Good afternoon, and thank you for inviting me to join you today.

I am delighted to be here today. Although I really like my new job, I've found it very helpful to get outside the Beltway and talk to real people. From my perspective, the next best thing to that is talking to people who are from outside the Beltway. So I do greatly appreciate the opportunity to visit with you.

What I would like to talk about today is the relationship of rural telephone companies, universal service, competition, and the FCC. The Telecommunications Act represents a sea change in the government's view of how to best serve its citizens. It essentially says competition will work better than monopoly. It directed the FCC to write rules that told competitors where they could connect with existing networks and how competitors could lease parts of the incumbent networks. The FCC's Report and Order setting forth those concepts was generally well-received and helped establish a level playing field for new local competitors.

I am told that the FCC's Local Competition Order was a major undertaking of resources and creativity. As significant as that step was, the Commission had the luxury, if you could call it that, of writing on a relatively blank slate. While some states had taken significant steps toward promoting competition, the Act directed the FCC to establish a national framework that allowed for state variation. Thus the Commission conceptualized the new world of competition and wrote rules consistent with that vision.

By contrast, the Universal Service proceeding was -- and is -- being conducted against the backdrop of the current universal service system. Business plans, customer expectations, and individual state policies have all grown up around the existing system. Trying to change the current system in the ways Congress told us will inevitably have unequal consequences for stakeholders.

Restructuring universal service funds and adding the Schools and Libraries program is a major undertaking. The universal service system predating the 1996 Act was based on a complex web of intrastate and interstate subsidies. Congress directed the FCC to make these subsidies explicit and to require all telecommunications carriers to contribute. Fixing an ongoing system of subsidies by itself is a tricky deal. It's a little like trying to fix the engine of your car while driving. Add to that the entry of local competitors and the implementation of the 1996 Act becomes an extremely challenging assignment.

This complexity, however, is no excuse for diminishing the federal commitment to universal service. To me, the 1996 Act unmistakably strengthens the nation's commitment to universal service. A major component of universal service is making sure high-cost carriers, which are predominantly rural LECs, are not left out in the cold. What I don't want to happen is for the FCC to adopt policies that strike the right balance for large LECs but overlook the unique nature of rural LECs.

Being from New Mexico, I am fully aware of the vital role played by small LECs in rural America. I saw firsthand that companies like ENMR, Penasco Valley, and Leaco provide high-quality service at affordable rates. I also know that rural LECs are good corporate citizens who serve their customers in a variety of ways that may not be readily apparent. That is why I am a strong supporter of federal policies that will allow you to continue your good work around the country.

But your ability to run a business rests in part on whether government regulators understand your business. From what I can tell, the economics of your business is fairly different than that of large LECs. Let me give you a few examples from a study I saw recently. One key difference is the number of subscribers per square mile. The study found that rural LECs have 4.4 subscribers per square mile compared with 330 per square mile for BOCs. That is an enormous difference. Living in New Mexico for the past 15 years, I always knew we had fewer people than urbanized areas, I just never realized how few!

Smaller, dispersed populations are a fact of life for rural LECs, and it has a fundamental effect on your ability to run a successful business. Having fewer customers means you allocate switching costs over fewer people. The study found that the average central office of a rural LEC served 1,275 access lines, while a typical BOC central office served 11,000 access lines. And having your customers farther apart means the loops you've installed are much longer than the average BOC loop. The study showed that small, rural LECs have loop costs that are between two and five times higher than average BOC loop costs.

The other important characteristic of rural LECs is the high proportion of residential customers. One study showed that around 18 percent of rural LECs' subscribers are businesses, compared with 25 percent for BOCs. And business customers served by rural LECs purchase less local telephone service than business customers of BOCs. The study showed that 50 percent of BOC business customers purchased multiple lines, compared with only 10 percent for rural LECs. These numbers clearly have public policy implications, since business rates support universal service.

Federal and state governments long ago recognized that your business model is different than larger LECs. That is part of the deal you and your predecessors made with the government. You agreed to build lines across your serving areas, no matter how far that was, to provide service to all of your customers. You often knew from the moment you agreed to build line to a particular household that -- purely as a business proposition -- you would lose money every month on that customer. But you did it because the government said it would use rates from other services to support local service. That way you wouldn't go out of business serving high cost customers. That was the deal. It was sustainable when local telephone service was a monopoly and government regulators could adjust prices of different services.

Today, while competition is the reason we are revising that deal, it must not be an excuse for breaking the deal. Otherwise we risk higher local rates and a decline in telephone penetration. In my view, that would be clearly inconsistent with Congress's directive that we "preserve and advance" universal service.

As good as our universal service policies are, I was very surprised to learn that the United States now ranks 29th in the world in terms of telephone penetration. I believe universal service reform is an opportunity to improve that situation. The FCC has already taken very positive steps in that direction last May when it significantly increased support for Lifeline and Linkup. But under no circumstances should our new policies cause us to move backwards in terms of universal service.

Because of the cost structures of your networks, I believe that rural LECs are the most at-risk participants in universal service reform. If some of you are forced to charge higher local rates due to competition, you may lose customers, and the national universal service ideal would be diminished. I am committed to seeing that that does not happen.

There are a number of FCC actions in the coming months that will significantly affect universal service. We will be adopting the high-cost models for non-rural LECs. We will undertake a review of the critical universal service decisions, including the 25/75 decision and related issues. Not having been a member of the Commission when those decisions were first made, I very much look forward to that critical policy debate.

I also expect the Commission to begin the rulemaking on access reform for rate-of-return LECs very soon. And believe it or not, the FCC will soon appoint members of the Rural Task Force. A revised list of nominees came in very recently, and I'm truly hopeful we will assemble that task force very soon. The mission of that task force is to help the FCC understand the technology and economics of your phone networks. The report of the Rural Task Force will help us develop a model for calculating high cost support for rural LECs.

The final FCC action I'd like to flag for you is the section 706 proceeding. In section 706 of the 1996 Act, Congress directed the FCC to begin an inquiry by this September on whether advanced telecommunications capability is being deployed to all Americans in a timely and reasonable fashion.

Some companies haven't waited for the inquiry. Instead they've filed petitions telling us how we can change our rules today to promote greater access to advanced telecommunications capability. Either based on those petitions, or on our own 706 inquiry, we will soon examine whether advanced capabilities are as widespread as possible. If we find that such services are not becoming widely available, section 706 tells us to use various regulatory mechanisms to eliminate barriers to infrastructure investment.

I imagine that our 706 proceeding will be where the Commission first evaluates how the Internet affects average Americans. We may well find that the Internet is such a compelling service that people are likely to find ways to obtain Internet access without additional federal policies. Or we may learn that segments of the population very much want to be connected but are unable to do so for some reason, such as geography or income level. At least one prominent government official has predicted that Internet access will be a basic service within the next decade. I expect that rural carriers will have a major stake in that proceeding as well. I encourage you, either individually or through NTCA, to help us bring the benefits of advanced capabilities to all Americans.

Once again, I appreciate having the chance to speak with you today.