Joint Board Recommendation USF Reform NARUC Winter Meeting February 2008 Ray Baum Commissioner Oregon Public Utility Commission State Chair USJB

2  Growth in High Cost Fund threatens sustainability and burdens telecom consumers  Total fund grew from $2.6B in 2001 to over $4B in 2007  Over $1B of growth due to increased payments to CETCs What’s the Problem?

3  Other rural states receive less than 10% of that amount Examples: –Idaho: $0Utah: $0.3m –Missouri: $0.1mTennessee: $1.5m = $1.9 million What’s the Problem? (continued)  CETC support distribution is skewed heavily toward a few states and is unrelated to need  Top ten states (exclusive of Alaska & Puerto Rico) receive almost 45% of CETC support Examples: –Mississippi: $140mWisconsin: $51m –Kansas: $55mWashington: $44m = $290 million

4  Broadband services are not explicitly supported despite need in many unserved areas What’s the Problem? (continued)  Current mechanism encourages duplicative networks/subsidizes competition, while many rural areas remain without wireless service  CETC support is based on costs of incumbents

5 Background 3.Public Notice - Comments on reverse auctions, use of GIS technology, disaggregation of support and support for broadband, etc.  May 2007 Recommended Decision – 1.Emergency/interim cap--Limits growth in high cost support to competitive eligible telecommunications carriers (CETCs) to 2006 level 2.Committed to comprehensive high-cost USF reform by November 2007

6 Background (continued)  January 29 NPRM – FCC seeks comment on Recommended Decision  Sept Public Notice 1. Support for voice, broadband and mobility 2. Comprehensive reform: cost control, accountability, state participation, and infrastructure build-out in unserved areas  November 2007 Recommended Decision – Board’s long-term reform proposal released

7 Objectives Avoid increasing financial burden on consumers Universal availability of broadband and mobility services Universal availability of wireline voice services at affordable and comparable rates

8 Objectives (continued) Strengthen state-federal partnership Increase effectiveness of funding; avoid duplicative support and eliminate subsidization of competition Eliminate equal support rule and explore alternative distribution mechanisms, e.g. competitive bidding

9 Key Elements of Proposal Separate distribution mechanisms, funding allocations, and caps for each fund Cap total high-cost funding near current level ($4.5 B) Transition to three new funds Provider of Last Resort (POLR) Mobility Broadband

10 Key Elements of Proposal (continued) Explicit support for broadband and mobility services Distribute support to only one provider per fund in given area Target funds to extend mobile and broadband infrastructure into unserved areas Eliminate equal support rule for CETCs

11 POLR Fund  Recommend FCC develop new unified POLR mechanism to apply to all ILECs  High cost support for wireline providers of last resort (initially ILECs)  Sum of all existing ILEC support mechanisms  Board unable to reach consensus on specific changes to legacy mechanisms

12 POLR Fund (continued)  “Rural” and “non-rural” company distinctions  Some costs are not recognized, e.g. transport  Cost averaging across wide areas vs. wire centers  Non-regulated revenues not reflected  Drawbacks of current ILEC support mechanisms

13 Mobility Fund - Purpose  Primary purpose  Expand availability of wireless voice services to unserved areas, focus on populated unserved rural areas and public safety concerns  Secondary purpose  FCC to seek additional comment on whether to expand availability to underserved areas where service is not reliable

14 Mobility Fund – Support Type  Funding should decrease as build-out occurs  Primary support type  One-time, project-specific grants for construction of new wireless facilities

15 Mobility Fund - Distribution  FCC determines allocations to each state (unserved population, highway miles, etc.)  USAC processes and audits funds  State cannot exceed allocation  States develop and publish maps of unserved areas  States award support based on federal standards and accountability safeguards; options (RFPs, reverse auctions, etc.)

16 Mobility Fund - Recipients  Eligible Recipients  Eligibility rules specific to fund to be established  Only one carrier supported for wireless services per geographic area/project

17 Broadband Fund - Purpose  Primary purpose  Expand availability of broadband internet services to unserved areas  Secondary purpose  Enhance broadband services in areas with substandard service

18  Secondary support type  Ongoing support for expenses in areas where subsidy is required for continuing operations Broadband Fund – Support Type  Primary support type  One-time, project-specific grants for construction of new broadband facilities  Funding should decrease as build-out occurs

19 Broadband Fund - Distribution  FCC determines allocations to each state (based on number of residents without broadband, etc.)  State cannot exceed allocation  States develop and publish maps of unserved areas/stimulate demand  States award support based on federal standards and accountability safeguards; options (RFPs, reverse auctions, etc.)  USAC processes and audits funds  Focus on high-cost areas of non-rural carriers

20 Broadband Fund - Recipients  Eligible Recipients  Eligibility rules specific to fund to be established  Only one carrier supported for broadband services per geographic area (includes ILECs, cable, satellite, wireless broad, etc.)

21 Funding Levels - Caps  Total cap of $4.5 billion (approx level)  Excludes any new support ordered in response to Tenth Circuit Remand in Qwest II  Mobility Fund cap = $1 B (Jt. Board’s May 2007 decision recommendation)  POLR Fund cap = $3.2 B (2007 ILEC level)  Collection of funds targeted to constant $4.5 B annual total; not based on variable forecasts of support as currently  Broadband Fund (initial) = $0.3 B

22 High Cost Fund Changes Proposed Levels $1.0 $3.2 $0.3 Current Levels $1.3 $3.2

23 More on Funding  State Matching Funds  For broadband and mobility funds  Base funding level; supplemental funding available if state provides matching funds  Broadband Funding  Available support can accumulate from year-to- year if unspent  Will grow as other funds decrease  RUS monies also available for broadband expansion in RLEC areas  Avoid duplication of funding

24 Issues for Further Comment  Compliance with federal law More Issues  Allocation of funds among states  Identification of unserved areas  Definition of broadband  Impacts on Lifeline/LinkUp  Implementation, transition and review

25 FCC Actions  FCC released RD for comment on January 29, along with two other NPRMs  Elimination of identical support rule; support to CETCs based on own costs  Reverse auctions to determine support  No FCC order on interim cap to date  Approximately 50% wireless support capped at June 2007 levels via merger/sale conditions (Alltel, AT&T/Dobson); Verizon/RCC (pending)

26 FCC Actions (continued)  Reply comments due 60 days after publication  Comments due 30 days after publication in Federal Register

Will any action be taken before elections? 27