Rate-of-Return Carrier USF Reforms Telecommunications Consulting Rate-of-Return Carrier USF Reforms Review of Clarification and Reconsideration Items * 5 Chris Barron Regulatory Manager May 16, 2016

Agenda Model Accuracy Sufficiency of support and reasonable comparability of rates Standards for Unsubsidized Competitors Disaggregation Caps in the Presence of Competition Operating Expense Caps Streamlined Waiver for Capital Expenditure Limits Recovery of Common Line Costs

Accuracy of the ACAM “We believe that the final version of the A-CAM will sufficiently estimate the costs of serving rate-of- return areas and that further adjustments are not necessary” (¶38) “Finally, we reject arguments in the record that the model should not be adopted because it produces…amounts…that vary from actual costs of fiber-to-the-home networks.” (¶58) Vantage Point study Alexicon Ex Parte

Accuracy of the ACAM FCC claims that the ACAM is “accurate enough” are not convincing Common FCC claim – voluntary model path only uses the ACAM to distribute support FCC has responsibility to ensure support is distributed equitably Problems with the ACAM remain Capital costs derived from price cap carrier data Network topology data sets (road map data errors) Vantage Point engineering study

Accuracy of the ACAM ACAM should not be used for any distribution or calculation of RoR carrier support ACAM should not be used for any other purpose, such as the disaggregation option adopted or for the cost per location metric for broadband deployment obligations ACAM should not be used at all without significant changes

Sufficiency of Support Reasonable Comparability of Rates There should be specific, predictable and sufficient Federal and State mechanisms to preserve and advance universal service. - 47 USC § 254(b)(5) Consumers in all regions of the Nation, including low- income consumers and those in rural, insular, and high cost areas, should have access to telecommunications and information services, including interexchange services and advanced telecommunications and information services, that are reasonably comparable to those services provided in urban areas and that are available at rates that are reasonably comparable to rates charged for similar services in urban areas. - 47 USC § 254(b)(3)

Sufficiency of Support Reasonably Comparable Rates Standalone broadband supported by new mechanism – CAF BLS CAF BLS also covers ICLS CAF BLS will cover lesser of $42 per loop per month or total consumer broadband loop revenue requirement FCC adopted $2 billion budget FCC reasonably comparable broadband rates Benchmark is currently $75.20 for 10/1, unlimited The budget and $42 benchmark will make it difficult, if not impossible, for many carriers to provide standalone BIAS at or below the reasonably comparable rate benchmark Setting speed standard at 10/1 mbps does not help

Standards for Unsubsidized Competitors No CAF BLS is provided in census blocks containing qualifying unsubsidized competition Based on Form 477 data Competitor must offer service to at least 85% of the residential locations within a given census block Qualifying service includes broadband meeting FCC minimum service obligations at reasonably comparable rates Competitors must certify the 85% coverage Challenge process for incumbents to challenge coverage Problems: No steps to ensure competitors offer reasonably comparable substitute to the RLEC-provided voice and/or data service Would be competitors not required to submit geocoded information on locations served within the census block

Disaggregation, Caps, and Competition In instances where support is removed due to the presence of unsubsidized competition, RoR carriers are allowed to choose a disaggregation of support method “…total support in a study area shall not exceed the support that otherwise would be available in the study area absent disaggregation.” - (Order, ¶ 139) Problem – Disaggregating support to areas without competition will likely result in support being identified in higher cost areas. Once study area-wide average is lost, then total support assigned to these areas could exceed pre-disaggregation levels.

Operating Expense Caps Operating expense caps adopted to limit recovery of expenses via HCLS and CAF BLS Regression model-produced opex per location plus 1.5 standard deviations Rural Associations recommended 2.0x standard deviations 2.0x standard deviations used for reasonably comparable rate standards FCC rationale – 1.5x affects more study areas than 2.0x (50 vs 17) Problems: 1.5x standard deviation is arbitrary No inflationary factor Application of Opex regression on an annual basis will result in a race to the bottom

Capex Allowances – Streamlined Waiver Based on carrier’s current broadband deployment Adjusted for deployment progress Adjustments allowed in certain situations “Streamlined” Waiver Process Any carrier can file a waiver under the Commission’s existing rules. To enable expeditious treatment of any waiver request, a carrier should provide an explanation of why it is in the public interest for that carrier to be allowed to recover costs above the amounts estimated for purposes of establishing that carrier’s deployment obligation, recognizing that the purpose of the capital allowance is to provide those carriers, with deployment less than the average level, the opportunity to catch up to those that have already deployed broadband at or above the average level. Specific factual evidence will assist the Commission in evaluating any such requests. Those carriers who cannot meet their deployment obligation even by expending the full amount of their TALPI allowance should submit information regarding the costs expected to be incurred to meet the deployment obligation certified by an engineer licensed in the state(s) in which the construction will take place. (Order, FN 235)

Capex Allowances – Streamlined Waiver Any streamlined waiver process must be available in any situation where the capex allowance limits recovery and precludes the carrier from obtaining financing for broadband buildout. Capex limit may not reflect the reality of serving rural areas Capex limit cannot accurately reflect the diversity of areas served by rural LECs FCC must affirm that a streamlined process is available to address these concerns

Recovery of Common Line Costs Budget control mechanism $2 billion overall budget Amount available for HCLS and BLS is equal to total budget less CAF ICC and ACAM Support If actual demand for HCLS and BLS > that budget, USAC will determine a target mechanism for each mechanism Any necessary reduction in each mechanism will be determined by a per-line calculation and a pro rata reduction applied to each study area This could result in unrecoverable common line costs

Questions? Chris Barron cbarron@alexicon.net (803)547-9571