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Executive Summary
For well over 100 years, small rural incumbent local exchange carriers (ILECs)
have been engaged in the provision of local telecommunications services
throughout rural America. These carriers are the embodiment of the universal
service concept, having built the infrastructure that provides ubiquitous,
high-quality local exchange service and exchange access (as well as a variety of
other telecommunications services) to some of the nation's most economically
challenging to serve areas. This would not have been possible were it not for
their dedication to community, and the nation's long-standing commitment to the
policy of universal service.
Born of this policy is the universal service fund (USF), which is a cost
recovery program that is designed to encourage investment in rural
telecommunications infrastructure. Today, a number of factors are converging in
a manner that is pacing both the USF and its underlying national policy at great
risk. They are:
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Judicial misinterpretation of congressional and statutory intent
associated with the implementation of the universal service provisions of the
Communications Act of 1934 as amended.
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Lax state and Federal Communications Commission (FCC) consideration of what
constitutes the public interest when granting eligible telecommunications
carrier (ETC) status to competitors.
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Less stringent or non-existent service, billing, quality, capability,
coverage, and reporting requirements for competitive ETCs (CETCs) while
incumbent ETCs must meet very high thresholds in each of these categories.
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FCC rules that allow competitive ETCs to receive universal service support
based on incumbent ETC costs rather than their own costs, despite a statutory
mandate that carriers certify the universal service support they receive is
going for actual universal service oriented costs.
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A changing economic, technological, and regulatory environment that is
eroding the USF funding base.
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A bias on the part of state regulators and the FCC to pursue competitive and
deregulatory policies at the cost of universal service mandates, in the process
inciting artificial competition that is ballooning the size of the USF.
Now is the time for Congress to weigh in on these matters. Policymakers, the
judiciary, the public, and competitors alike must be reminded that the USF is a
scare national resource and that it must be carefully managed to fulfill its
public interest goals of providing affordable, high-quality telecommunications
services to rural consumers and helping to protect our national and economic
security.
Introduction
Chairman Upton, members of the subcommittee, my name is Sidney Shank, and I
am the manager of Bloomingdale Telephone Company, which is an independently
owned telecommunications corporation headquartered in Bloomingdale, Michigan.
We've been engaged in the provision of local exchange service for nearly 100
years. Today we serve approximately 2000 customers with an investment of over
250 miles of cable. But that's not all we provide to our community and the
surrounding area. In addition, we are involved in the provision of Internet,
broadband services, long distance, cellular, competitive local exchange
services, and Direct Broadcast Satellite (DBS) services.
We are proud of this record of service, which is representative of the
nation's small rural ILECs. That's why I'm also pleased to be appearing on
behalf of the hundreds that are represented by the National Telecommunications
Cooperative Association (NTCA) and the Organization for the Promotion and
Advancement of Small Telecommunications Companies (OPASTCO).
The Importance of Universal Service
Today, the Subcommittee will hear from a variety of witnesses that are deeply
interested in the future of universal service - each for very different reasons.
Let me state at the outset that our concern is centered exclusively on ensuring
that the strong mandates of the nation's long-standing policy of universal
telecommunications service are carried out in a manner that best serves
consumers. That is how we have always conducted our businesses.
The success of Bloomingdale, and its small rural ILEC colleagues, is tied
directly to a dedication to community, and the nation's commitment to universal
service. Yet, in the uncertain competitive deregulatory environment that we
operate in today, these constants may be in jeopardy. Left hanging in the
balance could be quality, affordable, universally available rural
telecommunications service.
It's no secret that the ability to fully recover costs is the very lifeblood
of small rural ILECs. Thus, of particular concern to us today are the many
regulatory and judicial proceedings that will either sustain or destroy this
ability - and subsequently the continued investment in rural telecommunications
infrastructure.
Any adjustment to one of the three components of our cost recovery - the
local end-user rates, intercarrier compensation such as access charges, and
universal service - requires the inverse adjustment of the others. Not
surprisingly, the local end-user rate component is the least able to tolerate
increased pressure. Conversely, the intercarrier component is the one most
susceptible to regulatory and competitive oriented pressures. This leaves
universal service as the most likely to contend with cost recovery fluctuations.
In past proceedings on access charge reductions, the USF has been charged
with such residual cost recovery responsibilities. And the current debate over
additional intercarrier compensation adjustments has suggested this could happen
again. Yet with other regulatory dilemmas currently facing the USF, we fear it
is ill prepared to take on another such obligation.
Greater Oversight and Reform of the ETC Designation Process is Needed
Perhaps most notable of these regulatory dilemmas is how easily many states
and the FCC are granting USF ETC status to competitors today. These carriers are
receiving this valuable designation without having to comply with the same
stringent service, billing, quality, capability, coverage, and reporting
requirements that ILECs must, and have been happy to, adhere to each and every
day. Is it too much to ask carriers to meet such obligations as a condition of
receiving scarce USF support? We think not. Adding insult to injury is the fact
that under the FCC's current rules, competitor support is based on incumbent
costs. This despite the fact that the law requires carriers to certify support
is for actual universal service allowed costs.
This problem is particularly pronounced with regard to wireless competitive
ETCs. For example, since 1999, universal service support allocated to wireless
CETCs has increased dramatically from $500,000 in 1999 to a projection of
approximately $240 million in 2003. This astonishing growth in support to
wireless CETCs is particularly troubling since these carriers are not held to
the same regulatory obligations and service standards faced by other carriers.
We ask that Congress reaffirm its strong admonition about financially
supporting competition when it crafted section 214(e) of the Act. In enacting
this section of the law governing the designation of multiple ETCs, Congress
clearly recognized that supported competition would not always be in the
"public interest" of areas served by rural telephone companies. Sadly,
some state commissions and the FCC have ignored the intent of Congress and have
designated additional ETCs without thoughtfully considering the factors that
determine the public interest. Regulators have placed far too much emphasis upon
the Act's general goal of competition at the expense of rural markets and
consumers. The result of state government-sponsored artificial competition in
rural service areas has been a swollen USF that has put the entire universal
service program at great risk.
Possible Solutions to the CETC Designation Process
Mr. Chairman, many witnesses come before your committee without solutions.
However, I am very pleased that both NTCA and OPASTCO have each developed their
own principles to strengthen the public interest standard governing the CETC
designation process.
This past July, during a forum of the Federal-State Joint Board on Universal
Service, NTCA put forth, and urged the adoption of a seven-point public interest
test for evaluation of ETC designations in rural telco service areas. The points
are as follows:
1. Is the additional ETC designation of the requesting carrier required to
ensure that consumers living in the rural ILEC service territory have access to
the nine support services listed in the definition of universal service at rates
that are comparable to similar services and rates received by consumers living
in urban areas?
2. Would the requesting ETC designation be able to provide service to the
entire rural ILEC service territory, as required by FCC rules?
3. Do the potential benefits to the rural service area of granting the ETC
designation outweigh the ultimate burdens on consumers that will occur through
the added growth in state/federal universal service funds?
4. Is the carrier requesting designation willing to demonstrate its cost to
provide universal service to consumers living in the rural ILEC service
territory?
5. Would the ETC designation result in excessive support to the requesting
carrier based on the amount of support distributed under the identical support
rule?
6. If the carrier seeking ETC designation is offering rural consumers
universal service at a rate that is at, below or slightly above the comparable
rate for supported services, why is the requesting carrier seeking universal
service support?
7. Is the carrier requesting ETC designation willing to adhere to
quality-of-service guidelines or other state-specific requirements?
Earlier, OPASTCO had developed an industry white paper, titled,
"Universal Service: A Congressional Mandate At Risk." This paper
elaborates upon how misinterpretations of the public interest standard by state
and federal regulators when designating multiple ETCs has placed the universal
service fund in serious jeopardy. The recommendations of the OPASTCO paper have
also been presented to the Joint Board for its consideration. It lays out the
following principles, guidelines and requirements that State commissions and the
FCC should utilize in their consideration of ETC applications for rural
telephone company service areas:
1. Rural consumers should receive access to affordable, high-quality
telecommunications and information services, including advanced services that
are reasonably comparable to those services provided in urban areas and at
reasonably comparable rates.
2. The high-cost support mechanisms should not be used as an incentive to
attract uneconomic competition in the areas served by rural telephone companies.
3. The USF is a scarce national resource that must be carefully managed to serve
the public interest.
4. Rural universal service support reflects the difference between the cost of
serving high-cost rural areas and the rate levels mandated by policymakers.
5. The public interest is served only when the benefits from supporting multiple
carriers exceed the costs of supporting multiple networks.
6. In areas where the costs of supporting multiple networks exceed the public
benefits from supporting multiple carriers, the public interest dictates
providing support to a single carrier that provides critical telecommunications
infrastructure.
7. The cost of market failure in high-cost rural America could be severe.
Along with the adoption of public interest principles, the OPASTCO white paper
further recommends that in order to be considered for ETC status in a rural
telephone company service area, a carrier should be required to demonstrate to
the state commission or FCC that it meets, and will abide by, all of the
following qualifications and requirements:
1. A carrier must demonstrate its ability and willingness to provide all of the
services supported by the federal High-Cost program throughout the service area.
2. In fulfilling the requirement to advertise its services and rates, an ETC
must emphasize its universal service obligation to offer service to all
consumers in the service area.
3. A carrier must have formal arrangements in place to serve customers where
facilities have yet to be built out.
4. A carrier must have a plan for building out its network once it receives ETC
designation and must make demonstrative progress toward achieving its build-out
plan in order to retain ETC designation.
5. A carrier must demonstrate that it is financially stable.
Lastly, OPASTCO suggests State commissions and the FCC should also adopt the
following policies regarding ETC designations in rural telephone company service
areas:
1. ETC designations in rural telephone company service areas should be made at
the study area level (an ILEC's entire service territory within one state).
2. State commissions and the FCC should ensure that competitive ETCs will be
capable of providing high-quality service to all of the customers in the service
area should the rural ILEC find it necessary to relinquish its own ETC
designation.
3. Any service quality standards, reporting requirements and customer billing
requirements established by the state commission should be applied equally to
all ETCs in the state.
4. State commissions have the authority to decertify any ETC that is not meeting
any of the qualifications or requirements enumerated above.
We strongly believe that the long-term sustainability of the federal USF has
been greatly threatened by federal and state regulator decisions about whether
to designate multiple ETCs in an area served by a rural telephone company. The
number of competing carriers seeking designation as eligible to receive
universal service support is growing at an ever increasing pace. If the size of
the USF reaches a point where further growth is prohibited, yet the number of
carriers receiving support continues to grow, then no carrier will have the
funding necessary to provide affordable, high-quality telecommunications
services and rural consumers will be denied the benefits promised by the Act.
This is an area that Congress simply can no longer ignore.
Contribution Methodologies Must Adhere To Statutory Mandates
Unfortunately, there are other major regulatory proceedings that are still
underway that have the potential to undermine the USF and its underlying
national policy. It is very possible that the FCC could still adopt a
"connections-based" or "numbers-based" proposal for revising
the universal service contribution methodology, which without a legislative
change, may not comply with the Telecommunications Act of 1996's requirement
that every interstate telecommunications provider contribute to the Fund on an
"equitable and nondiscriminatory basis." We urge the Congress to
direct the FCC to follow the law and ensure that interstate carriers continue to
contribute their fair share to the Fund. We also believe the FCC should be
strongly encouraged to take action that would broaden the base of contributors
to universal service. NTCA and OPASTCO have both advocated a narrow legislative
approach as one part of this solution, which would effectively overcome a
judicial decision that limits USF assessments to interstate and international
revenues.
The FCC has recently given consideration to three different
"connections-based" proposals for revising the universal service
contribution methodology. The first proposal would impose a flat monthly fee for
each end-user connection and assess a "minimum" contribution from each
interstate telecommunications provider regardless of whether the carrier
provides connections. The second proposal would split
"connections-based" based contributions between switched access and
interstate transport providers. The final proposal would assess contributions on
the basis of telephone numbers assigned to end-users. We are very concerned that
through these proposals the Commission is considering possibly adopting a new
contribution methodology that would violate the requirement set forth in the
1996 Act that calls for "equitable and nondiscriminatory"
contributions from every interstate telecommunications carrier.
In addition, we also all strongly believe that any reform of the universal
service contribution
methodology should expand the base of contributions to the Fund. As you know,
the universal
service system has been funded by a broad-based national system of industry
contributions. The
traditional contribution base - the long distance market - has steadily
declined, eroding the funding
base for universal service. Alternatives to long distance - wireless, e-mail,
Internet Protocol (IP)
telephony, and most broadband platforms -- have not been asked to contribute
their fair share to alleviate the shortfall. We are very concerned that the
proposals currently pending before the FCC would fail to broaden the
contribution base sufficiently, and fail to ensure the stability and sufficiency
of the USF for the long-term.
The manner in which contributions are assessed for the USF is a very complex
and controversial issue. Furthermore, I can assure you in the strongest possible
terms that we are unified in our view that any further modifications by the FCC
to the contribution methodology must be consistent with the statute's clear
requirement that all interstate telecommunications services contribute to the
USF on an equitable and nondiscriminatory basis. Regardless of how the FCC
ultimately approaches this issue, interstate interexchange carriers have to
remain principal contributors as mandated by the law.
We all agree that universal service support needs to be sufficient and
sustainable and should be fair to all providers and users of all kinds of
networks. We are aware of growth in the USF and concerned about shifts in the
types of interstate services consumers are utilizing. These developments have
created a serious issue about how to prevent erosion and evasion of support
mechanisms. Thus, we firmly believe that the FCC needs to assess the broadest
possible list of contributors to keep each carrier's contribution and the amount
it needs to recover from its customers as small as possible.
We need to emphasize that the gradual but ever-growing use of broadband
platforms and Internet Protocol (IP) networks plays a growing role in the
instability of the contribution base. Consumers use IP networks in a variety of
ways (access to the World Wide Web, e-mail, instant messaging, Internet
telephony) and via various platforms (cable, wireless, satellite) to substitute
for interstate calls on the public switched network. As this "Internet
substitution" grows, traditional interstate revenues providing the funding
base for universal service will diminish. And there will be little offsetting
gain, since presently only wireline telecommunications carriers are required to
contribute on the basis of revenues earned from Internet access service. All
other Internet access providers using other platforms remain exempt from the
obligation.
Federal law allows the FCC to assess all providers of interstate
"telecommunications" if the public interest so requires, even if they
are not common carriers. We believe that all providers that compete with each
other and provide the same functions should have the same contribution
responsibilities. This means that cable modem providers and other information
service providers that provide their own transmission should contribute, just as
ILECs presently contribute for their transmission role in providing Internet
access. This also means that wireless carriers need to be assessed on a fairer
basis than even the "modified safe harbor" adopted by the Commission
last year.
More specifically, in reassessing who must contribute to the Fund, Congress
should insist that interexchange carriers, Internet access providers, wireless
carriers, bundled service providers, payphone providers, dial-around services,
and IP telephony providers, as well as local exchange carriers all contribute to
the USF. Broadband service providers, whether considered information service
providers or telecommunications service providers, also should be included as
supporters of universal service. Finding an equitable way of assessing
contributions to universal service support on carriers, and - as I just
discussed - broadening the base of contributors to universal service are
significant issues the FCC needs to resolve to make universal service support
funding sustainable.
Universal Service Is Good Public Policy For America
The high-cost component of the universal service program handles
approximately $3.3 billion in annual carrier-to-carrier support transactions,
which represents slightly more than half the amount that is channeled through
the overall fund each year. The high-cost component is a "safety net"
of sorts for rural carriers and their subscribers, but it is also a tool to
ensure that all Americans enjoy the benefits and security of a nationwide
integrated network. Congress and successive administrations have wisely
recognized the value of this component of the program and now, above all else,
need to take steps to ensure its ongoing ability to function according to
statutory intent.
The high-cost element of the Fund is used to build telecommunications
"platform" infrastructure. Without a telecommunications platform, our
schools and libraries, rural health care, and lifeline and link up programs, and
millions of rural Americans, have nothing. Modern telecommunications
infrastructure in rural America enables diversity of education, health, and
other social services comparable to those in urban areas.
Our nation's first priority for rural areas should be to provide a stable
environment for continued telecommunications investment. One of the most
important ways rural Americans have benefited from universal service is that it
has sustained a telecommunications commitment to rural communities for decades.
"Rural telephone companies," as defined in the 1996 Act, have become
an integral part of rural communities throughout America and have remained
economically viable in these high-cost areas due, in large part, to strong
universal service policy.
In sum, a strong universal service policy is still needed today to ensure a
stable environment that encourages continued telecommunications investment in
rural America. Incumbent rural telephone companies have met the challenge of
deploying telecommunications infrastructure in high-cost rural areas. With a
strong universal service policy, they can continue to help rural communities and
rural Americans realize diversity of education, improved health and other social
services, and economic development through modern telecommunications.
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