Proposal for Reforming the Intercarrier Compensation and Universal Service Systems CTIA – The Wireless Association™ May 18, 2005

2 Telecommunications Provider Sources of Revenues Under current regulations, telecommunications providers have three potential revenue sources. –Revenues from end-user customers; –Revenues from other telecommunications carriers; –Revenues from universal service. Under arcane and archaic FCC regulations, how much a provider receives from each of these revenue sources depends on: –Whether the provider uses wireless or wireline technologies; –For incumbent LECs, whether the LEC is rural or non-rural, rate-of-return or price cap; and –Whether traffic is local or long-distance, intrastate or interstate.

3 Average Rates in Cents per Minute High (¢/min): Low (¢/min): Large ILEC Interstate (0.6) Small ILEC Interstate (1.8) Large ILEC Intrastate (2.5) Small ILEC Intrastate ( 5.1) CLEC Interstate ( 1.8) CLEC Intrastate (3.0) CMRS to ILEC InterMTA Access Cost ( 0.6) CMRS to ILEC IntraMTA RC* (0.2) RC* Voice (0.2) RC* ISP ( 0.1) LONG DISTANCE CALLS LOCAL CALLS WIRELESS CALLS * RC = Reciprocal Compensation Arbitrary Regulatory Distinctions Result in Intercarrier Compensation Chaos Source: Intercarrier Compensation Forum, August 16, 2004, FCC Filing.

4 Intercarrier Compensation and Universal Service – Broken Systems Regulatory Distinctions Pick Winners and Losers in the Competitive Marketplace and Fail to Target Appropriate Amounts of Support/Compensation –Results in fewer competitive alternatives – especially for consumers located in rural areas. –Means that consumers in similar high-cost areas end up with very different service quality. “All You Can Eat” System Rewards Inefficiency –Increased pass-through charges make new and innovative products and services less affordable to end-user customers. –Excess subsidies do not benefit consumers. Unnecessary Administrative Complexity –Creates transaction and other unnecessary costs that are flowed through to end-user customers.

5 Intercarrier Compensation and Universal Service – How to Make it Better Eliminating Regulatory Distinctions and Allowing the Competitive Market to Work Will Mean More Choices for Consumers –Must eliminate distinctions across and within technology platforms and between different types of traffic (e.g., wireless/wireline, rural/non-rural, price-cap/rate-of- return, intrastate/interstate, local/long-distance). –Parties should be encouraged to voluntarily negotiate the terms of interconnection and the exchange of traffic Rules That Encourage and Reward Efficiency Lead to Better Services at Lower Costs –Intercarrier compensation and universal service support should be targeted and no more than necessary for an efficient carrier to provide high-quality, affordable rates to consumers. Administrative Simplicity Will Translate to Better Enforcement and Real Cost Savings for Consumers

6 CTIA-The Wireless Association™ Reform Proposal Highlights Encourage parties to continue exchanging traffic pursuant to validly negotiated and approved interconnection agreements; Transition to a Mutually Efficient Traffic Exchange (“METE”) system that: –Establishes a basic obligation for an originating provider to deliver traffic to the terminating provider’s “network edge;” –Eliminates regulatory distinctions between different types of providers and traffic (e.g., wireless/wireline, rural/non-rural, price-cap/rate-of-return, intrastate/interstate, local/long- distance); –Sets federal rates for transit/transport based on efficient (forward-looking) costs; and –Gives wireline carriers additional flexibility in how they recover costs from end-user customers. Reform universal service by transitioning to one unified mechanism that encourages and rewards efficiency; Ensure that universal service costs are spread over the widest base of contributors; and Provide for a transition of no more than three years to the new system.

7 Current and Proposed Intercarrier Compensation and Universal Service Systems Current Systems Uneconomic Distinctions Between Technologies, Service Providers, and Categories of Traffic Encourage and Reward Inefficiency Unnecessary Administrative Complexity CTIA’s Proposed Systems Eliminate Arbitrary Regulatory Distinctions Encourage and Reward Efficiency Dramatically Simplify Administration