1. USF Reform NARUC Panel Presentation Dale Lehman Director, Executive MBA in Information and Communication Technology Alaska Pacific University dlehman@alaskapacific.edu

2. A Budgeting Problem Current high cost fund (HCF) ($4.096B) Projected increases in CETC funding (conservative estimate: +$1.5B) AT&T Broadband “pilot” (+$1B/year) Eliminating Rural/Nonrural distinction (at wire center level: +$3B) Funding at sub-wire center level (conservative estimate: +$15B) ILEC “inefficiencies” (-$1B) are not credible

3. Essential Reforms and Diversions These are all interesting issues, but most are not essential and threaten to divert the Joint Board (and FCC) from needed reforms Necessary reforms: decide whether to support 1 or 2 network technologies; fix wireless CETC support; fix funding mechanism The other issues are more complex than usually portrayed and require further analysis

4. One Technology or Two? If One, it should be the most efficient Reverse auctions cannot determine this RFP specifications will determine “the winner” Stranded investment an issue, except in “greenfield” applications Evidence from other nations supports these conclusions If Two, reverse auctions may play a role

5. Nonrural Carriers and De-averaged Support Calculations Price cap carriers differ from rate-of-return regulated (RoRR) carriers Symmetry between regulatory commitment and carrier commitment: both are required for incentive regulation to work RoRR guarantees an “opportunity” to earn a competitive return Evidence required; appropriate intervention could involve USF, but there are alternatives Acquired exchanges raise similar issues Broadband makes things different

6. Adding Broadband as a Supported Service Price cap carriers have no obligation to undertake “uneconomic” investments However, incentive regulation plans sometimes involve infrastructure investments Many States have done so; will “early adopters” need to be compensated? Plan renewals with investment requirements should be voluntary (fallback to RoRR otherwise) More study needed on why broadband adoption lags in rural areas (is it availability or adoption? What is the best policy intervention?) “universal” broadband speed is likely to be slower than what economic development requires

7. The Wireless CETC Mechanism is Broken ETC designation and the Identical Support Rule produce absurd results Funding is tied to handsets (multiple) and addresses (no service guarantee, people move, etc.) ILECs receive funding based on total costs; CETCs are funded based on per- line costs of a different carrier/technology

8. Ratio of CETC/ILEC lines, in relation to ILEC cost, by study area, 2Q 2004 and 2Q 2007 13 study areas had ratio > 1 in 2004; 88 in 2007 CETC study areas increased by 24%, CETC lines increased by 89%, while ILEC lines decreased by 8%

9. MTA: a case study 4 wireless CETCs; total CETC lines > total ILEC lines Coverage area has not markedly changed Competitive neutrality between wireless carriers is what is being funded

10. Ideas about a Mobility Fund Decide what needs to be supported: construction of towers in under-served areas? (operation of service is more questionable) Attach appropriate conditions to support: cost-based collocation and roaming? Reverse auctions, cost models, and cost reporting are alternative methods for determining and awarding support

11. Conclusions Broadband, deaveraging, and mobility are all important, but complexities require more analysis They should not divert the Joint Board’s attention from the essential reforms These are: deciding whether to support one network technology or two; fixing the wireless CETC funding mechanism; and, fixing the contribution mechanism