1. Cost Recovery Mechanisms MATI Tribal Telecommunications Conference June 7-9, 2004 Presented by Doug Kitch & Vince Wiemer Alexicon, Inc.

2. Copyright © 2004 Alexicon, Inc. Governing Authorities FCC Rules govern federal jurisdiction Most states mirror or concur with federal rules Tribes can be self-governing or choose to work in cooperation with state Commissions Generally, smaller telecom carriers = Rate of Return (ROR) carriers; larger carriers = Price Cap carriers Being a ROR carrier currently provides for favorable regulatory environment from a cost recovery standpoint

3. Copyright © 2004 Alexicon, Inc. Funding Sources Available National Exchange Carrier Association (NECA) Pools Allows for recovery of interstate costs Cost study is necessary to jurisdictionalize costs NECA Administers 2 Pools: Carrier Common Line (CCL) Pool Traffic Sensitive Pool

4. Copyright © 2004 Alexicon, Inc. Funding Sources Available Collectively “Universal Service Support” High Cost Loop Support (HCLS) Local Switching Support (LSS) Interstate Common Line Support (ICLS) These 3 Mechanisms, in addition to NECA Cost Recovery, are essential in making a business case!

5. Copyright © 2004 Alexicon, Inc. High Cost Loop Support Complicated algorithm that helps subsidize local rates (per FCC rules) to facilitate complying with “affordable” standard Available to NECA pool and non- pool members Fund size capped Currently approximately $1+ billion

6. Copyright © 2004 Alexicon, Inc. Local Switching Support Supports smaller carriers with high switching costs. Effectively shifts part of the cost of switch- related equipment from the state to interstate jurisdiction Available to NECA pool and non- pool members Fund size approximately $500 million

7. Copyright © 2004 Alexicon, Inc. Interstate Common Line Support Recovers residual CCL revenue requirement Available to NECA pool and non-pool members Fund size currently about $1 Billion

8. Copyright © 2004 Alexicon, Inc. Interstate Common Line Support As of 7/1/03, CCL pool and CCL access revenue effectively went away. All residual CCL revenue requirement is “portable” and in the form of ICLS. CCL Revenue Requirement less End User/Subscriber Line Charges less Special Access Surcharge = ICLS

9. Copyright © 2004 Alexicon, Inc. Universal Service Ideology & Considerations Driven by Telecommunications Act of 1996 Quality services available at just, reasonable, comparable, and affordable rates Access to advanced services in all areas of the United States Access to advanced services should be available to schools, libraries, and rural health care providers

10. Copyright © 2004 Alexicon, Inc. Universal Service Ideology & Considerations All telecom providers should contribute on an equitable and nondiscriminatory basis Exempt if de minimis

11. Copyright © 2004 Alexicon, Inc. Eligibility Requirements Eligible Telecommunications Carrier (ETC) State Commission designation that the carrier meets the requirements for a service area as designated by the state Commission Petition to the state Commission for ETC status State Commission may designate more than one ETC in a rural service area if in the public interest

12. Copyright © 2004 Alexicon, Inc. Other Considerations Important in Early Stages to Investigate and Verify that Billing is Correct Affects Carrier Access Billing System (CABs) A LEC’s Access Revenues Will Likely Comprise 30% to 50% of Their Total Revenues –MOU Sensitive Billing –Special Access Billing Affects NECA Settlements Could Affect Customer/Local Billing