[Senate Hearing 107-1106]
[From the U.S. Government Printing 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.
---------------------------------------------------------------------------
    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.
---------------------------------------------------------------------------
    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.
---------------------------------------------------------------------------
    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.
---------------------------------------------------------------------------
    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\
---------------------------------------------------------------------------
    \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.
---------------------------------------------------------------------------
    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).
---------------------------------------------------------------------------
    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\
---------------------------------------------------------------------------
    \3\ Texas Office of Public Utilities Counsel v. FCC, 183 F.3d 393, 
447 (5th Cir. 1999).
    \4\ Id.
    \5\ Id.
---------------------------------------------------------------------------
    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.
---------------------------------------------------------------------------
    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.
---------------------------------------------------------------------------
    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.
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    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.
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    \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.
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    \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.
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    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.
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    \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.
---------------------------------------------------------------------------
    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.
---------------------------------------------------------------------------
    \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.
---------------------------------------------------------------------------
                                 ______
                                 
  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.
---------------------------------------------------------------------------
    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\
---------------------------------------------------------------------------
    \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.
---------------------------------------------------------------------------
    \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.
---------------------------------------------------------------------------
    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.
---------------------------------------------------------------------------
    \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.
---------------------------------------------------------------------------
    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
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                                  TIER 3
              STATE                  TIER 1 BASIC     TIER 2  OPTIONAL ------------------------------------------------------------     TOTAL FEDERAL
                                                                                 STATE MATCHING               FEDERAL MATCHING            SUPPORT*
--------------------------------------------------------------------------------------------------------------------------------------------------------
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
--------------------------------------------------------------------------------------------------------------------------------------------------------
*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.