LOCAL RATE INCREASE: OPPORTUNITY FOR ENHANCING PERCEIVED CUSTOMER BENEFITS July 9-11, 2014 TSTCI Accounting and Customer Service Conference Darla Parker John Staurulakis, Inc 1

OPPORTUNITY & RATE INCREASE Netflix announced plans to raise prices by $1-2 per month, initially for new customers but eventually for everyone, “to acquire more content and deliver an even better streaming experience.” With the company set to surpass 50 million streaming subscribers by the second half of 2014, the price increase could add between $600 million and $1.2 billion to the company’s revenues within the next two years. Forbes April

MAGIC? OR STRATEGY 3

4 In November 2011, in the USF/ICC Transformation Order, the Federal Communications Commission adopted a rate floor “to ensure that states are contributing to support and advance universal service and that consumers are not contributing to the Fund to support customers whose rates are below a reasonable level.”

FCC ESTABLISHES RATE FLOORS 2012: Residential rate floor established at $ : Residential rate floor established at $ : Residential Rate floor referred to in the USF/ICC Transformation Order estimated to be between $16 and $17. Floor includes state-regulated fees. Future floor to be determined by national average. 5

FCC 2014 SURVEY RESULT Survey based upon Fixed Stand Alone Voice Service Rates in urban areas from 2010 Census Blocks $20.46 is the national average local end- user rate 6

SURVEY SAYS: On March 20, 2014, the FCC’s Wireline Competition Bureau announced that the average local end-user residential rate plus state regulated fees of the surveyed incumbent LECs in urban areas is $ CFR (h) sets $20.46 as the rate floor effective July 1,

SUPPORT LIMITATION 47 CFR Section (b) provides that where residential rates fall below the national local urban rate floor for standalone fixed voice service, high cost support would be reduced equal to the extent to which rates and state regulated fees fell below the urban rate. 8

2014 RATE FLOOR Dilemmas for carriers included what would be the local rate to achieve in order to avoid losing high cost support and would state commission approval be achieved in time to meet the July 1 deadline? 9

RESIDENTIAL RATE FLOOR FOR June 10, 2014, the FCC approved phase-in of the $20.46 rate floor to prevent rate shock. (FCC 7 th Order) July 1, 2014, rate floor at $14. Rate floor of $16, January 2, 2015 through June 30, Rate floor of $18, July 1, 2016 through June 30, 2017, or the 2016 national surveyed rate, whichever is lower. Rate floor of $20, July 1, 2017 through June 30, 2018, or the 2017 national surveyed rate, whichever is lower. 10

RESIDENTIAL RATE FLOOR FOR 2014 – RECAP Link to FCC’s June 10 th order: 6/FCC-14-54A1.pdf Connect America Fund - Report and Order, Declaratory Ruling, Order, Memorandum Opinion and Order, Seventh Order on Reconsideration, and Further Notice of Proposed Rulemaking 11

12 THE NATIONAL AVERAGE RATE & THE FOUR- YEAR HORIZON

TIE RATE INCREASES TO BENEFITS DESIGNED TO RETAIN CUSTOMERS Increase the Customer’s Perceived Value By adding to basic service, at no charge, a feature or features that have perceived value and desirability. By expanding the local calling scope where feasible. By promoting unique services offered, such as technology help desk, voice mail. By reminding customers of your unlimited calling. 13

TIE RATE INCREASES TO BENEFITS DESIGNED TO RETAIN CUSTOMERS (CONTINUED) Increase the Customer’s Perceived Value Convenience as value. Companies have rolled out a new service, such as on-line payment, new bundled service, or on-line service applications, accompanying a rate change. Introduce “hidden” features in softswitches or software which may now have value. 14

TIE RATE INCREASES TO BENEFITS DESIGNED TO RETAIN CUSTOMERS (CONTINUED) For the extra revenue, what will your customer get? What will be delivered? Netflix promises better content and streaming. 15

IMPLEMENTING THE RATE INCREASE 16 Timing Informing your board and staff for understanding and approval. Informing customers. Informing billing vendors in advance. Working with your regulatory consultant to achieve your best timing with regard to filing your minor rate change provisions under PUCT Substantive Rule or as a partially deregulated cooperative under Rule

Board Approval PUCT Approval Customer Accepting Perceived Benefits Retained Customers and Retained Revenues 17

IN SUM Decide what will be the value you deliver in exchange for the rate increases ahead. Target features based on customer service desires. Where a company chooses not to raise rates to meet a benchmark, weigh future impacts from reduced high cost support. Know that your residential rates in effect December 1, 2014 are the first to be measured with the $16 benchmark. 18

QUESTIONS? 19

THANK YOU LET US KNOW HOW WE CAN ASSIST Contact Info: Darla Parker Manager John Staurulakis, Inc Research Blvd. II-200 Austin, Texas Tel: , Fax: