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Hearing Of The Subcommittee On Communications, Technology And The Internet Of The House Committee On Energy And Commerce - "Universal Service: Reforming The High-Cost Fund"

HEARING OF THE SUBCOMMITTEE ON COMMUNICATIONS, TECHNOLOGY AND THE INTERNET OF THE HOUSE COMMITTEE ON ENERGY AND COMMERCE
SUBJECT: "UNIVERSAL SERVICE: REFORMING THE HIGH-COST FUND"

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REP. BOUCHER: (Strikes gavel.) The subcommittee will come to order.

Our subject this morning is comprehensive reform of the Universal Service High Cost Fund, a matter on which the subcommittee will act in the near future. Universal service support is as essential to our national economic future as it has been historically. In this time when electronic communications are at the very heart of the national economy, it is perhaps more essential than ever before that all Americans remain connected.

Affordable telephone service not only benefits the individual users of that service, but at a time when electronic commerce and communications are central to national economic performance, having all of American connected should be a priority for rural and metropolitan residents alike.

The Universal Service Fund that assures affordable rural telephone service has come under increasing pressure, and comprehensive reform is now a necessity. New technologies and new business plans are combining to diminish the long-distance revenues that have historically been relied upon in order to support universal service. And broadband has emerged as a critical part of our telecommunications infrastructure.

In reforming the USF, other funding sources must be tapped, and new controls must be placed on expenditures from the fund. We should also reexamine which networks and services deserve USF support.

In an effort to achieve these goals in a manner that is fair to the rural telephone companies that are the net beneficiaries of USF support, and the large regional carriers that are net contributors into the fund, my colleague from Nebraska Mr. Terry and I have worked together for the last three years and in the last Congress introduced a comprehensive reform bill based on that three years of effort.

We consulted with dozens of stakeholders and sought consensus among various competing interests. We intend to continue that process this year and shortly will introduce a revised version of that legislation. And we welcome the suggestions and the cosponsorship of our measure by other members of the subcommittee on a bipartisan basis.

Our goal is to expand the revenue base for the fund. We would give the FCC discretion to use a revenues or a numbers approach to contributions, or some combination of the those two approaches. We would allow the assessment for the fund of intrastate as well interstate revenues. We would also impose strict limitations on growth of the fund by capping the entire fund and basing payments on a carrier's actual costs, rather than the costs of the incumbent telecommunications carrier in the region. We would improve the efficiency of expenditures from the fund by requiring that all recipients meet minimum FCC standards in order to receive support.

We would also future-proof the fund by requiring that all recipients offer broadband at pre-set minimum speeds. To receive support, that broadband's offering would be a condition. Broadband is to communities today what electricity and basic telephone service were 100 years ago. It is the new essential infrastructure for the commercial success of all communities and clearly deserving, in my view, of USF support.

Other elements of our measure would include a better targeting of support to high-cost areas by switching from statewide to wire-center averaging; fixing the phantom traffic problem by requiring carriers to pass through call-identifying information; making rural exchanges more marketable for telephone companies that may desire to sell them by repairing the parent trap; and making permanent the Antideficiency Act exemption to the Universal Service Fund, rather than requiring in annual appropriations a waiver of that ADA provision, which happens at the present time.

There are other matters that I think we should consider and about which I would welcome the insights of our distinguished panel this morning. For example, if at all, should the $7.2 billion of broadband stimulus money affect inclusion of broadband in the universal service reform measure?

Another question is, when we eliminate the identical support rule, how should the actual costs of the recipients of universal service funding be calculated?

As another question, should we eliminate the distinction between rural and non-rural carriers, presently embedded as a consequence of an FCC order?

I hope that our witnesses will address this morning these and other matters.

I want to thank today's witnesses for their participation, for preparing their testimony and engaging in this important discussion with us.

And I now recognize the gentleman from Florida, the ranking Republican of our subcommittee, Mr. Stearns, for five minutes.

REP. CLIFF STEARNS (R-FL): Good morning, and thank you, Mr. Chairman. And thank you for having this hearing. There's been many, many ideas, including your legislation, has been discussed. And so I look forward to hearing from our witnesses this morning and hearing how best to move forward.

I think all of us this morning agree that the USF needs to be reformed and reformed quickly. The system is fraught with waste, fraud and abuse, in our opinion. A major overhaul is necessary.

So a question before us this morning is, what are the appropriate goals of the program? Of course, how best do we achieve them?

The 1996 Telecom Act codified universal service, but the concept goes back decades earlier to a time when there was really only one phone company. Now the landscape looks a whole lot different, yet the fund is still administered by outdated rules.

This hearing will focus on the high-cost fund, the largest component of the USF and the program most in need of reform. The cost of this fund has more than tripled in the last decade, soaring from 1.3 billion (dollars) in 1997 to almost 4.5 billion (dollars) last year.

The FCC's high-cost rules do not reflect the dramatic changes in the marketplace, including multi-facilities-based providers entering markets throughout the nation. Now nearly the entire country has access to phone service. We have more competition and better technology than ever before.

Yet the Universal Service Fund has grown out of control and could continue to do so unless we adopt meaningful reforms. The universal service fees have topped 11 percent of the consumer's monthly bill. Accordingly, there is a need to reform the program away from subsidies, in our opinion, that may no longer be necessary as technology and services improve and become more and more widespread.

Instead we need to move towards a solution that ensures the goals of universal service but minimizes consumer cost. Without fundamental reform, now is not the time to expand the fund to include just broadband.

The recently enacted stimulus package already provides $7 billion, an entire year's worth of USF, to bring broadband to unserved areas. It'll take at least two years for the stimulus money to be fully distributed and the program to be completely implemented.

For now, let's take the two years while the stimulus package is being used and examine the effectiveness of the current program. Instead of adding new broadband requirements to universal service, we should engage in oversight, evaluation of these existing programs.

In addition, we should impose a firm cap to prevent uncontrolled growth in the fund. With a limitless pool of money, carriers have little incentive to operate more efficiently. The subsidy chills innovation by propping up older technologies and carriers, and making it harder for new innovators to compete. Throwing additional money at this crumbling program makes no sense.

Moreover, performance measurements are needed to ensure we are getting results from the over 50 billion (dollars) we have spent in the last decade.

What impact are these funds having when everyone already has access to phone service?

This type of transparency and accountability goes a long way toward preventing abuse. To really add competitive pressure, however, we also need to move to market-based mechanisms that are technology neutral and fund the carrier that can provide the most effective service in that area.

A report by the GAO shows that the FCC needs to improve oversight and management of the USF. The GAO has also criticized the FCC for failing to develop specific performance goals and measurements for this high-cost program. One question we might ask is, how much has been lost to waste, fraud and abuse?

The FCC's inspector general found error rates of close to 25 percent in the high-cost fund, which translates to improper payments of approximately $1 billion. The inspector general also found that all four universal service programs to be, quote, "at risk." We need to take a hard look at this program and institute real reform.

Now, Mr. Chairman, I again commend you having this hearing to examine the goals and assess the results of the existing program. We all agree that the system needs reform. I hope they are able to work together towards a solution that is fair to all consumers.

REP. BOUCHER: Thank you very much, Mr. Stearns.

The gentleman from Michigan, Mr. Stupak, is recognized for two minutes.

REP. BART STUPAK (D-MI): Thank you, Mr. Boucher. And thank you for holding this hearing on how we should reform the Universal Service Fund. I appreciate that we're taking up this issue quickly considering that we almost had the FCC make dramatic changes to the program late last year.

USF is important to rural Americans, so significant changes to the program should come from Congress where it can be done in an open manner with direct member input through the legislative process, not with the FCC. Know that -- this is not to say that this will be an easy process since there are many differing views on how we should reform USF.

But the one thing I think we can all agree on is that the USF should be reformed to promote broadband deployment. Communities that lack broadband access in today's world are at a disadvantage on all fronts. Businesses without broadband cannot compete in a globalized market. Schools without broadband cannot properly prepare their students today for the workforce of tomorrow. And hospitals without broadband cannot access the latest advances in telemedicine.

Reforming USF should mean retooling it so it reflects advancements in technology to meet the needs of tomorrow's economy. Reform should not be mischaracterized as a means to cut overall federal investment into our rural communities. We cannot obtain more broadband deployment with a smaller investment or a weaker support structure for rural telecommunications.

I look forward to hearing from our witnesses on how we can modernize the USF to continue meeting its goal of providing universally accessible and affordable telecommunications for all Americans.

Thank you, Mr. Chairman. I yield back the remaining 20 seconds.

REP. BOUCHER: Thank you very much, Mr. Stupak.

The gentleman from Missouri, Mr. Blunt, is recognized for two minutes.

REP. ROY BLUNT (R-MO): Thank you, Mr. Chairman, and thank you for holding this hearing today. And we'll have the opportunity to hear from this group of really well-grounded and distinguished witnesses. I know this is an area, Mr. Chairman, where you've shown great leadership in the past, and I know all the members of the subcommittee are looking forward to working with you to see if we can find ways to reform and update the Universal Service Fund.

We all understand the fund needs serious reform. The costs of the program soared, tripling in the past 12 years alone, and the impact on consumers is uneven and often arduous. Allegations of waste, fraud, and abuse have arisen and no suitable accounting mechanism exists to appropriately monitor where the money is going.

In short, this program's broken and the Congress should act. However, it should act responsibly and within the mission of insuring that valuable services remain available to parts of the country that need it. Congress should carefully consider whether it's appropriate to add new components such as broadband access to the Universal Service Fund. We need to stop the soaring cost of program, but do it in a way that ensures that unserved communities continue to get service where the market is challenged to deliver it.

I want to thank you, Mr. Chairman, for calling this hearing. I also want to thank both Mr. Terry and Mr. Barton, our full committee ranking member, for their leadership on this issue. Most importantly, I want to thank our witnesses today who come with incredible information on this topic. I look forward to a bipartisan bill to address this program.

REP. BOUCHER: Thank you very much, Mr. Blunt. That's my goal as well.

The gentleman from Pennsylvania, Mr. Doyle, is recognized for two minutes.

REP. MICHAEL DOYLE (D-PA): Thank you, Mr. Chairman, for holding this hearing on universal service. I hope that we're able to draw some conclusions after this hearing that will help us expedite the process to making sure that all Americans are able to communicate with each other however they choose.

At our subcommittee's last hearing on this issue, I said that the Universal Service Fund's best purpose as we conceived it in the Telecom Act in 1996 had fundamentally changed. At that time, I said that, quote, "we need to completely reform the fund by moving away from subsidizing telephone service and instead put our money towards the broadband future." For now, I'll call this needed reform "Universal Service 2.0."

Mr. Chairman, Universal Service 2.0 means that all Americans have access and are able to use fast broadband. Universal Service 2.0 recognizes that using cost-efficient technologies is critical when some parts of the country are asked to pay for others. Universal Service 2.0 recognizes that competition is still vital to drive down consumer prices and required subsidies.

And, Mr. Chairman, Universal Service 2.0 means that local governments have a role to play. And I want to say to you, Mr. Chairman, that I will join you in educating anyone at today's witness table that disagrees that they do.

Thanks, and I'll yield back my time.

REP. BOUCHER: Thank you very much, Mr. Doyle.

The gentleman from Oregon, Mr. Walden, is next. I believe he has departed, at least temporarily.

The gentleman from Nebraska, Mr. Terry, is recognized for two minutes.

REP. LEE TERRY (R-NE): Well, thank you, Mr. Chairman, for holding this hearing on Universal Service Fund. I've enjoyed our time working together to develop this bill and the framework.

I set out several years ago, almost four years ago, to reform USF because I felt that the principles and goals of universal service are relevant today just as they were at the origination of this program. However, the Universal Service Fund had failed to adapt to the changing telecommunications environment. The fact that broadband is still not supported -- is still not a supported goal of the USF reflects the need for reform.

The FCC has built a tremendous record on USF reform over the last few years. And now it's time for this committee to act. I'll note that I represent an urban/suburban area. I have more concrete that grass in my district, yet I see the need to continue universal service and modernize it.

I recognize the importance of ubiquitous broadband network and the value my constituents receive from being able to connect to anyone, anywhere in the country and hope that my colleagues do, too.

Now, as we move forward on reform, we must not lose sight that USF is about providing customers in all regions of the nation living in rural, insular, and high-cost areas access to affordable telecommunications and information services.

I yield back.

REP. BOUCHER: Thank you very much, Mr. Terry. And thank you for your outstanding work on this measure.

The gentlelady from the Virgin Islands, Ms. Christensen, is recognized for two minutes.

REP. DONNA CHRISTENSEN (D-VI): Thank you, Mr. Chairman.

Chairman Boucher and Ranking Member Stearns, as a representative of a district that is high -- has a -- is a high-cost insular area which reportedly received 25.5 million (dollars) in high-cost support in 2007 and has benefited from the other programs as well, I thank you for holding this hearing and for both of your long-term legislative efforts to try to keep the Universal Service Fund in sync with a rapidly-changing landscape.

I think everyone is agreed on a need for reform, but also to preserving the intent codified in 1996, that all consumers across our nation should have access to the broad spectrum of communication possibilities at affordable rates, although with some expansion of that. The broadband provisions in the recent recovery package will give a welcome boost to the goal of making technology equally accessible to everyone everywhere, as well as create more demand for broadband as we look to transform our health care system beginning with health information technology.

And so on the areas that present challenges to taking the Universal Service Fund into the 21st century, I look forward to the testimonies and welcome our panelists this morning.

REP. BOUCHER: Thank you very much, Ms. Christensen.

The gentleman from Georgia, Mr. Deal, is recognized for two minutes.

REP. NATHAN DEAL (R-GA): Thank you, Mr. Chairman. I want to welcome our witnesses. And in order to expedite the hearing of their testimony, I'll waive my opening statement.

REP. BOUCHER: Thank you, Mr. Deal. We'll be pleased to add two minutes to your time for questioning our witnesses.

The chairman of the full committee, the gentleman from California, Mr. Waxman, is recognized for five minutes.

REP. HENRY WAXMAN (D-CA): Thank you very much, Mr. Chairman.

I'm pleased that the subcommittee is beginning its review today of the nation's Universal Service Fund.

I suspect that we all agree that the program is in need of repair and that the high-cost fund is a good place to start.

I'd like to outline a few principles that will guide me during this process.

First, I believe the goals of universal service are as important now in the age of broadband as they have ever been. Simply put, we cannot allow any part of the country, urban or rural, to be left behind. Second, we need to modify the program by looking forward, not by looking back. We need a Universal Service Fund that supports the broadband networks of the future, uses public money wisely and efficiently, and spreads responsibility for the program as broadly and equitably as possible.

Third, we must recognize that public obligations accompany public money. The $7-billion Universal Service Fund is financed by consumers. Service providers are simply conduits that transfer to the fund an 11 percent fee on top of the ordinary charges for the long- instance and international calls.

We should ensure that recipients of these public funds meet certain obligations that benefit the consumers who pay these fees. For example, last Congress I introduced legislation to require wireless companies that receive USF subsidies to open their networks to other carriers for roaming purposes. I plan to reintroduce that measure shortly. Going forward, this committee will look closely at whether additional public-interest conditions are appropriate.

Fourth, we must ensure full accountability and transparency in this program. As GAO concluded in a June 2008 report, despite the investment of over $30 billion in the high-cost fund over the last 12 years, there are no data to show what this massive investment has produced. I know Ranking Member Barton feels strongly about this point, and I look forward to working with him and other committee members who share our concern about performance measures and potential waste, fraud and abuse.

As chairman of the Committee on Oversight and Government Reform during the last Congress, I asked the FCC to provide a list of the 10 largest recipients of high-cost program subsidy dollars for 2006 through 2008, as well as a list of the 10 largest per-line subsidies by location for 2006 and 2007. This was not secret information, but it had not been collected or released in this format before. The result of this inquiry raised additional questions about the high-cost program.

For instance, three companies in Hawaii, Sandwich Isles Communications, Sprint Nextel, and Mobi PCS, each receive a subsidy of close to $13,000 a year per line to serve the same insular area. Over the past three years, these three companies received a total of more than $120 million in support. Under current rules, a single household in part -- in this part of Hawaii might have a land-line phone connection from Sandwich Isle Communications, a wireless phone from Sprint Nextel, and a wireless phone from Mobi PCS, resulting in a federal subsidy of $39,000 per year.

As we consider reforms of the high-cost fund, we should ask tough questions and be open to creative solutions. For example, where is the money going and to whom? Is this really the best use of public dollars? Are companies adequately demonstrating that funds are being used for their intended purposes? Are there less expensive ways to provide service by using different technologies? Should we consider competitive bidding for what are, in effect, government contracts? For how long and at what level should carriers be supported after they build facilities? Should we consider requiring state matching grants? Now that over 90 percent of American households have access to wire- line broadband, should we consider shifting the fund to also support consumer adoption of broadband?

I know universal service legislation is a priority for you, Mr. Chairman. I look forward to working with you, Ranking Member Stearns and Barton and the other members of this committee, to figure out the best way forward.

Thank you.

REP. BOUCHER: Thank you very much, Mr. Chairman. And I look forward to working with you and others on this committee on a bipartisan basis to achieve those goals.

The gentleman from Arizona, Mr. Shadegg, is recognized for two minutes.

REP. JOHN B. SHADEGG (R-AZ): Thank you, Mr. Chairman. And thank you for holding this hearing. I want to begin by welcoming Mr. Steve Davis, the senior vice president of public policy in Government Relations for Qwest Communications. Qwest plays a large role in my congressional district. And I look forward to his testimony as well as that of the other witnesses.

I'd like to associate my remarks -- or my views with the remarks of the ranking member, Mr. Stearns. I believe he articulated my views here well. I would also like to commend Congressman Lee Terry and Ranking Member Barton for their work in this area.

I look forward to the discussion of the Universal Service Fund and to learning ways in which we should improve and reform the system. We've come a long way since the concept of a universal service fund first came forward. We have worked as a nation to ensure that affordable basic telecommution -- communications services are available to everyone regardless of where they live. But we are now at a crossroads as our technology evolves and improves. And I believe it is essential that we reevaluate the Universal Service Fund and how it is used.

It is clear that some reform is necessary, and, given the current status of our economy, we must find ways to make the system more cost effective. An audit as of July -- from July 2006 to June 2007 revealed that roughly $1 billion of Universal Service Fund funds were awarded erroneously. We simply cannot afford nor defend that kind of waste in our system.

We must find ways to work to make sure that these errors do not occur in the future, because they will only hurt our economy and our constituents. I look very -- I very much look forward to the testimony of our witnesses here today on how we can improve the system and use technology to make it better serve the nation at a more economical cost.

And again, Mr. Chairman, I think you for the hearing.

REP. BOUCHER: Thank you very much, Mr. Shadegg.

The gentleman from Vermont, Mr. Welch, is recognized for two minutes.

REP, PETER WELCH (D-VT): Thank you very much, Mr. Chairman.

Two things -- it's mostly been said -- but one, the need is enormous, and it has to include broadband. That would make a huge difference everywhere, but especially to rural states like Vermont. We get many companies that can decide whether to come to Vermont or not depending on whether, in the rural area they want to locate, there's access to broadband.

Second, we have to reform the amount of money and how it's being spent, how it's being deployed. It's been said, but just the witnesses here at this table represent companies who've received in the range of $5 billion for the universal fund. And the question obviously is, to the users, to your customers, are you using that money well? Are you getting the job done?

And you face attention because, on the one hand, you've got an obligation to the shareholders of your company; that suggests that you maximize profit. But on the other hand, you have a public trust, and that requires that you extend access to this essential utility service to every single American.

I look forward to working with you, Mr. Chairman and the members of the committee, to improve this bill.

Thank you.

REP. BOUCHER: Thank you very much, Mr. Welch.

The gentleman from Oregon, Mr. Walden, is recognized for two minutes.

REP. GREG WALDEN (R-OR): Thank you, Mr. Chairman. I'm going to waive my opening statement in lieu of more time at the questioning period.

REP. BOUCHER: Thank you very much, Mr. Walden.

The gentlelady from Florida, Ms. Castor, is recognized for two minutes.

REP. KATHY CASTOR (D-FL): Thank you, Mr. Chairman. I will ask unanimous consent to submit my opening statement for the record and waive at this time.

REP. BOUCHER: Without objection, the opening statements of all members who desire to submit them will be received for the record, and the gentleman -- the chair thanks the gentlelady.

The gentleman from Illinois, Mr. Shimkus, is recognized for two minutes.

REP. JOHN SHIMKUS (R-IL): Thank you, Mr. Chairman. I'll be real brief.

It's great to have the panel. We need to move on legislation. Broadband deployment's key in rural America. I represent 30 counties, parts of 30, of 102 in the state of Illinois. So this has been very helpful.

I also chair -- co-chair with Congresswoman Eshoo the E9-1-1 Caucus -- you know, cellular delivery and location identification's critical to rural America, especially when health and safety issues are concerned. We have some challenges as we move forward, Mr. Chairman. But I look forward to working with you as we make those challenges and -- accept those and move forward.

I yield back.

REP. BOUCHER: Thank you very much, Mr. Shimkus.

The gentleman from New York, Mr. Weiner, is recognized for two minutes.

REP. ANTHONY D. WEINER (D-NY): In the interest of more time for questions, I yield my opening statement.

REP. BOUCHER: Thank you, Mr. Weiner.

The gentleman from California, Mr. McNerney, is recognized for two minutes.

REP. JERRY MCNERNEY (D-CA): Thank you, Mr. Chairman.

Well, we certainly have seen a tremendous change in the technology since the last legislation on this in 1996. It was difficult then to foresee what we would be having now, and it's going to be hard for us to foresee what we're going to see in the next 10 years. So we're going to look to you all to give us guidance on that. We're going to work on both sides of the aisle. And we'll come up with some good legislation.

Thank you.

REP. BOUCHER: Thank you very much, Mr. McNerney.

Mr. Rush, from Illinois, is recognized for two minutes.

REP. BOBBY L. RUSH (D-IL): Mr. Chairman, I think I'll defer for an additional two minutes of questioning.

REP. BOUCHER: Thank you, Mr. Rush.

All members having been recognized for opening statements -- I -- yeah, I -- I did get him, I think -- we now turn to our panel of witnesses. And I want to express appreciation to each of them for their appearance here this morning and for their participation in this conversation regarding universal service reform.

Our panel consists of Mr. Steve Davis, Senior Vice President for Public Policy and Government Relations for Qwest; Mr. Joel Lubin, Vice President for Public Policy at AT&T; Mr. Ted Carlson, Chairman of the Board of United States Cellular Corporation; Mr. Mark Gailey, Chairman of the Board of the Organization for the Promotion of Advancement of Small Telecommunications Companies and a board member of the Western Telecommunications Alliance.

He's also president and general manager of Totah Communications. Mr. Derek Turner is research director at Free Press. Mr. Tom Tauke, a former member of this committee, is the executive vice president for Public Policy Affairs and Communications at Verizon. Mr. Tom Gerke is the chief executive officer of Embarq. Mr. Gregory Hale is speaking on behalf of the National Telecommunications Cooperative Association. He is general manager of the Logan Telephone Cooperative. And Mr. Scott Wallsten is vice president for Research and a senior fellow at the Technology Policy Institute.

Without objection, all of your prepared written statements will be entered into the record. And we would welcome your oral summaries and ask that you keep those to approximately five minutes so that we have ample time for questions.

Mr. Davis, we'll be pleased to hear from you first.

MR. DAVIS: Good morning, Mr. Chairman --

REP. BOUCHER: And you might want to push the button on your microphone. We can hear you better.

MR. DAVIS: I'll start over.

Good morning. Thank you, Mr. Chairman and members of the committee. My name is Steve Davis, and I am senior vice president for Public Policy and Government Relations for Qwest. I appreciate the opportunity to share Qwest's views with you this morning on universal service.

Before I address the universal service issues directly, I'd like to tell you a bit about Qwest and why we care so much about these issues. Qwest provides voice, data, Internet and video services nationwide and globally. And we provide local telephone service and broadband service in 14 western states.

REP. BOUCHER: Mr. Davis, let me ask that you pull that microphone just a bit closer. I think we can hear you better.

MR. DAVIS: Okay. Try that.

REP. BOUCHER: That's better. Thank you.

MR. DAVIS: Thank you.

As of December 31st, 2008, Qwest provided 11.6 million voice- grade access lines and 2.8 million broadband lines to customers in our territory. And we currently have broadband available to 86 percent of our customer base. Our local service territory is very diverse. It includes urban areas like Denver, Seattle, Minneapolis and Phoenix, but it also includes many smaller towns and cities, and many rural communities with low household density.

In fact, 42 percent of our 1,300 wire centers, serving 2.2 million homes and businesses, are located outside of metropolitan areas. We have 34 wire centers that serve areas comparable or larger than the size of Rhode Island. Needless to say, these are very sparsely populated areas.

Although Qwest serves extremely rural areas in all of the 14 states in which we provide local service, we only receive high-cost, federal, universal service support in four states. Qwest receives no high-cost support in such rural states as North Dakota, Idaho, Iowa, New Mexico. In 2009, Qwest is projected to receive approximately 1 percent of the total $2.3 billion federal high-cost assistance.

I'd like to commend Chairman Boucher for his long-standing recognition of the need for universal service reform and for holding his hearing to address these important issues. Qwest supported the proposed universal service reform bill of Chairman Boucher and Congressman Terry in the last Congress. And we look forward to continued efforts to accomplish significant universal service reform in this Congress.

Currently, there are different mechanisms for distributing high- cost support to carriers depending on whether they are deemed rural or non-rural under the FCC's rules. And despite the massive rural territory served by Qwest, under the FCC's rules we have been deemed a non-rural carrier and thus excluded from access to the vast majority of the federal high-cost assistance.

Qwest and other non-rural carriers receive limited support under a mechanism that has twice been held invalid by the 10th Circuit Court of Appeals. Yet this flawed system for distributing high-cost support remains in place. High-cost support should be based on the area served and not the size or identity of the carrier providing the service.

Qwest agrees with the approach of Chairman Boucher and Congressman Terry's USF reform bill that high-cost support to non- rural carriers should be retargeted to individual wire centers.

The purpose of high-cost support has been to enable telecommunications service in areas where it is not otherwise economic for a carrier to provide the service. It should not be used to support multiple carriers in an area where it's uneconomic for even one to provide service.

Unfortunately, in many areas the current high-cost support program does just that. High-cost support to duplicate network providers, primarily wireless carriers, has caused the enormous growth in high-cost support fund in recent years. While high-cost support to incumbent carriers has been flat since 2003, support to these duplicative network providers has grown from approximately $17 million in 2001 to a projected $1.4 billion in 2009. In order to return the high-cost fund to its core principle of universal service, high-cost support for all carriers should be based on their costs of providing the supported services.

As Chairman Boucher, Congressman Terry and many other have recognized, it's also time to promote universal access to broadband through universal service support. Qwest currently offers broadband services to approximately 86 percent of the households in our region. However, in the absence of additional federal assistance, the necessary upgrades to expand our footprint are not economically feasible in many rural areas. The grants for broadband deployment established in the stimulus are a start, but are not sufficient to result in the ubiquitous deployment of high-speed broadband. There remains a crucial role for universal service funding.

Qwest believes that the primary purpose of any broadband deployment subsidization should be to aid construction of facilities in unserved areas. The high-cost support should not provide ongoing operational subsidies. Nor should the support subsidize competition or build duplicate networks.

In 2007, Qwest proposed a new federal universal service program that would provide one-time grants to selected applicants to deploy broadband to unserved areas. And we commend that proposal to the subcommittee for its consideration.

Congress has an important opportunity here to structure an improved program for supporting universal access to basic telephone service and a new program for supporting universal access to broadband.

Again, I think you for the opportunity to testify today on these issues. And I look forward to your questions.

REP. BOUCHER: Thank you very much, Mr. Davis.

Mr. Lubin, we'll be pleased to hear from you.

MR. LUBIN: Good morning. Thank you, Chairman Boucher, Ranking Member Stearns, and members of the subcommittee for inviting me here today.

AT&T is a longtime supporter of our national policy of universal service, and our recent efforts to sustain that policy through meaningful reform. In this regard, we salute your leadership and the work of the entire committee.

AT&T is the single largest provider of telephone service in rural America today. AT&T provides service to 7 million rural telephone customers. AT&T remains committed to serve our customers regardless of where they live and where they work. AT&T's unique experience serving a diverse set of customers has shown us the value of broadband services.

Today's hearing is on point. The current universal service high- cost system is broken and will not create the proper incentives for broadband deployment in high-cost areas.

Let me explain with a personal experience of mine that happened five years ago. Five years ago, my daughter and son-in-law came to us and said, we've got some good news and bad news. I said, share the bad news first.

They said, well, we live six miles away today. We're moving 6,000 miles tomorrow. I said, what's the good news?

The good news is, we'll be back in about one or two years. But I already got online. I have an apartment. I got a broadband connection. And did you ever hear about this thing called voice over the Internet? I said, yes. They said, well, you know what; I can even keep the same local number.

That was a big deal. That was a big deal for them, because they didn't have to send out a number to everyone. It was a big deal for my wife and I, because we could be in contact as a local call, speaking to our granddaughter virtually every day.

Let me try to unpack what I just said. I call old technology -- let's call that the narrowband, local service that you know and you have today. That narrowband pipe is paid by a combination of local- rate line items, on a customer's bill, state and federal access charges paid by carriers that are then in turn recovered, not from that particular customer but from a host of customers, including that one who has the pipe. In addition -- (inaudible) -- by existing federal and state Universal Service Funds.

For this old technology to work, it is essential to know where the call originated and terminated. By the way, I'm going to describe a new technology where it just doesn't matter.

The new technology -- let's call it a broadband pipe -- is paid directly by the end user. You will not need to know where the call -- I actually should say packets -- where the packets originate and terminate. Just like when my kid moved 6,000 miles away, I still dialed the same number. And lo and behold, it arrived. And we spoke.

I'm sharing this story, because it clearly shows that broadband technology is a disruptive technology. It simply redefines the game, including the local calling area, not just to be the small local calling area. But it redefines it to be, in effect, the whole USA or, in my example, the globe.

In a broadband world, there are no access charges. There is no federal local-service line charge on the bill. It also turns out that the broadband service offers much more capability to the customers. That's why we're talking about it. And I hope you see that it doesn't have the complexity of the old narrowband pipe. Nor do I hope we ever take the baggage of the old technology and drive it into the new world. What a shame that would be.

So, what to do? I'd like to identify three things, because one needs to start thinking about a comprehensive solution to the dilemma. And the issue is, do I want broadband deployed? We'll talk about that shortly. But comprehensive reform needs to address three things.

First, number one, we need to replace the existing collection mechanism, from interstate retail revenues to a broader-based collection mechanism, which -- we would suggest telephone numbers or a combination of telephone numbers and connections, which is a more stable collection mechanism; reform intercarrier compensation, to preserve universal service during the transition to a fully deployed broadband world.

And let me be very clear on this point -- access charges are going to vaporize. They're going to go away. They're not going to exist. And it's an issue that needs to be dealt with.

Reform of the existing federal high-cost funding mechanisms, to promote deployment of next-generation broadband and expanded and improved wireless service in rural areas, is important.

I'd like to make one final point, and we need to clearly understand. As we adjust into the new world, this old world where you have very small local-calling areas, and now I'm going to focus on a small rural calling area. That small, rural calling area may have a local rate that's 40 to 50 percent lower than the urban rate. But yet the cost of that service, in the rural areas, could be 5, 10, 20 or more times greater than the cost in the urban area.

I just observe that the local-calling area of the old world is going to ultimately expand to be, in effect, the whole USA or maybe the globe. And the issue here ultimately is, how do we reconcile these differences and create that comprehensive solution?

My final point: Remember, Universal Service Funds and access charges didn't exist 25 years ago, 1984. And access charges won't exist in the broadband world.

I look forward to your questions and working with you to find solutions. Thank you.

REP. BOUCHER: Thank you very much, Mr. Lubin.

Mr. Carlson.

MR. CARLSON: (Off mike.)

REP. BOUCHER: Mr. Carlson, please pull the microphone over. Get it very close. Turn it on.

Thank you.

MR. CARLSON: There we go. Sorry about that.

REP. BOUCHER: A little technology lecture here and there. (Laughter.)

Thank you.

MR. CARLSON: I'm not an engineer. I'm sorry.

(Off mike.)

REP. BOUCHER: Mr. Carlson, I hate to raise the issue. But I think your microphone's off.

MR. CARLSON: You know, it did go off there.

REP. BOUCHER: There we go.

MR. CARLSON: First, we must recognize that the money involves is not the government's, as one of you said, nor the telecommunication provider's. It is the consumer's money. Second, collectively government and the participating carriers must be superb stewards of these precious funds.

Third, while progress has been made, there are still many areas of the country that are expensive to reach and serve with quality service and, without assistance, will not be successfully serviced. And thus the program continues to be needed. And finally that the core principle, of competitive telecommunications for every American, remains an important and worthy goal.

Based upon these principles, I believe, there are three questions for the committee to address. First, what is the proper role and scope of the universal service program? One of you mentioned that. Second, what investments would be made in the future? And finally how do you structure the program effectively and efficiently, so as to maximize the benefits to consumers, as something you pointed out?

As to the first question, I agree with the current law that the proper role of this program must be to ensure that high-cost areas have modern, high-quality telecommunication services that are reasonably comparable to those available, in our urban and suburban centers, and at reasonably comparable rates. Because if universal service were limited to a phone that was tethered to the kitchen wall, rural Americans would be denied access to the mobility tools that they need to compete with urban citizens, both here in the United States and abroad. And we commend your bill that you introduced, in the prior session, in that regard.

With respect to the second question, there are two observations that I would offer. First, broadband services and mobile wireless services are two must-have functionalities that consumers expect and demand, for personal and business use. Therefore the program should be expanded to make broadband eligible for USF support.

Second, however, significant additional investment is still required to bring high-quality mobile services to all Americans. Remaining committed to that investment in mobility will enable companies to bring essential economic development and public safety benefits to rural areas and, through the network effect, to all Americans.

As a carrier that serves vast rural areas, I know that many Americans do not have sufficient access to high-quality mobile wireless services. My company's use of USF support has enabled us to extend service to literally hundreds of small communities that previously had no service or poor service. And we have made some huge coverage gains in places where we have been eligible for those funds, such as Oregon, Washington and Maine.

There's also much work still to be done extending and improving service in states represented on this committee, such as Virginia, Illinois, North Carolina, Tennessee and Missouri, states where we have just recently been designated as an eligible telecommunications carrier.

For those of you who represent rural districts or anyone who visits rural America, you know how your smartphone can stop working. Or you've noticed how dropped calls and dead zones can increase when you leave heavily traveled roads.

I believe a reform program can effectively and efficiently address these problems and, if tailored correctly, can be complementing the program that's just recently been authorized, the American Recovery and Reinvestment Act.

To be clear, we now serve many rural areas that do not generate sufficient revenues, to meet ongoing operations expenses and to maintain a high quality of service. There's no escaping the reality that the USF program is critically important to the viability of providing basic mobile services for millions of Americans.

Some additional points that we'd like to see, we make sure -- that goes into the legislation. From our standpoint, the legislation should not favor any class of carrier or technology because by not doing so, we will foster innovation and competition.

We believe we should look at a cost model rather than carry zone costs, because a cost model would save significant cost and expense. And we believe that the legislation should reject any amendments that would foster a single market winner, for example, through reverse auctions. Because a single market winner would relegate rural America to the days of a monopoly carrier, requiring enormous and unnecessary regulatory oversight to protect consumers.

Thank you.

REP. BOUCHER: Thank you very much, Mr. Carlson.

Mr. Gailey.

MR. GAILEY: Chairman Boucher, Ranking Member Stearns and members of the subcommittee, thank you for inviting me here today.

I am Mark Gailey, president and general manager of Totah Communications, located in Ochelata, Oklahoma. Our family-owned company serves over 3,000 telephone subscribers, and more than 1,000 DSL subscribers in sparsely-populated areas of Oklahoma and Kansas.

I come before you as chairman of the board of the Organization for the Promotion and Advancement of Small Telecommunications Companies, and as a board member of the Western Telecommunications Alliance. The companies and cooperatives represented by these associations provide numerous services to their communities, including voice, broadband Internet access, video and wireless.

The recent enactment of The American Recovery and Reinvestment Act of 2009 has brought more attention and focus than ever on the efforts to provide broadband to service to all citizens of our nation. The broadband infrastructure funding included in that law should further the goals set forth by Congress and the administration.

However, as significant as that funding was, the funding levels -- as significant the funding levels were for broadband buildout, it will not get the entire job done. Nor will these grants and loans provide for the ongoing operations, maintenance and upgrades of broadband networks.

This brings me to the subject of today's hearing, the Federal Universal Service Fund. OPASTCO and WTA believe very strongly that the Universal Service Fund high-cost program should explicitly support broadband. The goal of universal service policy has been to ensure that every American, regardless of the location, has access to affordable, high-quality access to the public switch network. For rural incumbent local exchange carriers, high-cost universal service support is a cost recovery program designed to promote investment in areas where it would not otherwise be feasible for carriers to provide quality service today or in the future. And the future of communications, as we know, is broadband.

While the availability of broadband service is necessary, just as important is the adoption of broadband service. There are many factors that spur adoption of broadband. Computer availability and training come to mind, but the major factors are price and speed of the service. And USF plays a very important role in making broadband both affordable and attractive for consumers. Healthcare, education, and commerce have joined communications and entertainment as applications that now make high-speed broadband Internet connection a necessity.

USF needs other significant reforms. The USF contribution base must be expanded to include all broadband and voice connections, thus leading to smaller USF line items on consumer's bills and more funding availability. The so-called identical support rules should be eliminated, which would result in cost savings to the USF and prudent use of funds based on real investment levels of competitive carriers, not the investment levels of an incumbent carrier.

OPASTCO and WTA strongly believe that no cap should be imposed on the high-cost program or any portion of it, so that sufficient funds are available for ongoing broadband investment and upgrades. Continual investment is critical because broadband connections that are available today are not the networks that will enable rural areas in the rest of the country to completely -- to compete globally five years from now. A high-quality broadband network can enable existing businesses in rural areas to grow, as well as to attract new business to the areas, both of which will energize the local economy.

We also request that USF be permanently exempt from the Antideficiency Act accounting standards. The imposition of the ADA on the USF, or even the threat of such action, brings about uncertainty regarding future USF payments that thwart investment in communications and network services. OPASTCO and WTA also oppose the implementation of reverse auctions, state grants, vouchers and other mechanisms that will only diminish the usefulness of USF.

Chairman Boucher, I wish to thank you and Congressman Terry for the insight and leadership you have shown on this issue. Introduced in the previous Congress, the Boucher-Terry USF reform legislation was supported by both OPASTCO and WTA. Many of the reforms to USF that we requested in this testimony were contained in that bill. We look forward to working with you once again, to move forward with progressive reform to this very important program.

Now, I would like to move to an important aspect of any USF reform effort: oversight and accountability. OPASTCO and WTA pledge to work with Congress and the administration to continue the high-cost program's accountability to the public. On the issue of transparency and the operation of the USF, all parties involved must work toward realistic processes and fair solutions to better administer the funds collected from communications customers.

In conclusion, for nearly 75 years, our nation has supported the policy of universal communications services for its citizens. Throughout those years, this meant telecommunications or voice service. Our country, our economy and, in fact, our entire world has vastly changed, and it is well past time to reform the USF.

Thank you.

REP. BOUCHER: Thank you very much, Mr. Gailey.

Mr. Turner.

MR. TURNER: Chairman Boucher, Ranking Member Stearns, Mr. Barton, and members of the committee, I thank you for the opportunity to testify today on the important issue of high-cost reform.

I'm the research director for Free Press, the public interest organization dedicated to public education and consumer advocacy on communications policy.

Technology is rapidly changing the way Americans interact, learn and do business, and all for the better. But the rules governing our communications markets are not keeping up with this rapid pace of change and consumers are suffering as a result. When the current universal service regime was created in 1996, the Internet was an application that rode on top of the telephone infrastructure. Today, it's the opposite: Telephony is just one of many applications that ride on top of broadband infrastructure.

With this convergence comes the opportunity to ensure universal, affordable broadband access, while also reducing the future burden on the fund. We strongly support the goals of universal service. Everyone benefits when rural consumers have access to affordable, high-quality communications services. But as advocates for the consumers whose monthly bills support the fund, we want to ensure that our system of universal service is both fair and efficient.

Consumers in the 21st-century marketplace should not be forced to subsidize a 20th-century technology. We believe a bold and transformative shift in USF policy is needed. Done properly, we can bring affordable broadband to all Americans, while also substantially reducing the size of the fund in the long term. Here's how.

We must begin by asking two basic questions: How much money is each USF-supported line receiving each month? And is that support actually needed?

Our research shows that 40 percent of the high-cost fund -- nearly $2 billion annually -- goes to subsidizing lines that receive less than $10 per month. This is also true for small-rate-of-return carriers. Two-thirds of these lines receive less than $10 per month in high-cost support. Now, these subsidies may be justified, but it begs the question: Is this the best use of that $2 billion?

We also should ask whether rates in these areas are already below the national average. And should we, instead, be using this money for broadband deployment, to bring rural customers more than just a telephone line?

The path to universal broadband and the ending of the over- reliance on subsidies begins with recognizing how convergence has changed the business of telecommunications. Before broadband, carriers were only able to earn perhaps $20 per customer each month selling local phone service. In today's convergent world, a carrier can earn well over $100 on that same line, by offering phone, TV and Internet services. Unfortunately, our current regulatory structure does not account for this potential, ignoring that, with this additional revenue, many high-cost carriers can operate profitably without ongoing subsidies.

Instead, it tries to clumsily separate out regulated from unregulated costs and revenues, and it really results in overpayments and anti-competitive subsidies. As an alternative to this broken process, we suggest basing ongoing high-cost support on total revenue earning potential, and forward-looking infrastructure costs calculated for each carrier on a granular disaggregated basis.

This modernized regulatory structure will reduce the need for ongoing support, as many carriers will be able to recoup network costs and earn healthy profits from triple-play services. However, for some carriers the up-front costs for deploying broadband into currently unserved areas is just too high. Here is where we have the opportunity to turn the regulatory structure on its head.

We should use the fund to pay these up-front costs, and then only provide ongoing support where it is truly needed. We propose a 10- year transition where the new, total cost potential revenue support model is phased in, and the resulting cost savings are used to fund the buildout of open access broadband infrastructure into unserved areas. We estimate that after this transition, the total size of the high-cost fund could be reduced by two-thirds, to less than 1.5 billion (dollars) per year.

Now, the 7 billion (dollars) in broadband stimulus funds presents policymakers with a window of opportunity to transform USF. Here, a substantial portion of the up-front costs for rural networks may be financed by taxpayer dollars. The carriers operating these networks will thus have little capital costs to recover, and therefore, little need for ongoing support. But unless the FCC moves to modernize the regulatory structure, we may see double-dipping. Now by that, I mean carriers might ask ratepayers to reimburse them for the networks already paid for by taxpayers.

Now, getting universal service policy right isn't the only thing we need to do to ensure universal service. For rural carriers, the viability of the self-supporting triple-play business model depends on getting fair rates and terms for transport and special-access services, and getting fair access to video programming.

In closing, we urge Congress to maintain its commitment to universal service, but to do so with policies that are flexible and that benefit all consumers.

I thank you for your attention, and I look forward to your questions.

REP. BOUCHER: Thank you.

Mr. Tauke, you're recognized for five minutes.

MR. TAUKE: Thank you, Mr. Chairman, Ranking Member Stearns and Ranking Member Barton. We appreciate the opportunity to have an -- to testify before this committee on this important issue.

We've come a long way. Just a year ago, we were spending our time talking about the need for a capital fund to cover the up-front investment costs for broadband, and we were talking about the need to reform universal service in order to be able to ensure that it was focused on operational costs where necessary.

We also talked about mapping in order to identify the areas of the country that were unserved so we could focus the money on the unserved areas. Well, now, a year later, the mapping legislation has been approved by the Congress, the capital funds are available through the stimulus package, and we're now back to looking at the Universal Service Fund.

I think it is fair to say, that the universal -- that there is consensus that the Universal Service Fund needs to be reformed. I'd offer four quick suggestions as to how -- what you should focus on in this reform.

First, cap the fund. The bottom line is that it's not that we're spending too little money. The problem is we aren't targeting the money we spend to the right places. And so the first effort is to try to force that retargeting of money to broadband and to mobile wireless services. To broadband and to mobile wireless services.

Second, consumers want access not just to fixed services or wire line services, they want access to wireless services. And the Congress recognized that 10 years ago. But the bottom line is, the mechanism for reimbursing mobile wireless carriers has been -- well, it's frankly a travesty. Nobody any longer steps up and defends the identical support rule, which says that every wireless carrier that comes into the community gets the same amount of support as the underlying wire line carrier in that community.

Nobody defends that anymore. Now the argument is over what is the new mechanism for giving support to wireless carriers? We strongly urge you to use a mechanism of reverse auctions or competitive bidding in order to enter into contracts with wireless carriers to provide service to unserved areas.

You know, today the reality of life is that we have four, five, six, and in some cases more carriers receiving reimbursement to provide service to areas, areas where many carriers are providing service without subsidy. There just is no rationale for this.

So some say we should use a cost-based system for all of those carriers that want to provide service. The first question is, why do we want to subsidize all of these carriers? But the second question is, what is the practical reality of trying to implement a cost-based system?

A cost-based system is a can of worms. Look, on the wire line side, you have infrastructure that is devoted to a single residence. And on the wireless side, you don't have that. One the wire line side, you have an accounting system that has been put in place for years to identify cost associated with that infrastructure that goes to the individual household. You don't have that on the wireless side.

The bottom line is, trying to impose a cost system on the wireless side is going to be a mess. So we encourage you to take a hard look at having some kind of reverse auction or some kind of competitive bidding as you do for other government contracts when you are in essence purchasing services.

Third point. Middle mile. This hasn't received much discussion. But when you look at the world of broadband, here's the reality. The cost of the last mile is high. But in many cases, the cost of the middle mile, from we'll call the central office to the long-haul network, is even greater per customer. We haven't paid much attention to this issue in the past. But as we look more closely at delivering broadband services to more rural areas, we have to look at that middle mile issue. And in my written testimony, I offer some suggestions.

Finally, we should pay into the fund on the basis of numbers. Last year, a broad coalition of players in this space filed with the FCC a numbers-based plan. I'm not saying it's the only plan, but I am saying a lot of work has been done. A lot of support has been developed from a broad coalition. It's simple. It's fair. And it's workable. And therefore, it's something that should be considered.

We look forward to working with you, Mr. Chairman, and all the members of the committee in your efforts to reform this important program.

REP. BOUCHER: Thank you very much, Mr. Tauke.

Mr. Gerke.

MR. GERKE: Good morning, Chairman Boucher, Ranking Member Stearns, and members of the committee. Thank you for the opportunity to testify today on behalf of my employer, Embarq, a primarily rural provider of voice, Internet, video, and other services.

Reforming the federal Universal Service Fund offers an opportunity to accelerate broadband deployment to customers in unserved areas while maintaining affordable access to critical voice connectivity. Embarq commends Chairman Boucher and Congressman Terry on their introduction of H.R. 2054, the Universal Service Reform Act, which included a transition to a broadband focused fund, a more targeted support mechanism, and appropriate carrier of last resort obligations, all critical elements of USF reform.

We also commend Congressmen Barton and Stearns on some of the key provisions in H.R. 6356, the Universal Service Reform Accountability and Efficiency Act, which sought to more precisely direct USF's support to truly high-cost areas and tie USF's support more directly to carrier of last resort obligations.

Policymakers, stakeholders and providers are increasingly coming to the conclusion that the Universal Service Fund is ready to enhance its mission by adding a focus on expanding and supporting broadband availability to all Americans. After all, broadband is increasingly an essential service. It's important in keeping people connected, enhancing public safety, enabling education and telemedicine, and creating jobs.

Of course, there are important considerations in this effort, such as ensuring that the current mission of reliable, avoidable (sic\means affordable) voice service from a carrier of last resort is not abandoned, and targeting USF support to places where the market would not otherwise deliver broadband.

Incumbent phone providers have a very specific carrier of last resort mandate associated with universal service. To illustrate, we have brought a diagram today of a rural market in Goodland, Indiana. Each of the green dots here represent a household. As you can see, most of the households are clustered in a town center. And that's the most economical place to serve. But as a carrier of last resort, we're required to serve all of the outlying areas as well, where the cost to provide such service is much higher. In this case, costs are well over 10 times higher.

The challenge here is how to layer on an expanding -- and expanding availability of broadband throughout low-density areas while maintaining the voice service that's critical. The policy of universal service was conceived to bring and maintain reliable, affordable service to places where the market forces alone would not otherwise provide it.

The Universal Service Fund was created in 1996 because Congress realized that as competition emerged, service providers in high-cost rural areas would no longer be able to maintain the implicit urban-to- rural subsidies and they would need to be replaced with explicit support in the form of the Universal Service Fund.

The contemplated competition has become a reality. Under today's system, universal service support has been calculated and distributed on the basis of broad statewide geographic study areas, averaging together low and high density areas that can be literally hundreds of miles apart.

In closing, and to illustrate our concerns, let's take another look at the map of Goodland, Indiana. The average cost to serve the 452 households clustered in or near the town center is $19 per line per month. The remaining households are dispersed throughout the outlying areas, and the cost per line is $266 per month.

With facts like these, here's what can happen. First, a dense area can knock out support for an extremely remote area. This is particularly egregious if the dense area is hundreds of miles away on the other side of the state.

Second, without the carrier-of-last-resort requirement, you run the risk of multiple carriers receiving unnecessary support to serve only the town center, creating duplication and waste. If you think about the situation like a donut and the hole, the answer is crystal clear. The hole will take care of itself. The purpose of Section 254 has always been to serve the donut.

We look forward to working with you on USF reform to accomplish just that.

REP. BOUCHER: Thank you, Mr. Gerke.

Mr. Hale?

MR. HALE: Thank you, Mr. Chairman, Ranking Member Stearns and subcommittee members. I thank you for the invitation to participate in today's discussion regarding the critical importance of the Universal Service Program and how best to strengthen it for the future.

I serve as general manager of the Logan Telephone Cooperative in Auburn, Kentucky, and also currently serve as a Region 3 director on the board of the National Telecommunications Cooperative Association, NTCA.

My remarks today are on behalf of Logan Telephone as well as NTCA and our 579 other members that serve rural areas throughout the nation. Organized as a cooperative, Logan Telephone's top priority has always been to provide every one of our customers, who are also our owners, with the very best telecommunications and customer service possible.

We serve 5,961 customer lines across our 596 square mile service area, which adds up to about 10 customers per square mile. Rural is different. We have approximately 1,100 small rural counterparts in our industry who together serve 50 percent of the nation's land mass, yet less than 10 percent of the population. Rural Americans throughout the markets of NTCA members are enjoying universal telephone service, access to broadband Internet services, access to advanced video services, and enhanced emergency preparedness.

Now, more than ever, our country's domestic economic and personal security needs are intricately linked to our national universal service policy. American consumers and businesses are dramatically altering their communications expectations. And rural communication providers continue to respond to this challenge, but the fulfillment of our mission is not without tremendous cost.

Universal service plays an integral role in helping providers that are committed to serving the nation's economically challenging markets and consumers overcome these financial challenges. Clearly, our highest priority must center on strengthening and preserving the universal service policies.

We also emphatically support proper oversight and accountability of the program, yet we do not believe this is occurring, as is vividly detailed in a February 12th report from USAC, which I'm making available for inclusion in your hearing record.

We believe it is crucial that we work together to again acknowledge the program's value in a way that restores America's communications preeminence. Our specific recommendations include the following:

One, include broadband in the definition of universal service and expand the contribution base to include all broadband service providers while retaining revenues as the basis for assessing contributions.

Two, affirm that universal service support should focus on providing consumers with affordable and comparable services and not be used to stimulate competition.

Three, allow universal service and inter-carrier compensation reform to occur simultaneously by reducing or freezing access rates and allowing carriers to recover lost access revenues through supplemental ICLS or IAS support.

And going along with that, we should require recipients of any new supplemental ICLS or IAS access cost recovery to voluntarily agree to Title 2 regulation of their broadband services and forego the retention of any excess earnings. During the transition from the public switch telephone network to a complete IP broadband network, we must require all providers of IP-PSTN traffic, including interconnected VoIP traffic, to pay applicable universal service access and inter-carrier compensation charges.

We should require tandem switching rights and special access transport rates to be cost based; strengthen the process for securing universal service eligibility or ETC status; eliminate the identical support rule and provide support based on a carrier's own cost; reject ideas to distribute support via auctions, vouchers or any other untested means; allow the program to operate as envisioned by lifting program caps and freezes; and remove this private program from the federal budgeting process.

Advanced communications services rely upon a healthy and robust network infrastructure. The biggest issue that must be resolved to ensure the existence of such a network is cost recovery. Without adequate cost recovery, there will be no network for any communication service to reach rural consumers, be it wire line, wireless, or other medium. We may well need to modify the program periodically, but the key is to have the network in existence and operational in the first place.

We must invest in this critical infrastructure or be left behind by the world. The words of our new president ring true when we apply it to universal service. The challenges we face are real. They are serious. And they are many. But the members of NTCA are ready to meet these challenges to ensure that no one is left behind. Only through your help in maintaining a strong USF program will we be able to succeed.

Mr. Chairman, we're excited to have someone with your knowledge of our industry and your commitment to rural America in a position to lead and develop policies that will ensure America's broadband and communications preeminence will shine once again.

I think you for your opportunity to speak here today. And I look forward to answering any questions from you or the subcommittee.

REP. BOUCHER: Thank you, Mr. Hale.

Mr. Wallsten?

MR. WALLSTEN: Mr. Chairman and members of the committee, thank you for giving me the opportunity to testify here today.

The current universal service program high-cost fund is inefficient, inequitable and growing at an alarming rate. Especially because the program is funded by taxes on telecommunication services paid by all users, including low-income people, most of whom get no benefit from any part of the Universal Service Fund, the program is in urgent need of reform.

The good news is that we have the tools to increase build out, increase penetration and reduce costs. We can do it by eliminating the current system and replacing it with competitive procurement.

The current high-cost mechanism is not only expensive, but also discourages competition and does little to benefit consumers. A study by Gregory Rosston and Bradley Wimmer, for example, concluded that completely eliminating the high-cost fund would decrease telephone penetration by only about one-half of 1 percent. This result is consistent with nearly every other economic study published in peer- reviewed journals.

Since then, the proliferation of wireless alternatives means that the effected connections would probably be even less. The 1996 Telecommunications Act tried to address the competition problem by opening up the system to entrants called competitive eligible telecommunications carriers, or CETCs. Some contend that we can control the growth by eliminating the rule under which CETCs receive the same subsidy as the incumbents. After all, they say, most of the increase in the fund is from subsidies to competitive entrants, most of which are wireless companies that have lower costs.

That's partly correct. It makes no economic sense to pay entrants with lower costs the high subsidies that incumbents currently get.

But it also makes no sense to subsidize a firm's high costs when a lower cost option is available. Thus, rather than eliminating the identical support rule, we should rewrite it so that all firms, including the incumbent, get the smallest, not the biggest subsidy required for a firm to provide service.

So, for example, if a wireless entrant can provide service in the area for only half the subsidy the incumbent receives, then all eligible carriers in the area, including the incumbent, should receive only that smaller subsidy.

But we can do even better than that. An efficient program would provide just enough of a subsidy to make it profitable to provide the service. The problem is how to determine what that subsidy should be or even whether a subsidy is really necessary. Fortunately, the government has a tried and true method for getting the biggest bang for its buck.

When the government wants a good or a service, it asks for bids and generally awards the contract to the lowest bidder, all else equal. The government uses competitive bidding for buying products as simple as paper to those as complex as weapons systems like the Joint Strike Fighter. Everyone understand this concept and recognizes the importance of getting multiple bids, whether it's for work on your car or for providing services to the U.S. military in Iraq. This everyday, common-sense approach is sometimes called a reverse auction.

Universal service is just another type of government procurement. In this case, the government is buying some minimum set of telecommunication services that society believes everyone should have at a specific price. The current system, however, is akin to awarding no-bid contracts that last forever.

We know that no-bid contracts are more costly and less transparent than are contracts awarded in a more open and competitive manner. For that reason, we generally don't tolerate no-bid contracts. Yet they've become so accepted in universal service that anything else is considered radical. But there's no reason for the no-bid perpetual contract approach to continue. The high-cost fund could begin procuring universal service using the same competitive bidding approach that the government uses for almost everything else.

In a reverse auction for universal service, firms tell the government how much of a subsidy they would need to provide particular telecom services in particular areas. The government then chooses the firm that can provide the service for the smallest subsidy.

Reverse auctions are not a new idea. Aside from the government using them for nearly all procurement, other countries have already tried using this method -- have already used this method to provide telecommunication services in rural areas. This experience, which I review in a paper forthcoming in the Federal Communications Law Journal, and that I'm submitting as part of my testimony, has important lessons.

In particular, reverse auctions for universal service are feasible and typically lead to much smaller subsidies than incumbent beneficiaries previously said was necessary, thus using less taxpayer money to provide more services. In some cases, the auctions reveal that firms were willing to provide service with no subsidy at all. And the very worst outcome from using reverse auctions was one that ended up with the incumbents winning everything. In other words, the worst outcome from using -- for using reverse auctions in universal service was what we accept as the status quo today.

I do not, however, want to give the impression that just because reverse auctions are feasible, they would be easy. The details of the auction matter a lot. For example, would you want to allow multiple winners in any given area? Allowing multiple winners would facilitate service competition, but could actually increase universal service obligations, at least in the short run.

Another issue is how to handle the incumbent. On the one hand, the incumbent may have an advantage in an auction because it already has facilities in the area, potentially discouraging other firms from bidding. On the other hand, if the incumbent loses, could it or should it still be the carrier of last resort?

These problems, however, can be solved. Auctions for spectrum too were once widely considered impractical. Yet the FCC successfully implemented spectrum auctions and they are now used routinely around the world.

Moving from no-bid perpetual contracts to competitive bidding for universal service provision would help bring the high-cost fund under control. Reducing the high-cost fund would, in turn, go a long way towards facilitating an efficient and fair universal service program.

Thank you. I look forward to answering your questions.

REP. BOUCHER: Thank you very much, Mr. Wallsten.

And thanks to all of our witnesses for their testimony here this morning.

The chair recognizes himself for a first round of questions.

In the recently enacted stimulus measure, fully $7.2 billion has now been made available for broadband deployment. That money will be distributed through grants, loans, loan guarantees by NTIA and by the Rural Utility Service in the U.S. Department of Agriculture. And to my way of thinking, that to some extent changes the dynamic for how we should consider universal service, and specifically broadband.

So my questions to any who desire to respond would be this. How should we consider the availability of that stimulus money, 7.2 billion (dollars), as we consider, number one, making broadband an eligible expenditure for universal service funding and potentially, number two, requiring that the recipients of universal service funding provide broadband at certain minimum speeds throughout their entire service territory? Does the availability of that stimulus funding now make it feasible with a potential funding source in order to impose that requirement?

And who would like to respond? Mr. Davis?

MR. DAVIS: At least I'll start.

Mr. Chairman, first, we applaud the efforts of the Congress in the stimulus to address broadband and to create that stimulus package. We think it creates a very good starting point.

When we look at the cost of deploying broadband to additional areas, rural areas of our territory, it appeared to us or we estimated that the cost of increasing our deployment from 85 percent to 95 percent would have taken around $3 billion or thereabouts. And so I think the stimulus package adopted by the Congress is a good starting point and will get us on the right path.

But I think if we're talking about ubiquitous broadband across America, then I think it's a starting point. But more needs to be done, and that's why we suggest that universal service be extended to broadband facilities.

I also think that it gives us a point to begin the discussion of what speeds are adequate with respect to deploying broadband. What is the speed that we need to meet today's needs and yet not gold-plate the expenditures?

REP. BOUCHER: Let me put the question very specifically. Current law says that USF money may not be spent for broadband. I would assume there's fairly broad agreement here that we ought to modify that to at least say it's an eligible subject for expenditure. Would you agree with that, Mr. Davis?

MR. DAVIS: I would.

REP. BOUCHER: Would anyone disagree with that? There's no disagreement.

The better question is whether or not, as the draft that Mr. Terry and I have put forward would require, that we actually impose an obligation on the recipients of universal service funding to provide broadband, to do so throughout their service territories, and to do so at a certain minimum speed. It's a pretty low speed. I think we've got a megabit per second, which on today's metric is not extraordinarily high.

So my question is this. Does the availability of 7.2 billion (dollars) on a nationwide basis in the stimulus measure for broadband make it more feasible to impose that obligation; that if you're going to receive USF money, you have to deploy it?

MR. DAVIS: I think --

REP. BOUCHER: And Mr. Davis, I think a yes or a no at this point from you, because I want to give others a chance.

MR. DAVIS: The answer would be no.

REP. BOUCHER: All right. Others care to comment on that?

Yes, Mr. Gerke?

MR. GERKE: (With microphone turned off.) Thank you, Chairman --

REP. BOUCHER: Microphone, please.

MR. GERKE: (With microphone turned on.) We certainly applaud the efforts in the stimulus and very much want to participate there, definitely agree that broadband should be eligible.

We've done a similar estimate to what Mr. Davis talked about, and for our part, to get us up to a hundred percent, it would be about $2 billion. That's not a bill that would be economical without assistance.

So what we're going to get from stimulus -- and you know how that works, and hopefully it gets directed to unserved areas -- and what we can continue under USF would not come close to fulfilling that. We'd certainly commit to utilize all the money we get to continue to fulfill our USF obligations of extending the service, maintaining it, and keeping that service alive and available to those rural residents.

REP. BOUCHER: All right. Others care to comment on that question?

Mr. Hale?

MR. HALE: I will just say that most of our members are deploying broadband in their areas. But there could be extremely high-cost areas with the cap on the fund where there wouldn't be cost recovery for those areas. So there could be extreme -- you know, in general, yes, we would deploy it and we are deploying it. But there could be very, very small rural areas that it would be difficult to deploy with the cap on the fund.

REP. BOUCHER: I'm detecting some hesitation on about whether or not we should impose that requirement.

Mr. Tauke?

MR. TAUKE: There's no question but it's a stretch for a lot of carriers to be able to meet a requirement to deliver broadband even at the speeds you mentioned within the five-year period. But I think it's really hard from a public policy perspective to say that we're going to indefinitely provide funding for voice services when voice service is not what the future is about.

So whether it's five years or seven years or four years, I don't know the answer to that question. And I think once the mapping is completed, and you have a better handle on what's out there that's unserved, then you can begin to get a better handle on how much capital is needed in order to be able to meet those needs. Maybe there will have to be a little more capital provided besides what's in the stimulus package.

And -- but I don't think it's unreasonable to have some kind of requirement for broadband for those who are receiving the funds. That is the bottom line.

REP. BOUCHER: Thank you very much.

MR. TAUKE: I have one more point that I'd like to make, Mr. Chairman, if I have the opportunity --

REP. BOUCHER: Okay.

MR. TAUKE: -- is that I think it's really important that this committee provide good oversight and perhaps even direction to some of the -- to the administration's agencies that are administering the stimulus funds. Now there are a lot of new people there, a lot of great people, but I think this committee has a lot of history and, I think, probably can give some good guidance to the way in which these funds are administered to achieve the objective.

REP. BOUCHER: Thank you very much, Mr. Tauke. And I might comment that we are in the process of doing precisely that now through conversations with both of the grant-making agencies, with the administration, and we will actually move to an oversight hearing on that very issue in the not too distant future.

My time has expired.

The gentleman from Florida is recognized for five minutes.

REP. STEARNS: Thank you, Mr. Chairman.

Mr. Wallsten, let me just ask you sort of a more blunt question. I mean, obviously everybody in the room agrees that we -- the Universal Service Fund is broken, and it's not working to taxpayers' advantage, and we need to do something. What about just eliminating the Universal Service Fund?

Now I say that because when AT&T started, they were the one carrier, and that's how the program got started. Now you can go to even -- Mr. Gerke, even in my congressional district, which you serve, there's a lot of rural areas -- they can get service from more than EMBARQ.

So forget for the second broadband. Just talking about the Universal Service Fund for land-lease lines, why is it still necessary to do this?

MR. WALLSTEN: Well, I think that's a -- it's a good point that it was originally started to make sure that we brought telecommunication services to areas. Then once it was there --

REP. STEARNS: Maybe can I ask you -- you just said you agree that there's a possibility we don't even need the Universal Service Fund for what it's doing now?

MR. WALLSTEN: I'm sure there are definitely areas where that's true. I mean, if we had reverse auctions in areas like that, if everyone were -- all carriers were eligible, you would find places where firms bid zero, possibly even were willing to pay.

REP. STEARNS: Yeah, in the bill Mr. Barton and I dropped in the last Congress, we listed that you no longer have companies get reimbursed for artwork, cafeteria, lunchrooms, vending machines, charitable contributions, lobbying, public relations, janitorial service. All these were the cost that people like Mr. Gailey or Mr. Hale used in their reimbursement expenses that they would put on top and give to the FCC.

And so in our bill we said: Gee, we didn't think sewage or water, utilities or membership fees in social and political clubs and recreational clubs were necessary to be expenses. So we said: You know, let's make sure that they don't be incurred.

Mr. Tauke said -- and I think Mr. Waxman is sort of looking at and -- which is very encouraging for me, to talk about reverse auctions, and that -- Mr. Wallsten, you had indicated that would be the key here. And particularly you talked about this identical support rule, and if we did away with that, and we had reverse auctions, bingo, then we would be out of this business of getting reimbursed on the membership fees and those in social and political services. Is that correct?

MR. WALLSTEN; Yeah, if the -- if these auctions were done, if they're done correctly, firms are going to want to -- they're going to want to win the auction, and they're not going to include costs like that, because then they wouldn't win.

REP. STEARNS: Now, Mr. Davis, I'm a little concerned to hear you say, when you talk about broadband, the 7.2 billion (dollars) that's in the stimulus package -- you say that's just the beginning. So you're asking the government to continue to tax people in -- who are getting phone lines for a lot more than the 7.2 billion (dollars), because you realize, if we spend that 7.2 billion (dollars) this year, and the Universal Service Fund is about 7 billion (dollars) now -- so if we're going to tax them next year, it's going to go from 11 percent of the bill to 22 percent of the bill.

So we're really working backwards.

And then I heard -- I think Mr. Gerke said we're going to spend $2 billion in broadband and we could use the help -- I think those were your words -- so now you're coming here and asking us here in the committee to give you 7.2 billion (dollars) this year and more money this year.

And if Mr. Gerke needs 2 -- it's 2 billion (dollars), and I assume you need 2 billion (dollars), and I'm sure everybody in this room, including the people in the last row, could use 2 billion (dollars). (Laughter.)

So, I mean, let's -- Mr. Wallsten, am I wrong? I mean, where -- why should I tax people when AT&T just announced it plans to spend 12 billion (dollars) in capital expenses -- expenditures on broadband in 2009? And I applaud them for doing it, you know, but if the private sector's going to out and do it, I mean, I'm not clear, Mr. Davis, why you're saying this is just the beginning. You want the government to continue to fund (this ?) through the Universal Service Fund. That's what you're saying.

MR. DAVIS: Mr. Congressman, first, what I was --

REP. STEARNS: Just bring the mike a little closer to you.

MR. DAVIS: Sorry. What I would say first is that we believe that the size of the fund should not be increased. The size of the fund does not need --

REP. STEARNS: But you believe that --

MR. DAVIS: -- to be larger for us to spend money --

REP. STEARNS: You believe that we should tax the people who use the fund for this money, is what you're saying.

MR. DAVIS: I believe that we can more wisely use the fund, reform the fund, so that without increasing the size of the fund we can provide universal broadband in America.

REP. STEARNS: Mr. Wallsten, even if we took the inverse -- the reverse auction and we did away with the identical-support rule -- and let's just talk about broadband -- how in the world can we go back and ask the taxpayers to pay for this broadband when it looks like the private sector's willing to do it?

MR. WALLSTEN: Well, as you're pointing out, and as others have pointed out here, one of the -- I mean, there are -- there are two issues. One is how we raise the money, and the other is how we distribute the funds.

And the way we raise the money is especially inefficient. Everybody who -- every user of telecommunication services has to pay into this fund, including low-income users, most of whom don't receive anything.

There have been lots of -- there have been many studies on this. A paper by Jerry Houseman (sp) estimated that each dollar raised in taxes on wireless services costs the economy an extra 72 cents to $1.14. Jerry Ellig (sp) estimated that these taxes on wireless services and interstate long distance to support universal service reduced economic welfare by about $2 billion a year.

So even just the -- on the -- on raising-the-funds side, it's inefficient and inequitable: inefficient because it's not a good way to raise taxes -- you're taxing a price-sensitive service -- and it's inequitable because you're imposing the tax on some of, you know, on -- including low-income people who would -- and then it's -- you know, to turn around and use it to subsidize people who are not necessarily low income. So that's the inequitable.

Sorry.

REP. STEARNS: Thank you, Mr. Chairman.

REP. BOUCHER: Thank you. Thank you very much, Mr. Stearns.

The gentlelady from the Virgin Islands, Ms. Christensen, is recognized for five minutes.

DEL. DONNA M. CHRISTENSEN (VI): Thank you, Mr. Chairman.

And I hope my questions -- well, they'll probably let you know that I'm new to telecommunications, but I do have a few questions to ask.

I'll start with Mr. Tauke. You're a strong proponent of capping the high-cost fund. And opponents say that it could have unintended consequences that could undermine the universal service goals. So how would you respond to that concern?

MR. TAUKE: I think the key is to direct the money to the area where is -- it is needed. Today we provide a lot of support for old technology, and we provide support for multiple recipients in a given area. So as -- using Mr. Gerke's chart, before, of Indiana, a lot of money is going into the hole in that donut when the need is outside, in the donut itself. And so if you can redirect the funds to the area where it's needed, I think you can meet the needs without spending more money.

But if you don't -- if you don't cap the fund, I think what will happen is that we will keep adding on more things. So we need to redirect, not just add on. Because consumers are paying the bill, and right now, the bill is, you know, (hovering/however on ?) -- 10 -- 9- 1/2 to 11 percent on the bottom of the bill.

DEL. CHRISTENSEN: Thank you.

Mr. Davis, obviously, there -- this hearing is, in part, about some of the inequities in the system. And one you raise is how your -- the rural side of your business, the services you provide to the rural, don't get -- doesn't get the support. Are you recommending the same treatment for rural and non-rural? Or are you just recommending that your service to your rural areas be -- get the support even though you're not considered a rural provider?

MR. DAVIS: I'm suggesting the same treatment for rural and non- rural carriers, such that we look at the specific geography and whether or not it's rural, and support it irrespective of whether or not the company also serves urban areas.

DEL. CHRISTENSEN: (Okay ?). I -- I understand.

Mr. Tauke and Mr. Lubin, as I understand, both of you support going to a numbers-based system. How would you address concerns raised that this could raise the cost to consumers?

MR. LUBIN: With regard to the question will it raise the cost to consumers, my belief is -- I believe it will reduce the overall contribution paid by the residential consumer, that the value of having a telephone number collection mechanism is, first, you get certainty, you know what it is; it doesn't fluctuate month by month. Sometimes you'll pay 50 cents because you're not making a lot of calls. The next month, maybe you have some family -- positive life event and you make a significant amount of calls, and all of a sudden you can see an USF line item for $5 because you made a lot of calling.

So you see a lot more stability. But the beauty of what the coalition did, that Tom Tauke talked about, which AT&T participated in, is that the actual telephone number rate, when you look at it in aggregate, over -- the residential user was paying less.

In addition, that coalition exempted lifeline customers. So a lifeline customer would not pay the line item. And you heard the previous speaker highlight that, in the ways in which you collect it today, customers who are on lifeline are still contributing it on certain portions of their revenue.

DEL. CHRISTENSEN: That's --

MR. TAUKE: I would reiterate everything Mr. Lubin said.

Bottom line is that the number system as -- and the way it was designed in the submission that a number of us made to the FCC slightly shifts the cost from residential to consumer -- from consumer -- to commercial. So from residential to commercial. So it lowers the overall cost for consumers, and at the same time it takes care of the low-income consumer.

DEL. CHRISTENSEN: Okay. Mr. Wallsten, you are supportive of reverse auction too. Why not base it on carrier costs, as others would suggest?

MR. WALLSTEN: The main problem with using carrier costs is that it's impossible to know what they are. And companies will always have an incentive to say that their costs are higher than they are so that they can increase their subsidy. And it reduces any incentive for them to -- you know, to work more efficiently, because the higher their costs are, the bigger the subsidy they get. And so you can end up in a -- sort of a constant spiral of increasing subsidies.

DEL. CHRISTENSEN: Thank you, Mr. Chairman. I have no further questions.

REP. BOUCHER: Thank you very much, Ms. Christensen.

The gentleman from Texas, Mr. Barton, the ranking member of the full committee, is recognized for five minutes.

REP. JOE BARTON (R-TX): Well, thank you, Mr. Chairman. I commend you for rescuing me from climate-change hearing fatigue. We have our second one of those of the week going on upstairs, so it's a -- it's nice to come down and participate in a hearing that's on something else.

It's also nice to have a hearing entitled "Universal Service Fund: Reforming High-Cost Support." We've got the word reform in there, which is good, and universal service, which is good. I wish instead of reforming, you'd say -- you would have repealing. But that's just wishful thinking on my part.

It's ironic to me that we have a program looking for a need to continue to exist. I would have voted for universal service in the beginning, back in the 1930s, when my district in rural Texas had very few telephones outside of the small communities and the few cities in the district.

I still support some sort of a universal service requirement, I suppose. But I'm at a loss to figure out why we need to change the definition. But maybe if you can't kill the snake, it may be time to change it in such a way that we get some benefit.

And I thought your question, Mr. Chairman, about a requirement, if you're going to have -- get -- receive universal service funds, you should have to provide broadband. I think that's a very good question.

If you can't kill it, at least require something that's useful today. So I'm intrigued by that.

Mr. Tauke, I thought you gave one of the more articulate opening statements. I know that's because you used to be a member of this committee, which is not widely known and you don't talk about in polite company much more any day -- these days. But you were a member of this committee.

Why would somebody oppose a reverse auction? Or why would somebody support a cost-based system reimbursement? If we're going to have it, why not do reverse auctions? Why not do competitive bidding? I mean, obviously, that would save money and you would still have the basic requirement to provide the services.

MR. TAUKE: I'm probably not the best person to answer that question, since we support reverse auctions and competitive bidding.

But as I understand the arguments of those who oppose it is, the first argument is that they favor having multiple carriers in a given area. Parenthetically, I guess, first, we don't think, just as a company, it's our view that --

REP. BARTON: Well, then go to competitive bidding.

MR. TAUKE: If you have an unserved area, we don't see why you should support multiple carriers in that area, especially because as technology develops, those multiple carriers are going to come anyway. But in the near term, why should the government subsidize multiple players?

But secondly, if you decided you really wanted multiple players, you could through a competitive bidding process provide that support to two or three carriers if you wanted to do that. But to try to have a system that is focused on determining costs, I think, is going to be counterproductive in a whole variety of ways, which I've already --

REP. BARTON: I'm going to ask the gentleman next to you, who's an advocate more of classic universal service, why couldn't you exist in a world of competitive bidding, or reverse auction? I thought your chart was informative. You know, I still have areas of my district that have significant rural areas. Why couldn't you exist in a competitive bidding, reverse auction world?

MR. : I think the most critical thing to emphasize is one of the points that Mr. Wallsten made, which is, you have to tie it to carrier of last resort. A lot of the proposals with respect to reverse auctions allow people to come in, identify areas, and cherry- pick those, and then leave me or similarly situated people to try to figure out how you make a profit on $266 per month of cost and a $25 or whatever receipt.

And so, if we can't isolate and leave behind those Americans, which is exactly what 254 was intended to stop or avoid, I think it's absolutely key that that concept --

REP. BARTON: Well, do you accept as a carrier of last resort that you can be served in a wireless mode as opposed to a wire line mode?

MR. : That's my point, is if you were going to -- if a wireless carrier would win, they would need to take that obligation to serve the entire area and relieve the underlying carriers so we wouldn't have that unprofitable operation separated and forced upon you. I think that's the --

REP. BARTON: But if you -- I know my time's expired -- but if we accepted that a wireless carrier is acceptable for the carrier of last resort -- and I'm not saying that you have to accept that, but if you do, is it not true that the cost to serve as last resort would not be $266 per month?

MR. : They'd have to calculate their own costs. With our network already in the ground and because their CFOs don't have them building out to those most rural areas, I'm assuming they've got a cost that doesn't make sense for them.

REP. BARTON: Thank you, Mr. Chairman.

REP. BOUCHER: Thank you very much, Mr. Barton.

The gentleman from Michigan, Mr. Stupak, is recognized for five minutes.

REP. BART STUPAK (D-MI): Thank you, Mr. Chairman.

Mr. Gerke, in your testimony, you mentioned about using the data that we have from a broadband inventory map as a means to retarget high-cost support, either at the wire center level or even more granular. Can you explain what you mean by a more granular targeting?

MR. GERKE: Well, I'm just open to dialogue among the industry and with the committee. My thought is you want to make sure that you separate out from providing service or pollute the calculation with numbers that, you know, represent a different market than what's really being targeted under 254, which is the rural market. And the statewide averaging does that.

So the wire center is a great way to target it. I think it just was an expression of our openness to figure out what's the most laser- like manner in which we can proceed.

REP. STUPAK: Right. But isn't the wire center at times targeting too narrow considering the size of a rural area?

MR. GERKE: Well, as long as you're talking within a particular rural area, you can look at the different wire centers that are there and calculate the cost based on that.

REP. STUPAK: Okay.

Mr. Carlson, if I may. I share some of U.S. sellers' concern that the FCC does not have accurate mobile wireless service coverage data. What level of detail do you believe is appropriate for the commission to have to improve their ability to administer funds? And are we talking about creating something similar to the broadband inventory map for wireless carriers?

MR. CARLSON: Yes. I think the detail needs to go down below the ZIP code level, because if you work with the ZIP code, you could have areas that were both high density and low density within the same ZIP code. And I think ultimately, what we need to do is identify the cost characteristics of each area so that we could introduce a cost model that would take us away from this issue of subsidizing inefficient carriers.

With the cost model approach, we would be subsidizing only those areas which truly were low density and therefore, for any carrier to serve them with high-quality service would have relatively high cost.

So we are advocates of high-cost model system which would require us to get down to the very granular below ZIP code level.

REP. STUPAK: Okay, thanks.

And Mr. Tauke, you raised an interesting proposal for the creation of the subsidy of the middle mile, the long haul between a rural Internet end user and the network. Are the costs associated with developing a connection not fully supported by the current USF because it's strictly broadband in nature?

MR. TAUKE: The costs of the middle mile are not currently subsidized, therefore -- to the extent that it's necessary in order to deliver broadband services to consumers. So when we look at the challenges of delivering service to let's say the eastern shore of Maryland or western Maryland, or Congressman Boucher's district, or parts of West Virginia, various areas we serve. I mean, the bottom line is, that sometimes the cost of providing the last mile in the community or area is much less than the ongoing cost of the 50 miles of transport you have to build.

And so that's why, when we looked at this issue, we said this is an area that needs to be addressed. Hopefully, some of the stimulus money would go to building that middle mile. But in the interim, it seemed to us there was a need for some kind of program to address that issue. And that's why proposed establishing a separate fund in that area.

In some cases, the cost is over -- or almost $100 a month that we have seen for just the transport piece per customer.

REP. STUPAK: You mentioned the economic recovery package as maybe -- that may be some source of it. Would it go for construction, then, that money? Would you see that? Or are we talking about operations and maintenance? And since you're suggesting there would be a temporary support, how long should it last?

MR. TAUKE: We believe that the primary issue, as an issue of construction or capital expenditure, two things happen over time. One is is you get more broadband penetration so you have more customers using that middle mile. And once the middle mile is developed, and the customers have access to broadband, they are buying more services. So therefore, the revenue per customer goes up.

So the combination of more customers and more revenue per customer probably would allow for the operation and some maintenance costs at the last mile and the middle mile to be supported in most instances. But the upfront capital expenditure is big.

REP. STUPAK: So how long it would last just depends on how long that middle mile got developed, how many users got in before you could --

MR. TAUKE: We're working on it. Maybe I'll have a better answer in weeks, but right now, I don't have a firm answer. Our sense is, is that, you know, it's something that probably should be looked at in five years. You could put it in place, have the FCC review it in five years, something like that. But I think that we just need to do more work. And maybe we'll come up with a better answer for you a few weeks down the road.

REP. STUPAK: Thanks.

REP. BOUCHER: Thank you, Mr. Stupak.

The gentleman from Oregon, Mr. Walden, is recognized for a total of seven minutes.

REP. GREG WALDEN (R-OR): Thank you, Mr. Chairman. I appreciate it. And I appreciate all the testimony of the witnesses.

Mr. Carlson, I want to especially draw some attention to you because I appreciate your company's willingness to come into the great metropolis of Fossil, Oregon, where there are 208 households, 469 souls as of the 2000 census. MORE I'd like you to write down the word "Ione, Oregon," population 321, also seeking cellular coverage for the first time in its history. And they are approaching you and all.

But I throw that out there because I know USF played a key role in serving an area -- Fossil, by the way, is the county seat of Wheeler County. And there were very serious legitimate concerns the community had about having no cell service when it gets a lot of people floating the nearby river and there are traffic accidents and things. So I do appreciate that.

Can you speak, though, a bit about the high-cost fund and how the wire line, the wireless industries each get out of this -- what they get out, and how much customers pay into the fund? How do we make this work so we get wireless service out there? What works for you? And what would be detrimental to getting that first and only service out there?

MR. CARLSON: Well, I think that today -- I think it's important to remember that wireless today -- wireless is receiving only about 25 percent of the total program funds as opposed to wire line which receives about 75 percent. And you know, I'm not smart enough to know if that's the right balance or not.

But what I do know is that wireless more and more is becoming, you know, the dominant form of people communicating, certainly for voice services. And I think that the data services are growing rapidly with wireless. So I would hope that the committee in its judgment would consider to think about the future for technology, and not be looking backward about where technology investments have been made, but look about what -- where the country needs to go.

And I believe that when you think about that, wireless will play an ever bigger role in bringing the best service, best quality service out to rural Americans.

REP. WALDEN: And I don't disagree with that. I think there are issues related to that compensation level and the cost. And I think that's something we're all going to struggle with.

And I'm not sure I agree with Mr. Wallsten about sort of once it's built, you could walk away from it. And I -- maybe I'm mischaracterizing your comments, sir, but I sense that once it's out there, then whoever's cheapest at providing the service should be the one that gets reimbursed, or that's the reimbursement rate.

And it strikes me that that means a cellular carrier who may have a lot cheaper ability to provide cellular service might set the rate. And yet, a lot of people may not have cell phones but have a line into their home. And if you're out in rural Wheeler County or Morrow County, it's going to be much more expensive to have that hard wire line.

And I guess my question to you is, is that what you were saying in your testimony, that we'd find the cheapest reimbursement -- the provider who can do it cheapest and that would become the rate?

MR. WALLSTEN: Well, you have to first define what exactly it is that you want and then you want to find the lowest cost method of reimbursing that. And if what you want is -- well, in this case, we're talking -- the fund currently focuses on voice service -- then you do want the lowest cost mechanism of doing it. You don't want to continue supporting a very high cost approach just because it's always been there.

REP. WALDEN: All right. So I did understand you correctly, then?

MR. WALLSTEN: If they can -- if they can bid and can continue offering that service at a low cost, then that would be fine.

REP. WALDEN: Okay. I want to -- I want to go next to our witness from Verizon. What are the pros and cons of using actual cost versus a reverse auction or competitive bidding to determining the distribution of those amounts? Mr. Tauke?

MR. TAUKE: First, to be clear, we favor reverse auctions for mobile carriers, not for fixed carriers, because in fixed carriers, we have generally only one in a community.

REP. WALDEN: Right.

MR. TAUKE: We think customers want both mobile and fixed --

REP. WALDEN: Right.

MR. TAUKE: -- in a community. And we have a mechanism in place, whether we like it or not, that is -- that works for determining costs for fixed carriers.

For wireless carriers, the problem is that, first, unlike wire line where you have an access line --

REP. WALDEN: Right.

MR. TAUKE: -- that flows to the home, with wireless -- and you can measure how long that is, what the cost of it is and so on.

REP. WALDEN: Right.

MR. TAUKE: Wireless, you don't have anything like that. There's no -- there's been no structure in place from an auditing perspective or an accounting perspective, I should say, to keep track of all the costs and how you assign them to individual residences.

You have a host of other issues, such as how you value the spectrum and so on --

REP. WALDEN: Right.

MR. TAUKE: -- that would go into determining costs. So I think what I'd say to you is if you want years of legal challenges, go to a cost-based system for wireless --

REP. WALDEN: Right.

MR. TAUKE: -- and you'll be in court for a long time.

REP. WALDEN: Okay.

MR. TAUKE: But if you want a system that will work, go to a competitive bidding system.

REP. WALDEN: But what you're suggesting is a competitive system for each type of service delivery.

MR. TAUKE: Well, correct.

REP. WALDEN: (Inaudible) -- competitive for line if there's more than one carrier. Or how do you --

MR. TAUKE: Well, for the time being, we'd stick with the cost- based system for wire line --

REP. WALDEN: But if you can figure out --

MR. TAUKE: -- and for wireless use the competitive.

REP. WALDEN: The question I would have, if you can figure out the cost-based system for a wire line, are you suggesting that wireless can't figure out a cost-based system for delivering their service?

MR. TAUKE: I'm saying it's much harder for wireless because you don't have dedicated facilities. If you're talking about the donut, for example, in the area around it, you don't have dedicated facilities for the area around it, so you can't figure out what the cost is for the area around it versus the area in the donut.

Second point is -- that I'd make is that there's been a whole history of accounting systems set up to determine cost on the wire line side. We don't have anything like that on the wireless side.

REP. WALDEN: Right.

MR. TAUKE: And so the challenge of putting new system in place is very significant. So trying to come up with the cost will be tough and as soon as you come up with a method, it's going to be challenged in court by the carriers.

REP. WALDEN: All right.

Mr. Davis, should a universal service broadband program operate in the same manner as voice telephone service program? Or should it be structured differently?

MR. DAVIS: I would structure the broadband --

REP. WALDEN: You want to turn on your microphone, sir.

MR. DAVIS: I would structure the broadband system differently.

REP. WALDEN: Yeah.

MR. DAVIS: I would learn from what we've done in the past. I would base the broadband grants on a bidding process. The low bidder for a particular geographic area would be the only carrier that would be subsidized. We would not subsidize multiple carriers and we would, through the bidding process, subsidize the low-cost carrier.

The other thing I would do would make it a one-time grant, a grant necessary to build out the facilities at a certain service level and price, but a one-time grant, not an ongoing subsidy.

REP. WALDEN: My time's going to run out.

Mr. Lubin? And then I have one comment I want to make.

MR. LUBIN: I just want to make the following observation, given AT&T is spending $17 to $18 billion in terms of this capital budget. Roughly two-thirds of it's going for broadband --

REP. WALDEN: Right.

MR. LUBIN: -- and wireless. And the bottom line is that even with that amount of expenditure, we're going to have to figure out -- if you want to see broadband and wireless in high-cost areas, there's going to have to be some way to address that. And so, in the broadband world, what we highlight is a competitive bidding process, one-time dollars and only one-time, under-served areas and one party gets it.

REP. WALDEN: All right.

I thank you. And Mr. Chairman, I would just conclude by saying I would take disagreement with my ranking member's position that water and sewer shouldn't be included in the reimbursement mechanism because I actually favor flush toilets over the outhouse.

Thank you, Mr. Chairman.

REP. BOUCHER: Thank you very much, Mr. Walden.

The gentleman from New York, Mr. Weiner, is recognized for two minutes.

REP. ANTHONY WEINER (D-NY): It's actually news to this member that you have indoor plumbing in your district. (Laughter.)

REP. WALDEN: Actually, we do have both.

REP. WEINER: Let me just say, it strikes me to some degree, this is an economic question for the citizens of my district. They're not under-served. They wind up, though, being donor citizens in this program. We want it to succeed. We want broadband access and we want telephone services available.

But it does beg the question that the chairman mention in his line of questioning. It seems if you're running pipes, if you're trying to envision how we get information, how we get technology to these homes that we should look at it a holistic way, especially since you have this tranche of money in the stimulus bill, and we have a focus on extending broadband.

It seems that we make mistakes in this Congress when we try to envision technology as it is today and write legislation for it, when, in fact, what we should be doing is trying to create as open enough of a process that new technologies can emerge.

You know, I think that the argument for the reverse auction is pretty powerful. And I, frankly -- I don't see why you couldn't transition the present formula for a wire line service to reverse auction as well. I mean, the idea is being we're trying to incentivize reduced costs and people think more efficiently in evolving technologies that might be able to do these things at lower costs. Let me hear someone -- let's just talk about the wireless side, since that's the side that Mr. Tauke said that would be the best for the reverse auction. Let me hear someone -- and you can decide -- someone make the best argument against the reverse auction model.

Yes, sir?

MR. CARLSON (?): Well, I tried to make some of that position against the reverse auction in my opening comments when I said that if you create a single-winner system, what you will have will be a single wireless provider, which means that that single wireless provider would only provide the services that it chose to provide to the people, and --

REP. WEINER: Why could you not have a reverse auction that the top two bidders win?

MR. CARLSON (?): Well --

REP. WEINER: Or why could you not have a rolling system whereby if someone during the -- I mean, look, we did something similar at the advent of cable television in places like New York City, where we said, listen, it probably doesn't -- it's difficult; probably doesn't make a lot of sense for -- have three or four people digging trenches, so let's go ahead and give one in -- one the opportunity. And then, as a result, you then agree if you do that you're going to subjected to a greater regulatory regime to make sure you provide quality service and the like.

MR. CARLSON (?): Well, I think that, you know, it kind of takes you back: What are you trying to create as a nation?

And I think that the 1996 act recognized that monopoly provision of services was not in the interest of the nation in an era when technology was driving huge opportunities for innovation --

REP. WEINER: Right. Let me -- let me just --

MR. CARLSON (?): -- and that by opening up to innovation we would create an immense amount of national wealth.

REP. WEINER: Yeah. The -- if I can interrupt here -- I mean, but you're creating a straw man, are you not? Isn't the problem that we're trying to find areas that have zero service -- that, yes, one service is definitely less advantageous than three or four, but that's a false choice in the cases of most of these communities like those in Mr. Walden's district, is it not? Aren't we trying to first and foremost get a player to come in? Isn't that the purpose of the Universal Service Fund in the first place?

MR. CARLSON (?): Well, we totally agree with that, that the program needs to have more targeting so that we direct more of the funds toward those areas that Congressman Walden spoke about, which have no service today or very, very, very poor service.

But we believe that that can be done within the context of the 1996 act, where there is competition. What we need is -- what we need is giving direction to the FCC to target the funds toward those areas while preserving competition.

REP. WEINER: Right. But I -- I think I see that. I guess the question that I'm trying to get to here is once you reach the point where you say, all right, "We want to target this community, but we also want to do it in a way that we're incentivizing whoever comes in there to give us, meaning we the taxpayer, the best possible deal to provide that service," it doesn't seem -- I mean, I think we can almost stipulate to the idea that it doesn't seem we're getting the best possible value with the way this is structured presently. So if you have a model that incentivizes the players who are represented at that table and elsewhere to say, "You know what, I think I can go in there and provide this community service for an average, you know, whatever dollar per household," and three other firms go in there, "I wonder if we can beat that; let's figure out how we make it more efficient," we're operating now in an environment where we're trying to apportion scarce resources in a more efficient way.

And I want to just caution you all, the challenge that you face is you've lost confidence that this fund -- people are wondering (in here ?), Mr. Barton is coming at it from one economic perspective. Some of us come at it from a different one. If you don't figure out a way to start incentivizing the providers to do it in a more efficient way, we're going to lose complete confidence that this fund should exist at all.

And I think one of the ways you do that is to say, you know what? We're going to start making the marketplace work for us for a moment here. And I don't know if there's anyone else who wants to rise to the defense of the cost model here.

Can I ask one other question then? You know, if we are -- I mean, voice is a relatively tiny part of what the larger conversation about information and -- is really about at this point. I mean, a lot of -- most of it's data, video and everything else. Why shouldn't we just take the stimulus money, take this money, put it into a big pot and say, let's figure out, using a model that works -- it may be -- it -- the reverse model or another one -- and say, let's just see what technology, what people come to us and say, "You know what, we can provide the full panoply of services." Why are we saying that, "You know what? Let's create a fund to get this little sliver of the service to these communities."

I think that if we're going to do this for the amount of money that we're investing, let's figure out a way to do it right. Let's try to really figure out a way to grow the marketplace for the services that come along with broadband and everything else by putting everything in one basket and saying we're going to try to plow into these communities and give them the same opportunities that my constituents have.

What's the -- why shouldn't we do that? Is that too ambitious?

Yes, sir?

American Telephone and Telegraph.

MR. LUBIN: Right, right. On one hand, I would say what you're suggesting is a clever point. And the clever point is let's see how much of the stimulus dollars get used in unserved areas. And so -- Chairman Boucher asked a question in the beginning, what's the linkage between the stimulus package and universal service?

For me the linkage is at some point -- however this $7 billion gets disbursed over the two-year period -- hopefully that gets used to get more broadband deployed. When that happens, you're going to have less unserved areas.

My only point here is that you have money. That money's going to be put out there relatively quickly. Find out can it work. And it's a bidding process -- so it's a competitive bidding process, so you'll see -- you'll have empirical information if it works. My guess, as you heard the other speakers say, 7 billion (dollars) is not enough. Maybe they're right; maybe they're wrong. But you'll get empirical information once and for all.

My own particular bias -- and again, it's up to you. You're the policymaker. You're the policymakers that say if you want broadband, and you're the policymaker that says do you want mobility. And if the answer is yes, then I -- my particular belief is you shouldn't be waiting. You should be figuring out how to create the sea change, figuring it out in a way which is a coherent way. And if, in fact, this investment gets deployed and you have less unserved areas, that's a huge win. And now you're going to have whatever remains, and then you go from there.

REP. WEINER: Thanks, Mr. Chairman.

REP. BOUCHER: Thank you very much, Mr. Weiner.

The gentleman from Nebraska, Mr. Terry, is recognized for five minutes.

REP. LEE TERRY (R-NE): Thank you, Mr. Chairman. And I want to thank the panel. This has been a great discussion and very helpful, I think. Every one of you have done an excellent job.

Couple of points that I want to make is -- first of all, I -- we talk about advanced services. And frankly, advanced services a year ago are mainstream services today. I walked into the Verizon store with my wife trying to get her phone fixed for about the sixth time, but we won't go into that -- (laughter) -- but I saw their new VoIP system for homes. Very cool. Nice monitor and we can do video on it and the whole nine yards.

And now that's being sold with all the regular phones -- little bit more expensive right now. But the point is that in today's society, what is advanced a few months ago, or a few years, is mainstream today, and we have to think of it that way.

I'm pleased that Mr. Barton wants to treat the (snake ?) differently. And that's exactly the conclusion I came to, is how do we get ubiquitous rollout of broadband? Two advantages that this bill brings is, number 1, we use the same pot of dollars that already exist without creating one new dollar on the taxpayer to get ubiquitous rollout within our rural -- rural America. Number 2 in that is that, by making it mandatory, what we do is say, for Mr. Gaileys and Mr. Hales that represent, really, the sparsest areas, they have risen up and they've provided -- without the help of universal service, but just other revenues -- they've rolled out high-speed broadband to their customers.

But not every rural provider has, and I'm not sure every rural provider would, unless that's a requirement to take. And so this is the way that we really ensure that all the universal service dollars provides that universal telecommunications services that is mainstream today.

But my colleagues bring up a couple of decent points about -- that universal service should be used in an accountable way for the services of which it is intended, whatever that service may be -- as determined by this committee, hopefully, and not the FCC.

So, Mr. Gailey and Mr. Hale, I want to ask you these questions on this question, or general question, of how should we go about ensuring that these tax dollars are properly used? What systems would you suggest to us? And by the way, I want to use the phrase here that -- the analogy with the doughnut? Make sure that you people that are serving that doughnut, and not the hole, the dough must go to the doughnut. Okay? (Laughter.)

So, Mr. Gailey first.

MR. GAILEY: Well, the first thing I'd like to say is that annually my company provides a cost to UNECA (ph), which tells them what the costs are that we have incurred in a year, that is submitted to USAC. And then, two years after we incur those costs, we receive recovery on those costs. Annually, we also go through an accounting audit by an independent accountant. So we do have oversight over, in my opinion, my company today.

Now, some of the stuff that's in the report from OIG has been contradicted in this report from USAC. And we all know that some of the things that have been reported could be interpreted in one or two ways. Now, my company will go through a USAC audit in May, so I can better address if there's any refinement needed to be made to that type of audit system. But we haven't opposed an audit system, per se. We just want to know what the rules are before we go through it.

MR. HALE: Yes, we think that audits should be performed. The way that they're being performed are the problems that we have with the current system. In the past -- I haven't been in the business as long as some of our other folks here, but in the past we've -- there's cost models, and those things have been looked at. It's just very difficult. At that point, it always came back to embedded costs, because our membership -- we're not alike. Sometimes someone looks at rural and say we're all rural, but we're a very diverse membership that serve a lot of different geographic areas. So it is difficult.

But I mean, we would be open to discussing those things, I think. But it's very difficult to do that with a model, or that type of thing.

REP. TERRY: My time is up, but I will predict that will be one of the things that Rick and I work on for our last draft.

REP. BOUCHER: Thank you very much, Mr. Terry.

The gentleman from Illinois, Mr. Rush, is recognized for seven minutes.

REP. RUSH: Thank you, Mr. Chairman.

First of all, Mr. Chairman, I want to just take a moment to welcome my friend from Chicago, Mr. Carlson, who is the president of U.S. Cellular. We worked together on many issues. And I'm so glad to see you here as a part of this panel, and I want to extend a heartfelt welcome to you, as well as to all the other panelists.

Mr. Chairman, this panel and this hearing will not touch upon an area that I am intensely interested in, and that is the area of access to the -- to some -- to telephone services, and the lessening of the burden that the cost of telephone services have then placed on low- income families, especially for those who are incarcerated. It's not the subject of this hearing but, Mr. Chairman, I do want us to at least be -- to take that up as a part of our future deliberations on the reforming of the Universal Service Fund.

I do have a bill that I've introduced, H.R. 1133, the Family Telephone Connection Protection Act, that will require the FCC to regulate the rates so that they are reasonable. And there are a lot of families who now are overburdened, immensely overburdened, because of the high cost that the telephone companies are charging incarcerated prisoners and their families who communicate with them. And so that will be a part of a discussion that I want to engage in in the future. It's not the subject right here.

REP. BOUCHER: Would the gentleman yield to me for a moment?

REP. RUSH: Yes, indeed.

REP. BOUCHER: I thank the gentleman for yielding. I share the gentlemen's concern. And this is a matter that I also would like to look at. And I look forward to working with the gentleman as we try to find a constructive way to work to address it.

REP. RUSH: Thank you, Mr. Chairman. And with that, I also just want to say hello to my friend, Charlie Sullivan (ph) over there, who has been on this for the last few years -- for a lot of years, really.

Mr. Chairman, I do have a number of questions. And first of all, I want to ask all of the panel, for the limited time that I have remaining -- I want to ask the panel to answer this first question with either a response of "yes" or "no." And we can go down the line. But the question is: Is broadband really a universal service? Is it so essential to everyday life, like electricity was a century ago, that we should ensure that all Americans have access to broadband? Either "yes" or "no."

MR. : Yes.

MR. : Yes.

MR. : Yes, and I would add, it should be also mobile broadband.

MR. : I agree, yes, it should be.

MR. : Yes, absolutely.

MR. : Yes.

MR. : Yes.

MR. : Yes.

MR. : As the economist, I'll say it depends. (Laughter.) I think our resources are limited, and I would much prefer to first see things like health care be available to everybody.

REP. RUSH: (Laughs.) Okay. All right. All right, so after we get the health care, then we get the broadband. Is that what you're saying? Okay. All right. All right. (Laughs.)

Section 54 -- Section 254 of the United States Telecom Act states that universal service policies shall promote, one, the availability of quality services at just, reasonable and affordable rates and, two, access to advanced telecommunications and information services in all regions of the nation. Mr. Turner and the rest of the panel, do you think our universal service policies have achieved these goals?

MR. TURNER: Not directly, sir. The problem is, is that the FCC has not updated its definitions of what services are supported to include broadband. However, through the magic of accounting, lots of USF-supported carriers have actually used the money that they're getting to deploy broadband services.

So I think, instead of doing this funny and tricky accounting, we should just make it explicit, and actually recognize that broadband is already being supported by the fund. And I mean, let's make it explicit, and let's cost it out and let's see what the support would actually be needed to bring it into the areas that don't currently have it.

REP. RUSH: Is there anybody else on the committee wants to respond -- on the panel, rather.

MR. HALE: I think we're still working on the goal. I think there's misconception that, when we draw money from the fund, the networks are paid for. Most of our companies -- or a lot of our companies are financing these networks through RUS loans. The amount of USF money that we receive is based on the depreciation of that plant two years prior, so we still have debt service to do on the networks that we've built for universal service. So I think we're -- I still think it's a work in progress.

REP. RUSH: Yes, Mr. Gerke?

MR. GERKE: Yes, Congressman. I agree that it is a work in progress. I do think we've shown that we can deliver universal voice, and have done a good job on it. I think the targeting that is suggested in this bill to get the money where it needs to go is important. I am very encouraged by the -- people understanding the connection to the carrier-of-last-resort obligation, and making that part of the discussion. Broadband's inclusion, I think, is a big plus, and can move us forward. Agree with those comments.

And last, I would echo that we're out every day making investment in new plant based on an understanding of the USF support that's there. We have maintenance, we have enhancement -- words that come from 254 -- that we have to live up to. And we have shareholders who are expecting that when we make those kind of investments and it's in a stable enough environment, that they -- it's predictable for them. The lack of stability sometimes really creates a challenge for us to move forward.

Thank you, Congressman.

REP. RUSH: Anybody else want to comment on this?

MR. : I would -- I know that many members here, you know, don't want to talk about expanding the program, but there was one element of the program that was not properly implemented by the FCC. And that was, when the cap was imposed, there were a number of states -- and I could list some of them that we're familiar with: North Carolina, Nebraska, Virginia, Tennessee, Michigan, Oregon, and Washington and a smaller amount in Illinois -- states that were unfairly treated in the way in which the cap was imposed. And fixing that would cost about $350 million additional to the fund, which would raise the contribution level from, today, 9-1/2 percent to 10 percent -- a very modest increase -- which would make it fair across America.

REP. RUSH: Mr. Chairman, I see my time is up, but I want to thank you for this opportunity.

REP. BOUCHER: Thank you very much, Mr. Rush.

The gentleman from Illinois, Mr. Shimkus, is recognized for five minutes.

REP. SHIMKUS: Thank you, Mr. Chairman. I was picking on you upstairs. You got the televised hearing; climate change and the ending of the world did not. So good -- kudos for you. (Laughter.)

REP. BOUCHER: Thank you. We deserve a few pats on the back here today. (Laughter.)

REP. SHIMKUS: You have more people at the panel by two, so -- I've been bouncing back and forth. I apologize for that.

I know the chairman would have liked to, but he has to manage the chair here.

Rural America -- y'all -- many of you know my district. We've benefitted from USF. There are challenges.

Let me just ask: As we look at the USF funds to facilitate broadband deployment, does wireless broadband have a role or practical application? And if we can just go quickly, Mr. Davis through Mr. Wallsten.

MR. DAVIS: I think that broadband support should be technology- neutral. So I think that once we determine what the speed, the level of service and the price should be, it shouldn't depend -- that any technology should be applicable or available.

REP. SHIMKUS: Thank you.

MR. : I also think it should be technology-neutral, but I also think, clearly, the policymakers, namely yourselves, need to decide whether mobility, advanced mobility, is important, as well as fixed broadband. And if they are, then you need to figure out what's a rational plan for both.

REP. SHIMKUS: Because I've successfully tried to stay on the fence in this process so far, so I'm trying to figure it all out.

Mr. Carlson?

MR. CARLSON: Yes. I think both are important. I think the speed that is capable in a wired system is higher than it is in a mobile system, so that target speed for mobility should be set at a level that's different than the target speed for wired.

REP. SHIMKUS: Mr. Gailey?

MR. GAILEY: I would agree with Mr. Carlson that wired can provide bigger pipes to a residence. The mobile can provide a smaller pipe that you can carry with you to different locations.

REP. SHIMKUS: Great. Keep going.

MR. : I think they both have their utility. Wireless is definitely going to play a role in the areas that are most extremely high-cost to serve. But wire line will always have the advantage of having more capacity and not being a shared medium. So I think we really need to look at that.

I'm not sure at this point that checking your Facebook while driving 70 miles an hour down the road is an essential service that should be subsidized.

REP. SHIMKUS: You haven't talked to my son yet. (Laughter.)

MR. : I -- just to be clear, I think it should be fixed versus mobile. And fixed should be reimbursed, as it is today, and generally we call that wire line, but it also can be fixed wireless.

And the other is mobile, and I think Americans today see mobile as essential.

REP. SHIMKUS: Well, I think that's a good point, because I tell you, in a rural community that has a couple hundred residents, wire -- hooking it up versus having a tower --

MR. : Right.

REP. SHIMKUS: -- that's fixed wireless is a different ball game than checking your Facebook as you're driving down the road.

Mr. Gerke?

MR. GERKE: Yes, I think it's real important -- it's real important, as mentioned before, to define exactly the criteria you're going after. I think generally the wire line plan is what's going to get you there.

And then making sure that that obligation is to serve the entire doughnut, that you don't just serve part of it, but you have that carrier of last resort obligation to serve all of it.

REP. SHIMKUS: And being in rural America, there's problems with line of sight and terrain and stuff, and I understand that also.

Mr. Hale?

MR. HALE: I believe it should be technology-neutral. I don't think we can imagine the -- tomorrow's technology, what we're going to ask to use for broadband deployment. As long as the minimum speeds and those standards are high enough to support what we need for the future of the country, technology shouldn't play a role.

REP. SHIMKUS: Mr. Wallsten?

MR. WALLSTEN: Yeah, I mean, once you decide what type of service it is that you want to guarantee, then it should, as everyone has said, basically be technology-neutral.

I think the key is to make sure that you don't define the service in a way that arbitrarily benefits one type of provider just in order to benefit that provider.

REP. SHIMKUS: Thank you.

And two final questions. Well, just to -- each one panelist, Mr. Chairman, if I may.

Mr. Turner, you know, Ranking Member Barton's got a credible beef of some of the abuse of the USF, and you know, that's going to cause a lot of challenge for us in this committee.

Have you identified in the way high-cost funding is currently distributed to wire line and wireless carriers, or what excesses have you identified?

MR. TURNER: Well, I think one of the most important things that hasn't come up in this hearing is, a lot of these rural carriers are supported based on historical cost, when the most efficient way of supporting them should be forward-looking cost, if we're going to use cost models.

The often-talked-about $970 billion in overpayments identified by the FCC OIG -- it's not that there was actually $970 million (sic) overpayments. It's that these companies didn't keep good historical records of their costs, and the audit triggered that being an overcost.

I think, going forward, forward-looking costs is the best way to go. It's economical. I certainly would like to be able to recover the historical costs for my house that I bought two years ago, but unfortunately that's not what the market will bear today.

MR. GERKE: I -- Congressman --

REP. SHIMKUS: It's the chair --

REP. BOUCHER: Mr. Gerke, go ahead.

MR. GERKE: Yeah, I just want to make sure I get in the record. We absolutely encourage transparency, and we're willing to make sure that we do whatever's necessary so that you can see that these dollars are spent exactly the way they should be.

In 2008 we had seven audits -- no material weaknesses, deficiencies. We weren't penalized. No consent agreements. There was 92 -- yeah, $92,000 more that should have been paid to us. There was 18,000 (dollars) more that we should have paid in. So net, we were shorted $74,000. We're not looking for that. But it shows up as $110,000 in mistakes the way it's counted.

And so I don't know how much of those eight audits go into the 23 percent, but I suspect, whatever those dollars were, they actually were in our favor, and the costs we incur, just -- we want transparency. Let's do it in a manner that doesn't drive costs that way, way exceed the numbers that we're talking about. Thank you very much.

REP. SHIMKUS: Thank you, Mr. Chairman. I would just end by saying I wonder how much the actual audits cost. (Chuckles.)

MR. : Yeah.

REP. BOUCHER: Thank you very much, Mr. Shimkus. And I'm glad you raised the question of the legitimacy of the audit itself, because I think there are some substantial questions about the methodology that it used, and that's a matter into which we will inquire further at the proper time.

The gentleman from North Carolina, Mr. Butterfield, is recognized for five minutes.

REP. G.K. BUTTERFIELD (D-NC): Thank you, Mr. Chairman, for convening this very important hearing, and I will try not to consume my entire five minutes.

Like John Shimkus, I would like to apologize to you for being late for your hearing. We've been bouncing between two subcommittees, both in this building. But thank you very much. Thank the witnesses for your testimony today.

Mr. Chairman, I look forward to working with you as you chair this committee. You and I are friends, and we have similar congressional districts, and I pledge to you my complete support as we go forward with this subcommittee.

Mr. Chairman, according to a recent analysis from the 2007 American Community Survey, my district in eastern North Carolina now has the fourth-lowest median household income out of all 435 congressional districts in the House. That figure, along with the sprawling, very rural geographic characteristics of my congressional district, make issues like this very important to me.

And while there is no question that an escalating contribution factor is rightfully a concern for carriers and policymakers and certainly the FCC, I remain confident that a sensible resolution can be achieved that recognizes and upholds the universal service concept; makes advanced telecommunications service, including broadband, a part of the universal service scope; and upholds those principles outlined in Section 254.

And so thank you very much for convening this hearing today.

I thank the witnesses for coming, including my good friend Tom Gerke, who represents EMBARQ, who is a good corporate citizen in my district. And thank you for all that you do.

I have one brief question, and then I will close. And let me address this to, I guess, my friend from Verizon, the former member of this body, Mr. Tauke.

There have been proposals floated to allow the Lifeline and Link- Up Program to help lower-income people purchase computers so they can access the Internet. There were also proposals to allow the program to pay for broadband.

Are these good ideas? Should the government be looking at other ways to increase computer ownership and subsidize monthly broadband access for low-income consumers?

MR. TAUKE: First, on the issue of subsidizing broadband access for low-income consumers, we believe it's appropriate to look at the feasibility of having a Lifeline-type program for broadband access.

We don't have a specific proposal. I think there are issues that need to be addressed relating to it. But I think that it's something worth looking at, and also that it should be done at the federal level since broadband services are federally regulated.

On the issue of computers, I don't think we would look to using the Universal Service Fund to support computers, because the Universal Service Fund is paid for, as Mr. Carlson noted -- is really consumers' money that we collect. And it's consumers of communications services, and though we -- so we -- while we'd feel comfortable using that funding for communications services, I don't know that we would agree that it should be done -- used for computers.

However, if you asked my boss, the CEO of Verizon, what could we do to encourage broadband deployment, he'd say the most important thing you can do is to increase demand, and the most important way to increase demand is to get a computer in the hands of every kid in America.

So I think we recognize that that's very valuable.

REP. BUTTERFIELD: Thank you.

Would AT&T associate itself with those comments, in substance?

MR. LUBIN: Yes. In fact, AT&T has been looking and recently shared some thoughts in terms of how to potentially have a Lifeline program on broadband, and we would be glad to share that with you.

REP. BUTTERFIELD: Thank you very much.

And speaking of association, Mr. Chairman, I also want to associate myself with the comments of Chairman Rush a few minutes ago about H.R. 1133. That is a very significant piece of legislation. Before I had a life in this body, I served as a judge, and I received very heartbreaking letters from families about the expensive cost of long-distance phone calls for their loved ones in prison. It's an issue that we need to talk about and come to a sensible solution.

I yield back.

REP. BOUCHER: Thank you very much, Mr. Butterfield. And I share the concerns you and Mr. Rush have expressed about that matter as well.

I want to ask unanimous consent that there be included in the record a written statement from the Mercatus Center at George Mason University and a written statement of testimony from the American Homeowners Grassroots Alliance. Without objection, so ordered.

The record of this hearing will remain open for a reasonable period until members can submit written questions to our panel of witnesses. When they are received by you, I hope you will respond promptly -- and with the chair's thanks for what has been, I think, an interesting and stimulating discussion today. We appreciate your being with us and sharing your very useful information.

This hearing is adjourned.


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