susceptible to a quick fix. As the expert agency, the FCC must work within the statutory framework of the Communications Act to ensure that wireless companies, which pay into the fund and currently receive less than 4% of the total high-cost support, have the same opportunity to obtain support in rural areas as do ILECs. III. WIG RESPONSES TO COMMON ILEC ARGUMENTS From the WIG perspective, Congress and the FCC set forth laws and rules implementing a system for encouraging competitors to obtain ETC status. I am advised that rural ILEC lobbyists have asked the FCC to reverse policies that have encouraged competition in rural areas. Thus far, they have succeeded in getting the FCC to initiate a proceeding to reexamine its policies for designating and distributing high-cost support to CETCs, without examining how the overall system for providing support to all carriers can be improved. Here are our positions in response to a few of the more popular ILEC misstatements: A. The Universal Service System Should Not Support More Than One Network in Rural Areas. Many ILECs state, without any supporting economic evidence of which we are aware, that most rural areas will not support competition and therefore the government should not be supporting duplicative networks, risking stranded plant and endangering universal service. The common argument is that competitive carriers are going to construct five or six wireless networks in remote areas that will not today support even two competitors. This argument directly contradicts Congress’ express goal set forth in Section 254(b) of the Act that Consumers in all regions of the Nation, including low-income consumers and those in rural, insular, and high cost areas, should have access to telecommunications and information services, including interexchange services and advanced telecommunications and information services, that are reasonably comparable to those services provided in urban areas and that are available at rates that are reasonably comparable to rates charged for similar services in urban areas. The current system provides exactly the proper incentive for CETCs to enter rural areas. We are not aware of any evidence that any significant number of rural customers are going to abandon wireline service any time soon. We suggest that competitive market forces supply a very good discipline on market participants. The long-term economic benefits of competition represent the greatest potential gain for consumers in rural areas and for rural economic development. Those benefits cannot be realized if one carrier is funded to the exclusion of all others. Reserving support for ILECs harms consumers in rural areas by relegating them to second class status indefinitely by locking out improvements in service and new services (such as mobile service) that can be introduced by competitors. We urge Congress and the FCC to reject these and other ILEC arguments that seek market outcomes in their favor, especially when such companies are asking the FCC to set aside of spectrum for the second time in 15 years, or to adopt eligibility rules favoring rural ILECs. B. High-Cost Support to CETCs Stimulates Artificial Competition. We believe exactly the opposite is true – that denying high-cost support to CETCs cements artificial monopolies into place. If no high-cost support were available to any carrier, most of the wireline infrastructure that is today in use in high-cost areas would not have been constructed. Unfortunately, that infrastructure has been constructed at a very high price. A system that only supports one carrier artificially keeps a monopoly in place and denies consumers the benefits that a competitive system inevitably and surely brings. We believe that most every rural area in America can support competition, especially if competitors only receive support to the extent that they have a customer. Throughout the country, in over 30 cases, we are not aware that ILECs have been able to demonstrate any consumer harms which will arise as a result of competitive entry. In northeast Arizona, one of the most remote and sparsely populated areas of the country, it is my understanding that a CETC has signed up over 25,000 new customers on Native American lands in just 18 months since becoming an ETC. I am also advised that in rural northeastern Colorado, a new CETC has signed up over 500 new subscribers that have “cut the cord” with their ILEC in just one year, while using high-cost support to provide improved service and more choices to consumers. As a general rule, we believe that consumers throughout this country should enjoy the benefits of competition. C. CETCs Receive Support Based Upon ILEC Costs. The FCC properly determined that high-cost support must be made available to all eligible carriers, no matter what technology is used. ILECs and CETCs receive high-cost support in completely different ways. ILECs use cost studies to obtain "explicit" support from the high-cost fund, and receive additional implicit high-cost support within their rate structure. A wireless CETC receives no implicit support and can only receive the "per line" support available to an ILEC when it gets a customer. In order for a CETC to gain support, it must get and maintain customers. Therefore, it is misleading to say that a competitor is getting paid on ILEC costs. Moreover, it is not by any means clear that a wireline carrier's "per line" costs in remote areas are lower than those of wireless carriers. In fact, the opposite may be true because in most rural areas, wireless carriers have fewer customers. Their networks are relatively young and require much more capital expenditures to extend new service than do wireline networks, which are mature and not growing rapidly. From all we have observed, allegations that the current system provides excess support to wireless carriers are unfounded. The current system, which forces market participants to compete for customers and support is the right approach. WIG believes that the size of the fund must be managed in a competitively neutral fashion so that all carriers can compete for customers and for support on a relatively level playing field. D. The High-Cost Support Mechanism Appropriately Funds All Lines From the outset, the high-cost fund has supported all lines because the cost of providing all services are spread across an ILEC’s entire network, including primary lines, second lines, fax lines, lines in vacation homes, and lines dedicated to internet access. Spreading costs across the entire network is appropriate because it enables an accurate determination of whether the costs of providing that network are above the level which triggers high-cost support. Some have posited that the fund should support only one line per household. Others advocate only one line per household per competitor. A few theorists believe that only the primary line in a household should receive support and that the customer should designate its primary line for purposes of high-cost support. We view all of these approaches as band-aids that provide no comprehensive answer to the problem of fund growth. I am advised that we may agree with ILECs that these solutions will be arbitrary and unlikely to result in appropriate support levels being achieved. Moreover, a system where customers designate a primary line will undoubtedly lead to a new class of “slamming” caused by carriers competing over the "primary" designation. In the end, consumers are likely to be harmed. All lines are properly funded under the current system, and if change is to be made, it should be done thoughtfully and carefully. CONCLUDING REMARKS WIG members and other wireless carriers have played by the rules in obtaining ETC status and are now beginning to deliver on the promise that Congress made to rural America. Certain rural ILECs seek to cut short the process by urging quick changes that favor only them in a regulatory area that is more complex than almost any other in telecommunications. The Federal-State Joint Board is currently requesting comment on well over 100 issues relating to the universal service system. We urge thoughtful consideration by regulators, industry leaders and other experts. WIG believes that another process similar to that conducted by the Rural Task Force should be instituted to achieve useful and productive recommendations that encompass both CETCs and ILECs, so that comprehensive and competitively neutral solutions are reached. Piecemeal decisions advocated by some ILECs will be disruptive to rural subscribers, or worse yet, deny them the benefits of competition that they deserve. We do not come here today with all the answers. What we do know is that making it harder for ETCs to be designated, imposing onerous monopoly-era regulations, and reducing support to competitors but not incumbents, all appear to be on the shopping list of certain ILECs. All are bad for rural consumers and we believe are contrary to Congressional and FCC directives that consumers be the focus of universal service policy decisions. In our ETC service area, Bell South has both a monopoly on wireline facilities and in some areas, a 40% interest in a formidable wireless network, operating under the Cingular brand name. They have enormous capital resources, the highest credit rating, a national advertising budget, Section 271 authority to provide long distance services, and the ability to bundle wireline and wireless services to their existing and potential customers. Their market advantages are enormous. It is only the provision of high-cost support which begins to level the playing field, providing Cellular South an opportunity to construct a network that can challenge their lock on the market and more important, give rural Mississippi consumers the advantages of quality competitive wireless services enjoyed by their urban cousins. If they believe that we are capturing any significant market share, they can respond in the marketplace and I'm sure they will. We urge Congress to provide the FCC with clear direction that they are charged with upholding the Communications Act, as well as Court decisions interpreting it – and that the rules for qualifying for and drawing from the high-cost support mechanism be administered in a competitively neutral fashion and in a pro-competitive manner.

• Mr. Matthew Dosch
  Read statement

  Witness Panel 2

  Mr. Matthew Dosch

  Good morning, Mr. Chairman and members of the subcommittee. My name is Matthew Dosch, and I am Vice President of External Affairs of the Comporium Group, based in Rock Hill, South Carolina. Comporium is a group of rural incumbent local exchange carriers (ILECs) that have been providing telecommunications services to communities in upstate South Carolina for nearly 110 years. Rock Hill Telephone Company, Fort Mill Telephone Company, and Lancaster Telephone Company collectively serve 105,000 access lines. Although “one-stop shopping” has become something of an industry cliché, Comporium has always sought to make its customers’ lives easier by providing a wide variety of the latest telecommunications products and services. From local and long distance telephone service to high-speed internet access, wireless, cable TV, and security, Comporium continually strives to provide our customers with affordable solutions to their communications needs. I am appearing before you today on behalf of the United States Telecom Association (USTA). I currently serve as Chairman of the Mid-Size Company Caucus within USTA. My mid-size company brethren, along with the small company and large company members of USTA, have worked tirelessly throughout the winter to forge the consensus positions on universal service that I am pleased to share with you today. Charting a Stable, Sustainable Future For more than a century, our nation’s telecommunications network has helped define the fabric of American life. Like the electrification of the countryside, the nation’s commitment to universal service -- seeing essential telecommunications reach every corner of the country – has played a major role in America’s economic and social development. The ubiquitous presence of a telephone in virtually every American home stands as one of the nation’s landmark achievements of the 20th century and a testament to the efficacy and value of the universal service program. Universal service support exists to bring essential telecommunications service to parts of the country where the market alone cannot support its presence. By easing the extraordinary costs of reaching sparsely populated areas, universal service helps ensure that all Americans have affordable, reliable access to a dial tone and the security and opportunities it represents. With the nation’s evolution from an industrial to an information economy and with the country’s escalating security concerns, reliable access to essential telecommunications has never been more important. Yet the funding mechanism that ensures this broad access today is in peril—undercut by telecommunications policies that discourage investment, undermine the evolution of healthy telecommunications markets, lavish resources on companies that do not face the same obligations as incumbent wireline providers, and turn a blind eye to new platforms that now regularly compete for consumers’ communications dollars, but that do not contribute their fair share to the universal service support funding mechanisms. Fortunately, there is growing recognition of the value and vulnerability of universal service funding mechanisms. The Federal Communications Commission (FCC) recently adopted an interim funding mechanism that makes incremental progress. It also has proceedings underway to contemplate long-term solutions to perpetuate the program. This morning, I would like to examine the trends that have placed federal universal service support in jeopardy today, as well as solutions to ensure the fair and fiscally sound continuation of this vital program. The Core Challenge: A Costly, Unsustainable Status Quo For most of their existence, universal service mechanisms have focused on mitigating the high costs associated with delivering vital telecommunications services and infrastructure to rural, insular and remote parts of the nation. With the Telecommunications Act of 1996 (1996 Act), however, Congress set universal service on a perilous path of ‘mission creep.’ Rather than a focused cost-recovery mechanism aimed at helping facilities-based infrastructure providers offset extraordinary costs toward the public benefit, universal service has become a costly and sprawling mechanism rooted in the well-intentioned, but overly simplistic philosophy that supporting competition for competition’s sake must be even better. Unfortunately, this has been implemented without a thorough and fair evaluation of the public interest. Seven years after the passage of the 1996 Act, this policy alteration—and how it was executed--has set off a chain reaction that now has called the entire program’s sustainability into question. As a result of this alteration, the number of companies successfully gaining universal service support has exploded. In fact, if the trend continues unabated, experts predict the high-cost fund will, due to this factor alone, grow by $2 billion over the next four years. Inflating the Balloon The primary driver inflating the costs associated with Universal Service are provisions of the 1996 Act that open up support to multiple providers in the same service area that successfully secure status at the state level as Eligible Telecom Carriers (ETCs). For incumbents to gain universal service support, they must thoroughly document the costs of their telecom infrastructure, promise to deliver a specified list of services, and most importantly, continue to fulfill the regulatory, public safety, and national security expectations and obligations of state and federal officials. So while incumbent providers have access to a cost-recovery mechanism, non facilities-based providers are offered what amounts to a windfall. They get the money, regardless of whether they are truly fulfilling the obligation of being a critical infrastructure provider, and potentially the sole critical infrastructure provider, in a particular area. This perpetuates a fundamental disparity rampant throughout today’s outdated system of wireline regulation: rewarding those who fail to assume the full obligations of a true carrier of last resort and punishing those that actually carry out the Fund’s initial purpose of delivering the infrastructure that ensures reliable, affordable access to basic services in every community across the country. The expensive universal service mission creep undermines the political viability and economic sustainability of the entire program. With far more companies participating at a price tag in the billions of dollars, taxpayers and legislators see diminishing returns on their rising investments because the benefits of support for multiple carriers in each service area rarely outweigh the explosion in costs. There also is a strong argument to be made that this subsidy-heavy approach undermines the evolution of healthy, sustainable markets in rural America, as well as the rollout of leading-edge services. The way rural markets develop, typically one business determines that there is adequate ‘critical mass’ to support their business. Then, over time, the opportunity and the community grow to the point where others are attracted into the area and competition ensues. In the case of telecom, universal service support has skewed the economics of what attracts companies to higher cost areas. A mechanism that lures multiple providers and subsidizes inferior service undermines this natural evolution, all but ensuring long-term dependence on government subsidies and weakening the growth of a sustainable market and the investment that typically accompanies it. Cherry-picking Further Punishes True Carriers of Last Resort Another challenge to the current USF structure is the effort in some states to reduce the size of USF service areas in places served by rural telephone companies. This is yet another attempt to use universal service to promote competition rather than simply access to affordable, essential services. For example, CenturyTel is fighting such an effort in Colorado. States' segmentation of service areas to a granular level encourages competitors to selectively enter areas with higher revenue customers, leaving incumbents (which have carrier of last resort obligations for the broader service area as a whole) with the least profitable customers of all. Funding competition that cannot be supported by normal marketplace economics, and handing out vast amounts of resources to companies without the obligations and expectations that accompany service provided by the incumbent LEC, clearly call into question the future viability of the program. In fact, the purse strings are perceived to have become so loose in recent years that organizations that target government waste are starting to zero in on high-cost USF support, making it imperative that the Fund be operated in a more responsible and restrained manner in the future, in order to ensure that its important core work continues. Spreading the Burden Fairly The current universal service approach has undermined the program’s initial purpose--delivering to remote communities the economic opportunities and security of a dial tone. However, like U.S. telecom policy in general, the universal service program is behind the times in making another crucial acknowledgement: In the 21st Century telecom marketplace, voice telephony is no longer the sole domain of incumbent local exchange carriers. Consider these core facts: Today, one in five Americans use their cell phone as their home phone; half of all Americans, according to Forrester Research, will follow suit in five years’ time; The cable industry is adding 100,000 new voice customers every month; and Cox Cable today is the 12th largest phone company in the nation; Internet-based telephony is beginning to go mainstream; in fact, the U.S. Department of Commerce is in the process of transferring its entire telephone system to Internet-based telephony. Even in the traditional wireline market, 93% of households have at least two local providers serving them. Given that the 21st Century telecommunications marketplace has diversified, so too must the pool of contributors to universal service. This is the only path to ensuring a platform neutral approach in which all participants in the marketplace contribute, so no set of companies is put at a disadvantage. The Current Mechanism is Not Sustainable The current mechanism used to collect federal universal service support as established in Section 254 of the Telecommunications Act of 1996 is not sustainable. Congress, when it passed the 1996 Act, had multiple goals. First and foremost, however, it wanted to promote local telephone competition, even in rural areas where the provision of service is extremely costly and without universal service support would be prohibitively expensive to the consumer. Density, or more appropriately, the lack of density, is the costly rural problem—there are more telephones in a typical Manhattan office building than there are in the entire service area of many rural telephone providers. Nonetheless, Congress specifically provided for the possibility of multiple non facilities-based recipients of federal universal service support—this was in furtherance of its primary policy goal of local telephone competition in all areas, including rural ones. In other words, universal service support would, pursuant to the 1996 Act, be used to facilitate the entry of new local telephone providers even in areas served by rural telephone companies — this then is the “mission creep”. Section 214 of the Communications Act of 1934 was amended by the 1996 Act to authorize multiple “eligible telecommunications carriers” (ETCs) to be the recipients of universal service support in rural areas, with state commission approval. The funding source for this universal service support is “telecommunications carriers that provide interstate telecommunications service.” Consequently, the states have no reservations about authorizing additional ETCs, given that they have no responsibility for raising the universal service support funds that will be distributed in their states. Only the FCC has this fundraising duty, and the courts have instructed the FCC that only interstate revenues may serve as the basis for assessing federal universal service support contributions. This statutory combination of universal service support as a local telephone competition facilitation device, coupled with the limitation on universal service support contributions to only narrowly based interstate revenues, places extreme pressure on these federal universal support mechanisms. In and of themselves, these two factors alone will render the existing federal mechanisms unsustainable, in that demands for universal service support funds are increasing far more rapidly than interstate revenues are growing. Over the next five years, USTA estimates that demands for universal service support will increase substantially, from $7.4 billion to $11.9 billion, while the interstate service revenue funding base remains flat at best. In addition to these two factors, however, there are other developments in the telecommunications marketplace that make the current federal universal service support mechanism truly unsustainable. First, for decades, states have established a host of implicit subsidy mechanisms and telecommunications rate determinations that need federal universal service support in order to be maintained. Devices of this sort can exist in the non-competitive telecommunications environment that existed when they were originally established, but that era has passed. Rates in high cost areas must be rebalanced. Second, popular flat rate, all-distance pricing plans for voice services are rendering distinctions between interstate and all other telecommunications services meaningless and thus unworkable as a basis for collecting universal service support funds going forward. Third, the FCC is currently examining the regulatory classification of a number of “voice over Internet protocol” services (VOIP). The outcome of its review could have a dramatic effect on the base of services which will be available to support the universal service programs. If VOIP services are allowed to avoid contributing to universal service, this could skew demand in favor of these services, making it increasingly costly, if not impractical, for traditional telecommunications service providers to continue funding universal service support even at existing levels. Not only will these developments in the telecommunications marketplace impact the base of contributions that fund universal service, but the current system of intercarrier compensation, particularly access charges paid to local carriers from interexchange carriers, is slowly collapsing under the weight of technological change and creative arbitrageurs. Many carriers rely on interstate and intrastate access charges to recover a significant portion of the costs of their networks. The deterioration of the access charge system must be recognized and managed in an orderly way so that carriers will still be able to recover their costs and continue to invest in their networks. An appropriate transition should be developed to move from the current system of intercarrier compensation to a uniform intercarrier compensation plan under which carriers would recover their costs from end users (through affordable and reasonably comparable rates) and the universal service mechanism. In many high cost study areas, end users will not be able to bear the totality of this added burden. The universal service mechanism will be called upon to fill in that gap. This necessary extension of the mechanism is consistent with its current goals and structure but certainly has the potential to increase the demand for universal service funding. Universal Service Reform—What Should Congress Do? Support Recipients Must Have an Equality of Obligations The policy of using universal service support as a means to promote competition has proven to be an expensive failure. This artificial approach simply adds to the cost of the universal service program. States should make reasoned public interest findings before designating additional ETCs, with full consideration of an equality of obligations on carriers and equality of expectations of all of the consumers in the subject service area. A recipient should be required to serve an entire high cost area – not just the least costly part, as is often the case today. Universal Service Support Should Not Create a Parallel de facto Regulatory Regime Universal service support should be used to provide incentives for continued investment in and rehabilitation of high cost study area infrastructure and to help recover the actual costs of such networks (not lines or services). Since increased competition, for the most part, has replaced the need to regulate retail and wholesale rates in U.S. telecommunications markets, exchange carriers should be given the option of being deregulated on a date certain. Regulatory status should not affect a carrier’s universal service support and such support provided to a deregulated carrier should serve to help fund an infrastructure platform, not dictate the rates and services offered over that platform. This should apply whether a carrier elects the deregulation or continued regulation model. Exchange carriers that remain regulated should be given the flexibility to package and price service to meet consumer needs, and for rate of return carriers, NECA (National Exchange Carrier Association) pooling options should continue. Broader Support Base Congress should give the FCC the authority to impose a support fee on a broader base of telecommunications products and services. By broadening the base for universal service support to all telecommunications products and services, both technological and competitive neutrality will be achieved. The receipts from these fees must be targeted exclusively to universal service support purposes in a manner similar to the specifically targeted and Congressionally mandated assessments for highways and airports. Rate Rebalancing Rates for telecommunications services should be comparable throughout a given state. Considerable universal service support is now being utilized to maintain telecommunications service rates in some areas of states at rate levels that are much lower than those existing for equivalent service in other areas of such states. To lessen this demand, Congress should provide for rate rebalancing. Telephone rates have for decades been based in many instances on political and social considerations that could be justified and effective in a non-competitive, monopoly environment. Conversely, a competitive environment, where all telecommunications products and services are legally open to competition, should require state regulators to adjust these rates in a manner that reflects this new competitive marketplace reality. This rate rebalancing should be accomplished without the necessity of extensive and expensive rate cases. When accomplished on a revenue neutral basis, the remedy should not require extensive regulatory intervention. Congress Should Ensure that Support is Based on Actual Costs Because of the ever increasing demand for universal service funds due to the requirement to fund multiple ETCs from a declining interstate revenue base, for larger ILECs, the FCC has employed a cost recovery methodology that does not permit the recovery of the actual costs incurred by such carriers in high cost areas. Universal service support is needed in high cost areas to keep telephone rates comparable to rates in other parts of the country and thus, widely affordable. Consequently, actual cost recovery is a necessary component of any universal service reform plan. Congress Should Address How a New Uniform Intercarrier Compensation Plan Will Impact Universal Service The necessary transition from the current intercarrier compensation system, including interstate and intrastate access charges, to a uniform intercarrier compensation plan under which carriers would recover their costs from end user or universal service, will have the potential to increase the demand for universal service funding. This funding will be necessary to maintain reasonably comparable and affordable composite end user rates in high cost study areas and to allow continued network investment. Conclusion Congress should insist that our universal service support structure returns to the core concepts that were in place prior to the passage of the 1996 Act, but in a manner consistent with today’s converged marketplace. Congress should ensure that everyone pays into the fund on technology neutral principles; eligibility for ETC status should be based on sound economic and public interest fundamentals; support should be based on actual costs; states should not continue to expect that designation of additional ETCs is a license to increase the burden on interstate ratepayers; and, rationalizing the system of support cannot happen if rate rebalancing does not occur. Under these concepts, incumbent LECs and their customers will have a more equitable climate, while interexchange carriers will receive significant relief as a result of continued declines in the access charge regime. The funding burden can be relieved on everyone as the base of who contributes is broadened. This will promote investment in rural areas because there will be a reliable source of universal service funding that keeps rates affordable, that gets comparable services out to these parts of the country, that encourages providers to invest in facilities and provide advanced services and intrastate calling should be much cheaper and providers will have more opportunity to creatively bundle their services.

• Dr. William R. Gillis
  Read statement

  Witness Panel 2

  Dr. William R. Gillis

  Executive Summary I testify today that one of the greatest barriers to progress in establishing a regulatory and public policy environment supportive of needed rural telecommunications investment by BOTH traditional and competing carriers is litigious conflict common both in Commission hearing rooms and other judicial forums. Uncertainty is the silent cancer of rural investment. The common polar positioning of competition and universal service and the resulting conflict among rural stakeholders is perhaps one of the greatest contributors to regulatory and ultimately investor uncertainty. I believe Congress can play an important role in lessening this unproductive controversy if it is indeed your intent that both competitive choice and the deployment of a network providing access to the full benefits by all Americans to the benefits of modern telecommunications be achieved. While I would hope that this indeed in your intent, even if not, a formal clarification from Congress would help us all to move forward and end unproductive debate. It is my testimony that we need to fundamentally rethink our approach to universal service in the modern era to accommodate the need to provide rural Americans with access to all the benefits of modern telecommunications including a network capable of accessing broadband services, mobile wireless and basic voice telephone. We, of course, need to do this responsibly without unnecessarily exploding the size of the nation’s universal service fund. With this context in mind, I suggest there are two areas of federal universal service policy for which Congressional attention is most critical at this time: 1) Congress should clarify FCC authority to collect federal universal service on the broadest possible base of telecommunications services. 2) Congressional leadership is needed to address the current tension between supported deployment of mobile wireless, broadband connectivity and manageable fund size. Statement of Dr. Bill Gillis Director, WSU Center to Bridge the Digital Divide Future of Universal Service Hearing Subcommittee on Communications Senate Committee on Commerce, Science, and Transportation April 2, 2003 My name is Bill Gillis. I serve as Director of the Center to Bridge the Digital Divide at Washington State University. Between 1994 and 2000, I was a member of the Washington State Public Utility Commission. I have substantial experience in regulatory public policy matters impacting the availability and use of telecommunications and information systems in rural locations. For example, between 1997 and 2000, I chaired, on behalf of the Federal State Joint Board on Universal Service, a Rural Task Force providing recommendations on appropriate reforms of the federal universal service methodology supporting national universal service goals as required by the Telecommunications Act of 1996. While my interest in accepting the invitation to appear as a part of today’s panel is supported by my specific professional responsibilities and expertise, I am motivated also by my own roots in rural America. The vast majority of the nation’s population resides in large urban centers. However, we remain a nation of small towns. Of the approximately 220 incorporated cities in the state of Washington, 180 have a population smaller than 5,000. Demographic and economic indicators document that many of these small cities and towns, once vital centers of commerce and activity, now struggle to sustain the most basic of community functions including viable income opportunities, local education, health care, civic participation, public facilities and governance. I myself am a product of one of these smaller eastern Washington communities. My hometown is one of several in the state of Washington that are presently considering “dis-incorporating.” In effect, throwing in the towel and closing the town’s doors. I am appreciative to this Committee for holding today’s hearing. Six years after passage of the 1996 Telecommunications Act, I have an uneasy sense that resolve to implement the twin responsibilities of both competition and universal service as equal responsibilities under the 1996 Act is waning. Rural communities such as my hometown depend on access to the best telecommunications infrastructure and services available if they are to survive as communities and contribute to the economic and social strength of our nation. My neighbors can ill afford to have progress in deploying necessary telecommunications investment sidetracked by needless conflict over whether regulatory or public policy should favor competition or universal service. The answer in my view is plainly outlined within the law that we are to accomplish BOTH of these essential goals. There are some who will suggest to you that competition and universal service are fundamentally inconsistent and in many rural areas and we must make a choice. Frequent are assertions that universal service can only be accomplished concurrently with competition in rural America at a very high cost. I disagree. I believe there are solutions that will enable us to preserve and advance universal service in rural America without abandoning the opportunity to make continued progress towards offering a greater number of our citizens a choice of alternative providers and services. Neither do I agree that this must necessarily result in an unacceptable expansion to the size of the national fund. Fundamental however, is a renewed commitment among regulators and the diverse stakeholders in rural America to focus on universal service and competition as goals that must be accomplished jointly—not simply balanced as necessary trade-offs. My hope is that today’s hearing will provide a sense of urgency from Congress that there must remain a national commitment to both universal service and competition as fundamental principles of the 1996 Act. Your leadership and directive to regulators and stakeholders in the debate, in my view, is essential to keep us on task. Before turning specifically to the specific opportunities for Congressional leadership, I would like to highlight the significant industry changes since the passage of the 1996 Act and the implications for achieving national universal service goals. The most notable change since 1996 is the explosion of both consumer demand and the availability of mobile wireless and Internet technologies. At the time of the passage of the 1996 Act, the primary universal service challenge was to ensure that the vast majority of Americans have access to a quality dial-tone voice telephone connection. What a difference 6 years makes. In today’s world the majority of Americans have access to a variety of telecommunications services including mobile wireless options, broadband connectivity and in more limited cases, a choice of basic dial tone providers. While we should celebrate our successes in this regard, our purpose here today is to focus on the reality that there remain many Americans who currently do not enjoy access to a network providing the full benefits of modern telecommunications technologies. In today’s world it is no longer appropriate to consider the universal service challenge as simply connecting rural Americans to quality and affordable basic dial-tone. However, a narrow universal service focus on raising the standard to ensuring all Americans have access to the benefit of modern broadband Internet connectivity also is not responsive to the challenge before us. What is required to fulfill the principles outlined by Section 254 (b) of the Federal Telecommunications Act is that all regions of the nation have access to a bundle of modern telecommunications services and options “reasonably comparable” to what is available in much of urban America and a growing number of rural locations, including where feasible, a choice of alternative service providers. Here lies the challenge that I believe is not widely articulated in regulatory hearing rooms. We need to fundamentally rethink our approach to universal service in the modern era to accommodate the need to provide rural Americans with access to all the benefits of modern telecommunications including a network capable of accessing broadband services, mobile wireless and basic voice telephone. We, of course, need to do this responsibly without unnecessarily exploding the size of the nation’s universal service fund. I believe this is entirely feasible, but we must first frame the problem correctly. With this context in mind, I suggest there are two areas of federal universal service policy for which Congressional attention is most critical at this time: 1) Congress should clarify FCC authority to collect federal universal service on the broadest possible base of telecommunications services. 2) Congressional leadership is needed to address the current tension between supported deployment of mobile wireless, broadband connectivity and manageable fund size. Congress should clarify FCC authority to collect federal universal service on the broadest possible base of telecommunications services. Section 254(d) of the1996 Act establishes an obligation that “every telecommunications carrier that provides interstate telecommunications services shall contribute on an equitable and nondiscriminatory basis, to the specific, predictable and sufficient mechanisms established by the Commission to preserve and advance universal service.” The 1996 Act expressly sets a standard of adequacy for the federal universal support program in that the support “should be explicit and sufficient to achieve the purposes of this section.” Sufficiency of support must be gauged against the standards embodied in the universal service principles set forth in Section 254(b). It is my view that the current federal universal service mechanism established by the FCC is broke and can not be relied upon to achieve the fundamental universal service obligations under the Act. To restore stability to the national high-cost universal service program, more fundamental reforms of the federal collection mechanism are needed than the current tweaks to the existing mechanism. While the FCC took positive steps forward to increase universal contribution from the growing number of wireless customers, the mechanism still heavily emphasizes collection from a declining base of traditional interstate and international long distance minutes of use. In addition to evidence of rapid customer substitution of national wireless plans for traditional inter-exchange carrier provided long-distance service, a look at the near future suggests a further migration of telecommunications traffic towards the Internet. Shifts of customer usage such as these in response to new technological developments should be applauded and supported by public policy. These are precisely the types of changes we want from a dynamic telecommunications economy necessary to keep us among the leaders in the world. Unfortunately, the current collection mechanism is a distraction as it results in these necessary market transitions undermining the fiscal stability of the national universal service fund. This combination of events plays out in the Commission hearing room with polar positions being presented by the different interests, particularly those focused on expanding competitive options versus those concerned about the provision of quality and comparable telecommunications service in high cost rural areas. It is time to move on and end the unnecessary drag on further regulatory policy reforms needed to encourage access to multiple telecommunications options for all Americans, both in rural and urban regions. Fundamental change to the current federal collection mechanism is needed to ensure that advances in a dynamic telecommunications market do not undermine fundamental high-cost universal service principles. Among the barriers to the joint advancement of both competitive options and universal service in rural America, is a lack of legal clarity regarding the extent the current base of services, upon which federal universal service is collected, can be expanded. I believe it is important for Congress to find an appropriate vehicle to clarify your intent and it would be my hope that your intent would be to collect universal service from the broadest base of telecommunications customers possible. If it is determined that Congress must act with legislation to provide the FCC with additional authority to broaden the federal universal service collection base, I believe it is important for you to act quickly and decisively in providing that authority. Congressional leadership is needed to address the current tension between supported deployment of mobile wireless, broadband connectivity and manageable fund size. One of the greatest barriers to progress in establishing a regulatory and public policy environment supportive of needed rural telecommunications investment by BOTH traditional and competing carriers is litigious conflict common both in Commission hearing rooms and other judicial forums. Uncertainty is the silent cancer of rural investment. The common polar positioning of competition and universal service and the resulting conflict among rural stakeholders is perhaps one of the greatest contributors to regulatory and ultimately investor uncertainty. I believe Congress can play an important role in lessening this unproductive controversy if it is indeed your intent that both competitive choice and the deployment of a network providing access to the full benefits by all Americans to the benefits of modern telecommunications be achieved. While I would hope that this indeed in your intent, even if not, a formal clarification from Congress would help us all to move forward and end unproductive debate. There are some, perhaps many, who may suggest my optimism that it is possible to advance both universal service and competitive choices without an unacceptable expansion of the national universal service fund is naïve. The “devil is in the details” it will be pointed out and while the principle is sound, how is the principle achieved in practice? I respond here rhetorically to this criticism with an obvious observation. In our democratic society, Congress, with the concurrence of the President, is responsible for establishing the formal legal framework for the implementation of national public policy. The delegated administrative authorities and those of us who participate in their formal and informal processes must act within that direction. If we do not frame the challenge properly in the context of Congress’ intent, then we will not get to the desired end game. The current conflict found in regulatory hearing rooms suggests substantial disagreement among stakeholders regarding what was intended regarding our responsibility in advancing universal service and competition, with various suggestions of which of those two goals should have priority for rural America. I appear here today to suggest that clarification from Congress on what specifically you do expect may go a long ways towards focusing the implementers on the appropriate challenge and minimize distracting and unnecessary debate. The challenge is illustrated by a tension in regulatory forums over a perceived conflict between deployment of mobile wireless technologies, broadband connectivity and maintaining the national universal service fund at an acceptable level. When cast in the context of universal service and mobile wireless competition as being opposing goals for rural areas, no apparent solution to this tension is apparent. However, by reframing the challenge as ensuring rural Americans have reasonably comparable access to a range of telecommunications services including quality mobile wireless, broadband connections and voice grade telephone without expanding the national universal service fund beyond an acceptable level, solutions may be possible. At the heart of the problem are current FCC rules that award federal universal service on the basis of “eligible lines” provided by eligible carriers. In the case of mobile wireless carriers this means that when awarded status as an eligible telecommunications carrier, the mobile wireless carrier receives payment based on the number of connections to the network. In the case of mobile technologies, those connections are expanding at a rapid rate putting substantial pressure on the cost of federal universal service. Some interests will accurately point out that the typical mobile wireless technology does not provide access to the modern broadband network. It is extended from this observation that we may need to make a clear choice between substantially expanding the fund to support mobile wireless and new investment by rural carriers with technology capable of a network of providing access to broadband services. I would suggest reframing the issue in a different context. First I would observe mobile wireless and traditional telecommunications are not for the most part competing services and have been inappropriately characterized as such. With the exception of those cases where mobile wireless has resulted in the ability of customers to eliminate their traditional telecommunications connection, we are discussing complementary services, both desired by consumers for different reasons. A reasonable interpretation of the principles of Section 254(b) of the 1996 Act is that all regions of the nation should have access to a quality mobile wireless network without coverage holes, access to 911 and quality connections. In addition, the standard of “reasonably comparable” service could (and in my view should) include supporting a rural network capable of providing access to broadband services, typically associated with wireline technology but also potentially fixed wireless solutions. The public policy question is whether it is the desire of Congress that federal universal service should support multiple technologies offering a broader functionality of service to consumers as well as competing providers in rural areas. If the answer to this question is yes, then the issue of impact on the size of the fund becomes key. However, when properly framing the issue, the impact of funding multiple and potentially competing technologies in rural America should not be restricted by current application of federal rules for allocating universal service support. I suggest we should refocus the question as, “What would it cost and how do we appropriately allocate available universal service support to ensure rural Americans will have a choice to purchase both quality mobile wireless service and a service CAPABLE of providing broadband connectivity?” The question should not be answered in the context of applying current FCC rules which allocate universal service to mobile wireless carriers determined by state commissions as eligible to receive universal service. Rather the focus should be on how we should support comparable services in all regions of the nation including multiple consumer options with the minimum impact on the size of the national universal service fund. Towards this end I recommend Congress encourage the FCC to undertake a broad stakeholder process focused on rethinking the current federal rules for allocating universal service dollars to support mobile wireless and the competing provision of services in rural locations. The question may appropriately be parsed out differently with regard to the mobile wireless question than the question of appropriate rules for allocating support to ‘competing” providers of service. In the case of mobile wireless careful attention should be given to whether the present practice of allocating universal service to carriers based upon the number of connections to the network makes sense. Focusing on the goal of eliminating current holes in the wireless network and dependable E-911 service in all locations, a distribution based on the number cell phones supported by the carrier may not be appropriate. The costs incurred in meeting the objective are the construction new towers and the electronic enhancements. The current allocation system does not recognize the likely reality that adding new cell phone users only adds marginally to the cost of achieving the goal. An alternative basis of allocating subsidy supporting desired mobile wireless facility upgrades such as targeted grants or low-interest loans may be a more appropriate vehicle to achieve the desired end than the current practice of awarding universal service to wireless carriers on a per connection basis creating a potentially unnecessary expansion to the federal fund. Other carefully targeted universal service options may also be possible. In the case of truly competitive services, whether they be wireline or wireless, the FCC should consider rethinking a universal service portability recommendation originally put forward by the Rural Task Force that universal service funds be awarded to eligible competing carriers only for those lines that are actually captured from the incumbent provider AND the amount of money available to all providers in a given area be frozen at the level available when competition emerged with growth in funding tied to inflation and the number of new lines in that area. The FCC’s decision was to reject the Rural Task Force’s recommendation on appropriate rules for dividing available universal service funding between the traditional and competing carriers in areas served by rural telephone companies. Rather they chose to continue the practice of awarding competing carriers, including mobile wireless, a universal service allocation based on the total number of connections to the network. They further decided that the fund would be allowed to grow to accommodate the needs of these competing providers. Choosing to reject the Rural Task’s Force recommendation has had unfortunate consequences which are playing out today. For example, several parties assert that state public utility commissions have not been rigorously considering the public interest ramifications of allowing federal universal service funds to be used for competitive provision of services in rural areas. While there are certainly differences in process among states, for the most part I agree with this observation. However, it is not surprising given the current federal rules. From a state perspective there is little potential of harm and there is an opportunity to gain as the amount of money available to the traditional rural carriers is not restricted by a decision to allow competition. The result is more federal sourced money flowing into states, but significant pressures on the federal universal service fund without any clear connection to the achievement of universal service goals. Concluding Remarks I very much appreciate your invitation today. We are needlessly losing ground in progress towards implementing the progressive vision of the 1996 Act over an unmerited controversy over asserted conflicting goals of universal service and competition. At the same time, I remain optimistic that we can be successful in providing all Americans with access to the full benefits of the nation’s telecommunications system including mobile wireless, broadband connectivity, and quality voice grade connections including in many cases a choice of alternative providers. I further believe this can be accomplished without an unacceptable expansion to the national universal service fund. I respectfully offer the following specific recommendations to advance both universal service and competition in rural American and provide for the stability and sufficiency of the fund: · Clarify FCC authority to collect federal universal service on the broadest possible base of telecommunications services. · Provide a clear statement of principle regarding Congress’ intent with respect to the accomplishment of BOTH universal service and competition. · Encourage the FCC to undertake a broad stakeholder process focused on rethinking the current federal rules for allocating universal service dollars to support mobile wireless and the competing provision of services in rural locations.

Witness Panel 3

• Mr. Thomas Meade
  Read statement

  Witness Panel 3

  Mr. Thomas Meade

  Introduction On behalf of Alaska Communications Systems (“ACS”), I would like to offer the following testimony to the Senate Commerce Committee and its Communications Subcommittee on the critically important topic of the future of Universal Service and the ultimate viability of the federal Universal Service Fund. ACS appreciates the invitation to address the Subcommittee. I hope that ACS’ comments will prove both valuable and provocative. ACS stands ready to respond to any follow up inquiry that the Subcommittee members might have. ACS’s primary business is that of local service and exchange access services via four separate local exchange companies operating in the largest urban and some of the smallest rural communities in Alaska. In addition, ACS offers wireless, Internet and long distance services through affiliated business units. While new technologies and competition continue to prompt advances in products, services and the efficiencies of service delivery, the practical reality of serving rural America – and rural Alaska in particular – cannot be overlooked. ACS’ testimony today will focus on this reality and the need for Congress, the FCC and state policy makers to remain vigilant in protecting universal service objectives and resources. We must not lose sight of the ultimate goal of the universal service program – that is to provide high quality, reliable and affordable telecommunications services to the greatest extent possible throughout the country. The desire to enhance opportunities for competitive market entry may be laudable, but must never be allowed to compromise the overarching goals of universal service. Congress clearly had this in mind when it created the delicate balance between competition in the local market and the strong endorsement of universal service found in the Telecommunications Act of 1996. Unfortunately, over the last seven years, the FCC and the states have opted to tip the balance in favor of competitive entry in ways that now threaten preservation of universal service principles. ACS has repeatedly advanced the caveat that continued growth of the federal Universal Service Fund (“USF’) cannot be sustained. While periodic review of universal service funding to reflect changes over time is sound policy, the idea that the fund can grow exponentially and indefinitely is unrealistic. Recent additions of new categories of support have already stretched the limits of USF. These additions have prompted new and expanded end user fees. When viewed together with other significant flow-through charges reflected on the customer’s bill, such as the successive rounds of increases to the Subscriber Line Charge, the whole process is likely to crumble under its own weight. Representatives from densely populated “payer” states have already drawn a line in the sand arguing that they can no longer shoulder the ever increasing burden. Congress, the FCC and state policy makers must recognize this reality and take steps to properly balance and focus USF resources or face the dire consequences of failing to do so. ACS offers some specific examples and suggestions in response. Universal Service in Alaska ACS serves numerous rural communities in Alaska. USF funding is essential to ensure that rural subscribers have affordable telecommunications services that are comparable to the services provided in urban areas. Consequently, ACS has a strong interest in the integrity and continued availability of USF. Unfortunately, existing Federal Communications Commission (“FCC”) rules allow USF to be distributed in ways that are inconsistent with the purposes of universal service support set forth in Section 254 of the Telecommunications Act of 1996. We believe Congress should be interested in this misuse of USF. Such improper use results in increased pressure on limited resources and creates “perverse incentives” to compete for subsidies instead of for customers. In addition to the direct threat to rural consumers, misuse of USF resources creates an impediment to investment and service improvements (including both basic telephone and broadband) in rural areas. Section 254(e) of the Telecommunications Act of 1996 requires, in pertinent part, that a carrier that receives federal universal service support use that support only for the provision, maintenance and upgrading of facilities and services for which that support is intended. The FCC has identified the high cost carriers entitled to support from the High Cost Loop Fund as those with embedded loop costs in excess of 115 percent of the national average loop cost. In other words, eligibility for high cost support is directly related to the degree to which a provider’s loop costs exceed the national average. Under current rules, that means a local loop costing in excess of approximately $23 per line per month is eligible for high cost support. Improper Use of High Cost Loop Support in Alaska The misuse of funds and inefficient competition for subsidies stems from Section 54.307(a) of the FCC rules. Under 54.307(a), competitive eligible telecommunications carriers (“CETC”), including wireline CLECs in Alaska, receive federal high-cost loop support (“HCLS”) for each line served based on the support the ILEC would be entitled to receive. This per-line support amount flows to the CETC for each line regardless of the competitors’ actual cost associated with that line. The situation confronted in Fairbanks, Alaska offers a vivid example of the problem. In Fairbanks, ACS’ per line cost is approximately $33.50 per month making it eligible for about $10 per line per month of support for its local loops. Most of this comes from the High Cost Loop Support fund. Alaska’s state commission, the Regulatory Commission of Alaska (“RCA”), however, has required ACS to lease these same Fairbanks loops to its competitor, General Communication, Inc. (“GCI”), at the deeply discounted rate of $19.19 per month. Despite this low cost of the loop to GCI, a cost substantially less than the $23 per line per month threshold otherwise required to be eligible for any cost support, current FCC rules appear to entitle GCI to the same $10 per line per month support that ACS receives. In Alaska, then, allowing the CETC to receive the same support as the ILEC is a rule that can and does produce absurd and improper results. Because GCI does not have high cost loops, as defined by the FCC, any high cost loop support received by GCI will necessarily be for a purpose other than to purchase, maintain or upgrade high-cost loops as required by the Act. Furthermore, Section 54.307(a) can and does result in huge windfalls for CETCs, which, by definition, also means that USF funds are not being used for the purposes for which they were intended. Such misuse violates the principle of competitive neutrality and rather than promote efficient competition instead allows inefficient carriers to enter the market and compete based on these unlawful subsidies. Perhaps more importantly, such misuse puts continued stress on finite USF resources, ultimately threatening the very viability of a program that has for many years served the interests of consumers in high cost rural markets. Congressional Intent Ignored Congress should be concerned that its policies, as set forth in the Telecommunications Act of 1996, are not being implemented as intended. There has been some concern expressed that asking a CETC that provides service on its own facilities to submit cost information in support of a claim for USF assistance would be overly burdensome. ACS finds this argument specious. ILECs have been required to provide such cost rationale since the inception of the Fund. It does not appear to be any more burdensome for other facilities-based providers to justify their need. The argument totally falls apart when dealing with a CETC that serves customers via UNE loops. Where a CETC’s loop costs are known and documented, such as when the CETC purchases UNEs at a state-sanctioned rate, there is no burden in identifying the CETC’s actual loop costs. In such cases, USF support should be based on the CETC’s own per-line costs -- that is, the UNE loop price it pays -- not on the costs of the ILEC. GCI argues that its loop costs include other elements beyond the UNE price it pays to ACS. Although there may be some other costs involved, USAC rules limit recovery of certain cost elements associated with providing local service. It is reasonable to assume that those limitations would also apply to CLECs. More importantly, if CLECs like GCI want to be “credited” with their additional costs, they should be required to detail those costs the same way an ILEC must do. When the CETC certifies to the state and the FCC that it is using the support for the purpose for which it was intended, it should be required to justify the level of support it receives. At the same time the CETC should be compelled to substantiate that its loop costs meet the minimum cost threshold for high-cost loop support eligibility established by the FCC. While most of the blame for allowing USF to be used as a regulatory crutch to prop up an otherwise inefficient competitor lies with the FCC, state commissions, including the RCA, could but have failed to prevent this misguided policy. Under Section 214(e) of the Communications Act of 1934, state commissions are responsible for designating competing carriers as eligible to receive USF. However, the Act provides that, “Before designating an additional eligible telecommunications carrier for an area served by a rural telephone company, the State commission shall find that the designation is in the public interest.” (emphasis added.) In the Fairbanks case, the Alaska commission conducted no such analysis and offered no basis, in the record or otherwise, to support an affirmative public interest finding. Rather, reflecting a profound misunderstanding of the issues, the RCA summarily concluded: We found no evidence that GCI plans to use 2002 federal universal service funds in an inappropriate matter [sic]. We also note that GCI’s local rates in competitive areas remain comparable to or lower than the incumbents’, further suggesting 2002 federal funds will be used appropriately. This failure to conduct a factual investigation and reach conclusions based on a factual record prevents the FCC or the RCA from knowing anything about how this funding is being utilized. Congress should take steps to ensure that states carefully determine whether USF support is in fact being used for the purposes for which it was intended. This measured evaluation should apply equally to all CETCs. Improper UNE Rates Compound the USF Dilemma As is true with almost everything associated with implementation of the Telecommunications Act of 1996, no one issue stands alone. In this congressional hearing the focus has been on the specific operations of the Universal Service Fund. In its testimony, ACS has pointed out anomalies with CETC eligibility for support and the improper use of USF dollars. But, there is more. While unquestionably important, USF is but one revenue stream that joins others to contribute to the overall financial health of the telecommunications industry. In turn, a healthy industry is able to offer more and better services and hold rates at affordable levels. It was Congress’ intent that USF contribute to that end. But, we must remember that other revenue streams also make important contributions. One source of revenue that has failed to achieve universal service objectives is that derived from the sale of unbundled network elements or UNEs. The most consequential UNE is the “loop” or the connection that directly ties the customer’s home or office to the rest of the phone network. Beyond offering a facilities-based opportunity for competitors to enter local markets, UNE prices are also supposed to fairly compensate incumbents for the use of their networks. These rates should send proper economic signals to both incumbents and new competitors to prompt new infrastructure investment. These rates should also be set at levels that ensure that the Carrier of Last Resort, typically the ILEC, has the financial resources necessary to ensure that the network continues to meet established universal service standards for safe, reliable and affordable basic telecommunications services. In addition to redirecting USF support away from meeting Carrier of Last Resort obligations, the situation in Alaska has been substantially exacerbated by the state commission’s approval of unconscionably low UNE prices. ACS’ experience in the Fairbanks market is a case in point. As previously noted, the cost to ACS of providing a loop in Fairbanks is approximately $33.50. However, the RCA has deemed it reasonable to set the UNE loop price at $19.19. When ACS is forced to lease its loops under the state commission’s pricing scheme, it immediately loses much more than the $14.30 difference between ACS’ cost and the price paid by the competitor. It also loses all of the retail revenue associated with that line, along with the access revenue previously received from long distance carriers for use of the local network. And, as already noted, it loses the USF support related to that line. The end result is that ACS, with ongoing responsibility as Carrier of Last Resort, must approach its universal service obligations with only one-third of the revenue it previously had available prior to losing the access line to a competitor. While low UNE rates may have prompted market entry – in some cases, uneconomic market entry – they clearly do not fairly compensate the owner of these facilities nor will they incent any industry participant to invest. In the final analysis, the aggregate loss of these revenue streams will, over time, make it impossible for the incumbent to continue to provide reliable and affordable service – the very essence of the universal service definition. Improper Termination of “Rural Exemption” Prompts the USF Dilemma In addition to the “UNE factor” just discussed, the state regulator’s improper termination of the congressionally mandated “rural exemption” has also severely and negatively impacted the goals of universal service in Alaska. As Congress is well aware, the express language of the Act specifically creates a mechanism to protect the fragile universal service balance that has been struck in America’s rural markets. The Telecom Act confers upon rural customers and the companies that serve them an exemption from certain interconnection obligations unless it can be demonstrated that it would be in the public interest to terminate or otherwise alter those obligations. State commissions have generally been tasked with the responsibility to find that terminating this exemption will not impose undue economic burdens on the incumbent carrier or otherwise do harm to the goals of universal service. To date, the RCA has been asked to terminate the “rural exemption” in several Alaska communities, including some communities of less than 1,000 people such as Seldovia, Ninilchik, North Pole and Delta Junction. In every instance, with virtually no factual basis to sustain its findings, the RCA has granted the petitions filed by competitors and has terminated the federal protections you thought you had authorized in the Act. Clearly the balance Congress sought to strike between the advent of local competition and the preservation of universal service goals in rural America has been lost in practice as witnessed by the Alaska experience. Implications for Congressional Policy The combined effect of the improper termination of the “rural exemption,” the state commission’s desire to price UNE loops at the lowest possible levels, and the shifting of scarce USF support to a competitor that does not even have high cost facilities has placed tremendous pressure on ACS’ ability to assure universal service to the consuming public. Perhaps the RBOCs are big enough and sufficiently entrenched that these types of policies can be applied to them without threatening their survival, but ACS is a small independent carrier and cannot withstand this type of assault on its business. Just last month, Goldman Sachs noted, “ALSK [ACS] actually faces the most severe competition in the country evidenced by its low 50% market share in Anchorage, mid-70% market share in Fairbanks, and mid-80% market share in Juneau.” Federal policies that encourage our customers to move to competing carriers on the basis of artificially low UNE-based cost structures is a recipe for disaster. To put it simply, ACS cannot not continue to invest in the provisioning, maintenance and upgrading of facilities if it cannot achieve a fair return on its investments. Likewise, our competitors will not invest in facilities-based service – the ultimate goal of the Telecommunications Act of 1996, when they can acquire access to facilities less expensively from ACS than it would cost to build out the network themselves. Congress must be concerned that its legislative intent is being ignored or misdirected. ACS is prepared to suggest fair and impartial remedies. 1) Although many of us believe Congress clearly intended USF subsidies to flow only to those carriers with unusually high costs, the FCC apparently didn’t get the message. Congress can fix this problem by enacting legislation clarifying that all carriers, not just incumbent carriers, must justify their need for subsidies with data demonstrating their costs. Congress must also ensure that subsidies flow only to those carriers with unusually high costs. This would not prevent competition based on price, but would insure that the USF subsidy flows to the competitor which actually incurs the high cost. 2) To adequately protect its goal of providing universal service to consumers in high cost and rural areas, Congress must tighten the laws that currently give state commissions wide discretion to terminate the unbundling exemption – the “rural exemption.” These decisions are just as much a threat to universal service as are limitations on the flow of USF subsidies. 3) Congress should clarify that the burden of proof for terminating a rural exemption is on the competing carrier – a view adopted by the federal courts and the FCC but misunderstood and rejected by the Alaska commission and potentially by other states. 4) In addition, Congress should clarify that the goals of universal service will not be compromised solely to open the doors to competition. It is difficult to understand how competition can benefit consumers in markets where there would be no service at all but for the significant flow of federal subsidies. In that regard, Congress should instruct the states that the statutory “rural exemption” should be terminated only in unusual circumstances and where CLEC applicants have put forth a clear and convincing case that the public interest will not be harmed. 5) Finally, Congress should put an end to the all-to-common state practice of denying incumbent carriers their costs when setting UNE rates. This practice, particularly when applied to rural carriers that have had their rural exemption terminated, significantly compromises universal service. ACS does not think this practice was intended by Congress, but both the statute and the FCC rules are sufficiently vague to allow for this interpretation. Consequently, ACS strongly urges Congress to enact legislation making it clear that Carrier of Last Resort must be fairly compensated when leasing its facilities to competing carriers. Conclusion ACS joins the other witnesses in expressing its concern for the ongoing health and viability of the Universal Service Fund. While only one of several revenue streams contributing to the preservation of basic affordable telephone service, USF remains a critical element in the equation. If the issues described in this presentation remain unresolved, the Fund will soon spin out of control. At that point, policymakers will have no other choice but to substantially expand the base of contributors and increase the amount of the contributions. Doing so will not only have a direct impact on individual consumers, but will also add unexpected burdens on the deployment of new technologies. Congress must act soon to minimize the negative effects that are likely to occur in the absence of near term action. Thank you for this opportunity to raise our concerns. I would be happy to answer any questions you might have.

• Mr. Jack H. Rhyner
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  Witness Panel 3

  Mr. Jack H. Rhyner

  Summary of Alaska Telephone Association Testimony Universal Service Funding (USF) is growing at an alarming rate. At the same time, a traditional source of funding is quickly evaporating, jeopardizing the integrity of a ubiquitous communications network upon which our nation and her people critically depend. Congressional action must be taken quickly to stem a tide of devastating regulatory and legal decisions. USF springs from an assessment on revenues produced from the sale of interstate (long distance) services, a too-narrow and too-quickly-evaporating revenue stream. The FCC has made rural local exchange carriers even more dependent on USF…by substituting universal service support for access charge cost-recovery. State commissions exacerbate the situation by failing to evaluate whether granting USF eligible status to competitive carriers, through portable support models, serves the public interest to a degree that justifies jeopardizing service by proven providers and adding incalculable expense. In the Telecommunications Act of ’96, Congress gave equal weight to maintaining universal service and promoting competition. In practice, regulatory initiatives vigorously promote competition at the expense of universal service. Congress can right that wrong. Two areas of need that USF supports are cost recovery for Rural Local Exchange Companies (RLECs) to provide basic telephone service in high cost areas; and funding for social subsidy programs that add and enhance services. Universal Service Funding for the RLECs is not a subsidy. It is a cost recovery mechanism and the way RLECs recover the actual cost of building and maintaining rural America’s critical communications infrastructure Interstate revenue is in decline because providers can bundle local, intrastate, and interstate services and/or move to new technologies to avoid contributing. All other factors aside, it is the Circuit Court of Appeals’ interpretation of the 1996 Act that limits the base of this methodology to only interstate revenues. Congress could act to clarify the original intent of the 1996 Act that all revenues of any carrier providing interstate services should be assessed. Satellite, cable, some wireless and Internet service providers contribute nothing. They should contribute because they are interstate telecommunication service providers that extensively use the network to provide their services. That would increase the base to over $200 billion. FCC decisions to resolve interstate access pricing have shifted the local exchange carriers’ revenue requirement - and corresponding cost recovery - from access to the high cost side of the USF. Here are some other financial facts impacting the burgeoning cost of USF:
  • CALLS and MAG initiatives have shifted more than $1 billion from access to USF over the last two years.
  • The second phase of MAG will be implemented July 1, 2003 and another $450 million will shift from access to USF (minus affects of the intercarrier compensation issue).
  • A bill and keep regime will shift an additional $.5 billion to USF.
  • Some states may not have the ability to generate sufficient state universal service funds; some of those $1.5 billion may have to be recovered from the federal USF. Thus, another $1 billion is added to the size of the fund - and maybe much more.
  • The growth in USF from wireless CLECs being made eligible telecommunications carriers (ETC) to receive portable USF. This part of the fund is growing at an explosive rate of from $11 million in the first quarter 2002 to over $100 million in the first quarter of 2003. If all wireless providers were granted ETC status nationwide it could increase the fund by an additional $2 billion.
  • The FCC should adopt a standardized set of minimum qualifications, requirements, and policies for state PUCs and the federal Commission to apply to potential and existing ETCs in rural service areas.
  The base upon which USF contributions will be assessed must be expanded or the future of affordable basic telephone service in rural America is in jeopardy and could leave some citizens completely estranged from the great promise of a good life in this great country. Congress can prevent this by clarifying its intent in passing the Telecommunications Act of 1996. Introduction Mr. Chairman, members of the Committee, my name is Jack Rhyner. I am the President and CEO of TelAlaska Inc. My company provides telecommunication services to some of America’s most remote rural locations, most of which are accessible only by air or water. Only three of the 25 rural communities we serve are on the road system. Our service areas range from above the Arctic Circle to well out into the Aleutian Islands, a distance roughly equivalent to that between San Francisco and Chicago.
  I have 36 years of experience in the provision of rural telephony and am the third generation of my family to be so involved. I am appearing before you today in my capacity as the Chairman of the Government Affairs Committee of the Alaska Telephone Association. Opening Remarks Universal Service Funding (USF) is growing at an alarming rate. At the same time, a traditional source of funding is quickly evaporating, jeopardizing the integrity of a ubiquitous communications network upon which our nation and her people critically depend. Congressional action must be taken quickly to stem a tide of devastating regulatory and legal decisions. Those decisions, coupled with changes in technology and new competitive initiatives, could leave remote rural Americans totally estranged from the great promise of a good life in this great country. Universal service funding (USF) springs from an assessment on revenues produced from the sale of interstate (long distance) services, a too-narrow and too-quickly-evaporating revenue stream. The Federal Communications Commission (FCC) has made rural local exchange carriers (RLECs) even more dependent on USF by acting adversely on controversial court rulings about what constitutes implicit support that should be made explicit by substituting universal service support for access charge cost recovery. State public utility commissions (PUCs) for the most part have done nothing but exacerbate the situation by failing to accurately assess detrimental impacts to the public interest when granting eligible status to competitive local exchange carriers (CLECs) when such action produces relatively little compensating benefit. The results of these actions are clear: USF is growing at an alarming rate. We must make at least the cost recovery side of USF sufficient and predictable as required by the 1996 Act. The relentless over-burdening of any resource - or the failure to provide adequate maintenance of a public resource - is known to economists as the tragedy of the commons. Unrestrained freedom in the commons results in ruin. It is not difficult to postulate real disaster in the very near future if action to find solutions is not started today. Cost Recovery Verses Subsidy Elements Congress gave equal weight to two pillars of maintaining universal service and promoting competition in the Telecommunications Act. Yet, in practice, regulatory initiatives vigorously promote competition at the expense of universal service. We must begin to peel back the layers of regulatory fiat that threaten to unravel the 67-year history of universal service. One place to begin is with an understanding of the two areas of need that USF supports:
  • cost recovery for RLECs to provide basic telephone service in high cost areas, and
  • funding for social subsidy programs that provide and enhance additional telecommunications services. Cost Recovery for Basic Telephony Universal Service Funding for the RLECs is not a subsidy. It is a cost recovery mechanism. USF has been broken into small pieces and labeled with new names like high cost loop support (HCLS), long-term support (LTS), local switching support (LSS). Most recently added to the list is interstate common line support (ICLS), which is the transfer of what was the legitimate cost recovery from access charges to USF. Whatever the FCC calls it, it is only important to understand that, in total, this mechanism is how the RLECs recover the actual cost of building and maintaining rural America’s critical communications infrastructure. This part of the current USF is more generally known as the high cost support side of the fund. Social Subsidy Programs The other side of the USF, social subsidy programs, provides Lifeline and Link Up connections to the economically disadvantaged and discounted access to schools, libraries, and rural health care. I point this out to try to restore a lost sense of proportion and priority. Throughout the process of implementing the 1996 Act, it has been the rural high cost recovery mechanism that has been relegated to last place on the list of priorities.
  • The social subsidy part of the USF was fully funded.
  • The non-rural high cost support was fully funded.
  • The funding for rural high cost support has only been sufficient two of the last eight years.
  Without an adequate cost recovery mechanism, critical infrastructure for these important additional services would not exist. There would be no reliable Lifeline and Link Up connections nor would there be connections to provide access to schools, libraries, and rural health care providers. New Proposals Worsen the Outlook Rather than seeking ways to insure that funding for the critical, underlying infrastructure in rural areas is sufficient, the Federal State Joint Board on USF is now seeking comment on a list of proposals that can only erode that support further. Proponents are apparently overlooking the simple fact that the total amount of the high cost fund is no more and no less than exactly what it costs to maintain the existing critical infrastructure. Contribution Methods Discussing contribution methodology without knowing key relevant factors is analogous to rearranging the deck chairs on the Titanic to stave off unforeseen disaster. Without knowing the size of the fund that must be supported or the base upon which the contribution will be assessed, it is impossible to test any methodology for long-term sufficiency and sustainability. Since the size of the fund is controlled by legislative mandate, regulatory fiat, and the legal interpretation of both, we should first discuss the base that will be assessed. Revenue Methodology The current methodology of assessing interstate revenues has been called into question because interstate revenue is in decline. There are a number of contributing factors to this decline:
  • Arbitrage of jurisdictional separation by bundling local, intrastate, and interstate services is probably the largest contributor today.
  Virtually all of the major wireless carriers offer bundled local and national long distance services for one flat rate.
  • While not nearly as extensive, the transitioning of services to providers and technologies that are exempt from contributing also is becoming an ever-increasing problem.
  An example of this would be the use of voice over Internet. Congressional Clarification Would More than Double the Base All other factors aside it is the Circuit Court of Appeals’ interpretation of the 1996 Act that limits the base of this methodology to only interstate revenues that is at the heart of its trouble. Congress could act to clarify the original intent of the 1996 Act that all revenues of any carrier providing interstate services should be assessed. This alone would increase the base from the mid-$70’s to over $200 billion. It would end the ability of some carriers to escape contribution by arbitraging jurisdictional separation and it might well slow the growth of fund size, which I will address further on in my comments.
  • The use of the FCC’s discretionary authority to exempt certain carriers that provide interstate services has played no small part in limiting the size of the base that could be and should be contributing to USF. Satellite, cable, some wireless and Internet service providers - even though they make extensive use of the public switched network - contribute nothing. These providers do not manipulate the content of the data they carry; they merely transmit interstate communication from one point to another. Therefore, they are not information service providers as defined in regulation. They are interstate telecommunication service providers. As such, they should be contributing to the fund that sustains the network they extensively use to provide their services. Their contribution would be nothing more than the fulfillment of the 1996 Act’s mandate that all providers of interstate services contribute on an equitable and nondiscriminatory basis. Whether using revenues or connections, this would be a sizable increase in the contribution base. Connections Methodology As I have already tried to point out - as reflected in comments filed with the FCC by the Western Alliance (WA), Organization for the Promotion and Advancement of Small Telecommunications Companies (OPASTCO), National Telecommunications Cooperative Association (NTCA) and in Senator Stevens own remarks while addressing an NTCA meeting only last Tuesday - expanding the base of contributions is the real solution for a sustainable USF. Very simply stated, any provider that connects to the network should pay into the fund that supports that network. Rather than fixing the underlying problems and expanding the base, the FCC is attempting to stabilize the base by choosing something to assess that is not declining. A severed artery cannot be healed with a compression bandage; it requires surgery to repair the damage. The number of connections - at least at this time - is still increasing. However, the growth rate of connections will in no way keep pace with the growth rate of the USF. Of the three connections-based methodologies that have been noticed for comment, the one that splits contribution responsibilities between providers of interstate transmission and switched access services (proposal #2) would seemingly attempt to comply with the 1996 Act’s mandate of equitable and nondiscriminatory contribution. The assessment is based on a fairly nominal monthly flat rate for single line residential connections and a doubling of that rate for single line business and wireless connections to generate roughly 40 to 60% of the total fund. The residual would be born by multiple line business and private line customers. It is the recovery of this residual that may have unintended consequences especially if the fund - and therefore the assessment - continue to grow. Sophisticated businesses will quickly realize that with up-to-date technology and connection through an exempt provider they can have a virtual private network and access to the rest of the public network without having to contribute. This inevitably results in yet another reduction in the contribution base. Growth of the USF Cost Shifting Impacts FCC decisions to resolve interstate access pricing have shifted the local exchange carriers’ revenue requirement - and corresponding cost recovery - from access to the high cost side of the USF.
  • CALLS and MAG initiatives have shifted more than $1 billion from access to USF over the last two years. The second phase of MAG will be implemented July 1, 2003 and another $450 million will shift from access to USF. The FCC’s staff report on alternative contribution methodologies factors in a growth rate of two percent per year and the second phase of MAG. However, what is not accounted for is the resolution of the intercarrier compensation issue.
  • A bill and keep regime will shift an additional $.5 billion to USF.
  States will not be able to maintain an access charge system in the intrastate jurisdiction after the FCC has determined to move to bill and keep in the interstate jurisdiction.
  • There is $1.5 billion that is recovered through intrastate access. Some states may not have the ability to generate sufficient state universal service funds to recover all of this revenue. Potentially, some of those $1.5 billion may have to be recovered from the federal USF. Thus, another $1 billion is added to the size of the fund - and maybe much more. Portable Support Impact What is totally being left out of the equation is the growth in USF from wireless CLECs being made eligible telecommunications carriers (ETC) to receive portable USF. This part of the fund is growing at an explosive rate of from $11 million in the first quarter 2002 to over $100 million in the first quarter of 2003. Most of these support funds are being paid to wireless carriers for large numbers of their existing low-cost customers.
  • It is estimated that if all wireless providers were granted ETC status nationwide it would increase the size of the fund by an additional $2 billion dollars.
  Continuation of this trend, in conjunction with the FCC’s determination to make all interstate cost recovery explicit through USF, could drive the fund to an unsustainable level. There’s one more critical factor to consider. State PUCs were given the authority to grant ETC status in the 1996 Act. However, with that authority came the responsibility to make an affirmative finding that such a grant was indeed in the public interest. The public interest is a fairly nebulous concept in the absence of any definition contained in the Act. Such a determination of the public interest likely would at least contain
  • some sort of cost/benefit analysis,
  • a structured, verifiable time line within which the CETC will provide some new service, or expand it’s service coverage, to all customers within a service area,
  • and some objective, verifiable measurements to prove that the funds are being used for the intended purpose. Left to discretionary interpretation, the vast majority of state PUCs - and the Wireline Competition Bureau, for that matter - has granted CETC status on little more justification than “it furthered the goal of competition”. A serious investigation into the creation of uneconomic competition, supported by USF in the areas served by RLECs, would clearly show that it will not further the goal of universal service. The facts will show that the loss of even a small percentage of customer base may seriously impede the RLECs ability to continue to carry out their carrier of last resort responsibilities and may threaten their financial viability. Conclusion The base upon which USF contributions will be assessed must be expanded or the future of universal service in rural high cost America is in real jeopardy. Simply by adhering to the intent of the 1996 Act and adding all telecommunications service providers who connect to and make substantial use of the network we could expand the base considerably. Congress should act to expand the base to more than $200 billion by clarifying its original intent that all revenues (interstate and intrastate) should be assessed. This would also put an end to the ability of some carriers to arbitrage services between jurisdictions. The FCC should adopt a standardized set of minimum qualifications, requirements, and policies for state PUCs and the federal Commission to apply to potential and existing ETCs in rural service areas. I wholeheartedly endorse the proposed standards in the OPASTCO report Universal Service in Rural America: a Congressional Mandate at Risk.

• Ms. Dana L. Tindall
  Read statement

  Witness Panel 3

  Ms. Dana L. Tindall

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