Universal Service and USF Reform: Establishing a Rational and Efficient System Presentation to NASUCA Mid-Year Meeting San Antonio, TX June 28, 2011

2 CenturyLink: Network Map and Service Territory CenturyLink CLEC Service Area Qwest POPS CenturyLink IP / MPLS Core CenturyLink Fiber Network Qwest CenturyLink Qwest Fiber Network Upon Merger Close, Served Approximately:  17 Million Access Lines  >5 Million Broadband Customers  >600,000 Video Subscribers w/ growing facilities base  In 37 States

CenturyLink in Texas 3  286,000 access lines  106 exchanges  6 operating companies  22.9 HH per square mile average density  Largest exchanges served:  Killeen  Porter  Humble  San Marcos  Small, rural exchanges (HH density/square mile)  74 exchanges below 20  47 exchanges below 10  23 exchanges below 5

4 Population Density Matters  ILECs bear expensive COLR obligations to service all customers; a burden unique only this class of provider, and very important in areas of low population density  CenturyLink serves vast tracts of rural America; in addition to urban centers like Denver, Las Vegas, Seattle, Phoenix, and Minneapolis Line Density (loops/sq. mile ): Service Area (sq. miles): AT&T 101 AT&T602,391 Verizon 155Verizon229,569 CenturyLink 29CenturyLink699,521  Much of CenturyLink’s service area has fewer than 10 households per square mile  Competitors routinely avoid serving low density areas  If COLR, ICC & USF reform is not handled properly, there is a real risk of leaving rural areas behind

Historically COLR Costs Have Been Buried Petroleum, IN Monthly Cost: $100 Franklin, IN Monthly Cost: $28 Indy Metro Preble, IN Monthly Cost: $73 Salamonia, IN Monthly Cost: $104  When the entire territory (study area) in a state is averaged, it is assumed that revenues earned in low-cost Franklin can be used to offset the cost incurred in serving high-cost Petroleum.  Migrating USF distributions from a study area basis can better align funding with costs – and (generally) away from competition.  Legacy EQ receives $0 High Cost funding (except IAS access replacement) under the study area system; a wire-center system would fund the higher cost exchanges. * Costs for voice network. Principle holds true for broadband.

6 Sweet Springs, Missouri Investment Overview Distance and Density Drive Costs Wire Center Total Lines Served 1, sq. mi. Investment per Line $6,610 City Center Lines Served 138 per sq. mi. Investment per Line $2,650 Outside City Center Lines Served 2.4 per sq. mi. Investment per Line $17,960

Population Density Example: ILECs Serve Higher Cost Areas  Network deployed deeper into rural markets  Deployment not a choice: subject to state and federal obligations  Continuing service obligations lead to ongoing capital expense requirements  Cost of service far exceeds viable business case parameters Brookneal, Virginia 2,600 Access Lines

Rural Broadband Will Need Support  Broadband has become a necessary component for business, education, health, and in the lives of consumers  Market forces are working for most consumers:  large-scale broadband network development, broadband devices, software development, and application development.  However, consumers in the most rural portions are not served  Universal service funding will be required if national public policy to serve “all” remains in place  Must avoid unfunded mandates and minimize investment risk during transition Principle: Competition in the cities must not deprive the rural areas of needed universal service support

9 Universal Service: 5 Fundamental Questions #1 Determine what “it” is -Define broadband service, speeds, other parameters #2 Determine the areas that need universal service support -Target to high cost areas; given rate comparability policies #3 Determine the cost of achieving universal service -Calculate the total cost of qualifying high-cost areas less expected customer contributions #4 Determine rules for vendors to implement universal service policy -Provide requirements for those who receive funds and deliver on the promise of universal service #5 Determine how to fund the Universal Service Fund -Apply surcharge applicable to all providers to establish a broad, competitively neutral contribution mechanism The government buys jet fighters, computers, light bulbs, etc. It should “buy” universal service similarly.