USF – ICC Reform: First Look at the Future

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Utah Broadband Advisory Council December 14, 2011 Douglas Meredith Director – Economics and Policy John Staurulakis, Inc.

FCC Report and Order and Further Notice of Proposed Rulemaking

• Order released Nov 18th

• Effective date for most items in Order is December 29, 2011

• Two Further Notice comment cycles begin in January and February

• Order is subject to appeal and reconsideration

• Deadline for reconsideration is Dec 29th

• Order is appealed in the following U.S. Courts of Appeal: 1st, 2nd, 3rd, 4th, 5th, 6th, 8th, 10th and D.C.

• These will be consolidated by lottery and more are expected since the appeal window is still open

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Comprehensive Reforms

• USF

• Make programs more efficient

• Target support to specific areas

• Transition support to broadband

• Create a mobility fund

• ICC

• Eliminate loopholes and arbitrage opportunities

• Establish a bill-and-keep rate structure • Begin with Terminating Switched Access Service

• Transition all LEC traffic to bill-and-keep over time 3

Major Changes

• FCC Order represents major change to three industry groups

• Incumbent local exchange carriers • Price Cap

• Rate of Return

• Wireless providers of voice and broadband

• Competitive local exchange carriers

• Changes include USF and ICC revenues

• Changes will alter company behavior

• Changes do not touch USF School and Library programs such as e-rate • Utah total committed School and Library funds for Jul 2009-Jun

2010 was $24.1M

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Budget

• FCC is putting a cap on the amount of federal support for USF and ICC reform

• Current

• USF is $4.2B

• ICC approximately $1B for rate of return carriers

• Proposed

• USF and about 1/3 of ICC reform $4.5B

• Unclear whether there will be sufficient support to promote the deployment of broadband in rural areas served by price-cap carriers and continue the development of broadband in areas served by rate-of-return carriers.

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Slice the $4.5B Pie

Price Cap, 1.8

Rate of Return, 2.0

Mobility, 0.5

Admin, 0.1 Satellite, 0.1

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Note: Amounts inclusive of ICC recovery mechanism funds

Expanded Obligations

• All USF recipients must offer voice telephony service and broadband service

• Broadband is 4/1 now and moving to 6/1.5

• VoIP qualifies as a voice telephony service

• Price Cap carriers must use support in areas where there is no unsupported competitor offering broadband

• Rate-of-return Carriers must provide broadband to end-user customers upon reasonable request

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Federal High-Cost USF by Utah Study Area

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Monthly Amount of Federal High Cost Universal Service Support by Program

State UT

Study Area

Monthly High Cost Loop

Monthly Safety Net Additive

Monthly Safety Valve

Monthly Local Switching

Monthly Interstate CL

Monthly Total High Cost

ALL WEST COMM-UT $ 47,295 $ 15,972 $ - $ 24,636 $ 101,190 $ 189,093

BEAR LAKE COMM $ 15,119 $ - $ - $ 8,725 $ 15,050 $ 38,894

BEEHIVE TEL CO - UT $ 102,688 $ 4,348 $ - $ 18,112 $ 154,198 $ 279,346

CENTRAL UTAH TEL INC $ 24,466 $ - $ - $ 24,245 $ 61,315 $ 110,026

CITIZENS-FRONTIER-UT $ - $ - $ - $ 88,972 $ - $ 152,105

DIRECT COMMUNICATIONS CEDAR VALLEY, LLC $ 98,782 $ 3,674 $ - $ 26,328 $ 77,833 $ 206,617

EMRY DBA EMRY TELCOM $ 4,502 $ - $ - $ 2,411 $ 123,395 $ 130,308

GUNNISON TEL CO $ - $ - $ - $ 9,781 $ 14,692 $ 24,473

MANTI TEL CO $ - $ - $ - $ 7,643 $ 24,727 $ 32,370

NAVAJO-UT-FRONTIER $ - $ - $ - $ 1,346 $ - $ 10,001

QWEST CORP-UT $ - $ - $ - $ - $ - $ 84,403

SKYLINE TELECOM $ 8,631 $ - $ 1,144 $ 10,094 $ 27,940 $ 47,809

SMITH BAGLEY, INC. - CL $ - $ - $ - $ 1,959 $ - $ 11,466

SOUTH CENTRAL UTAH $ 34,020 $ - $ - $ 75,671 $ 104,263 $ 213,954

SPRINT SPECTRUM, LP $ - $ - $ - $ - $ - $ -

UBTA-UBET COMM INC. $ 107,752 $ - $ - $ 30,946 $ 273,532 $ 412,230

State Total $ 443,255 $ 23,994 $ 1,144 $ 330,869 $ 978,135 $ 1,943,095

Source: 4Q2011 Projections by USAC

USF Changes

• Make programs more efficient

• Adjust rate-of-return programs and place limits on support for past and future investments and expenses

• Increase end-user rates for voice service

• Eliminate identical support rule for CLEC support

• Target support to specific areas

• Support for incumbent carriers is limited to areas where there is no unsupported competitor offering broadband

• Rate-of-return limited exception = 100 percent coverage of carrier’s study area

• Begin to use auctions as an allocation mechanism for wireless and price-cap carriers

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USF Changes (cont.)

• Transition support to broadband

• Provide support for broadband capable networks

• Require that broadband services be provided by USF recipients

• Create a mobility fund

• Establish a separate fund for mobile providers

• Build-out, and

• Ongoing operations

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Broadband Coverage (excluding wireless (3/0.7))

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Broadband Coverage (including wireless (3/0.7))

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USF Conclusions

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• Timeline

• Most reforms begin in 2012 (Jan or July)

• All is subject to appeal and further orders

• Current rate-of-return carriers will have reduced cost recovery options in high-cost areas

• This will reduce the deployment of infrastructure

• Price-cap carriers must commit to statewide deployment or have areas move to an competitive auction for low-bid support

• CLECs may receive support through auctions

• Wireless providers will have dedicated support for build-out and ongoing operations

ICC REFORMS

Monumental Changes 14

FCC Abandons Access Policy

• We reject the notion that only the calling party benefits from a call and therefore should bear the entire cost of originating, transporting, and terminating a call. As a result, we now abandon the calling-party-network-pays model that dominated ICC regimes of the last century.

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Comprehensive Reforms

• Uniform Access Rate Structure

• Bill and keep as the “ultimate end state for all telecommunications traffic exchanged with a LEC”

• Begin with terminating charges

• Follow-up with originating and transport charges

• State terminating switched access rates to equal interstate rates by 2013

• Reduce termination (and some carriers’ transport price cap) to bill and keep

• Six years for price cap

• Nine years for rate of return (July 2020)

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Alternate Cost Recovery

• After assessing an end-user charge, a portion of remaining costs may be recovered through a new USF program (CAF)

• End-user charges • $0.50 per residential and single business line

• Price cap five years

• Rate of return six years

• $1.00 per line for multi-line businesses for 6 years • Subject to federal charges cap of $12.20

• FCC to assess federal SLC levels in Further Notice

• CAF support • Systematic reductions to eligible support

• Eliminated for price-cap carriers in < 10 years 17

Other Traffic Issues

• Certain types of VoIP traffic will be subject to long distance charges

• Wireless to Wireline Charges

• Intra-MTA areas will have no charges assessed

• Doesn’t cover transport charges

• FCC wants to promote IP-to-IP Interconnection

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Summary

• FCC

• Move to broadband services

• Provide incentives for IP interconnection and VoIP

• Encourage wireless deployment

• Encourage consolidation of smaller carriers

• Industry Response

• Less infrastructure deployment in some rural areas

• Increased local service rates will lead to more churn and wireless services as customers value mobility of service

• Long distance services may drop in price

• Customer Response

• Depends on services that are purchased

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QUESTIONS / DISCUSSION

Douglas Meredith

dm@jsi.net

801-294-4576

www.jsitel.com

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