Indatel Annual Summer Symposium “Position for Success in the Fluid Regulatory Environment” Presented by Doug Kitch, CPA, Principal Alexicon Telecommunications Consulting

Agenda In Order to Reinvent, You Need to Look at the Original Invention… Can You Reinvent Regulation?? Other Notables

Current “Invention”: What Are the Current Rules Based Off Of? Jurisdictional cost separations TDM technology FCC “10% rule” 10/1 Mbps mandate for Universal Service Funding (USF) Net neutrality

State & Local Revenue Requirement Interstate Revenue Requirement FCC Part 36 Separations Net Telephone Plant x Rate of Return + Operating Expenses = Total Revenue Requirement State & Local Revenue Requirement Jurisdictional Separations Interstate Revenue Requirement

Jurisdictional Separations “Interstate Revenue Requirement” is generally recovered through switched and special access charges assessed to end users or interexchange carriers via the National Exchange Carrier Association (NECA) tariff, or through access charges assessed from an individual company tariff “State and Local Revenue Requirement” is generally recovered through a combination of local rates charged to end user customers, access charges assessed via a state access tariff, and high cost loop universal service funding (USF) USF is now available for data only broadband service (called CAF BLS): Costs are assigned to the interstate jurisdiction Subject to numerous caps Ensures a fair share must be received from end users before eligible for USF Many of the current cost recovery mechanisms are still based on traditional rate of return regulation, and therefore jurisdictional separations

TDM Technology Still widely used, but quickly being replaced by Ethernet Transport Service (ETS) Current regulation was primarily written based on this technology FCC focus on technology transitions, including copper retirement and IP transition rules According to NTCA’s most recent report, 49% of respondent lines are served by FTTH, 29% by copper

FCC 10% Rule In 1989, the FCC adopted the recommendation of the Federal/State Joint Board that the cost of mixed use or WATS lines be assigned to the interstate jurisdiction when interstate traffic exceeds ten percent “The nature of the traffic carried on a private line is the primary determinant of the proper jurisdictional assignment of the line and associated revenues” Recent FCC Order released March 30th, 2017 reconfirms the above This item alone is extremely important because the FUSC assessment is based upon the nature of interstate end user telecommunications traffic

USF Funding Based Upon 10/1 Mbps Broadband Offering 2011 Transformation Order mandated 4/1 Mbps. Current and future USF funding, however, is contingent on the ability of carriers to offer 10/1 service by specific build out dates Buildout obligations exist and vary depending on whether a carrier receives Alternative Connect America Cost Model (ACAM) funding or whether a carrier elected to stay on traditional rate of return (i.e. Legacy) funding For price cap carriers, Phase II of the Connect America Fund has been awarded to carriers accepting statewide support For areas where the price cap carrier declined support (and for certain other areas), a competitive reverse auction will take place to award nearly $2 billion in support over 10 years Differing performance and latency tiers will factor into bid scoring. For example, bids that contemplate 1 gig performance are weighted to provide the bidding company a slight advantage

Net Neutrality Breakdown FCC’s 2015 Open Internet Order applied Title II (common carrier) regulations to the provision of broadband internet access service, with some major exemptions (i.e., forbearance). Focus of the rules was on: No blocking, No throttling, No paid prioritization No unreasonable interference or unreasonable disadvantage to consumers or edge providers Enhanced Transparency (providers clearly disclose network management practices, etc) Did not impose any type of rate regulation in BIAS Recently upheld by DC Circuit Court of Appeals Notice of Proposed Rulemaking (rel. May 23, 2017) Proposes to reverse the 2015 Open Internet Order Eliminate the “Internet conduct” standard

Can You Reinvent Regulation? Reinvented jurisdictional cost separations Reinvented TDM technology Reinvented FCC “10% rule” Reinvented 10/1 Mbps mandate for Universal Service Funding (USF) Reinvented Net neutrality Reinvented First Responders (FirstNet)

Reinvented Jurisdictional Separations In an IP world, the need for jurisdictional separations is virtually unnecessary except as a “power grab” between the feds and states Commissioner Michael O’Rielly’s take on [current] jurisdictional separations Sacred Wind rate case in New Mexico: “The issue of the use of a total company view of regulated revenues, for petitions based on need, is appropriately considered by the Commission in an appropriate rulemaking docket considering the requirements of 17.11.10.25 NMAC for future ETC petitions for needs-based support” This topic is ripe for advocacy….

Reinvented TDM Technology Cloud-based services, via data centers, will soon enough rule the day and host [non-localized] electronics, switching services, dedicated circuits, interexchange services, and traffic measurement In essence, then, will companies simply be transport companies?? Assuming this is the case, fiber will be the most essential element in the network Three thoughts related to the [practical] theme of reinvention: Nonregulated affiliate purchases wholesale, bulk ETS capacity. Nonregulated affiliate essentially becomes the customer interface, “muxes” this capacity, and sells broadband services to end users similar to how this works today with an affiliated ISP If competition is real, dark fiber builds are also real. Consider leasing dark fiber if you have the capacity?? Consider “one build” to keep costs down http://reinventtelecom.com/company/: Re-invent Telecom is a leading provider of enhanced hosted voice-over-IP and cloud-based IP PBX applications for business sold primarily through a network of strategic partners and resellers. With nationwide IP network coverage, Re-Invent delivers reliable, high-quality wholesale hosted VoIP services for business including IP PBX, SIP Trunks, IP Call Recording, hosted contact center services and more

Reinvented FCC 10% Rule In 1989, the FCC adopted the recommendation of the Federal/State Joint Board that the cost of mixed use or WATS lines be assigned to the interstate jurisdiction when interstate traffic exceeds ten percent When is the last time small carriers met with the Federal State Jt. Board to reconsider this rule? Start becoming active and having dialogue with NARUC With newer technology, can “mixed use” be specifically identified so as to no longer default to “ten percent” but instead report actual usage, even over private lines? (could pull revenue back into the states…consider getting state decision makers involved)

Reinvented USF Funding Based Upon 10/1 Mbps Broadband Offering For purposes of determining broadband progress in the United States, the FCC has retained the speed benchmark of 25 Mbps download/3 Mbps upload (25 Mbps/3 Mbps) for fixed broadband services Why wouldn’t this benchmark then be used for USF funding purposes? As a reinvention tool, sound public policy should dictate that 25/3 Mbps be the threshold for funding purposes as it is for Congressional reporting purposes in the FCC Broadband Progress report One possibility is to perform a “bottom-up” analysis of the level of support necessary to reach national broadband goals. Thus far, the FCC has limited support to a certain level based on past payments, and has adopted new and creative ways to constrain support in order to fit within its budget

Reinvented Net Neutrality The recent Open Internet NPRM proposes to completely reverse the 2015 Order Practical impacts are unknown as many ISPs have committed to an open and free internet Fears are that certain edge providers (e.g., Google, Facebook, Netflix) will be able to negotiate deals with ISPs to prioritize traffic Many ISPs have been complying with the Open Internet rules transparency requirements This will likely end up in court, causing more uncertainty As the Pai FCC envisions it, all Internet regulation will revert to the Federal Trade Commission. Basically, a re-reinvention

FirstNet The First Responder Network Authority (FirstNet) was established in 2012 under the Middle Class Tax Relief and Job Creation Act. It is an independent entity within the National Telecommunications and Information Administration (NTIA) Mission is to provide emergency responders with the first nationwide, high- speed, broadband network dedicated to public safety. FirstNet is to develop, build, and operate a wireless-based network operating in the 700 mhz band Included in FirstNet’s business plan is the nationwide core network, radio access network (RAN) services, backhaul, and aggregation Congress provided the initial $7 billion in funding FirstNet issued an RFP and awarded the contract to AT&T on March 30

Other Notables Chairman Pai roots Advocacy at the federal and state level is essential!! CAF Phase II Capitalizing costs Operating leases/FASB/IASB

THANK YOU! dkitch@alexicon.net 719-531-6342