Better Thinking. Better Results. Beyond “The Order” – The New Regulatory Horizon for Rural Carriers Bob Schoonmaker, President GVNW Consulting, Inc. August 7, 2012

Better Thinking. Better Results. 11/21/2015 2

Better Thinking. Better Results. 11/21/ Overview Long-term FCC objectives Items implemented Items not implemented Longer-term impact of items implemented

Better Thinking. Better Results. Long-term FCC Objectives Bill and keep for access “compensation” Increase broadband availability in rural areas (including price cap rural areas) Increase broadband capability (speed) Continue to encourage replacement of wireline service with wireless Budget control on USF – no increase Transform TDM network to IP Efficiency 11/21/2015 4

Better Thinking. Better Results. Steps toward bill and keep Implemented first step for terminating rates – end game –Price cap companies by 2018 –ROR companies by 2020 Originating rates – FNPRM – unknown IntraMTA CMRS – Effective July 1, 2012 Recovery Mechanism – PC – 6 years, ROR 10+ years 11/21/2015 5

Better Thinking. Better Results. Increased Broadband Availability Price Cap Carriers –Frozen support 3 year phase in – 2016 to 100% use for broadband in unserved areas –CAF I - $300 million incremental to unserved broadband locations - $775/location –CAF II – Start 1/1/2013 or later – Initially model based – Reverse auctions in five years 11/21/2015 6

Better Thinking. Better Results. Increased Broadband Availability Rate of return –CAF for broadband delayed until FNPRM –ROR carriers have responsibility to provide 4 Mbps/1 Mbps upon reasonable request 11/21/2015 7

Better Thinking. Better Results. Increased Broadband Speed Initial requirement - 4mbps/1mbps “actual” ETC reporting requirement starting by July 1, 2013 (actual measurements) CAF II – indicates a future requirement potential of 6 mbps/1.5 mbps 11/21/2015 8

Better Thinking. Better Results. Broadband Provisioning FCC Projection – US Avg – 4 Mbps in 2015 Akami - 4 th Qtr. – 2011 report - US Avg Mbps 11/21/2015 9

Better Thinking. Better Results. More wireless “White spaces” availability Moves to provide more spectrum (500 MHz, 300 MHz in 5 years) Mobility I fund –Reverse auction – late 2012 –3G or greater to areas unserved by 3G –Service over 75% of road miles in area –$300 million one-time support Broadcast spectrum voluntary auction 11/21/

Better Thinking. Better Results. Budget Control FCC implemented budget controls for $4.5 billion – Specified amounts by fund type Core Wireless reserve to help fund overruns If less than quarterly amount, hold the remainder in reserve USAC reports to FCC within 75 days of how to correct overrun 11/21/

Better Thinking. Better Results. Transform TDM network to IP Transition ICC to bill and keep Facilitate IP to IP interconnection FNPRM – Should CAF recipients be required to offer IP to IP interconnection? Some have proposed specific “shut-off” dates for TDM 11/21/

Better Thinking. Better Results. Efficiency Corp. Oper. Exp. Cap for HCL and ICLS Regression analysis for HCL and ICLS $250/month/line cap on ROR USF Only one recipient per area – phase out of CLEC and CETC support Reverse auctions for some funds Price cap existing funds to broadband construction in unserved areas 11/21/

Better Thinking. Better Results. Items Implemented ETC Reporting Requirements Urban rate floor at $10 Corporate Operations Cap–HCL and ICLS Intrastate Access Reductions – Step 1 $250/month/line USF limit Regression analysis for HCL Recovery Mechanism and ARC rates CLEC USF Phase-out 11/21/

Better Thinking. Better Results. Items Implemented (cont.) LSS shift into Recovery Mechanism Safety Net Additive-elimination begun 11/21/

Better Thinking. Better Results. Items Yet to be Implemented Regression analysis for ICLS Change in rate-of-return Broadband CAF for ROR companies Transition of originating and transport access to bill and keep Phase out of Recovery Mechanism IP to IP interconnection Broadband speed testing 11/21/

Better Thinking. Better Results. Items Yet to be Implemented Loss of USF where unsubsidized competitor serves substantial portion of area (but less than 100%) 11/21/

Better Thinking. Better Results. Short term Focus–ETC Reports ETC Requirements – July 1, 2013 –Five-year plan including: Maps showing planned upgrades (by wire center or census block) Describe with specificity planned improvements and areas Estimate the area and population that will be served by upgrades Service to Anchor Institutions May want to include appropriate caveats related to funding 11/21/

Better Thinking. Better Results. Short term Focus–ETC Reports ETC Requirements – July 1, 2013 – (most by voice and broadband separately) –Outage Reporting –Complaints –Network Performance Reports (not defined) –Unfulfilled requests for service –Price offerings –Audited financial Reports –Lines under Urban Benchmark-$14-6/1/ /21/

Better Thinking. Better Results. Longer Term Focus Financial Planning Operating expense control Capital expense control – efficiency Broadband expansion –Area and customers covered –Capability Area covered by an unsubsidized competitor (75% of households possibly) 11/21/

Better Thinking. Better Results. Billed Access Impact (6% minute loss) 11/21/

Better Thinking. Better Results. RM Impact ( 6% minute loss) 11/21/

Better Thinking. Better Results. RM Impact (2% minute loss) 11/21/

Better Thinking. Better Results. RM Impact (10% minute loss) 11/21/

Better Thinking. Better Results. Impacts – Corp. Ops. Cap Impacts vary by company size Current difference between actual & max Examples: –Assume 3.0% growth in corp. op. expense –Assume -5.0% loss in access lines 11/21/

Better Thinking. Better Results. Corp Ops. Exp. – Small Co. 11/21/

Better Thinking. Better Results. Corp. Ops. Exp. – Med Co. 11/21/

Better Thinking. Better Results. Corp. Ops. Exp. – Large Co. 11/21/

Better Thinking. Better Results. Regression Analysis April 25, 2012 – Impacts only 100 companies instead of (2 in AR, 1 in MO) only two parameters – Op. Exp. and Cap. Exp. Continued industry concern re: unpredictability and variability, some coefficients don’t comport with reason Need to verify inputs, particularly sq. miles, exchange boundaries, & road miles 11/21/

Better Thinking. Better Results. Op. Expense – Possibilities Consortiums and/or consolidations Shared management Shared technicians Past due or early retirements Depreciation expense (cap. in regression) Employee benefits Energy use 11/21/

Better Thinking. Better Results. Op Expense – Term Access for LD July 3, 2012 – Missouri (est.) –AT&T - $0.015 reduction – 49% –Windstream - $0.016 reduction – 22% –CenturyLink - $0.03 reduction – 42% –RLECs - $0.02 to $0.06 – 20% to 40% July, 2013 – Similar $ amounts – larger % reductions from 2012 rates 11/21/

Better Thinking. Better Results. New Revenue Sources Increase Broadband penetration Broadband speed and “volume” increases Expand technology offerings Backhaul for wireless (incl. mini-cell sites) “White Spaces” offerings “Smart meter/energy control” “Smart home” offerings 11/21/

Better Thinking. Better Results. Unknown Impacts Regression analysis – longer term Rate of return reduction Originating and Transport Access ROR CAF for Broadband Loss of USF in competitive areas Competition from cable, wireless & satellite Changes in technology 11/21/

Better Thinking. Better Results. 10 th Circuit Court of Appeals Several issues under appeal –Smith vs. Illinois Bell –Bill and Keep –Regression analysis –Preemption of states Court denied FCC request to delay until FCC answered all questions Briefing schedule for most of the remainder of /21/

Better Thinking. Better Results. Future Regulatory Horizon Uncertainty – unanswered questions Financial challenges from current revenue sources Need to move toward a broadband service model What will it the future horizon be like? 11/21/

Better Thinking. Better Results. 11/21/

Better Thinking. Better Results. 11/21/

Better Thinking. Better Results. THANK YOU!! HAVE A GREAT DAY!! Bob Schoonmaker /21/