1. 1 Federal Telecom Policy and Rural America October 6, 2002 Des Moines, Iowa Glenn H. Brown gbrown@mcleanbrown.com

2. 2 Agenda 1. The FCC and State PUCs 2. Major Trends in Telecommunications 3. The Telecommunications Act of 1996 4. Regulatory Issues Facing Rural America Universal Service Broadband Deployment

3. 3 Federal Communications Commission Established by the Communications Act of 1934 Five Commissioners –Appointed by the President and Confirmed by the Senate –No More Than 3 From The Same Political Party –Five Year Terms –President Designates Chairman Six Bureaus –Organized by Function –Handle Day-to-Day Responsibilities Total Staff of 1755 (Per 1997 Annual Report) –Highly Qualified –Generally Lawyers, Accounts & Economists

4. 4 The FCC

5. 5 How the FCC Works Telecom Rules in Code of Federal Regulations (CFR) Title 47 FCC Processes to Make and/or Modify Rules –Notice of Inquiry (NOI) FCC Considering Possible Action Requests Input From Interested Parties Written Comments, Reply Comments and Ex-Parte Presentations –Notice of Proposed Rulemaking (NPRM) FCC Proposing Additions or Changes to Rules Written Comments, Reply Comments and Ex-Parte Presentations –Requests for Public Comment Requests Comment on Proposals and/or Papers Presented to Commission FCC Processes to Enforce Rules

6. 6 When/How to Work With the FCC Before Visiting With Commissioners or Bureau Chief be Sure Issue is “On the Radar Screen” Work With the Lower Level Staff First Best Time to Present Views is Before Issue is Put Out For Comment –Opportunity to Shape the Notice –Ex-Parte Filings Not Required File Complete and Informative Comments and Replies –Use Facts and Data Make Ex-Parte Contacts to Reinforce Your Advocacy –Support Your Position –Address the Issues Presented by Other Parties –Form Coalitions When Possible Contacts Prohibited During “Sunshine” Period

7. 7 State Regulatory Commissions All 50 States and DC Have Commissions –From 3 to 7 Commissioners –Commissioner Selection 39 States Appointed 12 States Elected –Staff Size From 11 (RI) to 800 (CA) –Varied Responsibilities Including Telecom, Electricity, Gas, Water, Taxi Cabs, Insurance, etc. –Varied Rules and Procedures

8. 8 State Commissions

9. 9 Major Differences

10. 10 U. S. Telephone Penetration

11. 11 U. S. Telephone Penetration

12. 12 U. S. Telephone Penetration

13. 13 Revenue Trends by Service

14. 14 Total U.S. Telephone Lines

15. 15 Technology Substitution FromTo Local Toll Pay Phone Wireless 800 Service FAX Internet 2 nd Lines Wireless Broadband

16. 16 Percentage of CLEC Lines

17. 17 Number of CLECs

18. 18 Number of CLECs

19. 19 High Speed Lines

20. 20 Number of High-Speed Providers

21. 21 Number of High-Speed Providers

22. 22 Major Industry Trends Explosive Growth in Wireless Declines in Other Areas –Long Distance –Pay Phones –2 nd Lines Increasing Burdens From Universal Service Emergence of Local Competition The Importance of the Internet The “Digitalization” of Everything –It is truly becoming a world of “0s and 1s”

23. 23 Industry Dynamics Evolving Technology and Markets The “Mania” of the Late 1990s Huge Debt Loads Cut-Throat Competition Plunging Margins Bankruptcies The “Comoditization” of Telecommunications

24. 24 1996 Telecom Act Major Objectives Incumbent Local Exchange Carriers (LECs) Must Open Their Networks To Competitors: –Interconnection –Wholesale provisioning of services –Unbundled Network Elements RBOCs Long Distance Upon Meeting 14-point “Checklist” FCC Must Provide For The Provision Of Universal Service –Rural Areas have comparable services and rates to urban areas –Schools And Libraries have access to advanced services Broadband Development –Forebear from regulation where necessary

25. 25 1996 Telecom Act Other Major Provisions –Creates a Federal/State Joint Board to recommend universal service solutions to the FCC (254(a)) Recommendation due November 8, 1996 FCC to act on recommendations by May 8, 1997 –Defines “Eligible Telecommunications Carriers” (ETC) for receipt of universal service funds (214(e)) –Differentiates between “Rural” LECs and “Non-Rural” LECs Based on size (I.e. < 100,000 lines) and area served (3(37)) Different market opening requirements (251(f)) NRLECS shall have multiple ETCs (214(e)(2)) –States that any Federal universal service support “should be explicit” (254(e))

26. 26 Section 214(e) 214(e)(1)Eligible Telecommunications Carriers –Must offer defined universal services –Must advertise in media of general distribution 214(e)(2)Designation of ETC –The Commission may for rural companies, and shall for non- rural companies designate more than one ETC –Before designating additional ETC for a rural company area the State Commission shall find that the designation is in the public interest 214(e)(6)ETCs not Subject to State PUC Jurisdiction –Added 12/1/97 –The [FCC] shall, upon request, designate such common carrier that meets the requirements of 214(e)(1) –Before designating additional ETC for a rural company area the [FCC] shall find that the designation is in the public interest

27. 27 Obligations of Carriers 251(a)All Carriers –Interconnection 251(b)All Local Exchange Carriers –Resale –Number Portability –Dialing Parity –Access to Rights-of-Way –Reciprocal Compensation

28. 28 Obligation of Carriers 251(c)Incumbent Local Exchange Carriers –Duty to negotiate (252 provides specifics) –Interconnection at any technically feasible point –Unbundled access to network elements –Resale at wholesale rates –Notice of changes for transmission and routing –Physical collocation of equipment 251(f)(1)Rural Exemption –Rural carriers exempt from 251(c) until Bona fide request State Commission finding of public interest

29. 29 Section 254(b) - Universal Service Principles The Six “Pillars of Wisdom” (1) Quality and Rates Quality services should be available at just, reasonable and affordable prices (2) Access to Advanced Services Access to advanced telecommunications and information services should be provided in all regions of the Nation (3) Access in Rural and High Cost Areas Consumers in all regions of the Nation should have access to services (including advanced services) at rates that are reasonably comparable to those in urban areas

30. 30 Section 254(b) - Universal Service Principles The Six “Pillars of Wisdom” ( 4)Equitable and Non-Discriminatory Contributions All telecommunications providers should contribute to the preservation and advancement of universal service (5)Specific and Predictable Support Mechanisms There should be specific, predictable and sufficient Federal and State mechanisms to preserve and advance universal service (6)Access to Advanced Services for Schools, Rural Health Care and Libraries Elementary and secondary schools and classrooms, health care providers, and libraries should have access to advanced services.

31. 31 Other Section 254 Provisions 254(a)Joint Board Created Recommendation in 9 months FCC to complete proceeding in 15 months 254(c)Universal Service is an Evolving Level of Service The Joint Board “from time to time” will recommend modifications 254(d)Telecommunication Carrier Contribution “Every provider that provides interstate telecom services…” 254(e)Universal Service Support Only ETCs (per 214(e)) may receive support Support must be used only for the provision, maintenance and upgrading of facilities and services for which the support is intended Any such support should be explicit

32. 32 Other Section 254 Provisions 254(f)State Authority for Universal Service States can adopt different standards but must provide funding 254(g) Interexchange and Interstate Services Rural and high cost areas no higher than urban areas 254(h)Schools, Libraries and Rural Health Care 254(i)Rates Must be Just, Reasonable and affordable 254(j)Lifeline Assistance Not Affected 254(k)Subsidy of Competitive Services Prohibited Universal Service shall bear “no more than a reasonable share” of joint and common costs

33. 33 Major Universal Service Issues Growth of the Fund Contribution Methodology Portability The “Non-Rural-Rural” Problem The “Parent Trap” Rule

34. 34 Growth of the Fund The Universal Service Fund has grown significantly in recent years due to: –The Schools and Libraries Fund –MAG lifting of funding cap –Access Reform Proceedings CALLS/IAS MAG/ICLS –Portabilitiy The Fund will experience additional growth in the future due to: –The “Non-Rural-Rural” Problem –Rural Broadband Initiatives

35. 35 Contribution Methodology Section 254(d) provides that funding will be paid by “all interstate telecommunications providers” on a non- discriminatory basis. Interstate end-user services assessed 7.2% of revenues Many carriers are marking-up their assessment –AT&T surcharge is 11.5% It is not politically possible to grow this much more Interstate toll revenues are declining Proposals before the FCC: –Bifurcate Rural High-Cost from Schools and Libraries fund –Change assessment to a “per-connection” fee –Expand funding base to include Internet services –Assess both Interstate and Intrastate revenues

36. 36 USF Portability Portability in Rural Areas Requires Public Interest Finding FCC and Many States Take a Simplistic View –Competition = Public Interest In Reality, the Public Interest is More Complex –Portability has Benefits and Costs –Benefits Greater Choice, Higher Quality, Lower Price Incentives on all providers to serve customers and be more efficient –Costs Increased Fund Size Decreased Network Efficiency The Public Interest is Only Served When Benefits Exceed Costs

37. 37 CETC Support is Growing

38. 38 The “Top 20” CETCs

39. 39 The “Customer List” Issue Wireless Carriers Generally Have an Established Customer Base in Rural Areas These Customers Were Obtained Under Business Plans That did not Include High Cost Funding Should This Existing Base Receive Funding? –Significant Additional Funding Requirement –Questionable Consumer Benefits States Generally do not Regulate Wireless Prices –How Will Wireless Carriers Meet 254(e) Obligations? –Scarce Universal Service Funds Should Bring New Services to New Areas

40. 40 Network Efficiency Issues Commissioner Martin’s Question: “I also note that I have some concerns with the Commission’s policy – adopted long before this Order – of using universal service support as a means of creating “competition” in high cost areas. I am hesitant to subsidize multiple competitors to serve areas in which costs are prohibitively expensive for even one carrier. This policy may make it difficult for any one carrier to achieve the economies of scale necessary to serve all of the customers in a rural area, leading to inefficient and/or stranded investment and a ballooning universal service fund. It is thus with real pause that I sign on to an Order that may further this policy.” Separate Statement of Commissioner Martin to the MAG Order, May, 2001 In Some Subset of Rural America is Telephone Service a Natural Monopoly?

41. 41 Other CETC Issues What Level of Funding is Appropriate for CETCs? –Current Rules Use Wireline Incumbent Cost –ILECs Incur Costs That Wireless Carriers Don’t: Presubscribed Interexchange Carrier Unlimited Local Usage State and Federal Regulation –FCC Will Have Proceeding Later This Year How Will CETCs Meet 254(e) Certifications? –Funds Only Used for Intended Purposes –Should ILECs Propose Proactive 254(e) Agenda? FCC is Planning NPRM on Portability

42. 42 “Parent Trap” Rule The FCC’s Proxy Model Provides Limited Support to Non-Rural LECs Rule 54.305 Provides That Party Acquiring an Exchange Receives the Same Support as the Seller Over Half of High-Cost Rural Lines Nationwide are Served by “Non-Rural” LECs Unless Something is Done With the “Parent Trap” Rule Consumers in Legacy-RBOC Communities Could Become “Digital Have-Nots ” The “Non-Rural-Rural” Problem

43. 43 Broadband Major Change in Focus –Kennard Commission focused on Unbundled Network Elements (UNEs) –Powell Commission has changed focus to facilities-based competition Regulation of Broadband –Is it “Telecommunications” or “Information Service” –Should different provider types be regulated differently? ILECs Cable –Should Broadband services contribute to Universal Service? Rural Broadband –What does 254(b)(3) mean? “Customers in all areas of the nation shall have access to …” –How will rural broadband be funded? –Can it even be funded if it is an “Information Service”