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 CHAIRMAN JULIUS GENACHOWSKI
REMARKS ON MOEDERNIZING AND STREAMLINING THE UNIVERSAL SERVICE FUND
THE INFORMATION TECHNOLOGY AND INNOVATION FOUNDATION
WASHINGTON, DC
February 7, 2011

 
Thank you Rob Atkinson and ITIF for hosting this event. 
 
Last year, the FCC released America’s first National Broadband Plan. The plan identified broadband – high-speed Internet -- as vital infrastructure for our economic future and global competitiveness – an essential platform for innovation and job creation, crucial to the success of our businesses, large and small, and to building stronger, more connected communities. 
 
Broadband is also a key building block to our education, health care, and energy futures. 
 
But we won’t fully realize the promise of broadband and the fundamental American promise of opportunity for all if large swaths of our country are left out.
 
History tells us that universally available infrastructure can drive our economy and improve our quality of life.      
 
Lincoln understood this when he opened transportation to the American West with the transcontinental railroad. 
 
FDR understood this when he brought electricity to rural parts of our country, lighting up farms and homesteads from Wyoming to West Virginia.
 
Eisenhower understood this when he built our national highway system, unleashing commerce and connecting communities. 
 
In his State of Union Address, President Obama called on the nation to invest in a 21st century infrastructure that will enable businesses to grow, innovate, and compete in a global economy.  
 
The indispensible infrastructure of the 21st century is broadband. 
 
The good news is that we’re not at the starting line when it comes to broadband connectivity.  Our country has made real strides in expanding access to broadband.  
 
Innovative technologies like DSL and cable modem service, and many billions of dollars in private investments, have helped make wired broadband available to more than one hundred million American homes. 
 
And thanks to policies that are unleashing spectrum for the next generation of mobile connectivity, and to revolutionary mobile devices, applications, and services created and sold by American companies -- and billions more in private investments -- the U.S. is well positioned in the global mobile revolution, with the opportunity to lead the world for years to come. 
 
But the bad news is:  when it comes to our broadband infrastructure, we are not where we need to be.  Worse, we risk falling behind our global competitors if we don’t accelerate our rate of progress. This is one race we can’t afford to lose.
 
Consider a study that Robert Atkinson, Scott Andes and ITIF released, which left no doubt that our country needs to step up our game.
 
The study looked at 40 industrial countries and ranked them on a small number of metrics demonstrating innovative capacity and competitiveness – things like IT investment and broadband deployment and adoption.  
 
On a snapshot basis, it ranked the U.S. 6th out of the 40 nations.  That alone should be a call to action.  But it’s not the truly scary part.  The study then looked at those same metrics, and rated each country on its rate of change – that is, on its rate of improvement in innovation and competitiveness. 
 
On that basis it ranked the U.S. 40th out of 40. 
 
Moving forward slowly is moving backwards – when other countries are moving faster. 
 
To seize the opportunities of broadband, we need improvement across the broadband economy.  Advances in applications, devices, and networks will drive innovation and investment across the full broadband ecosystem – maximizing benefits for all.
 
As the National Broadband Plan found, we also need to overcome real challenges. 
 
One is spectrum – the invisible infrastructure that sustains our mobile networks.  Mobile data traffic is exploding, and we face a looming spectrum crunch, with demand for spectrum outstripping supply. 
 
That’s why we’re pursuing a strong multi-part agenda to unleash more spectrum for broadband and drive spectrum efficiency.  
 
This includes voluntary “incentive auctions,” which would bring market forces to underutilized bands of spectrum, freeing up spectrum for mobile broadband.  
 
Another major challenge is broadband adoption and deployment.
 
Multiple studies show the U.S. lagging other countries on key broadband metrics.  
 
Roughly one-third of Americans aren’t online – that figure is under 10% in Singapore.  
 
And too many parts of the country aren’t connected at all. Up to 24 million Americans couldn’t get broadband today even if they wanted it.  The infrastructure simply isn’t there.  
 
This is especially a problem in rural communities in our country, and in Tribal and insular areas.  
 
Tomorrow, my fellow Commissioners and I will vote on a plan that is critical to overcoming key broadband challenges and is one of the FCC’s highest priorities – a proposal to modernize and reform the Universal Service Fund, or “USF.”
 
Today, I want to focus my remarks on this initiative to bring USF and the related Intercarrier Compensation system into the 21st century. 
 
Universal service has been at the core of the FCC’s mission since the Communications Act of 1934 created the agency with the commitment to make vital communications services accessible to all Americans.  
 
The program has helped connect virtually every American to our 20th century communications grid, first bringing basic telephone service to places where there was no economic case for service, and then extending the benefits of mobile phone service to more and more areas across the country. 
 
Universal telephone service helped spur American success in the 20th century.  Small business in our smallest towns suddenly had the country – and later the world – open up to them.  
 
Universal service brought new life to Main Streets, driving commerce in all reaches of our land.  And it strengthened communities, tying friends and families together.
 
But of course the world has changed.
 
In the 21st century, high-speed Internet, not telephone, is our essential communications platform, and Americans are using wired and wireless networks to access it.  
 
But while the world has changed around it, USF – in too many ways – has stood still, and even moved backwards.  
 
The program is still designed to support traditional telephone service.  It’s a 20th century program poorly suited for the challenges of a 21st century world.  
 
Where USF has changed over the years, it’s too often changed for the worse.  However well-intentioned, policies have been put in place over the years that today are weighing the program down. 
 
As Republican Lee Terry, Vice Chair of the House subcommittee that oversees communications, said last year along with Rick Boucher, then the Democratic Chairman of the subcommittee: “The Universal Service Fund is broken.”
 
That’s why the Commission will act tomorrow.  USF must be fixed – modernized and streamlined for the 21st century.
 
The FCC has taken steps in the last year to address some key aspects of USF: 
We’ve modernized our E-rate program, so schools and libraries can get faster Internet connections and access to 21st century learning tools like digital textbooks.  
We’re updating our rural health care program so patients at rural clinics can benefit from broadband-enabled care, like remote consultations with specialists anywhere in the country. 
 
These changes are helping deliver on the National Broadband Plan’s goal of ultra-high-speed broadband to anchor institutions in every community in the country.  
 
Late last year, we proposed a Mobility Fund intended to spur the build out of advanced mobile wireless networks in areas not served by current-generation networks. 
 
Next month, we will be taking on a part of USF called Lifeline-LinkUp, which helps low-income Americans get and stay connected, an important program that is in real need of reform.  And we’re also considering proposals to reform the contribution system that supports USF.
 
Today, I want to discuss the largest part of the USF program – the part focused on supporting communications service for rural Americans.  
 
I want to talk about our plan to modernize it to directly support fixed and mobile broadband, make it less wasteful, more efficient, more accountable, and more fiscally responsible. 
 
I’ll begin with some of the challenges facing the program. 
 
First, the program is plagued with inefficiencies. 
 
For example, the fund pays almost $2,000 per month – more than $20,000 a year – for some households to have phone service.  
 
According to one study, approximately one hundred million dollars flow to companies each year to serve areas where competing providers, without a single dollar of government support, offer service to all households.  
 
And in many places, the existing system funds four or more phone companies to serve the same area. 
 
Second, the program lacks necessary accountability. 
 
 USF guarantees hundreds of companies a significant rate of return on expenditures they choose to make related to networks used for phone service.  
 
But when public dollars are at stake, no company should control their own funding spigot.  There needs to be oversight and accountability to ensure public money is being used wisely.  
 
And accountability applies to government as well:  We need clearly stated goals and performance metrics to gauge how the program is being administered.
 
Third, some of the rules in place are creating perverse incentives.  
 
For example, one rule intended to encourage new investment in networks is instead rewarding companies for losing customers.  
Believe it or not, as companies lose lines, they actually get more USF support.  And meanwhile, the overall growth of USF is not constrained. 
 
These and other problems have combined to produce a rural-rural divide, where some parts of rural America are fully connected – sometimes with state-of-the-art broadband faster than anything available in many urban areas – while other parts of rural America are entirely left behind.
 
A couple of months ago, I was in West Virginia with Chairman Rockefeller, who has long been a champion of serving the unserved.  
 
During our visit I spoke with people who can’t get high-speed Internet or mobile coverage at their home or business, even though communities right next door are connected.  
 
How frustrating is that?  And how can it be acceptable that millions of Americans and small businesses are missing out on the upside of our digital economy, and on 21st century education and health opportunities? 
 
This rural-rural digital divide isn’t a one-state problem.  It’s a national problem, affecting Oregon and Maine and most states in between.
 
The closely related Intercarrier Compensation system has its own challenges. 
 
Intercarrier Compensation, or ICC, is a complex system of payments that phone companies make to each other when they connect calls.  It has long served as an implicit subsidy for rural carriers, with intercarrier rates set well above costs so that long-distance service would subsidize local networks.  
 
As a result, it can cost 10 times more to call a friend a few towns over than to call someone on the other side of the world.  
 
That just doesn’t add up. 
 
To game this flawed system, some local phone companies enter arrangements with chat line or conference calling providers to inflate their volume of incoming calls in order to increase payments they receive – what some call “traffic pumping.”  
 
On the flip side there’s the problem of “phantom traffic,” where some carriers disguise the source of calls to reduce or avoid payments to other carriers. 
The Intercarrier Compensation system is not only flawed, it’s unstable.  Overall intercarrier revenues are in rapid and unpredictable decline, as more and more people drop landline phone service.  
 
There’s also considerable uncertainty and ongoing litigation about how ICC should work in a modern era with Voice-over-IP, or “VoIP,” services.
 
 
To top it off, the Intercarrier Compensation system today discourages private investment in cost-saving 21st century infrastructure:  Some companies fear losing millions of dollars in ICC if they upgrade traditional telephone equipment to IP equipment enabling more efficient, IP interconnection. 
 
Simply put, the current inter-related USF and ICC system is unsustainable.  
 
It was designed for a world with separate local and long-distance telephone companies; a world of traditional, landline telephones before cell phones or Skype; a world without the Internet – a world that no longer exists. 
 
What should we do now?
 
Some say we should eliminate the Universal Service Fund altogether.  I reject that idea.  While the world has changed, the importance of universal service has not.
 
We simply shouldn’t let millions of Americans be bypassed by the broadband revolution. 
 
Americans like the 17-year-old girl in Alachua County, Florida who’s doing her homework in the parking lot of the local library at night, because her family can’t get broadband at home and the library’s hot spot is her only option.
 
Americans like the residents of a rural community in Georgia that was being considered by a major airline as a site for a call center.  Those jobs could have replaced some of the ones that left with the shuttered textile mill. But the airline eventually passed because the community didn’t have adequate broadband access.
 
Without a modernized USF, these people and millions like them will continue to be left behind. 
 
Some people say the Universal Service Fund doesn’t need major change, that the status quo is largely fine.  I reject that proposition, too.
 
In its current state, the program is not getting the job done.  It’s leaving millions on the outside looking in, and wasting taxpayer dollars every year.
 
That’s unacceptable.  We need to be responsible fiscal stewards, to get the most bang for our USF buck.  Particularly in light of its inefficiencies, we need to control the costs of USF. 
 
And we need to ask tough questions.  For example, should the government use consumer dollars to guarantee double-digit returns to companies receiving USF funds?  
 
If we reform USF and Intercarrier Comp, along with pursuing other key broadband initiatives, broadband can drive our economy and provide broad opportunity, as universal telephone service and rural electrification did in the 20th century.
 
Building on the excellent and groundbreaking work of the National Broadband Plan, our USF and ICC reform agenda rests on 4 pillars:
 
Modernizing the Programs To Support Broadband Networks
Ensuring Fiscal Responsibility
Demanding Accountability
Enacting Market-Driven and Incentive-Based Policies
 
In pursuing a plan to meet these objectives, we must ensure that reform occurs of both USF and ICC – which are fundamentally inter-related – while minimizing disruption along the way.  
 
So we need a sensible but certain transition – one that gives participating companies sufficient runway to adapt, with no overnight flash cuts, but with clear milestones and a firm path forward.  
  
The Notice of Proposed Rulemaking the Commission will vote on tomorrow sets forth a two-stage proposal:
 
In the near-term, we would begin several key reforms.  
 
These would include proposed changes to our Intercarrier Compensation rules to stop waste and reduce disputes that result when companies exploit loopholes in our rules to game the system, and to address the proper treatment of VoIP traffic for Intercarrier Compensation.  
 
We also propose to start a multi-year transition path, in partnership with the states, to phase down intercarrier payments and shift any necessary recovery to USF.  
 
Doing so will provide much-needed predictability for the industry and investors, while also reducing the inefficiencies and perverse incentives created by the current system. 
 
We would also set the Universal Service Fund on the path to reform by taking existing funding that’s being used inefficiently and without accountability, and transitioning it to the Connect America Fund. 
 
 So we’ll fund broadband for unserved areas out of savings from existing programs, while constraining the size of the Fund.  
 
The plan the Commission will vote on tomorrow will include specific proposals to control costs and limit the Fund’s annual expenditures.
 
The proposal includes performance goals and reporting requirements to increase the accountability of Universal Service Fund recipients and to better measure the performance of the Fund as a whole.
 
These immediate reforms would move us toward a fairer distribution of USF, targeted at the unserved areas where support is needed the most.  
 
They would allow more carriers an opportunity to expand their services through healthy public-private partnerships, including wireline, fixed wireless, mobile, and satellite providers.  And they would set the foundation for longer-term reform. 
 
The second stage of reform would focus on streamlining and consolidating the various existing mechanisms to support networks to rural consumers into a single smart and efficient Connect America Fund.  
 
The Connect America Fund would provide ongoing support both to bring advanced high-speed Internet networks to unserved areas and to maintain service where it exists today, creating jobs and fueling economic growth.
 
At the end of this transition, we would no longer subsidize telephone networks; instead we would support broadband.  
 
As we do this, we will make sure that all Americans continue to have access to voice service and can make calls from their homes.  Voice will be one application that consumers can use over their fixed or mobile broadband connections.  
 
We would also target funding to those areas that truly need it, where the economics dictate that broadband would not be available without support. 
 
And we would ultimately eliminate the regulated, per-minute intercarrier charges that can slow the transition to an all-IP, broadband world.
 
As we move forward, we will work with Congress and all parties on any constructive ideas for accelerating the transition and spurring buildout of high-speed Internet in unserved areas. 
 
We also look forward to working closely with the States.  USF and ICC are both hybrid federal-state systems, and successful reform will require the best ideas and healthy federal-state cooperation.
 
In the coming weeks, there will be ample opportunity for public input, to improve and refine the proposed framework the Commission will vote on tomorrow.  
 
We will run a fact-based, data-driven, open, and participatory process, including public workshops on key issues.  I call on all stakeholders to engage with us in this project.
 
I look forward to all input and ideas consistent with the pillars for reform I outlined earlier. 
 
To those who say the Connect America Fund should fund the highest speeds technically possible:  Bring us your specific proposals, but you must show us how much it would cost and who would pay for it, consistent with our commitment to fiscal responsibility and accountability.
 
To providers concerned the Connect America Fund won’t help them build out wired or wireless broadband networks, but will support only their competitors or providers in other areas:  Work with us to maximize the number and types of providers that can compete for support.  A technology-neutral approach is key to putting scarce resources to the best possible use.
 
To those who receive ICC:  Help us develop sensible but certain transition paths that maximize predictability while minimizing disruption. 
 
To those who pay ICC:  Work with us to ensure that reforms ultimately benefit consumers, which will be the true measure of the success of our efforts.
 
I understand that change may not always be easy, but ignoring the problems with USF and ICC is not an option.  This is not a question of if we should reform the system, but how we reform it. 
 
Last year, during the release of the National Broadband Plan, all five FCC commissioners adopted a joint statement, which said:  
 
“The Universal Service Fund and the Intercarrier Compensation system should be comprehensively reformed to increase accountability and efficiency and encourage targeted investment in broadband infrastructure.”  
 
Since that time, we have continued to work together and with the outstanding FCC staff focused on this issue, and our commitment to this cause has only gotten stronger.  
 
Now is the time to act, and I am confident that we will. 
 
Thank you.