FCC USF REFORM Presented by: Gordon Dauchy Vice President - JSI May 11, 2016

Discussion Topics A-CAM Path Legacy Reform Further Notice 2

March 30, 2016 Federal Communications Commission releases its “Report and Order and Order on Reconsideration, and Further Notice of Proposed Rulemaking” (FCC 16-33) Modernizes and reforms the federal universal service program supporting the nation’s rate-of-return (ROR) carriers 3

Modernize Focuses on broadband, including standalone broadband Seeks to direct federal support to areas lacking broadband deployment Increases requirements and accountability for federal support 4

FCC Reform Goals Create a voluntary path to using a cost-based model for support (A-CAM) Reform Legacy Support (HCLS and ICLS) to ensure that carriers have the incentives and support to continue investing in robust broadband networks Establish a timely and reasonable transition period Require specific budgets on capital and operating expenditures that can be recovered through the programs 5

A-CAM The Connect America Cost Model (CAM) which was developed for the price-cap carriers was used as the basis for a model applicable to the ROR carriers The ROR model is the “Alternative” Connect America Cost Model (A-CAM) The latest, but not final release of the A- CAM was released April 7,

A-CAM is a Choice (Voluntary) Carriers that elect the A-CAM –Change their federal regulatory paradigm Common Line offerings are effectively transitioned to incentive regulation Carriers would no longer be in NECA’s Common Line Pool A-CAM support is set for 10 years –Likely starting January 1, 2017 –Year 8 expected the Commission will conduct a rulemaking to determine how support will be determined after the 10 year term Strict compliance requirements will be applied to carriers electing A-CAM 7

A-CAM Model The A-CAM contains two modules Cost Module – calculates the cost to build the network in specific geographic areas Support Module –calculates support based on the cost produced in the Cost Module and specific FCC policies Form 477 data plays an important role in the A-CAM June 30, 2015 filing with any corrections through March 30, 2016 will be the basis for A-CAM support. The model uses a 9.75% rate-of-return for ROR carriers The model uses a $52.50 funding benchmark to qualify for support The model uses a $200 per-location funding cap for support 8

A-CAM Eligibility Locations under the $52.50 funding benchmark are not eligible for support Locations served by fiber (FTTP) or cable broadband (HFC) are not eligible for support Locations in a census block with a qualified unsubsidized competitor are not eligible for support Locations that exceed the funding cap (currently $200) will be deemed not fully funded locations. Companies with greater than 90% deployment of 10/1 Mbps in their study area would not be offered the choice to select the A-CAM 9

A-CAM Path Final Model FCC releases final version with Form 477 revisions Funding Carriers elect the model within 90-days of a Public Notice If carriers’ model support is fully funded election is final Election Electing carriers fund A-CAM with the total of their legacy support plus $150M annually of CAF Reserves Only if needed If support is not sufficient, FCC will adjust support and obligations May add $50M if needed to maintain the $200 per location funding cap Only electing carriers will be offered a second offer. Declining carriers affect legacy support total budget 10

Form 477 Validation Form 477 data are used to determine A-CAM support In preparation of the final A-CAM version, the FCC will allow ROR carriers to challenge June 2015 Form 477 data filed by competitors –Streamlined timeline (21 days) – Deadline April 28th –Only corrections made by competitors will be included in the final A-CAM version 11

Buildout Obligations Fully funded locations All modeled locations in an eligible census block where the average cost is between $52.50 and $ Mbps download and 3 Mbps upload (25/3) to certain % of locations based on density 10 Mbps/1 Mbps to remaining fully funded locations Capped locations Locations in an eligible census block where the average cost exceeds $ will receive a maximum of $200 in monthly support and are partially funded locations 4/1 (or existing service) to capped locations (not fully funded) based on density 12

Buildout Obligations Locations where the average cost is less than $52.50 are considered low-cost locations and are subject to the reasonable request standard Companies are obligated to demonstrate how they evaluate requests under the reasonable request standard Unreasonable Request The FCC encourages any carrier electing the model to identify any census blocks where they do not expect to offer broadband. These blocks may then be included in an upcoming auction where parties, including the carrier giving up the census block may bid for the support. Model support will be reduced for the locations identified as not being able to serve 13

Buildout Milestones Performance begins in year 4Milestones End of Year 1 (2017)None End of Year 2 (2018) None End of Year 3 (2019) None End of Year 4 (2020)40% End of Year 5 (2021)50% End of Year 6 (2022)60% End of Year 7 (2023) 70% End of Year 8 (2024) 80% End of Year 9 (2025) 90% End of Year 10 (2026) 100% Considerations: What is the actual cost to build out to fully funded locations? What is my cost to build to capped locations? What is the availability of designers, material, contractors? What is my reasonable request obligation? What are my reporting requirements? What are the penalties for missing the milestones? Can I satisfy my existing operational obligations through model support? 14

Speed Obligations (Fully Funded Locations) 15 State Level Density25/3 Mbps10/1 Mbps 10 locations per sq. mile or greater 75%25% Greater than 5 but less than 10 per sq. mi. 50% 5 or fewer locations per sq. mile 25%75%

Speed Obligations (Capped Locations) State Level Density4/1 MbpsReasonable Request 10 locations per sq. mile or greater 50% 10 or fewer locations per sq. mile 25%75% 16

Reading the Output 17 State Rate of Return Carrier Code Holding Company (All SACs in state) State Holding Company Density Index Total Rate of Return Locations Total Number of Rate of Return Locations in Census Blocks Receiving Model-Based Funding Fully Funded Locations with Obligation to Offer 25/3 | 10/1 Capped Locations with Obligation to Offer 4/1 | R Req. Total Rate of Return Carrier Model-Based Support MDHOLDABC Tel9.655,0003,0001,250 | 1, | 3754,000,000 FCC released A-CAM 2.2 Version 6.0 on April 7 th including four reports (6.1, 6.2, 6.3 and 6.4) Table above uses Reports 6.1 and 6.2

Legacy Reform Goals Reform legacy support (HCLS and ICLS) to ensure that carriers have the incentives to support and to continue investing in robust broadband (BB) networks Reduce the unitary rate of return Introduce changes to cost recovery for BB-only service Impose specific limits on capital (capex) and operating (opex) expenditures that can be recovered through the high cost programs Reduce recovery of high cost support in areas served by a qualifying (unsubsidized) competitor Establish more stringent BB service deployment (buildout) obligations 18

Authorized Prescribed Interstate Rate of Return Changed authorized interstate rate of return:11.25% 9.75% FCC makes this change in six (6) annual steps 19 YearRateYearRate July %July % July %July % July %July %

Broadband Only Loop Support Interstate Common Line Support is moved to new CAF Broadband Loop Support (CAF-BLS) Includes support for broadband-only loops –CAF-BLS equals (old ICLS) Interstate common line revenue requirement less interstate common line revenues Now add Consumer broadband-only loop revenue requirement less consumer broadband-only loop revenues Assign costs properly to ensure no double recovery FCC to impute a $42 per loop per month consumer broadband-only loop revenue, or the actual per line per month consumer broadband loop revenue requirement (initially whichever is less) 20

Operating Expense Limitation Double-log regression using 1.5 standard deviations to determine limits to HCLS and CAF-BLS payments 30-days after effective date of order, NECA will submit list of companies subject to limits under the adopted formula FCC initial estimate of 50 study areas impacted by opex limitation Affected carrier’s reduction will be phased in 21

Operating Expenses Accounts Included in Operating Expense Limitation Cable and Wire Facilities ExpenseInformation Origination/Termination Expense Central Office Equipment ExpenseOther Property Plant and Equipment Expenses Network Support and General Expense Customer Operations Expense: Marketing Network Operations ExpenseCustomer Operations Expense: Services Limited Corporate Operations Expense 22 Housing units used in regression are the most recently available U.S. Census data for each census block in the study area

Capital Investment Allowances FCC adopts industry association capital investment limitation proposal with minor modifications In essence, carriers with older, more depreciated plant will have the ability to make greater capital investments eligible for high-cost support than carriers with newer, less depreciated plant 23

Eliminate Areas Served by Qualifying Competitor CAF-BLS (not HCLS) is eliminated for all locations in a census block if a qualifying competitor offers qualifying voice and broadband service to at least 85% of the residential locations in the census block Qualifying unsubsidized competitor defined as a facilities- based provider of residential fixed voice and broadband service that does not receive high cost support The FCC shall publish a list of potentially affected census blocks and identify the competitor(s) at issue in each such census block –based upon Form 477 census block availability data –Investment and Expenses from these census blocks would be excluded from CAF-BLS only settlements 24

Knockout Process Unsure when WCB will issue a Public Notice containing list of qualifying competitors – no CETC’s or affiliates will be listed Competitor has the burden of proof and would have to affirm appearance on WCB’s preliminary list with specific data Affected RLEC will have opportunity to rebut the competitor assertions Competitor must offer –Residential fixed broadband meeting current service obligations on speed (10/1 Mbps), latency (100 ms), and usage allowances (>150 GB per month) –residential fixed voice service (E911, CALEA, Porting, 10 business-day service provision) 25

Disaggregation Methods Carriers have three options –Relative density of competitive and non- competitive areas (different revenue requirements) –Ratio of competitive to non-competitive square miles in study area (using a reduction ratio table) –Ratio of A-CAM calculated for competitive areas compared to total A-CAM support for the study area (competitive and total A-CAM runs) Total disaggregated support in a study area shall not exceed total non-disaggregated support 26

CAF-BLS Disaggregation CAF-BLS excluded would be determined based on disaggregation methodology and use the following phase down path. –If <25% of support is affected, 66/33/0 phase-out of support. Zero at the beginning of third year –If >25% of support is affected, 85/68/51/34/17/0 phase-out of support. Zero at the beginning of the sixth year. FCC WCB to revisit competitive overlap every 7 years 27

Broadband Buildout Duties Tiers of Buildout 0-20% 10/1 = 35% of projected CAF-BLS over 5 year forecast 20%-40% 10/1 = 25% of projected CAF-BLS over 5 year forecast 40%-80% 10/1 = 20% of projected CAF-BLS over 5 year forecast Above 80% - no buildout obligation, but must report progress on locations reached Five year completion target for buildout (no milestones) 28

Budgetary Controls Budget $2B adopted for , and seemingly beyond 2017 FCC created automatic controls to keep budget at $2B HCLS, CAF-BLS will be calculated to fit within the annual budget 29

Topics Addressed in FNPRM Permitted expenses Cost allocation procedures Affiliate transaction rules Compliance issues NECA issues Tribal issues 30

Thank You Gordon Dauchy 31