[Senate Hearing 107-1106]
[From the U.S. Government Publishing Office]
S. Hrg. 107-1106
THE FUTURE OF UNIVERSAL SERVICE: ENSURING THE SUFFICIENCY AND STABILITY
OF THE FUND
=======================================================================
HEARING
before the
SUBCOMMITTEE ON COMMUNICATIONS
OF THE
COMMITTEE ON COMMERCE,
SCIENCE, AND TRANSPORTATION
UNITED STATES SENATE
ONE HUNDRED SEVENTH CONGRESS
SECOND SESSION
__________
JUNE 19, 2002
__________
Printed for the use of the Committee on Commerce, Science, and
Transportation
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SENATE COMMITTEE ON COMMERCE, SCIENCE, AND TRANSPORTATION
ONE HUNDRED SEVENTH CONGRESS
SECOND SESSION
ERNEST F. HOLLINGS, South Carolina, Chairman
DANIEL K. INOUYE, Hawaii JOHN McCAIN, Arizona
JOHN D. ROCKEFELLER IV, West TED STEVENS, Alaska
Virginia CONRAD BURNS, Montana
JOHN F. KERRY, Massachusetts TRENT LOTT, Mississippi
JOHN B. BREAUX, Louisiana KAY BAILEY HUTCHISON, Texas
BYRON L. DORGAN, North Dakota OLYMPIA J. SNOWE, Maine
RON WYDEN, Oregon SAM BROWNBACK, Kansas
MAX CLELAND, Georgia GORDON SMITH, Oregon
BARBARA BOXER, California PETER G. FITZGERALD, Illinois
JOHN EDWARDS, North Carolina JOHN ENSIGN, Nevada
JEAN CARNAHAN, Missouri GEORGE ALLEN, Virginia
BILL NELSON, Florida
Kevin D. Kayes, Democratic Staff Director
Moses Boyd, Democratic Chief Counsel
Jeanne Bumpus, Republican Staff Director and General Counsel
------
SUBCOMMITTEE ON COMMUNICATIONS
DANIEL K. INOUYE, Hawaii, Chairman
ERNEST F. HOLLINGS, South Carolina CONRAD BURNS, Montana,
JOHN F. KERRY, Massachusetts TED STEVENS, Alaska
JOHN B. BREAUX, Louisiana TRENT LOTT, Mississippi
JOHN D. ROCKEFELLER IV, West KAY BAILEY HUTCHISON, Texas
Virginia OLYMPIA J. SNOWE, Maine
BYRON L. DORGAN, North Dakota SAM BROWNBACK, Kansas
RON WYDEN, Oregon GORDON SMITH, Oregon
MAX CLELAND, Georgia PETER G. FITZGERALD, Illinois
BARBARA BOXER, California JOHN ENSIGN, Nevada
JOHN EDWARDS, North Carolina GEORGE ALLEN, Virginia
JEAN CARNAHAN, Missouri
C O N T E N T S
----------
Page
Hearing held on June 19, 2002.................................... 1
Statement of Senator Burns....................................... 2
Statement of Senator Dorgan...................................... 6
Statement of Senator Inouye...................................... 1
Statement of Senator Nelson...................................... 5
Statement of Senator Rockefeller................................. 3
Statement of Senator Stevens..................................... 7
Witnesses
Altschul, Michael F., Senior Vice President, and General Counsel,
Cellular Telecommunications and Internet Association........... 73
Prepared statement........................................... 76
Attwood, Dorothy T., Chief, Wireline Competition Bureau, Federal
Communications Commission...................................... 8
Prepared statement........................................... 10
Bond, Don, President and Manager, Public Service Telephone
Company, Georgia............................................... 64
Prepared statement........................................... 65
Greene, Margaret H., President, Regulatory and External Affairs,
BellSouth Corporation, Georgia................................. 57
Prepared statement........................................... 59
Gregg, Billy Jack, Director, Consumer Advocate Division, Public
Service Commission of West Virginia............................ 24
Prepared statement........................................... 27
Harker, Victoria D., Chief Financial Officer, MCI Group.......... 48
Prepared statement........................................... 50
Jaber, Lila A., Chairman, Florida Public Service Commission...... 19
Prepared statement........................................... 22
Thompson, G. Nanette, Chair, Regulatory Commission of Alaska..... 13
Prepared statement........................................... 14
Appendix
Carson, Wesley E., President and Chief Operating Officer, Alaska
Communications Systems Holdings, Inc., prepared statement...... 86
Jaber, Lila A., Chairman, Florida Public Service Commission,
supplemental testimony......................................... 99
Sandusky, Vincent R., President, American Public Communications
Council, prepared statement.................................... 84
Snowe, Hon. Olympia J., U.S. Senator from Maine, prepared
statement...................................................... 83
Response to Written Questions Submitted by Hon. Max Cleland to:
Billy Jack Gregg............................................. 104
Lila A. Jaber................................................ 100
G. Nanette Thompson.......................................... 96
The Federal Communications Commission........................ 89
Response to Written Questions Submitted by Hon. Daniel K. Inouye
to:
Billy Jack Gregg............................................. 105
Lila A. Jaber................................................ 101
G. Nanette Thompson.......................................... 96
The Federal Communications Commission........................ 90
THE FUTURE OF UNIVERSAL SERVICE:
ENSURING THE SUFFICIENCY AND
STABILITY OF THE FUND
----------
WEDNESDAY, JUNE 19, 2002
U.S. Senate,
Subcommittee on Communications,
Committee on Commerce, Science, and Transportation,
Washington, DC.
The Subcommittee met, pursuant to notice, at 10:10 a.m. in
room SR-253, Russell Senate Office Building, Hon. Daniel K.
Inouye, Chairman of the Subcommittee, presiding.
OPENING STATEMENT OF HON. DANIEL K. INOUYE,
U.S. SENATOR FROM HAWAII
Senator Inouye. My apologies for being late. Believe it or
not, I got stuck in an elevator.
[Laughter.]
Senator Inouye. This morning's hearing focuses on one of
the oldest and most revered principles of U.S.
telecommunication policy, universal service. The Federal
Government's commitment to universal service is grounded in our
belief that basic telecommunications services should be
available to all Americans at rates that are affordable and
relatively uniform.
As each of us can attest, access to adequate
telecommunications services is essential to modern-day social
and economic commerce. These challenges are acutely felt by
millions of Americans in remote areas who rely on telephone and
Internet connections to contact families and friends, to
benefit from expanded job opportunities offered by
telecommuting, to access educational information from remote
libraries, and to maintain critical contacts with health and
emergency service personnel.
Yet beyond these specific uses, as telecommunications
services reach more and more individuals, all Americans benefit
from the network effects of a ubiquitous communications
network.
In 1934, when only 40 percent of U.S. households had access
to telephone service, Congress passed the Communications Act
clearly expressing its intention to make available, so far as
possible, to all of the people of the United States, a rapid,
efficient, nationwide and worldwide wire and radio
communications service with adequate facilities at reasonable
charges. And in response to that mandate, Federal and state
regulators developed a system of pricing and cost recovery
designed to promote expansion of telecommunications networks
and to provide all Americans with access to telecommunications
services at affordable prices.
By enacting the 1996 Telecommunications Act, Congress
ensured that its longstanding commitment to universal service
would survive in a competitive telecommunication marketplace.
As a result, Members of this Committee worked diligently to
explicitly define the term ``universal service'' in Section 254
of the act. In so doing, Congress made sure that this
definition was sufficiently flexible to capture an evolving
level of telecommunications services and that contributions to
the fund would be equitably imposed on telecommunications
carriers.
As implemented by the Federal Communications Commission,
the current mechanism for funding universal service relies on
assessments to telecommunications carriers interstate and
international revenues. For many years, this system adequately
and effectively fulfilled a mission of universal service.
Of late, however, an increasing chorus of carriers have
begun to express their dissatisfaction with the current
revenue-based assessment mechanism. New technology, such as
Internet telephony, the emergence of bundled-service offerings,
and the introduction of new competitive providers of interstate
services have led some to question the long-term viability of
current contribution mechanism and to advocate an assessment
based on the number and capacity of carrier connections.
Other parties, however, argue that such wholesale changes
are unneeded, unlawful, and unwise in light of less radical
reforms that may stabilize the current system during the
current economic downturn.
In light of these competing claims, it is my hope that
today's hearing will allow the Committee to examine, first, the
nature and extent of the problems facing the current
contribution mechanism, and, second, the impact that proposed
changes will have on consumers and the future of the universal-
service fund.
To assist us, we are fortunate today to hear from two
distinguished panels of government and industry experts. And I
look forward to their testimony. But, before I do, may I call
upon my colleagues? Senator Burns?
STATEMENT OF HON. CONRAD BURNS,
U.S. SENATOR FROM MONTANA
Senator Burns. Thank you, Mr. Chairman. I'm very pleased
you're having this hearing today to address the vital topic of
universal service.
I am a strong supporter of universal-service programs.
During my time here in the Senate, in particular, I have worked
to ensure that the rural, commercial, and cooperative companies
of Montana continue to recover their costs of providing voice-
grade service from the high-cost universal-service system
through my introduction of the Universal Service Support Act
and other acts that we've sponsored in the past.
I firmly believe that a solvent and stable universal-
service fund benefits consumers throughout Montana and this
country through the availability of high-quality and affordable
service. The topic of this hearing is particularly timely,
given the FCC is currently reaching a conclusion on its
proceeding to reform the manner in which the universal-service
programs are funded. In fact, within the order released by the
Commission this past Friday, the FCC expressed its desire to
complete this proceeding and implement its changes by early
next year.
Clearly, some significant reforms to the universal-service
contribution system need to be made. Market forces, such as
competition in the long distance market, alone, warrant such
changes.
I'm going to carefully review the Commission's work to
ensure that it adheres to the stated core principles which
include: to ensure stability and sustainability of the
universal-service fund, to ensure that contributors are
assessed in an equitable and nondiscriminatory manner, to
minimize the regulatory costs associated with complying with
universal-service obligations, and to develop a contribution
recovery process that is fair and readily--and understood by
the consumers.
This universal-service contribution proceedings impacts all
providers of interstate telecommunications services. The
proceeding also impacts consumers because of the uncertainty of
how carriers will ultimately be allowed to recover their
contributions from end users.
My thinking on universal service has been greatly informed
by the experience that Montanans have had with their small,
rural operators. I want to specifically point out the
tremendous job that these independent companies and rural
cooperatives have done in providing quality service to Montana
for decades. In particular, the smaller operators have been
incredibly productive in the area of providing advanced
services. There will soon be 121 small Montana communities that
will have access to high-speed Internet services because of the
foresight and the hard work of these operators--just to name a
few, in cities like Circle, Multa, and Plentywood that are not
really on the large-city radar screen.
With these and many other contributions to our rural
providers in mind, I'd like to examine the proceedings to make
sure that it is consistent with the Act's requirement that
universal-service support be specific, predictable, and
sufficient. As a sponsor of the Universal Service Support Act,
I view any artificial limits on universal service as a
discouragement to investment and inconsistent with the 1996
act. I'm against imposing barriers to investment upon any new
universal-service contribution regime.
Thank you, Mr. Chairman, again, for holding this hearing. I
look forward to hearing from our witnesses.
Senator Inouye. Thank you very much, Senator Burns.
Senator Rockefeller?
STATEMENT OF HON. JOHN D. ROCKEFELLER IV,
U.S. SENATOR FROM WEST VIRGINIA
Senator Rockefeller. Thank you, Mr. Chairman.
I want to first acknowledge that we have our director of
Consumer Advocate Division in the Public Service Commission of
West Virginia, Billy Jack Gregg, here. And I'm very happy about
that, because he's very good.
And, second, I have to apologize, because I've got to go to
that Intel hearing, so I won't be able to do all I want to do.
I want to make a couple of points, however. The FCC has to
be much more aggressive and timely in, sort of, redefining this
whole contribution system. I think some of the--my colleagues
will remember that I had each of the FCC members swear that
they would do nothing--swear, on their confirmation hearings,
that they would do nothing to undermine the universal-service
funding. And they all swore. Some of them are proceeding,
however, to back off on that, particularly Chairman Powell.
It is--you know, what they are basically doing now is, they
are taking uncommitted e-rate funding, and they are using it to
keep universal-service contributions stable. Now, I could have
made a heck of a fuss about that, and I do make a heck of a
fuss out of it, and I decided not to because of--what it would
have done is spiked up telephone rates and e-rate would have
gotten a black eye. And, around here, and in the, sort of,
climate here in Washington, you have to fight every year to
protect e-rate. And I suspect that Byron Dorgan and Conrad
Burns had some of the same feelings.
But let's just make no mistake about it. This is a really
bad thing to do. It's a really bad thing to do to be using e-
rate. In fact, Chairman Powell wants to use this way beyond the
April date. He was the lone dissenting vote on this.
He wasn't the lone dissenting vote? Another matter.
He was the lone dissenting vote. And it was--that's very
discouraging to me, because I'm not sure, one, of his
commitment to e-rate, I'm not sure of his commitment to
universal service, and I'm not sure of the FCC's ability, other
than Michael Copps and our witnesses here, to withstand his
cerebral force.
Nevertheless, we went ahead with it, but I'm very unhappy
about it. The FCC is being very slow to look at this whole
contribution thing. And I don't like that.
So I'm just saying, Mr. Chairman, as loudly as I possibly
can, that we need to get a contribution system worked out,
certainly by April, certainly not later than April, and not put
the e-rate further at risk.
And just to add on as a freebie here, although we won't be
able to discuss it, that I also don't like the fact that the
FCC is redefining information services--Internet services--that
they should be classified as information services under the
1996 act, rather than as telecommunications. That makes a very
big difference. I won't get into that now, but it, again, has
to do with how we're going to preserve universal service if
we're going to do it, and if there's a will in the FCC, if they
feel that that's something which is useful to the nation. Some
of us certainly do.
The final point I want to make is that there is this
problem of the migration of regulated voice services to
unregulated Internet services. And that migration is very
concerning to me. When the FCC has taken a number of steps
recently to deregulate broadband service, I'm not sure that it
has adequately explored the effects of these rulings, that they
have on the universal-service funding. Universal-service
funding is everything to those of us in rural states and inner
cities. So I think this is too much business-as-usual.
The Chairman has handed me a little note here saying, ``The
change has a profound implication, not only for competition in
the telephone industry, but also for people who live in rural
and poor areas where telephone services are heavily subsidized
under current regulatory regimes.''
So I think that the time for reform of the contribution
system is long past due. The FCC is much too slow, of course,
in my judgment. And I'm not really sure how anxious they are to
change it, particularly at the leadership level.
So I will leave it at that, and I thank the Chairman.
Senator Inouye. I thank you very much.
Senator Nelson?
STATEMENT OF HON. BILL NELSON,
U.S. SENATOR FROM FLORIDA
Senator Nelson. Thank you, Mr. Chairman.
This is a subject matter that is extremely important to
Florida, from two different perspectives. I'm doubly pleased
that we have our chair of the Florida Public Service Commission
here to testify. And you'll be hearing, essentially, that, not
only do we have a lot of rural parts of Florida, but, of
course, Florida being 16 million people now, we contribute into
this, and we're concerned that we examine the existing
contribution system and consider changes, because I'm concerned
that there is a huge imbalance, that Florida is at the top of
the list of states that put in the most and get back the least,
as compared to all of the states. And yet I support the
universal-service system. All consumers deserve access to
telecommunications services, at rates that they can afford, and
we clearly have a lot of our state that is rural that benefits
from this program.
I've got some concerns about how transitioning to a per-
connection system may impact Florida's senior citizens, because
the elderly often make very few interstate and international
calls. And, as you know, we have a greater percentage of the
elderly in Florida, more than any other state. As a result,
they might shoulder a disproportionate burden of a per-
connection system.
So, Mr. Chairman, we have, on the floor of the Armed
Services, a DOD Authorization Bill, of which my presence is
needed there, and so I would just like to proffer some
questions for you all to consider.
Do you feel there is a penalty or reward for state
commissions that have already provided advanced services for
schools and libraries prior to the passage of the 1996
Telecommunications Act?
What are better ways than increasing the size of the fund
to address universal-service issues? And maybe our Chair can
discuss some of the initiatives in Florida.
What types of consumer education has Florida initiated to
tell customers about the lifeline linkup program?
And do you think that the size of the fund should be
limited?
So, with proffering of those provocative thoughts, I'm
going to request your permission that I might go and help out
our Armed Services Committee chairman on the floor, Mr.
Chairman.
Senator Inouye. Thank you very much.
And now may I call upon Senator Dorgan?
STATEMENT OF HON. BYRON L. DORGAN,
U.S. SENATOR FROM NORTH DAKOTA
Senator Dorgan. Mr. Chairman, thank you very much. And let
me add my thanks. This hearing is right on point, it's timely,
and it's very important.
And, as I was listening to my colleagues, we all pretty
much have the same mentality. We get up and put on a necktie in
the morning and come here prepared to speak in our special
language in very low and polite tones. But, you know, what's
happening here is really an outrage--really an outrage--with
respect to universal service. And I want to explain why I think
that and why I think the FCC really owes us aggressive action
here to respond to these issues.
Mr. Chairman, I grew up in a town of 300 people. We had a
telephone number that had only four digits. Now, I--as is the
case, perhaps, with West Virginia and Montana, I have a special
understanding of high-cost areas. And why the universal-service
fund decided that the telephone in Regent, North Dakota was
just as valuable as a telephone on Donald Trump's desk? Because
one was available to connect to the other. And without one, the
other was diminished. That's why we have universal service in
this country.
Now, we passed an act 6 years ago, and we included in that
act Section 254. It's not foreign language. It's not in code.
This isn't about wind-talkers having to convert it to
understandable English. Let me just read a part of it.
``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 inter-exchange 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 to rates charged for
similar services in urban areas.''
Now, that's not something that's hard to understand. And
yet, through a series of bungling efforts by the FCC--not just
the current FCC, but including the current FCC--and the FCC
that began in 1996 to implement this act, I include them as
special bunglers--through bungling, through court decisions,
and through people who come to this job in the FCC with a
philosophy that says, ``You know, we're not interested in what
the law says. We have our own philosophy about how things
should work,'' we now end up in a situation where we have a
universal-service program that, in my judgment, is in great
jeopardy. The FCC should know, in my judgment, that the
Congress placed the responsibility on the Commission to
preserve and advance universal service, not to minimize it or
neglect it.
And I'm not going to go through the whole series of things
that we have to do, but there are three very quick points.
Section 254 makes it clear universal-service support is
supposed to support advanced services--not debatable, in my
judgment; it's written in law. Second, universal service was to
be the mechanism by which we have comparable service at
comparable rates. And, third and finally, it was to require all
telecommunications carriers to contribute to universal service.
Now, Mr. Chairman, we're in a situation where slowly, but
surely, relentlessly over time this universal-service fund has
been neglected and chopped away at, and we will not long have a
universal-service fund that works relevant to he philosophy
that we have embraced for many decades, and especially relevant
to what is in Section 254 in the act. And I hope very much, Mr.
Chairman, that we will get Chairman Powell down here, as well,
at some appropriate time in the future, because I think we--I
like him a great deal, personally, but I think the Commission
has a lot to answer for with respect to what's gone on in
recent years on universal service.
I thank you for allowing me this therapy of waking up and
saying these things this early in the morning. But it's so
important to a state like North Dakota and other rural states.
Mr. Chairman, thank you.
Senator Inouye. I'm happy to oblige, sir.
Senator Stevens?
STATEMENT OF HON. TED STEVENS,
U.S. SENATOR FROM ALASKA
Senator Stevens. Mr. Chairman, I'm sorry to be late, so
I'll be very short.
Along with you, I believe I'm one of the original sponsors
of the concept of universal service, and I do believe that this
concept has made modern communications a reality, in my state
and many rural areas, facilities that would otherwise still be
a dream. I'm delighted that you've permitted Ms. Thompson--Nan
Thompson to appear here today.
I don't want to offend the Senator from West Virginia, but
sometimes I think those of us who invented universal service
are sort of watching the tail wag the dog, because the concept
of taking money from universal service and using it to provide
service to schools, libraries, and health facilities, the
inner-core cities--what we call the urban centers of the
country--has really provided--presented us with this problem.
This universal-service fund cannot stand the continued
deviation of funds from its original purpose if we don't find
some way to assure that all concepts of communication carried
through the airwaves will contribute to this fund and also put
some limits on what is taken out of the fund for non-
communications service. The hookup of the schools, libraries,
and health facilities, we all supported, but we never dreamed
it would be taking billions annually out of this fund.
And I'm anxious to hear the witnesses, because I do believe
that there has to be some changes made if this basic concept is
to survive. Contrary to my friend from the Dakotas, I commend
Chairman Powell for what he's been trying to do to reform the
way we use the universal-service fund, and I think that as
long-distance revenues decline, we must find some way to have
those who provide similar concepts of service in the
communications field contribute to the support of the
activities of the universal-service fund, or the day will come
when, once again, rural America is not online. And if that
happens, then I think we've lost our whole concept of the unity
of this country, and we cannot afford that. So if we don't act
aggressively, there's going to be no one paying into the
universal-service fund if all of these concepts migrate to
another form of service other than the traditional long-
distance service.
Thank you very much, Mr. Chairman.
Senator Inouye. I thank you very much, sir.
We have two panels this morning. Our first panel is made up
of the chief of Wireline Competition Bureau of the FCC, Ms.
Dorothy Attwood; commissioner of the Alaska Public Utilities
Commission, Ms. Nan Thompson; commissioner of Florida Public
Service Commission, Ms. Lila A. Jaber; and director of the
Consumer Advocate Division, Public Service Commission of West
Virginia, Mr. Billy Jack Gregg.
May I first recognize Ms. Attwood?
STATEMENT OF DOROTHY T. ATTWOOD, CHIEF,
WIRELINE COMPETITION BUREAU, FEDERAL
COMMUNICATIONS COMMISSION
Ms. Attwood. Good morning, Mr. Chairman and senators. My
name is Dorothy Attwood, and I'm chief of the Wireline
Competition Bureau at the FCC. I appreciate the opportunity to
appear before you today to discuss universal service.
Universal service is certainly a cherished principle, and
I'm sure that all on this panel and everyone in this
Subcommittee recognizes the importance of maintaining universal
service support and achieving the goals of ensuring affordable
and ubiquitous telecommunications service.
In the Telecommunications Act of 1996, Congress directed
the Commission to ensure the affordability and availability of
telecommunications for all Americans. Congress mandated that
the implicit subsidies and universal service support in a
monopoly environment be replaced by explicit, predictable, and
sufficient support mechanisms. The task Congress set out for us
was a monumental one requiring a massive overhaul of the
existing universal service system so that it would be
sustainable in an increasingly competitive marketplace.
The Commission's initial implementation of the universal
service provision of the 1996 act is now complete. Implementing
the statutory mandate, the commission made certain policy
choices. First, contributions to support universal service are
based on interstate telecommunications mechanisms service
revenues. Second, we have seperate high-cost support for both
rural and non-rural carriers. Third, high-cost support for
competitors is based on the costs of the incumbents.
Now, as the marketplace evolves, though, each of these
policy choices brings new complexities. Though the Commission
has done much work, more work needs to be done in the future to
account for the advances in technology, the shifting consumer
preferences, and the realities of the competitive marketplace.
One striking development that we've witnesses in the
interstate marketplace is the steady decline of interstate
revenues. Although traditional long-distance revenues grew
consistently between 1984 and 1997, they're now in a period of
steady decline.
A variety of factors are responsible. First, new carriers
are entering the long-distance market bringing aggressive price
competition that benefits consumers, but also drives down the
overall interstate revenues. Second, wireless substitution is
increasing. And, third, companies are marketing innovative
bundled packages of service that blur traditional service
categories.
These changes--price competition, technological
substitution, and the development of service bundles--are
precisely the kind of development that Congress sought to
stimulate when it passed the 1996 act. They're good things.
Nonetheless, they strain traditional regulatory distinctions.
They present challenges to our current universal service
framework, and they require us to consider difficult questions.
Now, the Commission is up to the task and is guided overall
by the 1996 act and the principles of Section 254. Our
reexamination of the policy choices we made to implement the
1996 act will rest on a few core concepts. First, the
competitive telecommunications market requires a more
sophisticated targeting of universal service support than in a
monopoly environment. This support needs to be sufficient, but
not excessive.
Second, universal service policy should not encourage
inefficient investment or preclude innovation. In other words,
the Commission must be cognizant of the market-distorting
effects of universal service support and target support in a
manner that reduces the impact of this distortion.
Finally, universal service must be maintained as
technologies and markets evolve. The Commission's framework
must be flexible so it can accommodate legal, technological and
market developments.
The Commission already has begun to take on these issues in
a new set of foundation proceedings. Throughout these
proceedings, we seek to work closely and collaboratively with
our state colleagues and our industry stakeholders.
First, in May of 2001, the Commission began a proceeding to
reexamine the way in which contributions are assessed on
carriers and recovered from consumers. We take this action in
response to the contributors' concerns about the competitive
effect of the current assessment system and the consumers'
growing frustration with line items on their bills.
In February 2002, the Commission requested further comment
on a specific industry proposal to replace the existing
revenue-based assessed mechanism with one based on the number
and capacity of connections provided to a public network. And
we refreshed the record on a variety of other proposals. We've
received a voluminous record and will be holding a public forum
to further develop these records with our state colleagues this
Friday.
The Commission intends to adopt a new foundation for a
contribution methodology before the end of the year. In the
interim, the Commission has acted to stabilize the contribution
factor for consumers by using unused funds from the schools and
libraries program to decrease the upward pressure on consumer
line items caused by declining interstate revenues.
Second, in February of 2002, the Commission initiated a
foundation proceeding concerning universal service and
broadband technology. As traditional services migrate to
broadband platforms, the Commission must assess the
implications for funding universal service and determine how to
sustain universal service in an evolving telecommunications
market.
In addition, the Commission has underway foundation
proceedings to streamline and strengthen universal service
support mechanism for schools and libraries and rural
healthcare.
Finally, the Commission also intends to initiate other
proceedings later this year which will examine other critical
universal service issues. In particular, the Commission intends
to begin a foundation proceeding to take a look again at the
nature and level of support for competitive service providers
whose costs may differ from those of the incumbent carriers.
As part of its comprehensive high-cost review, the
Commission also intends to begin the complex process of
examining the disparate rural and non-rural support mechanisms
so that we can assure our universal service framework is
resilient over time.
I'd like to thank you, Mr. Chairman, for the opportunity to
appear before you today, and I look forward to working with you
and other Members of the Subcommittee on these universal
service issues.
Thanks.
[The prepared statement of Ms. Attwood follows:]
Prepared Statement of Dorothy T. Attwood, Chief, Wireline Competition
Bureau, Federal Communications Commission
I. Introduction
Good morning, Chairman Inouye, Senator Burns, and Members of the
Subcommittee.
My name is Dorothy T. Attwood, and I am the Chief of the Wireline
Competition Bureau at the Federal Communications Commission. I
appreciate the opportunity to appear before you today to discuss
universal service.
Universal service is a cherished principle. I am sure that all of
us on this panel and everyone on this Subcommittee recognizes the
importance of maintaining universal service support and achieving the
goals of ensuring affordable and ubiquitous telecommunications service.
Universal service ensures that consumers living in rural, insular and
high cost areas have access to telecommunications services. Universal
service ensures that millions of school children and library patrons,
including those in many of the nation's poorest and most isolated
communities, obtain access to modern telecommunications and information
services for educational purposes. Through universal service, rural
health care providers can provide access to high-quality medical
service in rural America. Universal service also increases the
availability of telecommunications services in underserved areas such
as Indian tribal lands. In short, universal service ensures the
delivery of telecommunications to all Americans.
II. Background
In the Telecommunications Act of 1996, Congress directed the
Commission to ensure the affordability and availability of
telecommunications for all Americans. Congress mandated that the
implicit subsidies that ensured universal service in a monopoly
environment be replaced with explicit, predictable, and sufficient
support mechanisms. The task Congress set out for us was a monumental
one, requiring a massive overhaul of the existing universal service
system so that it would be sustainable in an increasingly competitive
marketplace.
The Commission's initial implementation of the universal service
provisions of the 1996 Act is now complete. Starting with the First
Universal Service Order in 1997, the Commission created an equitable
and non-discriminatory assessment methodology for contribution to
universal service, and implemented the statutory mandate to provide
support to schools, libraries, and rural health care providers. The
Commission removed implicit support from access charges and created
explicit interstate support mechanisms in two proceedings in 2000 and
2001. The Commission also reformed intrastate high cost support for all
carriers, creating separate mechanisms for non-rural and rural carriers
in 1999 and 2001, respectively. In undertaking these reforms, the
Commission recognized the differences between the larger price cap
carriers, and the rate of return carriers that typically operate in
rural areas, and it proceeded in a staged fashion to minimize
disruption to the smaller rural carriers.
In implementing the statutory mandate, the Commission has made
certain policy choices. First, contributions to support universal
service are based on interstate telecommunications service revenues.
Second, we have disparate high cost support systems for rural and non-
rural carriers. Third, high cost support for competitors is based on
the costs of incumbents. As the marketplace evolves, each of these
policy choices brings new complexities.
III. Changing Conditions for Universal Service
The preservation and advancement of universal service--the goals of
which remain paramount--presents significant prospective challenges.
Though the Commission has done much work implementing the 1996 Act,
more work needs to be done in the future.
As Congress has recognized, universal service policy cannot remain
static. The Commission must reexamine its regulatory framework in light
of the changing and maturing nature of the telecommunications market as
a whole. The foundation of universal service needs to be refined to
account for advances in technology, shifting consumer preferences, and
the realities of a competitive market environment.
In doing so, first, and foremost, the Commission is guided by the
principles in the 1996 Act, informed by what we know about the
telecommunications market today.
Interstate revenues are decreasing. Although traditional long
distance revenues grew consistently between 1984 and 1997, they are now
in a period of steady decline. A variety of factors are responsible.
First, new carriers are entering the long distance market, bringing
aggressive price competition that benefits consumers, but also drives
down overall interstate revenues.
Second, wireless substitution is increasing. Consumers are
substituting new mobile services for traditional wireline services such
as payphones and second lines to the home. A small but growing number
of customers have substituted mobile wireless for their primary
residential lines. Many consumers now use their wireless service rather
than traditional wireline interexchange service to make long distance
calls. According to one report, 16 percent of customers now make most
of their long distance calls using mobile services, which may skew the
balance of universal service contributions.
And third, companies are marketing innovative bundled packages of
service that blur service category lines. For example, carriers
increasingly are bundling services together in creative ways, including
offering flat-rate packages that include both local and long distance
services. Carriers also are offering bundled packages of
telecommunications services and customer premises equipment and
packages with telecommunications and information services, like
broadband Internet access.
These changes--price competition, technological substitution, and
development of new service bundles and new services--are precisely the
kind of developments Congress sought to stimulate when it passed the
1996 Act. These are good things. Nonetheless, they strain traditional
regulatory distinctions. They present challenges to our current
universal service framework. They require us to consider difficult
questions.
The Commission is up to this task. The realities of the maturing
telecommunications market require us to consider how, for instance, we
can ensure that the collection of funds to support universal service
does not favor one class of carriers or one technological platform over
another. As a related matter, the Commission must consider how to
maintain universal service as traditional communications services
migrate toward delivery over convergent broadband platforms. In this
changing environment, the Commission also needs to refine its thinking
on how to provide sufficient support to eligible providers in order to
ensure nationwide access to quality services in rural areas at rates
comparable to those in urban areas. Inasmuch as these are significant
challenges, the changed landscape does afford the Commission the
opportunity to promote universal service objectives in economically
sound ways.
Again, the Commission is guided above all by the statutory text.
The paradigm we are developing rests on a few core concepts.
First, the competitive telecommunications market requires a more
sophisticated targeting of universal service support than in a monopoly
environment. This support needs to be sufficient, but not excessive.
In addition, universal service policy should not encourage
inefficient investment or preclude innovation. In other words, the
Commission must be cognizant of the market distorting effects of
universal service support and target support in a manner that reduces
the impact of this distortion.
Finally, universal service must be maintained as technology and
markets evolve. The Commission's framework must be flexible so it can
accommodate legal, technological, and market developments that we
cannot even foresee.
IV. A New Phase in Universal Service Policy
In sum, the Commission is entering a new stage in the development
of universal service policy. With implementation of the 1996 Act
complete, the Commission's current task is to reexamine and reassess
the foundation it has built in order to ensure the preservation and
advancement of universal service in the modern telecommunications
marketplace. Throughout this endeavor, we seek to work closely and
collaboratively with our state colleagues and industry stakeholders.
The Commission already has begun to take on these issues in a new
set of foundation proceedings. By examining universal service issues in
these vehicles and others that will be introduced before the end of the
year, the Commission will incorporate its understanding of the evolving
market in an updated framework consistent with the basic principles in
the 1996 Act.
In May 2001, the Commission began a proceeding to revisit its
universal service contribution methodology. This system has two
distinct but related components: the assessment of contributions on
telecommunications providers and the recovery of contribution payments
by providers from their customers. Contributors are assessed on the
basis of their interstate and international end-user telecommunications
revenues, based on a percentage or ``contribution factor'' that is
calculated every quarter. Because interstate revenues are declining,
the contribution factor--which carriers typically pass along as a line
item on consumer bills--has increased over time. Consumers
understandably are frustrated with these growing charges.
The Commission must work to ensure that our contribution system is
both equitable and non-discriminatory. To this end, in February 2002,
the Commission requested comment in a Further Notice on a specific
industry proposal to replace the existing, revenue-based assessment
mechanism with one based on the number and capacity of connections
provided to a public network, and refreshed the record on other
proposals. We have received a voluminous record, and will be holding a
public forum to further develop the record on these pending proposals
later this week.
The Commission intends to adopt a new foundation for contribution
methodology before the end of this year. In the interim, the Commission
has acted to stabilize the contribution factor for consumers by using
unused funds from the schools and libraries program to decrease the
upward pressure on consumer line items caused by declining interstate
revenues.
In February 2002, the Commission also initiated a foundation
proceeding concerning universal service and broadband technology.
Universal service has historically been based on the assumption that
consumers use the network for traditional voice-related services and
that those voice services are provided over circuit-switched networks.
As traditional services migrate to broadband platforms, the Commission
must assess the implications for funding universal service and
determine how to sustain universal service in an evolving
telecommunications market. At the same time, the Commission must seek
to avoid policies that may skew the marketplace or overburden new
service providers. Thus, the proceeding seeks to answer the fundamental
question: in an evolving telecommunications marketplace, should
facilities-based broadband Internet access providers be required to
contribute to support universal service?
In addition, the Commission has underway foundation proceedings to
streamline and strengthen the universal service support mechanisms for
schools and libraries and rural health care. As with other areas of
universal service policy, the Commission seeks to ensure the continued
efficient and effective implementation of Congress's goals as
established in the statute, while taking into account the evolving
nature of the telecommunications market.
Finally, the Commission also intends to initiate other proceedings
later this year that will examine other critical universal service
issues. In particular, the Commission intends to begin a foundation
proceeding to take a look again at the nature and level of support for
competitive industry providers, whose costs may differ from those of
incumbent carriers. As part of its comprehensive high cost review, the
Commission also intends to begin the complex process of examining the
disparate rural and non-rural support mechanisms, so that we can ensure
our universal service framework is resilient over time.
I would like to thank you, Mr. Chairman, for the opportunity to
appear before you today. I look forward to working with you and other
Members of this Subcommittee on these important universal service
policy issues. I would be pleased to answer any questions you might
have.
Senator Inouye. Thank you very much, Ms. Attwood.
We will now recognize Commissioner Thompson.
STATEMENT OF G. NANETTE THOMPSON, CHAIR,
REGULATORY COMMISSION OF ALASKA
Ms. Thompson. Mr. Chairman and Members of the Subcommittee,
I want to thank you for the opportunity to testify today. I'm
Nanette Thompson, the chairman of the Regulatory Commission of
Alaska, and state chair of the Federal-State Universal Service
Joint Board. The focus of my testimony today will be the
importance of universal-service funding for rural areas.
Congress expressed its desire that universal service be
preserved in light of emerging competition and other market
forces through Section 254 of the Telecommunications Act of
1996. Section 254 was written largely for the benefit of small
telephone companies in the rural areas of the nation. It is not
clear that the full benefits of the universal service have been
achieved as Congress intended.
In 1998, before the universal-service reforms enacted by
the FCC, the total high-cost universal-service fund was about
$1.7 billion and was devoted primarily to small and high-cost
telephone companies. By comparison today, the universal-service
programs total about $4.3 billion.
While the universal-service fund has seen exception growth
since 1998, rural companies have been largely left behind as
the FCC has concentrated its efforts to non-rural company
support and access-charge reform. While the rural mechanism
supporting local rates has remained largely unchanged, many
non-rural companies receive substantially greater levels of
universal-service support than they did before the act was
passed. For example, even though the FCC's cost model deems
only seven states worthy of non-rural high-cost support, the
FCC has provided an additional $435 million to non-rural
companies in 44 states under the CALLs access-charge support
program. California, New York, and Virginia, which are all
relatively low-cost states, receive about 20 percent of this
funding.
Similarly, while the schools and library universal-service
program, in concept, is a worthy effort, a high proportion of
the $1.4 billion in program funding goes to the relatively
urban, low-cost areas. For example, California, Illinois, and
New York receive about $565 million, or 40 percent, of the
total school and library funding. The funding to these three
states is close to half of that available to all rural
companies nationwide for high-cost loop support, which totals
about a billion dollars. I'm not suggesting that California,
Illinois, and New York shouldn't receive school and library
support, but it's not evident that Congress intended such high
levels of school and library funding to be so devoted.
As a member of the Federal-State Joint Board on universal
service, I'm concerned that the fund not grow to such high
levels as to burden consumers throughout the nation. We must
use our universal-service funds wisely, and target funding to
the most needing areas. Without universal-service funding, many
areas of Alaska would face local rate increases ranging from
$25 to $97 a month. Telephone service throughout much of rural
Alaska would be unaffordable, absent Federal support.
I hope to work cooperatively with the FCC to ensure that
the rural areas of the country are provided with sufficient
support, while ensuring that universal-service funds benefit
the public, as intended by Congress. We must ensure that any
funding provided accrues to the benefit of consumers and not to
the utilities' pocketbooks.
While I believe there may be need for room for improvement
with some of the current Federal universal-service programs, I
wish to express my strong support for Commissioners Abernathy,
Martin, and Copps, who presently serve with me on the Universal
Service Joint Board, as well as for Chairman Powell. This
group, under the leadership of Chairman Powell, has worked well
with the states and supported the Joint Board's efforts. The
FCC has a daunting task in attempting to balance the
conflicting public needs while addressing controversial and
complex issues. This group has actively sought input from the
states in important policy issues.
The Universal Service Joint Board is now working o three
important issues. We've been asked to recommend additions or
deletions to the list of services supported by universal-
service funding, to recommend changes to the lifeline and
linkup programs to make them more effective, and also to
recommend definitions of reasonably comparable rates and
sufficient support to be used to benchmark universal-service
funding.
We are also participating with the FCC in a hearing later
this week to take testimony on various proposals for modifying
the fund's contribution mechanism. This joint board has been
working effectively to analyze specific issues that have big
impacts in the states. It provides an opportunity for me to
strive to ensure that affordable, reliable telecommunications
services are available to all Americans.
Thank you.
[The prepared statement of Ms. Thompson follows:]
Prepared Statement of G. Nanette Thompson, Chair, Regulatory Commission
of Alaska
Mr. Chairman and Members of the Subcommittee:
Thank you for the opportunity to testify. I am Nanette Thompson,
Chair of the Regulatory Commission of Alaska and state chair of the
Federal-State Universal Service Joint Board.
The focus of my testimony today will be the importance of universal
service funding for rural areas.
Congress expressed its desire that universal service be preserved
in light of emerging competition and other market forces through
Section 254 of the Telecommunications Act of 1996. Section 254 was
written largely for the benefit of small telephone companies in rural
areas of the nation. It is not clear that the full benefits of
universal service have been achieved as Congress intended.
In 1998, before the universal service reforms enacted by the FCC,
the total high cost universal service fund was about $1.7 billion and
was devoted primarily to small and high cost telephone companies. In
comparison, today the universal service programs total about $4.3
billion.
While the universal service fund has seen exceptional growth since
1998, rural companies have been largely left behind as the FCC has
concentrated its efforts to non-rural company support and access charge
reform. While the rural mechanism supporting local rates has remained
largely unchanged, many non-rural companies receive substantially
greater levels of universal service support today than they did before
the Act was passed. For example, even though the FCC's cost model deems
only 7 states worthy of non-rural high cost support, the FCC has
provided an additional $435 million to non-rural companies in 44 states
under the CALLs access charge support program. California, New York,
and Virginia, which are relatively low cost states, collectively
receive about 20 percent of this funding.
Similarly, while the schools and library universal service fund, in
concept, is a worthy effort, a high proportion of the $1.4 billion in
program funding goes to relatively urban, low cost areas. For example,
California, Illinois, and New York collectively receive $565 million,
or about 40 percent of all school and library funding. The funding to
these three states for their school and library programs is close to
half that available to all rural companies nationwide for high cost
loop support ($1 billion). I am not suggesting that California,
Illinois, and New York should not receive school and library support,
but it is not evident that Congress intended such high levels of school
and library funding to be so devoted.
As a member of the Federal State Joint Board on universal service,
I am concerned that the fund not grow to such high levels as to burden
consumers throughout the nation. We must use our universal service
funds wisely and target funding to our most needy areas. Without
universal service funding, many areas of Alaska would face local rate
increases ranging between $25 and $97 per month. Telephone service
throughout much of rural Alaska would become unaffordable absent
federal support.
I hope to work cooperatively with the FCC to ensure that the rural
areas of the country are provided sufficient support while ensuring
that universal service funds benefits the public as intended by
Congress. We must ensure that any funding provided accrues to the
benefit of consumers and not to the utilities' pocketbooks.
While I believe there may be room for improvement in many of the
current federal universal service programs, I wish to express my
support for Commissioners Abernathy, Martin and Copps who presently
serve on the Universal Service Joint Board as well as Chairman Powell.
The FCC has a daunting task attempting to balance conflicting public
needs while addressing controversial and complex issues.
The universal service joint board is working on three important
issues. We have been asked to recommend additions or deletions to the
list of services supported by universal service funding, to recommend
changes to the lifeline and linkup programs to make them more effective
and to recommend definitions of reasonably comparable rates and
sufficient support to be used to benchmark universal service funding.
We are also participating with the FCC in a hearing later this week to
take testimony on the various proposals for modifying the fund's
contribution mechanism. The Joint Board has been working to effectively
analyze specific issues that impact the states. It provides an
opportunity for me to strive to insure that affordable, reliable
communications services are available to all Americans.
Senator Inouye. I thank you very much, Commissioner
Thompson.
May I now recognize Commissioner Jaber?
STATEMENT OF LILA A. JABER, CHAIRMAN, FLORIDA PUBLIC SERVICE
COMMISSION
Ms. Jaber. Thank you, sir.
Mr. Chairman and Members of the Committee, I, too, want to
join in thanking you for the opportunity to testify before you
today on this very important topic of universal service.
To give some context to my comments, I believe it is
important for you to know some basic facts about Florida and
the universal-service fund. And let me say that I am here on
behalf of the Florida Public Service Commission, although I do
have the privilege of serving on the Universal Service Joint
Board with Commissioner Thompson.
In the year 2000, the size of the fund was $4.7 billion,
and Florida ratepayers contributed $438 million of that, or
7.24 percent of the entire fund. By comparison, Florida only
received $121 million, or 2.59 percent, in benefits from the
fund, making Florida, we believe, the net largest contributor
to the fund. Based on recent projected data for the year 2002,
we believe the fund will increase by an additional billion
dollars from that seen in the year 2000.
Now, let me say that Florida is extremely supportive of the
goal of access to all telecommunications services, and we
support all of the programs currently under the universal-
service umbrella. I think, though, that Florida believes that
the current level of funding is sufficient to provide the
continued support necessary to all states and everyone who
seeks the support.
We have some concerns with respect to rules and procedures
in the programs that have led or may lead to gaming and abuse
with respect to the programs. In general, we believe that some
adjustments to add more accountability to these programs make
the programs more efficient and effective.
An example of the kind of problem I would like to see
addressed by the FCC is the wide disparity in participation
rates in the lifeline program. Specifically, some states use a
self-certification process for determining eligibility for
lifeline. Florida is concerned that verification procedures may
vary across states and perhaps unintentionally lead to
misapplication of the fund. At a minimum, we believe that the
states should be required to inform the FCC of their efforts to
ensure that only eligible customers receive the benefits from
the fund.
Furthermore, we believe the FCC should address the
disparity in the lifeline participation rates and identify the
reasons for the disparity. In this way, a targeted and more
economically efficient approach to addressing low participation
could be identified, rather than simply expanding the
eligibility criteria and, hence, expanding the fund itself.
Under the high-cost program, which is by far the largest
universal-service fund program, in dollar terms, we believe the
current provisions allow for multiline consumers in high-cost
areas to receive support, not just for their primary lines, but
additional lines. It's not clear to Florida that that sort of
support which goes beyond the primary line is the intent of the
universal-service provisions found in Section 254. This may be
an area where greater stability and efficiency can be achieved
by a change in the administration of the fund.
With respect to the issue of expanding the definition of
``universal service'' to include broadband, the Florida Public
Service Commission has taken the position that it is premature
to expand the coverage of the universal-service fund. We are
concerned that expanding the fund to accommodate broadband
Internet access, at this time, will prevent the marketplace
from determining the most appropriate technology.
The marketplace should be permitted to work. Broadband is a
relatively new consumer service. And, as we speak,
entrepreneurs are busy developing the applications and the
technologies to provide all of these good services to our end
users. Just to give you an indication, without universal-
service support, the FCC advanced-services report indicates
that Florida ranks fourth nationwide in the number of high
speed Internet access lines, and third in residential and
small-business penetration. So we have that level of broadband
deployment without the universal-service fund having supported
those programs.
Second, recent reports from a variety of sources indicate
that broadband demand is lagging behind broadband supply. The
PSC believes that it is crucial to identify the reasons for the
alleged lack of demand, and, as a result, as the chairman of
the 706 Joint Conference, we are undertaking a study of take-
rates, penetration rates, to determine what the reason is for
low penetration in certain states and in certain areas within
the state. And again, my belief is if we could target where the
problems are, we could craft a solution that is more economical
and efficient for those areas in those states.
Finally, I would like to reiterate my support of this
hearing. And certainly I thank you for the invitation to
testify. I, too, want to share in Commissioner Thompson's
compliment to the FCC. What we've seen from the FCC is that
they are reaching out to the states to identify where the
problems are. I look forward to the en banc hearing this
Friday.
In just the couple of seconds I have left, I'd like to
address some questions that Senator Nelson asked before he
left, with respect to examples Florida has in enhancing
lifeline enrollment. We partnered with AARP and our consumer
advocates and the FCC in the state of Florida in a proactive
consumer-education program to make sure that consumers knew the
benefits of lifeline and linkup and the assistance they could
receive. We did a press conference. We have published
brochures--in Spanish, as well--and sent them out, mass media,
through the partnerships of news medias and press to make sure
that the consumers knew about the lifeline program. Those are
the examples we'd like to see the FCC undertake.
With respect to the reward or penalty question I think the
Senator is referring to, Florida undertook, years ago, before
the 1996 act was implemented, to wire its schools and libraries
with the most efficient technology possible. So when the act
was implemented and the universal-service fund was created,
Florida did not need as much money in the schools and libraries
program as other states did. So it looks like, for states like
Florida, there is a penalty. We continue to contribute,
although we may not need as much access to the fund as other
states.
I don't see this as a state-versus-state issue, but
certainly, we would be--we would advocate for an allocation or
a reward or some recognition that Florida shouldn't contribute
as much as it has because it was already ahead of the game with
respect to schools and libraries.
Thank you.
[The prepared statement of Ms. Jaber follows:]
Prepared Statement of Lila A. Jaber, Chairman, Florida Public Service
Commission
I. Introduction
Thank you, Chairman Hollings, Members of the Committee, for the
opportunity to testify before you on the important topic of Universal
Service in telecommunications. I am here today on behalf of the Florida
Public Service Commission (FPSC). I also have the privilege of
currently serving as a member of the Federal-State Universal Service
Joint Board and as the State Chair of the Federal-State Advanced
Services Joint Conference. While I do not represent the positions of
anyone other than the FPSC, I believe my participation in those bodies
does give me a unique perspective on the issues of Universal Service
and Advanced Telecommunications Services. I also want to commend the
FCC for reaching out to the Joint Board in a way that allows greater
state commission input.
The Florida Public Service Commission strongly supports the goal of
access to telecommunications services at affordable rates, and we
support all of the programs currently funded under the Universal
Service umbrella. We do have some concerns about various rules and
procedures in the programs that have led or may lead to gaming or
abuse. In general, we believe that making some clarifications and
adjustments to add more accountability to the programs will make the
programs more effective and efficient.
II. Highlights of FPSC Comments on Universal Service Issues
The following are highlights of comments filed by the FPSC on the
Universal Service issues:
A. Review of the Definition of Supported Service
1. The FPSC believes that the current services meet the
criteria established in the Telecommunications Act of 1996 and
recommends maintaining the current list of supported services
at this time. In addition, the FPSC believes that expanding the
definition to include advanced services or high-speed Internet
access is not warranted in part because support is conditioned
on the ability of a carrier to provide all of the supported
services. As such, any proposal to expand the definition to
include advanced services would not be technologically neutral.
2. The FCC invited comment on changing the definition of voice
grade access, including whether support for a network
transmission component of Internet access beyond the existing
definition of voice grade access is warranted at this time.
While we wholeheartedly support the idea of quality Internet
access for all Americans and understand its importance to our
nation, we do not believe that modification of the voice grade
access is in the best interest of consumers. We also have
technical concerns that if the intent of this proposal is to
improve data transfer rates in the rural areas, the mere
widening of the bandwidth specification, without concurrent
standard setting for other specifications (i.e., signal-to-
noise ratio), will not achieve the stated goals of improved
transfer rates. The cost of requiring complex equipment to
tweak the existing analog phone network could prove prohibitive
and result in a misallocation of resources; resources that
might be better deployed in a true digital system.
B. Review of Lifeline and Link-up Service for All Low-income
Consumers
1. Before proceeding with changes to the current Lifeline
program, the FCC should endeavor to understand the reasons for
low versus high participation rates in the various states. The
FPSC continues to support the original intent of the Lifeline
program, which is to increase subscribership for low-income
households that want, but cannot afford, telephone service.
2. States should make every effort to ensure that eligible
households with and without telephone service are aware of and
can easily enroll in the Lifeline/Link-up programs. Keeping the
program objective in mind, low program participation should not
be cause to manipulate eligibility criteria to increase the
number of households that could qualify.
3. The FPSC recommends that the Joint Board and the FCC
encourage states to explore various automatic enrollment
strategies to effectively target funding to consumers and
determine eligibility for Lifeline and Link-up support. We
believe that it is necessary to certify consumers' eligibility
and perform periodic verifications in order to prevent waste,
fraud, and abuse, and to ensure the integrity of the program.
We recommend increased promotion of the program through more
frequent bill inserts and requiring all ETCs to post
application information about their Lifeline service on the
Lifeline Support website.
C. Schools and Libraries Universal Service Support Mechanism
1. Development of Rules to Limit Equipment Transferability.
The FPSC believes it is necessary for the FCC to establish
rules governing when and how equipment can be transferred
without charge, before seeking to acquire new discounted
equipment. While the FPSC recognizes that there may be some
legitimate reasons to upgrade facilities because of
technological innovations, manipulation of the program consumes
resources that otherwise would have been better targeted to
other program applications.
2. Accountability. The FPSC believes that one way to deter
waste, fraud, and abuse is to make the current program more
transparent. Making available additional data about the
recipients of support would build greater confidence that the
program is fair. Currently, it is difficult to acquire data in
significant detail and format. More information relating to
what specific services have been committed to by a school or
library should be made publicly available. This information, as
well as the size of the school or library, would be of great
use to increase the integrity and accountability of the system.
3. State Funding Cap. The FPSC believes that establishing a
new, efficient direction for the E-Rate program can be achieved
by focusing on an equitable distribution of funds to each
state. We believe there is merit in establishing a state
funding cap based on poverty. Schools and libraries within a
state would only have access to an equitable distribution of
the $2.25 billion according to the poverty level of a state.
4. Application Process. FPSC supports the FCC development of a
list of specific eligible products or services that is
accessible online. Applicants could select the specific
products or services as part of their FCC Form 471 application.
This could help reduce accidental funding of ineligible
services. We believe it would be prudent to periodically review
the eligibility of services on the list to ensure that
ineligible services do not become bundled with eligible
services.
5. Internet Access When Bundled with Content. The FPSC
supports continuation of the FCC policy that schools and
libraries may receive discounts on access to the Internet, but
not for any proprietary content. Expanding support to include
proprietary content would likely increase the expense, and the
current annual funding requests already exceed the $2.25
billion cap.
D. Tenth Circuit Remand
1. The FPSC finds merit in the proposal filed by Verizon to
define ``reasonably comparable'' as rates in urban and rural
areas that are within two standard deviations of each other or
of the national mean. We agree with several commenters that
``reasonably comparable'' does not mean identical. We believe
that the data recently gathered by the General Accounting
Office could serve as a useful sample of rates.
2. On sufficiency, the FPSC agrees with the comments filed by
Verizon that a sufficient fund ``must be one that allows
reasonable comparability of rates in urban and rural areas
without causing excessive demands on the total universal
assessment and without impairing the amount of funds available
for other universal service programs.'' The FPSC supports
Verizon's proposal to define a ``sufficient'' federal high cost
fund as a fund that would provide assistance to states that
cannot maintain rates that are reasonably comparable to the
nationwide average due to high costs within those states.
3. Regarding the high-cost benchmark, the FPSC said that the
FCC should retain its existing cost-based approach in
identifying states that need support from the federal fund.
(The current benchmark is l35 percent).
4. On State Inducements, the FPSC said that the FCC should not
dictate the method that states take to address high-cost
support. The FPSC does see a benefit in adding a layer of
accountability into the program as to the individual states'
need for high cost support. The FCC could require that state
commissions provide notification of the steps their state has
taken to achieve this rate comparability. The FPSC agrees with
Verizon that states should be allowed to verify rate
comparability within the state by showing either: (1) that its
rates in urban and rural areas are within two standard
deviations of each other; or (2) that its rates in rural areas
are within two standard deviations of the nationwide average
urban rate.
5. In the alternative, the FCC should embark on a
collaborative model of ``state inducements'' that will satisfy
the Court's remand. Under this model, the FCC would undertake
an outreach with the states to develop ``inducements'' in
instances where rate comparability within a state has not been
achieved. In no way should these inducements be preemptive of a
state legislature's authority . . . The FCC could send a few
staff to meet with individual State Commissions on this matter
or establish individual conference calls to develop incentives
for states to address their high cost universal service needs.
The focus should begin with those states that are net
recipients of the Federal program funds.
III. Key Concerns of Florida Public Service Commission
A. Accountability--The funds should go where they are supposed to
go. We believe more can be done to make the programs more efficient and
reduce the need to expand the size of the fund. I don't believe that it
is necessary at this time to expand the Universal Service Fund to
include broadband Internet access services. I would not preclude that
ever happening but simply suggest that it is premature at this time.
B. Size of the fund--Some states are net contributor states and
others are net recipients. Florida is a net contributor state and is
concerned that the size of the fund is not any larger than it needs to
be to serve its purpose. It is important to provide some basic facts
about Florida and the Universal Service Fund. In 2000 (the most recent
data available to us), the size of the fund was $4.7 billion. In that
year, Floridians contributed $338 million or approximately 7.24 percent
of the entire fund. By comparison, Florida received $121 million or
only 2.59 percent in benefits from the fund, making Florida a net
contributor state by a significant margin. Based on recent projected
data for 2002 from USAC, we believe that the fund will increase by an
additional billion dollars for 2002 from that seen in 2000.
C. Lifeline--This year, the FPSC, the AARP, and a representative
from the FCC joined forces in April to kick off an education campaign
for the Lifeline and Linkup programs in Florida in an effort to
increase awareness and boost enrollment. I believe this is the kind of
initiative that is vital to getting low income consumers on the
network.
IV. Additional Information
We would be glad to provide the Florida Commission's comments on
the above topics that we filed with the FCC. Contact Cindy Miller, head
of our Office of Federal and Legislative Liaison, (850) 413-6082, for
the additional information.
Senator Inouye. Thank you very much, Ms. Commissioner.
May I now recognize Director Gregg?
STATEMENT OF BILLY JACK GREGG, DIRECTOR, CONSUMER ADVOCATE
DIVISION, PUBLIC SERVICE COMMISSION OF WEST VIRGINIA
Mr. Gregg. May it please the Committee, I'm Billy Jack
Gregg, director of the Consumer Advocate Division of the Public
Service Commission of West Virginia. My office is also a member
of the National Association of State Utility Consumer
Advocates, NASUCA. However, I should make clear that today I'm
testifying on my own behalf and on behalf of my office, and not
NASUCA.
I believe that universal service has been a great public-
policy success. The biggest issue facing us today is how to
sustain the universal-service fund, long-term. I want to go
over a little bit of the history of the fund, first, before
addressing the current problems facing the fund.
As Chairman Thompson indicated, before the passage of the
1996 act, the universal-service fund aggregated about $1.8
billion per year. As a result of the changes wrought by the act
and the expansion created by the FCC pursuant to that act, the
total funds from the universal-service fund have more than
tripled, to about $5.7 billion this year, prior to the action
of the FCC last Thursday to use unused schools and libraries
fund. That action will take about $240 million in each of the
last two quarters of this year, resulting in total universal-
service commitments for this year of about $5.2 billion.
Now, that sounds like a lot of money. And, indeed, it is.
However, it must be kept in perspective. Last year, the total
telecommunications revenues in the United States were more than
$220 billion. What that means is that, in return for collecting
and redistributing less than 3 percent of the total
telecommunications revenues--in this nation each year, we have
supported high-cost areas and kept rates affordable. We have
supported rates for low-income individuals. We have wired
schools and libraries. We have helped rural healthcare
providers. Moreover, all states have benefited from the
universal-service fund.
I have attached to my testimony, as Attachment 1, a listing
of the actual disbursements during 2001, as listed by the
Universal Service Administrative Company in its annual report.
This attachment breaks down the funds received by each state
under each support mechanism--the high-cost mechanism, the low-
income mechanism, the schools and libraries mechanism, and the
rural health mechanism. What is obvious is that all benefit.
The success of the universal-service fund in distributing these
benefits to all areas of our country is a accomplishment that
all involved should be very proud of.
However, there are problems, as everyone here has
recognized. As indicated by Ms. Attwood, the FCC decided to
base the funding for universal service on interstate revenues.
Initially, they had decided to base the funding for schools and
libraries and rural health on all revenues. However, that was
struck down by the Fifth Circuit Court of Appeals in 1999 based
on the wording of the act. And this is the root part of the
problem that we're facing today.
The principles of 254--listed in 254(b)--state that all
providers of telecommunications services shall contribute to
universal service. However, 254(d) limits that obligation to a
subset of all providers, only those who are providers of
interstate telecommunications services. So we have an anomaly
whereby all benefit--all states, all areas benefit--but yet not
all contribute.
And this has been the problem. Everybody loves universal
service, but nobody wants to pay for it. The reality is that,
since all benefit, all should contribute to universal service.
And that is what we are grappling with today, how to transition
our existing universal-service funding within the constraints
of the existing law.
Now, I have listed, on Attachment 2 to my testimony, graphs
and figures showing the growth of the fund and the various
components of the fund since 1997. I've also listed the funding
base, which is interstate revenues. As you can see from review
of this attachment, interstate funding grew at a fairly rapid
pace in the first few years and kept pace with the increases in
funding for the universal-service fund. However, starting in
2000 and continuing to the present, interstate revenues have
flattened out and now started to decline. The result is that,
when coupled with an increasing demand on the universal-service
fund, the assessments on carriers and ultimately on their
consumers have risen rapidly.
In the fourth quarter of 2000, the assessment level was
about 5.6 percent on all carriers, based on their interstate
revenues. By the second quarter of this year, it had risen to
7.2 percent of interstate revenues. Without the FCC's action of
last Thursday, the assessment rate would have risen to 8.77
percent on interstate revenues of all carriers. The impact on
consumers would have been even greater.
I'm sure all of you have heard complaints from consumers
concerning the fact that they are looking at assessments on
their bills from their long-distance carriers of 11, 12, 13, 15
percent, much greater than the actual assessment on those
carriers themselves.
This is the crisis, the fact that the funding base is not
stable. Prior to looking at alternatives, though, I think it's
important to keep in mind that, if you take a broader
perspective, this is a crisis created by the wording of the
law.
If you look at Attachment 3, you can see there charted
universal-service funding, the interstate funding base, and
total telecommunications revenues. If the law had been clear
that we could base assessments for universal service on total
telecommunications revenues, we wouldn't be here today. The
assessment rate on all carriers would have been less than 3
percent, and we would have been able to achieve all of the
universal-service goals set out in the act; plus, we would have
room for future growth as revenues grew. Unfortunately, that is
not the case, nor is it likely to be the case that we will get
a quick and easy change in the law to make the contribution-
base broader.
Given that, we have to look at different alternatives. One
alternative is simply to tinker with the existing system to
remove caps and safe-harbor provisions that have been provided
for wireless carriers, for paging carriers, and other carriers.
However, I think this is a short-term Band-aid that will not
address the long-term sustainability of the fund.
Another alternative that has been mentioned by several
parties here is the connection-based contribution system,
whereby all carriers would be assessed based on the number of
connections they provide to the public switched telephone
network.
However, this proposal has its own problems. 254(d)
requires that every provider of interstate telecommunications
service contribute to the fund. Going to a connection-based
system would exempt pure interstate long-distance carriers, the
very carriers who are today carrying the majority of the burden
in funding the universal-service fund.
While we look at the contribution base, we cannot ignore
the funding outflow from the fund. The fund, in fact, should be
based like a pyramid, have as broad a base as possible to be as
stable as possible at the bottom; at the top, to have a
sufficient but targeted place for these funds to go to benefit
America.
In looking at the different funds, I want to highlight one
issue that is very important that the FCC will be looking at
apparently, from what Ms. Attwood said, and that is the fact
that currently all lines are supported, all lines supplied by
an eligible telecommunications carrier.
The conception, initially, when people thought about
universal service, there would be competition for the subsidy
provided by universal service in high-cost areas since all
providers would be competing for the same per-line support.
However, in 1999, the Commission decided to support all lines.
That means if a family lives in a high-cost area, and they're
getting $9 per month of support per line, and they have two
lines--two land-line phones--they get $18--the phone company
gets $18, $9 for each of those lines. If a wireless carrier
happens to come in and get ETC status and provides three
lines--three phones--three separate numbers to that family,
they also get $9 per line for each of those numbers. This fact
has the potential to greatly explode the fund in the future and
must be looked at very carefully as more and more wireless
carriers, who are supplying additional phones in high-cost
areas, become eligible telecommunications carriers.
I want to thank you for allowing me to appear here today.
We, as members of the Joint Board, will continue doing our best
to look at both sides of the equation--the inflows of cash into
the fund, as well as the outflows--and we will continue to try
to ensure that we support access and not excess so that we can
continue this great public-policy success that is the
universal-service fund.
Thank you.
[The prepared statement of Mr. Gregg follows:]
Prepared Statement of Billy Jack Gregg, Director, Consumer Advocate
Division, Public Service Commission of West Virginia
My name is Billy Jack Gregg and I am the Director of the West
Virginia Consumer Advocate Division. My office is charged with the
responsibility of representing West Virginia utility ratepayers in
state and federal proceedings which may affect rates for electricity,
gas, telephone and water service. My office is also a member of the
National Association of State Consumer Advocates (NASUCA), an
organization of 42 state utility consumer advocate offices from 39
states and the District of Columbia, charged by their respective state
statutes with representing utility consumers before state and federal
utility commissions and before state and federal courts. I am a former
member of the Board of Directors of the Universal Service
Administrative Company (USAC) and currently serve on the Federal-State
Joint Board on Universal Service. I greatly appreciate the opportunity
to testify at this legislative hearing on the future sufficiency and
stability of the Federal Universal Service Fund (USF).
I. Introduction
First, I would like to commend Chairman Inouye, the Members of the
Subcommittee, and your staffs for conducting this review of the
operation of the universal service fund at this time. I and other
members of NASUCA truly appreciate your continuing efforts to seek out
the views of consumers and consumer representatives. We look forward to
continuing to work with you in developing telecommunications policies
and legislation that benefit all consumers and the nation as a whole.
II. Background
The most important issue facing the Federal Universal Service Fund
is its long-term sustainability, that is, ensuring that the USF is
sufficient, predictable and affordable for all parties involved: fund
recipients, telecommunications providers and consumers. Before I
address the current problems facing the USF, I believe it is
appropriate to review the achievements of the USF since the passage of
the Telecommunications Act of 1996 (the Act).
Section 254 of the Act enshrined and expanded universal service
principles which had been followed by the Federal Communications
Commission for decades. Based upon the requirements of Section 254, the
FCC, after consultation with the Federal-State Board on Universal
Service, created a new Universal Service Fund in 1997 containing
several distinct support mechanisms. As a result, total USF funding has
grown from $1.8 billion in 1997 to $5.7 billion during 2002. While
these support amounts are large, they must be kept in perspective.
Total telecommunications revenues in the United States last year were
in excess of $220 billion. By annually collecting and redistributing
less than 3 percent of these total revenues, we are able to make phone
service affordable in all high-cost areas of the nation; support low-
income customers; assist rural health care providers; and connect all
classrooms to the internet. Moreover, all states and territories
benefit from the USF as shown on Attachment 1 to my testimony. That's
quite an accomplishment, and one that everyone involved in the USF
should be proud of as we move forward to ensure the long-term
sustainability of the fund.
III. The Funding Base Crisis
As I mentioned earlier, total funding for the USF has grown from
$1.8 billion to $5.7 billion. Unfortunately, the funding base for the
USF has not kept pace with the growth in the fund, resulting in higher
and higher USF assessments on carriers and their customers. The problem
stems in large part from the wording of the Act itself. Section
254(b)(4) states that: ``All providers of telecommunications services
should make an equitable and nondiscriminatory contribution to the
preservation and advancement of universal service.'' However, Section
254(d) states: ``Every telecommunications carrier that provides
interstate telecommunications services shall contribute on an equitable
and non-discriminatory basis, to the specific, predictable, and
sufficient mechanisms established by the Commission to preserve and
advance universal service.'' In other words, even though the principle
set forth in the Act is that all telecommunications providers should
contribute to the fund, and even though the fund benefits all areas of
the country, Section 254(d) limits the obligation to support the fund
to a subset of telecommunications carriers--providers of interstate
telecommunications services.
In 1997 the FCC decided to base the funding for the high-cost and
low-income support mechanisms on each carrier's interstate and
international revenue, while the funding for schools and libraries and
rural health support mechanisms were supported by assessments on all
revenues, interstate and intrastate. The use of intrastate revenues for
USF assessment purposes was struck down by the Fifth Circuit Court of
Appeals in 1999. Since that time the contribution base for the USF has
been limited to only interstate revenues. As the USF has grown in order
to meet the Act's direction that support be sufficient and explicit,
the assessment rate has also increased.
Attachment 2 to my testimony shows the change in USF funding since
1997, along with changes in the interstate revenue contribution base
for the USF. \1\ As you can see, the introduction of the schools and
libraries fund and increases in the high-cost fund have driven the
overall size of the fund. As a result, the fund has tripled, rising
from approximately $1.8 billion in 1997 to approximately $5.8 billion
this year. \2\ So long as interstate revenues grew at a reasonable
rate, the ultimate impact of fund growth on the USF assessment rate and
customers' bills was fairly moderate. However, beginning in 2000
interstate revenue growth began to flatten out and during 2002 started
to decline. The result has been a steep escalation in the assessment
rate, from 5.67 percent in the fourth quarter of 2000 to 7.28 percent
in the second quarter of 2002. Without the FCC's actions of June 13,
2002, the assessment rate on providers would have risen to 8.77 percent
beginning July 1. The impact on customers would have been even worse.
Clearly, a universal service fund which cannot depend on its funding
base is not predictable, is not sufficient, and is clearly not
sustainable.
---------------------------------------------------------------------------
\1\ The interstate revenue base for a particular year generally
represents revenues reported from the previous year. The USF assessment
rate shown on Attachment 2 is not the actual rate used in any quarter,
but is derived by dividing annual funding by the interstate revenue
base. The interstate revenue base for years 1998--2002 comes from USAC
reports. The interstate revenue base for 1997 is estimated. Full year
data for 2002 assumes that the Fourth Quarter demand and revenue base
will be the same as in the Third Quarter.
\2\ The figures for this year do not take into account the actions
taken by the FCC on June 13, 2002, to hold down the size of the fund by
tapping unused schools and libraries funds.
---------------------------------------------------------------------------
IV. Alternatives for the Contribution Base
There are several alternatives available in order to stabilize the
USF contribution base. One alternative would be to remove the caps or
safe harbor provisions in current rules which artificially depress the
existing interstate revenue contribution base. However, I believe such
actions would amount to short term band-aids which would not address
the long term needs of the fund.
Another alternative would be to grant the FCC the authority to base
contributions to the fund on total telecommunications revenues. While
growth in the interstate revenue base has flattened out and begun to
decline, total telecommunications revenues from end-users have
continued to grow at a healthy pace. Shown on Attachment 3 to my
testimony is a comparison of changes in the universal service fund, the
interstate revenue base, and total telecommunications revenues from
1997 to 2002. \3\ As you can see, total telecommunications revenues
would provide a healthy funding base for the USF. In fact, if total
telecommunications revenues had been used as the funding base from the
start, we would not be here today. The growth in the fund could have
been accommodated while keeping the assessment rate below 3 percent.
---------------------------------------------------------------------------
\3\ Total telecommunications revenues are taken from the FCC's
Telecommunications Industry Revenues reports. To be consistent with the
interstate revenue base, reported revenues from a particular year are
shown on the graph as the funding base for the next year. For example,
the total reported revenues for 2000 of $229.1 billion are shown on the
graph as the funding base for 2001. Total revenues available for 2002
have not been reported. The funding base for 1997 is estimated.
---------------------------------------------------------------------------
Use of total revenues would also eliminate disputes about whether
revenues are intrastate or interstate, and would equitably spread the
obligation to support universal service to all providers and to all
customers based on their use of the network. However, basing federal
universal service on total revenues would require a statutory change to
clarify that the FCC has the authority to base contributions on all
revenues, intrastate as well as interstate. In addition, a total
revenues base could be susceptible to erosion in the future as more and
more traffic, including voice traffic, migrates to the internet and is
classified as ``information services'' exempt from USF assessment.
A third alternative would be base assessments on connections to the
public switched telephone network. The FCC is currently considering
such a proposal. While the proposal does enlarge the base of the USF
and open the opportunity for growth in the base in the future, it does
have several flaws: (1) it radically shifts the funding of the USF
among industry groups; (2) it appears to exempt a pure provider of
interstate long distance from making any contribution to the fund in
contravention of the plain wording of Section 254(d); and (3) it shifts
responsibility for payment of USF charges from high-use to low-use
customers. In spite of these flaws, the proposal does offer a promising
avenue to avoid future problems with classification of services or
revenues as information services, and deserves serious consideration.
IV. ISSUES RELATED TO PARTICULAR SUPPORT MECHANISMS
In looking at the long-term sustainability of the fund, we need to
focus not only on the contribution base, but also on the individual
support mechanisms which make up the overall fund. Each of these
support mechanisms presents unique issues which will have to be
resolved. Even though the focus of this hearing has been on stabilizing
the fund--which implies that we should limit funding--we must be
mindful that the Act requires the fund to be sufficient to carry out
each of the universal service principles. For some mechanisms this may
require a limitation in funding, while for others an expansion will be
needed.
A. HIGH-COST SUPPORT
The high-cost support mechanism is the oldest portion of the fund,
and is still the biggest. High-cost support has grown by over $1.2
billion in the last six years as the FCC has introduced three new parts
to the fund: high-cost model support, interstate access support, and
interstate common line support, which begins July 1. These new funds
helped adapt the USF to the introduction of competition by making
support explicit and portable. However, there is one issue common to
all parts of the high-cost fund which threatens to enlarge the fund to
an unsupportable size.
Under current rules, all lines provided by eligible
telecommunications carriers (ETCs) in high-cost areas receive support.
The support in any particular wire center is the same for all carriers,
and is based on the costs of the incumbent carrier. Rather than
competing for universal service support, all ETCs that provide service
receive support in equal per line amounts. For example, a single family
in a high-cost wire center could be provided two landlines by an
incumbent ETC and three cellular lines by a wireless ETC. Each of these
carriers would receive equal support for each of the lines provided. As
a result, the potential exists for a large increase in the high-cost
fund as more and more carriers, especially wireless carriers, attain
ETC status. If the high-cost fund is meant to provide affordable access
in all parts of the country, but not to subsidize the unlimited desires
of each individual, then this issue will have to be dealt with in some
manner.
B. LOW-INCOME SUPPORT
The FCC greatly expanded the eligibility criteria and the size of
the low-income support mechanism in 1997. Nevertheless, the
participation in the program varies widely among the states. As shown
on Attachment 1, of the $584 million paid out for low-income support in
2001, over half went to one state, California. This is not to disparage
California's low-income program, but to point out that low-income
support funds are distributed very unevenly throughout the nation.
There are also overall fund size implications from this skewed
distribution. If every state's program was as successful as
California's, the size of the low-income support fund would almost
triple to $1.5 billion. The FCC currently has a proceeding open to
review the operation of the low-income support mechanism.
C. SCHOOLS AND LIBRARIES SUPPORT
The schools and libraries fund has been capped since its inception
at $2.25 billion. Demand for schools and libraries funds have always
far exceeded the cap. As noted by the FCC in its Order of June 13,
2002, demand in the current year is almost double the funds available.
As more and more schools have become connected to the internet through
the e-rate, the demand for recurring or priority one funds has
increased. The result has been that the money available for internal
connections in the schools yet to be wired has been declining. The
FCC's resolution of the unused funds issue its June 13, 2002, Order may
help resolve this problem, but pressure on the cap is likely to
continue. The FCC is also currently considering comments on reforms to
the schools and libraries fund.
D. RURAL HEALTH CARE SUPPORT
Unlike the other support mechanism, the rural health fund has had
difficulty generating sufficient demand. The FCC originally anticipated
a $100 million per year fund. However, in spite of repeated attempts to
remake the fund, disbursements have remained low, only $7.9 million in
2001. Although the FCC is currently examining the operation of the
rural health fund, the root cause of the problems for the rural health
fund lie in the wording of Section 254. Unlike the schools and
libraries support mechanism which provides discounts from regular
prices on all telecommunications services, and pays for internal
connections, Section 254(h) limits the rural health fund to the
difference between rates available to health care providers in rural
and urban areas of a state. Since many states have rural rates which
are lower than urban rates, or have ``postage stamp'' rates for data
services, the rural support mechanism has been of limited utility in
meeting the needs of rural health providers. A statutory change should
be considered which would make the rural health section of the Act
parallel with the schools and libraries by providing services ``at
rates less than the amounts charged for similar services to other
parties.''
V. CONCLUSION
In order to be sustainable in the long-term, the USF must be
configured like a pyramid: it must have a broad and stable base of
contributions at the bottom, and a narrow but sufficient focus of
support at the top. The current universal service fund requires work on
both ends: issues related to the contribution base must be resolved,
and the limited resources of the fund must be properly targeted. In
order to continue the public policy success of the universal service
fund, we must support access, not excess.
Senator Inouye. I thank you very much, Mr. Gregg.
As one can imagine, all of us receive many letters and
calls from critics, and contributors. I think most of the calls
focus on the funding or contribution mechanism and cite that
there's a lag between prior reported revenues, which are 6
months old, and current revenues, which are assessed based on
the contribution factor.
My questions are: Is it possible to eliminate this lag, but
retain the revenue-based assessment mechanism? Are there ways
to minimize the competitive distortion that one finds between
carriers with rising revenues such as the RBOCs and carriers
with falling revenues? And how would the adoption of collect-
and-remit proposals advanced by some of the carriers affect the
administration and stability of the fund. Anyone can take this
one.
Ms. Attwood. The answer would be yes, yes, and yes.
[Laughter.]
Ms. Attwood. The questions you raise really go to the
choices that are now before the Commission in the contribution
proceeding--the contribution methodology proceeding. And as
each of the panelists has described, there are a variety of
proposals that are before us.
One proposal would be, in effect, to rely on projected
revenues, for example, which goes to your first question, is
there a way in which to minimize the lag. The Commission could
adopt--and I'm sure we'll hear testimony about that on Friday
in the Joint Board hearing--the Commission could adopt to look
at forward-looking revenues. And that would do several things.
One, in all likelihood, it would eliminate the lag which is
caused by declining revenue being assessed on the basis of 6-
month-ago revenue. It would also attempt to eliminate some of
the distortions among industry players, because those that are
in the increasing-revenue mode would, in fact, be paying more
than those that are obviously in a declining revenue mode. So
there are real advantages to looking at a projected mechanism.
There are disadvantages, however, as well. The projected-
revenue mechanism doesn't address the overall decline in
interstate revenue. That overall decline will continue as an
industry. And the question that begs that is--whether some of
these bundled services and technological migration to other
platforms, in fact, threaten the long-term stability of the
fund so that we need to look at the contributor-base generally
more broadly than just those that are based on interstate
revenues. So that's a disadvantage.
And those are the kinds of reasons why we're looking at the
industry proposal that bases it on a per-connection approach,
because the per-connection approach would, in fact, be arguably
more stable, since the number of lines, or the connections,
don't grow per quarter or fluctuate nearly the same way that
the revenues might.
So the answer is, yes, there are a variety of proposals
that could address some of the concerns that we've heard this
morning on a projected-revenue basis, but there are also--it's
not a complete answer--there are other advantages to some of
the proposals that have been raised by industry.
Mr. Gregg. I'll have to disagree a bit. One of the reasons
that's espoused by proponents of the connection-based system is
that it is still growing at a health clip, and, thus, can keep
up with any increases in the fund. I believe that, even if you
went to a connection-based system, you would still have the
problem of lags with reporting lines. Those that are gaining
lines would benefit from the lag. Those that are losing lines
would be hurt by the lag.
On the collect-and-remit system, it would be easier for
consumers to understand, in that they would be assessed exactly
what the FCC assesses on carriers. The carrier's burden would
be made somewhat easier, in that they are simply turning over
whatever they collect. But it would have to be made up by the
fact that USAC, the Universal Service Administrative Company,
would have to carry some sort of reserve balance to protect
against any shortfalls.
Happily, however, USAC at the end of last year was carrying
a cash balance of about two-and-a-quarter-billion dollars. That
was some of the money that the FCC tapped last Thursday to help
stabilize the assessment factor in the fund. So the reality is
you already have a built-in reserve fund just from the natural
lag between collections for schools and libraries and
disbursement for schools and libraries.
Senator Inouye. Any others?
Should pay-phone services be eligible for universal-service
support?
Ms. JABER. Mr. Chairman, I'll take a stab at that, and
perhaps the other panelists would like to add something. We are
currently reviewing that as a Joint Board in our review of the
definitions of universal service, and there appear to be two
schools of thought--without getting into the pending matter
that's in front of us, there appear to be two schools of
thought. To the degree that public-interest pay phones are in
demand and necessary within the states, then perhaps the states
should take the lead in crafting the appropriate funding
mechanism. With respect to the general pay-phone industry,
however, the school of thought is, perhaps that issue is
important enough and strong enough that the FCC might want to
spin out that discussion into a generic proceeding and receive
additional information from the pay-phone industry itself.
They are current--the industry is currently funded with
respect to the universal-service fund. They are receiving
funds. It's a question of additional funding. From a Florida
perspective, we have not spoken on that issue at all. I have to
tell you, just because I want to be very inclusive with respect
to getting information on the issue, I would very much be in
support of the FCC taking a very good, hard look at the pay-
phone industry and whether funding is appropriate, because they
do serve public interest.
Mr. Gregg. In 1998, when the FCC deregulated pay phones,
they found that the then-current number of pay phones, 2.2
million, represented widespread deployment of pay phones
throughout the nation, as required by the act. Currently, there
are only 1.7 million pay phones in the United States. There has
been a rather dramatic decline.
The reasons for that are fairly obvious. Cell phones have
increased in the same time period from 47.8 million up to
currently 136 million. Incredible growth. And people are
substituting cellular usage for pay-phone usage.
The issue of whether pay phones deserve special or extra
support should be looked at as a separate matter, I believe, by
the FCC. It doesn't fit nicely into any of the existing support
mechanisms that we have. In fact, any pay phone in a high-cost
area currently receives support as a line, just like any other
line. But pay phones in low-cost areas receive nothing.
It may be appropriate to establish a separate and distinct
support mechanism on top of state public-interest pay-phone
programs in order to continue to ensure the widespread
deployment of pay phones, because they continue to be necessary
for public health and safety. All of us have had the experience
of being on a dark, deserted road at night when we needed to
make a call. And, second, it still represents a lifeline for
low-income families throughout the country, in both rural and
urban areas.
Ms. Thompson. Senator Inouye, if I could add, I believe--it
is an issue that needs to be addressed. The decline of pay
phones nationwide is one that's been dramatic. I believe it's
one that should be addressed by the states. And the state of
Alaska is a good example of that.
We have supported public-interest pay phones through our
state universal-service fund. We've recognized in Alaska--we
don't have dark and deserted streets, but we have dark and
deserted air strips in most of our rural communities. And our
state commission has funded through our state fund two pay
phones in each community. The communities designate them, where
they are necessary for rural health and safety issues. So I
think it's an important issue to continue to look at, but I
think it's one because of, at least in Alaska's case, where we
have particularly unique health and safety concerns, the
state's been able to effectively address.
Senator Inouye. Thank you very much.
Senator Burns?
Senator Burns. I'm going to yield to my friend. He has a
Defense authorization and a lot of other things he's supposed
to attend, and I wanted to defer to my friend from Alaska.
Senator Stevens. I'm just going to take a brief moment. I'd
like to ask the four of you this. We developed this concept of
universal service. As a matter of fact, Senator Inouye and I
started it with the idea of integration of rates--national
integration of rates. That caused the creation of the
interstate rate pool. And from that came the universal-service
fund. All of that was intended to try and permit all Americans
to have equal access to long-distance.
Many of you have been talking about local telephone
service. We are dealing with something that's not a tax. It's a
contribution from other users to a fund to assure that their
telephone calls to some of those rural areas would get through,
on an interstate basis.
Now, as I hear you, I think you're all talking about, in
effect, taxing the users of telephone service to assure there's
equal access to telephone service on a local basis, without
regard to long distance and without regard to who's the
provider. Are we justified in giving the FCC the power to tax
users of communications services to provide such assistance,
when if we authorize them to do that, the FCC will be levying a
charge against users, which have nothing to do with interstate
commerce. And I think we're headed toward the total collapse of
the universal system fund.
Now, is it possible to get back to the point that we're
trying to unite the communications systems so that one can
communicate, without regard to where they are, to every other
place in the United States without getting caught up in a
battle over allowing the FCC to impose fees, which really are
taxes, on all users in order to meet some social objectives?
The libraries, health facilities, and schools hook-up was
one thing. I think I'm hearing now that we're supposed to pay
for the service to those schools and libraries and health
facilities, and pay for it by assessing the users of the
system, nationally. Is that where you all are going?
Mr. Gregg. Senator Stevens, in fact, out of the two-and-a-
quarter-billion dollars of the schools and libraries fund,
which is capped and has been capped from the beginning,
currently about $1.9 billion goes to pay for recurring or
priority-one services. In fact----
Senator Stevens. I know that, Mr. Gregg, but what I'm
asking you is why? Why?
Mr. Gregg. Because the act----
Senator Stevens. We didn't create that fund for that
purpose.
Mr. Gregg. Under 254(h), it says that schools and libraries
are to get services at prices less than offered to others, and
it also says that they shall pay----
Senator Stevens. That's----
Mr. Gregg.--for hooking up classrooms.
Senator Stevens.--acquisition. It's not service. And we're
going into service charges as we get into the complete digital
concept, this fund won't survive. And what'll happen is my
state will have areas the size of Texas that have no
communications at all.
We designed it for rural America. And I've just added it
up. Ten states took almost 50 percent of this fund in the last
year. None of them were rural. None of them.
Now, why should we have a fund to do the inner-core city
work that you're suggesting? Even Alaska paid for local funds
out of state funds for the local pay phones. But I'm hearing
here that this is to become a new social-services fund. And if
it is, my people are out of business, because this fund will
collapse soon.
Mr. Gregg. OK. If you look at Attachment 2 to my testimony,
you'll see that the high-cost portion of the fund is still the
largest portion of the fund--about $2.9 billion this year,
compared to $2.2 billion for schools and libraries. As I said,
the schools and libraries is capped. The high-cost fund is not
capped and will continue to grow.
Senator Stevens. High-cost fund, to you, means the problems
of people in the inner-core city.
Mr. Gregg. No, no. It means everything, rural and non-
rural.
Senator Stevens. But the bulk of the money you're talking
about went to the inner-core city. It did not go to--do you
want to add up--I could add up for you pretty quickly the money
that went to rural states for rural telephone service, rural
communications service, and it's nowhere near $2.9 billion.
Mr. Gregg. $2.9 billion is the total high-cost support that
went----
Senator Stevens. Yeah, but then--see, you're using high-
costs now, rather----
Mr. Gregg. Right. And it's----
Senator Stevens.--than connection to people.
Mr. Gregg.--it's made up of a number of different
mechanisms.
Senator Stevens. We were trying to provide a fund to assist
people who would not otherwise have service. You're trying to
provide funds so that people can be subsidized for existing
service.
Mr. Gregg. Part of the reasons why the high-cost fund has
gone up, besides supporting rural carriers, as Nan Thompson
said, a billion dollars for high-cost loop support, $400
million for local switching support, about $380 million for
long-term support. All of that goes to rural carriers. There is
also support that goes to non-rural carriers to support the
rural portions of their service territory. For example, the
Verizons and the BellSouths, while they serve the large metro
areas, they also have very large rural areas, and some of those
are so high-cost that they qualify for funds. All of that
together is the high-cost fund.
Senator Stevens. All right. Well, I've got to go, and I
don't want to take time. I would urge you to keep your eye on
ball.
Mr. Gregg. Yeah, and I would--I would just mention that
254(g), which you got added to the Telecom Act, is one of the
most important things that came out of the 1996 Telecom Act,
the ability that all people in the United States have access to
the same long-distance rates is critical.
Senator Stevens. But we started that before the act. That
was in the rate-integration resolution that the Congress passed
and the President approved. That's a long time ago.
But that goal was carried through in the 1996 act because
of the concepts of the rural coalition. And those of us who
tried to work out were sure our people would stay modern. But
we didn't dream that this little amendment talking about
schools, health facilities, and libraries would end up by
taking more than half of the fund and causing such an increase
now. I don't think it's too long until you get to the point
that the people who pay the bills are going to complain that
this service is not helping them. It's not to help them call
their son or daughter in North Dakota or Alaska or Hawaii when
they're stationed in some remote place.
Ms. Jaber. Senator, may I----
Senator Stevens. That was the theory, and we are abandoning
the theory of it, and you're going to destroy the fund. And I
want to put down a warning. We're going to fight--rural states
are going to fight to keep this fund for its original purpose,
and we're not going to have it turn into a slush fund for
inner-core city activities. And if it is, we'll all lose.
Ms. Jaber. Senator, may I agree with you and clarify? You
said, with respect to the four panelists, you heard advocacy
for increasing the fund and subsidies on the local level. I
wanted to clarify. From Florida's perspective, we have
identified the same concerns you have. And when I talk about
accountability, we are talking about stepping back and
analyzing the purpose of the fund, taking a look at where the
money is going and the purpose for which it was intended before
we increase the size of the fund, before we talk about
eligibility requirements, and before we add more programs.
So I wanted to clarify, for the record, that's what Florida
means by ``accountability.''
Senator Inouye. Thank you.
Senator Dorgan?
Senator Stevens. I'm told that this assessment could go as
high as 15 percent on each bill, at the rate we're going right
now. Fifteen percent. There's no state tax that high. It wasn't
intended to be a tax. And I don't see any way that can survive
if it goes beyond 15 percent. Matter of fact, I don't see it
surviving if it goes up to 15 percent. And my fear is, if it
doesn't survive, if Congress decides to call this off, what do
we do for our states? Hawaii has an enormous problem. We have
enormous problems in these Western states, and I just hope that
people will listen to you and go back to the original purpose
and try to see to it that all providers of communications
services pay into a fund to assure that anyone who uses the
service can reach any place in the United States. And leave it
right there.
Thank you very much.
Senator Dorgan. Mr. Chairman, I'm going to come to this
central point, but let me ask Ms. Attwood a question on the
level of contribution. The FCC determines the carriers
contribute 7.2 percent of their interstate and international
revenues in the universal-service fund. Major carriers are
charging customers roughly 11-plus percent in the universal-
service line item. Tell me about how that happens.
Ms. Attwood. The factor of 7.2 percent of interstate
revenues reflects what we believe to be the costs that we will
need to recover from each of the carriers. They--in addition to
that measure, they also have to look, in terms of their
uncollectibles, so they look and determine--they have the
obligation to pay, regardless of whether the consumer pays
them.
In addition to that, and as we've talked about this
morning, we assess on the basis of revenues 6 months earlier,
and there is a lag issue that we have taken one step to reduce.
We used to have a lag of 12 months. Now it's 6 months. But as
the base of customers declines, but the overall need to pay
continues to be evident for that carrier, it's going to have to
assess higher amounts on the existing customer in order to
cover the fact that there's been a reduction in those
consumers.
Senator Dorgan. And the carrier makes that judgment?
Ms. Attwood. Well, right now, we actually don't tell the
carrier that they must put a line item, but we permit them to--
--
Senator Dorgan. They do. They do, though.
Ms. Attwood. Yes, for the most part.
Senator Dorgan. Have you ever audited to determine that
which is being charged to the customers and being sent into the
fund?
Ms. Attwood. We have looked very closely at the arguments
raised by the carriers because of the inexplicable difference
between----
Senator Dorgan. I'm asking you about audits. Have you
ever--there's a substantial amount of money involved in this.
Any audits?
Ms. Attwood. We've--actually, we've--well, investigations
are not something that we comment on publicly. We have looked
very, very closely at the explanations given by----
Senator Dorgan. I'm asking if you have an audit program.
Ms. Attwood. We have audits at the Commission. Of course.
Senator Dorgan. You're auditing the charges that are
occurring on the consumers' bills for the company?
Ms. Attwood. Over the course--since the beginning----
Senator Dorgan. So that's not the case.
Ms. Attwood.--where there has been a difference between
what the carrier has charged and what has appeared on the line
item, we have taken an active role in reviewing the difference.
In fact, the contribution-methodology proceeding arose because
of the fact that consumers were very confused by this
difference.
Senator Dorgan. But you don't have an audit program, do
you, down there?
Ms. Attwood. We have an audit----
Senator Dorgan. I'm told you don't.
Ms. Attwood. We have----
Senator Dorgan. Oh, you do?
Ms. Attwood.--audit program, yes.
Senator Dorgan. OK. Would you send me information about it?
Ms. Attwood. Sure.
Senator Dorgan. Let me go on to this other question that--I
was not aware of that, but if you have an active audit program,
send me information----
Ms. Attwood. Sure.
Senator Dorgan.--so we can understand that.
The issue of the universal-service fund and what I think is
a future of--shrinkage of that fund, based on judgments that
the FCC is making and also assisted, in part, by a court
decision, one court decision that was never appealed--so tell
me, with respect to 254 and the language that deals with
advanced telecommunications services--as I and others helped
write that language, so we put it in deliberately and knew what
it meant--how do you see the current universal-service fund
support-mechanism supporting that which we intended with 254,
including advanced services?
Ms. Attwood. Well, the question of whether the advanced
services should be directly supported is currently before the
Joint Board, and the question of, what we call, the
definitional question, whether, in fact, it is a supported
service.
Senator Dorgan. Well, have you read----
Ms. Attwood. That's actively being worked on by the Joint
Board.
Senator Dorgan. Can I read 254 to you, though?
Ms. Attwood. Sure.
Senator Dorgan. I mean, I don't think the--in my opening
statement, I read the Section 254, in which we talked about
advanced telecommunication--including inter-exchange service
and an advanced telecommunications and information services.
So, I mean, I don't want you to deliberate too long about this.
Ms. Attwood. Well, I----
Senator Dorgan. We wrote it in a pretty explicit way.
Ms. Attwood. And I appreciate that. And I think your points
have been well taken and are really actively being reviewed by
the Commission--both the state commissions and the federal
commission.
There's also language in the Act, though--and I think this
is what confuses the issue--there's language in the act that
talks in terms of the criteria for supported services, and that
criteria include that the service, in fact, is being provided
by a substantial--or taken by a substantial number of
consumers.
And I think, in addition to that, there are concerns raised
that--in order for you to receive support, that--under the
terms of the Act, you have to be able to provide all of those
supported services. So there is a concern that's been raised by
several folks that if, in fact, there is a direct requirement
that advanced services be supported, before that support could
flow, the carrier would have to acknowledge that it was capable
of, in fact, offering that service, which would require
substantial upgrades to some carriers and would, in fact,
cutoff their----
Senator Dorgan. Who are these----
Ms. Attwood.--ability to receive money prior to being able
to make themselves available to----
Senator Dorgan. Who are these ``several folks'' that have
expressed that concern? Are you just being----
Ms. Attwood. Oh, I'm--you know, we have all--in all forms
of industry segments, and there are various industry segments
that comment. So when I talk about ``folks,'' I mean our
industry folks.
Senator Dorgan. Do you agree that when you redefine wire-
line broadband as something other than a telecommunications
service, you're involved in the shrinkage in the potential for
universal-service support in the long-term?
Ms. Attwood. I wouldn't agree with that statement the way
you stated it. I would say that the Commission is very
concerned. And, in fact, when we launched the NPRM that looked
at the question of how broadband services ought to be defined
or how they are defined under the Act, the Commission was
extremely concerned about the potential impact that that would
have on the base for contributions--or in the current
universal-service system. And that's why the Commission, in
fact, issued a further notice that sought to have and generate
comment on this. While we see migration, while we see this
definitional question being resolved, we want to ensure that
there is no effect on universal service and have developed a
huge record on that point. It's not even fully closed yet.
Senator Dorgan. Ms. Attwood, I don't understand, because I
think--I mean, I may be observing this inappropriately, but my
observation is that you are systematically taking steps to
shrink the base. And if you shrink the base, you're going to
end up with less revenue.
Ms. Attwood. Well, I give you credit, because, in the Act,
it also indicates that--that support can be based on the fact
that there is a telecommunications provider. And, as we
indicated in the further notice, when you're a
telecommunications service provider, you shall contribute.
However, if there is an information service provider that, in
fact, has a telecommunications component, the Act--and
Congress, in its wisdom--gave the Commission discretion to, in
fact, look at that contributing base. And that's the kind of
question that we asked in that further notice.
Senator Dorgan. But my concern, for a long period of time--
not just this commission, but for a long period of time----
Ms. Attwood. Uh-huh.
Senator Dorgan.--my concern is that the FCC has used
whatever discretion it has to shrink, rather than expand, the
base. And the result is, I think you have precious little
opportunity to provide universal service fund support for
advanced services. In fact, I wonder whether we will be
providing the kind of universal service support that we expect
for basic telephone services.
Now, the thing I did not quite understand with Senator
Stevens' comments--my impression of the universal service fund
has always been that there are some parts of the country in
which, if you were to create a telephone system there, based on
its own pricing, it would cost you $200 a month for basic
service. Well, nobody's going to afford that. And so we have a
universal-service fund support so that the lower-cost areas--
New York City, for example--can contribute into a universal-
service fund to drive down the cost in North Dakota, for
example, which would be very expensive. That's always been my
notion of what the universal-service fund has been about. And
then when we wrote this act, we explicitly called for reform--
--
Ms. Attwood. Uh-huh.
Senator Dorgan.--of the universal-service fund. And my
concern--I hope you'll take this back to the commissioners, and
I would be happy to do this directly when we get Chairman
Powell here--my concern is that in every opportunity where the
Commission has had discretion, they've chipped away at the
base, and, thereby, in my judgment, injured our opportunity in
the long-term to use the universal-service fund support the way
we intended it to be used--aggressively, in a robust way.
And so--at any rate, I think that's--that represents my
concern. I did not ask others of you questions. I appreciate
the testimony you've provided today.
This, I think, will become a festering, significant problem
between the Congress and the Commission, because it--at its
roots are the answers to the questions, who's going to be able
to afford the kind of communications services in the future in
this country? How will they afford them----
Ms. Attwood. Right.
Senator Dorgan.--and how will they be priced. So that this
will be a--this problem will grow, unless it's handled
delicately and appropriately by the Federal Communications
Commission.
Mr. Gregg. Senator Dorgan, I would just state, if you're
concerned about the contribution base, you should look with
interest at what the FCC does in the current inquiry on the
connection-based system, because if we're going to change from
a revenue-based to a connection-based system, this would
present the golden opportunity to cast the net very far and
wide to encompass all providers, including broadband providers.
Today, when they serve only 10 percent of the customers in this
country, even though about 80 percent have access to it, this
would be the time to bring them under the tent.
Senator Dorgan. There are many issues that relate to that,
of course. I understand your point that--my interest is in
broadening the base in a way that provides a robust fund that
allows us to do what the act intended to do.
Senator Inouye. Senator Burns?
Senator Burns. I am finding the testimony fascinating this
morning and just looking at the numbers and everything. I'm
wondering, on the board, the universal-service board, can we
get--can this Committee--do you do any projections on--if we
don't change anything--if Congress doesn't change anything, if
the FCC does not change anything--where are we in 5 years,
using current trends and projections?
Ms. Thompson. Senator Burns, we haven't done that kind of
analysis, but I'd be happy to. We would work with the Universal
Services Administrative Corporation that collects and
distributes the funds. But I think that's a very interesting
question.
Mr. Gregg. I would state that the commenters in the current
contribution-base inquiry have presented various projections of
where they think revenue growth will be and where they think
line growth will be, because those will be the drivers of
whether the fund stays affordable.
Senator Burns. Well, if we just stay where we are now and
at the present level of around 7 percent, I think we're headed
for tough times if we just did nothing or the FCC did nothing
to change those things. In light of that, and receiving that
information, I'd like to see those figures and do some
projecting on our working with those people. And you have
knowledge of that.
Does Section 254 of the Tel-co Act of 1996, which codified
our national longstanding universal-service policy--do you
think we're going to have to revisit 254 and take a look at
that? Because what I see, in the growth of these numbers--we
had no idea that the growth of schools and libraries would be
so huge and so dramatic, especially when we were being told
that most of them had already been wired and we passed a
regular tax that contributed to that. They also have access to
that. I'm very concerned about that.
Is there abuse? And where do we go from here? Or is the
majority of the growth already done? And can we see a decline
in the use of those funds?
Mr. Gregg. Senator Burns, as I indicated, the schools and
libraries fund has been capped, since its inception, at two-
and-a-quarter billion. The actual disbursements under the cap
have varied year to year, and now they're pretty much trending
at the cap.
The only other portion of the fund that is capped is the
rural high-cost loop support. There was a rebasing of the cap a
year and a half ago as a result of the rural task-force order
that the FCC issued. The cap grows each year based on a number
of factors; however, the schools-and-libraries cap does not
grow. That's why, if you look at my Attachment 2, you can see
that once the schools-and-libraries fund reached about $2
billion, it has stayed there; whereas, high-cost continues to
grow.
Senator Burns. Do we need to revisit 254?
Mr. Gregg. I think perhaps you should. One thing that I
would change would be the assessment-based language in 254(d).
I would make it broader, give more discretion to the Commission
to take whatever action necessary to keep that contribution
base broad.
The other fix that I would recommend would be for the rural
healthcare program. The way that it was originally conceived--
and this goes toward making the fund bigger--almost every other
part of the fund, we're worried about getting too big. Rural
health is just the opposite. Originally conceived, it was going
to be a $400 million fund. And that's a mistake in my
testimony. I said a hundred million. Originally, the FCC had
said it was going to be $400 million a year. In reality, it has
been closer to $10 to $15 million.
The problem is the statute. It was meant to eliminate the
disparity between rural and urban rates for rural healthcare
providers. In reality, a lot of rural rates are actually lower
than urban rates, and a lot of states have postage-stamp data
rates. In other words, it's the same wherever you are. There's
no mileage component. Therefore, the rural health provisions
have been of limited utility.
If you truly want to get rural health providers wired and
into the new digital age, you might consider adopting parallel
language to what you have for schools and libraries. But, on
the other side of that, it's going to cost money. And if you're
worried about schools and libraries and rural healthcare
stealing money away from rural telephone providers, that's a
consideration.
Ms. Jaber. Senator, may I address----
Senator Burns. Yes.
Ms. Jaber.--with respect to the schools and libraries
program and are there abuses? We have seen that there are. And
I think, actually, the FCC has seen that there are. In their
NPRM on the schools and libraries program, they talked about
the potential abuse, documented abuse with respect to equipment
transferability. And what that is, is when a school applies for
equipment and connections to a given school, it's been alleged
that that equipment stays in the school for a small amount of
time and is transferred elsewhere and the same school applies
other places. The FCC acknowledges that. Florida filed comments
with respect to at least putting a cap or a time limit with
respect to how long that equipment needs to stay at the
location for which it was requested.
The accountability theme, though, whether that takes a
change to Section 254 to give the FCC the absolute requirement
to communicate with states in identifying where those abuses
are, we talked about auditing, whether the FCC needs broad
auditing authority or requires the states to be accountable for
their own use of these programs, is something I would be an
advocate for.
It's about accountability. No one disagrees, at this table,
that the universal-service fund has benefited many, many
people. I certainly have seen firsthand the benefits of
universal service, but I'd like to see more people that need to
benefit from the fund receive the benefits. And until we see
that all of those end users have the benefits, we would
advocate for an overall cap in the program. And, again, that
may take a change to 254 to give the FCC the flexibility to cap
the overall program until those sorts of abuses are identified
and addressed.
Ms. Attwood. Can I comment, just briefly?
Senator Burns. Yes, ma'am.
Ms. Attwood. Because I think that all the themes here, we
would agree with. But I think there are two points that are
important to recognize about the schools and libraries program.
First of all, the question of accountability and waste,
fraud, and abuse. Obviously, it's of foremost concern to the
Commission to make sure that the funds go where they're
intended. There is no value in funds not, in fact, being used
to provide the service that it was intended for. So the
Commission has clearly--and this chairman--has clearly made an
effort to make sure that, in fact, we have those programs that
would increase accountability. And, as Commissioner Jaber
indicated, we flagged those in our recent schools NPRM.
But I also don't want to leave you with the impression that
this is something that, in fact, is a huge problem, other than
when you have a fund that is supporting large amounts of
support, you're going to make sure that you have accountability
and you have appropriate oversight. And so the Commission is
acting very responsibly in that regard and ferreting out those
issues where our rules need to be improved with respect to this
fund and all other support mechanisms.
The other point I guess I think is important to make is
that we talk about schools and libraries program as solely
benefiting an urban area. And I think it's really worth
mentioning and reminding ourselves that, in fact, what schools
and libraries does is, it also dramatically helps those in
rural areas, as well. What it does is--it, in fact, focuses on
communities, and those communities that need additional
assistance. And, for example, I know we were looking at the--
Senator Stevens isn't here, unfortunately, but I know we were
looking at the kind of support that schools and libraries has
provided to Alaska, clearly a rural area. And when you look at
the per-student amount of support, in fact, Alaska is No. 2 in
the receipt of funds.
So, while clearly the program supports inner city as well
as other areas, it also benefits, ultimately, the rural
consumer. And when we look at all of our universal service
policies, the focus isn't on helping rural carriers. It's on
helping rural consumers. And that help comes from a variety of
both big companies, small companies, and schools and library
support.
Senator Burns. Well, I'm well aware of the rural impacts,
because we did two or three projects of distance learning that
are still----
Ms. Attwood. Uh-huh.
Senator Burns.--operating today in the rural areas. We've
got four schools wired together that one biology teachers
teaches in four schools. Those schools are almost 150 miles
apart. And so we're well aware of that.
You wanted to make a comment, Ms. Thompson.
Ms. Thompson. I did, Senator Burns, thank you. I wanted
to--you asked about changes to Section 254----
Senator Burns. Uh-huh.
Ms. Thompson.--and I wanted to let you know that I'm
concerned that the current language of the act may not be able
to accommodate the dramatic changes in technology we've seen
since the act was passed. So in the context of this
contribution proceeding--again, we have a hearing Friday, we'll
hear more testimony--I'd like the opportunity to community with
you further on specific changes that we feel are necessary
after we've completed that process.
Accountability was another theme. And I think states have
an important role in assuring accountability for use of
universal-service moneys. That's something that the FCC
recently has, under the terms of the high-cost fund, given
states that responsibility. And I think that we have an
important role to play, in terms of the other programs, as
well.
And, finally, I'd agree with Dorothy Attwood that the focus
has been on supporting rural communities and the schools-and-
libraries use. And I'm aware of the dramatic--the great work
that's been done in the state of Montana to use that. You have
the same problem we have, with distance and population, that
can often be bridged by technology for benefit. But, again, the
focus should be on supporting the educational process in those
communities that need the support in order to be able to offer
a level comparable to what folks in urban areas receive.
Senator Burns. Well, we've had this panel up here, and we
want to thank you for your patience and the same, but if you
would supply to the Committee those projections and give us
some information that we can base some sort of a judgment,
because of a shrinking base and an increasing demand for money,
we're going to have to make some hard decisions. There's no
question about that. But I appreciate your good work, and I
appreciate your testimony here. As soon as I look at those
projections--and off of that, there'll probably be--we'll spin
off a lot more questions. But I think we ought to look at that
because I'm very concerned about the viability and the
sustainability of that. So thank you for coming today.
And I thank the Chairman.
Senator Inouye. I'd like to thank the panel in behalf of
the Committee. Obviously, we have many other questions. And if
we may, we'd like to submit them to you for your consideration
and response. Thank you very much.
And now may I call upon the second panel: the chief
financial officer of the MCI Group, Ms. Victoria D. Harker; the
president of Regulatory and External Affairs, BellSouth
Corporation of Atlanta, Georgia, Ms. Margaret H. Greene; the
president and manager of the Public Service Telephone Company
of Reynolds, Georgia, Mr. Don Bond; and the senior vice
president for policy and administration and general counsel of
the Cellular Telecommunications and Internet Association of
Washington, Mr. Michael F. Altschul.
Before we proceed, I just receive word from the office of
Senator Cleland advising me that he had to suddenly return to
Georgia, and so he wishes me to extend to Ms. Greene and Mr.
Bond his personal regrets. He would have wanted to introduce
you.
But, with that, may I call upon chief financial officer,
Ms. Harker?
STATEMENT OF VICTORIA D. HARKER, CHIEF FINANCIAL OFFICER, MCI
GROUP
Ms. Harker. Thank you and good morning, Mr. Chairman. My
name is Victoria Harker, and I'm the chief financial officer
and senior vice president of operations of the MCI Group, an
operating unit of WorldCom.
I'm pleased to address a very important issue this morning,
the continued sufficiency and stability of the universal-
service fund. This issue arises because of the dynamic changes
that have transformed the telecommunications marketplace since
the enactment of the 1996 Telecom Act. The benefits for
consumers have been enormous.
MCI, of course, has been an instrument of that change. MCI
pioneered competition in the long-distance industry. Today we
are also the largest competitive provider of local services in
the United States. In fact, MCI just recently launched ``The
Neighborhood,'' a set of national consumer products that serve
to fulfill the vision of the 1996 act. Our flagship product,
``Neighborhood Complete,'' is the first residential product
that combines unlimited local and long-distance service plus
features, such as call-waiting, caller-ID, and voicemail, all
in one package for one flat monthly fee. Consumer response has
been tremendous, with over 600,000 sales just since mid April.
We are proud of our pro-competition legacy. MCI's industry-
leading products benefit all customers. Technology convergency
and product bundling are hallmarks of our industry today. But
industry change, while good for consumers, now threatens the
sustainability of universal service.
The current funding mechanism must be reformed immediately
to assure three critical policy goals--fund sustainability,
competitive neutrality, and administrative efficiency. The
existing mechanism fails to meet many of these goals.
WorldCom participates in a coalition of carriers and users
that proposes to change the current mechanism to an assessment
on all connections to the public network. Our proposal is the
only one that achieves those three policy goals.
Because of declining interstate and international revenues,
the existing fund mechanism is not sustainable. When the FCC
created the current funding mechanism in 1997, interstate and
international telecom revenues had been growing steadily for
more than a decade. Bundling was not the norm, as it is today.
But that's all changed. The rapid growth in interstate and
international revenues in the late 1990's has been replaced by
sustained annual decline. As shown in Chart 1, quarterly
revenues have dropped nearly 12 percent from their peak of
$21.2 billion in 1999 to just $18.7 billion in the first
quarter of 2002.
Consider the substitution of other services that have
reduced traditional long-distance calling--e-mail, and instant
messaging, wireless packages that offer free long-distance
service--and soon voice over the Internet will be a major
factor. Bundled products make it difficult to clearly identify
assessable revenues by links started with wireless products,
but has since moved to local and long-distance wire-line
packages.
The problem is even more complex for the large-business
customers. As their USF charges approach 10 percent, they have
a growing incentive to bypass the system. This creates a
vicious cycle. As the assessment base declines, the USF rate
and remaining revenues continues to grow, further encouraging
customers to use services that are either unassessed, such as
voice over the Internet, or under-assessed, like wireless.
Residential customers will likely bear the brunt and face
increasing assessments unless a more rational approach is
adopted.
The existing funding mechanism fails to meet the
competitive neutrality test. It was created before local long
distance and wireless markets began to converge. With
convergence, the existing mechanism creates competitive
imbalances. For example, because their services are subject to
much lower assessments, wireless carriers are provided with an
artificial market advantage over long-distance carriers.
Also, because the current mechanism assesses carriers based
on their actual revenues 6 months earlier, it disadvantages
carriers whose revenues are declining, versus carriers with
growing revenues. Thus, the long-distance companies are forced
to increase the fees on customers' bills to fully recover their
USF obligations, while the Bells and wireless carriers enjoy a
windfall simply by charging their customers the FCC's
assessment rate on a growing base.
The coalition plan is the only one that achieves all policy
goals--fund sustainability, competitive neutrality, and
administrative efficiency. Every carrier would pay on a
collect-and-remit basis, based on the number of interstate or
international connections to the public network that it
provides to end users. Connections to the public network are
stable and growing; thus, meeting the goal of fund
sustainability.
Assessments would vary, based on customer class and
capacity, rather than on technology. Carriers offering services
that compete with one another would be assessed at the same
rate. Thus, this plan is competitive neutral.
Initial rates would be set as follows. One dollar for
residential lines, wireless, and single-line businesses.
Approximately $2.75 for switched multiline business connection.
Private-line assessments will be based on capacity.
Last, this plan is the most efficient. The provider of a
customer connection already bills monthly for that connection.
Generally, a long-distance or dial-up Internet service
connection occurs by the local telephone wire. It's efficient
for the assessment to be imposed on the provider of that
connection. In most cases today, that would be the ILEC. Over
time, though, a growing portion of those connections will be
provided by competitive carriers.
As noted earlier, WorldCom is the largest competitive
provider of local services. Because it is efficient, its
overall impact on consumers would be positive. Lifeline
customers would pay nothing. Residential customers across all
income groups and demographics would pay less, on average, in
USF fees than under the current mechanism or under a proposal
advocated by FCC and BellSouth.
In conclusion, irreversible marketplace changes render the
current universal-service funding mechanism insufficient and
unstable. Prompt action by the FCC is needed to adopt an
approach that makes an assessment on all connections to the
public network. This is only approach that will achieve fund
sustainability, competitive neutrality, and administrative
efficiency.
Thank you.
[The prepared statement of Ms. Harker follows:]
Prepared Statement of Victoria D. Harker, Chief Financial Officer,
MCI Group
Good morning, Mr. Chairman and Members of the Subcommittee. My name
is Victoria Harker. I am the Chief Financial Officer of the MCI Group,
an operating unit of WorldCom. I am honored to have this opportunity to
testify before the Subcommittee on a very important issue: ensuring the
continued sufficiency and stability of the universal service fund
(USF).
This issue would probably not command your attention but for the
dynamic changes that have transformed the telecommunications
marketplace in the last few years. The benefits for consumers have been
enormous. Spurred in large measure by the historic Telecommunications
Act of 1996, tremendous changes and opportunities have been experienced
since its enactment. Technological convergence and product bundling are
now two of the hallmarks of our industry.
MCI, of course, has been an instrument of change. More than 30
years ago, MCI pioneered competition in the long distance industry. Now
a part of WorldCom, MCI is no longer just a long distance company.
Among other things, we are now the largest competitive provider of
local services in the United States.
In fact, MCI recently launched The Neighborhood, a new set of
national consumer products that serve to fulfill the vision of the 1996
Act. Our flagship product, Neighborhood Complete, is the first
residential product that combines unlimited local and long distance
voice service plus features such as call waiting, caller ID and voice
mail--all in one package for one flat monthly fee ($49.99 or $59.99
monthly, depending upon the customer's location). Consumer response has
been tremendous. We didn't stop there. Last week, we also launched a
similar program for small businesses--Business Complete.
We are proud of our pro-competition legacy. When MCI brings
industry-leading products to market, all customers benefit. In this
context, change is clearly good. But industry change, while good for
consumers, now threatens the sustainability of universal service.
Universal service has been an essential feature of U.S
telecommunications policy for almost a century and has benefited all
Americans by extending the public switched network to rural communities
and to low-income households and by supporting schools, libraries, and
rural health care facilities. Adequate universal service support for
these important programs and activities must be maintained. Given the
rapid changes in the marketplace, however, the current funding
mechanism must be reformed immediately to assure three critical policy
goals: the fund's continued sustainability, competitive neutrality and
administrative efficiency. The existing funding mechanism fails to meet
any of those three goals.
In constructing the 1996 Act, Congress recognized that a major
source of universal service support--revenues generated by above-cost
access charges--could not be sustained if its overarching goal of
competitive telecommunications markets were to be achieved. Congress
therefore required the Federal Communications Commission (FCC) to
reform both access charges and the universal service funding mechanism.
It directed the FCC to replace the implicit subsidies with specific,
predictable, and sufficient universal service funding mechanisms that
telecommunications providers contributed to on an equitable and
nondiscriminatory basis.
When the FCC first acted in 1997, interstate and international
telecommunications revenues had been growing steadily for more than a
decade. Except for the case of wireless offerings, interstate and
international services were not being bundled with intrastate or
information services and thus represented a stable and growing
assessment base that was relatively easy to identify and measure.
This made possible a system for assessing and collecting universal
service funds from carriers based on historical revenues. Carriers are
required to report their interstate and international revenues on a
periodic basis. The FCC estimates the total amount needed for the fund
for a forthcoming period and, dividing that need by the total
assessable industry revenues reported, calculates a ``contribution
factor'' (currently 7.28 percent) that is applied to each carrier's
reported revenues to determine the dollar amount owed by each carrier.
Carriers recover their universal service costs from customers.
Problems arose, however, as market conditions changed. As I shall
discuss in greater detail below, the sustainability of this revenue-
based mechanism has been threatened as competition from products not
subject to the assessment has substantially and irreversibly reduced
total interstate and international telecommunications revenues.
Moreover, the revenue-based assessment mechanism proved not to be
competitively neutral as markets converged and now-competing services
are subject to different levels of universal service assessment.
WorldCom participates in a coalition of telecommunications carriers
and users that is proposing that the FCC change the current mechanism
to an assessment on all connections to the public network. For reasons
I'll explain, our coalition proposal is the only one that achieves the
three policy goals of sustainability, competitive neutrality, and
administrative efficiency. It has an additional advantage--it can be
implemented immediately.
The Existing Funding Mechanism Is Not Sustainable
Changes in the marketplace are driving the need for reform of the
USF funding mechanism. While these changes, by and large, have been
very beneficial to consumers and business users, they pose a
significant threat to the future sufficiency and stability of the
universal service program. Time is of the essence. In the context of
universal service policy, he who rejects timely and meaningful change
is an architect of destruction.
The universal service funding mechanism that worked well just five
years ago now faces a death spiral. The rapid growth in interstate and
international telecommunications revenues in the late 1990s has been
replaced by sustained annual decline (see Chart 1). Quarterly revenues
have dropped nearly 12 percent from their peak of $21.2 billion in 1999
to just $18.7 billion in the first quarter of 2002. E-mail and instant
messaging have replaced many long distance calls. Internet searches are
used as a substitute for 800 calls. Of course, wireless service
packages with ``free'' long distance have contributed enormously to
this fundamental market change. Although not yet a major factor, voice
over the Internet will soon have a significant impact on interstate and
international revenues.
At the same time, it is becoming much more difficult to identify
assessable revenues as customers demand that providers offer bundles of
interstate and international telecommunications services, intrastate
telecommunications services, information services, and even customer
premises equipment priced in a fashion that does not explicitly measure
the interstate and international telecom revenues generated. There is
no simple way to measure assessable revenues for bundled products.
Bundling started with wireless products but has since moved to local
and long distance bundles offered by the Bell monopolies and
competitive companies. The problem is even more complex for large
business customers who negotiate contracts for the purchase of services
and equipment that can exceed $100 million a year. As USF charges
assessed to businesses approach 10 percent, these enterprise customers
have a growing incentive to ``bypass'' the system to minimize the
portion of revenues subject to the assessment, including a migration
toward Internet solutions that could significantly reduce their
universal service burden.
This creates a vicious cycle. As the current assessment base
declines, the assessment rate on remaining interstate and international
telecommunications revenues continues to grow, further encouraging
customers to shift their purchasing decisions toward services that
either are unassessed (e.g., voice over the Internet) or under-assessed
(e.g., wireless). Residential customers have fewer opportunities for
avoidance and will likely bear the brunt of this cycle.
Most residential customers are already being assessed at least 9.9
percent of their interstate bill and will likely face even higher
assessments unless a more rational approach is adopted. Prompt reform
of the existing funding mechanism is an urgent necessity.
Although interstate telecom revenues are declining, customers still
must connect to the public network. Fortunately, connections to the
public network are stable and growing. For that reason, WorldCom and
its partners in the Coalition for Sustainable Universal Service (CoSUS)
have submitted a detailed funding mechanism proposal to the FCC that
would assess the provider of every customer connection to the public
network.
Existing Funding Mechanism Fails Competitive Neutrality Test
The current funding mechanism was created before local, long
distance, and wireless markets began to converge, and thus it had
little competitive impact on the marketplace. Today, however, several
imperfections in the mechanism have a glaring impact on the
marketplace. When the Commission could not identify the proportion of
wireless service that was interstate a few years ago, it created a
temporary 15 percent ``safe harbor'' for wireless carriers based on the
proportion of local exchange carrier (LEC) traffic that was interstate
in nature. Wireless carriers therefore bear a federal USF assessment
on, at most, 15 percent of their revenues. As we all know, however, the
major wireless carriers concentrate their marketing efforts today on
regional and national calling plans that provide large buckets of all-
distance minutes for a fixed monthly rate. Many customers increasingly
use these plans for long distance calling. These service offerings
compete directly with both the long distance and all-distance offerings
of wireline carriers. Because their services are subject to much lower
universal service assessments, wireless carriers are provided with an
artificial market advantage.
Similarly, international carriers with no or minimal interstate
revenues enjoy an advantage over carriers that offer domestic as well
as international services because they are exempt from the universal
service assessment. For example, a carrier with mostly international
revenues (such as Loral Space Communications or Lockheed Martin) that
does not have to contribute to universal service would be able to
provide a customer with a service offering free of any universal
service surcharges, while WorldCom would have to charge that same
customer a universal service recovery fee. This obviously provides some
of our international competitors with a significant yet artificial
advantage.
Also, because the current mechanism assesses carriers based on
their actual revenues six months earlier, it disadvantages traditional
long distance carriers vis-a-vis wireless and local carriers,
particularly those Bell companies that are now entering the long
distance market for the first time. Traditional long distance companies
are experiencing sharp declines in interstate revenues. Wireless
carriers and Bell companies gaining entry into the long distance
market, on the other hand, are experiencing substantial increases in
interstate revenues. Long distance companies are forced to increase the
federal universal service fee on customers' bills to recover fully
their USF obligations, while the Bells and wireless carriers enjoy a
windfall simply by charging their customers the FCC's assessment rate
on a growing base.
While it is important to remove these anticompetitive distortions
in the market, simply correcting these competitive imbalances would not
achieve the other two policy goals--sustainability and administrative
efficiency.
The CoSUS Plan Is the Only One That Achieves All Policy Goals
Under the CoSUS proposal, every telecommunications carrier and
private carrier would pay universal service contributions based on the
number of interstate or international connections to the public network
that it provides to end users. The assessment would vary based on
customer class and capacity, rather than on the technology used to
provide service, so that carriers offering services that compete with
one another would be assessed at the same rate. Initial rates would be
set as follows:
$1.00 per residential line, single-line business, and non-
paging wireless connection. Lifeline connections are exempt.
$0.25 per paging connection.
Approximately $2.75 per switched multiline business
connection, determined as follows: during a one-year transition
period for carriers to develop tracking, reporting, and billing
systems for high capacity connections, the contribution for
private line and special access connections would remain the
revenue-based contribution percentage in effect for the last
quarter under the current mechanism. Switched lines would then
be assessed on a per connection basis to cover the residual
between the fund size and the other USF funds generated.
Centrex lines would be assessed one-ninth the basic switched
access line rate.
Switched connection providers (LECs and wireless carriers) already
have a line item for universal service recovery, so billing systems
changes are not needed other than to change the amount of the USF fee.
After the one year transition period, per connection multiline business
connection assessment rates would be established based on the total
contribution that would have been collected from the combination of
switched multiline business and private line/special access connections
had the transition continued. That total contribution would be
collected through simple capacity-based charges, relying on the long-
standing industry categories of DS0, DS1, and DS3 to assign greater
weight to higher-capacity connections. Going forward, depending on the
growth of the fund size relative to the growth in the number of
(weighted) connections, all assessment rates would increase or decrease
in uniform proportion.
Under the CoSUS proposal, the impact on consumers will be positive.
Lifeline customers would pay no universal service fees. Residential
customers across all income groups would pay less, on average, in
universal service fees under the CoSUS proposal than under either the
current revenue-based mechanism or the proposal advocated by SBC and
BellSouth (see Chart 2). In addition, a single per-connection charge
will be much more understandable and more uniform for similar services,
simplifying the customer task of comparing alternative offerings.
Carriers would pay contributions on a collect and remit basis that
is analogous to the efficient process used to collect the federal
excise tax. The CoSUS proposal can be implemented without the FCC first
determining how it intends to define and regulate broadband providers;
it can accommodate any FCC decision on that issue in other pending
proceedings.
The CoSUS Proposal Would Achieve the Greatest Administrative Efficiency
It is essential that the assessment mechanism be as
administratively efficient as possible because the cost of universal
service funding is ultimately borne by telecommunications users. As
explained earlier, it is no longer possible to identify readily which
revenues are generated by interstate telecommunications services. By
collecting assessments for any customer connection from the single
provider of the connection to the public network, rather than from
multiple intermediate service providers (long distance companies and
ISPs), transaction costs are minimized.
A long distance company or Internet dial-up service provider will
not know the particulars of the connection its customer uses to receive
that service. In these cases, the customer's connection occurs via
their local telephone wire. If MCI, for example, were assessed based on
those connections (as proposed by SBC and BellSouth), my company would
have to depend on data that only our customer's local exchange carrier
possesses.
The industry and many customers learned from painful experience
that it is cumbersome and expensive to create mechanisms to transmit
that information from connection providers to intermediate carriers in
a usable and auditable form. When implementing access charge reform,
the FCC required the large ILECs to assess a per-line charge, called
PICC, on long distance carriers. That charge varied according to
connection characteristics--such as whether a residential line was a
primary line or whether a business line was a Centrex line--for which
only the ILECs had the relevant information. The IXCs could neither
audit the charges they received from the ILECs nor determine the right
amount to recover from their end-user customers. These large ILECs
ultimately developed electronic systems to provide and update the
connection information (for which they charged the IXCs), but they had
no incentive to accurately maintain the data and thus the IXCs had to
develop complex systems to compensate for errors in the data and to
this day are forced routinely to issue credits to customers to offset
charges billed as a result of inaccurate identification of customer
line types.
As difficult as the PICC experience has been, the SBC-BellSouth
proposal would be worse. Only the 13 or so very largest ILECs charged
PICCs and therefore only they had to construct the electronic systems
needed to provide the relevant line information to IXCs. Under the SBC-
BellSouth proposal, all 1,300+ ILECs--most of which are very small--
would have to construct the electronic systems. Moreover, the data they
would have to provide--customer specific information on the capacity of
connections, the number of Centrex connections, etc.,--is increasingly
market-sensitive as recipient companies, like mine, become actual or
potential competitors to the ILECs. ILECs, then, would have even
stronger incentives not to provide the data that the IXCs would need in
order to know how much to pay into the fund and how much to collect
from individual customers.
These administrative costs could be as great as the assessments
themselves and would have to be passed on to the customer. Moreover,
many long distance customers have zero usage during a particular month
and therefore do not generate a bill. If the long distance companies
were assessed for each customer to which they provided service, they
would have to send out bills to millions of zero-usage customers each
month just to recover the universal service assessment.
By contrast, the provider of a customer connection to the public
network will know the characteristics of the provided connection and
already bills monthly for that connection. Therefore, it is
administratively efficient for the universal service assessment to be
imposed on the provider of that connection. In most cases today, that
would be the incumbent local exchange carrier (ILEC). In many cases,
though, the obligation would be imposed on a competitive carrier. For
example, it is efficient to impose a USF assessment on WorldCom for
each interstate private line connection we provide to our customers
(even if the ILEC is providing the underlying access circuit to us)
because we have all the relevant billing and line characteristic
information. Similarly, it is efficient to impose a USF assessment on
all the switched connections we provide to our residential and business
customers, whether we use our own facilities, unbundled loops, UNE-
platform, or resale. As noted earlier, WorldCom (including its MCI
operating unit) is the largest competitive provider of local services.
The CoSUS proposal also would improve the efficiency of the
universal service assessment process by implementing ``collect and
remit,'' by which carriers would only have to remit those universal
service charges they actually collect. Rather than requiring carriers
to perform ``true-ups'' lagged over the period of time necessary to
determine which of their universal service revenues are uncollectible,
carriers would simply report their connections and (subject to audit)
their historical uncollectible rate for those connections, and pay into
the fund accordingly. This not only eliminates the need for carriers to
recover their uncollectible universal service charges from paying
customers, but also eliminates the lag between setting and recovering
the carrier's assessments.
Legislative and Regulatory Threats to USF Sustainability
While my testimony explains why the current system of USF funding
is not sustainable, I also must add that certain proposed changes at
the FCC and in Congress would also jeopardize the universal service
system.
The FCC has proposed to eliminate the Computer II unbundling
requirement for ILEC broadband Internet access services. Under current
rules, the elimination of the Computer II unbundling obligation for
broadband Internet access services could also exempt the ILECs from the
universal service contribution obligation associated with those
services. Not only would there be an immediate reduction in the
contribution base, but the impact on the contribution base would only
grow as the ILECs acted on their incentive to expand the scope of
services offered through the contribution-exempt Internet platform.
Also, legislation pending before the Commerce Committee would have
negative consequences for universal service. S. 2430, the Breaux-
Nickles bill, is objectionable for many reasons, particularly the
devastating impact it would have on telecommunications competition. My
testimony today, however, addresses only its impact on universal
service. The proposed legislation states that all providers of
broadband services must be subject to the ``same regulatory
requirements, or no regulatory requirements'' and that this policy must
be implemented ``without increasing regulatory requirements applicable
to any provider of broadband service.'' Since non-LEC broadband
providers do not currently contribute to universal service, the bill
would seem to require the FCC to relieve the Bells of the current and
future contribution requirements on their broadband services.
Under the current revenue-based mechanism, as the Bells shift more
and more traffic to high speed data service, Internet access and IP
telephony, the potential base for contributions to the universal
service fund would decrease. This would further destabilize the USF and
raise even greater concerns about the sustainability of its current
programs, such as the high cost fund designed to keep rural subscribers
on the network. In addition, under Breaux-Nickles, the contribution
burden would fall increasingly upon those consumers with the most basic
of telecommunications services.
Conclusion
WorldCom shares this Subcommittee's strong commitment to universal
service. Irreversible marketplace changes render the current funding
mechanism insufficient and unstable. Prompt action by the FCC is needed
to avert disaster. Now is the time for the FCC to adopt an approach
that makes an assessment on all connections to the public network. This
is the only approach that will achieve three critical policy goals:
fund sustainability, competitive neutrality and administrative
efficiency.
Senator Inouye. Thank you very much.
Ms. Greene?
STATEMENT OF MARGARET H. GREENE, PRESIDENT,
REGULATORY AND EXTERNAL AFFAIRS, BELLSOUTH
CORPORATION
Ms. Greene. Thank you, Mr. Chairman, Senator. I'm Margaret
Greene, president for----
Senator Inouye. Pull the microphone closer.
Ms. Greene. OK. I'm Margaret Greene, president for
Regulatory and External Affairs for BellSouth, and thank you
for inviting me here today.
Today, in this country, we have achieved universal
telecommunications service. That has taken decades to
accomplish, plus a great deal of industry investment. We've
accomplished this universal service, moreover, by guaranteeing
universal industry participation. Existing FCC rules in the
1996 Telecom Act require all carriers to participate fully in
the FCC's universal-service program, and that approach has
worked.
But today we face several critical choices. First, there's
the overall state of our telecommunications economy. Market
conditions are leading company after company to temper their
investment plans. Concerns regarding the overall fairness of
the regulatory system may also be having a negative affect.
Where regulatory burdens are unbalanced, unnecessary, or
excessive investment will, and, indeed, has been, deterred. We
need to address this challenge.
Second, however, we face very real questions about the
sustainability of the current universal-service system over
time. At present, the Federal universal-service support level
is about $6 billion a year. Some $2.65 billion of that goes to
support schools and libraries and rural medical Internet
connections. That support obligation, in turn, is assessed
against the interstate revenues associated with traditional
wire-line services.
But, as I describe in my full statement, today's bundling
of local and long-distance services, of wire-line and wireless
services, of information and video services is making it
increasingly difficult to identify and separate interstate
revenues. For example, the FCC believes that some 20 million
cell-phone customers today buy a bucket of local and long-
distance minutes for which they pay a flat monthly rate.
Wireless traffic is displacing wire-line traffic and, as a
result, eroding the traditional revenue base for universal-
service support. And most experts, including the FCC, believe
this situation will deteriorate over time.
Several approaches have been advanced. The Universal
Service Coalition, as discussed by my--the person who
immediately preceded me, for instance--has proposed that there
would be a flat monthly charge per connection--$1 per cell
phone and wire-line connection, and so forth. This option seems
simple and appealing. But the practical effect, if not the
purpose, of this plan would be to exempt long-distance carriers
and their customers from paying universal-service support.
Then there's the approach which Sprint PCS has urged. This
would basically freeze universal-service contributions by
wireless carriers, despite an increase in their provision of
interstate communications. The practical effect of this
approach would be to confer a competitive advantage on wireless
carriers for the foreseeable future. They would not have to
bear the burden of universal service placed on wire-line
companies, and would no doubt acquire a large share of
interstate revenues based on that free pass.
Mr. Chairman, the 1996 act requires a universal-service
approach that is competitively neutral. The act does not
envision conferring a special advantage on one group of
carriers or on one technology. We should not depart from our
tradition of ensuring universal carrier participation in these
support programs. That would be unfair. It would also deter the
future investment in new network capabilities that American
consumers expect and deserve.
BellSouth and SBC have developed a connections-based
contribution mechanism that would meet the statute's
requirements. We think our approach guarantees the support the
program needs. It avoids the creation of new loopholes. It is a
broad-based approach designed to create a strong fabric for
sustainable universal service.
In conclusion, we share your commitment. We want to
continue to work with you to ensure that every American has
access to telecommunications services at reasonably comparable
rates. In BellSouth's view, it is not an overstatement to
suggest that the nation's economic well being and its security
depend on it.
Thank you again for the opportunity to appear before you
today.
[The prepared statement of Ms. Greene follows:]
Prepared Statement of Margaret H. Greene, President, Regulatory and
External Affairs, BellSouth Corporation
Mr. Chairman, my name is Margaret Greene; I am President for
Regulatory and External Affairs at BellSouth. Thank you for the
invitation to participate in today's hearing.
BellSouth Corporation is a leading communications services company
headquartered in Atlanta, Ga., with $51 billion in assets and 85,000
employees serving nearly 45-million customers in the United States and
14 other countries.
BellSouth is also one of the fastest growing ISPs in the Southeast
with over 1 .3 million customers including 729,000 households and small
businesses that subscribe to our high-speed DSL Internet access
service.
Through a joint venture with SBC Communications, we also operate
Cingular Wireless, the nation's the second largest wireless carrier
with more than 22 million voice and data customers across the United
States.
I mention the breath of BellSouth's involvement in the
communications marketplace because it places the company in a unique
position to comment on how universal service funds should be collected
and from whom.
The Principal of and Need for Universal Service
Today, Mr. Chairman, virtually every American has access to
telecommunications--regardless of where they live or are visiting. This
is the product of more than 50 years of Federal and state policy, and
literally hundreds of billions of dollars in capital investment.
Universal service also is a product of universal industry
participation.
The provision of universal services extends beyond the $6 billion
annual universal service support mechanism that is administered under
the auspices of the FCC pursuant to Sec. 254 (d) of the
Telecommunications Act of 1996, which many Members of this Subcommittee
helped craft.
Simply put, universal service is about investment in
telecommunications networks that serve all Americans. Never before has
the importance of America's communications networks been more clear. As
the drama and tragedy of September 11th unfolded, Americans reached for
their phones. Never before has the capacity and reliability of our
nation's telecommunications network been put to such a test--or played
a more important role in preserving national security.
It is for this reason, Mr. Chairman, that the Subcommittee should
be very concerned about the state investment in the nation's
telecommunications network. According to published reports, capital
expenditures by telecommunications providers are at disturbingly low
levels and falling. Industry analysts estimate that telecommunications
capital investments will be sharply reduced this year from last year's
already depressed levels. R&D spending by U.S. communications equipment
companies has slowed dramatically along with equipment sales and in
some cases is moving off shore. And, nearly every telecommunications
company has seen its market value drop in the last year.
The confluences of market, regulatory and universal service
conditions are leading company after company to temper their investment
plans. The ability to deliver modem, affordable universal services
depends not only on a workable universal service support system, but a
healthy business and regulatory environment.
In general, if the regulatory environment is fair, the private
sector will invest in telecommunications networks. Where the rules and
regulatory burdens are unbalanced, unnecessary or excessive, investment
will and, indeed, is being deterred.
The most powerful universal service tool is a fair set of rules.
Companies should compete for customers, not regulatory classification.
Success in the marketplace should be based on a carrier's ability to
respond to customer needs at reasonable rates not regulatory preference
and those rules should treat providers of like services alike.
Unfortunately, that is not the current state of telecommunications
regulations today.
While the focus of this hearing is the universal service support
system, it is critically important for the Subcommittee to consider the
larger question of whether the conditions are right for companies to
make the investment that will be needed to keep the capabilities of the
nation's telecommunications networks in sync with user needs for
traditional voice services as well as new data applications like high
speed Internet access. Too often, in BellSouth's view, regulators look
at universal service policy as a discreet and separate discipline,
rather than a fundamental guiding principal for all policy.
We believe that a competition policy and a universal service
policy, which is based on a principal of treating all providers fairly
and equitably, best facilitates the delivery of universal services.
The Universal Service Support System
The universal service support system is an important driver of
investment. There are areas of high cost and low density where market
forces alone will not lead companies to invest. There are also families
who cannot afford market prices for essential telecommunications
services. That is where the universal service support system comes in.
Congress also determined that schools, libraries and rural health care
providers should improve their access to modem telecommunications and
information services through the universal service support system. This
alone entails some $2.65 billion in support each year.
In section 254 of the Telecommunications Act, Congress did not
prescribe a particular system of support, but outlined a set of
essential principals that must be followed. Specifically, Congress
stipulated 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. \1\
\1\ 47 U.S.C. Sec. 254(d).
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Since the passage of the Telecom Act, Federal and State regulators
have spent a great deal of time dealing with competitive issues,
sometimes without fully considering the effects of those policies on
the delivery of universal services. There also has been significant
attention on the uses of universal service funds. Only recently,
however, has much focus been placed on how universal service funds will
or should be collected in an increasingly competitive market
environment.
These questions are now being raised because changes in the
telecommunications marketplace have raised concerns that the current
the universal service support system no longer collects requisite funds
in an ``equitable and non-discriminatory basis,'' as is expressly
required by Sec. 254 (d) of the Telecom Act. These concerns
unfortunately, are symptomatic of a larger problem of technology and
customer choice outpacing regulatory classifications. The convergence
of technologies and services and the changing market have placed the
current support mechanism under considerable stress. That convergence
also raises doubt about the consistency of the current system with the
requirements of the law.
Just as the regulatory environment must keep pace with the dynamic
nature of the telecommunications market, so must universal service
policies.
In the past, BellSouth has recommended that the Congress consider
using the current federal excise tax to fund the nation's universal
service support system. While we understand the political and budgetary
challenges of such a reform, the mathematical coincidence of the
projected cost of the universal service support system and the revenues
generated by the excise tax is compelling. Each is about $6 billion a
year. Using excise tax revenues to pay the cost of universal service
also is good public finance in that it would correlate those who pay
for universal service with those who benefit by it. Analogs include the
Federal excise tax on gasoline which is used to help underwrite the
cost of maintaining the nation's highways, and the Federal excise tax
of airline tickets which is used to help keep airports in good working
order.
Short of major legislative action, however, any regulatory reform
of the universal service system, as well as a continuation of the
current system, must fully comply with the requirements of the
Telecommunications Act of 1996 as written.
Universal Service Contributions
The FCC has sought comment on the assessment and recovery of
universal service contributions. The current system is based on an
assessment or surcharge on revenues attributable to interstate and
international services.
The Commission identified trends that raise questions about the
viability of the current revenue-based contribution mechanism. The
Commission noted, for example, that interstate revenues have recently
declined for interexchange carriers and that the contribution base
could continue to erode over time. That, in turn, could necessitate
increasing the universal service contribution factor just to maintain
existing levels of support. \2\ Most carriers pass those costs along to
customers in the form of line items on monthly bills.
---------------------------------------------------------------------------
\2\ See Further Notice para.para. 7-8.
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The FCC also raised concerns about the current contribution
mechanism's reliance on historical revenues and the ability to adjust
quickly to relative changes in carriers' revenues. Because a carrier's
contribution is based on revenues earned six months prior to the
calculation of the factor, the FCC noted the possibility that carriers
with increasing revenues obtain a benefit, albeit for a short duration,
to the detriment of carriers with decreasing revenues. \3\
---------------------------------------------------------------------------
\3\ Id., para. 10.
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The FCC identified another market change that is having a profound
effect on universal service support. That change is the growth of
wireless communications. The Commission observed that carriers are
bundling services together in flat-rate packages that include both
local and long distance services. According to the FCC's Further
Notice, nearly 20 million mobile wireless customers subscribe to these
types of (flat rate) calling plans. \4\
---------------------------------------------------------------------------
\4\ Id., para. 12.
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The bundling of long distance and local services, wireline and
wireless services, offerings of information services and
telecommunications and the one-stop offers of voice video and data
service make it increasingly difficult to identify and segregate
interstate revenues.
The FCC opened a much-needed debate on the current assessment
mechanism. The Further Notice sought comments on ways to ensure the
stability and the sufficiency of the universal service fund as the
marketplace continues to evolve, to reduce regulatory costs, to
continue to have an assessment mechanism that is equitable and
nondiscriminatory and to provide contributors with certainty. \5\
---------------------------------------------------------------------------
\5\ Id., para. 15.
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BellSouth shares the FCC's concerns. The marketplace is witnessing
a substitution of bundled local and long distance packages for discrete
local and interstate long distance offerings. With these market
changes, interstate revenues are becoming masked. The decline in
discretely identifiable interstate revenues, however, does not
necessarily mean that the interstate revenue base is unstable. Instead,
interstate revenues are mixed into packaged revenues and require a more
sophisticated approach to identification and attribution.
While the identification and segregation of interstate revenues
that are in packaged arrangements of both wireline and wireless
carriers presents an increased challenge, such a challenge does not
make a revenue-based contribution mechanism unworkable. The FCC has the
authority to obtain the information and data that is necessary to
adjust the revenue mechanism to insure that the universal service
assessment mechanism captures the interstate revenues that have
migrated away from traditional forms of interstate interexchange
services toward the bundled offerings. However, the Commission would
have to close the current contribution loopholes that allow for
interstate communications to shift to internet-based offerings provided
by Internet service providers (``ISPs'') and, thus, escape assessment
for universal service purposes.
While the question of having ISPs contribute to the universal
service fund is before the FCC in a different proceeding, there is an
important principle that must be recognized. Regardless of the
assessment mechanism, if it contains exceptions, loopholes, and special
treatment; providers and customers will gravitate toward those
exceptions in order to avoid universal service assessments.
Exceptions instill instability and inequality in the assessment
mechanism. Exceptions could undermine any future system as well. It
does not matter whether the mechanism continues to be revenue-based or
whether the Commission adopts a flat-rate mechanism. The only way to
avoid instability is to follow the law's requirement that all providers
of telecommunications contribute to universal service support on a
competitively neutral basis.
The statute is unequivocal in its requirement--every carrier
providing interstate services must contribute to the universal service
fund. The only exemption from contributing to the fund that the
Commission is permitted to make is for a carrier or class of carrier
``if the carrier's telecommunications activities are limited to such an
extent that the level of such carrier's contribution to the
preservation and advancement of universal service would be de
minimus.'' \6\
---------------------------------------------------------------------------
\6\ Id.
---------------------------------------------------------------------------
Any assessment mechanism must be evaluated in terms of this
statutory requirement. If the mechanism fails to pass statutory muster,
it must be rejected. The statutory requirement is non-optional.
In this regard, The FCC's Further Notice seeks comment on the
proposal submitted by the USF Coalition. \7\ The essential elements of
the Coalition's proposal are that residential wireline and wireless
connections would be assessed $1.00 per connection per month and pagers
would be assessed $.25 per month; business connections would be
assessed based on connections and capacity. Under the Coalition
proposal, ILECs and CLECs would be responsible for paying the wireline
assessments, the wireless carriers would be responsible for the
wireless assessments and paging carriers would be responsible for pager
assessments.
---------------------------------------------------------------------------
\7\ The USF Coalition is comprised of AT&T, Ad Hoc
Telecommunications Users Committee, WorldCom and e-TUG.
---------------------------------------------------------------------------
While simple, the Coalition proposal nevertheless exemplifies the
type of mechanism that does not stand up to the statute's requirement
that all interstate carriers contribute to the universal service fund
on a nondiscriminatory and equitable manner. Indeed, adoption of the
Coalition's proposal would reduce the level of contributions from the
interexchange carriers from just less than 60 percent under current FCC
rules to less than 10 percent.
The Commission also sought comment on Sprint's proposal that would
create per-connection contribution obligations based on the proportion
of industry interstate revenues currently reported by the different
industry segments. The specific question asked by the Commission, i.e.,
would the proposal be equitable, nondiscriminatory and competitively
neutral, signals the infirmity in the proposal. The concerns that led
the Commission to consider alternatives to a revenue-based contribution
mechanism are imported to Sprint's connection-based proposal. For
example, Sprint's proposal would not adjust a wireless carrier's
contribution despite an increase in the provision of interstate
communications. An assessment mechanism cannot freeze contribution
levels in the face of known industry changes and pass muster. Such a
freeze is not equitable nor is it competitively neutral. One industry
segment--wireless carriers, in the case of Sprint's proposal--is
favored at the expense of all other industry segments. It is not
equitable for non-wireless carriers to shoulder the universal service
contribution burden that properly belongs to wireless earners. Equally
significant is the competitive advantage wireless carriers obtain over
both wireline local exchange carriers and interexchange carriers.
Wireless carriers' services are competitive alternatives for wireline
exchange and interexchange services. Shifting a portion of the wireless
carriers' contributions to wireline carriers provides a price advantage
to the wireless carrier because the wireline carriers' universal
service recovery charges are higher than they would otherwise be if the
wireless carriers bore their equitable share of the universal service
burden.
Despite the infirmities of the USF Coalition and Sprint's
connection-based proposals, such infirmities do not mean that a
connection-based proposal cannot be designed in a manner that conforms
to the statute's requirements. A connections-based mechanism can be
formulated that is equitable, nondiscriminatory and competitively
neutral. Such a formulation will require an innovative view of
connections.
In order for a connection-based contribution mechanism to meet
statutory muster, it should recognize that every provider of interstate
telecommunications that sells service to an end user has an interstate
connection that should be counted and contribute to the universal
service fund. Looking at connections in this manner enables the
Commission to adopt a mechanism that not only fulfills the statutory
mandate that all interstate carriers contribute to the fund but also
encompasses the full range of interstate telecommunications providers.
A broadened view of connections forms the foundation of a contribution
mechanism that is fair and equitable among all providers, and, equally
important, minimizes the opportunity for manipulation or avoidance of
the contribution obligation through the way services are packaged or
classified.
A broadened view of connections would be competitively neutral
because no provider of interstate telecommunications would gain an
advantage vis a vis a competitor simply by the way it chooses to offer
service. Competitive neutrality is a particularly important component
of a connections-based mechanism in an environment that continues to be
characterized by disparate regulatory regimes. Ensuring that all
providers of interstate telecommunications contribute to the universal
service fund will bring stability to the fund.
BellSouth and SBC have jointly developed a proposal for a
connections-based contribution mechanism that would meet the statute's
requirements. It counts all connections. It avoids the creation of new
loopholes and seeks to close existing loopholes.
Summary of BellSouth/SBC Proposal
Under our plan, universal service support would come from all
interstate telecommunications activity. Interstate telecommunications
activity occurs when a service provider sells interstate
telecommunications services or services that use an interstate
telecommunications component. These services require that a connection
be established so that a retail customer can gain access to other users
of interstate telecommunications services. The connections can be
provided through a variety of service architectures that have an access
and a transport component. Universal service contribution requirements
would apply to both the access and transport components. For example,
in the case where a customer has established two retail relationships,
one with a local telephone company (access) and another with a long
distance carrier (transport), both the local telephone company and the
long distance carrier would bill the customer to recover its universal
service contribution. The total amount that individual customers pays
would simply reflect the total amount of universal service support
divided by the total number interstate (access and transport)
components.
BellSouth's and SBC's proposed universal service contribution and
recovery mechanism is consistent with the requirements of Sec. 254 and
provides a number of important benefits. First, the proposal provides a
stable universal service fund in an evolving market by assessing
contributions on all interstate telecommunications activity. By
including all interstate telecommunications activity, the proposal
ensures that residential telephone customers will not be forced to bear
an unreasonable share of the universal service costs as more and more
customers migrate to alternative technology platforms that are outside
the scope of the current contribution mechanism.
Second, the proposal establishes a straightforward method for
assessing universal service contributions that does not rely on the
distinctions such as residential versus business, circuit versus
packet-switched connections, or interstate versus intrastate revenues.
The proposal addresses the concern about fluctuating revenues and the
ability to identify the jurisdiction of the revenue.
Third, the proposal correlates the amount of assessment to the
provider's interstate telecommunications activities. Higher bandwidth
services would be assessed more based on a progressive contribution
methodology.
BellSouth and SBC have developed its contribution proposal in good
faith. As this testimony indicates, there are alternative ways to
design a universal service support system of assessments, which meet
the requirements of the Telecommunications Act. We welcome the
opportunity to work with the various industry sectors, federal and
State regulators and the Subcommittee to find a workable solution to
this serious problem.
More broadly, it is not too early to begin a dialogue on the next
chapter of the universal service story. The various universal service
plans, which have been adopted by the FCC including the CALLS plan, the
Rural Task Force Recommendations and the Multi Association Group plan,
operate for a limited period of time. It would be an understatement to
say that the resulting universal service system is complex.
Conclusion
BellSouth appreciates the opportunity to present its views to the
Subcommittee. The coming crisis in the universal service support system
is real. That crisis is a symptom of a larger problem of technology and
customer choice outpacing regulatory classifications. The convergence
of technologies and services and the changing market place make the
current base of support unsustainable. The reduced levels of investment
in the nation's telecommunications networks also raise concerns about
the current regulatory, market and universal service landscape.
BellSouth also supports, without reservation; the vision embodied
in Section 254 of the Telecommunications Act, which we know many
Members of this Committee were deeply involved in when Congress wrote
the 1996 Act. We share your commitment that the universal service
system should ensure that citizens in all regions of the Nation have
access to advanced services and that all Americans deserve comparable
services at comparable rates. We look forward to working with this
Committee, the FCC, and the states to achieve these important goals.
For America to stay connected the regulatory and universal service
policies must keep pace with the dynamic nature of the
telecommunications market.
Thank you Mr. Chairman.
Senator Inouye. And thank you very much.
President Bond?
STATEMENT OF DON BOND, PRESIDENT AND MANAGER, PUBLIC SERVICE
TELEPHONE COMPANY, GEORGIA
Mr. Bond. Mr. Chairman and Members of the Committee, I'd
like to thank you for allowing me to testify this morning, and
I'd certainly like to thank Senator Cleland for the help that
he gave me in getting me here.
I am the president of Public Service Telephone Company in
Reynolds, Georgia. My grandparents began the company in 1911 by
installing a magneto system. My father, in 1953, extended
service to the rural area even further and installed a dial
system with the help of financing from the Rural Utility
Service.
The company today serves a little over 12,000 customers in
a thousand-square-mile area between Macon and Columbus. We
continue to rely on national programs, including Federal
universal-service fund support, which we are here to talk about
this morning.
In addition to wire-line service, we are also--we also
provide wireless, Internet access, cable TV, long-distance
resales--long-distance resale services. Public Service
Telephone Company, like hundreds of small companies throughout
the nation, links its customers into an essential
communications backbone for their social and economic lives and
the nation's safety and security.
That is why I'm also appearing on behalf of hundreds of
other rural telephone companies represented by the National
Rural Telecom Association, the National Telecommunications
Cooperative Association, the Organization for the Promotion and
Advancement of Small Telephone Companies, the Western Alliance,
and the Independent Telephone and Telecommunications Alliance.
I also bring to the table my experience as a director and the
current chairman of the National Exchange Carriers Association,
although I'm not speaking on their behalf today.
Mr. Chairman, Judge Greene and Charlie Brown started an
economic slowdown caused by uncertainty of the consent decree.
If you believe what the Wall Street Journal publishes and
Bloomburg has on TV, the communications industry in this nation
is headed into a communications depression. Rural American
communications system must not be forced into an economic
crisis through regulatory and judicial actions.
On the forefront of these actions is the national
universal-service fund program. There are three areas that I
would like to discuss today. First, the system allocates
payment responsibilities among interstate carriers based on
historical interstate end-user revenue. The inter-exchange
carriers say that--those distortions are caused by lag between
the historical revenue and assessment. Their plan, connections-
based proposal, has a major flaw in that it is inconsistent
with the requirement under Section 254(d) of the Communications
Act, which requires that all providers of the interstate
communications service should contribute to universal service.
In other words, the connections-based plan largely exempts the
large inter-exchange carriers from paying into the fund.
Congress should ensure that the inter-exchange carriers
continue to contribute in a fair and reasonable manner.
Also, the current safe-harbor reporting percentage for
interstate commercial mobile service--radio service providers
appears to be substantially understated. We should all pay our
fair share.
Second, all facility-based broadband, Internet, cable, and
satellite providers of communication, regardless of our
technology, should be included in the list of contributors to
USF.
The third key issue is how additional carriers qualify for
universal-service-fund support and the basis on which the
support--they receive the support once they're qualified. Some
states have moved aggressively forward establishing the
practice of making support available in the name of stimulating
competition, but hardly taking notice to their statutory
universal-service responsibilities.
Also, the FCC has put enormous pressure on the size of the
Federal support program for the high-cost rural areas by
providing support without regard to the competing carriers'
cost in trying to prevent states from adopting requirements to
assure the carrier provide value in return for the supports
they receive.
Congress should remind the FCC that to support--the purpose
of the Federal support in high-cost areas is neither to double
the cost of the nationwide universal service in order that the
new carriers will receive huge profits, nor to provide service
where very low--at very low cost to the customers.
Under the FCC rules, competitive carriers must receive
universal service based upon the incumbent's cost, rather than
their own cost. The Commission rules should require that each
eligible telecommunications carrier's support payments should
be based on its own cost of providing service and are actually
put into use for statutory purposes. If the goal is to have
consumers' universal services to be low--as low as possible,
then the carrier support amount should be based on their own
cost. Mounting pressure on the fund size also comes at a time
when the fund is growing because of a court-ordered
substitution of universal service for access-cost recovery.
In conclusion, we ask Congress today to work with us to
stem the tide of regulatory and legal decisions that are
unraveling the universal-service program, and to, once again,
sustain the nation's commitment to this important national
policy.
[The prepared statement of Mr. Bond follows:]
Prepared Statement of Don Bond, President and Manager, Public Service
Telephone Company, Georgia
Executive Summary
An unending string of Federal Communications Commission (FCC)
regulations and court decisions may be putting our national universal
service system at great risk.
First, the FCC is proposing to relieve long distance carriers of
the duty the Telecommunications Act of 1996 gave them to support
federal universal service programs by shifting an unfair support burden
onto carriers that connect end user customers to the public switched
voice telephone network. It is undisputed that the FCC needs to ensure
that universal service funding is sufficient and sustainable. While
there is still controversy about how to improve the current system, it
is clear that the FCC needs to follow the law and ensure that
interstate long distance carriers continue to provide their share of
support, as is mandated by statute. It is also clear that the FCC has
to make all service providers that offer competing services and
functions contribute to universal service funding to avoid both
marketplace distortions and saddling some customers with too much of
the cost of national policy.
Second, the FCC has to make sure that support for new carriers is
not excessive, carries real responsibilities, and provides real
customer benefits. Even though Congress specifically expanded and
spelled out the nation's long-standing commitment to universal service
in the 1996 Act, the FCC's notion of ``competitive neutrality'' has led
it to squander support collected from the nation's consumers and
businesses by guaranteeing windfall payments to ``competitors.'' The
FCC has put enormous pressure on the size of the federal support
program for high cost rural areas by providing ``support'' without
regard to a competing carrier's costs and trying to prevent states from
adopting requirements to ensure that carriers provide ``value'' in
return for the support they receive.
It is time for Congress to remind the FCC that the purpose of
federal support in high cost areas is neither simply to double or
triple the cost of nationwide universal service to provide new carriers
with premium profits nor to provide customers with subsidized choices.
The 1996 Act recognized the delicate balance that would have to
take place for its two-fold objective of universal service and
competition/deregulation to coexist. Yet the regulators and the courts
have routinely assigned a higher value to what one Commissioner has
called ``creating competition,'' to the distinct disadvantage of both
the rural markets and consumers it is designed to help and the users of
the network that pay the tab.
Today multiple carriers may receive universal service support based
upon the incumbents' costs, rather than their own. In addition,
competitors are receiving such support without ``capturing'' any
customer lines or serving any new lines. In other words, far more
support is flowing through the universal service system than necessary.
Such needless support adds to the pressure from the costs of the newer
programs developed under the 1996 Act's provisions for schools,
libraries and health care discounts. Mounting pressures on fund size
also come at a time when the fund is growing because of decisions that
substitute universal service support for access charge cost recovery in
furtherance of controversial court rulings about what constitutes
``implicit support'' that should be made ``explicit.''
The states generally have only exacerbated the situation, with many
failing to place a high premium on the public interest when evaluating
eligible telecommunications carrier (ETC) requests or determining
whether to develop state universal service plans. States need to
provide a fair share of state support for added carriers they
designate. They also need to use their oversight duties to ensure that
non-cost based support paid to competing carriers is used solely for
valid universal service purposes.
Considering the world we live in today, we believe there can be no
denying the critical role universal service plays in ensuring the
future of our nationwide integrated network--a network that has been
proven again and again to be so critical to our national and economic
security. Thus, we call on the Congress today to work with us to stem
the stream of regulatory and legal decisions that are unraveling the
universal service program, and to once again sustain the nation's
commitment to this important national policy.
Introduction
Mr. Chairman, Members of the Committee, my name is Don Bond, and I
am the third-generation president of Public Service Telephone Company
in Reynolds, Georgia. My grandparents Hiram Columbus Bond and Bessie
Marie Bond were the first generation of our family to enter the
telephone business. Among his many efforts to help our company grow, my
father H. C. Bond, Jr. worked to acquire Rural Utilities Service
(formerly Rural Electrification Administration) financing to upgrade
equipment and further extend service into rural areas. Today Public
Service Telephone Company serves 1,050 square miles of territory
between Macon and Columbus, Georgia.
The dream of my grandparents and parents to provide affordable
voice grade service to residents and businesses in rural Georgia has
been advanced as my family's company has grown to provide a variety of
services through Public Service Communications. Through its
subsidiaries, Public Service Communications provides wireline and
wireless telephone service, Internet access, cable television, and
long-distance services in Georgia and Alabama. Like the majority of
rural telephone companies all across the nation, my company was formed
to bring quality communications service to a rural market that was
overlooked by the nation's largest carriers. Because we are a community
based telecommunications provider, we have a special interest in
fulfilling the varied communications needs of our community.
The challenges facing Public Service Telephone Company are
representative of those facing rural incumbent local exchange carriers
(ILECs) in markets throughout the nation. And for the most part, the
hundreds of other rural ILECs throughout the nation are offering a
similar array of communications services to their markets. That is why
today I am also appearing specifically 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 which is a
partnership of the Western Rural Telephone Association and the Rocky
Mountain Telecommunications Association.
I also bring to the table my experience as a director of the
National Exchange Carriers Association (NECA) of which I am currently
the board chairman, although I am not speaking on behalf of NECA today.
NECA and its subsidiaries play an important role in administering the
federal universal service and access charge programs that are so
important to ensuring that telephone service remains available and
affordable in all parts of the country.
The Essence Of Our Concern
Universal service is the cornerstone of our nation's
telecommunications policy. It is a social compact embracing (1) the
ideal that all Americans, both urban and rural, are entitled to quality
telecommunications services at affordable rates and (2) the economic
fact that the value of a network to every customer is enhanced by
ensuring that the greatest possible number of customers are connected
to the network. So important is this national policy that its historic
high-cost and low-income mission, begun under the mandate of the 1934
Communications Act, was specifically enshrined in clear, concise terms
in the 1996 Act. At that time, Congress also expanded the policy,
adding the new objective ensuring that schools, libraries, and rural
health care facilities may fully access the advanced telecommunications
features that are available via our nationwide, integrated network.
Yet we continue to have ample reason for concern with the future of
our nation's universal service program. Generally, these concerns date
to the development of the rural and universal service provisions of the
1996 Act. While we are grateful that Congress worked such strong
provisions into that statute, we are, as we were then, nevertheless
wary of several elements of the provisions--particularly, those that
allow additional carriers to receive universal service support in a
given market without adding any value for the support they receive.
Ensuring The Stability And Sufficiency of Universal Service
The Committee has asked for testimony on the FCC's open proceeding
considering a proposal to relieve the long distance carriers from
almost all of their current statutory duty to contribute to federal
programs that support universal service. The plan would assess
contributions based on the number and capacity of ``connections''
provided to the public switched network. This is a highly controversial
proposal, and, to be honest, the associations I represent have taken
different positions on how to solve the current universal service
dilemma. One view is that the FCC should continue to assess interstate
revenues to fund support programs. The other is that the FCC should
only move forward on a flat-rate, non-revenue based contribution
assessment method if it makes significant changes in the proposal.
The interesting thing is that these seemingly opposite
recommendations are really the only differences between what the
associations have said about the ``end-user connection'' scheme. Let me
tell you about the points we all agree about. First, we all oppose the
plan as proposed because the statute expressly says that all carriers
that provide interstate telecommunications services have to contribute
on an equitable and nondiscriminatory basis. While end users connect
with local exchange carriers for exchange access--origination and
termination of calls within the local area--actual interstate service
requires the customer to use an interstate long distance carrier's
state-to-state service. Whether the FCC fixes the end user connections
plan or stays with interstate revenues, the associations all agree that
the interstate carriers have to be the principal contributors.
Second, 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 all aware of growth in the fund
and concerns about shifts in what carriers are providing interstate
services. These developments have created a serious issue about how to
prevent erosion and evasion of support mechanisms. Thus, we all agree
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. The law allows the FCC to
assess all providers of ``telecommunications'' if the public interest
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 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 current ``safe harbor'' adopted as a temporary measure
before the dawn of the new wireless era of nationwide toll and local
calling plans.
Therefore, we all oppose the plan that is the subject of this panel
and want everyone in the same shoes to contribute on the same basis.
The only difference is in whether we have urged the FCC to continue the
present method with a broader contribution base or suggested ways to
make a flat-rate monthly assessment method work.
Universal service programs have successfully connected rural
American households and businesses, schools and libraries, low-income
families, and others to the public switched network. In addition to
connecting people to the network, a strong universal service policy
provides other economic and social benefits. For example, rural
Americans in particular see opportunities for their communities to
thrive and prosper through rural economic development fostered by
modern telecommunications. Indeed, few would argue that the nation has
already achieved many benefits from pursuing universal service as a
national public policy goal.
With this in mind, it is critically important that Congress
continue to ensure a sustainable funding mechanism that provides stable
and sufficient universal service funds. This is necessary because the
sufficiency and the sustainability of the fund will be even more
seriously challenged in the days ahead for two reasons: (1) an
increasing demand for universal service funds; (2) a convergence of
technology and growth in the Internet.
Our concern is that the size of the universal service fund may
become so large that the current funding mechanism can no longer
provide sufficient support dollars. For example, in the year 2000
approximately $4.5 billion in universal service funds were needed to
support all existing programs. However, given recent FCC decisions
regarding access and universal service issues in the CALLS and MAG
access orders, it is currently estimated that for the year 2003,
universal service fund requirements will exceed $6 billion.
Moreover, the number of competing carriers seeking designation as
eligible to receive universal service support is growing at an ever-
increasing pace. And the resultant effect on the universal service
program is predictably significant. In the first quarter of 2001,
competing carriers were receiving their redundant universal service
support at an annualized rate totaling nearly $4.7 million. Just a
little more than a year later, in the third quarter of 2002, such
carriers are receiving duplicative support at an annualized rate
totaling nearly $76.4 million. Truly, the growing size of the fund is
taxing the ability of current contribution methods to generate
sufficient funds.
Moving to the second point, converging communications technologies
and the rapid growth of the Internet pose long-term challenges to the
``sufficiency'' and sustainability of funding for Universal Service.
Evolving technologies are causing the revenues of traditional
telecommunications providers that contribute to the fund to dwindle as
they are replaced by a new cadre of players. In addition, new
technologies are creating new ways to deliver telecommunications and
information services that, so far, enable the users and providers to
avoid universal service contribution responsibilities.
For example, the gradual but ever-growing use of broadband
platforms and Internet Protocol (IP) networks plays a significant role
in the present instability of the contribution base. Consumers use IP
networks in a variety of ways (e.g. access to the World Wide Web, e-
mail, instant messaging, Internet telephony) and via various platforms
(e.g. cable, wireless, satellite) to substitute for interstate calls on
the public switched network. As ``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 while all other Internet access providers utilizing
other platforms remain exempt from the obligation.
Given these threats to the fund, it is time to reassess the overall
fund composition, as well as the services and service providers that
should be contributing to universal service. Fundamentally, all
facilities-based providers of telecommunications, regardless of
technology platform, should contribute to the universal service fund.
Contributions should be based upon interstate telecommunications
activities, and not be tied to a narrow definition of ``interstate
telecommunications services.''
Essentially, what this means is that the contribution base should
be broadened for all purposes funded by the universal service
mechanism. Broadband service providers, whether considered information
service providers or telecommunications service providers, should be
included as supporters of universal service. And all broadband service
providers should be assessed in a similar manner. In short, there
should be parity in the contribution methodology applied to all
telecommunications providers.
It is important that the funding mechanism operate in a
competitively neutral fashion. Customers of both information and
telecommunications services should not be driven to one provider over
another based on differences in responsibility for contributing to
universal service. And for the benefit of consumers and providers
alike, an administratively simple and flexible method for assessing and
collecting funds from interstate service providers should be
implemented to ensure a sustainable fund.
In reassessing the makeup of contributors 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 universal service fund. Contribution
obligations imposed on a particular telecommunications industry segment
or consumer group, e.g., multi-line business, should be equitable,
competitively and technologically neutral, and not so large that they
drive users off the public network. For example, centrex customers have
already faced an access charge hike to $9.20, and cannot weather steep
new contributions pass-throughs.
In sum, for the reasons outlined above that threaten the existence
of the current universal service fund, it is important that Congress
reaffirm its commitment to a sustainable universal service fund.
Congress should direct the FCC to identify a better funding mechanism
in accordance with the statute that will provide a reliable and
sufficient source of funds. The funding mechanism chosen should be
applied to all facilities-based interstate telecommunications or
information service providers that provide an interstate
telecommunications component as part of their end user services.
Finally, the responsibility to ensure that schools, libraries and
rural health care providers have access to telecommunications, Internet
access, and internal connections is a national responsibility and
should not solely be the responsibility of the telecommunications
industry. For one thing, the schools and libraries and rural health
care programs should be collected and administered as a separate fund.
States Must Take ETC Responsibilities More Seriously
Finding a better way of assessing contributions to universal
service support on carriers is only one problem the FCC needs to
resolve to make universal service support funding sustainable. Another
key issue is how additional carriers qualify for universal service
support and the basis on which they are supported once they qualify.
We argued for tighter language at the time of the 1996 Act's
implementation, but the emphasis on moving to a so-called competitive
deregulated environment was such that a more restrictive universal
service section was ultimately precluded. Owing to misguided
interpretations and implementation of the 1996 Act, today we are at the
point where pressures on the program have grown to the degree that we
are now very concerned about its long-term viability.
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 voluntarily relinquish its ETC designation when a new
recipient qualified indicates that the congressional intent behind the
provision was that new entrants into a market would be making a
genuine, carrier of last resort-like, 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.
Spurred by the FCC, multiple state authorities have moved
aggressively forward to establish interconnection and universal service
environments that heartily embrace competition and deregulation, but
hardly take notice of their statutory universal service
responsibilities. The practice of making support available in the name
of stimulating competition has led to the granting of ETC status to new
market entrants without regard to the impact on efficiency, the cost or
who would pay.
In case after case state authorities have granted ETC status to
competitive carriers based on extremely loose public interest tests. In
fact, for the most part ``competitive neutrality'' is often judged to
be equivalent to artificially inducing competition and even such
synthetic competition has been assumed to be in the public interest.
Such theory has no place in the regulatory arena as it applies to rural
markets. In the case of the rural markets served by my company and
those of my rural company colleagues, the entire communities are
typically already receiving high quality, affordable communications
services and the existing provider is doing all it can to provide
advanced capabilities.
As noted, section 214(e)(2) of the Communications Act of 1934, as
amended, requires state commissions to designate additional ETCs in
areas served by non-rural ILECs. However, Congress had reservations as
to whether the introduction of subsidized competition into the areas
served by rural telephone companies would immediately or in all cases
be beneficial to the provision of universal service. These concerns led
Congress to require a public interest determination prior to the
designation of additional ETCs in rural company service areas. It
follows, then, that the introduction of competition in a rural service
area cannot be considered, itself, a demonstration of serving the
public interest. That is exactly the question Congress required the
states to determine as a prerequisite for designating an additional ETC
in a rural telephone company's study area.
We call upon Congress to work with us to strengthen the federal
statute in a way that makes it clear that ETC designations are to be
taken seriously and that the responsibilities associated with receipt
of this designation must be of a carrier of last resort level of
commitment that are demanded of incumbent carriers. Providing universal
service support to a carrier that is unwilling to provide service
within the evolving definition 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
But as I alluded in my opening, 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 the 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.
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 would receive the same level of universal
service support for a customer no longer served by the incumbent as the
ILEC would have been eligible to receive for serving that customer. \1\
---------------------------------------------------------------------------
\1\ Federal-State Joint Board on Universal Service, CC Docket No.
96-45, Access Charge Reform, Price Cap Performance Review for Local
Exchange Carriers, Transport Rate Structure and Pricing, End User
Common Line Charge, CC Docket Nos. 96-262, 94-1, 91-213, 95-72, Fourth
Order on Reconsideration in CC Docket No. 96-45, Report and Order in CC
Docket Nos. 96-45, 96-262, 94-1, 91-213, 95-72, 13 FCC Rcd 5318, 5364-
5365, para. 79 (1997) (4th Order on Reconsideration), citing Federal-
State Joint Board on Universal Service, CC Docket No. 96-45, Report and
Order, 12 FCC Rcd 8776, 8932-34, 8944-46 (1997) (Order).
---------------------------------------------------------------------------
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.'' \2\ 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.
---------------------------------------------------------------------------
\2\ Order, 12 FCC Rcd 8944, para. 311.
---------------------------------------------------------------------------
The FCC has never even required new eligible carriers to show which
lines they have ``captured'' or which lines are ``new.'' Instead, it
developed rules that now provide support for whatever lines the new
designated carrier serves when it is designated, including lines that
it has been providing for years without the need for any support from
the nation's consumers. Moreover, 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.
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 lines it is already providing to
paying customers. The lure of support for nothing is quickly inducing
wireless carriers to cash in on the consumer-financed bonanza.
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 and use of the support they draw
from the network 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
so that their customers can select among competing long distance
providers mean that they are shielded from meeting that universal
service 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 support under
programs designed to spread the cost of nationwide service at
affordable rates throughout the nation.
Indeed, 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, 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.
Universal Service Is Good Public Policy For America
I noted earlier that today, the high-cost component of the
universal service program handles approximately $3 billion in annual
carrier-to-carrier support transactions, which represents about half
the amount that is channeled through the overall fund each year. The
high-cost component is a ``safety-net'' of sorts for rural markets 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, and health and other
social services comparable to those in urban areas.
Our nation's first priority for rural areas should be to provide a
stable environment for continued telecommunications investment.
Technologies and businesses, even the likes of MCI, 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 recent years, rural areas have become increasingly dependent on
universal service funds. FCC decisions to resolve interstate access
pricing have consistently shifted ILEC revenue requirement and the
matching cost recovery to the high cost component of universal service.
Many small and rural ILECs today rely on interstate access and
universal service dollars for 45-to-70 percent of their revenue base.
The 1996 Act promoted both competition and universal service for
the telecommunications industry. However, those who focus solely on
competition for the industry believe that communications should
ultimately be viewed as a commodity. That certainly makes discussions
about the benefits of competition more applicable to communications.
But that is not reality for rural America, let alone what Congress had
in mind when formulating the public policy goal of universal service.
The commodity concept is too limiting when discussing the role of
communications, especially in rural America. Certainly the first
objective of universal service is getting people connected to the
network. But there is a much broader social context and objective for
rural America that is tied to universal service. How far Congress and
regulators are willing, or are permitted, to go to move away from
``commodity'' thinking and discuss social outcomes has a lot to do with
maximizing the benefits to be derived from our nation's universal
service policy.
Commodity and competition simply mean delivering a quality widget
at the lowest price possible. There is no consideration given to other
synergies and tangential outcomes that can have a positive impact on
rural communities--their economies and quality of life. Rural telephone
companies have demonstrated their commitment to their communities by
bringing and improving service in areas the largest companies were not
interested in serving. Their record speaks for itself. So,
demonstrably, rural communications is much more than a commodity. It is
both a utility and an engine for economic development. It is a tool for
local business leaders, local telephone company management, and local
government officials to use in growing their communities, to use in
improving the local economy and quality of life.
Rural telephone companies are working hard to support rural America
and promote rural economic development. The public policy provisions
that will be applicable to small and rural carriers must give them
assurance that they will have a reasonable opportunity to recover their
infrastructure investments, which will support future broadband
services.
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.
Senator Inouye. Thank you, Mr. Bond.
And Mr. Altschul?
STATEMENT OF MICHAEL F. ALTSCHUL, SENIOR VICE
PRESIDENT, AND GENERAL COUNSEL, CELLULAR
TELECOMMUNICATIONS AND INTERNET ASSOCIATION
Mr. Altschul. Thank you, Mr. Chairman and Members of the
Subcommittee. I, too, thank you for the opportunity to appear
before you today.
My name is Michael Altschul, and I'm the senior vice
president and general counsel of the Cellular
Telecommunications and Internet Association. I think, as you
know, CTIA represents all categories of commercial wireless
companies in this country, including cellular and PCS carriers.
I'm mindful of the hour, and I ask that my full statement
be made a part of the record.
Senator Inouye. Without objection.
Mr. Altschul. I have the benefit, as do you, of the prior
statements, so I think I can be brief here.
First, I can't ignore the fact that CTIA and the wireless
industry recognizes the role of universal service and the role
that telephone service provides, providing a vital link to all
Americans. We support the program. We also support our
contributions, pursuant to the direction that Congress has
provided in Section 254.
We believe that Congress directed, in the 1996 act, that
all carriers that provide interstate service, which includes
wireless carriers, have a role in promoting the availability of
nationwide telecommunications service to the Federal universal-
service fund. We are willing to pay our fair share of the
universal-service fund, as directed, on an equitable and
nondiscriminatory basis.
In that regard, I'd like to note that wireless carrier
support payments for universal service have grown
proportionally as wireless carriers have grown their proportion
of the nation's total telecommunications revenues. I've heard a
lot about a proxy and a fixed fee, but, as our share of the
overall industry has grown, so have our contributions into the
universal-service fund. Indeed, in the last year for which data
is available from the FCC, universal-service payment
contributions from the wireless industry increased by 28
percent.
As you know, the FCC is considering a proposal that will
radically change the method by which funds are raised to
support universal service. The immediate and most dramatic
effect of this proposal would be to shift the responsibility
for funding universal service from the nation's long-distance
carriers, who currently provide 63 percent of the payments, to
customers, even those customers who make no interstate calls in
a given month. We believe that this proposal is unlawful,
unfair, and unnecessary.
You've heard others talk about the reasons why the proposal
is unlawful. It would exclude some carriers and not follow the
congressional mandate that all carriers must contribute. It
also will, as I mentioned, require payments from those
customers that will make no calls, certainly no interstate
calls, in a given month.
Wireless is somewhat unusual in the mix of telephone
service providers in this country, in that we have a
significant percentage of users who subscribe for what some
carriers call peace-of-mind service, who like to have the phone
with them in case the car may break down. These are relatively
low-cost, low-usage plans available by every carrier in every
state in the country, typically for less than $20 a month. Many
of these customers will make no interstate calls. Many--some of
them will make no calls in a given month.
Similarly, we have a number of prepaid subscribers in the
wireless industry. These are customers that use wireless
services, but they don't use it on a predictable monthly basis.
And assessing a per-month contribution based on a pre-paid
customer's usage is something that can't be determined in
advance. It would require additional assumptions and leaps to
be made.
So those are our primary objections to the proposal that
you've heard.
I also want to point out that despite the comments from
others that the current contribution mechanism is inadequate to
the task, the overall size of interstate telecommunications
revenues is not changing that dramatically. Indeed, over the
past 3 years, the nation's interstate revenues have remained
surprisingly constant, from $74 billion in 1998 to $79.4
billion in the year 2001. And you can see, over that range,
that it actually increased a little bit.
What has happened is that the allocation of these revenues
has changed. You've heard, and there's no denying that
traditional long-distance companies' share of this pie has been
shrinking. Wireless carriers, I'm happy to say, have been
growing their revenues. And we've heard about bundled plans,
ILEC entry, voice over the Internet, services like that. So
while the individual proportions and slices of the pie may be
changing, the overall size of interstate revenues has not been
subject to dramatic changes.
We are paying more as our share grows, as I mentioned.
There is a very good basis for the safe harbor you've heard
about. This is a mechanism the FCC developed that creates an
assumption--a proxy, if you'd like--that the percentage of
interstate revenues that wireless customers use is 15 percent a
year--or 15 percent of total revenues. That is based on the
FCC's own data about the overall percentage of all
telecommunications revenues being 15 percent.
We have, obviously, a very mobile user group. We have
licenses that are licensed without respect to jurisdictional
separations or state boundaries. And wireless service uses
radio waves that obviously don't stop at a state boundary. I'm
fond of pointing out Washington D.C. is the absolute best
example of all of these factors, where carriers that provide
service in this market will typically serve as many as four
states, plus the District of Columbia. Area codes can be
assigned to any of us from any of these regions. I can have a
202 area code on my mobile phone, use the phone in Northern
Virginia, and have the wireless carrier switch that call to the
public switch network from a switch in Maryland and, driving
down the Whitehurst Freeway in Georgetown, have the call
physically handled by an antennae in Rosslyn, Virginia.
To deal with those issues, the FCC developed the proxy.
It's a reasonable approach. It's based--it's competitively
neutral, because it puts wireless carriers on the same national
overall percentage of interstate revenues as wire-line. We'd
certainly be happy to have that proxy adjusted as the overall
mix of--in this entire basket of services adjusts, but we think
that it does create a fair proxy for both wire-line and
wireless users.
Finally, I just wanted to make two or three quick points.
If there is a crisis, as you've heard, it exists by the
expansion of demand, not by the source of supply. And it makes
no sense to exclude from the source of support for universal
service the long-distance carriers that traditionally have been
the largest single contributors.
Second, very important issues facing all of us concerning
the definition of supported basic services and the expansion,
or not, to broadband services. CTIA believes that technology
neutrality and funding-support affordability is the best way of
ensuing that competition is not precluded in rural America.
And, finally, something that's very important to CTIA and
its wireless members is the determination of eligible
telecommunications-carrier status, or ETC status. This is a
huge challenge to state and Federal regulators. This wireless
industry supports a policy of competitive neutrality in this
determination. Federal guidelines should not be biased against
new entrants. We have had success. Some wireless carriers have
gained ETC status in a handful of states and on a few Indian
reservations. We believe that consumers benefit from
competition. They benefit from gaining new services. And this
competition spurs improvements to existing services.
[The prepared statement of Mr. Altschul follows:]
Prepared Statement of Michael F. Altschul, Senior Vice President, and
General Counsel, Cellular Telecommunications and Internet Association
Mr. Chairman and Members of the Subcommittee:
Thank you for the opportunity to appear before you today. I am
Michael F. Altschul, Senior Vice President and General Counsel of the
Cellular Telecommunications & Internet Association (CTIA) representing
all categories of commercial wireless telecommunications carriers,
including cellular and personal communications services (PCS). \1\
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\1\ CTIA is the international organization which represents all
elements of the Commercial Mobile Radio Service (CMRS) industry,
including cellular, enhanced specialized mobile radio, personal
communications services and wireless data. CTIA has over 750 total
members including domestic and international carriers, resellers, and
manufacturers of wireless telecommunications equipment. CTIA's members
provide services in all 734 cellular markets in the United States and
personal communications services in all 50 major trading areas, which
together cover 95 percent of the U.S. population.
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CTIA and the wireless industry recognize that telephone service
provides a vital link to all Americans. We believe, as Congress
directed in the 1996 Telecommunications Act, that all carriers that
provide interstate service, including wireless carriers, have a role in
promoting the availability of nationwide telecommunications service
through the Federal Universal Service Fund. Wireless carriers support
Universal Service and are willing to pay their fair share of the
Universal Service Fund ``on an equitable and nondiscriminatory basis''
as Congress has directed.
Prior to the 1996 Act, only long distance companies paid fees to
support the Federal Universal Service Fund. In 1996, Congress passed a
law that expanded the types of companies contributing to Universal
Service. Currently, all telecommunications companies that provide
service between states, including long distance companies, local
telephone companies, wireless telephone companies, paging companies,
and payphone providers, are required to contribute to the Federal
Universal Service Fund. Under FCC rules, telecommunications companies
must pay a specific percentage of their interstate and international
revenues into the Universal Service Fund. This percentage is called the
Contribution Factor. The Contribution Factor changes each quarter of
the year, depending on the needs of the Universal Service Fund and the
consumers it is designed to help. Because the Contribution Factor will
increase or decrease, depending upon the projected needs of the
Universal Service Fund, the amount owed to the Fund by each affected
telecommunications company will also increase or decrease accordingly.
Recently, the Federal Communications Commission sought comment on a
proposal that would radically change the universal service contribution
mechanism by assessing contributions based on the number and capacity
of connections provided by a carrier instead of on the basis of the
carrier's interstate revenue. Under this proposal, residential, single-
line business, and mobile wireless connections (excluding pagers) would
be assessed a flat amount of $1.00 per connection per month. Paging
connections would be assessed $0.25 per connection, and the remaining
universal service funding needs would be recovered through capacity-
based assessments on multi-line business connections.
CTIA believes that this proposal is unlawful, unfair, and
unnecessary. In the alternative, CTIA supports the current revenues-
based funding formula for Universal Service, including the ``safe
harbor'' for CMRS carriers.
The Commission is bound by the statutory mandate set forth in
Section 254(d) of the Communications Act, as amended. The connection-
based universal service funding proposal must be rejected by the FCC
because it would exclude interexchange carriers (``IXCs'') with
billions of dollars of interstate telecommunications activities from
the obligation to fund universal service. This would violate the plain
meaning of what Congress passed into law in Section 254(d)--which
requires that:
Every carrier that provides interstate telecommunications
service shall contribute, on an equitable and non-
discriminatory basis, to the specific, predictable; and
sufficient mechanism established by the Commission to preserve
and advance universal service. The Commission may exempt a
carrier or class of carriers from this requirement if the
carrier's telecommunications activities are limited to such an
extent that the level of such carrier's contribution to the
preservation and advancement of universal service would be de
minimis. Any other provider of interstate telecommunications
may be required to contribute to the preservation and
advancement of universal service if the public interest so
requires. \2\
\2\ Secton 254(d) Communications Act, as amended, (emphasis added).
47 U.S.C. Sec. 254(d).
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Section 254(d) imposes a universal service funding requirement on
all carriers, and the sole exception to this mandate applies only to
carriers whose interstate telecommunications activities are so limited
that the carrier's contribution to the universal service fund would be
de minimis. The connection-based universal service funding proposal
must be rejected because the exclusion of billions of dollars of
interstate revenue generated by the telecommunications activities of
interexchange carriers cannot be made to pass through the eye of the
``de minimis'' needle.
The connection-based universal service funding proposal also fails
the legal requirements established by the U.S. Court of Appeals for the
Fifth Circuit. In Texas Office of Public Utilities Counsel v. FCC, the
Court ruled that Section 2(b) of the Communications Act, read in
conjunction with Section 254(d), prohibits the Commission from adopting
a contribution mechanism that includes intrastate revenues in the
calculation of universal service contributions. \3\ The Fifth Circuit
stated that Section 2(b) denies the FCC ``jurisdiction with respect to
. . . charges, classifications, practices, services, facilities, or
regulations for or in connection with intrastate communications service
. . . '' \4\ In perfectly clear terms, the Court explained that ``the
inclusion of intrastate revenues in the calculation of universal
service contributions easily constitutes a charge . . . in connection
with intrastate communication service.'' \5\
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\3\ Texas Office of Public Utilities Counsel v. FCC, 183 F.3d 393,
447 (5th Cir. 1999).
\4\ Id.
\5\ Id.
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A connection-based assessment is just as much of a ``charge'' as
the revenue-based charge addressed by the Fifth Circuit. To the extent
the services provided over the connections are intrastate, the charge
is ``in connection with intrastate communication service'' and thus is
subject to the jurisdictional restriction of Section 2(b). This would
require the Commission to assume ``jurisdiction over intrastate matters
stemming from the agency's plenary powers.'' In so doing, the
Commission would again overstep its jurisdiction and violate Section
2(b).
The connections-based funding approach also violates the
requirement in Section 254(d) that every carrier ``shall contribute, on
an equitable and non-discriminatory basis.'' At the present time,
contributions from interexchange carriers constitute 63 percent of the
federal universal service fund assessments, reflecting the fact that
the interexchange carriers are, by far, the largest providers of
interstate telecommunications services. Excluding these carriers'
provision of interexchange services from the contribution base is
neither equitable nor is it non-discriminatory.
But even if Sections 2(b) and 254(d) did not present a complete bar
to the connection-based funding proposal, the proposal would still have
to be rejected as bad public policy. A connection-based flat-fee acts,
in effect, as a regressive tax that places a disproportional funding
burden on low-volume users (often low income individuals and small
businesses) in order to subsidize the largest (and often richest)
consumers of telecommunications services. CTIA agrees with the consumer
advocates and state commissions who submitted comments to the FCC that
the connections-based proposal is neither equitable nor
nondiscriminatory. As Consumers Union observed in its Comments to the
FCC, ``both average-use and low-use residential customers utilizing any
of the 13 calling plans of carriers studied would pay more per month
under the Commission's proposed connection-based fee system than they
do under the current revenue-based system.'' \6\
---------------------------------------------------------------------------
\6\ Comments filed by Consumer Union, et al. at 11.
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The proposal is particularly problematic to prepaid wireless
customers and to the millions of customers who subscribe to the ``peace
of mind'' tier of wireless service offerings primarily for occasional
or emergency use. These customers pay a low monthly fee--$19.99 per
month for 400 minutes, for example--or subscribe on a prepaid basis
(i.e., purchasing minutes in advance of their use.) Adding a flat-fee
of even $1 would represent a significant addition to these bills--
potentially discouraging the use of these important services. The
universal service fund, a system designed to advance the ubiquitous
provision of telecommunications services, should not discourage
consumers from purchasing these essential services.
It also is clear from the comments to the Commission that the
proposed connections-based funding system will create a new set of
additional administrative burdens and uncertainties. Rather than
simplifying the current contribution mechanism, the proposed
connections-based funding system will impose a monthly reporting
obligation on all carriers and require the creation of an entirely new
system of complex allocations to implement the capacity-based charges
to be recovered from multi-line business connections. Indeed, this
portion of the proposal raises difficult administrative issues that may
far exceed the problems the Commission has identified with a revenue-
based assessment mechanism.
The difficulty stems from the proposal to base the residual multi-
line business assessment on the maximum capacity of the connections,
and using bandwidth instead of lines to avoid the need to establish
voice-grade equivalency ratios for these connections. However, rapidly
evolving wireline and wireless broadband technologies promise to make
high bandwidth applications available to all subscribers. The
complexities of dealing with capacity-based or bandwidth-based
assessment mechanisms (especially in light of section 254(d)'s command
that the contribution mechanism be ``equitable and non-discriminatory''
as technologies and services rapidly evolve) may far exceed the
problems the Commission has identified with the current revenue-based
assessment mechanism.
Not only is the connection-based funding proposal unlawful and
unfair, it is also unnecessary. As many of the comments to the FCC
observed, the predicate for making such a dramatic change in the
current universal service funding mechanism is lacking. Contrary to the
implicit assumption that changes in the interstate telecommunications
market mandate a fundamental change in the universal service funding
mechanism, the overall size of the interstate telecommunications market
has been remarkably stable. Indeed, interstate end-user
telecommunications revenues increased 6 percent in the past three
years--from $74 billion in 1998 to $79.4 billion in 2001. \7\
---------------------------------------------------------------------------
\7\ See Universal Service Monitoring Report, Table 1.1. (Dec.
1999), and the Commission's Quarterly Contributions Factor Public
Notices.
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We note that the specific allocation of these revenues among
telecommunications providers is changing. For example, the entry of
ILECs into the interstate long distance telecommunications market has
now been approved in several states. And, wireless interstate revenues
are keeping pace with the overall growth of wireless revenues. In other
words, the interstate telecommunications revenue ``pie'' remains
constant, even growing, even though the ``slices'' of that pie among
different telecommunications providers may be shifting. Since the
universal service funding mechanism is dependent on the size of the
interstate ``pie,'' the distribution of the individual slices is not
particularly significant.
I also want to note that wireless' contribution to the universal
service fund is on the rise. With the rise in wireless revenues,
wireless universal service surcharges are increasing as a result,
fairly and appropriately according to the existing contribution
methodology.
CTIA supports continuation of the wireless ``safe harbor.'' The FCC
established this fifteen percent proxy for a wireless carriers'
contribution based on the Commission's own data, and in recognition of
the difficulty wireless carriers face separating their interstate
revenues for Universal Service funding purposes. Simply put, radio
waves do not stop at a state boundary, wireless users are very mobile
customers, and the FCC licensed CMRS carriers without respect to state
boundaries. This makes it impossible for a wireless carrier to
precisely identify the percentage of its revenues that are attributable
to interstate communications. Washington, DC provides a perfect
example. First, the CMRS licenses serving Washington, DC include the
District of Columbia, Virginia, Maryland, and even part of West
Virginia and Pennsylvania. Within this market, wireless customers can
be assigned phone numbers from area codes associated with any one of
these jurisdictions, and can access the wireless network from anywhere
in the market. Thus, I can have a ``202'' area code for my wireless
phone, be in Virginia, and have my wireless carrier connect my call to
the Public Switched Telephone Network from a switch in Maryland.
Moreover, I can be driving along the Whitehurst Freeway in Georgetown,
and if I use my wireless phone, the signal will be transmitted to and
from an antenna located across the Potomac River in Rosslyn, Virginia.
Under these circumstances, a proxy is required as an alternative to the
jurisdictional separations performed by wireline carriers using the
area code of the calling and called parties. While CTIA would not
oppose review of the safe harbor percentage, to assure that it
continues to reflect the Commission's best data on the actual
interstate usage of CMRS service, CTIA believes that a safe harbor is
still the best approach to dealing with jurisdictional complexities of
CMRS traffic.
For the foregoing reasons, CTIA believes that the connections-based
proposal is unlawful, unfair, and unnecessary. The current system, even
if not perfect, more closely follows the Congressional mandate to fund
Universal Service on an equitable and nondiscriminatory basis.
In the view of the wireless industry, there are, however,
significant challenges facing the universal service fund in the
immediate future. First, to the extent there is a funding ``crisis'' it
has been triggered by the expansion of the demand for universal service
funding, not by a reduction in the supply of support funds generated by
the current system. During the past three years, while revenues
remained stable, the federal Universal Service Fund disbursements
soared from $3.6 billion in 1998 to $5.5 billion in 2001. \8\ Changing
the contribution mechanism will do nothing to address this fundamental
imbalance. Indeed, rather than proposing to exclude the single largest
source of interstate telecommunications revenues from the obligation to
fund its universal service programs, the Commission should be seeking
to expand the base of contributors.
---------------------------------------------------------------------------
\8\ Id., Table 3.7 (Oct. 2001).
---------------------------------------------------------------------------
Will the disbursements from the federal Universal Service Fund
continue to grow at their present rate? This is the key question. If
so, there may be a need for significant changes in contribution
methodologies. If not, the continuing stability of the interstate
telecommunications revenues will serve to meet funding needs. Many have
suggested that the implementation of the ``schools and libraries''
program has been largely accomplished and the on-going charges for
maintaining the program should not require significant increases in
funding demands. But, this is not an area of expertise for CTIA and we
leave this to others to provide definitive judgment.
A second challenge is whether other carriers will contribute to the
support of Universal Service, as Congress intended when it passed the
1996 Telecommunications Act. For example, the Commission under its
discretion can extend universal service obligations to providers that
use telecommunications who are not telecommunications carriers (who
must contribute to universal service). This indicates Congress
recognized classes of services, other than telecommunications service
that may have to be reached by Commission discretion, rather than
mandatory application under the statute. Similarly, the schools and
libraries provisions make specific reference to information services as
being covered by the provision, entitling schools and libraries to
discounted service. The FCC now has a proceeding that is looking at
these issues.
Third, will the current definition of supported basic services be
expanded to include broadband services. Increasing universal service
funds to support deployment of broadband capabilities would involve
government in selecting, for the first time, which of many possible
advanced broadband services would be given preference (and thus
depressing demand for--and investment in--other broadband services.)
Technology neutrality and funding support portability will ensure that
competition is not precluded in rural America.
A fourth challenge involves the determination of Eligible
Telecommunications Carrier (or, ETC) status. The wireless industry
supports a policy of competitive neutrality in this determination--
federal guidelines should not be biased against new entrants. A few
wireless carriers have gained ETC status in a handful of states and on
a few Indian Reservations. Consumers benefit from competition, gaining
new services and improvements to existing ones. CTIA further a system
that subsidizes a few, can only discourage competition and, ultimately,
rob the consumer.
CTIA and the wireless industry appreciate the opportunity to
testify before the Subcommittee. I look forward to answering any
questions you may have. Thank you.
Senator Inouye. Thank you very much.
Ms. Harker and Ms. Greene, you have the coalition plan and
the BellSouth plan. The average residential consumer, how much
would he pay under your plan, Ms. Greene, and, Ms. Harker,
under your plan?
Ms. Greene. Our calculation is the average residential
consumer would pay 65 cents under our plan. According to our
calculations, or according to their plan, the average consumer
would pay a dollar.
Ms. Harker. That's correct. And our calculations who, on
average, that would be less for--on average, for all customers
across all income types than they currently pay today.
Senator Inouye. How much was yours, Ms.----
Ms. Harker. A dollar.
Senator Inouye. A dollar? And----
Ms. Greene. Sixty-five cents.
Senator Inouye. Sixty-five cents.
Ms. Greene. What we've tried to do, Mr. Chairman, in our
plan is make our plan modular, technology-neutral, and
competitively neutral so that if you had a residential consumer
that was not a long-distance subscriber, not a wireless
carrier, not a broadband user, didn't use an ISP, they would
pay only based on one connection. But if you had a household
that was a relatively affluent household that had a computer,
had ISP connection, had broadband services, and was a long-
distance user, that household would pay more than the simple
residential user.
Senator Inouye. Mr. Bond, as you know, there's a lot of
bundling services packages. As a result, oftentimes, the
bundled service would allocate less and less to interstate
revenues. If that is the case, would a flat-rate assessment be
better than a revenue-based assessment?
Mr. Bond. Well, in our particular case, we do not bundle
services, as such. The fee that we pay is paid by the National
Exchange Carriers Association, and they calculate the amount
and pay the amount of us. And then, of course, we reimburse
them. So it's choosing between those two plans which would--you
know, would be the best, it puts--you know, since we don't have
that--offer that type service, it wouldn't be a good thing for
me to pick, sir.
Senator Inouye. What do you think, Mr. Altschul?
Mr. Altschul. Well, wireless carriers do bundle. And the
FCC's proxy addresses this bundling. They, again, are looking
at the total telecommunications revenues of wireless carriers
and assessing--making an assumption that the interstate
percentage of those revenues is the same as with wire-line. And
that's a way of dealing with this bundling issue.
Senator Inouye. I have many other questions, but looking at
the clock, it seems that we have other meetings going on that--
may I submit my questions to all of you for your consideration
and response?
Mr. Altschul. Absolutely.
Senator Inouye. Senator Burns?
Senator Burns. I was going to do the same thing. It's
lunchtime. I've never missed a meal, and I don't plan to.
[Laughter.]
Senator Burns. I don't want to start now.
I'm interested in your testimony and what you've offered
here today, and thank you for offering suggestions on how we
may approach the problem and maybe solve the problem. So I'll
read some more of Ms. Greene's--I was interested in your
suggestions today--and also Ms. Harker.
I have no further questions for this panel. I just
appreciate your coming today and offering testimony, and I want
to see those projections. I want to see how this projects out,
and I think all of us do, on what's ahead of us and the
direction that we're going to have to change in order to
address that projection.
So thank you very much for coming today.
Senator Inouye. Once again, I thank you, On behalf of the
Committee. Obviously, this Committee is very interested in this
subject matter, and I can assure you that your statements will
be very seriously studied, and we will be submitting questions,
not just from the two of us, but the others have indicated an
interest in doing so.
So, with that, the record will be kept open for 3 weeks. If
you wish to make changes in your statement or addendums, feel
free to do so.
The meeting is adjourned.
[Whereupon, at 12:20 p.m., the hearing was adjourned.]
A P P E N D I X
Prepared Statement of Senator Olympia J. Snowe, U.S. Senator from Maine
Mr. Chairman, I thank you for holding this important hearing today.
We are here today discuss very timely issues related to the overall
stability and sufficiency of the universal service fund. Due to a
declining universal service revenue base, the FCC has expressed its
intent to carefully assess the long-term viability of the universal
service fund and, as a subset, the manner in which universal service
contributions are collected from the telecommunications companies.
Changes would be implemented by April, 2003.
Some of the panelists will discuss in detail the various options
that are before the Commission in relation to the implementation of a
new contribution methodology, and I look forward to hearing their
testimony and views. The time is now to start this process and it is
critical we have a clearly delineated timetable for the completion of
deliberation and action.
In the meantime, let me say I find it somewhat ironic that we are
here today, in part to discuss how the fund to implement the E-Rate can
be used to stabilize the overall universal service fund in the short-
term, given the tooth-and-nail fight we had to put up to get the E-Rate
in the first place. And it is the issue of the E-Rate I want to focus
on today.
First, I commend Commissioners Copps and Martin for their
commitment to allowing undisbursed E-Rate funds from one year to be
used to toward mitigating unmet demand in the following years.
Considering that the estimated demand for E-Rate funds for FY2002 is
$5.7 billion--more than double the level of funding afforded by the
$2.25 billion per year cap--using previously undisbursed monies could
play a vital role in realizing our goal of wiring 100 percent of
America's classrooms to the Internet.
In that light, I would be deeply concerned by any effort to keep
open--in perpetuity--the option of using E-Rate monies to stabilize the
overall fund. Moreover--and perhaps most importantly--taking that tack
could be a serious disincentive to rolling up our sleeves and
addressing the bigger picture of how we're going to change the
contribution methodology so as to ensure the long-term viability of the
entire fund.
In other words, we can keep taking the policy equivalent of
``aspirin'', and treat the symptoms while masking and ignoring the root
cause...or we can actually diagnosis the problem and start treating it
with a new contribution methodology that both reflects today's
realities with regard to telecommunications usage, and remains
sensitive to the service line-item costs to consumers. Mr. Chairman, it
is the latter approach that I advocate today--and that the FCC
recognized in their proceeding last week.
I believe that a commitment from the Commission that there is no
intention to use E-Rate money to stabilize the overall fund after April
2003 is critical to spurring the kind of speedy action required to
ensure that the entire universal service fund remains sufficiently
funded. The bottom line is that, in the long term, all of the very
important programs, including the E-Rate, encompassed under the
universal service umbrella will be affected by any future shortfalls in
the fund. A short term fix at the expense of a lasting solution would
be a terrible abrogation of our oversight responsibilities.
Therefore, I look forward to working closely with the FCC over the
next ten months, and am confident that we can sure up the overall fund
and end the reliance on unused schools and libraries money by April of
next year. Again, thank you Mr. Chairman.
______
Prepared Statement of Vincent R. Sandusky, President, American Public
Communications Council
The American Public Communications Council (``APCC'') is a national
trade association of over 1,300 independent (non-telephone company)
providers of payphone equipment, services and facilities. Of the
approximately 1.9 million payphones deployed nationwide, about 550,000
payphones are operated by independent providers with the remaining 1.35
million payphones operated by the incumbent telephone companies.
This statement explains the role that payphones have played to date
in contributing to universal service and describes how the Federal
Communications Commission's recent proposal for a connection-based
universal service assessment system, unless modified, would
dramatically and adversely impact that role. This statement also offers
thoughts on the future relationship between payphone service and the
Universal Service Fund.
The Unique Role of Payphones in our Communications Network
Payphone service is an ``on demand dial-tone/per use'' wireline,
high-quality service available to all members of the public twenty-four
hours a day, seven days a week, 365 days a year. Users are not required
to make an initial investment in equipment, await activation of the
service or pay recurring monthly charges. Any member of the public can
place a call anywhere at any time. Users have the option of paying for
calls with coins or by use of calling cards, prepaid cards or other
access code arrangements.
In many instances, payphones provide access to the communications
network at no cost to the consumer. For example, Emergency 911 calls
are available at all the payphones in the country free of charge to the
caller. Users can also place calls to 800 subscribers at no charge to
the caller. These numbers provide a variety of services to callers
including access to public services such as: Social Security; Women,
Infants, and Children Nutrition (WIC) programs; the Internal Revenue
Service; Veterans Benefits hotlines; and domestic violence hotlines.
\1\ By providing all Americans, no matter what their income level, with
readily available, affordable and reliable access to the telephone
network, payphone service is a vital contributor to universal service.
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\1\ Social Service agencies, recognizing the importance of ready
access to payphones by their constituents, have contacted the FCC to
emphasize the need for Commission action in various payphone
proceedings.
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As Congress recognized in mandating the FCC to encourage widespread
deployment of payphone service, payphones are important to all
Americans regardless of their income or where they reside. Users of
wireless service need ready access to payphones when their wireless
phones are out of a service area (such as in many rural areas), lose
battery power or are not otherwise available for use. Of greater
urgency, the victims of domestic violence and abused children generally
cannot use their home or wireless phones and must rely on payphones to
make calls to shelters.
All of these payphone users exist in every strata of society in
every neighborhood and region of the country. They rely on widespread
access to payphones to meet critical needs. In addition, payphone
service is vitally important to low income Americans, particularly the
more than five and a half million without a home phone. Payphones are
also critical in rural areas where a significant number of poor
Americans lack basic home telephone service. Not only is the percentage
of poor rural Americans without phones greater than in other areas but
fewer citizens in rural America own cellular phones, increasing the
need for readily available access to payphones. Those without home or
cellular phones need access to payphones not only in the communities in
which they live but also in the many communities in which they commute
to work each day.
The value of readily available, reliable, high-quality wireline
service cannot be underestimated as the events of September 11 clearly
demonstrate. New Yorkers were lined up twenty deep to access payphones
when their usual forms of communication were unavailable. On a typical
Tuesday, many of the New Yorkers lined up might not have had need to
use a payphone, but on September 11th they were certainly glad
payphones were readily accessible. In the days and weeks following the
tragedy, as systems providers were struggling to bring their services
up to full capacity, payphone service providers provided free payphone
service in the affected areas of Manhattan.
The Current Situation: Decreasing Payphone Deployment
Today, because of the rapid expansion of wireless, and because
delays in resolving regulatory uncertainties have negatively affected
payphone service providers' costs and revenues, payphone deployment is
eroding. The expansion of wireless services since 1998 has had a
dramatic effect in reducing the overall volume of calls made at
payphones. As call volume has declined, payphone service providers have
been under pressure to remove payphones from locations where payphones
are still needed by the public but no longer attract a sufficient
number of calls to offset costs. In a 1999 order, the FCC found that a
payphone with less than 439 calls a month was not economically viable.
If a payphone with 439 calls a month is removed, callers must find some
other way, or place, to connect to our communications network to make
these calls. The announcement last year by BellSouth, which at the time
operated 143,000 payphones throughout the southeast, that it plans to
exit the payphone market soon and focus on its wireless business is a
precursor of an even higher rate of decrease in 2002 and 2003. As
wireless continues to grow rapidly, payphone call volume is almost
certain to continue to decline, which will increase the pressure on
payphone service providers to remove marginally performing payphones.
In addition, delay in resolving regulatory issues has resulted in
PSPs bearing excessive line costs and suffering from an inability to
collect much of the dial-around compensation to which the Commission
has found they are entitled. The Commission recently has acted to
address some of these issues. However, the Commission's actions, which
do not fully resolve the issues, are still subject to a lengthy review
process with the potential for years of additional delay before the
issues are finally put to rest. While these lengthy delays are
problematic for all businesses, they are particularly difficult for the
many small businesses that comprise a significant portion of the
independent payphone service provider industry.
Current Universal Service Fund Payphone Assessments and the FCC's
Proposed Connections-Based System
Under the current revenue-based system, payphone service providers
are assessed by the Fund on the basis of their revenues from interstate
coin calls. Although calling patterns vary from phone to phone, the
average monthly payphone universal service assessment is significantly
less than a dollar per payphone line. Given declining payphone
deployment, even that amount is excessive; yet under the FCC's recent
proposal for a ``connections-based'' system of assessments, payphone
lines would be improperly grouped with multi-line business lines; the
result will be assessments that would be several times higher than the
current level applicable to payphones.
APCC is participating in the FCC's rulemaking proceeding on the
connections-based approach. APCC neither supports nor opposes the
proposed connections-based system of assessments. Instead, APCC has
pointed out that payphone service is a valuable component of universal
service; that the number of payphones is rapidly declining; that the
proposed multi-line business line rate, if applied to payphone lines,
would greatly accelerate the removal of payphones; and that to help
stabilize the deployment of payphones, the FCC can and should refrain
altogether from burdening payphone service providers with these per-
line charges.
It has never made sense to require payphone service providers to
make payments to the Fund. Payphones have always been a form of
universal service, and payphone service providers simply do not fit the
FCC's mold as a payor into the Fund. Unlike other payors to the Fund,
who pass-through their Fund-related costs by a line item charge on the
customer's bill, payphone service providers have no rational way of
passing on such costs. Moreover, in the 1996 Act, Congress did not
include payphone service providers as mandatory ``telecommunications
carrier'' contributors to the Fund. The independent payphone service
provider industry has always believed that the FCC overreached to find
that the public interest required that payphone service providers be
payors into the Fund. The industry believes that the FCC incorrectly
classified LEC payphone service as service provided by
telecommunications carriers and thus subject to mandatory universal
service payments. To retain ``competitive neutrality,'' the FCC also
required independent payphone service providers to make universal
service payments. In short, the FCC need not--and, because of the
decline in payphone deployment, should not--require payphone service
providers to make payments to universal service.
To Stabilize Payphone Deployment, Payphone Service Should Be A
Universal Service Fund Recipient
Rather than requiring payphone service providers to pay into the
Fund, to help preserve ready, affordable access to the network through
payphones, the FCC should use the Fund to provide support for
payphones. APCC has submitted a proposal to the Joint Board that would
provide both general support for all payphones and special support for
payphones in high cost/rural areas. The total cost of APCC's proposal
would be $169 million annually, or about 3 percent of the total size of
the Universal Service Fund. The level of support for all payphones
would be equal to the subscriber line charge assessed on (or imputed
to) payphone lines. Additionally, payphones located in high cost/rural
areas would receive an additional $5.00 per payphone line per month in
supplemental support (as well as current local switching and long term
support) from the Commission's High Cost Fund. Although there are
services other than payphone service that are worthy candidates for
universal service support (e.g., toll services, expanded area service,
prepaid services, which the FCC has charged the Joint Board to
consider), there is one characteristic of payphone service that
distinguishes it from the others. Unlike these other services, where
the Joint Board is being asked to support increased levels or
additional services through the Fund, consumers face a diminution in
the level of payphone service they have received until now. Universal
service support is thus being asked to help ensure continuation of an
existing service, a service that provides a vital communications link
for all Americans.
______
Prepared Statement of Wesley E. Carson, President and Chief Operating
Officer, Alaska Communications Systems Holdings, Inc.
Introduction
On behalf of Alaska Communications Systems Holdings, Inc.
(``ACS''), I would like to offer the following written 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 regrets
that it was not invited to present this testimony in person and to
respond directly to questions of the Subcommittee Members. I hope that
these written comments will prove both valuable and provocative. ACS
stands ready to respond to any follow up inquiry that the Subcommittee
Members might have.
ACS is a holding company with several operating units doing
business in the diverse Alaska market. In addition to its wireless,
Internet and long distance affiliates, ACS offers 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. \1\ 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.
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\1\ ACS of Anchorage, Inc., ACS of Fairbanks, Inc., ACS of Alaska,
Inc., and ACS of the Northland, Inc.
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We must not lose sight of the ultimate goal of this program. The
desire to enhance opportunities for competitive market entry may be
laudable, but must never take precedence over the need to ensure the
ongoing availability of reliable and affordable basic
telecommunications services for consumers throughout the country. ACS
has repeatedly advanced the caveat that continued growth of the federal
Universal Service Fund (``USF'') cannot be sustained. While
periodically adjusting the ``cap'' on the fund to reflect changes over
time is sound policy, the idea that the fund can grow exponentially is
doomed to failure.
Recent additions of new categories of support have already
stretched the limits of the USF to respond. These additions have
generated a multiplicity of end user fees. Compounding this, the
proliferation of new or expanded categories of support eligibility can
be expected to immediately be translated into yet other increases in
customer surcharges. When viewed together with other significant
increases reflected on the customer's bill, like the recent changes in
the Subscriber Line Charge, the whole process is likely to crumble
under its own weight. Sooner or later, consumers will rise up and
declare, ``We're mad as hell and we're not going take it any more.''
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 manage 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 the misuse of USF. Such improper use results in increased
pressure on limited resources and creates ``perverse incentives'' to
compete for subsidies. 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. \2\ The FCC has identified the high cost carriers entitled to
support from the High Cost 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 costs per loop exceed the national average
cost per loop. Under current rules, that means a local loop costing in
excess of $23 per line per month is eligible for high cost support. \3\
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\2\ 47 U.S.C. Sec. 254(e).
\3\ 47 CFR Sec. 36.631. The Commission decided to freeze the
``national average loop cost'' for this purpose at $240 per year for
the duration of the five-year plan, which became effective on July 1,
2001. Accordingly, a rural ILEC, whose embedded loop costs exceed 115
percent of $240 (approximately $276 per line, per year, or $23 per
month) generally is eligible for financial support.
---------------------------------------------------------------------------
The misuse of funds and inefficient competition for subsidies stems
from Section 54.307(a) of the FCC rules. \4\ Under 54.307(a), a
competitive eligible telecommunications carrier (``CETC''), including
wireline CLECs in Alaska, receives federal high-cost loop support
(``HCLS'') \5\ for each line it serves based on the support the ILEC
would be entitled to receive for each line regardless of the
competitors' costs for providing that service.
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\4\ 47 C.F.R. Sec. 54.307(a) provides, ``A [CETC] shall receive
universal service support to the extent that the [CETC] captures the
subscriber lines of an [ILEC] or serves new subscriber lines in the
[ILEC's] service area.'' Subsection (1) of this rule further provides,
in pertinent part, ``[a CETC] serving loops in the service area of a
rural [ILEC] shall receive support for each line it serves in a
particular service area based on the support the [ILEC] would receive
for each such line, disaggregated by cost zone if disaggregation zones
have been established within the service.''
\5\ As used in this Petition, ``High-Cost Loop Support'' or
``HCLS'' refers to: (1) high-cost loop support (formerly known as
``universal services fund''); (2) Long Term Support (``LTS''); and (3)
Interstate Common Line Support (``ICLS'').
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The situation confronted in Fairbanks, Alaska offers a vivid
example of the problem. In Fairbanks, ACS is eligible for approximately
$10 per line per month of high-cost loop support based on its per-line
costs of $33.51 per month. Alaska's state commission, the Regulatory
Commission of Alaska (``RCA''), however, has required ACS to lease the
same Fairbanks loop to its competitor, General Communication, Inc.
(``GCI''), at the deeply discounted rate of $19.19 per month. \6\
Despite the 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 rules appear to entitle GCI to the same
$10 per line per month support that ACS receives.
---------------------------------------------------------------------------
\6\ See Petition by GCI Communications Corp. d/b/a General
Communication, Inc., and d/b/a GCI for Arbitration with PTI
Communications of Alaska, Inc., under 47 U.S.C. Sec. Sec. 251 and 252
for the Purpose of Instituting Local Competition, Petition by GCI
Communications Corp. d/b/a General Communication, Inc., and d/b/a GCI
for Arbitration with Telephone Utilities of Alaska, Inc., under 47
U.S.C. Sec. Sec. 251 and 252 for the Purpose of Instituting Local
Competition, Petition by GCI Communications Corp. d/b/a General
Communication, Inc., and d/b/a GCI for Arbitration with Telephone
Utilities of the Northland, Inc., under 47 U.S.C. Sec. Sec. 251 and 252
for the Purpose of Instituting Local Competition, Docket No. U-99-141,
Order No. 9 (Regulatory Comm'n of Alaska 2000).
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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
the funds are not being used for the purposes for which they were
intended. Such misuse violates the principle of competitive neutrality
\7\ 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.
---------------------------------------------------------------------------
\7\ In Fairbanks, ACS has a post-USF cost of approximately $23.50.
Gd, on the other hand, will have a post-USF cost of approximately
$9.00. This is not a competitively neutral result and it should be no
surprise that GCI can offer its services at a lower price when it has a
significantly lower cost of goods sold than ACS strictly as a result of
regulatory decisions.
---------------------------------------------------------------------------
Congress should be concerned that its policies, as set forth in the
Telecommunications Act of 1996, are not being implemented as intended.
Where a CETC's loop costs are known and documented, such as when the
CETC purchases UNEs at a state-sanctioned rate, USF support should be
based on the CETC's own per-line costs, not on the costs of the ILEC.
\8\ 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. The CETC should
be compelled to substantiate that its loop costs meet the threshold
standard for high-cost loop support established by the FCC and justify
the level of support it receives.
---------------------------------------------------------------------------
\8\ ACS acknowledges the Joint Statement of 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. ACS believes
that the entire question of the designation of wireless providers as
CETCs needs to be closely examined. However, in those instances where
CETC designation is genuinely in the public interest, ACS believes that
the wireless provider's own costs must form the basis for any support
eligibility and actual high cost support received.
---------------------------------------------------------------------------
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.'' \9\ (emphasis added.)
---------------------------------------------------------------------------
\9\ Section 214(e)(2) of the Communications Act of 1934, as amended
by the Telecommunications Act of 1996.
---------------------------------------------------------------------------
In the Fairbanks case, the RCA 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. \10\
---------------------------------------------------------------------------
\10\ RCA Order U-01-90(2) dated November 13, 2001 at 6.
---------------------------------------------------------------------------
Conclusion
In conclusion, Congress should be concerned that its legislative
intent is being ignored or misdirected. ACS is prepared to suggest fair
and impartial remedies. Although it did not have an opportunity to
interact directly with the Subcommittee in this instance, ACS looks
forward to the continuing dialogue on this important matter and stands
ready to assist Congress and the regulatory agencies in righting the
course of this critical consumer support mechanism. Please let us know
if you how we might assist you in your further pursuit of these issues.
______
Response to Written Questions Submitted by Hon. Max Cleland to
the Federal Communications Commission
Question 1. The current regulatory scheme at the FCC is one of
``stovepiping,'' or segregating oversight by the means by which
communications services are delivered. As you know, there has been
somewhat of a convergence in communications so that once separate
industries are offering services of other industries. How do you see
this convergence affecting payments into the universal service fund?
Do you see this nation's pricing system moving more towards a cost
based system?
Answer. Changes in the telecommunications marketplace, including
the migration of traditional voice services to wireless and other new
technologies, and the bundling of telecommunications services with
equipment and information services, are making it increasingly
difficult to identify carriers' interstate telecommunications revenues,
the basis upon which universal service contributions are currently
assessed. These changes, coupled with increased price competition,
could erode the universal service contribution base over time.
Accordingly, the Commission has initiated a thorough review of its
universal service contribution methodology. The Commission is currently
considering whether to retain or modify the current revenues-based
system or to replace it with an assessment system based on the number
and capacity of connections to a public network. The Commission, with
participation by the Federal-State Joint Board on Universal Service,
recently held a public meeting for industry and interested parties to
present various options for consideration. In addition, the Commission
is examining in a separate proceeding whether to broaden the base of
contributors to include facilities-based broadband Internet access
providers.
With regard to your second question, it is worth noting that the
vast majority of consumers nationwide have access to multiple options
for wireless services and, in some cases, for wireline services. Given
the presence and expected growth of competition in the marketplace, it
is expected that market forces will, over time, require providers to
set prices for their services in an efficient, cost-based manner. In
the meanwhile, Congress granted to the states the authority to set
cost-based rates for the inputs that competitors use to compete. There
is no reason to believe that states are generally moving away from
setting those rates on the basis of cost as Congress has directed.
Question 2. As you know, companies must be deemed an eligible
telecommunications carrier (ETC) to receive USF funds. Reports indicate
that more people will use their wireless phones as their primary phone
and forego a traditional home line, but these companies do not receive
USF payments. Do you believe there should be changes to the means of
determining who is an eligible telecommunications carrier?
Answer. Currently, wireless carriers may be designated as eligible
telecommunications carriers if they meet the statutory requirements set
forth in section 214, so no changes to the process are necessary to
ensure the availability of universal service funds for wireless
carriers. In fact, there are a number of wireless carriers that are
currently receiving universal service support. Although the states have
primary jurisdiction to designate entities as eligible
telecommunications carriers, in the absence of state jurisdiction, this
Commission has designated several wireless companies as eligible
telecommunications carriers.
Question 3. Universal Service reform is quite an undertaking. I do
believe that we can achieve some type of reform of the system, but I
believe any reform considered must examine the long term affects on the
solvency of the system. Could you address the potential long term
affects on the system of some of the proposals?
Answer. As discussed above, the Commission has sought comment on
ways to ensure that the universal service contribution methodology
remains consistent with the Act as the marketplace continues to evolve.
Among other things, the Commission sought comment on a proposal to
assess universal service contributions based on the number and capacity
of connections to a public network. Because the number of connections
historically has been more stable than interstate revenues, a
connection-based assessment may provide a more predictable funding
source for universal service. A connection-based system also may
eliminate the need for contributors to identify interstate and
intrastate telecommunications revenues, distinctions that may become
more difficult to make as the marketplace continues to change. On the
other hand, some parties have raised concerns that a connection-based
system would disadvantage low-volume users.
The Commission also invited commenters to supplement the record
with proposals to retain or modify the existing, revenue-based system.
The Commission specifically sought comment on proposals to assess
contributions on projected or current, instead of historical, revenues.
These proposals would address concerns that the current methodology may
provide competitive advantages to contributors with increasing
interstate telecommunications revenues while disadvantaging carriers
with declining revenues. Certain commenters point out, however, that
neither of these proposals would eliminate the need for contributors to
distinguish between interstate and intrastate revenues, or
telecommunications and non-telecommunications services. The Commission
is also concerned that these proposals also may increase administrative
burdens for contributors and lead to increased fluctuations in the
contribution factor, the set percentage that carriers pay to support
universal service.
The Commission is actively considering these issues, and welcomes
input from all interested parties. Please be assured that the
Commission will continue to balance concerns such as these as it acts
to ensure the long-term sufficiency and solvency of the fund.
Question 4. Georgia receives a great deal of funds from the
universal service fund. We are the largest state east of the
Mississippi and has many rural areas. I need to be able to tell my
constituents that they will have universal service support. Can I, in
good faith, tell my constituents that universal service support will be
available at the same levels in Georgia as it has been in the past?
Answer. Beginning in 1998, through the second quarter of 2002,
Georgia has received more than $740 million in support from the various
universal service support mechanisms, thereby benefiting consumers in
the State of Georgia. There is no specific reason to believe that
universal service support to Georgia will decrease in the next few
years.
______
Response to Written Questions Submitted by Hon. Daniel K. Inouye to
the Federal Communications Commission
Question 1. One problem often cited by critics of the current
contribution mechanism is the ``lag'' between prior reported revenues,
which are six months old, and current revenues, which are assessed
based on the contribution factor.
Is it possible to eliminate this lag, but retain a revenue-based
assessment mechanism? Are there ways to minimize the competitive
distortion between carriers with rising revenues (such as the RBOCs)
and carriers with falling revenues (such as the IXCs)? How would the
adoption of ``collect-and-remit'' proposals advanced by some carriers
affect the administration and stability of the fund?
Answer. Several commenters have proposed that the Commission assess
contributions on projected or current, instead of historical, revenues.
Because this would eliminate the current six-month interval between
reported revenues and assessment of contributions based on those
revenues, commenters assert these proposals would eliminate the lag of
the current system, thereby minimizing competitive distortions between
carriers with rising and falling revenues.
The Commission also sought comment on a ``collect-and-remit''
proposal. Under a collect-and-remit system, carriers would be required
to remit to the fund administrator, Universal Service Administrative
Company (USAC), only those contribution amounts actually collected from
enduser customers. Accordingly, a collect-and-remit system would
relieve carriers of any risk associated with the recovery of universal
service contributions and eliminate the need for contributors to mark-
up universal service line items to reflect uncollectibles. Some parties
argue, however, that because USAC would not be able to predict with
complete accuracy the amount of assessments actually collected in a
given period, a collect-and-remit system would create the possibility
of shortfalls in the universal service fund, which may necessitate
directing USAC to establish a reserve funded through increases in
assessment rates. Certain commenters note that fluctuations in
uncollectible rates also could impact the predictability and stability
of the universal service fund.
The Commission is actively considering these issues, and welcomes
input from all interested parties.
Question 2. One of the items currently under review by the Federal-
State Joint Board is the effectiveness of the certain federal low
income support programs (Lifeline and Link Up Programs). Often, the
success of these programs varies widely from state to state due to
differences in state eligibility requirements and in the administration
of these programs. California, for example, received over half of all
federal low income support dollars in 2001.
What are the major reasons behind the relative successes or
failures of these programs in certain states? Should there be more
direct federal involvement in establishing eligibility requirements for
these programs? Should certain minimum outreach efforts be required to
ensure that low income residents have access to these programs?
Answer. The federal Lifeline/Link-Up programs have yielded the
highest participation rates where states have provided matching funds
and engaged in proactive targeted efforts such as aggressive outreach
and multi-agency cooperation. Certain states whose eligibility criteria
capture fewer low-income subscribers than the federal eligibility
criteria may have lower take rates. In addition, the take rate is low
where there is lack of knowledge or information about the Lifeline and
Link-Up programs.
The FCC has initiated a proceeding to examine the Lifeline and
Link-Up programs and has referred the issue to the Federal-State Joint
Board on Universal Service. The Joint Board is currently reviewing the
low-income programs. Issues under consideration with respect to
eligibility include modification of the existing federal eligibility
criteria, as well as whether to require all states to include the
federal eligibility criteria in their respective programs. The Joint
Board has also sought comment generally on outreach issues, including
whether to adopt specific outreach requirements for all carriers. Thus
if the record shows that either more direct Federal involvement or
certain minimum outreach efforts are warranted the Commission will not
hesitate to implement these proposed changes.
Question 3. As defined in the statute, ``universal service''
represents ``an evolving level of telecommunications services.'' One of
the items currently under review by the Federal-State Joint Board is
whether to add broadband or other items to the list of supported
services.
Should broadband be designated as a supported service? If not, what
test should guide future determinations as to when broadband should be
included? To the extent that the Commission defines broadband services
as an ``information service,'' would such a ruling preclude the Joint
Board and FCC from later finding that broadband is a
``telecommunications service'' eligible for universal service support?
Answer. On July 10, 2002, the Federal-State Joint Board on
Universal Service (Joint Board) issued its Recommended Decision
regarding the definition of supported services. As required by statute,
the Joint Board utilized the principles and criteria in section 254(b)
and (c) to guide its recommendations, including those regarding
advanced services. Those criteria include whether the service is (1)
essential to education, public health, or public safety; (2) subscribed
to by a substantial majority of residential consumers; (3) being
deployed by telecommunications carriers in public telecommunications
networks; and (4) consistent with the public interest, convenience and
necessity. The Joint Board, applying these criteria, concluded that
advanced or high-speed services should not be added to the definition
of universal service at this time. The Joint Board did, however, fully
support the Commission's prior conclusion that universal service
policies should not inadvertently create barriers to the provision of
or access to advanced services and that the current universal service
system does not create such barriers. The Joint Board stated in its
Recommended Decision that if the Commission concludes that wireline
broadband Internet access service is an ``information service'' and
that the transmission component of that service is
``telecommunications,'' it believes that broadband Internet access
services could not be included within the definition of supported
services because section 254(c) limits the definition of supported
services to telecommunications services.
The Recommended Decision is now before the Commission. The
Commission will address this issue, consistent with the governing
statutory framework.
Question 4. Under the President's Budget, the size of the Universal
Service Fund is expected to grow from $5.3 Billion in 2001 to $7.1
Billion in 2007.
Since the Schools & Libraries Fund is currently capped at $2.25
Billion per year, how much of this growth is attributable to expansion
in the High Cost Support Mechanism? Are there any further pending
changes to universal service programs that might place further upward
pressure on the size of the fund?
Answer. Most of the projected growth in the universal service fund
in the President's Budget is attributable to increased support to
carriers serving customers in high-cost areas. It is expected that
universal service will grow over time due to inflation, line growth,
and increased participation, even if no major programmatic changes are
implemented. Moreover, because the high-cost program is significantly
larger than the low-income and rural health care programs, it would be
expected that most of the growth is associated with the high-cost
programs.
Several proposals currently before the Commission could impact the
size of the universal service support mechanisms. It is difficult,
however, to determine at this time whether these decisions will
increase or decrease the size of the fund. For example, the Commission,
in consultation with the Joint Board, is considering whether to modify
the forward-looking high-cost support mechanism for non-rural carriers
in light of a recent ruling by the United States Court of Appeals for
the 10th Circuit. In addition, the Commission is considering
modifications to the rural health care support mechanism that could
bolster the availability of telemedicine and telehealth and increase
current levels of demand, subject to the existing cap. Finally, the
Commission has indicated its intent to initiate a proceeding to
evaluate the way portable high-cost support is calculated for
competitive eligible telecommunications carriers.
Question 5. In Qwest v. FCC, the 10th Circuit found that the
federal, statutory mandate stating that rural and urban rates be
``reasonably comparable'' requires the FCC, where necessary, to induce
states to meet federal principles.
In light of the 10th Circuit's decision in Qwest, what
``inducements'' should the federal government use to ensure that the
federal statutory goal of ensuring reasonably comparable rates between
urban and rural areas is met?
Answer. In response to the Qwest v. FCC decision, the Commission
issued a Notice of Proposed Rulemaking seeking comment on how states
should be induced to assist in implementing the statutory goal of
reasonable comparability, and on other issues remanded by the court.
The Commission asked about conditioning federal support on some form of
state action, entering into a binding cooperative agreement with the
states, and other possible inducements. It referred these and other
issues, as well as the record developed in response to the Notice, to
the Federal-State Joint Board on Universal Service for a recommended
decision. The official comment period closed on April 25, 2002, and the
Joint Board is now developing its recommendations.
Examination of the record developed so far indicates a range of
opinion as to what inducements the federal government should use. A
number of commenters maintain that, based on the states' long history
of advancing universal service goals, and evidence that urban and rural
rates nationwide are reasonably comparable, the Commission should
monitor state policies and use inducements only where a need arises.
Other commenters have proposed possible inducements, including
requiring states to certify that their urban and rural rates are
reasonably comparable, payment of additional federal support for states
that take specified action, and non-payment of federal support for
states that fail to take specified action. Some commenters also have
proposed specific actions that states should be induced to undertake
beyond setting reasonably comparable rates, such as establishing
explicit universal service support mechanisms.
The Commission is actively considering these issues, and welcomes
input from all interested parties. Please be assured that the
Commission will continue to balance concerns such as these as it acts
to ensure the long-term sufficiency and solvency of the fund.
Question 6. Proponents of changing the existing universal service
contribution mechanism often cite recent declines in total interstate
telecommunications revenues as evidence that the current assessment
mechanism is flawed.
Has the FCC made any attempts to quantify how much of the decline
in total interstate revenues is due to declining economic conditions
and how much is due to structural changes in the marketplace. Or put
another way, if economic times were better, would total interstate
telecommunications revenues still be expected to decline? Is the
growing use of Internet telephony having a quantifiable effect on
interstate revenues?
Answer. The cause of the decline in revenues is a complex matter.
Declines in total interstate end-user telecommunications revenues began
in the second half of 1999. The record in the Commission's ongoing
contribution methodology proceeding suggests that the universal service
contribution base is declining, in part, due to changes in the
telecommunications marketplace, including migration of customers to
wireless services and other new technologies that are difficult to
categorize by jurisdiction, increased bundling of interstate/intrastate
and telecommunications/non-telecommunications products and services,
local exchange carrier entry into the long distance market, and related
price competition. It is difficult, however, to quantify the precise
impact of any one of these factors, or to quantify the impact of
overall economic trends.
Commission rules do not currently require contributors to identify
Internet protocol telephony revenues when reporting revenues for
purposes of calculating universal service contribution obligations.
However, some commenters believe migration to Internet telephony will
significantly erode the contribution base. At this time, migration does
not appear to have greatly impacted the contribution base, but concerns
regarding this issue may increase in the future.
Question 7. In an effort to keep universal service charges from
rising, the Commission voted to borrow unused funds in the Schools and
Libraries account in order to keep the contribution factor level for
the next three quarters. In so doing, the Commission also stated its
intention to have completed and implemented rules changing the current
contribution methodology by April 1, 2003.
How much will have to be borrowed from the Schools & Libraries Fund
over the next 3 quarters?
Answer. The Commission directed the Universal Service
Administrative Company to apply sufficient unused funds from the
schools and libraries program to maintain the third quarter 2002
contribution factor at 7.2805 percent. Commission calculations indicate
that about $255.4 million in unused funds were necessary to stabilize
the contribution factor for the third quarter of 2002. Should carrier
interstate end-user telecommunications revenues and demand for
universal service support remain about the same, approximately the same
amount of unused funds would be necessary to keep the contribution
factors stable for the fourth quarter of 2002 and the first quarter of
2003.
Question 8. To the extent that the Commission is unable to meet its
April 1st deadline, what would be the expected effect on future
contribution factors if interstate revenues continue to decline?
Answer. The universal service contribution factor is calculated by
dividing total quarterly program collection or demand by the quarterly
contribution base. If the universal service contribution base declines
and program demand remains constant or increases, the universal service
contribution factor will increase. It is difficult to predict future
contribution factors due to the large number of variables at play.
While events may change these estimates, we project the contribution
factor could be over 9 percent in the coming year, assuming current
trends continue.
Question 9. Given that some parties have advocated expanding the
base of contributors to include all broadband providers, does the
Commission expect to conclude its related items regarding the
regulatory classification of broadband by that date?
Answer. The Commission is currently examining the complex record in
this proceeding and hopes to resolve the regulatory classification of
wireline, broadband Internet access by that date. Comments in the
broadband proceeding were submitted on May 3, 2002 and reply comments
on July 1, 2002. The Commission received approximately 150 comments and
reply comments and over 800 e-mailed responses.
______
FCC STAFF COMMENT:
The Federal Communications Commission in partnership with our state
public utility commissions, has had a program for auditing common
carriers for several decades, beginning in the late 1930's or early
1940's. After divestiture of AT&T in 1984, and prior to the passage of
the 1996 Act, the audit work of this Commission largely focused on
proper regulation of interstate rates charged to long distance
companies by price cap and rate of return incumbent local exchange
carriers. This audit program operated, and continues today pursuant to
section 220 and various other sections of the Communications Act of
1934, as amended. See 47 U.S.C. Sec. 220.
More recently, with the passage of the 1996 Act and the growth of
competition, the Commission's audit program has correspondingly
evolved. Audit staff has been tasked beyond its traditional regulatory
accounting role, to review compliance with other Commission policies
and requirements including, among other things, Bell Operating Company
(BOC) section 272 separate affiliate rules that govern after their long
distance entry, carrier numbering resource utilization rules, as well
as carrier obligations in connection with universal service, which was
the topic of the hearing, and the specific focus of your question.
In particular, consistent with its oversight obligations over the
administration of the universal service fund, the Common Carrier Bureau
began in the fall of 2000 a review of the universal service line items
charged by the three largest long distance carriers, AT&T, WorldCom and
Sprint, under our authority set forth in sections 218 and 220(c) of the
Communications Act. Specifically, the review focused on the carriers'
support and explanation for the universal service line charge in
customer bills that exceeded the contribution factor established by the
Commission.
The review was performed by audit staff, who conducted field
interviews with representatives of each company, issued data requests
to obtain information from these companies, examined tariff filings and
billing records, and examined the FCC Forms 457 and 499 filed by these
companies with the Universal Service Administrative Company (USAC)
reporting aggregate interstate end user revenues. Through this review,
staff sought to establish the underlying components of each carrier's
universal service fee charged to consumers to determine whether those
fees were consistent with the Commission's rules and applicable law.
This investigation, which concluded in 2001, ultimately revealed a
need to consider structural reform to our existing approach to
universal service assessment and recovery. Indeed, our review confirmed
the carriers' explanations for what composed the rate elements of the
carriers' universal service fee. For example, although the Commission
set a uniform contribution percentage, carriers chose to boost this in
order to account for a variety of market factors including, among other
things, uncollectible revenues, a declining revenue base, overhead
expense and unbilled revenues.
What we found far more difficult to answer, however, was the
question of whether these additional rate components violated our
existing rules. The Commission does not prescribe specific rates or
ratemaking methodology for the long distance companies, as they operate
in a competitive marketplace. Nevertheless, section 201 of the
Communications Act generally requires that charges be ``just and
reasonable.'' Moreover, although the Commission's rules give carriers
flexibility in how they recover the costs of contributing to support
universal service from their customers, they also require that carriers
not shift more than an equitable share of their contributions to any
customer or group of customers. The Commission's rules also require
that bills contain a full and non-misleading description of charges on
those bills.
Under these standards, whether the carriers' line item practices
and rate components, confirmed by the audit staff in its review, were
in fact unreasonable or contrary to our rules, reflected an inherently
subjective judgment, and would be susceptible to differing
interpretations and disputed by the carriers. This lack of clarity in
turn would make any specific enforcement action more difficult. Thus,
we concluded that a more effective long term solution was to focus on a
comprehensive examination of the framework for carrier assessment and
recovery of universal service contribution amounts. For that reason,
and as an outgrowth of the line item investigation, the staff chose to
direct its principal efforts toward a rulemaking examining in a
comprehensive fashion how to modify the current system to ensure long
term stability, fairness and administrative efficiency in a dynamic
marketplace. The rulemaking commenced with a request for comments to
reform the system in May of 2001. In that order, the Commission
expressly highlighted the need for changing its rules. See Federal
State Joint Board on Universal Service, CC Docket No. 96-45, Notice of
Proposed Rulemaking, 16 FCC Red 9892, para.para. 3, 5, 6 (2001).
Since then, as you know, in February of this year, the Commission
issued a further round of comments on a specific connection-based
proposal that would eliminate carrier discretion altogether in the
amount charged to its customers. Once again, the Commission made clear
its concern over the existing carrier line item practices:
Some carriers also employ different recovery methods for
different customer groups, imposing universal service line-item
charges on certain categories for different customer groups,
but recovering an undisclosed amount from other customers
through per-minute service rates. For example, some carriers do
not recover universal service contributions form certain
categories of customers, such as dial-around customers. In
addition, universal service line-item percentages for
residential customers often are higher than those for business
customers. Other carriers charge customers large, up-front
universal service fees that are unrelated to their revenues
from a customer. Such practices may be inexplicable to the
casual observer, and may shift a disproportionate share of the
cost of contributions onto certain customer classes. In this
Further Notice, therefore, we seek comment on how to modif' our
rules to ensure that carriers that elect to recover their
universal service obligations from their customers do so in a
manner that is reasonable, fair and understandable.
See Federal State Joint Board on Universal Service, Further Notice
of Proposed Rulemaking, CC Docket No. 96-45, FCC 02-43, para.para. 19,
20 (rel. Feb. 26, 2002) (citations omitted).
Finally, after your hearing on universal service issues, the
Commission held a public forum on these proposals that included the
federal and state members of the Joint Board on Universal Service.
Staff is actively working to analyze the record and make a
recommendation to the Commission in the near future on these issues.
The attached information provides a projection for the annualized
universal service factor for calendar years 2002-2006. To develop this
projection, the FCC's Wireline Competition Bureau utilized the
following assumptions: (1) interstate end user telecommunications
revenues would continue to decline at the past eight quarters'
annualized rate (3.8 percent per year); (2) program demand would
continue to grow consistent with historical growth rates, subject to
existing program caps (more details regarding program demand
projections follow below); and (3) unused funds from the schools and
libraries program would be applied to reduce the contribution factor
for the third quarter 2002 through the first quarter 2003. Annualized
projected contribution factors were calculated by dividing total
projected annual program costs by projected annual interstate end user
telecommunications revenues.
The above information is based on the following assumptions:
1) Based on historical annual average decline (third quarter 2000-
second quarter 2002), assumed contribution base would decline 0.9
percent each quarter;
2) Based on historical growth rates (fourth quarter 1998-third
quarter 2002), assumed demand for low-income program would increase by
7 percent each year;
3) Based on staff estimates guided by historical take rates,
assumed demand for rural health care program would increase by 5
percent each year;
4) The 2.6 percent growth rate per year for the high cost support
mechanisms is a weighted average of the projected growth rates for the
individual programs. Each program's projected growth was based on
historical growth in lines, inflation, and regulatory caps, where
applicable. Projected growth for ICLS was based on the historical
growth of the commonline revenue requirement and long term support, and
scheduled increases in subscriber line charges. Projected growth for
payments to competitive ETCs was based on historical growth for 2001;
5) Assumed demand for schools and libraries program would remain at
the cap ($2.25 billion) each year; and
6) Utilized USAC projection of unused schools and libraries funds
to reduce the contribution factor for third quarter 2002, fourth
quarter 2002 and first quarter 2003.
______
Response to Written Questions Submitted by Hon. Max Cleland to
G. Nanette Thompson
Question 1. Do you see this nation's pricing system moving more
towards a cost-based system?
Answer. Yes. The 1996 Telecommunications Act laid out a plan to
transition the nation's telecommunications industry from monopoly to
competitive markets. As competitive forces come to bear in any market,
prices migrate towards costs. It is the responsibility of state
regulators and the FCC to insure that the policy goal of universal
service is accommodated during that migration. The universal service
programs are designed to insure that all Americans can remain connected
to the national network by paying reasonably comparable local rates.
Question 2. As you know, companies must be deemed an eligible
telecommunications carrier (ETC) to receive USF funds. Reports indicate
that more people will use their wireless phones as their primary phone
and forego a traditional home line, but these companies do not receive
USF payments. Do you believe there should be changes to the means of
determining who is an eligible telecommunications carrier?
Answer. No. The current system allows cellular carriers to obtain
ETC status and a number of cellular carriers now receive USF. I agree
however that the regulatory scheme should keep abreast of technological
changes in the telecommunications world, and facilitate the delivery of
services to consumers in the most cost-efficient manner possible.
Especially where consumers across the nation are supporting delivery of
services to high cost areas through the universal service fund, we need
to insure that those funds are being wisely expended. Wireless
technology may provide service in some rural areas at lower cost than
wireline technology. Whatever technology can most cost efficiently
deliver services should be eligible to receive federal universal
service support.
Question 3. Universal service reform is quite an undertaking. I do
believe that we can achieve some type of reform of the system, but I
believe any reform considered must examine the long-term effects on the
solvency of the system. Could you address the potential long-term
effects on the system of some of the proposals?
Answer. I agree that universal service reform is quite an
undertaking. I also agree that any reforms should be made mindful of
the long-term effects. The goal should be a fund that accomplishes its
policy objectives and is sustainable in the long term. That goal can be
achieved only if the recent dynamic changes in the telecommunications
industry are accommodated. Modifications to the contribution mechanism
need to reflect the realities of the manner in which telecommunications
services are delivered to consumers. The current contribution mechanism
inequitably spreads the burden and benefits of universal service. The
best long term solution is to modify the contribution mechanism to
insure that all providers of telecommunications services contribute,
and all who provide essential telecommunications services to customers
in high cost areas are eligible for support.
______
Response to Written Questions Submitted by Hon. Daniel K. Inouye to
G. Nanette Thompson
Question 1. One problem often cited by critics of the current
contribution mechanism is the ``lag'' between prior reported revenues,
which are six months old, and current revenues, which are assessed
based on the contribution factor. Is it possible to eliminate this lag,
but retain a revenue-based assessment mechanism? Are there ways to
minimize the competitive distortion between carriers with rising
revenues (such as RBOCs) and carriers with falling revenues (such as
IXCs)? How would the adoption of ``collect-and-remit'' proposals
advanced by some carriers affect the administration and stability of
the fund?
Answer. Any revenue based system will have some lag because of
differences in market share of companies over time. It is possible,
however, to accommodate that lag with reconciliation process. The
complexity and cost of that reconciliation should be weighed against a
contribution mechanism based on some other standard. The most oft
debated alternative is a contribution standard based on connections.
Any system presents inequities and opportunities for gaming. The
best alternative is administratively simple for both the companies and
USAC, clear in its application to eliminate incentives to distort
reports, and equitable across all segments of industry that provide
telecommunications services and benefit from the fund.
The ``collect and remit'' proposal might resolve the inequities
created by changes in carriers' market shares, but would be more
administratively complex than the current system. It would shift the
burden of accommodating over and under collections to the fund itself
from individual carriers. USAC would be able to best estimate the cost
and administrative issues associated with that shift.
Question 2. One of the items currently under review by the Federal-
State Joint Board is the effectiveness of certain federal low income
support programs (Lifeline and Link-Up Programs). Often, the success of
these programs varies widely from state to state due to differences in
state eligibility requirements and in the administration of these
programs. California, for example, received over half of all federal
low income support dollars in 2001. What are the major reasons behind
the relative successes or failures of these programs in certain states?
Answer. The FCC referred this issue to the Federal-State Universal
Service Joint Board and we will issue a recommended decision before the
end of this year. There are several reasons for the differences between
states. Among the most significant factors causing the differences
between states is how they have set the eligibility criteria and how
they perform customer outreach. More funding under these programs goes
to states that allow automatic enrollment to persons receiving benefits
under another program that supports low income consumers. How the
programs are advertised, and the complexity of administering the
programs from the perspective of the consumer and telecommunications
provider also affect the disparate levels of enrollment between states.
For example, United Utilities, Inc. in Alaska managed to substantially
increase its Lifeline subscribership by going to remote villages with
an interpreter and explaining the program to the citizens.
To evaluate success and failure, those terms must first be defined.
The programs are designed to allow people with low-incomes to be
connected to the national network. The joint board is examining the
correlation between the states that have low income populations, those
who receive a large percentage of the funds distributed under this
program and the programs designed by the individual states to make
recommendations to the FCC on how the program should be modified to
better achieve its policy goals and be more equitable between states.
Question 3. Should there be more direct federal involvement in
establishing eligibility requirements for these programs? Should
certain minimum outreach efforts be required to ensure that low income
residents have access to these programs?
The balance between state and federal responsibility for
eligibility needs to be carefully struck to insure that states retain
enough flexibility to accommodate their unique needs. For example,
national guidelines that target Native American populations based on
their residency on reservations do not reach those populations in
Alaska with only one small reservation (Metlakatla) and a large native
community that lives throughout the state. The federal government
should encourage outreach efforts to insure that all eligible consumers
are aware of the programs.
Question 4. As defined in the statute, ``universal service''
represents ``an evolving level of telecommunications services.'' One of
the items currently under review by the Federal-State Joint Board is
whether to add broadband or other items to the list of supported
services. Should broadband be designated as a supported service? If
not, what test should guide future determinations as to when broadband
should be included?
Answer. The Joint Board recently released a Recommended Decision
which recommended that broadband not yet be added to the list of
supported services. We found that broadband services did not meet the
criteria in the 1996 Telecommunications Act for an eligible supported
service because nationally only ten percent of consumers now purchase
broadband services. We will re-examine this issue over time.
Question 5. To the extent that the Commission defines broadband
services as an ``information service,'' would such a ruling preclude
the Joint Board and FCC from later finding that broadband is a
``telecommunications service'' eligible for universal service support?
Answer. The recent ruling is potentially problematic. In paragraph
19 of the Recommended Decision of July 9, 2002, the Joint Board
identified the problems that would be created by an FCC determination
that broadband is an ``information service'' rather than a
``telecommunications service.'' If broadband is determined to be an
``information service,'' it could not be included in the definition of
universal service, which is limited to telecommunications services. It
should also be noted that Section 254(d) only allows the FCC to require
universal service contributions from telecommunications providers,
which would exclude broadband providers if the service were deemed an
information service. Broadband services could become a larger segment
of the market with no obligations to contribute towards universal
service.
Question 6. Under the President's Budget, the size of the Universal
Service Fund is expected to grow from $5.3 billion to $7.1 billion in
2007. Since the Schools & Libraries Fund is currently capped at $2.25
billion per year, how much of this growth is attributable to expansion
of the High Cost Support Mechanism? Are there any further pending
changes to universal service programs that might place further upward
pressure on the size of the fund?
Answer. Most of the fund's growth in recent years is attributable
to the expansion of the portion of the High Cost Fund associated with
FCC access charge reform (CALLs and MAGs plans). In the future, the
amount of non-access related funding might change as the FCC decides a
case remanded last year by from the 10th circuit court of appeals
concerning the non-rural cost support system. (Qwest v. FCC) That court
held that the FCC's rules for universal service program did not assure
that consumers across the nation were paying reasonable comparable
rates, nor demonstrate that the funding provided was sufficient. The
court was also critical of how the FCC assured state involvement in the
administration and achievement of the goals of the universal service
programs. The Joint Board is now working on a recommended decision to
the FCC that will detail remedies for the problems and concerns raised
by the court. The Joint Board was asked to complete its recommendation
by August 2002.
Question 7. In Qwest v. FCC, the 10th Circuit found that the
federal, statutory mandate stating that rural and urban rates be
``reasonably comparable'' requires the FCC, where necessary, to induce
states to meet federal principles. In light of the 10th Circuit's
decision in Qwest, what ``inducements'' should the federal government
use to ensure that the federal statutory goal of ensuring reasonably
comparable rates between urban and rural areas is met?
Answer. The FCC should clearly define its expectations regarding
use of federal universal service funds and objectives states must
strive towards if they desire continued support. State commissions use
different methods to set rates, depending on how competitive the market
is, the type of providers, and limitations placed on them by their
state legislature. Even within their borders, rates are often set
differently in different parts of the state as necessary to reflect
market conditions. Therefore, the goal of comparable rates requires
state involvement. The FCC should set standards, and require reporting
of data from each state so that it can monitor national trends.
Question 8. In the original Senate version of the 1996
Telecommunications Act, universal service contributions were to be
assessed on all telecommunications carriers based on an equitable and
non-discriminatory basis. In the conference committee, however, this
requirement was limited to telecommunications carriers providing
interstate services . . . ''
Given the shrinking contribution base for interstate revenues and
the increasing difficulty of accounting between interstate and
interstate revenues in bundled service offerings, does it make sense to
change the statute and return to the broader language originally passed
by the Senate?
Answer. Yes. Since the Act was passed the manner in which
telecommunications services are delivered and the way the industry is
regulated has changed. The distinction between interstate and
intrastate revenues is not as clear as it was in 1996. In the case of
wireless providers whose share of the market has increased, they may
not be able to accurately distinguish the revenues without incurring
substantial administrative costs.
Question 9. What effects, if any, will changes made to the federal
contribution mechanism have on state universal service programs. What
measures, if any, should be made to strengthen the Federal-State
partnership in ensuring that all Americans have access to basic
telecommunications services?
Answer. State programs are all different, so the answer to the
first question depends on the state at issue. Generally, the states are
likely to have increasing responsibility in the future to monitoring
the use and sufficiency of the fund. The states best understand their
own markets and the companies operating within their boundaries. The
states can most effectively monitor the proper use of the fund and
insure that it is achieving the national policy goals of sufficient,
predictable support and reasonably comparable rural and urban rates. In
2001, the FCC required states to certify that all companies receiving
universal service funds in their states were using the funds
appropriately. The federal state partnership can be enhanced by a clear
enumeration of the relative responsibilities of state and federal
regulators. States need to be able to adapt programs to meet their
unique needs. States can design their own state universal service
programs to fund particular policy goals or supplement the federal
programs. For example, in Alaska our state fund supports public
interest payphones because keeping operable payphones in remote
communities that do not otherwise generate enough revenue to justify
the expense is a public safety issue.
______
Supplemental Testimony of Lila A. Jaber, Chairman, Florida Public
Service Commission
We thought it would be helpful to provide greater detail to the
Committee on a couple of points from my testimony. First, the Florida
Public Service Commission (FPSC) has reason to urge that the overall
Universal Service Fund grow no bigger than it currently is, and that
the administration of the funds be subject to greater accountability
standards. Florida has already taken steps, with state funds, to
develop initiatives on funding for access to advanced services to
schools and libraries. Second, we have additional suggestions for
accountability of the disbursement of the funds. To the extent that
Congress does not see the need to open up Section 254 for revision, we
urge Congress to use its oversight role of the FCC to direct such
changes. If Congress does pursue revisions to Section 254, we have
included suggested language to limit the size of the overall fund.
Florida's Efforts to Provide Access to Advanced Services
In 1995, the Florida Legislature enacted a major overhaul of the
Florida telecommunications law. That included the creation of Part II
of Chapter 364, Florida Statutes, which created the Education
Facilities Infrastructure Improvement Act. The Legislature found that
it is in the interest of the State to assure its citizens access to
advanced telecommunications services since such access will complement
the provision of educational and health care services.
The law requires that advanced telecommunications services be
provided to eligible facilities. A program was set out in which
eligible facilities submitted a technology-needs request to the
Department of Management Services. ``Eligible facilities'' includes
campuses or instructional facilities, public community colleges, area
technical centers, public elementary schools, middle schools, and high
schools, as well as teaching hospitals and rural public hospitals.
Thus, a year prior to the Federal Telecommunications Act, the
Florida Legislature enacted its own ``E-rate'' program. Florida also
appropriated monies to rewire schools prior to its 1995 law. From 1992-
1996, the Florida legislature appropriated $680 million for schools and
library systems for technology initiatives. By the time the 1996
Telecommunications Act was passed, a considerable amount of the wiring
of Florida schools had already been completed. Practically 100 percent
of the classrooms in Florida today have Internet connections.
In addition, through programs like NetDay (a public/private
partnership established to connect schools to the Internet) and the
Florida Information Resource Network (FIRN, an organization of
education information specialists with the goal of networking all of
Florida's educational institutions), it is estimated that fully one-
half of the schools in Florida were already wired before the Federal
Schools and Libraries program began in 1997.
Indeed, Florida has good reason to be concerned about the size of
the Federal Universal Service programs, when Florida is the largest net
contributor and is almost ``penalized'' for its early success in wiring
our schools for advanced services, paid for by Florida citizens. As a
net contributor, Florida citizens are now paying for other states to
achieve similar access to advanced services.
Accountability
The second topic I would like to address is accountability. The
FPSC has consistently suggested that the Universal Service Funds need
to have an increased level of accountability in an effort to ensure
that funds are being disbursed in a manner that truly addresses the
intended goal of the statute. To that end, we would suggest a number of
possible steps that could be taken to achieve increased accountability.
First, the Congress, in its oversight role, might urge that the FCC
conduct biennial or triennial reviews of its rules and guidelines
governing each of the universal service programs to make sure the rules
are not inadvertently creating incentives for gaming and abuse.
Second, the Universal Service Administrative Company (USAC) should
be directed to implement a process to increase the number of
independent audits of the recipients of universal service funding. The
audits should be conducted in proportion to the relative size of the
programs and the relative amounts of support received such that more
audits would be conducted on large recipients versus small, and more
audits would be conducted on the recipients of high cost support versus
recipients of Lifeline and Linkup support. If Congress opens up Section
254 of the Act for review, language might be added for state
commissions to conduct these audits if necessary. In the alternative,
state commissions could be required, as part of the annual ETC
certification review, to better ensure that recipients of universal
service funding have used the funds as intended. The FCC could
establish stronger national criteria for that review to make sure that
there is consistency from state to state. The concept is not to burden
USAC, the FCC, state commissions or the industry with unreasonable
regulatory oversight but to provide some incentive for carriers and
states to reduce gaming and potential abuse.
In the recent FCC Inspector General's report, issued June 11, 2002,
the Inspector General continued to focus on the Universal Service Fund
activities because of continuing allegations of waste and fraud.
According to the Inspector General, the size and scope of the Schools
and Libraries program by itself makes it a major program for the FCC
and a significant area for risk of fraud, waste, and abuse. ``This,
coupled with the results of various oversight activities performed to
date, gives the Office of Inspector General a great deal of concern
about this program.'' The report says, ``It is our opinion that the
scope of USAC's program, conducting a very small number of audits in a
program with in excess of 30,000 applications (for Schools and
Libraries alone) per year, does not provide the FCC with adequate
insight on program-level compliance by program beneficiaries.'' The
Inspector General also acknowledges that a systematic program of
oversight has not yet been established.
Thus, we are concerned about the lack of audit resources, but we
are glad to see the problem recognized. Especially as a net contributor
state, with our schools wired for access to advanced services prior to
the 1996 Telecommunications Act, we have good reason to want greater
accountability in the program.
Revisions to Section 254
My last topic addresses possible legislative revisions to Section
254. If it is the Congress' desire to proceed with revising Section
254, then the Congress should cap the overall Universal Service Fund
for three years following the effective date of any revisions to the
Act. A provision for a triennial review could then take place.
Standards for accountability and sufficiency should be included for the
purposes of the review. We suggest the following provision:
LIMITATION OF Universal Service Support. (i) Notwithstanding
subsection 254(b)(5), universal service support shall be capped
for three years following the effective date of this Act. Every
three years thereafter, the Commission shall review the need to
lift the caps, applying standards of accountability and
sufficiency. If the Commission makes a finding that additional
funds are necessary to meet subsection 254(b)(5), then the
limitation shall be lifted for the subsequent three-year
period.
In conclusion, the Florida Commission urges greater accountability
in the Universal Service programs and offers the above suggestions for
consideration.
______
Response to Written Questions Submitted by Hon. Max Cleland to
Lila A. Jaber
Question 1. Do you see this nation's pricing system moving more
towards a cost based system?
Answer. In the context that robust competitive markets will
ultimately lead to rates which are closely aligned with cost, I believe
telecommunications pricing will be driven toward a more cost-based
approach as time goes on. That is the end result that all of us are
shooting for. Basic local service rates have historically been priced
to maximize customer connectivity without total reliance on cost
recovery. Aligning price to underlying cost for these services is not
something that can be achieved overnight without adverse impacts on
some consumers. Many states, however, are already considering or have
considered local service rate rebalancing and UNE pricing as ways to
inject a more rational pricing structure into the local service market
The Universal Service Fund is a key factor in ensuring that segments of
society are not left behind by the resulting price/cost relationship of
a more market-based pricing regime. Without a safety net for consumers
and high-cost service providers the results of market-based pricing may
be detrimental to some consumers in some areas.
Question 2. As you know, companies must be deemed an eligible
telecommunications carrier (ETC) to receive USF funds. Reports indicate
that more people will use their wireless phones as their primary phone
and forego a traditional home line, but these companies do not receive
USF payments. Do you believe there should be changes to the means of
determining who is an eligible telecommunications carrier?
Answer. No. Wireless carriers can and have become ETCs. For
example, Western Wireless was designated as an ETC for service to
tribal members on the Pine Ridge Reservation in South Dakota (FCC
Docket No. CC-96-45, Released 10/5/0 1). Many wireless carriers have
chosen not to seek ETC status because of the requirements to provide
certain services (such as offering Lifeline services) associated with
being an ETC.
Question 3. Universal Service reform is quite an undertaking. I do
believe that we can achieve some type of reform of the system, but I
believe any reform considered must examine the long term effects on the
solvency of the system. Could you address the potential long term
effects on the system of some of the proposals?
Answer. It is difficult to predict long term effects of any
proposed changes; however, it appears that the current funding
mechanism seems unable to cope with the changing marketplace dynamics
in the telecommunications industry. Specifically, there is increasing
difficulty in assessing the exact quantity of interstate services, and
that difficulty varies according to the type of carrier. In addition,
the size of the fund is ever changing, requiring constant adjustment in
collection factors. Thus, it is intuitive that certain changes need to
be made. The proposal put forth by AT&T based on the number of
connections served has the benefit of simplicity, certainty, and ease
of administration. However, I am concerned, that in the final analysis
it will appear as yet another end-user rate increase to some customers.
I do believe that some change is necessary in order to add some
stability to the collection mechanism and the fund itself. I applaud
the FCC for its current review of the contribution methodology.
In addition, I believe it is appropriate to address accountability
of the administration of the fund at both the federal and state level
and to establish a mechanism for measuring the effectiveness of the
fund. By that, I am really asking everyone involved to re-evaluate the
purpose of the funds and determine whether the current programs, and
the eligible services covered by a fund, match what we believe should
be the goals of the fund. Then, we can more effectively answer
questions such as sufficiency and stability. That is the primary reason
I have suggested capping the fund for a period of time to permit that
type of assessment to take place.
______
Response to Written Questions Submitted by Hon. Daniel K. Inouye to
Lila A. Jaber
Question 1. One problem often cited by critics of the current
contribution mechanism is the ``lag'' between prior reported revenues,
which are six months old, and current revenues, which are assessed
based on the contribution factor.
Is it possible to eliminate this lag, but retain a revenue-based
assessment mechanism? Are their ways to minimize the competitive
distortion between carriers with rising revenues (such as the RBOCs)
and carriers with falling revenues (such as the IXCs)?
How would the adoption of ``collect-and-remit'' proposals advanced
by some carriers affect the administration and stability of the fund?
Is it possible to eliminate this lag, but retain a revenue-based
assessment mechanism?
Answer. I believe that it may be possible to eliminate the lag if
forecasted or estimated revenues are used. However, this presents
regulators with the problem that carriers may intentionally
underestimate their expected interstate or international revenues to
minimize their financial exposure. It appears there should be a penalty
for materially underestimating revenues. In addition, a true-up
mechanism could be developed if revenues are underestimated. I would
note, however, that the FCC recently denied AT&T's petition for waiver
filed in December, to assess its contributions to universal service on
projected, rather than historical, revenues (FCC Order DA02-1419).
Question 2. Are there ways to minimize the competitive distortion
between carriers with rising revenues (such as the RBOCs) and carriers
with falling revenues (such as the IXCs)?
Answer. Several proposals have been suggested that purport to
address these differences, such as a collect-and-remit mechanism, or
moving from revenues to a per connection assessment mechanism.
Question 3. How would the adoption of ``collect-and-remit''
proposals advanced by some carriers affect the administration and
stability of the fund?
Answer. Moving to a collect-and-remit program would shift the risk
of under or over recovery of universal service support from the
carriers to the administrator of the fund. Specifically, under the
collect-and-remit proposal, the administrator would have to estimate
the amount of uncollectible support and factor that into the
assessment. This would be true under either a revenue or a per-
connection basis.
Question 4. One of the items currently under review by the Federal-
State Joint Board is the effectiveness of certain federal low-income
support programs (Lifeline and Link-Up Programs). Often, the success of
these programs varies widely from state to state due to differences in
state eligibility requirements and in the administration of these
programs. California, for example, received over half of all federal
low-income support dollars in 2001.
What are the major reasons behind the relative successes or
failures of these programs in certain states? Should there be more
direct federal involvement in establishing eligibility requirements for
these programs? Should certain minimum outreach efforts be required to
ensure that low-income residents have access to these programs?
What are the major reasons behind the relative successes or
failures of these programs in certain states?
Answer. I believe that there are a number of reasons for the
relative successes or failures of these programs in states.
Specifically, under the current federal rules, states that mandate
state lifeline support can determine what the qualification criteria
are. Hence, states can affect their pool of eligible participants.
Certification and verification procedures, if conducted at all, also
vary, not only from state to state, but from carrier to carrier. These
differences affect participation.
Question 5. Should there be more direct federal involvement in
establishing eligibility requirements for these programs?
Answer. I believe that there should be a balance between the
ability of a state to expand the eligibility criteria and federal
oversight of the program. Specifically, to the extent that a state
wishes to use their intrastate Lifeline criteria as eligibility for the
federal program, the FCC should thoroughly examine the criteria to
ensure that the program is properly providing support to consumers that
need the support. I have also suggested that the FCC increase its audit
frequency of these programs.
Question 6. Should certain minimum outreach efforts be required to
ensure that low-income residents have access to these programs?
Answer. Yes, we recommended increased promotion of the program
through more frequent bill inserts and requiring all ETCs to post
application information about their Lifeline service on the Lifeline
Support website. The Florida PSC has worked with the FCC, other state
agencies, and the Florida AARP organization to promote Lifeline
availability.
More recently, in fiscal year 2001--2002, the Florida Legislature
approved an appropriation of $500,000 to be transferred from the
Florida Public Service Commission Regulatory Trust Fund to the
Department of Children and Families to fund that agency's
implementation of an automatic enrollment system for its clients
eligible for Lifeline and Linkup. it is expected that this automatic
enrollment system will increase participation in these programs, so
that those needing assistance will be able to afford telephone service.
We will continue to monitor efforts to develop and implement an
automatic enrollment program for Lifeline and Linkup.
Question 7. As defined in the statute, ``universal service''
represents ``an evolving level of telecommunications services.'' One of
the items currently under review by the Federal-State Joint Board is
whether to add broadband or other items to the list of supported
services.
Should broadband be designated as a supported service? If not, what
test should guide future determinations as to when broadband should be
included? To the extent that the Commission defines broadband services
as an ``information service,'' would such a ruling preclude the Joint
Board and FCC from later finding that broadband is a
``telecommunications service'' eligible for universal service support?
Should broadband be designated as a supported service? If not, what
test should guide future determinations as to when broadband should be
included?
Answer. The Joint Board issued its recommended decision on July
10th. The Joint Board concluded that advanced and high-speed services
currently do not meet the Act's criteria for inclusion in the list of
supported services. Therefore, the Joint Board did not recommend that
the FCC expand the definition of supported services to include advanced
or high-speed services at this time. I support this decision.
Adding advanced or high-speed services to the list could also
jeopardize support currently provided to some carriers. For example,
some carriers, such as wireless carriers and some small wireline Local
Exchange Carriers, would no longer be eligible for universal service
support because a significant number are not now capable of providing
advanced or high-speed services or do not do so throughout their
service areas. This would reduce the number of providers eligible for
universal service support and might reduce consumer choice in rural and
high-cost areas. Accordingly, the Joint Board indicated that the
inclusion of advanced or high-speed services in the list of core
services could stifle competition among various types of eligible
telecommunications carriers and would not serve the public interest.
The Joint Board shares the FCC's and Congress's commitment to
ensuring that appropriate policies are in place to encourage the
successful deployment of advanced services. Even though advanced
services are not directly supported by federal universal service, I do
not believe that the FCC's policies impede the deployment of modern
plant capable of providing access to advanced services. I believe that
such a policy is more appropriate than directly supporting such
services at this time. As a result, I agree that it is appropriate to
make clear that the facilities installed by carriers should not create
barriers to the future deployment of advanced services, and that the
actual deployment of advanced services should be monitored, along with
possible universal service implications.
Question 8. To the extent that the Commission defines broadband
services as an ``information service,'' would such a ruling preclude
the Joint Board and FCC from later finding that broadband is a
``telecommunications service'' eligible for universal service support?
Answer. The classification of broadband services as information
services by the FCC may result in an inconsistency if the FCC and the
Joint Board sought to include broadband services as a supported
service. However, it may well be that support of facilities used in the
provision of broadband services could be included and not be contrary
to the classification of an ``information service.'' In the final
analysis, if it were the will of the Congress or the FCC to do so, I
believe the list of supported services could ultimately be expanded to
cover facilities necessary to provide high-speed data transport.
Question 9. Under the President's Budget, the size of the Universal
Service Fund is expected to grow from $5.3 Billion in 2001 to $7.1
Billion in 2007.
Since the Schools & Libraries Fund is currently capped at $2.25
Billion per year, how much of this growth is attributable to expansion
in the High Cost Support Mechanism?
Are there any further pending changes to universal service programs
that might place further upward pressure on the size of the fund?
Since the Schools & Libraries Fund is currently capped at $2.25
Billion per year, how much of this growth is attributable to expansion
in the High Cost Support Mechanism?
Answer. I would preface my remarks to clarify that I am not
intimately familiar with the assumptions made within the President's
Budget. Barring any changes in the cap on the schools and library
program or the rural health care program, I believe almost all of the
increases would be associated with the high cost fund and Lifeline/
Linkup. I should note that the FPSC has not done an independent
analysis on this question and thus we do not know the answers.
Question 10. Are there any further pending changes to universal
service programs that might place further upward pressure on the size
of the fund?
Answer. The Joint Board is presently reviewing proposals to respond
to the remand from the 10th Circuit Court of Appeals. This remand deals
in part with the sufficiency of the fund in fulfilling the goals of the
Telecommunications Act. The outcome of this proceeding could affect the
size of the fund. As I have stated in my supplemental testimony, if
Congress desires to proceed with revising Section 254, the Congress
should cap the overall Universal Service Fund for three years following
the effective date of any revisions to the Act. A provision for a
triennial review could then be put in place. Standards for
accountability and sufficiency should be included for the purposes of
the review.
Question 11. In Qwest v. FCC, the 10th Circuit found that the
federal, statutory mandate stating that rural and urban rates be
``reasonably comparable'' requires the FCC, where necessary, to induce
states to meet federal principles.
In light of the 10th Circuit's decision in Qwest, what
``inducements'' should the federal government use to ensure that the
federal statutory goal of ensuring reasonably comparable rates between
urban and rural areas is met?
Answer. The FPSC has suggested that there is a way to induce states
to take actions to alleviate the burden that particular states are
causing on the federal high-cost universal service support mechanism
for non-rural carriers. The FCC should not, however, dictate the method
that states take to address high-cost support. The FPSC does see a
benefit to injecting more accountability into the program as to the
individual states' need for high-cost support. The FCC could require
that state commissions provide notification of the steps their state
has taken to achieve this rate comparability. States should be allowed
to verify rate comparability within the state by showing either:
(1) that its rates in urban and rural areas are within two
standard deviations of each other; or
(2) that its rates in rural areas are within two standard
deviations of the nationwide average urban rate.
This information will shine a spotlight on those states that are
not taking sufficient steps to address their own state needs.
Question 12. In the original Senate version of the 1996
Telecommunications Act, universal service contributions were to be
assessed on all telecommunications carriers based on an equitable and
non-discriminatory basis. In the conference committee, however, this
requirement was limited to telecommunications carriers providing
interstate services . . . ''
Given the shrinking contribution base for interstate revenues and
the increasing difficulty of accounting between interstate and
intrastate revenues in bundled service offerings, does it make sense to
change the statute and return to the broader language originally passed
by the Senate?
Answer. While I cannot speak for the other members of the FPSC on
this matter, I believe that it may be appropriate to consider such a
change at this time given the current market conditions. However, such
changes could open-up a new round of major litigation. I believe that
it may be beneficial to consult with the FCC regarding such a statutory
change.
Question 13. What effects, if any, will changes made to the federal
contribution mechanism have on state universal service programs? What
measures, if any, should be made to strengthen the Federal-State
partnership in ensuring that all Americans have access to basic
telecommunications services?
What effects, if any, will changes made to the federal contribution
mechanism have on state universal service programs?
Answer. I think it depends on what changes are actually adopted by
the FCC. The biggest change that could affect the programs relates to
the collect-and-remit proposal. If the program administrator can
effectively estimate uncollectibles, the proposal would have no
detrimental effect on the program. Under this proposal, the program
would only be adversely impacted if the administrator underestimated
uncollectibles in any given quarter. This burden currently falls on the
carriers.
Question 14. What measures, if any, should be made to strengthen
the Federal-State partnership in ensuring that all Americans have
access to basic telecommunications services?
Answer. I do not believe additional programs are necessary to meet
the goal of universal access to basic telecommunications services. I do
believe, however, that making some clarifications and adjustments to
add more accountability to the existing programs will make the programs
more effective and efficient.
The FCC has been reaching out to the state commissions in several
significant ways. The FCC has held some Federal-State workshops on
performance metrics, actively sought the input of State Commissioners
on the Federal-State Joint Board on Universal Service and on the
Section 706 Joint Conference on Advanced Services. We see great
improvements in the Federal-State partnership and do not see the need
for additional measures at this time.
I hope that my answers to these questions have been responsive. If
you need further explanation or additional information to any of these
questions, please do not hesitate to contact me.
______
Response to Written Questions Submitted by Hon. Max Cleland to
Billy Jack Gregg
Question 1. Do you see this nation's pricing system moving more
towards a cost-based system?
Answer. Yes. The introduction of competition into any area of
economic endeavor always tends to drive prices toward cost.
Telecommunications is no exception. Prior to the introduction of
competition, rates in urban areas were generally above cost while rates
in rural areas were below cost. Although competition will likely result
in lower prices and a better variety of products and services in urban
areas, the challenge for universal service is to ensure that the advent
of competition does not result in rates in rural areas rising to
unacceptably high levels.
Question 2. As you know, companies must be deemed an eligible
telecommunications carrier (ETC) to receive USF funds. Reports indicate
that more people will use their wireless phones as their primary phone
and forego a traditional home line, but these companies do not receive
USF payments. Do you believe there should be changes to the means of
determining who is an eligible telecommunications carrier?
Answer. No. Under the 5th Circuit's decision in TOPUC v. FCC, \1\
states have primary responsibility for determining ETC status, and may
impose additional reasonable criteria beyond the minimum requirements
set forth in Section 214(e) of the Act. Wireless carriers are achieving
ETC status throughout the nation under current regulations, and are
receiving an increasing share of universal service support. As
discussed in paragraph 84 of the Joint Board's Recommended Decision of
July 9, 2002, \2\ wireless carriers in seventeen states are now
receiving $64 million in annual high-cost support from the federal
fund. These numbers are expected to increase over time.
\1\ Texas Office of Public Utility Counsel et al v. FCC, 183 F.3d
393 (1999) at 418.
\2\ In the Matter of Federal-State Joint Board on Universal
Service, CC Docket No. 96-45, Recommended Decision, FCC 02J-1(July 9,
2002) at para. 84.
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Question 3. Universal service reform is quite an undertaking. I do
believe that we can achieve some type of reform of the system, but I
believe any reform considered must examine the long-term effects on the
solvency of the system. Could you address the potential long-term
effects on the system of some of the proposals?
Answer. The two basic proposals for funding universal service are a
revenue-based system or a connection-based system. I believe the most
sustainable long-term funding will be produced by a connection-based
system. A revenue-based system has the advantage of equitably spreading
the responsibility for universal service based on relative usage of the
telecommunications network. However, the current USF funding system
based on interstate and international revenues is not sustainable over
the long-term. Even if safe harbor provisions for wireless carriers and
pagers are modified, the long-term trend for interstate revenues will
continue downward as more traditional circuit-switched communications
move to IP-based systems which are exempt from universal service
contributions. \3\ On the other hand, a connection-based system based
on the capacity of the connection should be sustainable over the long-
term. A connection-based system has the advantage of being indifferent
to how the connection is used, whether for traditional voice calls or
for internet traffic. Moreover, it is expected that the capacity of
connections to the public switched network will continue to grow even
if the total number of connections stabilizes in the future.
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\3\ An assessment system based on total revenues, both interstate
and intrastate, would be more sustainable. However, use of intrastate
revenues to support federal universal service was prohibited by the 5th
Circuit in TOPUC v. FCC, 183 F.3d at 447-448. In addition, any revenue-
based system would be subject to erosion from future migration to IP-
based telephony.
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______
Response to Written Questions Submitted by Hon. Daniel K. Inouye to
Billy Jack Gregg
Question 1. One problem often cited by critics of the current
contribution mechanism is the ``lag'' between prior reported revenues,
which are six months old, and current revenues, which are assessed
based on the contribution factor. Is it possible to eliminate this lag,
but retain a revenue-based assessment mechanism? Are there ways to
minimize the competitive distortion between carriers with rising
revenues (such as RBOCs) and carriers with falling revenues (such as
IXC5)?
How would the adoption of ``collect-and-remit'' proposals advanced
by some carriers affect the administration and stability of the fund?
Answer. There are several ways to address the problem of lag in a
revenue-based system. However, any mechanism adopted will have to deal
with the fact that expected revenue and actual revenue will never
exactly match. As mentioned in the question, one method would be a
``collect and remit'' system, whereby carriers would be authorized to
charge customers the prescribed assessment factor and remit to
Universal Service Administrative Company (``USAC'') whatever was
collected. The advantage of such a system is that it would affect all
carriers equally, regardless of whether their revenues were increasing
or declining. The disadvantage of a collect and remit system is that
USAC would have to carry a reserve fund on its books to guard against
unexpected shortfalls in revenue. \4\ Another option would be use of a
system based on projected revenues, subject to future true-up. The
disadvantage of such a system is that it would increase administrative
intrusion and expense to ensure that projections revenues were
reasonable and were actually trued-up. Moreover, use of projected
revenues would perpetuate the current wide disparity in assessment
factors charged to customers, while adding a new element of uncertainty
to the universal service assessment system.
\4\ It has been estimated that USAC would have to carry a $500
million reserve if a collect and remit system was adopted. However, it
should be noted that USAC was carrying a cash balance in excess of $2
billion at the beginning of 2002. Most of this reserve related to the
schools and libraries fund. A portion of these excess funds were tapped
by the FCC on June 13, 2002, to stabilize the universal service fund
through the first quarter of 2003.
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Question 2. One of the items currently under review by the Federal-
State Joint Board is the effectiveness of certain federal low income
support programs (Lifeline and Link-Up Programs). Often, the success of
these programs varies widely from state to state due to differences in
state eligibility requirements and in the administration of these
programs. California, for example, received over half of all federal
low income support dollars in 2001. What are the major reasons behind
the relative successes or failures of these programs in certain states?
Answer. The essential reason for the disparity among the states is
our federal system of government. Unless the Congress decides to
preempt the states and mandate a federal low-income support system,
there will continue to be differences in the size and efficacy of state
Lifeline and Link-Up (``Lifeline'') programs. The principal differences
among states occur in the size of benefits available, in the
applicability of benefits available, in the administrative procedures
for application and certification of eligibility for Lifeline benefits,
and in the promotion and advertising of the Lifeline program.
First, under the current Lifeline program the FCC has established a
basic monthly federal benefit of $5.25 to $7.75 per customer, with
additional federal benefits totaling $1.75 per customer per month
available based on the level of state matching funds. As can be seen by
review of Attachment 1, not all states offer the matching funds
necessary to achieve the maximum Lifeline benefit. \5\
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\5\ Attachment 1 is Appendix LI0l from USAC's Federal Universal
Service Support Mechanisms Fund Size Projections for the Third Quarter
2002 (May 2, 2002). It should be noted that the maximum Tier 1 Basic
Support was increased to $6.00 on July 1, 2002, when the cap on
subscriber line charges was increased to that level.
---------------------------------------------------------------------------
Second, beyond the level of benefits, there are also great
differences in the services to which the benefits apply. Some states
place no limit on the type of service to which the discount applies,
while others limit Lifeline to the lowest level of service available,
typically a measured or message service. Since such usage-based
services are generally not as popular with customers as flat-rate
services, participation in these types of Lifeline programs is also
low.
Third, there are great disparities in state application and
certification procedures. States with high participation rates like
California have very simple self-certification procedures for Lifeline
applicants, while states with low participation rates typically require
a multi-step process to verify participation in eligible welfare
programs. \6\ Complicating matters, many of the roadblocks to wider
participation mentioned above are enshrined in state statutes, and
cannot be easily changed.
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\6\ Current federal Lifeline rules base eligibility on
participation in any of a number of income-based welfare programs, such
as SSI, Medicaid, food stamps or TANF. With the enactment of welfare
reform the period of time an individual can qualify for welfare
benefits has been limited. Thus, it appears that some modification of
eligibility standards will have to be made to accommodate individuals
who have exhausted their welfare benefits but are nonetheless eligible
for Lifeline based on their level of income.
---------------------------------------------------------------------------
Fourth, the attitude of different states and telecommunications
companies in promoting and advertising the Lifeline program varies
widely. Some companies view Lifeline as an effective way to keep as
many customers on the network as possible, and actively promote the
program. Other companies seem to perceive Lifeline as a necessary evil,
and try to limit its availability. These differences in perspective
obviously affect the enthusiasm with which Lifeline programs are
advertised and promoted.
Finally, increasing participation in the Lifeline program has
implications for the overall size of the Universal Service Fund. The
Low-Income Support mechanism disbursed over $600 million during 2001,
with over half of that amount going to California. If every state had
the same participation rate as California, the size of the Low-Income
Support mechanism would grow by approximately $1 billion to a total of
$1.6 billion.
Question 3. Should there be more direct federal involvement in
establishing eligibility requirements for these programs? Should
certain minimum outreach efforts be required to ensure that low income
residents have access to these programs?
Answer. FCC regulations currently establish minimum eligibility
requirements for the Lifeline program. A telecommunications carrier
cannot maintain ETC status unless it offers Lifeline benefits in
compliance with the federal standards, as certified by the individual
states. As mentioned in the predicate to the question, the Joint Board
is currently considering various proposals to modify the Lifeline
program. An expansion of the eligibility criteria would have to be
implemented by the individual states in order for the phone companies
within their borders to maintain ETC status. One change that would
ensure minimum outreach programs nationwide would be to empower USAC to
engage in outreach and education programs related to the Lifeline and
Link-Up programs.
Question 4. As defined in the statute, ``universal service''
represents ``an evolving level of telecommunications services.'' One of
the items currently under review by the Federal-State Joint Board is
whether to add broadband or other items to the list of supported
services. Should broadband be designated as a supported service? If
not, what test should guide future determinations as to when broadband
should be included?
Answer. The Joint Board released its Recommended Decision on July
9, 2002, which recommended that broadband not be added to the list of
supported services at this time. \7\ I agree with that decision.
Although broadband is available to the vast majority of residential
customers (estimates vary between 70 percent and 85 percent), only 10
percent of these customers have actually subscribed to such broadband
services. One of the principal criteria to be considered by the Joint
Board in determining which services should be included in the
definition of universal service, is whether the service is subscribed
to by a substantial majority of residential customers. While I believe
broadband will ultimately be included in the list of supported
services, such inclusion is not appropriate at this early stage of the
development of the market for broadband.
\7\ 7. Recommended Decision at para.para. 9-19.
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Question 5. To the extent that the Commission defines broadband
services as an ``information service,'' would such as ruling preclude
the Joint Board and FCC from later finding that broadband is a
``telecommunications service'' eligible for universal service support?
Answer. In paragraph 19 of the Recommended Decision of July 9,
2002, the Joint Board noted the potential problems that would be
created by an FCC determination that broadband is an ``information
service'' rather than a ``telecommunications service.'' If broadband is
determined to be an ``information service,'' it could not be included
in the definition of universal service, which is limited to
telecommunications services. However, it should be noted that even if
broadband services were not eligible for universal service support,
Section 254(d) empowers the FCC to require universal service
contributions from any other telecommunications provider, including
broadband providers, ``if the public interest so requires.''
Question 6. Under the President's Budget, the size of the Universal
Service Fund is expected to grow from $5.3 billion to $7.1 billion in
2007. Since the Schools & Libraries Fund is currently capped at $2.25
billion per year, how much of this growth is attributable to expansion
of the High Cost Support Mechanism? Are there any further pending
changes to universal service programs that might place further upward
pressure on the size of the fund?
Answer. Attached hereto as Attachment 2 is my estimate of growth of
each of the support mechanisms and in the total fund through 2007.
Based on my evaluation of known changes in each of the support
mechanisms over the next five years, I estimate that the total fund
will be $6.9 billion in 2007, slightly less than estimated by this
year's budget forecast. As can be seen on Attachment 1, the majority of
the expected growth in the total Universal Service Fund between now and
2007 can be attributed to growth in the High Cost Support Mechanism.
High Cost Support currently totals approximately $3 billion, with $2
billion going to rural companies and $1 billion going to non-rural
companies. Most of the growth in High Cost Support through 2007 is
expected to be in support for rural companies. Support for non-rural
companies will stay at approximately $1 billion throughout this period
as growth in High Cost Model Support is offset by the phase-out of
interim Hold Harmless Support. Low-Income Support will continue to grow
through this period as more effective advertising and easier enrollment
procedures lead to increasing participation. The Schools and Libraries
Fund will continue to be capped at $2.25 billion, while the Rural
Health Fund will not grow appreciably.
Question 7. In Qwest v. FCC, the 10th Circuit found that the
federal, statutory mandate stating that rural and urban rates be
``reasonably comparable'' requires the FCC, where necessary, to induce
states to meet federal principles. In light of the 10th Circuit's
decision in Qwest, what ``inducements'' should the federal government
use to ensure that the federal statutory goal of ensuring reasonably
comparable rates between urban and rural areas is met?
Answer. The Joint Board is currently considering what type of state
inducements are appropriate under the Act and 10th Circuit's ruling.
The Joint Board is also considering other elements of Court's ruling
relating to defining key terms in Section 254: reasonable comparability
of rates and sufficiency of the fund. I believe each of these elements
is interrelated, and must be considered together in order to reach a
reasonable outcome. As to state inducements, I favor an expanded state
certification process under Section 254(e) to gain information on state
rates, on uses of federal support, and on actions taken or to be taken
by each state to ensure that rates in rural areas are comparable to
those in urban areas. This expanded certification process should induce
states to identify aberrant rates and use state resources to bring
these rates within the range of comparability. In the limited
circumstance where existing federal support and state actions are not
sufficient to enable comparable rates, additional targeted federal
support may be warranted. However, at this point data is simply
inadequate to make any finding about the level of rates, state actions
to support rates, or the need for additional federal support.
Question 8. Under the current revenue-based system, percentage
assessments charged to consumers may vary widely depending on whether
interstate revenues are declining or increasing. In your view, does the
current contribution mechanism cause unnecessary customer confusion?
Should the FCC adopt uniform ``labeling'' requirements for carriers
choosing to put a universal service line-item on customer bills? What
further action should be taken to make universal service charges more
understandable to consumers?
Answer. Under the current system carriers are allowed to recover
their universal service assessment from customers in any ``equitable
and non-discriminatory'' manner the carrier deems appropriate. There is
no doubt that the flexibility presently afforded to carriers has led to
widespread customer confusion and frustration. Some carriers recover
the USF assessment by means of a percentage mark-up on customers'
bills. Even though the percentage assessment on all carriers is the
same, the level of the percentage mark-up on customers' bills varies
wildly, and is usually substantially above the FCC-prescribed
assessment rate. For example, the current FCC-mandated 7.2 percent USF
assessment on carriers is recovered by AT&T using an 11.5 percent
assessment on customers' bills, and by MCI using a 9.9 percent
assessment. \8\ Other carriers, such as the RBOCs, recover the USF
assessment by means of a monthly per line charge on local phone bills.
These per line charges also vary greatly, from 280 to 600 per line.
Other carriers do not impose a separate surcharge and simply recover
the USF assessment in the cost of the service they sell.
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\8\ Because the percentage surcharges imposed by carriers are so
far above the prescribed USF assessment rate, many have charged that
some IXC's are using the surcharges to generate additional revenues. To
date, the FCC has not performed any audits of IXC recoveries of USF
assessments.
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In addition to the variation in how the USF assessment is
recovered, there is variation in how the USF surcharge is labeled. For
example, different carriers call the charge ``Federal Universal Service
Surcharge,'' ``Universal Access Charge,'' or ``National Line Charge.''
Explanations of these charges also vary by carrier. Thus, a typical
residential customer with a single landline phone, $30 in long distance
service, and a wireless phone could be charged 500 on his local bill
for a ``Federal Universal Service Surcharge,'' $3.45 (11.5 percent) on
his long distance bill for a ``Universal Access Charge,'' and 310 on
his wireless bill for a ``Universal Connectivity Charge.'' The customer
will likely be unaware that each of these charges is the same, and is
based on exactly the same USF assessment rate on interstate revenues.
Most importantly, use of varying percentage surcharges makes it
virtually impossible for a customer to accurately compare rates, or to
even know the actual rate he or she will be paying. For example, an
advertised rate of 100 per minute from a carrier with an 11 percent USF
surcharge would actually amount to an effective rate in excess of 110
per minute.
I believe that regardless of the contribution methodology adopted
to support universal service, the FCC should mandate uniform labeling
of any USF surcharges and should prescribe allowable end-user
surcharges under a collect and remit system. While any surcharges are
distasteful, adoption of a uniform system should at least reduce
customer confusion and eliminate any opportunity for carriers to
overrecover universal service obligations from customers.
LOW INCOME SUPPORT AVAILABLE STATE-BY-STATE Attachment 2
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TIER 3
STATE TIER 1 BASIC TIER 2 OPTIONAL ------------------------------------------------------------ TOTAL FEDERAL
STATE MATCHING FEDERAL MATCHING SUPPORT*
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ALABAMA $3.50/$5.00 $1.75 $3.50 $1.75 $7.00/$8.50
ALASKA $3.50/$5.00 $1.75 $3.50 $1.75 $7.00/$8.50
AMERICAN SAMOA $3.50/$5.00 $1.75 No $5.25/$6.75
ARIZONA $3.50/$5.00 $1.75 $3.50 $1.75 $7.00/$8.50
ARKANSAS $3.50/$5.00 $1.75 No $5.25/$6.75
CALIFORNIA $3.50/$5.00 $1.75 Varies By Co. By Exchange Will Vary
COLORADO $3.50/$5.00 $1.75 Varies By Co. Will Vary
CONNECTICUT $3.50/$5.00 $1.75 $1.17 $0.58 $7.00/$8.50
DELAWARE $3.50/$5.00 $1.75 No $5.25/$6.75
DISTRICT OF COLUMBIA $3.50/$5.00 $1.75 $3.50 $1.75 $7.00/$8.50
FLORIDA $3.50/$5.00 $1.75 $3.50 $1.75 $7.00/$8.50
GEORGIA $3.50/$5.00 $1.75 $3.50 (Bell South/Alltel) $1.75 $7.00/$8.50
GUAM $3.50/$5.00 $1.75 $3.50 $1.75 $7.00/$8.50
HAWAII $3.50/$5.00 $1.75 No $5.25/$6.75
IDAHO $3.50/$5.00 $1.75 $3.50 $1.75 $7.00/$8.50
ILLINOIS $3.50/$5.00 $1.75 $1.50 $0.75 $6.00/$7.50
INDIANA $3.50/$5.00 $1.75 No $5.25/$6.75
IOWA $3.50/$5.00 $1.75 No $5.25/$6.75
KANSAS $3.50/$5.00 $1.75 $3.50 $1.75 $7.00/$8.50
KENTUCKY $3.50/$5.00 $1.75 $3.50 $1.75 $7.00/$8.50
LOUISIANA $3.50/$5.00 $1.75 No $5.25/$6.75
MAINE $3.50/$5.00 $1.75 $3.50 $1.75 $7.00/$8.50
MARYLAND $3.50/$5.00 $1.75 $3.50(Verizon) $1.75 $7.00/$8.50
MASSACHUSE1TS $3.50/$5.00 $1.75 $6.00 $1.75 $7.00/$8.50
MICHIGAN $3.50/$5.00 $1.75 $2.00 $1.00 $6.25/$7.75
MINNESOTA $3.50/$5.00 $1.75 No $5.25/$6.75
MISSISSIPPI $3.50/$5.00 $1.75 $3.50 (Bell South) $1.75 $7.00/$8.50
MISSOURI $3.50/$5.00 $1.75 No $5.25/$6.75
MONTANA $3.50/$5.00 $1.75 $3.50 $1.75 $7.00/$8.50
NEBRASKA $3.50/$5.00 $1.75 Varies By Co. Will Vary
NEVADA $3.50/$5.00 $1.75 Varies By Co. Will Vary
NEW HAMPSHIRE $3.50/$5.00 $1.75 No $5.25/$6.75
NEW JERSEY $3.50/$5.00 $1.75 No $5.25/$6.75
NEW MEXICO $3.50/$5.00 $1.75 $3.50 $1.75 $7.00/$8.50
NEW YORK $3.50/$5.00 $1.75 Varies By Co. Will Vary
NORTH CAROLINA $3.50/$5.00 $1.75 $3.50 $1.75 $7.00/$8.50
NORTH DAKOTA $3.50/$5.00 $1.75 Varies By Co. Will Vary
NORTHERN MARIANA IS. $3.50/$5.00 $1.75 No $5.25/$6.75
OHIO $3.50/$5.00 $1.75 No $5.25/$6.75
OKLAHOMA $3.50/$5.00 $1.75 $1.17 $0.58 $5.83/$7.33
OREGON $3.50/$5.00 $1.75 $3.50 $1.75 $7.00/$8.50
PENNSYLVANIA $3.50/$5.00 $1.75 $2.50 (Verizon) $1.25 $6.50/$8.00
PUERTO RICO $3.50/$5.00 $1.75 No $5.25/$6.75
RHODE ISLAND $3.50/$5.00 $1.75 Varies By Co. Will Vary
SOUTH CAROLINA $3.50/$5.00 $1.75 $3.50 (eff.--10/1/01) $1.75 $7.00/$8.50
SOUTH DAKOTA $3.50/$5.00 $1.75 No $5.25/$6.75
TENNESSEE $3.50/$5.00 $1.75 $3.50 $1.75 $7.00/$8.50
TEXAS $3.50/$5.00 $1.75 $3.50 $1.75 $7.00/$8.50
UTAH $3.50/$5.00 $1.75 $3.50 $1.75 $7.00/$8.50
VERMONT $3.50/$5.00 $1.75 $3.50 $1.75 $7.00/$8.50
VIRGINIA $3.50/$5.00 $1.75 $l.75/$3.50 $.88/$1.75 $6.13/$7.00 $7.63/
$8.50
VIRGIN ISLANDS $3.50/$5.00 $1.75 $7.05 $1.75 $7.00/$8.50
WASHINGTON $3.50/$5.00 $1.75 Varies By Co. Will Vary
WEST VIRGINIA $3.50/$5.00 $1.75 Varies By Co. Will Vary
WISCONSIN** $3.50/$5.00 $1.75 Varies By Co. Will Vary
WYOMING $3.50/$5.00 $1.75 $3.50 $1.75 $7.00/$8.50
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*Cap for SLC for all companies was increased to $5.00 effective 1/02 and to $6.00 on 7/02.
**Low income customers in Wisconsin cannot be charged over $15.00.
USF BILLINGS 1997-2007 $ Millions Attachment 2
Fund 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007
High Cost 1,614 1,691 1,746 2,115 2,741 2,900 3,200 3,300 3,400 3,500 3,600
Low Income 148 464 501 537 578 666 740 820 890 950 1,000
Schools & Libraries 0 1,250 1,698 1,865 2,139 2,250 2,250 2,250 2,250 2,250 2,250
Rural Health 0 8 0 9 11 23 24 25 25 25 25
Subtotal 1,762 3,413 3,945 4,526 5,469 5,839 6,214 6,395 6,565 6,725 6,875
Unused Funds -480 -240
TOTAL USF 1,762 3,413 3,945 4,526 5,469 5,359 5,974 6,395 6,595 6,795 6,875
Years 2003-2007 are estimates.