managing short term Thinking long term, ICC-USF Reform Federal Regulatory Update Bob Schoonmaker, Sr. VP Jonas Karlson, Sr. Consultant November, 2013

managing short term Thinking long term, Overview Future Financial Impacts ETC Requirements-2014 Special Access Data Request IP Technology Transition Call Completion First Net Other 2

managing short term Thinking long term, Future Financial Impacts ICC-USF Transformation Order –ICC Terminating Rate transition –ARC Rates –CAF-ICC Impacts –HCL – Rural Growth Factor –HCL – Various limits Originating Minute and Line Losses 3

managing short term Thinking long term, ICC Terminating Rate Transition – Intrastate rates (EO Switch & Tdm. Switch Transport) to interstate levels – EO Switching – Both inter- and intra-state to $ – EO Switching - $0.005 to $ – EO Switching to “bill and keep” Continued loss of terminating minutes 4

managing short term Thinking long term, Terminating EO Rate Transition 5

managing short term Thinking long term, ARC Rates Residence & Single Line Business – Increase $0.50 per year to a maximum of $3.00 –Maximum Res Rate of $30.00 – (Basic + SLC + ARC + EAS additive + State SLC + state USF + State TRS + State 911) Multi-Line Business –$1.00 per year but max of ARC and SLC of $

managing short term Thinking long term, CAF-ICC Transition 2011 Base Revenue Requirement Multiplied by 95% each succeeding year Less –ARC –Interstate billed switched access –Intrastate billed terminating switched access Equals eligible recovery 7

managing short term Thinking long term, Hypothetical Example Local line loss – 4%/year Interstate minute loss – 7%/year Intrastate minute loss – 5%/year Term Minutes approx. 67% of total 2011 Base period rev req - $800,000 Band 8 Local Switching rate in

managing short term Thinking long term, CAF-ICC Recovery 9

managing short term Thinking long term, High Cost Loop (HCL) Cap Rural Growth Factor limit on total fund – Rural access line change + GDP-CPI Total HCL Fund-2010 through

managing short term Thinking long term, Other HCL Limits $250/line/month – Corporate Operations Expense Limit –Formula adjusted by GDP-CPI –Based on # of Loops-may be impact as loops go down –2013 Submission – 199 nationwide, 1 Iowa Safety Net – 38 Iowa companies 11

managing short term Thinking long term, QRA Currently based on sum of OpEx and CapEx results Phase in for 2014 same as 2013, max 15% decrease in USF Same factors in 2014, but against 2013 HCL data submission FCC “working on” single formula One IA company impacted in

managing short term Thinking long term, QRA - Future RAG and others pointing out flaws in the process NECA hypothetical test - QRA only identified 26% of the highest cost companies FCC Staff very committed to QRA Proposals to use QRA as a “trigger” for review rather than a hard cap 13

managing short term Thinking long term, Future Financial Impacts Revenue Impacts –Regulatory – generally negative –Minutes and access lines – mostly negative –Broadband – positive –New Services – can be positive Need to assess financial impacts on cash flow to project future investment ability 14

managing short term Thinking long term, 2014 ETC Report Requirements FCC 481 – Filed October 2013 –Filing Delayed to FCC due to Shut Down –Initial Responses/Feedback –Other Issues with This Year’s Filing Additional Requirements Next Filing –Filing Due July 1,

managing short term Thinking long term, 2014 ETC Report Requirements Additional Requirements for 2014 –Broadband Data as well as Voice Emergency Functionality Unfulfilled Service Requests Number of Complaints –Company Price Offerings Broadband and Voice Keep Track of Rate Floor Changes Within 2 Standard Deviations of National Average 16

managing short term Thinking long term, Five Year Plan Required with 481 due July 1, 2014 Should Include Broadband Deployment Community Anchor Institutions Progress Report of Past Work –Broken out by voice/broadband Financial/Strategic Plan Stay Conservative in Projections 17

managing short term Thinking long term, 2014 ETC Report Requirements 4Mbps Down/1Mbps Up Service Standard –Based on “Reasonable Request” –Define Criteria for Limits Mileage Cost for Extending Facilities Cost to Upgrade Network 18

managing short term Thinking long term, Special Access Data Request FCC investigation of PC Special Access September 18, 2013 Order Response date - after OMB approval Must file a response if: –A Provider of special access in a PC area –A Purchaser of special access in a PC area –A Best Efforts Business Internet Access Service Provider –Filed Form 477 in

managing short term Thinking long term, Special Access Data Request Filers of Form 477, but not in other categories certify to that effect only. Responses for provision and/or purchase of special access in price cap areas. If you are either a provider or a purchaser of dedicated special access in a price cap area-start reviewing DR now – it is very detailed 100 pages of form and instructions 20

managing short term Thinking long term, Circuit Switched to IP Transition FCC – Speak of it as key priority IUB – Recently held workshops primarily on regulatory and legislative issues Technically – investments being made –Softswitches & routers –Ethernet based transmission equipment –Broadband transmission to end users –IP voice over LTE close for wireless –VOIP being provided by some 21

managing short term Thinking long term, Circuit Switched to IP Transition Competitively Offered IP services –Vonage, Skype and others – public internet –Magic Jack –Cloud business system offerings – Level 3, 8x8, ANPI –Cable systems – IP based managed service network 22

managing short term Thinking long term, IP Transition - FCC AT&T Filed a Petition to conduct two trials –long on rhetoric, short on specifics –Let us conduct with very few regulatory requirements NTCA and others –Trials OK, but look at individual regulatory requirements to see whether applicable 23

managing short term Thinking long term, IP Transition - FCC Comments filed FCC Technology Transitions Policy Task Force formed and working No formal action on AT&T petition yet Number assignment trials to VOIP providers underway 24

managing short term Thinking long term, IP Transition – Technical Issues Technical requirements –who sets them? – Current Notes on the Network over 1600 pages –Interconnection – Sec 251 and 252 apply? –Translation of NPA-NXXs to IP addresses –Quality of service –Voice over public internet or managed “separate” IP network 25

managing short term Thinking long term, IP Transition - Numbering Who will be eligible for number assignments? Possibly require ten-digit dialing nationwide Eliminate geographic meaning of numbers Change thousand block assignments to hundreds blocks or individual number Data base for number to IP addresses 26

managing short term Thinking long term, IP Transition – Public Safety Impact on 911 and NG 911 systems Identifying end user locations Cost of upgrading Potential impact of non-geographic numbers 27

managing short term Thinking long term, IP Transition – Customer Impact End user instrument compatibility Special feature “transitions” –Verizon Fire Island – wireless replacement Alarm services Credit card verification Medical alert services FAX impacts Powering issues Education - Training 28

managing short term Thinking long term, 29 IP Transition - Government DoD on behalf of federal agencies filed comments in GN Docket No –DoD/FEA customers continue to rely heavily on wireline TDM-based networks and services and will do so for the foreseeable future. The FCC should carefully consider potential adverse consequences on public safety and national security interests as a result of requiring DoD/FEA to prematurely transition to different technologies or services. 9/14/2015

managing short term Thinking long term, 30 IP Transition - Government DoD cites example of Federal Aviation Administration (FAA) reliance on TDM technology and services 92% of the time for critical air traffic operations. Preliminary indications are that certain functionalities that DoD/FEA customers currently receive over wireline and TDM- based networks may not be available through wireless or IP-based networks 9/14/2015

managing short term Thinking long term, IP Transition – Rural CAF-BB Proposal to provide support for data only broadband lines Revenue Req. for data only lines shifts 75% of loop cost from state to interstate Loop cost for data only lines shifted from Special Access to Common Line CAF-BB provides support for total loop cost less $26 maximum BB SLC Would reduce data-only interstate charges 31

managing short term Thinking long term, IP Transition - Summary Will move forward – pushed by technology and cost issues Many difficult issues to deal with both nationally and locally Expect a considerable amount of change and possibly disruption 32

managing short term Thinking long term, Call Completion Continues to be a vexing problem in rural areas NPRM issued – Feb 7, 2013 Enforcement Bureau action against Level 3 – March 12, 2013 –$950,000 “voluntary contribution” –$1,000,000 per quarter if certain parameters are not met 33

managing short term Thinking long term, Call Completion FCC Order on circulation – On Oct 28 Meeting Agenda –Expect it will primarily require message data recording by IXCs –Will be some implementation time –Not end solution, but may give data for further Enforcement Bureau action 34

managing short term Thinking long term, FirstNet – What is it? Nationwide LTE wireless broadband network for Emergency Responders Early stages of implementation $7 billion of funding to come from spectrum auctions Intend to share and use facilities of existing providers “Hardened” Network Capability 700 mhz Block D spectrum – 10 mhz 35

managing short term Thinking long term, FirstNet - Implications FirstNet works with state coordinators State coordinates with in-state and local agencies FirstNet will need to coordinate use of facilities and possibly spectrum with current providers Potential for fiber use, towers, etc. of rural providers 36

managing short term Thinking long term, Transformation Order - NPRM Rate of Return –Staff report – proposes high of 8.72% –Comments generally that is too low –Need to have a rulemaking –Don’t anticipate quick action Originating Access Rate transition –No action apparent at this time 37

managing short term Thinking long term, Transformation Order - NPRM Transport Access Rates transition –No apparent action at this time QRA for ICLS –Was supposed to implement in July, 2012 –No action likely until QRA for HCL gets resolved 38

managing short term Thinking long term, Transformation Order - NPRM Limit USF where there is unsubsidized wireline competition (voice and BB) –Implementing for PC companies as part of CAF I and CAF II –Major issue for cable TV groups –Not implemented yet for ROR study areas with 100% overlap –How to implement in other ROR study areas with lower overlap? 39

managing short term Thinking long term, Transformation Order - NPRM CAF - Remote Area –$100 million budget –Provide funding for customers in “highest cost” areas not supported by CAF II both PC and ROR –Propose consumer subsidy –No significant action yet – may move forward after CAF II is implemented 40

managing short term Thinking long term, Transformation Order - Appeal 10 th Circuit Court of Appeals –Denver Written briefs have been completed Oral argument scheduled for Nov 19 Possibility of delay because of government shutdown No seats available 41

managing short term Thinking long term, Transformation Order - Appeal Some key issues –FCC authority over state access –Recovery of costs in different jurisdiction –USF provisions sufficient and predictable –Is bill and keep (zero rate) appropriate compensation –Act differentiates between reciprocal comp and access –Broadband requirement unlawful 42

managing short term Thinking long term, Transformation Appeal - Decision First half of – Uphold – Order Provision Stands 2 – Remand – Order Provision remains in place, but sent back to FCC for modifications in rationale or the provision. 3 – Vacate – Order Provision no longer applicable. FCC could replace it with something else. 43

managing short term Thinking long term, CACM Connect America Cost Model Currently close to finalization for PC companies and CAF II Cost results at census block level FCC Public Notice - comments regarding voluntary use for ROR companies May have other longer-term uses for ROR companies 44

managing short term Thinking long term, 45 Questions We are available to answer any of your questions here at the convention or contact us: Bob – – Jonas – – 9/14/2015