1 The Rural Alliance January 25, 2006

– A Critical Year 2006 will be a critical year for the RLEC industry Multiple events with significant impact – FCC Intercarrier Compensation FNPRM – Post-RTF Universal Service Program – USF Collection Mechanism – 1996 Telecom Act Re-Write – Consolidation of the RBOCs and IXCs – Brand X Ramifications Policy ideas with negative implications for RLECs – Bill & Keep – USF mechanisms that are not based on costs – Unregulated IP Interconnection – Giving VoIP and IP-enabled services a free ride How much of your cash flow comes from USF and Intercarrier Compensation? – It will all be in play

3 The Rural Alliance ARIC and EPG joined to form the Rural Alliance Over 250 RLECs, state and national associations and other stakeholders now make up the Rural Alliance Major Goals – Develop effective ICC and USF solutions and advocacy – Create a policy environment that will promote continued infrastructure investment in high-cost rural areas – Encourage additional rural stakeholders to join the cause – Create a powerful advocacy coalition Major Activities – Comments and advocacy – Effective messaging on critical telecom issues

4 The ICC Problem Disparate charging mechanisms based on: – Jurisdiction (intrastate, interstate) – Nature of the call/technology (local, long distance, Internet) – Type of carrier (LEC, IXC, CMRS, ISP, end-user) System is neither economically rational nor sustainable – Disparities leading to arbitrage and/or fraud – Phantom traffic – Inability to differentiate between interstate, intrastate and local traffic

5 Key ICC Issues How to unify the ICC rate structure? Which jurisdiction has authority over unified rates? Level of unified rate – Finite cost-based rate – Zero rate (i.e., Bill and Keep) Application of unified rates – Originating and terminating – Terminating only Do we need new interconnection rules? Revenue replacement issues – Increased SLC charges – New revenue replacement mechanism

6 Where Are We Now? FNPRM issued March 3, 2005 Comments filed May 23, 2005 Reply comments filed July 20, 2005 NARUC ICC Task Force facilitating negotiations among parties

7 Synopsis of Rural Alliance Comments Unified cost-based rates Compensation for both originating and terminating traffic Maintain access and reciprocal compensation rules Establish nationwide local rate benchmarks Increase SLCs to current cap levels before receiving revenue replacement funding Maintain existing interconnection rules and meet- points Develop rules that minimize “phantom traffic” Collaborative federal/state solution

8 Key Issues in ICC Negotiations 1. Originating Compensation 2. “Two-Track” Approach 3. Level of Rates 4. Access Replacement Mechanism (ARM) 5. Interconnection Rules 6. Commitment to Agreements

9 Originating Compensation LECs should be compensated for usage of their network by other carriers The ICF plan proposes elimination of originating compensation RLECs have “equal access” and 800 service obligations to originate traffic for others who bill the customer for the call 251(b)(5) rules do not contemplate these call origination obligations We have yet to find any valid public interest reasons why originating compensation should be eliminated

10 “Two-Track” Approach RBOCs and RLECs have vastly different service territories and cost structures RLECs depend on revenue contribution from ICC and USF/ARM to meet universal service and COLR obligations If RLEC ICC rates are driven too low there will be serious ramifications for the ARM It is in the public interest for RLECs to have different ICC rates and transition strategies than RBOCs

11 Level of Rates RLEC’s ICC rates should be cost-based RLEC rates should be based on the unseparated traffic sensitive cost of providing local switching and transport services The Transport Interconnection Charge (TIC) should be reinstated into RLEC transport rates Bill & Keep is not in the public interest because: – It is not cost-based – It would invite uneconomic network usage – It would create excessive reliance on USF and make the fund less sustainable – It will harm consumers, especially in rural areas

12 Access Replacement Mechanism Rate-of-Return carriers should receive replacement of revenues lost due to the unification of disparate interstate and intrastate intercarrier rates RLEC SLCs are already high, and should not be increased much more if rates are to remain comparable An Access Replacement Mechanism (ARM): – Should be computed as the difference between current rates and rules and the new “unified” rate levels – Should be available to RLECs that meet defined local service rate benchmarks – Should not be portable to CETCs that do not experience revenue loss due to rate unification

13 Interconnection Rules Existing meet-points and interconnection rules (with certain exceptions) are working well The ICF “Edge” proposal is overly complex, would impose additional costs on RLECs and other carriers, and is designed to eliminate originating compensation NARUC Staff’s “3-Segment Edge” proposal (10/21/05 version) is a better paradigm for the definition of intercarrier compensation obligations ICC reform must address flaws in the current interconnection rules and practices (e.g., VNXX, IntraMTA) RLECs should not be obligated to carry traffic beyond their local network boundaries

14 Commitment to Agreements Any reasonable ICC solution will involve significant new universal service funding or similar mechanisms (i.e. ARM) Parties to any negotiated settlement must commit to not engaging in policy advocacy that would seek to undermine the ARM and USF Such commitment must include the party itself, and any third-party advocacy groups that it supports

15 RA/NASUCA Plan (as of 12/21/2005) Two-Track Plan – RBOC BellSouth Plan ($ tandem, $ end office) SLC Cap increases up to $1 ARM funding phased out over 5 years – Non-RBOC Unified cost-based rates w/TIC (average ≈ 2 cents/min.) FCC review in year 4 to determine if uniform target rates appropriate and originating rates should continue SLC Cap increases $1 Full ARM funding for 8 years (FCC reviews in year 8)

16 RA/NASUCA Plan (as of 12/21/2005) ARM equals intercarrier revenue loss, less local rate increases to benchmark (or imputation) 3-year phase-in of local benchmark at national urban average ARM not part of USF and not portable ARM funded by all (same mechanism as new USF contribution) Collaborative federal-state plan with inducements – State must buy-in to target rates and local benchmarks to qualify for ARM funding – State Inducement Fund for “early adopter” states (replaces 50% of non-RBOC access-related intrastate USF) 3-Segment Edge proposal (as of 10/21/05) with modifications

17 1/11-13 Task Force Meeting RA presents recommendations for Rural RoR carriers ICF makes changes in its plan – “Optional” originating rates (Rural carve-out eliminated) – Tandem provider acts as “banker” for ICC – Recommendation for a “three-track” solution Mid-Size Carriers and ICF develop preliminary “Track 2” plan Proposal to initially transition to interstate followed by a “mid-course review” to determine ultimate rates Ray Baum appoints “Group of 10” to attempt to develop consensus plan – Each “Track” to make recommendations – Interconnection sub-group also created

18 Initial Three “Track” Concept Track 1 – Non-Rural Price Cap Carriers Track 2 – Rural Price Cap Carriers, Non-Rural RoR Carriers, Other Track 3 Carriers that choose to “opt-in” Track 3 – Rural Rate of Return Carriers

19 Rural RoR Proposal (1/17/06) Step Year Begin July 1 Network Interconnect Reciprocal Comp Originating & Terminating Compensation 2 SLC Cap Increases Local Rate Benchmarking 3 Access Recovery Fund Rural RoR Carriers Rural Carriers only responsible for transport of “local” calls within their local footprint 4 No LERG- Slamming Existing meet points 251(b)(5) and 251(g) remain in place ISP-bound traffic as defined in current FCC rules Reduce by 25% of difference between Inter and intrastate switched rates and adopt interstate structure 4 with TIC reinstated in transport and ICLS reduced $ 0.25 per line increase to offset, on a dollar for dollar basis, the access revenue reduction Increase local rates to 75% of benchmark rate Create single new support mechanism (ARM) for Rural RoR carriers to recover access revenue reductions that cannot be recovered through SLC and Local Rate increases on an dollar for dollar basis 5 Include an “Early Adopter Fund” to recover 50% of existing state funds established to reduce intrastate access The ARM would not be portable to carriers that do not experience a revenue loss as a result of rate unification. Any CLECs ARM based upon revenue loss from ICC reductions The ARM would continue for the duration of Phases 1 and II of the plan. The FCC can then determine what portion of the ARM should be harmonized with traditional USF A “Unity Agreement” will be developed Reduce by 25% of difference between inter and intrastate rates $ 0.25 per line increase to offset, on a dollar for dollar basis, the access revenue reduction Increase local rates to 85% of benchmark rate Reduce by 25% of difference between inter and intrastate rates $ 0.25 per line increase to offset, on a dollar for dollar basis, the access revenue reduction Increase local rates to 100% of benchmark rate All access rates reduced to interstate rates $ 0.25 per line increase to offset, on a dollar for dollar basis, the access revenue reduction 42009FCC review and recommendations for additional ‘Phase 2’ intercarrier compensation rate unification Begin Implementation of Phase 2 Reform

20 Rural RoR Proposal - Footnotes 1. As defined in the Telecommunications Act of Optional pooling and rate banding as today. At the option of the LEC, tandem provider provides billing of ICC rate with 5% mark-up for tandem switched calls. Terminating rates applied to reciprocal compensation if no contract exists at plan implementation. If a contract exists, upon expiration rate will be the lower of contract rate or unified rate. Termination rates would not apply to existing mandatory EAS arrangements between ILECs. Rates would apply to IP  PSTN termination, but not to IP  IP termination. 3 If a carrier chooses not to increase rates to the benchmark level, the benchmark would be imputed in the ARM calculation. 4 Local calling area of the originating carrier determines call type for originating compensation. 5 ARM for RoR carriers would be calculated by taking interstate switched and special access revenue requirement, plus base year intrastate net switched and special intercarrier revenues, less net revenues from unified intercarrier rates, less SLC, less increase of local rates to benchmark levels, less ICLS, less LSS. The ARM will provide the ability and incentive for rural carriers to invest in rural network infrastructure.

21 Initial Position of Other Tracks Track 1 – Essentially the ICF plan – Uniform termination charge $ – Eliminate originating compensation – SLC cap increase $3.50 – Universal service fund (portable) to replace revenue loss Track 2 – Target rates at or slightly above rates in CRTC portion of ICF plan $ transport + $ termination (ICF CRTC) – SLC cap increase less than ICF but more than RA – ARM (non-portable) to replace revenue loss

22 Major Issues for Resolution Definition of the three “Tracks” Sustainability of the ARM – Who qualifies – Early Adopter Fund Rate issues – Specific rate levels – Benchmark rate – SLC rate – TIC Interconnection issues – Definition of 251(g) and 251(b)(5) traffic – Should there be compensation for EAS traffic? – Transport obligations of RLECs Network Architecture Unity Agreement

23 Next Steps? NARUC “settlement” discussions continue NARUC Winter Meetings 2/12 – 14 FCC FNPRM??? Comments and Replies??? Ex-Partes

24 Where Do We Go From Here? Much has been accomplished – The RA has a sound ICC reform proposal – We are reaching out to other rural stakeholders – We are forming an alliance with consumer interests – We are getting traction on many of our key issues But much remains to be done – Continued dialogue with NARUC, NASUCA and other stakeholders – Other USF related dockets – Continued FCC and Hill advocacy We are in a war for our survival!

25 The Bottom Line Join the Rural Alliance The stakes are enormous – the time is short Powerful interests are trying to move the process in a direction harmful to RLECs and rural consumers Policy makers respond best to broad coalitions Chairman Martin will be receptive to well-crafted rural policy solutions Together we can be stronger!