Federal Universal Service Overview NARUC Summer Meeting July 2007 Ray Baum Commissioner Oregon Public Utility Commission

Universal Service Principles 47 U.S.C. 254(b)  Quality services at just, reasonable and affordable rates  Access to advanced services in all regions  Access to services in rural, insular and high cost regions, and to low-income consumers, that are reasonably comparable to those in urban areas, at reasonably comparable rates  Equitable and nondiscriminatory contributions  Specific, predictable and sufficient support mechanisms  Access to advanced telecom services for schools, health care providers and libraries  Additional principles determined by Joint Board and FCC: competitive neutrality

3  High-Cost $4,096 M Support to local service providers in high-cost rural & insular areas to keep rates affordable  Low-Income 820 M Discounts on monthly service and installation charges for low-income consumers  Schools & Libraries 1,669 M Discounts to eligible schools & libraries for telecom services and internet access  Rural Health Care 41 M Discounts to rural health care providers for telecom services and monthly internet charges Total 2006 Payments $6,626 M Four Federal Universal Service Fund (FUSF) Programs – 2006 Payments (in millions)

4  Program costs recovered through surcharge on interstate and international end user telecommunications revenues  Surcharge reset every quarter based on forecast of payments and contribution base revenues  3Q 2007 surcharge rate = 11.3% of revenues FUSF Surcharge

5 FUSF - Net Dollar Flows by State  Net FUSF dollar flows vary widely by state (Chart 1) and by year (NY -$190M, TX -$60M in S&L funds from 2005 to 2006)  Net dollar flow = payments to providers minus contributions from surcharge  Positive flow number indicates state is net receiver Mississippi: + $256 Million Oklahoma: + $123 Million Alaska: + $187 M Puerto Rico: + $109 M Kansas: + $146 M  Negative flow number indicates state is net payer Florida: - $330 Million Maryland: - $133 Million New York: - $210 MMassachusetts: - $119 M New Jersey: - $200 MIllinois: - $118 M Pennsylvania: - $138 M California: - $118 M

6 High-Cost Fund  High-cost fund comprises nearly 2/3 of total FUSF dollars and has increased dramatically in recent years  Only eligible telecommunications carriers (ETCs) receive support All ILECs are ETCs States may designate non-ILEC carriers as competitive ETCs (CETCs) CETCs receive support based on ILEC per-line support

7 High-Cost Fund (continued)  High-cost fund grew from $2.6 billion in 2001 to $4.1 billion in 2006 Increases since 2003 due largely to CETC payments (See Chart 2) High-cost payments to CETCs grew from $0 in 2000 to nearly $1 billion in 2006 (See Chart 3)  Total high-cost support (ILEC+CETC) varies significantly by state (See Chart 4)  High-cost support to CETCs is skewed heavily toward a few states, e.g., Mississippi and Puerto Rico (See Chart 5)

Chart 1 8

(Chart 1 continued) 9

Chart 2 10

Chart 3 11

Chart 4 12

Chart 5 13