Overview of the FCC’s Rate-of-Return Reforms Presented by: Vince Wiemer, CPA Principal Alexicon USF Briefing May 16-17, 2016

Two Regime Options Model-Based Support Voluntary election Support calculated by Alternative Connect America Cost Model Defined term of support Support received before investments made Specific deployment obligations Revised Rate-of-Return Mechanisms Support calculated using modified existing mechanisms Standalone broadband support added Operating expense limits Capital investment allowance 5-year deployment obligations

Model Support Additional monies to spur rural broadband growth Viable option for carriers no longer receiving HCLS Close the digital divide among RoR carriers Provides support based on “forward- looking efficient costs” Why? : FCC motives Who? : Eligibility How? : Term and amount What? : Service obligations Where? : Deployment When? : Process Timeline Pesky Details

Model Support Carrier Eligibility Carriers reporting 10/1 broadband deployment to 90% or more of its eligible locations in the state are not eligible Statewide election of support Location Eligibility Census blocks will not be supported: with modeled costs < $52.50 per month with unsubsidized competitors where the incumbent or an affiliate provides 10/1 Mbps using fiber or cable Why? : FCC motives Who? : Eligibility How? : Term and amount What? : Service obligations Where? : Deployment When? : Process Timeline Pesky Details

Model Support How long? 10 year support term (2017-2026) Carrier will receive a set monthly support amount as determined by the model support offer process How much in total? Model-based budget includes up to $150 million per year in excess of electing carriers’ 2015 legacy support) If demand exceeds budget there is possible additional funding of $50 million Why? : FCC motives Who? : Eligibility How? : Term and amount What? : Service obligations Where? : Deployment When? : Process Timeline Pesky Details

Model Support How much per location? Eligible locations with costs between $52.50 and $252.50 are “fully funded” Eligible locations with costs exceeding $252.50 are “capped” and will receive a maximum of $200 in monthly support Why? : FCC motives Who? : Eligibility How? : Term and amount What? : Service obligations Where? : Deployment When? : Process Timeline Pesky Details

Model Support What? : Service obligations Why? : FCC motives Who? : Eligibility How? : Term and amount What? : Service obligations Where? : Deployment When? : Process Timeline Pesky Details Minimum usage: 150Mbp which will increase over time based on the average usage of the majority of consumers Latency: 95% or more of peak period < 100 milliseconds

Model Support Build-out obligations determined by the model Annual milestones required Build-out must be to eligible locations Must deploy to at least 95% of the required locations by the end of the 10 yrs Why? : FCC motives Who? : Eligibility How? : Term and amount What? : Service obligations Where?: Deployment When? : Process Timeline Pesky Details

Model Support Competitive challenges due 21 day after updated model released Final model and support offers released in June 2016 via Public Notice Carriers will have 90 days to elect into model Election irrevocable if budget not exceeded If demand does exceed budget, a revised offer will be prepared May result in changes to capped location support Additional 30 days to accept revised offer Why? : FCC motives Who? : Eligibility How? : Term and amount What? : Service obligations Where? : Deployment When? : Process Timeline Pesky Details

Model Support Glide Path Pesky Details Electors receiving less model support than current legacy support Transition based on support difference Note that transitions are up to 4 and 9 years Why? : FCC motives Who? : Eligibility How? : Term and amount What? : Service obligations Where? : Deployment When? : Process Timeline Pesky Details

Model Support ETC Reporting Changes Tariff Issues Geocoded new locations on “rolling” basis Final annual submission by March 1, starting in 2017 Best practice within 30 days of service Geolocation of existing locations due no later than March 1, 2019 Five- year plans not required after 2016 Tariff Issues No longer participate in NECA CL pool; not subject to RoR for common line offerings Can participate in NECA tariffs for end user charges May assess a wholesale broadband-only loop charge not to exceed $42 per month on end user or ISP Why? : FCC motives Who? : Eligibility How? : Term and amount What? : Service obligations Where? : Deployment When? : Process Timeline Pesky Details

Questions about the ACAM?

Revised Legacy ICLS will be renamed the Connect America Fund Broadband Loop Support CAF BLS will also recover the difference between Broadband-only Loop costs and high cost threshold 100% interstate allocation of common line costs for standalone broadband lines Assumes carriers will recover at least $42 per month from end users for broadband-only loops Note that “broadband-only” includes lines with non-traditional regulated voice services Data-Only Broadband Rate-of-Return Operating Expense Limits Capital Investment Limits Build-out Obligations Competitive Overlap Total Budget Limits Implementation Dates Pesky Details

Revised Legacy Rate-of-Return reduced from 11.25% to 9.75% Included 40+ pages of “analysis” and justification for the change Data-Only Broadband Rate-of-Return Operating Expense Limits Capital Investment Limits Build-out Obligations Competitive Overlap Total Budget Limits Implementation Dates Pesky Details

Revised Legacy Regression analysis based on operating cost per housing unit Density and housing units used as variables 1.5 standard deviations Plant specific, Plant Non-specific, Customer Operations, and Limited Corp Ops Expense Will be applied proportionately to the OpEx accounts used to determine a carrier’s HCLS and CAF BLS First year, 50% transition of reductions NECA to submit schedule of companies subject to the limitation Data-Only Broadband Rate-of-Return Operating Expense Limits Capital Investment Limits Build-out Obligations Competitive Overlap Total Budget Limits Implementation Dates Pesky Details

Revised Legacy Each carrier will have a CapEx allowance that is based on the carrier’s inflation adjusted depreciation loop plant CapEx allowance adjusted based on carrier’s current broadband deployment Adjusted 1% for each percentage point the carrier is above or below the average New rule applies to investments made after the effective date of the Order so it will not affect HCLS until 2018 or CAF BLS until 2017 Several specific situations that may cause adjustment (grants, loans, etc.) Data-Only Broadband Rate-of-Return Operating Expense Limits Capital Investment Limits Build-out Obligations Competitive Overlap Total Budget Limits Implementation Dates Pesky Details

Revised Legacy Carriers with < 80% 10/1 Mbps broadband deployment have deployment obligations Percentage of forecast CAF BLS used to deploy broadband to unserved locations Deployment obligation = CAF BLS / cost per location Higher of actual cost per loop of similar carriers with 95% broadband deployment or 150% of average cost of with similar density and deployment Or, ACAM calculated cost of service Data-Only Broadband Rate-of-Return Operating Expense Limits Capital Investment Limits Build-out Obligations Competitive Overlap Total Budget Limits Implementation Dates Pesky Details

Revised Legacy Wireline broadband not required where deployment cost would exceed the $250 per line per month cap or $10,000 per location per project limit Obligation can be met any time during the five-year deployment period Reasonable request standard still in effect for remaining unserved locations FCC “encourages” carriers to identify any census blocks where they expect not to deploy broadband for upcoming auction Why would any carrier do this? Data-Only Broadband Rate-of-Return Operating Expense Limits Capital Investment Limits Build-out Obligations Competitive Overlap Total Budget Limits Implementation Dates Pesky Details

Revised Legacy CAF BLS will not be provided in areas served by a qualifying unsubsidized competitor Does not affect HCLS Competitive service obligations 10/1 Mbps, 100ms latency, 150 Mb usage, comparable rates Facilities-based provider of voice and data Must certify ability to provide service within 10 days to 85% of residential locations in a given census block Excludes CETCs and incumbent affiliates Data-Only Broadband Rate-of-Return Operating Expense Limits Capital Investment Limits Build-out Obligations Competitive Overlap Total Budget Limits Implementation Dates Pesky Details

Revised Legacy Challenge process will determine competitively served census blocks Burden of proof is on the competitor Must provide sufficient evidence of serving 85% of census block If competitor does not participate in the process, are is not deemed competitive Cost disaggregation is needed in study areas with competitive census blocks May elect one of several mechanisms Support reductions will be phased in 2-year transition for reductions < 25% 5-year transition for reduction > 25% Data-Only Broadband Rate-of-Return Operating Expense Limits Capital Investment Limits Build-out Obligations Competitive Overlap Total Budget Limits Implementation Dates Pesky Details

Revised Legacy $2 billion annual budget as adopted in 2011 No inflationary adjustment If demand for support exceeds the budget, USAC will determine a target amount for HCLS and CAF BLS Reduction of support will be split between a per-line reduction and a pro rata reduction applied to each study area Data-Only Broadband Rate-of-Return Operating Expense Limits Capital Investment Limits Build-out Obligations Competitive Overlap Total Budget Limits Implementation Dates Pesky Details

Revised Legacy Order effective May 25, 2016 but… Following still awaiting OMB approval: Imputation of ARC for broadband-only lines OpEx and CapEx limits CAF ACAM model support option Annual reporting requirements Elimination of support due to competition End user charge for broadband-only service Removal of broadband-only from SpA CAF-BLS implementation Jan 1, 2017 Capital Investment Allowance effective June 24, 2016 (30 days after effective date of the Order) Data-Only Broadband Rate-of-Return Operating Expense Limits Capital Investment Limits Build-out Obligations Competitive Overlap Total Budget Limits Implementation Dates Pesky Details

Revised Legacy Rate of Return reduction starts July 1, 2016 CAF BLS Annual Schedule Data-Only Broadband Rate-of-Return Operating Expense Limits Capital Investment Limits Build-out Obligations Competitive Overlap Total Budget Limits Implementation Dates Pesky Details

Revised Legacy Cost Allocation and Tariffing Part 69 updated to include new Consumer Broadband-Only Loop category RoR carrier may (not required to) a consumer broadband-only loop charge Subject to FUSC if tariffed If detariffed, must remove CBOL RRQ from the pooling process Continue to assess Subscriber Line Charges on end-user of voice and voice+data. May also assess an Access Recovery Charge on any line that can be assessed a SLC Data-Only Broadband Rate-of-Return Operating Expense Limits Capital Investment Limits Build-out Obligations Competitive Overlap Total Budget Limits Implementation Dates Pesky Details

Revised Legacy CAF ICC Considerations Must impute ARC on Consumer Broadband- Only lines Any revenues recovered from facilities that were voice+data and become data-only should be reported as double recovery for CAF-ICC purposes Represcribed RoR does not impact recovery ETC Reporting Requirements Provide geolocation and speed information of newly served broadband locations for prior year by March 1 Reductions in support for non-compliance No longer required to file a 5-year plan and annual progress reports after 2016 Data-Only Broadband Rate-of-Return Operating Expense Limits Capital Investment Limits Build-out Obligations Competitive Overlap Total Budget Limits Implementation Dates Pesky Details

Questions about the Revised Legacy Mechanisms?

Vince Wiemer, CPA Principal vince@alexicon.net 903-440-2034