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:

• Judicial misinterpretation of congressional and statutory intent associated with the implementation of the universal service provisions of the Communications Act of 1934 as amended.

• Lax state and Federal Communications Commission (FCC) consideration of what constitutes the public interest when granting eligible telecommunications carrier (ETC) status to competitors.

• 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.

• 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.

• A changing economic, technological, and regulatory environment that is eroding the USF funding base.

• 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.