MOSS ADAMS LLP | 1 © Moss Adams LLP | April 2012 V2 Rural Telecom Revenues FCC Reform Spring 2012 Presented to ABC Communications

MOSS ADAMS LLP | 2 THE BASICS

MOSS ADAMS LLP | 3 © Moss Adams LLP | April 2012 V2 ACCESS What other carriers pay to use our network Most companies pool access with NECA using cost studies

MOSS ADAMS LLP | 4 © Moss Adams LLP | April 2012 V2 RATE OF RETURN REGULATION Expenses & Operating Taxes, plus Profit (Return on Rate Base), equals Revenue Requirement Rates = Revenue Requirement / Demand

MOSS ADAMS LLP | 5 © Moss Adams LLP | April 2012 V2 COMPETITION When there is no monopoly, companies compete to: o Maximize revenues o Minimize costs

MOSS ADAMS LLP | 6 KEY ELEMENTS OF FCC REFORM INTENDED PURPOSE OF REFORM

MOSS ADAMS LLP | 7 © Moss Adams LLP | April 2012 V2 I. LOCAL VOICE SERVICE RATES Key elementsPurpose Minimum customer monthly rate (if HCLS recipient) 3-year phase-in with benchmarks ($10, $14, national average) ARC charge if local service rates are <$30/month Rural companies must charge end users a minimum rate for local service, reasonably comparable to urban rates, to justify cost recovery through USF.

MOSS ADAMS LLP | 8 © Moss Adams LLP | April 2012 V2 II. CARRIER ACCESS RATES Key elementsPurpose All terminating switched access transitions to $0.000 over 9 years Originating interstate rates frozen at Switched access rates are problematic. The number of minutes is declining due to wireless calls, VoIP traffic that is not measured and problems billing carriers that terminate traffic. Differences between state and interstate rates don’t make sense. Switching costs are lower in an IP environment - Reform to provide an orderly transition away from carriers paying for switching.

MOSS ADAMS LLP | 9 © Moss Adams LLP | April 2012 V2 UNIVERSAL SERVICE FUNDING III. FEDERAL SUPPORT FOR LOOP COSTS ASSIGNED TO INTRASTATE AND LOCAL (HCLS) Key elementsPurpose Revised corporate operations expense limitation calculation (more support if < 3,500) (less support if > 3,500) Regression based limitations on capital expenditures and operating expenses Current mechanism allows carriers to spend whatever they deem appropriate and receive support. Reform sets limits to provide incentive to companies to limit spending.

MOSS ADAMS LLP | 10 © Moss Adams LLP | April 2012 V2 UNIVERSAL SERVICE FUNDING IV. SUPPORT FOR HIGH LOOP COST GROWTH (SNA) Key elementsPurpose Phased out depending on qualification factor (plant versus lines) Original intent was to support significant cost growth in an environment where access lines were flat or growing. With access line losses, many carriers are growing cost per line only as a result of line loss. No longer consistent with original intent.

MOSS ADAMS LLP | 11 © Moss Adams LLP | April 2012 V2 UNIVERSAL SERVICE FUNDING V. SUPPORT FOR LOOP COSTS ASSIGNED TO INTERSTATE (ICLS) Key elementsPurpose New limitation on corporate operations expense Regression based limitations on capital expenditures and operating expenses Current mechanism allows carriers to spend whatever they deem appropriate and receive support. Reform sets limits to provide incentive to companies to limit spending.

MOSS ADAMS LLP | 12 © Moss Adams LLP | April 2012 V2 UNIVERSAL SERVICE FUNDING VI. SUPPORT FOR LOCAL SWITCHING COSTS (LSS) Key elementsPurpose Eliminated and cost recovery shifted to CAF Local switching costs are declining and can be absorbed by the end user. Cost recovery is locked in at a 5% annual reduction to provide stability during the transition period.

MOSS ADAMS LLP | 13 © Moss Adams LLP | April 2012 V2 UNIVERSAL SERVICE FUNDING VII. OTHER SUPPORT LIMITATIONS Key elementsPurpose Identical support for cellular & wireline competitors (CLEC) 5-year phase out of identical support Mobility Fund created for wireless providers for underserved areas Total support limited to $250 per line per month Difficult to justify supporting more than one carrier via identical support. Providing support equal to the incumbent means other carriers not required to cost justify support. Overall $250/line/month cap on support forces use of an alternate provider (i.e. satellite) when traditional wireline service is extremely costly – applies to very few companies/end users.

MOSS ADAMS LLP | 14 HOW THE CONNECT AMERICA FUND (CAF) WORKS

MOSS ADAMS LLP | 15 © Moss Adams LLP | April 2012 V2 PURPOSE OF THE CAF Designed to compensate companies for intercarrier switching costs with 2011 as a baseline, revenues are then reduced 5% per year.

MOSS ADAMS LLP | 16 © Moss Adams LLP | April 2012 V2 SWITCHED ACCESS REVENUE BASELINE Baseline Equals IS Switched Access Revenue Requirement, plus ST Terminating Switched Access Revenue, plus Net Reciprocal Compensation The baseline includes intercarrier and support revenues

MOSS ADAMS LLP | 17 © Moss Adams LLP | April 2012 V2 ANNUAL CAF CALCULATION Annual CAF revenue equals o Prior year switched access revenue baseline less 5% o Less actual revenues earned in the current year for:  All interstate switched access  State terminating switched access  Net reciprocal compensation  ARC revenues

MOSS ADAMS LLP | 18 © Moss Adams LLP | April 2012 V2 ACCESS RECOVERY CHARGE (ARC) ARC customer charges phase-in to $3/line/month Residential = $0.50 increments for 6 years Single Line Bus = $0.50 increments for 6 years Multi-Line Bus = $1.00 increments for 3 years ARC revenues reduce CAF revenues

MOSS ADAMS LLP | 19 REFORM YET TO COME?

MOSS ADAMS LLP | 20 © Moss Adams LLP | April 2012 V2 REFORM YET TO COME I. ORIGINATING SWITCHED ACCESS The FCC is phasing out terminating, and will likely also eliminate originating in favor of end users and USF paying all switching costs (bill and keep). When this will happen, the specifics of transition and the means for providing USF to offset lost revenues are currently being reviewed.

MOSS ADAMS LLP | 21 © Moss Adams LLP | April 2012 V2 REFORM YET TO COME II. BROADBAND SUPPORT Existing USF mechanisms cover portions of loop related broadband costs, but not all. The FCC is yet to establish the means for rural companies to recover costs for broadband connections from the customer premises to the connection with the backbone provider.

MOSS ADAMS LLP | 22 © Moss Adams LLP | April 2012 V2 REFORM YET TO COME III. USF CONTRIBUTIONS USF is funded through charges to consumers based on a percentage of purchased telephone services. This system is out dated and the contribution base is declining, which results in an increasing contribution factor (FUSC). Reform is expected to implement a line/connection based contribution, which would expand the base to include more carriers and services.

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MOSS ADAMS LLP | 25 The material appearing in this presentation is for informational purposes only and is not legal or accounting advice. Communication of this information is not intended to create, and receipt does not constitute, a legal relationship, including, but not limited to, an accountant-client relationship. Although these materials may have been prepared by professionals, they should not be used as a substitute for professional services. If legal, accounting, or other professional advice is required, the services of a professional should be sought.