TELECOM POLICY UPDATE: Impact of the FCC USF NPRM MTIA Industry Affairs Conference May 17, 2011 Steve Kraskin

The Perfect Federal Regulatory Report (This is not going to be that) 1. Regulated Service Cost Recovery Stability. 2. Video Services – equitable broadcast retransmission contracts and access to content at fair prices. 3. Wireless – equitable voice and data roaming available to rural wireless carriers and spectrum opportunities for all rural independents in their service areas.

So, What Else Is New? (2007 Joint Board) The Federal-State Joint Board on Universal Service (Joint Board) releases the following statement: The Joint Board is taking a fresh look at high-cost universal service support. The Joint Board has tentatively agreed that: 1. Support mechanisms for the future will focus on: a.Voice b.Broadband c.Mobility 2. In addition to the principles set forth in the statute, support mechanisms for the future will be guided by the following principles: a.Cost control b.Accountability c.State participation d.Infrastructure build out in unserved areas 3. The equal support rule will not be part of future support mechanisms. FEDERAL-STATE JOINT BOARD ON UNIVERSAL SERVICE STATEMENT ON LONG TERM, COMPREHENSIVE HIGH-COST UNIVERSAL SERVICE REFORM WC Docket No CC Docket No September 6, 2007

So, What Else Is New? What I hear – “Over the past 10 years, nothing happened at the FCC” and “nothing is going to happen.” That’s Wrong No “big bang” but a slow, steadily increasing debilitating squeeze. Loss of access lines and declining access minutes, capped high cost loop fund

Impact of the “Plan” on Rural Independent Companies The “Plan” threatens the very foundations and underlying policy that has supported the success of the rural industry in bringing universal service to the communities served by rural Independent companies.

Impact the “Plan” on Rural Independent Companies 1. The “Plan” ignores the objective of the Communications Act to establish and maintain universal service in rural America with “services and rates comparable” to those available in urban areas. In place of that objective, the “Plan” establishes a universal service goal for high cost to serve areas that is 1/25 th of the goal set for the rest of the nation.

Impact the “Plan” on Rural Independent Companies 2. In place of the regulatory concept of providing a rural carrier the opportunity to recover its costs including a reasonable return, the “Plan” proposes the end of rate-of-return regulation, and would replace it with “price cap” regulation - a regulatory framework with a proven record of failure if the success of regulation is measured by whether it has fostered “comparable services and rates” in high cost to serve areas.

Understanding The FCC Perspective 1. We don’t want to limit rural areas. We want to bring all rural areas up to the quality of service rural independents have provided. 2. We have limited USF and want to get the biggest most effective use of it we can. 3. “Most rurals can take a haircut” “No Barriers” “You want rate of return?” Boucher/Mattey

Fixing the Problem Begins With Asking The Right Questions

Answering The Question “How do you think we should reform intercarrier compensation and the Universal Service Fund?” But, The FCC was really asking: “Hasn’t the time come to throw out intercarrier compensation and the universal service network support program for rural Independents?”

Everyone in the rural industry should be given the answers 1. Why does your service area require universal service support mechanisms and funding? 2. How should we measure and determine the amount of funding your company should receive from universal service support mechanisms? 3.And why should the universal service funding needed for your community go to your company and not to another carrier? The answers to these three questions hold the key to the substantive aspect of responding to the challenges of the broadband “Plan.” Restoring the grassroots is the key to the political aspect of the challenge.

Fundamental Questions Lead To... Can your company operate successfully and provide universal service within your incumbent service area if you have to rely only on the revenues you obtain from charges to your customers? Do we want to rely on products that are declining (switched access charges and a USF built initially on long distance assessments?) 13

… Our Fundamental Objective The Broadband Plan universal service proposals should be modified to provide for an explicit funding mechanism that provides each rural telephone company with revenues that are sufficient to enable the company to recover the actual expenses, including a reasonable return on investment, that it incurs in the provision of universal services to rural consumers at rates comparable to those charged to consumers in urban areas. 14

What the NPRM Would Do Reduces Interstate Cost Recovery Existing cost recovery is reduced by the arbitrary removal of funding for all corporate expenses The distribution formula for the capped high cost loop fund is changed, creating immediate winners and losers among the rural companies.

What the NPRM Would Do The NPRM also proposes generally maintaining current cost recovery rules (except, of course, for the elimination of funding for corporate expenses and elimination of the safety cap for high cost loop recovery) - this means that rural incumbents may think they are encouraged to continue to invest in loop plant regardless of the fact that the high cost loop fund remains capped. As more rural companies add to aggregate investment levels, the cost recover gap for all rural companies increases as the aggregate investment grows further beyond the cap.

A United Association Industry Plan Unity Driven By Substance To Unify Behind Unity Forged Through Common Objective Based On Accepted Principles That Drive FCC To Our Proposals

The Elephant In The Room

The “elephant” – how to distribute limited funding. Current FCC rules cap the HCLF – investment goes up, recovery down Shuffling the deck chairs does not fix the problem – creates winners and losers

The Elephant In The Room The only way to deal with an elephant in the room is to face the reality, work around it in the short-term, and find a way to remove it in the long-term. Changing the distribution rules and formula only changes the “winners” and “losers” on a year-to-year basis.

The Elephant In The Room “The Alliance submits that the Commission can respond to the issue of cost recovery of established rural rate-of-return carrier universal service expenses in a manner that not only provides predictability and stability, but that is also responsive to the Commission’s intent to ensure accountability, encourage efficiencies and provide an alternative optional incentive option for carriers subject to rate of return regulation.”

NPRM Response Objectives 1) Propose rational common-sense alternatives that ensure cost recovery of established investment and operational expenses incurred in providing universal service.

NPRM Response Objectives 2) Develop and propose a mechanism to ensure stability for recovery of needed additional investment and operational expenses during the interim period during which the Commission deliberates a long-term broadband USF solution.

NPRM Response Objectives 3) Seek broad-based support and understanding that the nation’s ability to achieve the full vision of the National Broadband Plan will ultimately require an increase in the size of the USF. Objection from an association advocate: “Key changes is to get away from explicit advocacy of increasing USF (even if you used the caveat of "ultimately") and just make it more about putting USF on a solid contribution base. This positions the fund for the longer-term objectives that may very well (almost certainly?) require expansion, but doesn't specifically push it on policymakers at this point. I also suggest ceasing references to the NBP, as the FCC has indicated that it views the NPRM as moving "beyond" the NBP.”

An Interim Stability and Incentive Plan Assure existing interstate revenues (access and USF) Transition Access Rates, USF Establish interim Broadband USF level Provide ROR failsafe safety valve Special Access alternative incentive

I no longer sit on company Boards or have an ownership interest, but...